UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                                    FORM 10-K

(MARK ONE)
[X]  ANNUAL REPORT  PURSUANT TO SECTION 13 OR 15(D) OF THE  SECURITIES  EXCHANGE
     ACT OF 1934
                 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2005
                                       OR
[_]  TRANSITION  REPORT  PURSUANT  TO  SECTION  13 OR  15(D)  OF THE  SECURITIES
     EXCHANGE ACT OF 1934

                 FOR THE TRANSITION PERIOD FROM ______ TO ______
                         COMMISSION FILE NUMBER 0-21858
                           INTERLINK ELECTRONICS, INC.
             (Exact name of registrant as specified in its charter)
            DELAWARE                                             77-0056625
  (State or other jurisdiction                                (I.R.S. Employer
of incorporation or organization)                            Identification No.)
             546 FLYNN ROAD
         CAMARILLO, CALIFORNIA                                      93012
(Address of principal executive offices)                          (Zip Code)

       REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (805) 484-8855

                                   -----------
           SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
                                      None
           SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
                                  Common Stock
                              (TITLE OF EACH CLASS)

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

         Yes [_]  No [X]

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

         Yes [_]  No [X]

         Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the  Securities  Exchange  Act of
1934  during  the  preceding  12 months  (or for such  shorter  period  that the
registrant was required to file such reports),  and (2) has been subject to such
filing requirements for the past 90 days. Yes [_] No [X]

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


<PAGE>


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

Large accelerated filer [_]   Accelerated filer [X]    Non-accelerated filer [_]

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

         Yes [_]  No [X]

         On June 30,  2005  (the  last  business  day of the  registrant's  most
recently  completed  second fiscal  quarter),  the aggregate market value of the
shares of Common Stock held by  non-affiliates of the registrant was $77,660,000
based upon the last sale  price  reported  for such date on the Nasdaq  National
Market.  Shares of common stock held by officers and directors of the registrant
are  not  included  in  the  computations;   however,  the  registrant  made  no
determination that such individuals are "affiliates"  within the meaning of Rule
405 of the Securities Act of 1933.

         As of June 30,  2005 the  number of shares of the  registrant's  Common
Stock outstanding was 13,720,929.

                      DOCUMENTS INCORPORATED BY REFERENCE:

         Portions of Registrant's Proxy Statement for its 2006 Annual Meeting of
Stockholders are incorporated by reference into Part III of this report.


<PAGE>


                           INTERLINK ELECTRONICS, INC.
                                TABLE OF CONTENTS

                                                                          PAGE
ITEM NO.                                                                   NO.
--------                                                                  ------
                                     PART I

1.       Business.........................................................     1
1A.      Risk  Factors....................................................    12
2.       Properties.......................................................    20
3.       Legal  Proceedings...............................................    20
4.       Submission of Matters to a Vote of Security  Holders.............    21
4A.      Executive Officers of the  Registrant............................    22

                                     PART II

5.       Market for Registrant's Common Equity, Related
           Stockholder Matters And Issuer Purchases of Equity Securities..    23
6.       Selected Financial  Data.........................................    24
7.       Management's Discussion and Analysis of Financial
           Condition and Results of Operations............................    25
7A.      Quantitative and Qualitative Disclosures About Market Risk.......    45
8.       Financial Statements and Supplementary Data......................    45
9.       Changes in and Disagreements with Accountants on
            Accounting and Financial Disclosure...........................    45
9A.      Controls and  Procedures.........................................    45
9B.      Other  Information...............................................    51

                                    PART III

10.      Directors and Executive Officers of the Registrant...............    51
11.      Executive Compensation...........................................    51
12.      Security Ownership of Certain Beneficial Owners and Management...    52
13.      Certain Relationships and Related Transactions...................    52
14.      Principal Accounting Fees and Services...........................    53

                                     PART IV

15.      Exhibits, Financial Statement Schedules..........................    54


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                                     PART I

ITEM 1.  BUSINESS

OVERVIEW

         We  design,  develop  and sell  intuitive  interface  technologies  and
solutions for a variety of business and home applications. Our products include:

         o        signature  input  devices,  pen  input  pads  and  proprietary
                  application software;

         o        cursor  control and other input  devices for a wide variety of
                  electronic  products  including  game  controllers,   cellular
                  telephones, handheld media players and medical devices; and

         o        interactive  remote and integrated  input  devices,  including
                  remote  controls  for  presentation  projectors  and  advanced
                  viewing systems.

         Our  signature  and pen  input  pads  record  and  bind  signatures  to
contracts  or  other  legally  significant  documents  and also  record  various
identity-defining factors such as signature biometrics and fingerprints.

         Our Specialty Components  technologies,  such as MICRONAV(TM),  support
full mouse  functionality  and file navigation  using  miniaturized  sensors and
supporting  systems that consume  relatively  little power,  thereby making them
particularly attractive to manufacturers of handheld devices.

         Our  remote  control  input  devices  enable  a  user  to  control  and
communicate  with electronic  products,  such as computers,  digital  projection
systems and digital  televisions,  by providing an intuitive device on which the
user can remotely input a variety of commands.

         We currently  focus on four  principal  markets that we refer to as our
E-transactions,  Specialty Components,  OEM Remote Controls and Branded Products
markets.  We serve a global  customer  base from our corporate  headquarters  in
Camarillo,  California,  where we also  manufacture  all of our  "force  sensing
resistor"  or FSR  technology.  We have  sales  offices  in  Tokyo  and  Taiwan,
production  logistics  centers in Hong Kong and China and a  product-engineering
center in China.

         Our products benefit from a diverse technology portfolio based on trade
secrets,  patented  inventions  and  proprietary  software.  These  technologies
include our FSR technology,  wireless  communication  technologies and unique or
patented product design features.  Alone and in collaboration  with our industry
partners,  we have developed numerous  technologies that support various product
applications.

         We  make  FSR-based  sensors  that  we  and  others   incorporate  into
electronic  control  and  input  devices.  Our  FSR  technology  can  capture  a
three-dimensional  record of any input, recording both the location of the input
on an x/y grid and the pressure applied at any point and is therefore capable of
supporting  complex data input and process  control  functions such as signature
authentication. Our FSR-based sensors are scalable through a wide range of sizes
from a fraction of an inch in diameter to several feet across and can  therefore
be applied to requirements as diverse as miniaturized  input devices in consumer
products,  such as  cellular  telephones  and MP3  players,  to seat  sensors in
automobiles.  Combining our FSR technology  with unique or patented  designs and
proprietary  wireless data transmission  technologies permits us to offer a wide
range of  intuitive  devices on which the user


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<PAGE>


can  remotely  input a  variety  of  commands.  We offer our  sensors  either as
discrete components for installation in a device manufactured by our customer or
as complete devices,  such as remote input devices.  With respect to the latter,
we offer  proprietary,  ergonomic  designs or are capable of  delivering  custom
products designed to customer specifications.  We also offer, through retail and
other channels, a line of branded products under the Interlink brand name.

MARKET OPPORTUNITIES

         E-TRANSACTIONS.  Electronic  document  management and  transmission  is
becoming more  appreciated  and accepted for business  transactions  but,  until
recently, signature of transaction documents could only be accomplished by using
a pen and ink on paper followed by physical delivery of the signed documents. In
many areas of commerce this imposes  substantial time and cost burdens,  most of
which can be  substantially  reduced by a dependable and  verifiable  electronic
signature  process.  Several major industries engage in financially  significant
and document intensive  transactions as a regular part of their business.  These
include the financial  industry,  in particular the branch  banking,  insurance,
leasing and mortgage/notary businesses, the healthcare industry and governmental
entities.  In addition,  many  businesses have document  intensive  processes in
specific areas, including field sales force automation and human relations.

         Compared with the  traditional  process of circulating  paper documents
with an ink signature,  an electronic  signature  process can offer  substantial
time and cost efficiencies as well as improved  customer  satisfaction in all of
these  applications.  For example,  a customer in the insurance industry reports
that electronic document processing in its industry can reduce application costs
by up to  90%.  A major  automobile  leasing  company  reports  that  electronic
document  processing can reduce the time to return a car to inventory at the end
of a lease from several weeks to as little as a few days.

         Until  2000,  the  use of  electronic  signatures  was  limited  due to
questions  about its validity.  In that year,  Congress  enacted the  Electronic
Signatures  in  Global  and  National   Commerce  Act,  which  established  that
electronic  signatures have the same legal validity as pen and ink signatures on
paper. Other recently enacted federal laws,  including the Government  Paperwork
Elimination  Act,  the  Patriot  Act and the Health  Insurance  Portability  and
Accountability  Act,  support  the  move  toward  electronic   documentation  by
permitting electronic signatures.  The National Notary Association has drafted a
new Model  Notary Act that  suggests  standards  for  electronic  signature  and
notarization.

         Concerns over identity theft and terrorism have also given impetus to a
need for  identity  verification.  This has  increased  demand for systems  that
utilize biometric  information in a way that identifies the signer. Such systems
can combine signature authentication with other identity verification techniques
such  as  electronic   fingerprint   capture,   password,   card  swipe  or  PIN
identification.

         SPECIALTY COMPONENTS. Our specialty components market has traditionally
served the dual function of providing a steady  revenue  stream from a series of
diverse custom products while, at the same time, serving as an incubator for new
applications and technologies. Most recently, it has been the market in which we
have developed our MICRONAV family of sensors.  These miniaturized  sensors come
in various formats and permit precise input of a broad range of selections.  Our
MICRONAV 360 sensor offers smooth  pressure-controlled cursor acceleration and a
complete set of actuator  reference designs to enable Internet,  e-mail,  gaming
and menu functions for portable wireless devices.  Other members of the MICRONAV
family include  circular and linear input pads that enable inputs such as volume
control or list scroll-through.  Our MICRONAV sensors are specifically  targeted
at the MP3 and


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<PAGE>


cellular  telephone  markets.  At the same time,  we  continue  to  provide  our
traditional  line of custom  sensors  and  pointing  solutions  to the  medical,
industrial, commercial and government markets.

         OEM REMOTE CONTROLS.  The Company focuses its efforts  primarily on two
areas  of  OEM  Remote  Controls:  advanced  viewing  devices  and  presentation
projectors. We merged these two business segments following the third quarter of
2005  into  a  single  unit  that  sells  remotes  to  advanced  viewing  device
manufacturers and presentation  projector  manufacturers.  This combination is a
result of the increased  similarities  between the two businesses  giving us the
ability to leverage our broad customer  relationships  with the leading consumer
electronics  companies.  The combined unit allows us to direct our  engineering,
marketing and sales efforts on the high growth,  advanced  viewing device market
while  continuing  to  maintain  our efforts  and  presence  in the  established
presentation  projector  market both of which are  consumer  oriented  and price
competitive.

         o        Advanced Viewing Devices: Robust viewing device unit growth is
                  anticipated  for the next several  years due to a multitude of
                  technological  changes.  These  changes  include:   increasing
                  migration by consumers from analog to digital television,  the
                  increasing adoption of High Definition,  or HD, television and
                  the  popularity  of thinner  LCD,  plasma and rear  projection
                  displays.  When these  three key  technologies  converge,  the
                  market growth  opportunity  could be  significant,  especially
                  because more  broadcasters are offering  compelling HD content
                  and readily  available access to this content via satellite or
                  cable.

         o        The market growth has attracted many new entrants, all of whom
                  are very eager to  differentiate  their viewing device.  While
                  brightness, sharpness and overall picture quality are promoted
                  by  the  manufacturers  as  a  differentiator,  the  intuitive
                  technology  and  stylish  design of the  control  device  also
                  appear to be winning differentiators with customers.

         o        The continued growth of advanced  digital  television and high
                  performance  viewing devices has  substantially  increased the
                  complexity of the processes that these devices may be required
                  to  control,  while at the same  time  permitting  the  unique
                  design of  intuitive  control  systems to enhance  the overall
                  appearance and value of the customer's product.

         o        Presentation  Projectors:  As computer technology has replaced
                  traditional  presentation  devices  such as slide and overhead
                  projectors, the mechanisms to control the presentation process
                  have undergone a similar  evolution.  Presentation  projectors
                  enable visual or mixed-media presentations using PowerPoint or
                  other  presentation  software.  Today,  it is  possible  for a
                  presenter   to   control   various    characteristics   of   a
                  sophisticated   audio-visual   presentation   using  a  small,
                  wireless  device.  A presentation  given on a  computer-driven
                  presentation projector can be controlled,  edited,  amplified,
                  distributed  and otherwise  manipulated  electronically.  This
                  demands a  wireless  input  device  that can  transmit  a wide
                  variety of commands and support complex  control  functions in
                  an intuitive manner.

         o        Increased  portability is enabling many users to travel with a
                  complete   presentation   system   that  fits  in  a  standard
                  briefcase.   In   addition,   the  rapid   growth  of  digital
                  photography  and video has created a consumer  application for
                  computer-linked  projectors  and has  expanded the universe of
                  original  equipment  manufacturers of presentation  systems to
                  include  many of the leading  computer  manufacturers  such as
                  BenQ, Dell, Hewlett-Packard, IBM and Lenovo.


                                       3
<PAGE>


         BRANDED PRODUCTS.  The explosion of presentation software and continued
growth of digital  projectors  has driven demand for wireless input devices that
can transmit a wide variety of commands and support complex control functions in
an  intuitive  manner.  Many  presentation  projectors  are shipped with a basic
control device. However, these projector remotes lack the intuitive and advanced
control features provided by our aftermarket branded devices. In addition,  some
presenters  use  their  computer  monitor  or  notebook  computer  instead  of a
projector.  These consumers constitute a significant market that we address with
our branded wireless presentation devices.

STRATEGY

         Our overall  strategy is to identify  business and consumer  markets in
which our competitive strengths enable us to be the leading provider of advanced
intuitive  interface devices and to establish and maintain a leadership position
in those markets by implementing the following key strategies:

         o        LEVERAGING OUR MOMENTUM IN THE E-TRANSACTIONS  MARKET. We have
                  spent  the past six  years  developing  our  capabilities  and
                  proving  our  value to our  partners  and  customers.  We have
                  evolved  from a simple  signature  pad  provider to a complete
                  solutions provider offering a signature  software platform,  a
                  broad  set  of  signature  capture  options  and  professional
                  services  to address  the unique  needs of the  e-transactions
                  market.  In conjunction with the National Notary  Association,
                  we developed a combined electronic signature, notarization and
                  journal  platform to  facilitate  the  migration to electronic
                  closings.  Our  technologies,  solutions,  and  approach  have
                  enabled  us to  secure  the  largest  implementations  in  the
                  industries  in which we focus  including  banking,  insurance,
                  auto finance,  brokerage,  and healthcare,  as demonstrated by
                  our customer relationships with Wells Fargo, State Farm Mutual
                  Automobile  Insurance  Company,  DealerTrack,   Inc.,  Charles
                  Schwab & Company, Inc. and Veterans Administration Hospitals.

         o        USING  OUR  CORE  SENSOR   TECHNOLOGY   AND   INNOVATIVE   NEW
                  APPLICATIONS TO SUPPORT INTEGRATED MICRO-INPUT DEVICES SUCH AS
                  OUR  MICRONAV  FAMILY OF PRODUCTS.  The advent and  increasing
                  complexity   of  a  wide   range  of   miniaturized   consumer
                  electronics products such as MP3 players, cellular telephones,
                  digital  cameras  and video  recorders  and PDAs have  greatly
                  increased  demand for small, low power consuming input devices
                  that can provide full mouse  functionality,  including  cursor
                  control.  Our patented  MICRONAV  technology is well suited to
                  this application and we have invested  considerable  effort in
                  the  development  of this  technology  and its markets.  Using
                  resistive,  rather than the more common capacitive  technology
                  enables  our  sensors to  respond to a broader  range of input
                  pressures  (for  example,  a gloved  finger  which  capacitive
                  sensors  will not  record)  while  consuming  less  power  for
                  comparable  applications.  We are  developing a broad range of
                  applications for our MICRONAV  products  targeted at the tasks
                  that today's complex handheld devices accomplish.

         o        MAINTAINING OUR LEADERSHIP  POSITION IN THE OEM REMOTE CONTROL
                  MARKET  BY  OFFERING   EFFECTIVE   TECHNOLOGY   SOLUTIONS  AND
                  INNOVATIVE  DESIGNS. We are one of a few dominant suppliers of
                  advanced  wireless  input devices for  presentation  projector
                  systems,   supplying  the  majority  of  all  wireless  remote
                  controls used to control presentation  projectors.  We plan to
                  leverage  our  leadership  position,   strong  reputation  and
                  customer  relationships  to maintain  our market  share of the
                  projector OEM market while providing  unique remote  solutions
                  as our  existing  and new  customers  move  into the  advanced
                  viewing device markets.  We also plan to maintain and grow our
                  leadership  position  in  the  branded  business


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                  presentation   market  by   continuing  to  offer  and  market
                  effective and  innovative  presentation  and meeting  products
                  under the  Interlink  Electronics  brand.  We will offer these
                  products and solutions through a broad mix of computer, retail
                  and specialty distribution channels.

         o        IDENTIFYING   FUNDAMENTAL  CHANGES  IN  CONSUMER  OR  BUSINESS
                  PRACTICES  RESULTING FROM TECHNOLOGICAL  CHANGE AND DEVELOPING
                  TECHNOLOGIES  AND PRODUCTS  THAT  FACILITATE  THIS CHANGE.  We
                  remain  alert to  technological  changes  that alter the basic
                  processes  that   businesses  and  consumers  rely  upon.  For
                  example,  we developed our EPAD devices in anticipation of the
                  needs of e-commerce for electronically-verifiable  transaction
                  documentation  in a broad range of businesses.  We are working
                  aggressively to identify new  applications as they develop and
                  to apply our existing  technologies to the design of solutions
                  appropriate to these applications. We believe that by applying
                  a disciplined  approach to the identification and selection of
                  our target markets and applications,  we can achieve a leading
                  position  in those  markets  based on our strong  intellectual
                  property position and market relationships.

         o        MAINTAINING  AND DEVELOPING NEW STRATEGIC  RELATIONSHIPS  WITH
                  SOFTWARE  DEVELOPERS AND OTHERS  ADDRESSING OUR TARGET MARKETS
                  TO  DELIVER  TURNKEY  SOLUTIONS.  We work  with  software  and
                  hardware developers, integrators and others to provide turnkey
                  solutions that address our customers'  evolving  requirements.
                  We believe that, by coupling our proprietary technologies with
                  our  partners'  expertise,   we  can  deliver  solutions  that
                  uniquely address our customers' requirements.

         o        LEVERAGING  AND  EXTENDING  OUR STRONG  INTELLECTUAL  PROPERTY
                  POSITION.  We have  significant  expertise  in the  design and
                  manufacture of intuitive interface  technologies and products.
                  We intend to  continue to broaden  our  intellectual  property
                  position   through   internal   development   to  enhance  the
                  competitiveness   and  size  of  our  current  businesses  and
                  diversify into markets and  technologies  that  complement our
                  current product portfolio.  We have numerous trade secrets and
                  proprietary  technologies  and  manufacturing  processes  that
                  further strengthen our intellectual property position.

         o        OPPORTUNISTICALLY  ACQUIRING  TECHNOLOGIES AND BUSINESSES THAT
                  DEEPEN OUR PENETRATION INTO OUR TARGET MARKETS.  We anticipate
                  evaluating  acquisition  opportunities  that we  believe  will
                  increase our market share in our target  markets,  improve our
                  portfolio of intellectual  property or strengthen our customer
                  base.  We  also  anticipate  that  we  will  pursue  strategic
                  acquisitions  and alliances  with companies that have products
                  or technologies that complement our current  products,  expand
                  our global  footprint,  enhance our technical  capabilities or
                  expand our service offerings.

PRODUCTS

         Our  products   address   customer  needs  in  four  principal   areas:
E-transactions, Specialty Components, OEM Remote Controls and Branded Products.

         E-TRANSACTIONS.  Simple  signature  capture devices that are now common
features of various  retail  checkout  counters are commodity  products that are
available  from  a  number  of  manufacturers.  We  have  targeted  applications
requiring  features that not only capture an image and biometric  information of
the signature  but also bind the  signature to a related  document in such a way
that any  alteration  in the  document  will  destroy  the  signature.  With our
IntegriSign   Signature  Software  Suite  and  EPAD  products,  we  provide  the
foundation  for  a  legally  enforceable  transaction  that  supports


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signature  verification.  Our  electronic  signature  processes  are targeted at
applications requiring some or all of these features.

         Since the  introduction of our basic EPAD device,  we have introduced a
series of  functionality  enhancements.  In 2002,  we  introduced  EPAD-INK,  an
LCD-based signature capture product.  Our EPAD-ID adds a fingerprint scanner. In
addition to hardware enhancements,  we are, internally and in collaboration with
others, developing application software that targets a number of specific market
needs.  For  example,  working in close  cooperation  with the  National  Notary
Association,  we have developed a specific  application  of our EPAD-ID  product
that provides a platform for electronic  signing,  notarization  and journaling.
Finally,  we have recently  launched our  sophisticated  signature  device,  the
EPAD-XL.  This  device  provides  a larger  color LCD  display  for  signatures,
marketing  messages  and soft  pinpad,  as well as a  cardswipe  for payment and
security applications.

         The IntegrSign  Signature  Software Suite provides  developers with the
plug-ins  and tools  necessary  to  integrate  our EPAD family of  products.  In
addition,  it supports tablet PCs and fingerprint  sensors.  IntegriSign permits
signature  capture  and binding to a specific  document in MS Office,  InfoPath,
Adobe Acrobat, html and proprietary  electronic forms. In addition, the platform
permits biometric authentication of individuals.

         We work with a broad  range of  industry  partners  to provide  turnkey
solutions to specific end-users. Our industry partners include key developers of
signature capture, forms and imaging software,  suppliers of related hardware to
our targeted industries and system integrators.

         SPECIALTY  COMPONENTS.   Our  specialty  components  business  consists
primarily of two product lines. We sell integrated cursor pointing  technologies
to manufacturers  of notebook  computers and industrial  applications  and, more
recently,  to the  manufacturers  of  handheld  electronic  devices  such as MP3
players  and  cellular  telephones.   We  also  sell  a  diverse  assortment  of
custom-designed  sensors  for  non-computer  applications,  such  as for  use in
medical devices as safety switches.  If the design process involves  significant
work,  we may charge a product  development  fee. We  continue  to market  these
devices,  both as stand-alone products and as components sold to OEMs for use in
their products.

         Mice and other cursor control devices are manufactured  using a variety
of sensor  technologies.  Our FSR-based  cursor control sensors are particularly
well suited to applications  that require file navigation or full cursor control
but that have limited space or available  power,  such as cell phones,  PDAs and
other  handheld  devices,   or  the  need  to  operate  in  harsh  environmental
conditions,  such as in  industrial  environments,  or  require a high  level of
reliability, such as medical applications.

         The  explosive  growth in the use of handheld  devices such as cellular
telephones  and PDAs and in the  applications  for which these devices are used,
including games and Internet access, has created a need for miniaturized  cursor
control devices that have the full  functionality  of a mouse but can fit in the
very  limited  geography  of these very small  products and can function in very
limited power  environments.  We believe that our FSR sensors are ideally suited
to this  application  and have  developed  our  MICRONAV  family of  sensors  in
response to it. One form of MICRONAV  sensor  provides full 360o cursor  control
functionality in a sensor that is less than 10 mm square and less than 1.5 mm in
thickness.  Other  versions  provide  strip  or ring  sensors  that  can be used
intuitively to control volume,  to scroll through a list or for other functions.
In some  applications  we supply the basic  sensor,  usually  with a  protective
shield,  and a license to use the  related  software  drivers.  We also  support
various  lighting options and flexible  actuator  designs and materials.  We can
also supply a sensor and micro-processor combination and can incorporate both in
a module format ideal for "drop-in" solutions.  We offer all three formats on an
OEM basis to manufacturers of various handheld products.


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<PAGE>


         OEM REMOTE  CONTROLS.  Our OEM remote controls address the growing need
for both  remote and direct  input  devices to control an  increasingly  complex
array of home entertainment products, including high performance viewing devices
and home  theaters  as well as  business  projectors.  We also sell  sensors  to
manufacturers of remote controls for integration into their products.

         Simple remote  control  devices for use with  presentation  projectors,
televisions and other audiovisual  products are widely  manufactured using other
technologies  and are adequate  for channel  selection,  volume  control and the
other  basic  functions  for which  they are used.  Our remote  control  devices
address more  complex  requirements  such as the remote  control of business and
other  presentations  where the control  process  must not  distract  the user's
audience,  and the digital  television  market where the  communication  process
involves high levels of complexity.

         Our OEM remote  development  efforts are focused on  interface  devices
that will directly control high end audiovisual  products such as front and rear
projectors,  LCD and plasma display  televisions.  Most  traditional  television
manufacturers  and retailers of consumer  electronics  products have  introduced
advanced viewing devices into the home market. We are working both directly with
the  manufacturers of these products and, at the chip level,  with innovators of
new  projection  and  television  technologies  in an  effort to  integrate  our
interactive input devices with their products and technologies. Our customers in
this area include Acer, BenQ, Dell, Hewlett Packard, Sony and Sanyo.

         Traditional  remote input devices use infrared  signals,  which operate
only on a "line of sight" basis and  therefore  require the device to be pointed
at the  signal  receiver  on or near  the  presentation  projector.  Many of our
products  now use  radio  frequency,  or RF,  communication  to  eliminate  this
shortcoming and allow control of distant or hidden systems  without  aiming.  We
also  support  many  of  the  other  common  communications  protocols  such  as
Bluetooth, 802.11 and Zigbee.

         BRANDED PRODUCTS.  Our Interlink branded  presentation devices are used
to control  presentation  and  meeting  room  equipment.  Many of our  interface
devices also incorporate a pointing button to control the cursor and one or more
function selection buttons. Our meeting room products typically control multiple
devices  such as  computers,  projectors  and DVD  players  and are also used as
standard keyboards.

         Many  of our  remote  presentation  devices  incorporate  our  patented
CLICKTRIGGER  button,  which  allows  the  presenter  to enter  the most  common
commands (usually to advance to the next slide of a presentation) with the index
finger,  leaving the thumb free for less commonly used functions.  These devices
are ergonomically  designed to allow the device to fit into the hand so that all
controls  and  functions  are  available  without  shifting  the position of the
device, making it easier to locate the appropriate button.

CUSTOMERS

         E-Transactions:  Within the  e-transactions  market, we serve a diverse
set of customers across several industries including DealerTrack,  Inc., Eastman
Kodak Company, Ford Credit Corporation, Jackson National Life Insurance Company,
Nationwide Building Society,  Prudential, State Farm Mutual Automobile Insurance
Company,  Charles Schwab & Company,  Inc.,  Veterans  Administration  Hospitals,
DaimlerChrysler Services North America, LLC and Wells Fargo.

         Specialty  Components:  Selected specialty  component customers include
manufacturers of handheld devices such as iRiver, Sony, LG, Pantech and Siemens,
as well as computer and computer


                                       7
<PAGE>


peripheral  manufacturers  including an assortment  of medical  device and other
equipment manufacturers.

         Branded  and OEM  Remotes:  We sell  advanced  wireless  input  devices
principally to OEMs and as branded  products  through a variety of  distributors
and value added resellers. We serve a broad range of customers including many of
the  leading   global   electronics   companies  such  as  Acer,   BenQ,   Dell,
Hewlett-Packard,  Hitachi, IBM, InFocus, Lenovo, Mitsubishi,  Panasonic,  Sanyo,
Sharp,  Sony  and  Toshiba.  We  offer  our  branded  products  through  leading
distributors and resellers such as Ingram Micro, CDW, Insight and PC Connection.

           As a result of having  served many of these  clients over a number of
years, we believe that we have established a reputation as a dependable producer
of quality  devices and components and as an innovator of solutions that support
our clients.

TECHNOLOGIES

         We develop  technologies in several areas: force sensing resistors,  or
FSRs,  wireless  communications  and remote  control  user  interfaces.  We also
develop  software to implement many of the  applications  for which our products
are used.

         FORCE SENSING RESISTORS.  Many of our products  incorporate one or more
FSRs.  A basic FSR can  detect  and  accurately  measure a force  applied to it,
thereby enabling precise control of the process applying the force.

         More complex sensors are also possible.  One configuration,  known as a
"four zone"  sensor,  has four sensors  arranged in a two-by-two  square with an
actuator  placed directly where the four sensors touch. By toggling the actuator
in any direction, an operator can control the direction and speed of a cursor on
a computer  screen.  An FSR sensor  can also serve as a touchpad  by  creating a
two-dimensional  surface  capable of measuring  the  location  and  intensity of
pressure  applied at any set of  coordinates  on the grid.  In  contrast to most
standard  touchpads,  FSR  touchpads  can also  measure  the amount of  pressure
applied  at  any  point  on  the  grid,  thereby  creating  a  three-dimensional
characterization of input along X, Y, and P (pressure) axes. This type of device
can be used to support functions such as handwriting  input,  where not only the
outline  of the  signature  but the  pressure  applied  in  writing  it,  can be
measured, or computer cursor control,  where variable cursor speed is desirable.
Other sensor  configurations  include the strip and ring sensors  which  measure
position and pressure of the touch.  These are commonly used to create scrolling
and panning interfaces for control of handheld and other devices.

         Our FSR sensors can be as thin as one-hundredth of an inch, making them
particularly well suited for use where space is a critical issue, as in notebook
and sub-notebook keyboards and handheld devices. In finger-sensing applications,
such as touch pads and scroll rings, they consume  significantly less power than
do capacitive sensors, the principal competing technology. FSRs are therefore an
appropriate  choice for products that depend on battery power,  and particularly
for products with limited battery  capacity.  Also,  unlike  capacitive  sensors
which  react to the  electrical  capacitance  in a human  finger,  FSRs react to
pressure  from any object and therefore  support pen or gloved hand  activation.
FSR sensors  have no moving  parts and can be packaged in a sealed  environment.
They are therefore highly reliable, retaining their performance through millions
of  actuations,  even in adverse  environments  involving  heat,  moisture,  and
chemical contamination.


                                       8
<PAGE>


         WIRELESS  COMMUNICATIONS AND REMOTE CONTROLS.  We have expertise in and
can  support  any of the  popular  wireless  communication  protocols  and  have
developed our own proprietary  communication  technologies as well. We have also
created a number of applications that allow our hardware technologies to support
specific  functions.  These  applications,  for  example,  enable our sensors to
support our patented  Pad-To-Screen  (PTS) mapping,  context sensitive scrolling
and gesture control  technologies.  We expect to develop, or work with others to
develop,  new applications  that will allow our intuitive  interface  devices to
control an ever increasing number of interactive functions.

         We maintain active,  in-house product design,  engineering  support and
advanced  technology  departments  in the  U.S.,  Japan  and  China  and  have a
relationship  with an outside software  development firm that provides access to
additional   application  developers  for  electronic  transition  software.  As
appropriate,  we engage outside  development firms to facilitate the integration
of our products into our  customers'  products or handle peak loads greater than
our internal capacity.

INTELLECTUAL PROPERTY

         We  consider  our  intellectual  property  to be a key  element  of our
ability to compete in our chosen markets.  Our intellectual  property  portfolio
consists of trade secrets, patents and proprietary software.

         TRADE  SECRETS.   FSR  sensors  are  manufactured   using   proprietary
screen-printing techniques. All proprietary aspects of the manufacturing process
are  conducted  in-house at Interlink to maintain  quality and protect the force
sensing  technology.  While  screen-printing  is a  common  process  in  various
industries,  the quality and  precision  of  printing,  as well as the  specific
processes  required  to  make  high-quality  FSR  sensors  require  considerable
expertise.  We believe this  expertise is difficult to replicate  over the short
term and, to our  knowledge,  no  unrelated  party has done so. In the course of
developing  our  products,  we have  developed  expertise in various  aspects of
wireless  communication,  signature content and verification,  document security
and other matters that we believe afford us a meaningful advantage in our target
markets.  We require our employees to sign nondisclosure  agreements and seek to
limit access to sensitive information to the greatest practical extent.

         PATENTS.  We regularly  file U.S. and foreign  patent  applications  to
cover new or improved technologies,  manufacturing methods, and product designs.
These filings protect methods of  manufacturing  FSR sensors and new innovations
in types of FSR sensors, as well as inventions related to wireless communication
and intuitive control.

         The first of our patents for FSRs,  which cover certain  aspects of the
use of an uneven  surface to produce  variable  resistance,  expired in 1999 and
others expired between then and mid 2002. However,  the FSR sensors that we make
today are covered by a number of patents related to their function,  formulation
and manufacture.  Our issued  FSR-related  patents expire between 2011 and 2020.
Additional  FSR-related patents are pending that, if issued, would expire around
2026.

         Patents  covering   wireless   communications   and  intuitive  control
inventions  relate to our patented  high-speed  infrared  technology  as well as
various intuitive control and ergonomic  features of our advanced pad-based home
entertainment/personal   computer  remote  controls.  These  technologies  allow
intuitive  gestures on pad-based  remote controls to control home  entertainment
systems,  or to  highlight  parts of a slide  during a  presentation.  They also
include our CLICKTRIGGER input key.

         Issued patents covering wireless  communications  and intuitive control
inventions  will  expire  between  2016 and 2023.  Additional  such  patents are
pending that, if issued, would expire in 2026.


                                       9
<PAGE>


         SOFTWARE.  We have  developed  software that we use in our products and
have  acquired  rights to  software  developed  by others.  Particularly  in our
e-transactions  market,  we have assembled a portfolio of  application  specific
software technologies that address our target markets. We expect to aggressively
develop or acquire additional application technologies supporting this and other
markets.

SALES AND MARKETING

         For  e-transactions  sales, we use public  relations  activity,  direct
advertising  and  trade  show   participation  to  generate  product  awareness.
Promising  sales leads and known  industry  targets  are  followed up with sales
visits. To a lesser extent, we leverage the sales and marketing resources of our
software  partners.  We are also teamed with the National Notary  Association in
connection  with sales of EPAD  devices to notaries  and the  financial  service
market.

         With  the  development  of our  MICRONAV  family  of  sensors,  we have
considerably  broadened the range of OEM applications that our products address.
We are  aggressively  pursuing  opportunities  to develop these  applications by
working with our OEMs to design our solutions  into their  products.  To achieve
this result, our specialty  components  business is supported by internal design
engineers who initially  determine whether a sales opportunity should be pursued
and work  with new  customers  to  design a  product  or  component  to meet the
customer's need.

         For sales of  Branded  and OEM  remote  control  products,  we employ a
direct sales team of five people in the U.S.,  two in Japan and three in Taiwan.
In addition, we have sales and marketing  representation in Korea, Singapore and
the United  Kingdom.  Each sales team is supported  by inside  sales  personnel,
product managers and application engineers.

         Current  distribution  channels  for our  branded  products  consist of
distributors  such as  Ingram  Micro  and  Tech  Data,  catalogs  and  specialty
resellers targeting corporate accounts.  We market to these channels with direct
sales  through  our  employees.  In Europe  we use  distributors  and  specialty
resellers.  We use these  distribution  channels  not only to  increase  branded
product  sales but also to  establish  customer  demand  for new  products  that
generate OEM sales.

MANUFACTURING

         We seek to maximize protection of our proprietary technology by keeping
the  development  and  manufacturing  of all  FSR  sensors  at our  facility  in
Camarillo,  California.  At the same time,  we  continue  to expand our  product
development and manufacturing capabilities in Asia yet limit the transferring of
sensitive technologies.

         Prior  to  2001,   we  contracted   directly  with  offshore   contract
manufacturers for the manufacture of products other than the sensors themselves.
In late 2001, we formed Interlink  Electronics Asia Pacific Limited, or IEAP, to
coordinate  our  non-U.S.  manufacturing  activities.  Based in Hong Kong,  this
wholly  owned  subsidiary  purchases  components,  assembles  them into kits and
distributes  the kits to one of several  contract  manufacturers  for  assembly.
Finished  products  are shipped to the customer at the  direction of IEAP.  IEAP
maintains  an  active  oversight  and  quality  control  program  and  regularly
evaluates the capacity and performance of its contract manufacturers. We believe
that there  exists a wide  range of choice of  contract  manufacturers  and that
manufacturing  can be  shifted to other  manufacturers,  if  necessary,  without
significant interruption of business.

         We acquire raw  materials  and  components  for our FSR sensors  from a
number of sources,  mostly within the United States. We have worked closely with
a small group of manufacturers to


                                       10
<PAGE>


create new materials  optimized for FSR usage;  most of which are supplied to us
on an exclusive  basis.  The raw materials  are processed  into their final form
using proprietary material and methods.

COMPETITION

         Our  E-transactions  market is emerging and  competition  exists today.
Competitors consist primarily of relatively smaller organizations,  with respect
to revenue and headcount,  which are singularly focused. However, a wide variety
of  companies  that  currently  supply  products  or  services  to our  targeted
customers  can be  expected  to try to expand the range of  products or services
that they offer to include advanced signature input devices. Also, manufacturers
of basic  point-of-sale  signature  input  devices  may  develop  more  advanced
features that address our target markets. If the market for these products grows
as we believe it will, it can be expected to attract additional competitors.

         Our Specialty  Components  business faces competition from a variety of
sources depending on the application.  This is especially true in the cell phone
and MP3 markets where numerous technologies compete.

         In our OEM Remotes and Branded  Products  market,  we face  competition
from   manufacturers  of  less  advanced  remote  devices,   including  Hoshiden
Corporation, SMK Corporation and Koninklijke Philips Electronics N.V, as well as
our OEM customers  themselves who could choose to manufacture some or all of the
products or components  that they currently buy from us. With Branded  Products,
we face  competition  from a number of aftermarket  control device  competitors,
including Logitech, Targus and Kensington.

         Many of the companies with whom we currently  compete or may compete in
the  future  have  long-standing   customer  relationships  with  key  potential
customers.  These  competitors  may  develop  or acquire  enhanced  technologies
sufficient  to maintain or improve  their market  share.  Moreover,  competitive
pricing pressures on our OEM customers'  products may force them to choose lower
cost,  less  sophisticated  solutions from our  competitors.  We expect that our
success against our  competition  will depend on our ability use our technology,
experience and industry relationships to offer timely and effective solutions to
our customers.

EMPLOYEES

         The Company had 202  employees as of December 31, 2005. Of that number,
127 are  full-time  employees  in the United  States  with 118 at our  corporate
offices and manufacturing facilities in California and 8 located at our regional
sales  offices in the U.S. We have one employee in our regional  sales office in
Canada,  and five employees in our regional sales office in Taiwan. Our Japanese
subsidiary had 22 employees and 48 employees were  associated with our Hong Kong
subsidiary.

AVAILABLE INFORMATION

         We file annual reports,  quarterly reports,  proxy statements and other
information with the Securities and Exchange  Commission  ("SEC").  You may read
and copy any materials we file with the SEC at the SEC's Public  Reference  Room
at 100 F. Street,  NE,  Washington,  DC 20549. You may obtain information on the
operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The
SEC maintains an Internet site that contains our reports, proxy statements,  and
other information. The SEC's Internet address is http://www.sec.gov.


                                       11
<PAGE>


         We also make available free of charge through our Internet  website the
Company's annual reports on Form 10-K,  quarterly reports on Form 10-Q,  current
reports on Form 8-K and, if  applicable,  amendments to those reports as soon as
reasonably   practical   after   we   file   such   materials   with   the   SEC
(http://www.interlinkelectronics.com).  Information  contained on the  Company's
website is not part of this report or any other report filed with the SEC.

ITEM 1A. RISK FACTORS

WE ARE ENTERING NEW MARKETS AND IF WE FAIL TO  ACCURATELY  PREDICT THE GROWTH OF
THESE NEW MARKETS, WE MAY SUFFER REDUCED EARNINGS.

         Historically,  our sales were concentrated in the specialty  components
markets, as well as remote control devices for presentation projectors. However,
we have devoted  significant  resources to the  development  of products and the
support of  marketing  and sales  efforts  in new  markets,  such as  television
remotes and the  e-transactions  market.  We expect to continue to identify  and
develop  products for new markets.  These markets  change  rapidly and we cannot
assure you that they will grow or that we will be  accurately  able to  forecast
market demand in time to respond  appropriately.  Our investment of resources in
these  markets may either be  insufficient  to meet  actual  demand or result in
expenses that are excessive in light of actual sales volumes. Failure to predict
growth and demand  accurately in new markets may cause us to suffer  substantial
losses or reduced earnings.

OUR OEM  REMOTE  CONTROLS  BUSINESS  IS  FOCUSED ON  CONSUMER  MARKETS  THAT ARE
INTENSELY  PRICE   COMPETITIVE.   IF  WE  CANNOT  GENERATE  VOLUME  AND  RELATED
MANUFACTURING  EFFICIENCIES REQUIRED TO COMPETE IN THESE MARKETS, OUR RESULTS OF
OPERATIONS WILL BE ADVERSELY AFFECTED.

         Historically,  our OEM Remote Controls  business was focused on selling
remote devices in the presentation projector market. As a specialty market, this
sector generated relatively low sales volumes with correspondingly high margins.
However the presentation  projector market has become more consumer-oriented and
price  competition  has  increased.  We have  shifted  our OEM  Remote  Controls
business toward sales to manufacturers of advanced viewing devices which is also
very  consumer-oriented and price competitive but which offers the potential for
higher  volumes.  If we cannot  increase  production and sales volume,  or if we
otherwise fail to achieve production efficiencies, our results of operations and
financial position will be adversely affected.

FAILURE TO MAINTAIN, DEVELOP AND EXPAND OUR OEM RELATIONSHIPS COULD CAUSE DEMAND
FOR OUR PRODUCTS TO DECREASE.

         Sales to OEMs constituted 30% of our total sales in 2005. If we fail to
maintain,  develop and expand our  relationships  with  significant  OEMs, or if
those OEMs are not successful in their  marketing and sales efforts,  demand for
our products may decrease.  For example,  our OEM Remote  Controls  products are
sold to OEMs and consist  primarily of remote  devices  that are  packaged  with
advanced  viewing  devices,  televisions  or  presentation  systems.  If our OEM
customers  experience a  significant  reduction  in demand for advanced  viewing
devices,  televisions or  presentation  systems it will  significantly  decrease
demand for our remote devices.

         Our ability to generate increased  revenues also depends  significantly
on the extent to which our OEM customers develop, promote and sell products that
incorporate   our  technology  and  products.   If  our  OEM  customers  do  not
successfully develop and market products that incorporate our products, sales of
our products to our OEM  customers  would be adversely  affected.  The extent to
which our


                                       12
<PAGE>


OEM  customers  develop,  promote and sell our  products is based on a number of
factors that are largely beyond our ability to control.

THE LOSS OF ANY SIGNIFICANT CUSTOMER OR ANY CANCELLATION,  REDUCTION OR DELAY OF
A LARGE PURCHASE BY A SIGNIFICANT  CUSTOMER COULD REDUCE OUR REVENUE AND REQUIRE
US TO WRITE-DOWN INVENTORY.

         In 2005,  approximately  52% of our total  sales were to our OEM Remote
Controls  customers  and most of these  sales  were to OEM  customers.  With the
advent of our  MICRONAV  family of sensors,  we expect that our  reliance on OEM
sales  will  increase.  The  loss  of any key OEM  customers,  or a  significant
reduction in sales to those customers,  could  significantly  reduce our revenue
below anticipated levels. From time to time, we expect to lose other significant
revenue streams and will be required  constantly to seek new opportunities  with
new and  existing  customers.  Because  our  expense  levels  are  based  on our
expectations as to future revenue and are, to a large extent, fixed in the short
term,  a  substantial  reduction  or delay in  sales of our  products  to an OEM
customer,  the unexpected  loss of any  significant  OEM or other  customer,  or
unexpected returns from customers, could harm our business.

FAILURE TO INCREASE MARKET  AWARENESS AND ACCEPTANCE OF  E-TRANSACTIONS  AND OUR
E-TRANSACTION  PRODUCTS  MAY CAUSE OUR  REVENUES IN THIS MARKET TO FALL SHORT OF
OUR EXPECTATIONS.

         The prospects  for our  e-transactions  business  depend in part on the
acceptance by our target markets of electronic  signatures as a replacement  for
traditional pen and ink  signatures.  The market for  e-transactions  is new and
emerging  and we cannot be certain  that it will  continue to develop or grow or
that  businesses will elect to adopt our products rather than continuing to rely
on traditional pen and ink signatures. Businesses that have invested substantial
resources in traditional infrastructures may be reluctant to adopt an electronic
approach to replace their existing systems. Concerns about privacy and fraud may
cause businesses not to adopt e-transactions or our e-transaction  products.  We
expect  that we will need to continue to pursue  intensive  marketing  and sales
efforts to educate  prospective  customers about the benefits of  e-transactions
and  our  e-transaction   products.   If  market  awareness  and  acceptance  of
e-transactions  do not occur, our revenues and profitability in this market will
fall short of our expectations.

SALES  OF  SIMPLE  SIGNATURE   CAPTURE  DEVICES  ARE  GROWING  RAPIDLY  AND  THE
MANUFACTURERS  OF THESE  DEVICES  COULD  BROADEN  THEIR PRODUCT RANGE TO INCLUDE
PRODUCTS THAT COMPETE WITH OUR EPAD.

         Simple signature capture devices have recently become a common sight at
retail  checkout  counters and a number of companies  manufacture and sell these
devices.  While  our  EPAD  product  is  targeted  at a more  demanding  market,
signature  capture  device  manufacturers  could elect to upgrade their existing
products in an effort to compete in our markets.  Such competition  could reduce
margins or  otherwise  adversely  affect  our  prospects  in our  e-transactions
market.

IF WE ARE UNABLE TO KEEP PACE WITH RAPID  TECHNOLOGICAL  CHANGE AND GAIN  MARKET
ACCEPTANCE OF NEW PRODUCTS, WE MAY NOT BE ABLE TO COMPETE EFFECTIVELY.

         Technology,  both in our  markets  and in our  customers'  markets,  is
undergoing  rapid change.  In order to maintain our  leadership  position in our
existing  markets  and to  emerge as a leader  in new  markets,  we will have to
maintain a leadership  position in the  technologies  supporting  those markets.
Doing so will require, among other things, the following:

         o        we must accurately predict the evolving needs of our customers
                  and develop,  in a timely


                                       13
<PAGE>


                  manner, the technology required to support those needs;

         o        we must  provide  products  that are not only  technologically
                  sophisticated  but are also available at a price within market
                  tolerances and competitive with comparable products;

         o        we must establish and effectively  defend our ownership of the
                  intellectual property supporting our products; and

         o        we must enter into  relationships  with other  companies  that
                  have developed complementary  technology on which our products
                  also depend.

         We  cannot  assure  you  that we will be able to  achieve  any of these
objectives.

IF WE FAIL TO MANAGE OUR GROWTH SUCCESSFULLY,  OUR OPERATIONS COULD BE ADVERSELY
IMPACTED AND OUR GROWTH COULD BE IMPAIRED.

         The  ability to  operate  our  business  in  rapidly  evolving  markets
requires an effective planning and management  process. We expect that growth in
our  business  will  place a  significant  strain on our  personnel,  management
systems, infrastructure and other resources. Our ability to manage any potential
future growth effectively will require us to attract, train, motivate and manage
new  employees,  to integrate new employees  into our overall  operations and to
continue to improve our  operational,  financial  and  management  controls  and
procedures.  If we are unable to implement  adequate  controls or integrate  new
employees  into our business in an efficient and timely  manner,  our operations
could be adversely affected and our growth could be impaired.

MOST OF OUR OEM AND MAJOR  RETAIL  CUSTOMERS  ORDER  FROM US ON A "JUST IN TIME"
BASIS, WHICH REQUIRES US TO ESTIMATE DEMAND FOR PARTICULAR PRODUCTS.

         The  agreements  or  understandings  that we reach with most of our OEM
customers  specify  various terms such as product  design and price,  but do not
constitute firm purchase orders for a specific number of products or components.
Our OEM and major retail  customers  typically  place firm purchase  orders on a
"just in time" basis and expect  products or components to be shipped to them as
soon as they can be made.  Accordingly,  our backlog of firm orders is typically
quite small in relation to the volume of our sales.  In anticipation of customer
demand,  we are often required to purchase raw materials and components based on
estimates of customer demand derived from non-binding  information  furnished by
the  customer.  If  customer  purchase  orders  differ  substantially  from  our
estimates,  we may accumulate excess inventory that has to be written off. If we
underestimate  demand, we may be unable to meet customer needs, which could harm
our relationship with the customer.

WE RELY ON  THIRD  PARTIES  FOR THE  MATERIALS  THAT WE USE TO  MANUFACTURE  OUR
PRODUCTS AND A SHORTAGE OF SUPPLY COULD ADVERSELY AFFECT OUR REVENUES, OPERATING
RESULTS AND CUSTOMER RELATIONSHIPS.

         We rely on third-party suppliers for the raw material components of our
products.  We cannot assure you that our  suppliers  will be able to maintain an
adequate  supply of these raw  materials  to  enable  us to  fulfill  all of our
customers'  orders on a timely basis. A failure to obtain an adequate  supply of
the materials for our products could increase our costs of goods sold,  cause us
to fail to meet  delivery  commitments  and cause our customers to purchase from
our competitors, which could adversely affect our operating results and customer
relationships. In some situations, we rely on a single supplier for raw material
components of our products. Any disruption in these supplier


                                       14
<PAGE>


relationships  could prevent us from maintaining an adequate supply of materials
and could adversely affect our results of operation and financial position.

DISRUPTIONS  IN OUR  MANUFACTURING  FACILITIES OR  ARRANGEMENTS  COULD CAUSE OUR
REVENUES AND OPERATING RESULTS TO DECLINE.

         We  manufacture  all of our FSR  sensors at our  Camarillo,  California
facility. This facility is vulnerable to damage from earthquakes, floods, fires,
power loss and similar events.  It could also be subject to break-ins,  sabotage
and intentional acts of vandalism.  Our insurance may not cover such events and,
if the event is covered,  our  insurance  may not be sufficient to compensate us
for any  losses  that may  occur.  Despite  any  precautions  we may  take,  the
occurrence  of  a  natural  disaster  or  other  unanticipated  problem  at  our
manufacturing  facility  could result in delayed  shipment of  products,  missed
delivery deadlines and harm to our reputation,  which may cause our revenues and
operating results to decline.

         All of our non-FSR  product  manufacturing  is currently  done by third
parties in China  identified and managed  through our Hong Kong  subsidiary.  We
rely on our subsidiary to select and contract with contract  manufacturers  with
suitable  manufacturing  facilities  and  appropriately  trained  employees.  An
interruption in our current  manufacturing  arrangements  could adversely affect
our revenues, operating results and customer relationships.

PERFORMANCE,  RELIABILITY  OR QUALITY  PROBLEMS  WITH OUR PRODUCTS MAY CAUSE OUR
CUSTOMERS TO REDUCE OR CANCEL ORDERS WHICH WOULD HARM OUR OPERATING RESULTS.

         We  regularly   introduce  new  products  with  new   technologies   or
manufacturing processes. Our products have in the past contained, and may in the
future contain,  errors or defects that may be detected at any point in the life
of the product.  Detection of such errors could result in delays in shipping and
sales during the period required to correct such errors. Defects may also result
in  product  returns,  loss of sales  and  cancelled  orders,  delays  in market
acceptance,  injury to our  reputation,  injury to  customer  relationships  and
increased  warranty  costs,  which could have an adverse effect on our business,
operating results and financial condition.

INTERNATIONAL SALES AND MANUFACTURING RISKS COULD ADVERSELY AFFECT OUR OPERATING
RESULTS.

         Our revenue from  international  sales accounted for approximately 55%,
60% and 51% of net sales for 2005, 2004 and 2003, respectively.  We believe that
international  sales will  represent a substantial  portion of our sales for the
foreseeable  future. Our non-FSR  manufacturing is currently  performed by third
parties  in  China.  Our  international  operations  involve  a number of risks,
including:

         o        import-export license requirements,  tariffs,  taxes and other
                  trade barriers;

         o        difficulty in staffing and managing foreign operations;

         o        ability to secure credit and funding;

         o        difficulty  in  maintaining  an  effective  system of internal
                  controls at our foreign manufacturing facility;

         o        foreign collection problems;

         o        reduced protection of intellectual property rights;

         o        international unrest and terrorism;


                                       15
<PAGE>


         o        political and economic instability; and

         o        transportation risks.

Any of the above factors could adversely affect our operating results.

OUR OPERATING  RESULTS COULD BE ADVERSELY  AFFECTED BY FLUCTUATIONS IN THE VALUE
OF FOREIGN CURRENCIES.

         International  sales made through our Japanese subsidiary are generally
denominated in yen. A weak yen would  materially  affect total revenue and could
result in a decrease in dollar  revenue even though sales  remained  constant or
increased.  We  also  contract  for  most  of  our  large-volume,  non-technical
manufacturing in China. Although we contract in U.S. dollars, a weakening of the
dollar  could  cause  existing  contracts  to be  uneconomic  to the  vendor and
therefore  require a  renegotiation.  Over the past two years, the valuations of
many  foreign  currencies  have  fluctuated  significantly  relative to the U.S.
dollar. The Japanese yen, in particular,  has fluctuated in value due in part to
the economic problems  experienced by Asian countries and the recent devaluation
of the U.S. dollar. Although we at times engage in currency hedging transactions
in order to protect ourselves from risks of Japanese yen currency  fluctuations,
we cannot assure you that these activities will protect us from such risks.

OUR MARKETS ARE INTENSELY COMPETITIVE AND MANY OF OUR POTENTIAL COMPETITORS HAVE
RESOURCES THAT WE LACK.

         Our  markets are  competitive  and we expect  competition  in our newer
markets to increase.  Our competitors include companies with similar products or
technologies,  companies that sell complementary  products to our target markets
and our OEM customers themselves,  who could choose to manufacture products that
they currently buy from us. Our competitors  and potential  competitors may have
established business  relationships that may afford them a competitive advantage
or may create  technologies that are superior to ours or that set a new industry
standard that will define the successful  product for that market. If any of our
competitors establish a close working relationship with our customers,  they may
obtain advance knowledge of our customers' technology choices or may be afforded
an opportunity to work in partnership to develop compatible technologies and may
therefore  achieve  a  competitive  advantage.  We  may  be  unable  to  compete
successfully against our current and future competitors.

OUR PRODUCTS ARE OFTEN  CUSTOMER-SPECIFIC,  AND FROM TIME TO TIME WE MAY NEED TO
WRITE OFF EXCESS OR OBSOLETE INVENTORY.

         A  substantial  percentage  of  our  intuitive  interface  devices  and
components are customer-specific and cannot be easily recycled for sale to other
customers. However, we must have sufficient quantities of our products available
to satisfy our customers'  demands.  If a particular  customer fails to order as
expected  or  cancels  or  substantially  delays  an order,  we may have  excess
inventory  that we may be required to hold for long  periods of time or that may
eventually become obsolete. In these situations, we may be required to write off
or write down  inventory,  which  would have a  material  adverse  effect on our
results of operations.


                                       16
<PAGE>


EARLY  IMPLEMENTATION  OF THE  RESTRICTION  ON HAZARDOUS  SUBSTANCES ACT OF 2002
("ROHS") OR THE ADOPTION OF SIMILAR  RESTRICTIONS  IN MARKETS  OUTSIDE OF EUROPE
MAY REQUIRE US TO MAKE ADDITIONAL WRITE-DOWNS OF OUR INVENTORY.

            When it goes into  effect,  the ROHS will  limit the use of  certain
restricted  raw  materials  in  production  of  consumer  goods that are sold in
Europe. Many of these restricted  materials are found in our products and in the
components we have in our  inventory.  Although the ROHS is not effective  until
late 2006,  many of our OEM customers  are  implementing  the ROHS  restrictions
early  and are  requiring  our  products  to be  ROHS-compliant.  We  previously
determined  that we would not be able to  adequately  reduce  our  inventory  of
non-compliant  materials and, as a result, we recorded an expense of $900,000 to
create a reserve for  obsolescence.  While we  currently  believe our reserve is
adequate,  we may need to reassess  it if other OEM  customers  begin  demanding
ROHS-compliant  products prior to the effective date of ROHS or if other markets
adopt similar restrictions.

OUR  ABILITY TO OPERATE  EFFECTIVELY  COULD BE  IMPAIRED  IF WE WERE TO LOSE THE
SERVICES OF KEY PERSONNEL, OR IF WE ARE UNABLE TO RECRUIT QUALIFIED MANAGERS AND
KEY PERSONNEL IN THE FUTURE.

         Our success is substantially dependent on the continued availability of
our key management and technical  personnel,  including the employees  listed in
the management  table appearing later in this Annual Report.  Several of our key
management  personnel have been with us throughout  most of our history and have
substantial  experience with our business and technology.  If one or more of our
key  management  personnel  leaves  Interlink  and  we  are  unable  to  find  a
replacement  with the combination of skills and attributes  necessary to execute
our business  plan, it may have an adverse  impact on our business.  Our success
will also  depend,  in part,  on our  ability to attract  and retain  additional
qualified  professional,   technical,   production,   managerial  and  marketing
personnel, both domestically and internationally.

IF OUR PRODUCTS DO NOT SUPPORT EVOLVING INDUSTRY STANDARDS, THEY MAY NOT ACHIEVE
OR MAINTAIN MARKET ACCEPTANCE AND OUR REVENUES MAY DECLINE.

         Our wireless  communication  products must  communicate  using whatever
communication  protocol  is  chosen by the  customer.  Supporting  a  particular
communication  protocol requires specific technical expertise and we expect that
we will be required to establish  and maintain  such  expertise  with respect to
each commonly  used  communication  protocol.  New  communication  protocols are
constantly under development and we may fail to acquire the necessary experience
to support a popular  new  protocol  or to  respond  to  changes in an  existing
protocol.  In our  e-transactions  business,  our customers will expect that our
products  will enable them to comply with  applicable  requirements  relating to
electronic signatures,  such as the Electronic Signatures in Global Commerce Act
and procedures  adopted by the National Notary  Association.  If our products do
not support these  requirements,  sales of our e-transactions  products would be
adversely affected.

IF WE ARE NOT ABLE TO PROTECT OUR INTELLECTUAL PROPERTY OR IF WE INFRINGE ON THE
INTELLECTUAL  PROPERTY OF OTHERS,  OUR BUSINESS AND  OPERATING  RESULTS COULD BE
ADVERSELY AFFECTED.

         We  consider  our  intellectual  property  to be a key  element  of our
ability to compete in our chosen  markets.  We rely on a combination of patents,
trade secrets and proprietary software to establish and protect our intellectual
property  rights.  We cannot  assure you that patents will be issued from any of
our pending  applications  or that any claims  allowed from  existing or pending
patents will be  sufficiently  broad to protect our  technology.  We also cannot
assure you that any patents issued to us will not be challenged,  invalidated or
circumvented,  or that the rights granted will provide


                                       17
<PAGE>


proprietary  protection.  Litigation  may be  necessary  to enforce our patents,
trade secrets and other intellectual  property rights, to determine the validity
and scope of the  proprietary  rights of others or to defend  against  claims of
infringement. Such litigation could result in substantial costs and diversion of
resources and could have a material  adverse effect on our business,  regardless
of the final outcome of the litigation.

         We are not currently  engaged in any patent  infringement  suits but we
have been threatened with one such suit in recent years.  Despite our efforts to
maintain and safeguard our proprietary rights, we cannot assure you that we will
be successful in doing so or that our competitors will not independently develop
or patent  technologies  that are  substantially  equivalent  or superior to our
technologies.  If any of the holders of these patents  assert claims that we are
infringing them, we could be forced to incur substantial  litigation expenses or
to pay substantial royalties.  In addition, if we were found to be infringing on
someone  else's patent,  we could be required to pay  substantial  damages,  pay
royalties in the future and/or be enjoined from infringing in the future.

WE RELY ON OTHERS FOR ASPECTS OF OUR TECHNOLOGY DEVELOPMENT.

         Our  in-house  research  and  development  expertise  is focused on our
sensor and communication technologies. We do not have broadly based expertise in
software development,  chip design or other critical  technological aspects of a
complete product.  We rely on other companies with whom we may contract or enter
into joint  development  agreements  to  provide  these  aspects of our  product
technologies. We cannot assure you that we will be able to contract or otherwise
arrange  for these  services in the  future.  We also  cannot  assure you that a
developer with whom we contract for technology  will not use or permit others to
use similar technology in competition with us.

WE ARE A  PUBLIC  COMPANY  AND ARE  THEREFORE  REQUIRED  TO INCUR  COSTS  AND TO
DISCLOSE  INFORMATION  THAT  PRIVATE  COMPANIES  ARE NOT  REQUIRED  TO  INCUR OR
DISCLOSE.

         As a public company,  we are required to comply with complex and costly
accounting and disclosure  requirements  that do not apply to foreign  companies
that are not public in the United States,  private  companies or to subsidiaries
or divisions of very large  companies for whom the results of the  subsidiary or
division are not material. The costs that we are required to incur have recently
increased dramatically,  especially in connection with our reporting obligations
under  Section 404 of the  Sarbanes-Oxley  Act of 2002,  and these  expenses may
continue to be incurred at historically unprecedented levels for the foreseeable
future.  These  costs  impact  our  profitability  and  therefore  constitute  a
competitive  disadvantage vis-a-vis much of our competition.  These requirements
may also prevent our management from focusing on other areas of our business. In
addition,  our public status requires us to disclose  publicly  information that
can afford a competitor a  competitive  advantage.  If we are unable to maintain
costs associated with our public company status within reasonable parameters, or
if we are  required  to disclose  information  that our  competitors  can use to
compete  with us, our  ability to remain  competitive  in our  markets  could be
adversely affected.

BUSINESS  ACQUISITIONS  OR  PARTNERING  ARRANGEMENTS  MAY DISRUPT OUR  BUSINESS,
DILUTE SHAREHOLDER VALUE AND DISTRACT MANAGEMENT'S ATTENTION.

         As part of our business strategy,  we may consider  acquisitions of, or
significant  investments in, businesses with services,  products or technologies
that we believe could  complement or expand our business.  Such  acquisitions or
investments involve numerous risks, including:

         o        unanticipated costs and liabilities;


                                       18
<PAGE>


         o        difficulty  of  integrating  the   operations,   products  and
                  personnel of the acquired business;

         o        difficulties in managing the financial and strategic  position
                  of acquired or developed products and technologies;

         o        difficulties in maintaining customer relationships;

         o        diversion of management's attention;

         o        inability to maintain uniform  standards,  controls,  policies
                  and procedures;

         o        impairment  of  relationships   with  acquired  employees  and
                  customers occurring as a result of integration of the acquired
                  business; and

         o        accounting  results that are unrelated to the  performance  of
                  either business.

         Acquisitions  also frequently result in recording of goodwill and other
intangible  assets  that are  subject to  potential  impairments  in the future.
Additionally, if we finance acquisitions by using convertible debt or stock, our
existing  stockholders may be diluted which could affect the market price of our
stock. If we fail to properly evaluate and execute  acquisitions or investments,
we may not achieve the anticipated  additional  benefit to our business,  and we
may incur costs in excess of what we anticipate.

WE HAVE IDENTIFIED  MATERIAL  WEAKNESSES IN OUR INTERNAL  CONTROL OVER FINANCIAL
REPORTING AND HAVE BEEN REQUIRED TO RESTATE OUR HISTORICAL FINANCIAL STATEMENTS.

         In our Annual Report for the year ended  December 31, 2004, we reported
material weaknesses in our internal control over financial reporting. Additional
material  weaknesses  were  identified  in 2005.  As a result of these  material
weaknesses,  we were  required to restate  several of our  historical  financial
statements.  We  have  taken  significant  measures  to  improve  our  financial
reporting  process but,  despite  these  measures,  continued  to have  material
weaknesses  as of December 31, 2005.  As a result,  management  and our auditors
have  concluded  that  our  internal   control  over  financial   reporting  was
ineffective  as of December 31,  2005.  These  matters are more fully  described
elsewhere  in this  report  under  the  captions  "Management's  Discussion  and
Analysis of Financial  Condition  and Results of  Operations"  and "Controls and
Procedures--Internal Control Over Financial Reporting."

         Any  continuing  material  weaknesses  in  our  internal  control  over
financial  reporting  could result in errors in our financial  statements.  Such
errors could cause our internal  planning and  assessment  of our business to be
based on false information and could cause our published financial statements to
fail to fairly  present our financial  condition and results of  operations.  We
cannot  assure you that we will be  successful  in our effort to  eliminate  all
material  control  weaknesses.  Any continuing  material  weaknesses could erode
market confidence in our company, could cause the price of our stock to be based
on false or misleading  information and could result in litigation  based on any
such false or misleading information.

WE ARE FACING  LITIGATION  BASED ON OUR  RESTATEMENTS  OF  HISTORICAL  FINANCIAL
STATEMENTS,  WHICH MAY HAVE A MATERIAL  ADVERSE  IMPACT ON OUR CASH RESERVES AND
MAY IMPAIR OUR ABILITY TO ACHIEVE OUR BUSINESS OBJECTIVES.

         Certain former Interlink stockholders have filed a class action lawsuit
claiming  damages  under various  securities  laws based on our  restatement  of
historical  financial  statements.  Other stockholders have brought a derivative
action against our Chief Executive  Officer,  our former Chief Financial


                                       19
<PAGE>


Officer and our directors, alleging mismanagement.  These actions will require a
vigorous  defense and could result in a settlement  or adverse award that is not
covered by insurance or that exceeds  applicable  insurance limits. The time and
expense  required to defend these claims may also affect our cash  resources and
ability to pursue our  strategy.  There is also no  assurance  that the ultimate
resolution of these matters will not result in a material  adverse effect on our
business, financial condition or results of operations.

ITEM 2.  PROPERTIES

         Our  corporate  offices  and  principal  manufacturing  facilities  are
located in a 44,110 square foot leased  facility in Camarillo,  California.  The
lease on the Camarillo premises runs until February 28, 2010 (with one option to
extend for an  additional  sixty month  period) and  provides for a monthly rent
payment of $29,113 with a 3% annual increase. Our Japanese subsidiary, Interlink
Electronics,   K.K.,  leases  office  space  in  Tokyo,  Japan.  Our  Hong  Kong
subsidiary,  Interlink Electronics Asia Pacific Limited,  leases office space in
Hong Kong and warehouse space in Hong Kong and mainland China.

ITEM 3.  LEGAL PROCEEDINGS

         On November 15, 2005, a class  action  alleging  violations  of federal
securities  laws was filed against the Company and two of its current and former
officers  in the  United  States  District  Court for the  Central  District  of
California.  The complaint alleges that,  between April 24, 2003 and November 1,
2005,  the Company and two of its  current  and former  officers  made false and
misleading  statements and failed to disclose material information regarding the
Company's results of operations and financial condition.  The complaint includes
claims under the Securities Act and Exchange Act and seeks  unspecified  damages
and legal expenses.

         To date,  the  Court  has not  certified  a class,  and the  litigation
remains in its early stages.

         On  January  24,  2006,  a  shareholder's  derivative  action was filed
against two of the Company's  current and former officers and the members of its
Board of  Directors  in the  Central  District  of  California.  The  derivative
complaint  contains the same factual  allegations as the class action  complaint
and  sought to  recover  unspecified  damages  from the  defendants,  as well as
forfeiture of their equity-based  compensation and contribution from them in the
event that the Company is found to have  violated the federal  securities  laws.
Following a motion made by the  defendants  to dismiss,  or in the  alternative,
stay the derivative action, the plaintiff  voluntarily  dismissed the derivative
action without prejudice on June 14, 2006.

         In  connection  with the class  action and the  derivative  proceedings
described above, an independent investigation was undertaken at the direction of
the Audit  Committee  by Dorsey & Whitney,  LLP.  Dorsey & Whitney  retained the
services  of  PricewaterhouseCoopers   LLP  with  respect  to  various  forensic
accounting   and   electronic   procedures   performed  in  the  course  of  the
investigation.  The internal  investigation  and findings are  discussed in more
detail in  "Management's  Discussion  and  Analysis of Financial  Condition  and
Results of Operations."

         While it intends to vigorously  defend against these  allegations,  the
Company  cannot  predict the final  disposition  of these matters or whether the
Company  will be liable  for  amounts  not  covered  by  insurance.  There is no
assurance,  however,  that the  ultimate  resolution  of these  matters will not
result  in a  material  adverse  effect  on the  Company's  business,  financial
condition or results of operations.


                                       20
<PAGE>


         In addition to the matters  identified  above,  from time to time,  the
Company is involved in various legal  actions that arise in the ordinary  course
of business.

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

         There were no matters submitted to a vote of security holders,  through
the solicitation of proxies or otherwise,  during the fourth quarter of the year
ended December 31, 2005.


                                       21
<PAGE>


ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT

         The  following  table  contains  information  as of July 15,  2006 with
respect to each person who is an executive officer of Interlink:

NAME                              AGE   POSITION
-------------------------------   ---   --------------------------------------
E. Michael Thoben, III.........   52    President, Chief Executive Officer and
                                          Chairman of the Board
Charles C. Best................   46    Chief Financial Officer and
                                          Secretary
Michael W. Ambrose.............   47    Senior Vice President,
                                          Technology & Product Development

         E.  MICHAEL  THOBEN,  III has served as  Interlink's  president,  chief
executive  officer and chairman of the board of directors  since 1994. From 1990
to 1994, he served as  Interlink's  president  and a director.  Prior to joining
Interlink in 1990, Mr. Thoben was employed by Polaroid Corporation for 11 years,
as  the  manager  of one of  Polaroid's  seven  strategic  business  units  on a
worldwide basis.  Mr. Thoben holds a B.S. degree from St. Xavier  University and
has taken graduate  management  courses at the Harvard  Business  School and The
Wharton School of Business.

         CHARLES C. BEST has served as Interlink's  chief financial  officer and
secretary since August 2005. Mr. Best joined Interlink Electronics, Inc. in June
2005 as the vice  president of finance.  From June 2004 to April 2005,  Mr. Best
worked for Celetronix  USA, Inc., an electronics  service  manufacturer,  as the
vice  president and corporate  controller.  From December 1999 through May 2004,
Mr. Best served as  executive  vice  president  and chief  financial  officer of
BioSource  International,  Inc., a biotech reagent company. Mr. Best served four
and a half years as vice president and chief  financial  officer of Cogent Light
Technologies,  Inc., a company engaged in the  manufacture of surgical  lighting
instruments.  From 1989 to 1995, Mr. Best worked in various positions  including
corporate controller for 3D Systems,  Inc., a company engaged in the manufacture
and sale of high tech  rapid  prototyping  equipment.  Mr.  Best is a  certified
public  accountant  and  holds a B.S.  degree  in  business  administration  and
accounting from San Diego State University.

         MICHAEL    W.    AMBROSE    has    served    as    Interlink's     vice
president--engineering since June 1999. Between March 1998 and June 1999, he was
director of  engineering.  From August 1995 to February 1998, Mr. Ambrose served
as the director of marketing of  Communication  Intelligence  Corp.,  a computer
software company specializing in software for mobile computing, e-signatures and
computer  security.  Prior to August 1995,  he was employed by Logitech  Inc., a
computer  peripherals  company,  as the general manager of its Gazelle  Business
Unit and as vice president of product marketing for Gazelle Graphic Systems. Mr.
Ambrose holds a B.S.  degree in electrical  engineering  from  Washington  State
University.


                                       22
<PAGE>


                                     PART II

ITEM 5.  MARKET FOR REGISTRANT'S COMMON EQUITY,  RELATED STOCKHOLDER MATTERS AND
         ISSUER PURCHASES OF EQUITY SECURITIES.

         As of April 10, 2006, our common stock trades on the OTC Bulletin Board
under the symbol  "LINK.PK." Prior to April 10, 2006, our common stock traded on
the Nasdaq  National  Market under the symbol  "LINK." The following  table sets
forth the high and low  closing  prices for the common  stock as reported on the
OTC Bulletin Board and the Nasdaq National Market for the quarters indicated, as
applicable.   These  prices  do  not  include  retail   markups,   markdowns  or
commissions.

                                                                 LOW       HIGH
                                                                -----     ------
YEAR ENDED DECEMBER 31, 2004
   First Quarter.............................................   $6.45     $12.15
   Second Quarter............................................    7.43      12.37
   Third Quarter.............................................    7.31       9.99
   Fourth Quarter............................................    7.55       9.94
YEAR ENDED DECEMBER 31, 2005
   First Quarter.............................................   $6.14      $7.09
   Second Quarter............................................    5.06       5.80
   Third Quarter.............................................    5.02       5.50
   Fourth Quarter............................................    2.95       3.68

         On June 30,  2006,  the  closing  price of our common  stock on the OTC
Bulletin  Board was  $3.15.  As of June 30,  2006 there  were  approximately  59
stockholders  of record of our common stock. We believe the number of beneficial
owners is  substantially  greater  than the number of record  holders  because a
large  portion  of  Interlink's  outstanding  common  stock is held of record in
broker  "street names" for the benefit of individual  investors.  As of June 30,
2006, there were 13,774,126 shares outstanding.

         We have never  declared  or paid cash  dividends  on our common  stock.
Payment of any cash dividends will depend on the results of our operations,  our
financial  condition and our capital expenditure plans, as well as other factors
our board of directors may consider relevant.  We presently intend to retain any
earnings for use in our business and,  therefore,  do not anticipate  paying any
cash dividends in the foreseeable future.

ISSUER  PURCHASES OF EQUITY  SECURITIES MADE DURING THE FOURTH QUARTER OF FISCAL
2005

We did not repurchase any shares of our stock in the fourth quarter of 2005.


                                       23
<PAGE>


ITEM 6.  SELECTED FINANCIAL DATA.

         The  selected  financial  data  presented  below was  derived  from the
audited  consolidated  financial  statements  of the Company.  Our  consolidated
financial  statements as of and for the years ended December 31, 2005,  2004 and
2003 were audited by BDO Seidman, LLP and our consolidated  financial statements
as of and for the years ended  December  31, 2002 and 2001 were audited by other
auditors.   The  data  presented  below  should  be  read  in  conjunction  with
Management's  Discussion  and  Analysis of Financial  Conditions  and Results of
Operations,  the  financial  statements  and the  notes  thereto  and the  other
financial  information included therein.  Historical results are not necessarily
indicative of future performance.
<TABLE>
<CAPTION>
                                                      Year Ended December 31,
                                     --------------------------------------------------------
                                       2005       2004(3)     2003(3)     2002(3)     2001(3)
                                     --------    --------    --------    --------    --------
                                              (In thousands, except per-share data)
<S>                                  <C>         <C>         <C>         <C>         <C>
CONSOLIDATED STATEMENT OF
OPERATIONS DATA:
Revenues .........................   $ 38,239    $ 35,406    $ 31,042    $ 25,042    $ 25,265
Cost of revenues .................     30,181      24,811      19,676      16,959      16,454
                                     --------    --------    --------    --------    --------
Gross profit .....................      8,058      10,595      11,366       8,083       8,811
Operating expenses:
  Product development and research      4,586       4,158       3,418       3,336       3,518
  Selling, general and
    administrative ...............     11,844      10,238       8,172       7,457      10,637
                                     --------    --------    --------    --------    --------
    Total operating expenses .....     16,430      14,396      11,590      10,793      14,155
                                     --------    --------    --------    --------    --------
Operating loss ...................     (8,372)     (3,801)       (224)     (2,710)     (5,344)
                                     --------    --------    --------    --------    --------
Other income (expense):
  Minority interest ..............       --          --          --            68         (12)
  Interest income (expense), net .        162          15         (44)       (132)        174
  Other ..........................        (95)         17          48         (23)         45
                                     --------    --------    --------    --------    --------
     Total other income (expense)          67          32           4         (87)        207
                                     --------    --------    --------    --------    --------
Loss before provision for income
  tax expense (benefit) ..........     (8,305)     (3,769)       (220)     (2,797)     (5,137)
Provision for income tax expense
  (benefit)(2) ...................       --          --            28       1,301        (764)
                                     --------    --------    --------    --------    --------
Net loss .........................   $ (8,305)   $ (3,769)   $   (248)   $ (4,098)   $ (4,373)
                                     ========    ========    ========    ========    ========

Loss per share-basic(1)(2) .......   $  (0.61)   $  (0.31)   $  (0.02)   $  (0.42)   $  (0.45)
Loss per share-diluted(1)(2) .....   $  (0.61)   $  (0.31)   $  (0.02)   $  (0.42)   $  (0.45)

Weighted average shares-basic(1) .     13,721      11,972      10,339       9,766       9,645
Weighted average shares-diluted(1)     13,721      11,972      10,339       9,766       9,645

                                                            DECEMBER 31,
                                     --------------------------------------------------------
                                       2005       2004(3)     2003(3)     2002(3)     2001(3)
                                     --------    --------    --------    --------    --------
CONSOLIDATED BALANCE SHEET DATA:                          (In thousands)
Working capital                      $ 22,952    $ 30,455    $ 18,873    $ 16,414    $ 19,333
Total assets                           33,171      39,948      25,582      21,766      26,641
Short term debt                           154         491         706         933       1,923
Long term debt                            154         405       1,010       1,401       1,855
Stockholders' equity                   24,272      32,091      19,370      16,300      17,943
</TABLE>

----------
(1)      As  adjusted  for the  three-for-two  stock  split  effected as a stock
         dividend to stockholders of record on March 20, 2000.
(2)      Adjustments  to provisions  for income tax expense during these periods
         have fluctuated due to the deferred tax asset valuation allowance. This
         has affected the  comparability  of net income  (loss) and earnings per
         share amounts.
(3)      As restated.


                                       24
<PAGE>


ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
         OF OPERATIONS.

         We develop,  manufacture,  market and sell intuitive  interface devices
and components  for a variety of business and home  applications  worldwide.  We
generate  revenues from the sale of our hardware  products,  including pen input
and signature pads,  integrated  cursor control  devices and interactive  remote
input  devices.  To a lesser but increasing  extent,  we derive revenue from the
sale of software combined with our hardware. Depending on the application,  this
software may be internally developed or purchased from software partners.

         We record our revenue in four market  segments:  e-transactions  (input
devices for the electronic signature markets);  specialty components (integrated
FSR-based  sensors,  subassemblies  and modules that support  cursor control and
other input functions); OEM remote controls (wireless intuitive input device and
sensor  products  for use with  presentation  projectors  and  advanced  viewing
devices) and Interlink branded products (aftermarket remote control devices sold
through  retail  channels).  We have addressed our specialty  components  market
since our  inception  in 1985.  Our other three  markets have evolved out of our
specialty  components  market.  We have  addressed  our OEM remotes  market as a
separate  market since 1994 and separately  since 2005,  branded  products since
1994 and our  e-transactions  market since 1999. The relative  revenue and gross
profit  contributions  of each of these segments is provided below in RESULTS OF
OPERATIONS-BUSINESS SEGMENT OVERVIEW.

2005 OVERVIEW

         In 2005, we achieved modest overall  revenue growth,  compared to 2004,
principally as a result of an increase in e-transactions revenue.  Revenues from
OEM remotes,  historically our largest market, was flat,  compared to 2004, as a
result  of a  decrease  in  sales  of  business  communication  products  and an
offsetting  increase in sales of advanced viewing device  products.  In November
2005, we announced a  restructuring  of our OEM remotes  business as a result of
adverse  trends  in the  presentation  projector  market.  In  the  restructured
business we are pursuing new orders for OEM remote  controls on a more selective
basis and  therefore  expect to see a  continuing  decline in  revenue  from the
presentation  projector market offset by an increase in controllers for advanced
viewing  devices.  We are  continuing  our  emphasis on our  e-transactions  and
specialty  components  markets and expect to continue to achieve  strong revenue
growth in those markets.  In the specialty  components market, we are continuing
to emphasize our MICRONAV  sensors for use in small,  battery  operated  devices
such as digital music players and cell phones.

         We continued to be challenged in 2005 by decreasing  margins in our OEM
remotes business and by increases in general and administrative  costs, compared
to 2004. The decreasing  margins are a result of competitive market pressures in
the lower end of the OEM presentation  projector market. The increase in general
and administrative  costs is due primarily to increases in accounting  personnel
and  consultants  required to deal with the need to restate  various  historical
financial  statements  and to add  internal  accounting  capability  in order to
achieve an adequate  system of internal  controls over financial  reporting.  We
expect the  increased  general and  administrative  cost to  continue,  although
possibly at lower levels than in 2004 and 2005,  and therefore seek to reduce it
over time as a percentage of revenue by increasing revenue in the markets we are
emphasizing.

         Cash and cash  equivalents  at December 31, 2005 totaled $13.9 million.
We consumed $5.1 million of cash in 2005 primarily to fund our 2005 operations.


                                       25
<PAGE>


OUTLOOK

         We expect continued growth in our e-transactions market as our products
continue  to set the  standard  for  advanced  e-transaction  support  and  more
companies  make decisions to automate  their  document  process.  In addition to
growth  in unit  sales,  we  expect  to  achieve  revenue  growth as a result of
continuing functionality enhancements, such as the addition of thumbprint, voice
and other recognition technologies.  As has been the case in the past, we expect
revenue in this sector to fluctuate on a quarterly  basis as sales tend to be in
the form of a relatively small number of large contracts.

         We expect our specialty  products  market to  experience  steady annual
growth  based on our MICRONAV  sensor  products.  In 2004 we had some  important
initial  design  wins and we  continued  in 2005 to expand our  target  markets,
including  most notably the cell phone  market.  Actual  results will depend not
only on our success in convincing  customers to incorporate our sensors in their
products  but also on the  success  of the  products  in which our  sensors  are
incorporated,  Accordingly,  we believe that the amount of growth in this sector
is difficult to predict.

         We expect our OEM  remotes  business  to  experience  flat to  moderate
growth in 2006 as a result of  continuing  decline  in sales of our  remotes  to
presentation projector  manufacturers offset by an increase in sales of advanced
viewing device remotes.  We intend to pursue this market selectively with a view
to achieving improved margins.

         With the exception of the fourth quarter of 2005, our branded  business
communication  business has been growing since we implemented a new distribution
plan in 2004. We expect year over year growth to continue in 2006.

         As previously  noted, we experienced  substantial  increases in general
and  administrative  costs in 2004 and  2005,  primarily  the  result of new and
complex  financial  control  requirements  and  associated  audit  costs  and  a
substantial  build-up in our internal accounting  capability.  We expect general
and administrative  costs could continue to increase as the company continues to
improve   its   infrastructure   and  comply   with   regulatory   requirements.
Additionally,  a number of the  opportunities  that we are  considering  involve
investments in technology,  infrastructure or both. Based on these issues, we do
not expect that the company will achieve profitability in 2006.

         We are involved in class action and derivative proceedings based on our
recent  restatements.  In connection with that litigation,  we may be liable for
costs, expenses or other amounts not covered by insurance.

         We expect to use  current  cash to fund our  operations  in 2006.  As a
result of the pursuit of new opportunities,  the funding of continued  operating
losses or the  litigation  described  above,  we may find it  advisable to raise
additional capital through  financings to increase our cash resources.  There is
no assurance  that such  financings  will be possible or on terms  attractive to
existing investors.

CURRENT OPPORTUNITIES AND CHALLENGES

         Our  principal  challenge  is to  manage  margins  in our  OEM  remotes
business while continuing to invest in our e-transactions and specialty products
businesses  as they grow to achieve  the revenue  levels  that will  sustain and
justify our  investments  in them.  As our  business  becomes  more  diverse and
complex,  we face challenges in adapting our internal accounting systems to meet
new challenges.  Our ability to manage these businesses will define the level of
our success over the next two to three years.


                                       26
<PAGE>


         Management faces the constant  challenge of balancing its investment in
new  technology,   product  development   marketing   initiatives  and  enhanced
infrastructure  and regulatory  costs,  against the objective of steady earnings
growth. A decision to make a significant investment in a new technology, product
or marketing effort may have a short-to-medium  term negative impact on earnings
even if the investment proves to be justified. We are considering investments in
technologies and  infrastructure  that will increase operating costs and, in the
short term, decrease margins and negatively impact earnings. We are looking at a
number  of  ways to  make  these  investments  including  internal  development,
acquisitions and partnering with others.  We may be constrained in pursuing some
of these options by our cash position.

FORWARD LOOKING STATEMENTS

         This Report, including the two immediately preceding sections, contains
forward-looking   statements  within  the  meaning  of  the  Private  Securities
Litigation  Reform Act of 1995. In many cases, you can identify  forward-looking
statements  because they describe  management's  intentions or expectations with
respect  to future  events  or future  possibilities.  Such  statements  involve
inherent  risks and  uncertainties,  many of which are  described in the section
entitled "Risk  Factors" in this Report.  It is likely that, as a result of such
risks  and  uncertainties,  management's  assessment  of future  events  and the
forward-looking  statements contained in this Report will prove to be incorrect.
As a  result,  while  such  statements  may  be  relied  on as a  reflection  of
management's expectations as of the date of this Report, they should not be read
as constituting  any assurance that such  expectations  will be realized or that
management's expectations will not change.

QUARTERLY FINANCIAL PERFORMANCE

         The following table presents certain financial  information for each of
the following quarters:
<TABLE>
<CAPTION>
                                                             QUARTER ENDED (UNAUDITED)
                                                        (In thousands except per share data)
                 -------------------------------------------------------------------------------------------------------------------
                    DEC.       SEPT.       JUN.        MAR.        DEC.        SEPT.       JUN.        MAR.       DEC.        SEPT.
                    31,         30,         30,         31,         31,         30,         30,         31,        31,         30,
                   2005        2005       2005(1)     2005(1)     2004(1)     2004(1)     2004(1)     2004(1)    2003(1)     2003(1)
--------------   --------    --------    --------    --------    --------    --------    --------    --------   --------    --------
<S>              <C>         <C>         <C>         <C>         <C>         <C>         <C>         <C>        <C>         <C>
Revenues .....   $  8,484    $ 10,223    $ 10,263    $  9,269    $  9,682    $  9,556    $  8,232    $  7,936   $  8,716    $  7,848
--------------   --------    --------    --------    --------    --------    --------    --------    --------   --------    --------
Gross Profit .   $  1,691    $  1,292    $  1,819    $  3,256    $  2,190    $  2,088    $  3,183    $  3,134   $  2,025    $  3,285
--------------   --------    --------    --------    --------    --------    --------    --------    --------   --------    --------
Net Income
 (loss) ......   $ (3,256)   $ (2,689)   $ (1,961)   $   (398)   $ (2,067)   $ (1,690)   $    (78)   $     66   $   (907)   $    238
--------------   --------    --------    --------    --------    --------    --------    --------    --------   --------    --------
Earnings
 (loss) per
  share -
  basic ......   $  (0.24)   $  (0.20)   $  (0.14)   $  (0.03)   $  (0.15)   $  (0.15)   $  (0.01)   $   0.01   $  (0.08)   $   0.02
--------------   --------    --------    --------    --------    --------    --------    --------    --------   --------    --------
Earnings
 (loss) per
  share -
  diluted ....   $  (0.24)   $  (0.20)   $  (0.14)   $  (0.03)   $  (0.15)   $  (0.15)   $  (0.01)   $   0.01   $  (0.08)   $   0.02


<CAPTION>
                    -------------------
                      JUN.       MAR.
                       30,        31,
                      2003       2003
--------------      --------   --------
<S>                 <C>        <C>
Revenues .....      $  7,476   $  7,002
--------------      --------   --------
Gross Profit .      $  3,126   $  2,930
--------------      --------   --------
Net Income
 (loss) ......      $    181   $    240
--------------      --------   --------
Earnings
 (loss) per
  share -
  basic ......      $   0.02   $   0.02
--------------      --------   --------
Earnings
 (loss) per
  share -
  diluted ....      $   0.02   $   0.02
</TABLE>

(1)      As restated


                                       27
<PAGE>


         Quarterly  revenues have  increased by 21% on a cumulative  basis since
March  2003.  Sequential  growth  occurred  in each  quarter of 2003.  The first
quarter of 2004 showed a decline in revenues  compared to the fourth  quarter of
2003 but we then showed  sequential  growth for the  following  year.  The first
quarter of 2005 also saw a decline in revenues from the fourth  quarter of 2004,
but we then  showed  sequential  growth  for the next two  quarters.  The fourth
quarter  of 2005 saw a decline  in  revenues  due in part to lower  sales to our
branded  products  channel  and  distributor  partners  as we began a program to
better  align our  operational  activities  and  manufacturing  flow more evenly
throughout each quarter. This allowed for more operational efficiencies and will
more strongly align our partner relationships to our operational strategies.

         Our  gross  profit  has  fluctuated  over  the  past  twelve  quarters.
Quarterly gross profit in 2003 ranged from 23% to 42% with the fourth  quarter's
margin  of 23%  being  affected  by a write off of  approximately  $1.2  million
related to a certain  vendor  receivable as discussed in more detail below.  For
2004,  quarterly  gross profits as a percentage of sales ranged from 22% to 40%,
with the third and fourth  quarters  of 2004 gross  margins  being  affected  by
higher  material  costs due to the ramp up of remote  control  sales of our home
entertainment  market  segment.  Margins for 2005 were lower in the last half of
the year  compared to the first two quarters of the year due to increased  costs
associated  with the  introduction  of new EPAD  products and due to  additional
inventory reserves related to excess and obsolete  inventory  resulting from the
slowdown in the OEM segments of our business.

         Earnings  generally  remained  flat in 2003 with the  exception  of the
fourth quarter, which was impacted by the $1.1million charge to cost of sales as
noted below. For the first quarter of 2004, we experienced  marginal net income.
We have  experienced  net losses since the second  quarter of 2004.  During this
period  revenue has  continued to be relatively  steady and strong,  while gross
profits and earnings have been impacted by revenues  being derived from sales of
wireless  input  devices  on which we earn  lower  margins.  We have  also  been
impacted by substantially increased selling, general and administrative expenses
as we incurred financial and accounting costs required by new legislation and in
building a more robust finance and accounting infrastructure.

         On  March  9,  2005,  we  reported  the  restatement  of our  financial
statements for the first three quarters of 2004. The restatements  were due to a
misinterpretation  of the revenue recognition  guidelines  regarding a "bill and
hold"  product sale in the first  quarter of 2004.  The  resulting  restatements
decreased  revenues  in the first  quarter  of 2004 by  $498,000  and  increased
revenues  by $74,000  and  $114,000  in the second and third  quarters  of 2004,
respectively.  Gross profit and net income were reduced in the first  quarter of
2004 by $218,000  and  increased  by $33,000 and $50,000 in the second and third
quarters  of  2004,  respectively.  Also,  in the  third  quarter  of  2004,  we
underestimated  the ramp up costs  and low  yields  of the  start up of our high
volume home entertainment  remote control business and overstated  inventory and
the amount of  manufacturing  overhead  allocable to  inventory.  The  resulting
restatement  increased cost of sales and decreased inventory by $1.2 million and
resulted in a net decrease to gross profit and net income of $1.1 million in the
third quarter of 2004.

         On  November 2, 2005,  we reported  our  intention  to make  additional
restatements to our financial  results for the years ended December 31, 2003 and
December  31,  2004  and  the  first  two  quarters  of  2005.   The  additional
restatements  reflect  adjustments  to correctly  account for the following four
items:

         o        The first item  involves a key vendor and was  identified in a
                  recent reconciliation of accounts with that vendor. This issue
                  relates  to  a  net  write-off  of  $1.1  million  of  certain


                                       28
<PAGE>


                  receivables  primarily  originating  in the fourth  quarter of
                  2003  due  from  the  vendor,  with  $167,000  of that  amount
                  originating  in the fourth  quarter of 2002, and the recording
                  of $1.0  million in payables due to that same vendor that were
                  not properly  recorded in the Company's  accounting system for
                  the third and fourth quarters of 2004 and the first and second
                  quarters of 2005.

         o        The second item relates to the understatement of cost of sales
                  in the  second  quarter  of 2005 of  $372,000  as a result  of
                  certain  inventory  components  being doubled counted and thus
                  overstated in inventory as of June 30, 2005.

         o        The third item relates to the  understatement of cost of sales
                  in the first and second quarters of 2005 totaling  $616,000 as
                  a result of certain  licensing  charges that were not properly
                  recorded in cost of sales and inventory.

         o        The fourth item relates to a balance sheet reclassification of
                  $1.3 million in cash  payments  made by a customer  during the
                  second  and fourth  quarters  of 2004 as well as the first and
                  second  quarters  of 2005 in  advance of future  shipments  of
                  product.  These  payments  were  incorrectly  applied  against
                  accounts  receivable rather than recorded as deferred revenue.
                  The  cash  prepayments  have  been  properly  reclassified  to
                  deferred revenue.

         These  additional  restatements  reduced  stockholders'  equity  by  an
aggregate of $2.7 million and affected prior periods as follows:

         o        Gross  profit and net  income  for the fourth  quarter of 2003
                  were each reduced by $1.3 million,  to a gross profit of $11.4
                  million and net loss of $248,000.

         o        For the third  quarter of 2004,  gross  profit was  reduced by
                  $249,000  to  $2.1  million  and  our net  loss  increased  by
                  $249,000 to $1.7 million.

         o        For the fourth  quarter of 2004,  gross  profit was reduced by
                  $178,000  to  $3.0  million  and  our net  loss  increased  by
                  $178,000 to $1.2 million.

         o        For the first  quarter of 2005,  gross  profit was  reduced by
                  $238,000  to  $2.5  million  and  our net  loss  increased  by
                  $238,000 to $1.1 million.

         o        For the second  quarter of 2005,  gross  profit was reduced by
                  $945,000  to  $2.4  million  and  our net  loss  increased  by
                  $945,000 to $1.3 million.

         During  the  closing   process  for  our  2005  year,   two  additional
restatement  issues were  discovered.  The first issue  relates to a  terminated
employee's  ability  to extend the time to  exercise  any stock  options  vested
through their respective  termination date in a blackout period.  If we are in a
blackout period,  we will allow the terminated  employee to extend their time to
exercise  to 30 days after the  blackout  period is lifted as opposed to 30 days
after termination as stated in the terms of our stock option plan. This practice
results in a re-measurement  date as defined under stock option accounting rules
which require a revaluation of any stock options that were given this benefit.

         As a result of this  discovery,  we  determined  we had to evaluate all
stock options that have been  exercised from 2001 through 2005 and determine who
exercised  stock  options  beyond the 30-day  period as  specified  in the stock
option plan. We did this and also  determined that since notice of this


                                       29
<PAGE>


blackout period extension was given to employees on their  termination date that
date constituted the re-measurement date.

         We have determined that we have material  amounts of expense related to
the expensing of certain options exercised after the 30-day period in 2001, 2004
and 2005. The amount of  compensation  expense related to 2001, 2004 and 2005 is
$2.4  million,  $220,000  and  $108,000  respectively.  These  amounts  will  be
reflected in our financial statements in the appropriate periods.

         The  second  issue  relates to the  understatement  of cost of sales of
$837,000 in 2004 and an  overstatement of cost of sales of $748,000 in 2005 as a
result of certain  inventory in transit from the parent company to its Hong Kong
subsidiary being overvalued at December 31, 2004.


         These  additional  restatements  reduced  stockholders'  equity  by  an
aggregate of $2.8 million and affected prior periods as follows:

         o        Our net loss for 2001  increased by $2.4 million to a net loss
                  of $4.4 million.

         o        Gross  profit  for 2004 was  reduced  by  $837,000  to a gross
                  profit of $10.6 million and our net loss for 2004 increased by
                  $1.0 million, to a net loss of $3.8 million.

         o        Gross  profit for 2005 was  increased  by  $748,000 to a gross
                  profit of $8.1 million and our net loss  decreased by $640,000
                  to a net loss of $8.3 million.

         In November  2005,  the  Company's  audit  committee  began an internal
investigation  into the matters disclosed in the November 2, 2005  announcement.
In  connection  with the  restatement  issues  identified  in November the audit
committee hired outside legal counsel to conduct an internal investigation. They
in turn retained the services of an independent  accounting  firm to assist with
various forensic accounting and electronic procedures performed in the course of
the investigation.

         For the items discovered  subsequent to the November 2005 announcement,
the  Committee,  seeing no evidence  suggesting  the  involvement of any current
employees,  instructed  senior  company  management and outside legal counsel to
conduct investigations into these matters.

         Based on the findings of the independent and company  investigations as
well as senior  management's  evaluation of the  effectiveness of the design and
operation of the company's  controls and  procedures,  the Committee  determined
that inadequate  internal controls  contributed to the restatement  issues.  The
primary control deficiencies are identified on pages 46 to 47 of this Form 10-K.


                                       30
<PAGE>


         The following tables present certain financial  information for each of
the restated quarters,  as originally reported, as affected by both the original
restatement and the additional restatements and as restated:

<TABLE>
<CAPTION>
                                          AS                             AS
                                      ORIGINALLY       ORIGINAL      ORIGINALLY       ADDITIONAL
                                       REPORTED      RESTATEMENT(1)   RESTATED(1)    RESTATEMENTS    AS RESTATED
                                     ------------    ------------    ------------    ------------    ------------
                                                         (in thousands except per share data)
----------------------------------   ------------    ------------    ------------    ------------    ------------
<S>                                  <C>             <C>             <C>             <C>             <C>
1ST QUARTER 2001
----------------------------------   ------------    ------------    ------------    ------------    ------------
Revenues .........................   $      7,389    $       --      $      7,389    $       --      $      7,389
----------------------------------   ------------    ------------    ------------    ------------    ------------
Gross Profit .....................          3,272            --             3,272            --             3,272
----------------------------------   ------------    ------------    ------------    ------------    ------------
Net income (loss) ................            733            --               733          (2,282)         (1,549)
----------------------------------   ------------    ------------    ------------    ------------    ------------
Earnings (loss) per share - basic             N/A             N/A             N/A             N/A             N/A
----------------------------------   ------------    ------------    ------------    ------------    ------------
Earnings (loss) per share -
diluted ..........................            N/A             N/A             N/A             N/A             N/A
----------------------------------   ------------    ------------    ------------    ------------    ------------

2ND QUARTER 2001
----------------------------------   ------------    ------------    ------------    ------------    ------------
Revenues .........................   $      6,539    $       --      $      6,539    $       --      $      6,539
----------------------------------   ------------    ------------    ------------    ------------    ------------
Gross Profit .....................            854            --               854            --               854
----------------------------------   ------------    ------------    ------------    ------------    ------------
Net loss .........................         (1,818)           --            (1,818)            (67)         (1,885)
----------------------------------   ------------    ------------    ------------    ------------    ------------
Earnings (loss) per share - basic             N/A             N/A             N/A             N/A             N/A
----------------------------------   ------------    ------------    ------------    ------------    ------------
Earnings (loss) per share -
diluted ..........................            N/A             N/A             N/A             N/A             N/A
----------------------------------   ------------    ------------    ------------    ------------    ------------

3RD QUARTER 2001
----------------------------------   ------------    ------------    ------------    ------------    ------------
Revenues .........................   $      6,036    $       --      $      6,036    $       --      $      6,036
----------------------------------   ------------    ------------    ------------    ------------    ------------
Gross Profit .....................          2,464            --             2,464            --             2,464
----------------------------------   ------------    ------------    ------------    ------------    ------------
Net loss .........................           (462)           --              (462)            (10)           (472)
----------------------------------   ------------    ------------    ------------    ------------    ------------
Earnings (loss) per share - basic             N/A             N/A             N/A             N/A             N/A
----------------------------------   ------------    ------------    ------------    ------------    ------------
Earnings (loss) per share -
diluted ..........................            N/A             N/A             N/A             N/A             N/A
----------------------------------   ------------    ------------    ------------    ------------    ------------

4TH QUARTER 2003
----------------------------------   ------------    ------------    ------------    ------------    ------------
Revenues .........................   $      8,716    $       --      $      8,716    $       --      $      8,716
----------------------------------   ------------    ------------    ------------    ------------    ------------
Gross Profit .....................          3,339            --             3,339          (1,314)          2,025
----------------------------------   ------------    ------------    ------------    ------------    ------------
Net income (loss) ................            407            --               407          (1,314)           (907)
----------------------------------   ------------    ------------    ------------    ------------    ------------
Earnings (loss) per share - basic    $       0.04    $       --      $       0.04    $      (0.12)   $      (0.08)
----------------------------------   ------------    ------------    ------------    ------------    ------------
Earnings (loss) per share -
diluted ..........................   $       0.04    $       --      $       0.04    $      (0.12)   $      (0.08)
----------------------------------   ------------    ------------    ------------    ------------    ------------

1ST QUARTER 2004
----------------------------------   ------------    ------------    ------------    ------------    ------------
Revenues .........................   $      8,434    $       (498)   $      7,936    $       --      $      7,936
----------------------------------   ------------    ------------    ------------    ------------    ------------
Gross Profit .....................          3,352            (218)          3,134            --             3,134
----------------------------------   ------------    ------------    ------------    ------------    ------------
Net income (loss) ................            317            (218)             99             (33)             66
----------------------------------   ------------    ------------    ------------    ------------    ------------
Earnings (loss) per share - basic    $       0.03    $      (0.02)   $       0.01    $      (0.00)   $       0.01
----------------------------------   ------------    ------------    ------------    ------------    ------------
Earnings (loss) per share -
diluted ..........................   $       0.03    $      (0.02)   $       0.01    $      (0.00)   $       0.01
----------------------------------   ------------    ------------    ------------    ------------    ------------

2ND QUARTER 2004
----------------------------------   ------------    ------------    ------------    ------------    ------------
Revenues .........................   $      8,158    $         74    $      8,232    $       --      $      8,232
----------------------------------   ------------    ------------    ------------    ------------    ------------
Gross Profit .....................          3,150              33           3,183            --             3,183
----------------------------------   ------------    ------------    ------------    ------------    ------------
Net income (loss) ................             76              33             109            (187)            (78)
----------------------------------   ------------    ------------    ------------    ------------    ------------
Earnings (loss) per share - basic    $       0.01    $       0.00    $       0.01    $      (0.02)   $      (0.01)
----------------------------------   ------------    ------------    ------------    ------------    ------------
Earnings (loss) per share -
diluted ..........................   $       0.01    $       0.00    $       0.01    $      (0.02)   $      (0.01)
----------------------------------   ------------    ------------    ------------    ------------    ------------
</TABLE>

(1)      Reported on March 9, 2005


                                       31
<PAGE>


<TABLE>
<CAPTION>
                                          AS                             AS
                                      ORIGINALLY       ORIGINAL      ORIGINALLY       ADDITIONAL
                                       REPORTED      RESTATEMENT(1)   RESTATED(1)    RESTATEMENTS    AS RESTATED
                                     ------------    ------------    ------------    ------------    ------------
                                                          (in thousands except per share data)
----------------------------------   ------------    ------------    ------------    ------------    ------------
<S>                                  <C>             <C>             <C>             <C>             <C>
3RD QUARTER 2004
----------------------------------   ------------    ------------    ------------    ------------    ------------
Revenues .........................   $      9,442    $        114    $      9,556    $       --      $      9,556
----------------------------------   ------------    ------------    ------------    ------------    ------------
Gross Profit .....................          3,456          (1,119)          2,337            (249)          2,088
----------------------------------   ------------    ------------    ------------    ------------    ------------
Net loss .........................           (322)         (1,119)         (1,441)           (249)         (1,690)
----------------------------------   ------------    ------------    ------------    ------------    ------------
Loss per share - basic ...........   $      (0.03)   $      (0.09)   $      (0.12)   $      (0.02)   $      (0.15)
----------------------------------   ------------    ------------    ------------    ------------    ------------
Loss per share - diluted .........   $      (0.03)   $      (0.09)   $      (0.12)   $      (0.02)   $      (0.15)
----------------------------------   ------------    ------------    ------------    ------------    ------------

4TH QUARTER 2004
----------------------------------   ------------    ------------    ------------    ------------    ------------
Revenues .........................   $      9,683    $       --      $      9,683    $         (1)   $      9,682
----------------------------------   ------------    ------------    ------------    ------------    ------------
Gross Profit .....................          3,205            --             3,205          (1,015)          2,190
----------------------------------   ------------    ------------    ------------    ------------    ------------
Net loss .........................         (1,052)           --            (1,052)         (1,015)         (2,067)
----------------------------------   ------------    ------------    ------------    ------------    ------------
Loss per share - basic ...........   $      (0.08)   $       --      $      (0.08)   $      (0.07)   $      (0.15)
----------------------------------   ------------    ------------    ------------    ------------    ------------
Loss per share - diluted .........   $      (0.08)   $       --      $      (0.08)   $      (0.07)   $      (0.15)
----------------------------------   ------------    ------------    ------------    ------------    ------------

1ST QUARTER 2005
----------------------------------   ------------    ------------    ------------    ------------    ------------
Revenues .........................   $      9,269    $       --      $      9,269    $       --      $      9,269
----------------------------------   ------------    ------------    ------------    ------------    ------------
Gross Profit .....................          2,722            --             2,722             534           3,256
----------------------------------   ------------    ------------    ------------    ------------    ------------
Net income (loss) ................           (910)           --              (910)            512            (398)
----------------------------------   ------------    ------------    ------------    ------------    ------------
Earnings (loss) per share - basic    $      (0.07)   $       --      $      (0.07)   $       0.04    $      (0.03)
----------------------------------   ------------    ------------    ------------    ------------    ------------
Earnings (loss) per share -
diluted ..........................   $      (0.07)   $       --      $      (0.07)   $       0.04    $      (0.03)
----------------------------------   ------------    ------------    ------------    ------------    ------------

2ND QUARTER 2005
----------------------------------   ------------    ------------    ------------    ------------    ------------
Revenues .........................   $     10,263    $       --      $     10,263    $       --      $     10,263
----------------------------------   ------------    ------------    ------------    ------------    ------------
Gross Profit .....................          3,355            --             3,355          (1,536)          1,819
----------------------------------   ------------    ------------    ------------    ------------    ------------
Net loss .........................           (342)           --              (342)         (1,619)         (1,961)
----------------------------------   ------------    ------------    ------------    ------------    ------------
Loss per share - basic ...........   $      (0.02)   $       --      $      (0.02)   $      (0.12)   $      (0.14)
----------------------------------   ------------    ------------    ------------    ------------    ------------
Loss per share - diluted .........   $      (0.02)   $       --      $      (0.02)   $      (0.12)   $      (0.14)
----------------------------------   ------------    ------------    ------------    ------------    ------------
</TABLE>

(1)      Reported on March 9, 2005


                                       32
<PAGE>


         The  following   table  presents  the  effects  of  both  the  original
restatement  and the  additional  restatements  on the years ended  December 31,
2001,  December  31, 2003 and  December  31,  2004,  which have been  previously
reported, and our results for those periods, as restated:

<TABLE>
<CAPTION>
                                          AS                             AS
                                      ORIGINALLY       ORIGINAL      ORIGINALLY       ADDITIONAL
                                       REPORTED      RESTATEMENT(1)   RESTATED(1)    RESTATEMENTS    AS RESTATED
                                     ------------    ------------    ------------    ------------    ------------
                                                          (in thousands except per share data)
----------------------------------   ------------    ------------    ------------    ------------    ------------
<S>                                  <C>             <C>             <C>             <C>             <C>
FY 2001
----------------------------------   ------------    ------------   ------------    ------------    ------------
Revenues .........................   $     25,265    $       --     $     25,265    $       --      $     25,265
----------------------------------   ------------    ------------   ------------    ------------    ------------
Gross Profit .....................          8,811            --            8,811            --             8,811
----------------------------------   ------------    ------------   ------------    ------------    ------------
Net loss .........................         (2,014)           --           (2,014)         (2,359)         (4,373)
----------------------------------   ------------    ------------   ------------    ------------    ------------
Loss per share - basic ...........   $      (0.21)   $       --     $      (0.21)   $      (0.24)   $      (0.45)
----------------------------------   ------------    ------------   ------------    ------------    ------------
Loss per share - diluted .........   $      (0.21)   $       --     $      (0.21)   $      (0.24)   $      (0.45)
----------------------------------   ------------    ------------   ------------    ------------    ------------

FY 2003
----------------------------------   ------------    ------------   ------------    ------------    ------------
Revenues .........................   $     31,042    $       --     $     31,042    $       --      $     31,042
----------------------------------   ------------    ------------   ------------    ------------    ------------
Gross Profit .....................         12,680            --           12,680          (1,314)         11,366
----------------------------------   ------------    ------------   ------------    ------------    ------------
Net income (loss) ................          1,066            --            1,066          (1,314)           (248)
----------------------------------   ------------    ------------   ------------    ------------    ------------
Earnings (loss) per share - basic    $       0.10    $       --     $       0.10    $      (0.13)   $      (0.02)
----------------------------------   ------------    ------------   ------------    ------------    ------------
Earnings (loss) per share -
diluted ..........................   $       0.09    $       --     $       0.09    $      (0.12)   $      (0.02)
----------------------------------   ------------    ------------   ------------    ------------    ------------

FY 2004
----------------------------------   ------------    ------------   ------------    ------------    ------------
Revenues .........................   $     35,407    $       --     $     35,407    $         (1)   $     35,406
----------------------------------   ------------    ------------   ------------    ------------    ------------
Gross Profit .....................         11,859            --           11,859          (1,264)         10,595
----------------------------------   ------------    ------------   ------------    ------------    ------------
Net loss .........................         (2,284)           --           (2,284)         (1,485)         (3,759)
----------------------------------   ------------    ------------   ------------    ------------    ------------
Loss per share - basic ...........   $      (0.19)   $       --     $      (0.19)   $      (0.12)   $      (0.31)
----------------------------------   ------------    ------------   ------------    ------------    ------------
Loss per share - diluted .........   $      (01.9)   $       --     $      (01.9)   $      90.12)   $      (0.31)
----------------------------------   ------------    ------------   ------------    ------------    ------------
</TABLE>

(1)      Reported on March 9, 2005

         We identified  material  weaknesses in our system of internal  controls
over financial  reporting related to these  restatements  which are discussed in
Item 9.A "Controls and Procedures" in this Report.


                                       33
<PAGE>


RESULTS OF OPERATIONS

BUSINESS SEGMENT OVERVIEW

         Revenue and gross profit by market  segment are shown in the  following
table:

<TABLE>
<CAPTION>
                                           2005                            2004(1)                         2003(1)
                               -----------------------------    ----------------------------    ----------------------------
                                                PERCENT OF                      PERCENT OF                      PERCENT OF
MARKET SEGMENT                    $000'S        TOTAL SALES        $000'S       TOTAL SALES        $000'S       TOTAL SALES
                               ------------     ------------    ------------    ------------    ------------    ------------
<S>                            <C>                   <C>        <C>                  <C>        <C>                  <C>
Business Communications(2):
  -Revenue .................   $      6,552          17%        $      6,070         17%        $      8,133         26%
  -Gross Profit ............          3,407                            3,205                           4,312
  -Gross Profit % of Segment
   Revenue .................        52%                              53%                             53%
                               ------------     ------------    ------------    ------------    ------------    ------------
OEM Remotes(3):
  -Revenue .................   $     17,846          47%        $     18,762         53%        $     14,114         45%
  -Gross Profit ............           (632)                           2,185                           2,075
  -Gross Profit (Loss) % of
   Segment Revenue .........       (4)%                              12%                             15%
                               ------------     ------------    ------------    ------------    ------------    ------------
E-Transactions:
  -Revenue .................   $      8,326          22%        $      5,328         15%        $      4,165         14%
  -Gross Profit ............          3,233                            2,491                           2,005
  -Gross Profit % of Segment
   Revenue .................        39%                              47%                             48%
                               ------------     ------------    ------------    ------------    ------------    ------------
Specialty Components:
  -Revenue .................   $      5,515          14%        $      5,246         15%        $      4,630         15%
  -Gross Profit ............          2,050                            2,714                           2,974
  -Gross Profit % of Segment
   Revenue .................        37%                              52%                             64%
                               ------------     ------------    ------------    ------------    ------------    ------------
All Segments:
  -Revenue .................   $     38,239          100%       $     35,406         100%       $     31,042         100%
  -Gross Profit ............          8,058                           10,595                          11,366
  -Gross Profit % of Segment
   Revenue .................        21%                              30%                             37%
                               ------------     ------------    ------------    ------------    ------------    ------------
</TABLE>

(1)      As restated.
(2)      Branded Only.
(3)      Comprised   of   business   segments   formerly   known   as   Business
         Communications - OEM and Home Entertainment.

YEAR ENDED DECEMBER 31, 2005 COMPARED WITH YEAR ENDED DECEMBER 31, 2004

E-TRANSACTIONS

         In our  e-transactions  segment,  we sell electronic  signature capture
devices and, depending on the customer requirement,  signature-capture software.
Our 2005 e-transaction  revenues increased 56% over 2004 due to greater industry
adoption of the EPAD product  line.  We had a number of high quantity EPAD sales
to customers which represented the primary reason for the large increase in 2005
revenues  compared to 2004. We anticipate  this trend to continue as we target a
larger  client base,  including  those who have the ability to purchase  between
5,000 to 100,000 units per  commitment.  We see this


                                       34
<PAGE>


business  segment  as  having  high  growth  potential  in the next  few  years.
E-transaction  gross  margins  are one of our  stronger  gross  margin  business
segments with gross margins typically ranging between 39% and 48%.

SPECIALTY COMPONENTS

         Our specialty components segment is comprised of our MICRONAV products,
which targets the rapidly growing handheld consumer  electronics  product market
and our custom FSRs and  FSR-based  subassemblies,  which  target  customers  in
several vertical markets, such as medical devices, industrial input and military
input  products.  Continuing  from  2004,  we have  significantly  expanded  the
MICRONAV market  opportunity.  As a result, our revenue from the MICRONAV family
of products is anticipated  to exceed our  traditional  Specialty  market in the
very near future. Specialty components revenues increased 5% in 2005 as compared
to 2004 due to initial shipments of MICRONAV products to early adopters.

         Specialty  component  gross  margins have  declined in 2005 compared to
2004 due to the relatively lower margin associated with the MICRONAV products as
compared to our  historical  specialty  components  product  margins and startup
costs associated with this new component of this business segment.

         Because of the early adoption phase of our MICRONAV sensors,  Specialty
Components  has  become  a  marketing   focal  point.   We  continue  to  pursue
opportunities  to  incorporate  our  sensors  in  various  consumer   electronic
products.  Design cycles for these  products are typically long and new business
in this market may develop  slowly.  In  addition,  product  life cycles in this
industry can be relatively short. Because of our limited experience to date with
these  sensors,  we are unable to  predict  the rate at which new  business  may
develop or the margins that will apply to any business that does develop.

OEM REMOTES

         In our OEM remotes segment,  we sell wireless remote controls on an OEM
basis to manufacturers of advanced  viewing devices,  including  projectors sold
for  TV  viewing  and  for  use  with  certain  computer  software  presentation
applications.

         In 2005, and similar to the past few years,  OEM average selling prices
are declining due to market demands. For 2005, OEM remotes revenues decreased 5%
as compared to 2004. OEM remotes gross margin declined considerably in 2005 when
compared to 2004 as a result of a $2.5 million  write-down of certain  inventory
and tooling  fixed  assets in the third  quarter of 2005 due to the slow down in
this market space. Our gross margins have ranged from 12% to 15% in prior years.
For 2005,  our gross margin loss for OEM Remotes was 4% primarily as a result of
the $2.3 million write-down.

BRANDED PRODUCTS

         Overall,   2005  Branded  Products  revenues  grew  8%.  Sales  of  our
Communicator Suite (up 49%) and Remote Point Navigator (up 26%) were stronger in
2005  than in 2004 and were key  products  contributing  to our year  over  year
growth.  We see this segment of our business  continuing  to grow as we focus on
bringing new products to market and expanding our geographical presence.

         Branded  gross margins  continue to be strong and remain  consistent at
52% to 53%, depending on the product mix in any given quarter or year.


                                       35
<PAGE>


OPERATING EXPENSES

         Product  development  and research costs include  internal  engineering
labor,  contract  engineering  and outside  processing  costs for the design and
development of our OEM and branded  designs and products and the research of our
technologies.  Our product development and research costs increased $428,000, or
10.3%,  from  $4.2  million  for  2004  to $4.6  million  for  2005,  due to the
development of new products in our OEM remotes, EPAD and MICRONAV product lines.
As a percentage of revenues, our product development and research costs remained
constant at 12% in 2005 as compared to 2004. We expect that product  development
and research costs will continue to be at this same or slightly  higher level of
revenues for the foreseeable future.

         Sales,  general  and  administrative  costs,  or SG&A,  include  sales,
marketing, accounting and administrative labor, sales commissions,  advertising,
general marketing,  branded business communications channel marketing and travel
and  entertainment  costs. SG&A grew 14.6%, from $10.2 million for 2004 to $11.7
million  for 2005,  primarily  due to  increased  regulatory  costs  and  normal
increases due to the growth of our business. Costs related to complying with the
Sarbanes-Oxley Act of 2002, or SOX, were approximately $340,000 in 2005 compared
to $784,000 in 2004.  Overall,  SOX compliance costs related to fiscal year 2005
compliance  are  considerably  lower  than  costs for  2004.  The  Company  also
experienced  increased  accounting and financial costs,  including  increases in
accounting and finance department  personnel and consulting and other fees. As a
percentage of revenues,  SG&A increased to 31% of revenues in 2005 versus 29% of
revenues in 2004.  We will  continue to monitor  our SG&A  expenses  closely and
anticipate slight increases in overall SG&A on a pure dollar spending level, but
hope to maintain  S,G&A expenses as a percentage of revenues at or below current
levels.

OPERATING RESULTS

         In summary,  our  operating  results in 2005 were  attributable  to the
following factors:

         o        8% growth in consolidated revenues;

         o        our e-transactions sector grew 56% over 2004;

         o        a decline in overall gross margins as a result of:

                  o        a charge of approximately  $2.3 million for inventory
                           and tooling write-downs;

                  o        charges  related to the physical  inventory  year end
                           reconciliation of inventory quantities and costs from
                           the taking of a year end physical inventory; and

                  o        general decline in OEM remotes margins.

         Total  other  income,  net  improved  to $67,000 in 2005 as compared to
$32,000 in 2004 due  primarily to interest on cash from  proceeds of a secondary
offering  in  September   2004  and  to  the  interest   income  from  loans  to
shareholders.  In addition,  the net pay down of long-term debt reduced interest
expense in 2005 compared to 2004.

         We have $39.7 million in net operating loss, or NOL,  carryforwards for
U.S.  federal  tax  purposes.  In 2000 and 2001,  for  accounting  purposes,  we
recognized some of those NOLs as an accrued tax benefit. However, because of our
subsequent  losses in 2001 and 2002, in the fourth quarter of 2002 we recorded a
valuation  allowance  of $1.3  million  against our  deferred  tax assets.  This
non-cash  charge reduced the net value of the deferred tax assets on the balance
sheet to zero. In determining whether or not a valuation allowance is necessary,
forecasts of future  taxable income are


                                       36
<PAGE>


not considered sufficient evidence to outweigh a history of losses. Accordingly,
the assets were  reserved  against in full.  This has no effect on the Company's
NOL  carryforwards  for tax purposes and they continue to be available for up to
20 years. We have maintained the full valuation  allowance  against our deferred
tax assets as of December 31, 2005.

         Section 382  ("Section  382") of the Internal  Revenue Code of 1986, as
amended (the "Code"), places a limitation on the realizability of NOLs in future
periods if the  ownership  of the  company  has  changed  more than 50% within a
three-year  period.  Under Section 382, we have  experienced an approximate  43%
change in ownership  for the  three-year  period ended  December 31, 2005. As of
December 31, 2005, none of our NOLs have been limited by the Section 382 rules.

YEAR ENDED DECEMBER 31, 2004 COMPARED WITH YEAR ENDED DECEMBER 31, 2003

E-TRANSACTIONS

         In our  e-transactions  segment,  we sell electronic  signature capture
devices and, depending on the customer requirement,  signature-capture software.
Our 2004 e-transaction  revenues increased 28% over 2003 due to greater industry
adoption of the EPAD product  line and thus a  broadening  of our client base in
this market.

         Our e-transaction gross margin remained relatively unchanged at 47% for
2004 as compared to 48% in 2003.

SPECIALTY COMPONENTS

         In our specialty  components segment, we sell custom FSRs and FSR-based
subassemblies  to many customers in several  vertical  markets,  such as medical
devices,   industrial  input  and  military  input  products.  In  2004  we  had
significantly  expanded  the  market  opportunity  reflected  by this  market by
developing  our MICRONAV  family of sensors  which address  applications  in the
rapidly growing handheld consumer electronics product market.

         Specialty  component revenues increased 13% in 2004 as compared to 2003
due to sales of MICRONAV sensors to initial customers in the MP3 player and cell
phone markets.

         Specialty  component  gross margin  declined to 52% in 2004 from 64% in
2003 due to the relatively  lower margin  associated with the MICRONAV  products
(approximately 50%) as compared to our historical  specialty  components product
margins and startup costs associated with this new program.

         Because  of  the  development  of  our  MICRONAV   sensors,   specialty
components  have become a marketing focal point.  We are  aggressively  pursuing
several  opportunities to incorporate our sensors in various consumer electronic
products.  Design cycles for these  products are typically long and new business
in this market may develop  slowly.  Because of our limited  experience  to date
with these sensors,  we are unable to predict the rate at which new business may
develop or the margins that will apply to any business that does develop.

OEM REMOTE CONTROLS

         In our OEM remotes segment,  we sell wireless remote controls on an OEM
basis to the leading  manufacturers  of  presentation  projectors  as well as to
manufacturers  of advanced  viewing  devices,


                                       37
<PAGE>


including  projectors  sold for TV  viewing,  and FSR sensors to  Microsoft  for
integration into their Xbox game controller.

         Our  OEM  remotes  revenues  grew  33% in  2004 as  compared  to  2003,
reflecting  initial  sales in  significant  quantities  of remote  controls  for
advanced TV viewing devices and continued sales of sensors for Microsoft's  Xbox
controller. Xbox related sales ended in the last half of 2005.

         OEM remotes  gross margin  declined to 12% in 2004 from 15% in 2003 due
to lower  margins  associated  with high volume  remote sales and startup  costs
associated with these new programs.

BUSINESS COMMUNICATIONS

         In our  business  communications  segment,  we  sell  Interlink-branded
wireless remote controls and keyboards  direct to computer  products  retailers,
corporate resellers and distributors.

         Revenues from branded  products,  which had average  selling  prices of
approximately  $23 to $174,  declined  25%  from  $8.1  million  in 2003 to $6.1
million in 2004 as a result of our decision to stop  selling to consumer  retail
channels.

         Business  communication  gross margin in 2004 remained unchanged at 53%
compared to 2003.

OPERATING EXPENSES

         Product  development  and research costs include  internal  engineering
labor,  contract  engineering  and outside  processing  costs for the design and
development of our OEM and branded  designs and products and the research of our
technologies.  For 2004, our product  development  and research costs  increased
21.7% over 2003 due to development of new products in our OEM remotes,  EPAD and
MICRONAV  product lines.  As a percentage of revenues,  product  development and
research  costs  increased to 12% in 2004 as compared to 11% in 2003.  We expect
that  product  development  and  research  costs will  continue to exceed 10% of
revenues for the foreseeable future.

         SG&A costs include  sales,  marketing,  accounting  and  administrative
labor,  sales  commissions,  advertising,  general  marketing,  branded business
communications  channel marketing and travel and entertainment  costs. For 2004,
SG&A  grew 25% over  2003 due to  approximately  $800,000  in SOX  costs  and to
increased accounting and financial costs and general marketing commensurate with
sales growth. As a percentage of revenues,  SG&A increased to 29% in 2004 versus
26% in 2003.

OPERATING RESULTS

         In summary,  our  operating  results in 2004 were  attributable  to the
following factors:

         o        14% growth in  revenues  that  occurred  primarily  in our OEM
                  remotes and e-transactions sectors;

         o        a decline in overall  gross  margins as a result of  increased
                  high  volume  sales of remote  products;  and a high  ratio of
                  startup costs associated with these new programs; and

         o        a  substantial  increase  in  SG&A  cost  attributable  to new
                  financial and accounting requirements.


                                       38
<PAGE>


         Total  other  income,  net  improved  to $32,000 in 2004 as compared to
$4,000 in 2003 due to lower debt levels  partially and interest  income from the
investment of the proceeds of our stock offering that was completed in 2004.

         We have  $39.7  million  in NOL  carryforwards  for  U.S.  federal  tax
purposes.  As described  above,  these tax assets were reserved against in full.
Our federal NOL  carryforwards  are not impacted and can continue to be utilized
for up to 20 years. We have maintained the full valuation  allowance against our
deferred tax assets as of December 31, 2004.

LIQUIDITY AND CAPITAL RESOURCES

         Our  capital  resources  have  historically  come from  sales of equity
securities and commercial borrowing.  Our principal historical cash requirements
have been to fund new  product and  technology  development,  to support  sales,
marketing,  inventory  and  accounts  receivable  costs and to fund  losses from
operations.   While  we  expect  operations  to  eventually  generate  cash,  we
anticipate that additional  capital resources will be required to support future
growth and expect to rely on existing cash balances and sales of securities  and
commercial  financing to provide the  required  resources.  To some  extent,  we
expect that our rate of growth will be within our control and,  accordingly,  we
expect  to adjust  our  growth  commitments  to  reflect  the  availability  and
attractiveness   of   financing   arrangements   and   non-growth-related   cash
requirements.

         In September  2004, we completed a public stock  offering  which made a
net contribution of $13.5 million to our capital.  We also received $2.7 million
in proceeds  from option  exercises  in 2004.  Principally  as a result of these
events,  our cash and cash  equivalents  increased from $6 million at the end of
2003 to  $19.1  million  at the end of  2004.  Our  cash  and  cash  equivalents
decreased to $13.9 million at the end of 2005 primarily as a result of cash used
by operations.  We believe that we are adequately  funded to support  operations
for the foreseeable future.

         Cash flow comes principally from collection of accounts receivable and,
to a lesser extent, from interest or other return on financial  investments.  We
maintain what we believe to be  appropriate  reserves for doubtful  accounts and
are not aware of any  prospective  development  that  would  impact  collections
differently from our historical  experience.  It is our common practice to allow
payment  terms of greater  than 30 days  (generally  45-90 days) for our branded
products and Asian customer base. In 2005, sales to customers with terms greater
than 30 days were 12% of our overall  sales,  as compared to 19% in 2004. To the
extent our growth in these areas  continues to increase as a percentage of total
revenues,  our average days to collect on our accounts  receivable will increase
and this would slow down our average cash collections. On two occasions, we have
made  substantial   inventory  reserve  adjustments  that  reflect  management's
judgment  as  to  the  recoverable  value  of  inventory.  We do  not  currently
anticipate  the need for a  further  inventory  adjustment  but any  significant
diminution in inventory value would ultimately affect cash flow.

         In  May  2006,  we  terminated  our  U.S.  bank  line  of  credit  and,
accordingly, we no longer have that line available to us.

         Working  capital  increased  from  $18.9  million at the end of 2003 to
$30.5  million at December 31, 2004 and  decreased to $23.0  million at December
31, 2005.  The increase in 2004 resulted  primarily  from our stock offering and
additional option exercises.  The decrease in 2005 resulted from our losses from
operation.


                                       39
<PAGE>


         Operations  used cash of $1.3 million in 2004 and $4.2 million in 2005.
The change was due primarily to increased operating losses year over year.

         We spent  $362,000 in 2005 and $973,000 in 2004 to purchase  additional
manufacturing and computer equipment.

         We made payments on long-term debt of $588,000 and $820,000 in 2005 and
2004,  respectively.  Net  proceeds  from  the  exercise  of stock  options  and
stockholder  loan  repayments  were  $220,000 and $2.7 million in 2005 and 2004,
respectively.

CONTRACTUAL OBLIGATIONS

         We currently have modest  commitments for capital  expenditures  and no
material purchase obligations.

         Our long-term debt and operating  lease  obligations as of December 31,
2005 are set forth in the following table:

                                               LESS THAN      1-3        4TH
                                     TOTAL      1 YEAR       YEARS       YEAR
                                   ---------   ---------   ---------   ---------
Long-term debt obligations ......  $     308   $     154   $     154   $    --
Software licenses ...............  $     900   $     600   $     300   $    --
Operating lease obligations .....      1,713         469         836         408
                                   ---------   ---------   ---------   ---------
Total ...........................  $   2,921   $   1,223   $   1,290   $     408
                                   =========   =========   =========   =========

         These  amounts may  increase as we pursue our growth  strategy  but the
amount of any such  growth  will depend on the  particular  requirements  of any
growth  commitment,  the  availability  and  attractiveness  of  equity  capital
arrangements and our general liquidity position.

APPLICATION OF CRITICAL ACCOUNTING POLICIES AND ESTIMATES

         Management's   discussion  and  analysis  of  the  Company's  financial
condition and results of operations  are based upon the  consolidated  financial
statements,  which have been prepared in accordance with  accounting  principles
generally  accepted in the United States.  The  preparation  of these  financial
statements  requires  management to make estimates and judgments that affect the
reported  amounts of assets,  liabilities,  revenues and  expenses,  and related
disclosures  of  contingent  assets  and  liabilities.  On  an  on-going  basis,
management  evaluates  estimates,  including  those  related to the valuation of
inventory and the allowance for uncollectible  accounts receivable.  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:

         REVENUE RECOGNITION.  We recognize revenue in accordance with SEC Staff
Accounting Bulletin ("SAB") No. 104, "Revenue Recognition." SAB No. 104 requires
that four basic  criteria  must be met before  revenue  can be  recognized:  (1)
persuasive  evidence of an  arrangement  exists;  (2)  delivery  has occurred or
services rendered; (3) the fee is fixed and determinable; and (4) collectibility
is  reasonably   assured.   Determination   of  criteria  (3)  and  (4)  require
management's  judgments  regarding


                                       40
<PAGE>


the fixed nature of the fee charged for services rendered and products delivered
and the  collectibility  of those fees. To satisfy the  criteria,  we: (1) input
orders based upon receipt of a customer  purchase order; (2) record revenue upon
shipment of goods and when risk of loss and title has  transferred;  (3) confirm
pricing through the customer  purchase order; and (4) validate  creditworthiness
through past payment  history,  credit agency reports and other  financial data.
All customers  have  warranty  rights and some  customers  also have explicit or
implicit  rights of return.  We comply with  Statement of  Financial  Accounting
Standards  No. 48 with  respect to  sell-through  and  returns  and the  related
recording  of  reserves  for  potential  customer  returns.  Should  changes  in
conditions  cause management to determine the revenue  recognition  criteria are
not  met  for  certain  future  transactions,   such  as  a  determination  that
collectibility was not reasonably assured,  revenue recognized for any reporting
period could be adversely affected.

         ACCOUNTS  RECEIVABLE AND ALLOWANCE FOR DOUBTFUL ACCOUNTS.  Our accounts
receivable are  unsecured,  and we are at risk to the extent such amounts become
uncollectible.  We continually  monitor individual account receivable  balances,
and provide for an allowance  of doubtful  accounts at the time  collection  may
become  questionable  based on payment  performance or age of the receivable and
other  factors  related to the  customer's  ability to pay. We  generally  offer
30-day  payment  terms.  However,  some  of our  distributors  in  the  business
communications-branded  market and some of our Japanese OEM customers require as
long as 180-day  payment  terms.  We recorded an increase to the  allowance  for
doubtful accounts of $176,000 and $284,000 for 2003 and 2005, respectively;  and
a decrease to the allowance of $22,000 in 2004. Write-offs against the allowance
for doubtful  accounts  totaled $3,000,  $589,000 and $7,000 for the years ended
December 31, 2003, 2004 and 2005, respectively.

         INVENTORY  RESERVE.  At each balance sheet date, we evaluate our ending
inventories for excess  quantities and  obsolescence.  This evaluation  includes
analyses of forecast sales levels by product and historical demand. We write off
inventories  that are considered  obsolete and reserve against  inventories that
may become obsolete.  Remaining  inventory  balances are adjusted to approximate
the lower of our cost or market  value  and  result in a new cost  basis in such
inventory  until sold. If future demand or market  conditions are less favorable
than our projections, additional inventory write-down may be required, and would
be  reflected  in cost of sales in the period  the  revision  is made.  Based on
lowered  expectations  for future  demand in the OEM Remotes  segment as well as
limitations  on the use of certain  restricted  raw materials  prompted by early
adoption of the  Restriction of Hazardous  Substances Act of 2002 by many of our
customers  , we  increased  our  reserve for excess and  obsolete  inventory  by
approximately  $1.9  million  in the  third  quarter  of 2005.  The  reserve  is
discussed in detail in the BUSINESS SEGMENT OVERVIEW under OEM Remotes.

         PROVISION  FOR INCOME  TAX.  As part of the  process of  preparing  our
financial statements, as required by Statement of Financial Accounting Standards
("SFAS") No. 109 "Accounting For Income Taxes",  we are required to estimate our
income  taxes in each of the  jurisdictions  in which we operate.  This  process
involves  estimating  our actual  current tax exposure  together with  assessing
temporary  differences  resulting from differing  treatment of items for tax and
accounting  purposes.  These  differences  result in  deferred  tax  assets  and
liabilities,  which are included in our balance  sheet.  We must then assess the
likelihood  that our deferred tax assets will be recovered  from future  taxable
income  and to the  extent we  believe  that  recovery  is not  likely,  we must
establish a valuation reserve.  To the extent we establish a reserve or increase
this reserve in a period, we must include an expense within the tax provision in
the statements of operations.

         Significant   management   judgment  is  required  in  determining  our
provision for income taxes, deferred tax asset and liabilities and any valuation
reserve  recorded  against our net deferred tax assets.


                                       41
<PAGE>


Management  continually evaluates the Company's deferred tax asset as to whether
it is likely that the deferred tax asset will be realized.

         We  first  achieved  profitable  operations  in  1995.  Because  of NOL
carryforwards available both for our U.S.-based and Japan-based  operations,  we
did  not  accrue  income  tax  expense  until  1999.  In that  year,  due to the
expiration or full utilization of NOL  carryforwards in California and Japan, we
began to record a provision  for income tax expense in those  jurisdictions.  By
the end of 2000,  we also began to accrue an income tax  benefit  related to our
federal NOL carryforwards to be used in future periods. However, in mid-2001, we
began to record  quarterly tax losses and suspended any further  recognition  of
NOL carryforward  tax benefits.  In the fourth quarter of 2002 and for the 2003,
2004 and 2005 years, based on historical and prospective  evidence, we concluded
that we did not  have  sufficient  evidence  to be  able  to  recognize  our NOL
carryforward  benefits as assets and thus we  recognized  a valuation  allowance
against our deferred tax asset balance.

         As of December 31, 2005, the Company had NOL carryforwards for federal,
state and foreign income tax purposes of $39.7  million,  $23.9 million and $5.9
million,  respectively,  which are available to offset future  taxable income in
those jurisdictions through 2025.

         FOREIGN EXCHANGE EXPOSURE. We have established  relationships with most
of the major OEMs in the business  communications market. Many of these OEMs are
based in Japan and approximately 23%, 28% and 23% of our revenues for 2003, 2004
and 2005,  respectively,  came from  Japanese  customers.  Revenues  from  these
customers  are  denominated  in  Japanese  yen and as a result we are subject to
foreign currency exchange rate fluctuations in the yen/dollar  exchange rate. We
may use  foreign  currency  forward  contracts  to hedge this  exposure.  We use
revenue  forecasts  from our Japanese  subsidiary to determine the amount of our
forward  contracts to purchase and we attempt to enter into these contracts when
we believe the yen value is relatively  strong against the U.S.  dollar.  To the
extent that our revenue  forecast may be inaccurate or the timing of forecasting
the  yen's  strength  is  wrong,  our  actual  hedge  gains  or  losses  may not
necessarily  correlate with the effect of foreign currency rate  fluctuations on
our revenues.  We mark these contracts to market value and the gain or loss from
these  contracts  is recorded in business  communications  revenue.  These hedge
transactions  are  classified  as  economic  hedges and do not qualify for hedge
accounting under SFAS No.133 "Accounting For Derivative  Instruments and Hedging
Activities".  In addition, because our Japanese subsidiary's functional currency
is the yen,  the  translation  of the net  assets  of that  subsidiary  into the
consolidated results will fluctuate with the yen/dollar exchange rate.

         The  following  table   illustrates  the  impact  of  foreign  currency
fluctuations  on our  yen-denominated  revenues  and  the  effectiveness  of our
foreign currency hedging activity (in thousands).

                                                       2005     2004      2003
                                                       -----    -----     -----
Increase (decrease) in revenues resulting from
foreign currency fluctuations .....................    $ 121    $(232)    $ 294
Hedging gains (losses) ............................       47      (57)     (211)
                                                       -----    -----     -----
Net revenue impact ................................    $ 168    $(289)    $  83
                                                       =====    =====     =====

         We  calculate  the  "increase  (decrease)  in revenues  resulting  from
foreign currency  fluctuations" by calculating the U.S. dollar equivalent of our
yen-denominated  revenues for the year using the yen/dollar exchange rate at the
beginning of the year. The resulting product is compared to our  yen-


                                       42
<PAGE>


denominated  revenues  converted  to U.S.  dollars  according  to  GAAP  and the
difference is shown in the table above.

RECENT ACCOUNTING PRONOUNCEMENTS

         In December 2004, the FASB issued SFAS No. 123R, "Share-Based Payment."
This  statement  is a revision  to SFAS No.  123,  "Accounting  for  Stock-Based
Compensation"  and  APB  Opinion  No.  25,   "Accounting  for  Stock  Issued  to
Employees."  This  statement   establishes  standards  for  the  accounting  for
transactions  in which an entity  exchanges its equity  instruments for goods or
services,  primarily  focusing on the  accounting for  transactions  in which an
entity obtains employee services in share-based payment  transactions.  Entities
will be required to measure the cost of employee  services  received in exchange
for an award of equity  instruments  based on the  grant-date  fair value of the
award (with limited  exceptions).  That cost will be recognized  over the period
during which an employee is required to provide service,  the requisite  service
period (usually the vesting  period),  in exchange for the award. The grant-date
fair value of employee share options and similar  instruments  will be estimated
using  option-pricing  models.  If an equity  award is modified  after the grant
date, incremental compensation cost will be recognized in an amount equal to the
excess  of the  fair  value of the  modified  award  over the fair  value of the
original award immediately before the modification.  This statement is effective
as of the beginning of the first annual  reporting period that begins after June
15, 2005. We adopted SFAS No. 123R as of January 1, 2006.
 We are  currently  assessing  the  impact of this  accounting  standard  on our
consolidated  results of  operations  or financial  position for 2006.  Based on
current  calculations,  we  expect  that we will  incur  non  cash  expenses  of
approximately $4.0 million in 2006.

         In  December  2004,  the  FASB  issued  SFAS  No.  153,  "Exchanges  of
Nonmonetary  Assets,"  an  amendment  of APB  Opinion  No. 29,  "Accounting  for
Nonmonetary  Transactions." The amendments made by SFAS No. 153 are based on the
principle that  exchanges of nonmonetary  assets should be measured based on the
fair value of the assets exchanged. Further, the amendments eliminate the narrow
exception for nonmonetary  exchanges of similar productive assets and replace it
with a broader  exception for exchanges of  nonmonetary  assets that do not have
commercial  substance.   Previously,  APB  Opinion  No.  29  required  that  the
accounting for an exchange of a productive asset for a similar  productive asset
or an  equivalent  interest in the same or similar  productive  asset  should be
based  on the  recorded  amount  of the  asset  relinquished.  SFAS  No.  153 is
effective for nonmonetary asset exchanges  occurring in fiscal periods beginning
after June 15, 2005.  Earlier  application  is permitted for  nonmonetary  asset
exchanges  occurring in fiscal periods beginning after the date of issuance.  We
adopted SFAS No. 153 as of January 1, 2006.  The  adoption of this  statement is
not expected to have a material impact on the Company's  consolidated results or
operations or financial position.

         In October 2004,  the American Jobs Creation Act of 2004 ("Act") became
effective  in the  U.S.  Two  provisions  of the Act may  impact  the  Company's
provision (benefit) for income taxes in future periods,  namely those related to
the  Qualified  Production  Activities  deduction  ("QPA") and Foreign  Earnings
Repatriation ("FER").

         The QPA will be effective  for the  Company's  U.S.  federal tax return
year  beginning  after  December  31, 2004.  In summary,  the Act provides for a
percentage  deduction  of earnings  from  qualified  production  activities,  as
defined,  commencing  with an initial  deduction of three  percent for tax years
beginning in 2005 and increasing to nine percent for tax years  beginning  after
2009, with the result that the Statutory  federal tax rate currently  applicable
to the Company's qualified production  activities of 35 percent could be reduced
initially to 33.95 percent and  ultimately to 31.85  percent.


                                       43
<PAGE>


However,   the  Act  also   provides   for  the   phased   elimination   of  the
Extraterritorial  Income Exclusion  provisions of the Internal Revenue code. Due
to the interaction of the law provisions  noted above as well as the particulars
of the Company's tax  position,  the ultimate  effect of the QPA on the Company'
future  provision  (benefit)  for income taxes has not been  determined  at this
time.  The FASB  issued  FASB  Staff  Position  FAS 109-1,  Application  of FASB
Statement  No.  109,  Accounting  for  Income  Taxes,  to the Tax  Deduction  on
Qualified  Production  Activities  Provided by the American Jobs Creation Act of
2004 ("FSP  109-1"),  in December  2004.  FSP 109-1  required  that tax benefits
resulting  from the QPA should be  recognized  no earlier than the year in which
they are  reported  in the  entity's  tax  return,  and  that  there is to be no
revaluation of recorded deferred tax assets and liabilities as would be the case
had there been a change in an applicable statutory rate.

         The FER  provision  of the Act  provides  generally  for a one-time  85
percent  dividends  received  deduction for qualifying  repatriations of foreign
earnings to the U.S. Qualified  repatriated funds must be reinvested in the U.S.
in certain  qualifying  activities and  expenditures,  as defined by the Act. In
December  2004,  the FASB issued FASB Staff  Position FAS 109-2,  Accounting and
Disclosure  Guidance for the Foreign  Earnings  Repatriation  Provision with the
American Jobs Creation Act of 2004 ("FSP  109-2").  FSP 109-2 allows  additional
time for entities potentially impacted by the FER provision to determine whether
any foreign earnings will be repatriated  under said  provisions.  At this time,
the Company has not  undertaken  an  evaluation  of the  application  of the FER
provision  and any  potential  benefits of  effecting  repatriations  under said
provision.  Numerous factors, including previous actual and deemed repatriations
under federal tax law provisions,  are factors impacting the availability of the
FER provision to the Company and its potential  benefit to the Company,  if any.
The Company  intends to examine the issue and will provide updates in subsequent
periods.

         In May 2005,  the FASB  issued SFAS No.  154,  "Accounting  Changes and
Error  Corrections--a  replacement  of APB Opinion No. 20 and FASB Statement No.
3." SFAS No. 154 requires  retrospective  application  of a voluntary  change in
accounting  principle to prior periods'  financial  statements and also requires
that a  change  in  method  of  depreciation,  amortization,  or  depletion  for
long-lived,  non-financial  assets be  accounted  for as a change in  accounting
estimate that is affected by a change in accounting  principle.  SFAS No. 154 is
effective for accounting  changes and corrections of errors made in fiscal years
beginning  after December 15, 2005. We believe the adoption of SFAS No. 154 will
not have a material impact on our results of operations or financial condition.

         In  March  2005,  the  FASB  issued  Financial  Interpretation  No.  47
"Accounting for Conditional  Asset Retirements  Obligations"  ("FIN 47"). FIN 47
clarifies that the term  "conditional  asset  retirement  obligation" as used in
FASB Statement No. 143 "Accounting for Asset Retirement  Obligations," refers to
a legal obligation to perform an asset  retirement  activity in which the timing
or method of settlement are conditional on a future event that may or may not be
within the control of the entity. The obligation to perform the asset retirement
activity is  unconditional  even though  uncertainty  exists about the timing or
method  of  settlement.  Thus,  the  timing  or  method  of  settlement  may  be
conditional on a future event. Accordingly, an entity is required to recognize a
liability for the fair value of a conditional asset retirement obligation if the
fair value of the liability can be reasonably  estimated.  FIN 47 also clarifies
when an entity would have sufficient information to reasonably estimate the fair
value of an asset retirement  obligation.  FIN 47 is effective no later than the
end of fiscal  years  ending  after  December  15,  2005.  We do not  expect the
adoption  of  this  statement  to  have a  material  impact  on our  results  of
operations or financial position.


                                       44
<PAGE>


ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

         FOREIGN  CURRENCY  EXCHANGE  RATE  RISK  -  Our  Japanese   subsidiary,
Interlink  Electronics  K.K.,  generally  makes sales and  collects its accounts
receivable in Japanese yen. To hedge these revenues  against future movements in
exchange rates, we may purchase  foreign exchange  forward  contracts.  Gains or
losses  on the  forward  contracts  are then  offset  by gains or  losses on the
underlying  revenue  exposure.  Accordingly,  sudden  or  significant  change of
foreign  exchange  rates would not have a material  impact on net income or cash
flows to the extent future revenues are protected by forward currency contracts.
These contracts,  however, typically have a six-month duration. Thus, yen/dollar
fluctuations  lasting more than six months will have an impact on our  revenues.
During 2005, 2004 and 2003, we entered into foreign currency exchange  contracts
in the normal course of business to manage our exposure against foreign currency
fluctuations  on  revenues  denominated  in foreign  currencies.  The  principal
objective of such contracts is to minimize the risks and costs  associated  with
financial  and  global  operating  activities.   We  do  not  utilize  financial
instruments for trading or other speculative purposes. The fair value of foreign
currency  exchange  contracts is estimated by obtaining quotes from bankers.  At
December 31, 2005, we had foreign currency exchange contracts outstanding with a
notional value of $900,000.  During fiscal 2005, we recognized  $47,000 of gains
on foreign  currency  exchange  contracts  which is  reflected in revenue in the
accompanying  consolidated  statements of operations.  Our hedging  policies are
designed to offset the effect of a yen  devaluation  on our  revenues;  thus,  a
hypothetical  10%  devaluation  of the yen  would  reduce  our  yen  denominated
revenues by 10%; but our theoretical  hedging gains would offset that effect for
a period of time.

         INTEREST RATE EXPOSURE - Based on our overall interest rate exposure at
December 31, 2005, a  hypothetical  10% change in interest  rates applied to our
outstanding  debt as of December  31,  2005,  would have no  material  impact on
earnings or cash flows, over a one-year period.

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

         The information  required by this item is included at pages F-1 to F-21
and as listed in Item 15 of Part IV.

ITEM 9.  CHANGES  IN  AND  DISAGREEMENTS  WITH  ACCOUNTANTS  ON  ACCOUNTING  AND
         FINANCIAL DISCLOSURE.

         None.

ITEM 9A. CONTROLS AND PROCEDURES.

DISCLOSURE CONTROLS AND PROCEDURES

         As of the end of the period  covered by this  Report  (the  "Evaluation
Date"),  we  carried  out an  evaluation,  under  the  supervision  and with the
participation of our management,  including our Chief Executive  Officer and our
Chief Financial Officer, of the effectiveness of the design and operation of our
disclosure controls and procedures  pursuant to Exchange Act Rule 13a-15.  Based
upon  that  evaluation,  our Chief  Executive  Officer  and our Chief  Financial
Officer  concluded that as of the Evaluation  Date, our disclosure  controls and
procedures  were  ineffective  in alerting  them in a timely  manner to material
information  relating to the Company and its subsidiaries that is required to be
included in the reports that we file or submit under the Securities Exchange Act
of 1934.


                                       45
<PAGE>


MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

         SYSTEM OF INTERNAL  CONTROL OVER  FINANCIAL  REPORTING:  Management  is
responsible  for  establishing  and  maintaining an adequate  system of internal
control over financial reporting.  This system is designed to provide reasonable
assurance  regarding the reliability of financial  reporting and the preparation
of financial  statements  for external  purposes in accordance  with  accounting
principles generally accepted in the United States of America.

         Our internal control over financial  reporting  includes those policies
and  procedures  that  (i)  pertain  to the  maintenance  of  records  that,  in
reasonable   detail,   accurately  and  fairly  reflect  the   transactions  and
dispositions  of the assets of the Company;  (ii) provide  reasonable  assurance
that  transactions are recorded as necessary to permit  preparation of financial
statements in accordance with accounting  principles  generally  accepted in the
United States of America,  and that receipts and expenditures of the Company are
being made only in accordance with authorizations of management and directors of
the Company;  and (iii) provide  reasonable  assurance  regarding  prevention or
timely  detection  of  unauthorized  acquisition,  use  or  disposition  of  the
Company's assets that could have a material effect on the financial statements.

         Management  conducted an evaluation of the  effectiveness of the system
of internal control over financial  reporting based on the framework in Internal
Control-Integrated  Framework  (the  "Framework")  issued  by the  Committee  of
Sponsoring  Organizations  of  the  Treadway  Commission  (COSO).  Based  on its
evaluation,  management  concluded that the Company's system of internal control
over  financial  reporting  was  ineffective  as  of  December  31,  2005.  This
conclusion  was  reached  based on the  identification  of  material  weaknesses
described below:

         o        Certain  weaknesses were identified related to the closing and
                  financial  reporting  of our  quarterly  and annual  financial
                  statements.   These  weaknesses  resulted  in  adjustments  in
                  accounts receivable and allowance for doubtful accounts, sales
                  return reserves,  prepaid expenses and other assets,  accounts
                  payable,  stockholders' equity and due from stockholders.  The
                  failure to have identified certain material adjustments to the
                  financial   statements   also   resulted   in  the   following
                  restatement issues:

                  -        failure to identify $1.0 million in payables due to a
                           vendor, for the third and fourth quarters of 2004 and
                           the first and second  quarters of 2005, that were not
                           properly recorded and a write-down of $1.1 million of
                           certain net receivables from the same vendor, for the
                           fourth  quarters of 2002 and 2003, as a result of not
                           reconciling  accounts  with  the  vendor  in a timely
                           manner; and

                  -        failure to record stock option expense, in accordance
                           with generally accepted accounting principles (GAAP),
                           of $2,400,000,  $221,000 and $108,000 for 2001,  2004
                           and  2005,   respectively,   by  allowing  terminated
                           employees  to extend the period in which to  exercise
                           their  options to 30 days after a black out period as
                           opposed to 30 days after  termination  as  explicitly
                           stated  in  our  stock  option  plan.  This  practice
                           results in a  re-measurement  date as  defined  under
                           stock  option  accounting  rules,   which  require  a
                           revaluation of any stock options given this benefit.

                  While these adjustments were correctly  identified and made as
                  a  result  of a  review  of  the  financial  statements,  this
                  material  weakness  prevented  us from  filing  our  Quarterly
                  Report on Form 10-Q for the quarter  ended  September 30, 2005
                  and our Annual Report on Form 10-K for the year ended December
                  31, 2005 in a timely  manner.  At the  direction  of our


                                       46
<PAGE>


                  Chief Executive and Chief Financial Officers,  we are adopting
                  new closing  processes  and  procedures  that we believe  will
                  remediate this material weakness.

         o        We   identified  a  material   weakness   related  to  certain
                  weaknesses  in our inventory  management,  reserves for excess
                  and obsolete  inventory and costing process,  in the course of
                  reviewing our inventory records. These adjustments resulted in
                  the following restatement issues:

                  -        failure  to  recognize   approximately   $616,000  of
                           software  license costs  remaining in inventory  that
                           should  have been  expensed  in the first and  second
                           quarters of 2005;

                  -        failure to identify an additional $372,000 of certain
                           inventory   components   that   were   double-counted
                           resulting in an overstatement of inventory as of June
                           30, 2005; and

                  -        failure to properly  recognize $837,000 of overstated
                           inventory in transit from our US and Japan operations
                           to our Hong Kong  subsidiary  as of December 31, 2004
                           and $748,000 of overstated cost of sales in 2005, for
                           a net increase to cost of sales of $89,000.

                  At the direction of the Chief  Executive  and Chief  Financial
                  Officers,  we  have  developed  and are  implementing  revised
                  internal   control   procedures   related  to  our   inventory
                  management and costing  process that we believe will remediate
                  this material weakness.

         o        Due to the number of deficiencies and significant deficiencies
                  found  within the Sales Order to Cash,  Procure to Payment and
                  Stockholders'  Equity  processes,  in  addition  to the  items
                  discussed  above,  we  have  assessed  the  financial  control
                  environment as a whole as a material weakness.

         Our  management,  including  our  Chief  Executive  Officer  and  Chief
Financial Officer,  do not expect that our disclosure controls and procedures or
internal control over financial  reporting will prevent all error and all fraud.
A control system no matter how well designed and  implemented,  can provide only
reasonable, not absolute, assurance that the control system's objectives will be
met.  Further,  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.  Because of the  inherent  limitations  in all control
systems,  no  evaluation  of controls can provide  absolute  assurance  that all
control issues within a company are detected.  The inherent  limitations include
the  realities  that  judgments  in  decision-making  can be  faulty,  and  that
breakdowns can occur because of simple errors or mistakes.  Controls can also be
circumvented by the individual acts of some persons, by collusion of two or more
people or by  management  override  of the  controls.  Because  of the  inherent
limitations in a cost-effective  control system,  misstatements  due to error or
fraud may occur and not be detected.

ATTESTATION REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

         Management's  assessment of the  effectiveness  of our internal control
over  financial  reporting has been audited by BDO Seidman,  LLP, an independent
registered public accounting firm, and their attestation  report is presented on
the next page.


                                       47
<PAGE>


             REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors
Interlink Electronics, Inc.
Camarillo, California

We  have  audited   management's   assessment,   included  in  the  accompanying
Management's Report on Internal Control over Financial Reporting, that Interlink
Electronics,  Inc. did not maintain  effective  internal  control over financial
reporting as of December 31, 2005, because of the material  weaknesses  relating
to inventory valuation,  quarterly and annual closing processes,  application of
accounting  policies as it relates to stock-based  compensation,  and the entity
level  control   environment,   based  on  criteria   established   in  INTERNAL
CONTROL--INTEGRATED   FRAMEWORK   issued   by  the   Committee   of   Sponsoring
Organizations of the Treadway Commission (COSO).  Interlink Electronics,  Inc.'s
management  is  responsible  for  maintaining  effective  internal  control over
financial  reporting  and for its  assessment of the  effectiveness  of internal
control over financial reporting. Our responsibility is to express an opinion on
management's  assessment  and an opinion on the  effectiveness  of the company's
internal control over financial reporting based on our audit.

We conducted  our audit in accordance  with the standards of the Public  Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain  reasonable  assurance  about whether  effective
internal  control  over  financial  reporting  was  maintained  in all  material
respects. Our audit included obtaining an understanding of internal control over
financial reporting,  evaluating management's assessment, testing and evaluating
the design and operating  effectiveness of internal control, and performing such
other  procedures as we considered  necessary in the  circumstances.  We believe
that our audit provides a reasonable basis for our opinion.

A company's  internal control over financial  reporting is a process designed to
provide reasonable  assurance  regarding the reliability of financial  reporting
and the preparation of financial  statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial  reporting  includes those policies and procedures that (1) pertain to
the  maintenance  of records that, in reasonable  detail,  accurately and fairly
reflect the  transactions  and  dispositions  of the assets of the company;  (2)
provide  reasonable  assurance  that  transactions  are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting  principles,  and that receipts and  expenditures  of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of  unauthorized  acquisition,  use, or  disposition  of the company's
assets that could have a material effect on the financial statements.

Because of its inherent  limitations,  internal control over financial reporting
may not prevent or detect misstatements.  Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate  because of changes in  conditions,  or that the degree of compliance
with the policies or procedures may deteriorate.

A  material  weakness  is  a  control  deficiency,  or  combination  of  control
deficiencies,  that  results  in more than a remote  likelihood  that a material
misstatement of the annual or interim  financial  statements of the Company will
not be  prevented or  detected.  The  following  material  weaknesses  have been
identified and included in management's assessment:


                                       48
<PAGE>


1.       As of  December  31,  2005,  the  Company  did not  maintain  effective
         controls  over  the  application  of  appropriate  accounting  policies
         related to the measurement of stock-based compensation. During the year
         ended December 31, 2005, and for several  preceding  years, the company
         allowed  employees who were terminated  during a "black-out"  period to
         exercise  vested stock  options up to 30 days  following the end of the
         "black-out"  period as opposed to 30 days after  termination  as called
         for under the terms of the Company's  stock option plan.  The change in
         terms resulted in a re-measurement  of the stock-based  compensation at
         the  termination  date.  This resulted in restatements of the Company's
         previously issued financial statements for the years ended December 31,
         2001 and 2004, as well as for the first and second quarters of the year
         ended December 31, 2005.

2.       As of  December  31,  2005,  the  Company  did not  maintain  effective
         controls over inventory costing,  master file maintenance and inventory
         movement, and reserves for excess and obsolete inventory. This material
         weakness resulted in significant  adjustments in the fourth quarter, as
         well as the restatement of financial  statements  previously  issued in
         the year ended  December 31, 2004 and the first and second  quarters of
         the year ended December 31, 2005.

3.       The company did not maintain  effective controls over its quarterly and
         annual financial  statement close process in the United States and Hong
         Kong which resulted in a significant  number of adjustments in accounts
         receivable and allowance for doubtful accounts,  sales return reserves,
         prepaid  expenses and other  assets,  accounts  payable,  stockholders'
         equity and due from stockholders.  There was not a documented review by
         accounting personnel with appropriate  financial reporting expertise of
         routine and non-routine  transactions  to ensure that the  transactions
         are accounted  for in accordance  with  generally  accepted  accounting
         principles in the United States of America. There were also significant
         errors  noted in the  reconciliation  of  amounts  receivable  from and
         payable  to a  significant  vendor as of  December  31,  2005 and prior
         periods,  which  resulted  in the  restatement  of  amounts  previously
         reported in the years ended December 31, 2003 and 2004 and in the first
         and second  quarters of the year ended December 31, 2005. This material
         weakness impacts the Company's ability to report financial  information
         in  conformity  with  U.S.  generally  accepted  accounting  principles
         ("GAAP"),  which  could  affect  all  significant  financial  statement
         accounts and has  partially  resulted in the  restatements  referred to
         above.

4.       The  number  and  magnitude  of  the  various  audit   adjustments  and
         restatements,   supplemented   by  the  number  of   deficiencies   and
         significant  deficiencies  found  in our  testing  of  the  significant
         processes of Sales Order to Cash, Procure to Payment, and Stockholders'
         Equity,  resulted  in the  conclusion  of a material  weakness  for the
         financial reporting control environment as a whole.

These material weaknesses were considered in determining the nature,  timing and
extent of audit tests  applied in our audit of the 2005  consolidated  financial
statements,  and  our  opinion  regarding  the  effectiveness  of the  Company's
internal  control over financial  reporting does not affect our opinion on those
consolidated financial statements.

In our opinion, management's assessment that Interlink Electronics, Inc. did not
maintain effective internal control over financial  reporting as of December 31,
2005, is fairly stated, in all material respects,  based on criteria established
in INTERNAL CONTROL--INTEGRATED  FRAMEWORK issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). Also in our opinion,


                                       49
<PAGE>


because of the effect of the  material  weaknesses  described  above,  Interlink
Electronics,  Inc. has not maintained  effective internal control over financial
reporting  as of December 31, 2005,  based on criteria  established  in INTERNAL
CONTROL--INTEGRATED   FRAMEWORK   issued   by  the   Committee   of   Sponsoring
Organizations of the Treadway Commission (COSO).

The scope of our work was not sufficient to enable us to express,  and we do not
express, an opinion on management's  comments in their assessment  regarding the
remediation of the material weaknesses.

We have also  audited,  in accordance  with the standards of the Public  Company
Accounting  Oversight Board (United States),  the consolidated  balance sheet of
Interlink Electronics, Inc. as of December 31, 2005 and the related consolidated
statements of  operations,  changes in  stockholders'  equity and  comprehensive
loss, and cash flows for the year then ended, and our report dated July 21, 2006
expressed an unqualified opinion.


/s/ BDO Seidman, LLP
-----------------------
    BDO Seidman, LLP

Los Angeles, California
July 21, 2006


                                       50
<PAGE>


CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING DURING LAST FISCAL QUARTER

         In connection with the  restatements  discussed above in  "Management's
Discussion and Analysis of Financial  Condition and Results of  Operations"  and
with respect to the material weaknesses  identified by management as of December
31, 2004 and December 31, 2005,  management  has taken  significant  measures to
improve our financial  reporting  process during the last fiscal quarter.  These
measures have included assessing the adequacy of controls, implementing remedial
procedures,  taking  corrective  action to address our material  weaknesses  and
replacing,  augmenting and upgrading the financial  staff.  In  particular,  the
following  changes in internal  control over  financial  reporting have occurred
during the last fiscal quarter:

         o        We identified  the two material  weaknesses  during the fourth
                  quarter  of 2005 and  during  the  course of the 2005 year end
                  audit  process  described  above  in  Management's  Report  on
                  Internal  Control Over Financial  Reporting as of December 31,
                  2005 and  subsequently are taking the remedial actions related
                  to each, as described above.

         Other than as  discussed  above,  there was no change in the  Company's
internal  control over financial  reporting  during the last fiscal quarter that
materially  affected,  or is likely to materially affect, the Company's internal
control over financial reporting.

ITEM 9B. OTHER INFORMATION.

         None.

                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

         Information  with respect to our directors and our audit  committee has
been included in our definitive  proxy  statement for our 2006 Annual Meeting of
Stockholders  (the  "2006  Proxy  Statement")  and  is  incorporated  herein  by
reference.  Information with respect to our executive officers is included under
Item 4A of Part I of this Report.  Information  with respect to compliance  with
Section  16(a) of the  Securities  Exchange  Act of 1934,  as amended,  has been
included in the 2006 Proxy Statement and is incorporated herein by reference.

CODE OF BUSINESS CONDUCT AND ETHICS

         The Interlink Electronics, Inc. Code of Business Conduct and Ethics for
Directors,    Officers    and    Employees   is   available   at   our   website
(http://www.interlinkelectronics.com)  and will be  provided  in  print  without
charge to any  stockholder  who  submits  a request  in  writing  to:  Interlink
Electronics,  Inc.,  546 Flynn Road,  Camarillo,  California  93012,  Attention:
Corporate  Secretary.  The Code applies to our chief executive officer and chief
financial officer, and to all directors,  officers and employees of the Company.
The Code  provides  that any waiver of the Code may be made only by the Board of
Directors.

ITEM 11. EXECUTIVE COMPENSATION.

         Information with respect to executive compensation has been included in
the 2006 Proxy Statement and is incorporated herein by reference.


                                       51
<PAGE>


ITEM 12. SECURITY  OWNERSHIP OF CERTAIN  BENEFICIAL  OWNERS AND  MANAGEMENT  AND
         RELATED STOCKHOLDER MATTERS.

         Information  with respect to security  ownership of certain  beneficial
owners and management and equity compensation plan information has been included
in the 2006 Proxy Statement and is incorporated herein by reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

         THE SHAREHOLDER LOANS

         In late 2000, E. Michael Thoben, III, our Chairman, President and Chief
Executive  Officer,  Paul D.  Meyer,  our former  Chief  Financial  Officer  and
Executive Vice  President,  and Michael W. Ambrose,  our Senior Vice  President,
Technology and Product Development, exercised certain incentive stock options to
purchase  Common Stock of Interlink  and then sold the Common Stock  obtained on
that exercise. By early 2001, the price of Interlink's Common Stock had declined
significantly and, among others,  Messrs.  Thoben,  Meyer and Ambrose determined
that they would  purchase  Common  Stock of  Interlink  in the open  market.  To
complete the purchase,  and after  considering  the benefit to Interlink and its
stockholders,  Interlink's  board of directors,  with Mr. Gu, Mr. Thoben and Mr.
Lutz each recusing himself from the decision, agreed to accept a promissory note
from each of Messrs.  Meyer, Ambrose and Lutz in the amount of $42,892, from Mr.
Gu in the amount of $40,883 and from Mr.  Thoben in the amount of $42,936.  Each
promissory note is dated May 1, 2001, bears interest at the rate of 5% per annum
and is secured by all right, title and interest in the shares purchased with the
money  borrowed  under the note and all  distributions  received,  receivable or
otherwise distributed in respect to or in exchange for the shares purchased.  We
refer to these notes as the  "Shareholder  Loans." As subsequently  amended upon
the approval of the Board of Directors in June 2002, the  Shareholder  Loans are
due and payable on November 1, 2006.  As of December 31, 2005,  the  outstanding
balance of principal and accrued and unpaid  interest on the  Shareholder  Loans
was $52,900,  $52,900, $50,422 and $5,772 in the case of Messrs. Meyer, Ambrose,
Gu and Thoben,  respectively.  Mr.  Thoben has paid the full amount of principal
owing  under his  Shareholder  Loan as of December  31,  2005 and the  remaining
balance of accrued interest was paid in full in 2006. Mr. Lutz has paid the full
amount of all principal and interest owing under his Shareholder Loan.

         Due to concerns about the  collectability of certain of the Shareholder
Loans and in an  effort  to treat  our  current  officers  and  directors  in an
equivalent  fashion,  we have  reserved  $72,054 of the  outstanding  balance of
principal and accrued and unpaid interest due on the Shareholder  Loans from our
executive  officers and directors.  This reserve was recorded as of December 31,
2005 and is reflected in the accompanying consolidated financial statements.

         On June 21, 2006, the  disinterested  members of our Board of Directors
approved a proposal to eliminate the outstanding  Shareholder  Loans by allowing
each of the borrowers to surrender the shares pledged as collateral as a payment
against the loan. The remaining amount of the Shareholder Loans will be forgiven
by Interlink. Each borrower has agreed to the Board's proposal.

         THE 16(B) LOANS

         As a result of a miscalculation  of the time period between the sale of
the underlying  Common Stock following the exercise of the stock options and the
purchase of the Common Stock in the open market,  the  purchases  occurred  five
months  after  the date of the  sales  and,  pursuant  to  Section  16(b) of the
Securities  Exchange Act of 1934,  as amended,  resulted in liability of Messrs.
Thoben,  Meyer


                                       52
<PAGE>


and  Ambrose to  Interlink  in the amount of the deemed  profit  measured by the
difference  between the sale and purchase prices.  The amount of the liabilities
as of June 11, 2001 were  $132,652,  $132,109 and  $104,050 for Messrs.  Thoben,
Meyer and  Ambrose,  respectively.  Because of the amount of these  liabilities,
Messrs.  Thoben, Meyer and Ambrose were unable to make immediate payment without
substantial disruption to their personal financial affairs.  Accordingly,  after
considering  the matter  carefully,  and having  obtained the advice of counsel,
Interlink's  Board of  Directors,  with Mr.  Thoben  recusing  himself  from the
decision,  unanimously  agreed to accept  promissory  notes from the individuals
evidencing the debt. Among the factors  considered by the Board in reaching this
decision was the ongoing  contribution  to  Interlink  being made by each of the
individuals and the interest of Interlink in avoiding unnecessary  pressures and
distractions  on these  individuals at a critical time in  Interlink's  history.
Each  promissory  note bears interest at the rate of 7% per annum and is secured
by  Interlink  options that had a value as of June 11, 2001 equal to 150% of the
principal  amount  due  under the note.  We refer to these  notes as the  "16(b)
Loans." As  subsequently  amended upon the approval of the Board of Directors in
June  2002,  the  16(b)  Loans  are  due  and  payable  in  three  equal  annual
installments  beginning  on  June  11,  2006.  As  of  December  31,  2005,  the
outstanding  balance of principal  and accrued and unpaid  interest on the 16(b)
Loans was $114,776,  $126,610 and $25,213 in the case of Messrs.  Meyer, Ambrose
and Thoben,  respectively.  The outstanding balance of principal and accrued and
unpaid interest of $25,213 for Mr. Thoben was paid in full in 2006.

         Upon his departure from Interlink in early 2006, Mr. Meyer  surrendered
the options that he had pledged as  collateral  in partial  payment of his 16(b)
Loan.

         Due to concerns about the  collectability of certain of the 16(b) Loans
and in an effort to treat our current  officers and  directors in an  equivalent
fashion,  we have reserved $189,766 of the outstanding  balance of principal and
accrued and unpaid  interest due on the 16(b) Loans from our executive  officers
and  directors.  This  reserve  was  recorded  as of  December  31,  2005 and is
reflected in the accompanying financial statements.

         Our Board of  Directors  is  considering  a proposal to  eliminate  the
outstanding  16(b) Loan of Mr.  Ambrose by allowing him to  surrender  the stock
options he pledged as  collateral as a payment  against the loan.  The remaining
portion of the loan would be forgiven by Interlink.

ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES.

         Information with respect to audit fees,  audit-related  fees, tax fees,
all other fees and the audit  committee's  pre-approval  policies and procedures
has been  included in the 2006 Proxy  Statement  and is  incorporated  herein by
reference.


                                       53
<PAGE>


                                     PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES.

(a)      1.       FINANCIAL STATEMENTS.                                   PAGE
                                                                         IN THIS
                                                                         REPORT
                                                                         -------
         Index to Consolidated Financial Statements....................      F-1
         Report of Independent Registered Public Accounting Firm.......      F-2
         Consolidated Balance Sheets...................................      F-3
         Consolidated Statements of Operations.........................      F-4
         Consolidated Statements of Stockholders' Equity and
           Comprehensive Income (Loss).................................      F-5
         Consolidated Statements of Cash Flows.........................      F-6
         Notes to Consolidated Financial Statements....................      F-7

         2.       FINANCIAL STATEMENT SCHEDULES.

         The following information is filed as part of this Form 10-K and should
be read in conjunction with the financial statements contained herein:

         Schedule II Valuation and Qualifying Accounts

         All other  schedules have been omitted  because they are  inapplicable,
not required by the  instructions or because the required  information is either
incorporated  herein by reference  or included in the  financial  statements  or
notes thereto included in this report.


                                       54
<PAGE>


         3.       EXHIBITS.

         The exhibits listed below are filed as part of this report.

       EXHIBIT
        NUMBER

           3.1 Certificate  of  Incorporation,   as  amended   (incorporated  by
               reference  to Exhibit 3.1 to the  Registrant's  Annual  Report on
               Form 10-K for the year ended December 31, 2000).
           3.2 Bylaws   (incorporated   by  reference  to  Exhibit  3.2  to  the
               Registrant's  Annual  Report  on Form  10-K  for the  year  ended
               December 31, 2000).
         10.1* 1996 Stock Incentive Plan, as amended  (incorporated by reference
               to Exhibit 10.2 to the  Registrant's  Annual  Report on Form 10-K
               for the year ended December 31, 2000).
         10.2* Form  of  Incentive  Stock  Option  Agreement   (incorporated  by
               reference to Exhibit 10.2 to the  Registrant's  Annual  Report on
               Form 10-K for the year ended December 31, 2004).
         10.3* Form of  Non-Statutory  Stock Option  Agreement  (incorporated by
               reference to Exhibit 10.3 to the  Registrant's  Annual  Report on
               Form 10-K for the year ended December 31, 2004).
          10.4 Lease  Agreement  dated  August  15,  1998 to lease  premises  in
               Camarillo,  California (incorporated by reference to Exhibit 10.8
               to the Registrant's Annual Report on Form 10-K for the year ended
               December 31,  1998),  as amended by the First  Amendment to Lease
               dated July 23, 2003 between Mobile Park Investment,  Inc. and the
               Registrant,  as amended by the Second  Amendment  to Lease  dated
               January 23, 2004  between  Mobile Park  Investment,  Inc. and the
               Registrant  (incorporated  by  reference  to Exhibit  10.4 to the
               Registrant's  Annual  Report  on Form  10-K  for the  year  ended
               December 31,  2003),  as amended by the Third  Amendment to Lease
               dated October 14, 2004 between Mobile Park  Investment,  Inc. and
               the Registrant  (incorporated by reference to Exhibit 10.4 to the
               Registrant's  Annual  Report  on Form  10-K  for the  year  ended
               December 31, 2004),  as amended by the Fourth  Amendment to Lease
               dated March 24, 2005 between Mobile Park Investment, Inc. and the
               Registrant.
          10.5 Pledge  Agreement  between George Gu and the Registrant dated May
               1,  2001  (incorporated  by  reference  to  Exhibit  10.13 to the
               Registrant's  Annual  Report  on Form  10-K  for the  year  ended
               December 31, 2003).
          10.6 Pledge  Agreement  between E. Michael  Thoben and the  Registrant
               dated May 1, 2001  (incorporated by reference to Exhibit 10.15 to
               the  Registrant's  Annual  Report on Form 10-K for the year ended
               December 31, 2003).
          10.7 Pledge  Agreement  between Paul D. Meyer and the Registrant dated
               May 1, 2001  (incorporated  by reference to Exhibit  10.16 to the
               Registrant's  Annual  Report  on Form  10-K  for the  year  ended
               December 31, 2003).
          10.8 Pledge  Agreement  between  Michael W. Ambrose and the Registrant
               dated May 1, 2001  (incorporated by reference to Exhibit 10.17 to
               the  Registrant's  Annual  Report on Form 10-K for the year ended
               December 31, 2003).
          10.9 Secured Promissory Note of George Gu, as Borrower,  in the amount
               of $40.883  dated as of May 1, 2001,  in favor of the  Registrant
               (incorporated  by reference to Exhibit 10.18 to the  Registrant's
               Annual Report on Form 10-K for the year ended December 31, 2003).
         10.10 Secured  Promissory Note of Merritt M. Lutz, as Borrower,  in the
               amount  of  $42,892  dated  as of May 1,  2001,  in  favor of the
               Registrant  (incorporated  by reference  to Exhibit  10.19 to the
               Registrant's  Annual  Report  on Form  10-K  for the  year  ended
               December 31, 2003).
         10.11 Secured  Promissory Note of Michael Thoben,  as Borrower,  in the
               amount  of  $42,892  dated  as of May 1,  2001,  in  favor of the
               Registrant  (incorporated  by reference  to Exhibit  10.20 to the
               Registrant's  Annual  Report  on Form  10-K  for the  year  ended
               December 31, 2003).


                                       55
<PAGE>


         10.12 Secured  Promissory  Note of Paul D. Meyer,  as Borrower,  in the
               amount  of  $42,892  dated  as of May 1,  2001,  in  favor of the
               Registrant  (incorporated  by reference  to Exhibit  10.21 to the
               Registrant's  Annual  Report  on Form  10-K  for the  year  ended
               December 31, 2003).
         10.13 Secured  Promissory Note of Michael W. Ambrose,  as Borrower,  in
               the  amount of $42,892  dated as of May 1, 2001,  in favor of the
               Registrant  (incorporated  by reference  to Exhibit  10.22 to the
               Registrant's  Annual  Report  on Form  10-K  for the  year  ended
               December 31, 2003).
         10.14 First  Amendment to Secured  Promissory  Note dated June 11, 2002
               between the  Registrant,  George Gu, Paul D. Meyer and Michael W.
               Ambrose  (incorporated  by  reference  to  Exhibit  10.23  to the
               Registrant's  Annual  Report  on Form  10-K  for the  year  ended
               December 31, 2003).
         10.15 Pledge  Agreement  between Paul D. Meyer and the Registrant dated
               June 11, 2001  (incorporated by reference to Exhibit 10.25 to the
               Registrant's  Annual  Report  on Form  10-K  for the  year  ended
               December 31, 2003).
         10.16 Pledge  Agreement  between Mike Ambrose and the Registrant  dated
               June 11, 2001  (incorporated by reference to Exhibit 10.26 to the
               Registrant's  Annual  Report  on Form  10-K  for the  year  ended
               December 31, 2003).
         10.17 Secured  Promissory  Note of Paul D. Meyer,  as Borrower,  in the
               amount of  $132,109  dated as of June 11,  2001,  in favor of the
               Registrant  (incorporated  by reference  to Exhibit  10.28 to the
               Registrant's  Annual  Report  on Form  10-K  for the  year  ended
               December 31, 2003).
         10.18 Secured  Promissory  Note of Mike  Ambrose,  as Borrower,  in the
               amount of  $104,050  dated as of June 11,  2001,  in favor of the
               Registrant  (incorporated  by reference  to Exhibit  10.29 to the
               Registrant's  Annual  Report  on Form  10-K  for the  year  ended
               December 31, 2003).
         10.19 First  Amendment to Secured  Promissory  Note dated June 11, 2002
               between the Registrant, E. Michael Thoben, Paul D. Meyer and Mike
               Ambrose  (incorporated  by  reference  to  Exhibit  10.30  to the
               Registrant's  Annual  Report  on Form  10-K  for the  year  ended
               December 31, 2003).
          21.1 Subsidiaries of the Registrant.
          23.1 Consent of BDO Seidman, LLP.
          24.1 Power of Attorney (see signature page).
          31.1 Certification of Chief Executive  Officer of Registrant  Pursuant
               to SEC Rule  13a-14(a)/15d-14(a),  as Adopted Pursuant to Section
               302 of the Sarbanes-Oxley Act of 2002.
          31.2 Certification of Chief Financial  Officer of Registrant  Pursuant
               to SEC Rule  13a-14(a)/15d-14(a),  as Adopted Pursuant to Section
               302 of the Sarbanes-Oxley Act of 2002.
          32.1 Certification of Chief Executive  Officer of Registrant  Pursuant
               to 18 U.S.C.  Section 1350, as Adopted Pursuant to Section 906 of
               the Sarbanes-Oxley Act of 2002.
          32.2 Certification of Chief Financial  Officer of Registrant  Pursuant
               to 18 U.S.C.  Section 1350, as Adopted Pursuant to Section 906 of
               the Sarbanes-Oxley Act of 2002.

----------------

* Management contract or compensatory plan or arrangement.


                                       56
<PAGE>


                                   SIGNATURES

         Pursuant to the  requirements  of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its  behalf  by the  undersigned,  thereunto  duly  authorized,  in the  City of
Camarillo, State of California on July 24, 2006.


                                     INTERLINK ELECTRONICS, INC.

                                     By:   /s/ CHARLES C. BEST
                                           -------------------------------------
                                           CHARLES C. BEST
                                           CHIEF FINANCIAL OFFICER AND SECRETARY


                                POWER OF ATTORNEY

         KNOW ALL PERSONS BY THESE  PRESENTS,  that each person whose  signature
appears below  constitutes  and appoints E. Michael  Thoben,  III and Charles C.
Best, and each of them, his or her  attorneys-in-fact and agents, each with full
power of  substitution,  for him or her and in his or her name, place and stead,
in any and all capacities, to sign any and all amendments to this Report, and to
file the same,  with all  exhibits  thereto and other  documents  in  connection
therewith,  with the  Securities  and Exchange  Commission,  granting  unto said
attorneys-in-fact and agents full power and authority to do and perform each and
every act and thing  requisite and necessary to be done in connection  with this
Report,  as fully to all intents and  purposes as he or she might or could do in
person,  hereby ratifying and confirming all that any of said  attorneys-in-fact
and agents,  or his  substitute or  substitutes,  may lawfully do or cause to be
done by virtue hereof.

         Pursuant to the  requirements  of the Securities  Exchange Act of 1934,
this Report has been signed below by the  following  persons on July 24, 2006 on
behalf of the Registrant and in the capacities indicated:

SIGNATURES                                TITLE
/S/  E. MICHAEL THOBEN, III               President, Chief Executive Officer and
---------------------------               Chairman of the Board of Directors
E. Michael Thoben, III                    (Principal Executive Officer)

/S/  CHARLES C. BEST                      Chief Financial Officer and Secretary
------------------------------------      (Principal Financial Officer and
Charles C. Best                           Principal Accounting Officer)

/S/ GEORGE GU                             Director
------------------------------------
George Gu

/S/ EUGENE F. HOVANEC                     Director
------------------------------------
Eugene F. Hovanec

/S/ MERRITT M. LUTZ                       Director
------------------------------------
Merritt M. Lutz

/S/ JOHN A. BUCKETT, II                   Director
------------------------------------
John A. Buckett, II

/S/ EDWARD HAMBURG                        Director
------------------------------------
Edward Hamburg


                                       57
<PAGE>


                           INTERLINK ELECTRONICS, INC.
                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

                                                                            PAGE
                                                                            ----

Index to Consolidated Financial Statements..............................     F-1
Report of Independent Registered Public Accounting Firm.................     F-2
Consolidated Balance Sheets.............................................     F-3
Consolidated Statements of Operations...................................     F-4
Consolidated Statements of Stockholders' Equity and Comprehensive
   Income (Loss)........................................................     F-5
Consolidated Statements of Cash Flows...................................     F-6
Notes to Consolidated Financial Statements..............................     F-7


                                      F-1
<PAGE>


             REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM


The Board of Directors and Stockholders of Interlink Electronics, Inc.
Camarillo, California

         We  have  audited  the  accompanying  consolidated  balance  sheets  of
Interlink  Electronics,  Inc. (a Delaware  corporation)  and  subsidiaries as of
December  31,  2005  and  2004  and  the  related  consolidated   statements  of
operations, stockholders' equity and comprehensive income (loss), and cash flows
for the three  years ended  December  31,  2005.  These  consolidated  financial
statements   are  the   responsibility   of  the   Company's   management.   Our
responsibility  is  to  express  an  opinion  on  these  consolidated  financial
statements based on our audits.

         We conducted our audits in accordance  with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain  reasonable  assurance about whether the
financial  statements  are free of  material  misstatement.  An  audit  includes
examining,  on a test basis,  evidence supporting the amounts and disclosures in
the  financial  statements.  An audit also  includes  assessing  the  accounting
principles  used  and  significant  estimates  made  by  management,  as well as
evaluating the overall  financial  statement  presentation.  We believe that our
audits provide a reasonable basis for our opinion.

         In our opinion, the consolidated financial statements referred to above
present fairly, in all material  respects,  the financial  position of Interlink
Electronics, Inc. and its subsidiaries as of December 31, 2005 and 2004, and the
results of their  operations  and their  cash  flows for the three  years in the
period  ended  December  31,  2005  in  conformity  with  accounting  principles
generally accepted in the United States of America.

         We have also audited,  in  accordance  with the standards of the Public
Company  Accounting  Oversight Board (United States),  the  effectiveness of the
Company's  internal  control over  financial  reporting as of December 31, 2005,
based on the criteria  established  in INTERNAL  CONTROL - INTEGRATED  FRAMEWORK
issued by the Committee of Sponsoring  Organizations of the Treadway  Commission
and our  report  dated  July  21,  2006  expressed  an  unqualified  opinion  on
management's  assessment of the effectiveness of the Company's  internal control
over  financial  reporting and an adverse  opinion on the  effectiveness  of the
Company's internal control over financial reporting.


/s/ BDO Seidman, LLP


Los Angeles, California
July 21, 2006


                                      F-2
<PAGE>


INTERLINK ELECTRONICS, INC.
CONSOLIDATED BALANCE SHEETS (In thousands, except par value)


ASSETS                                                         DECEMBER 31,
Current assets:                                              2005       2004(1)
                                                           --------    --------
  Cash and cash equivalents ............................   $  3,938    $  6,067
  Short-term investments, available for sale ...........     10,000      13,000
  Accounts receivable, less allowance for
    doubtful accounts and product returns of $423
    and $198 in 2005 and 2004, respectively (Note 3) ...      9,184       8,248
  Inventories, net of reserves of $1,739 and
    $412 in 2005 and 2004, respectively ................      8,119      10,256
  Prepaid expenses and other current assets ............        456         335
                                                           --------    --------
    Total current assets ...............................     31,697      37,906
Property and equipment, net (Note 4) ...................      1,099       1,669
Patents and trademarks, less accumulated
     amortization of $1,201 and $1,144
      in 2005 and 2004, respectively ...................        308         265
Other assets ...........................................         67         108
                                                           --------    --------
       Total Assets ....................................   $ 33,171    $ 39,948
                                                           ========    ========

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Current maturities of long-term debt .................   $    154    $    491
  Accounts payable .....................................      5,731       5,641
  Accrued payroll and related expenses .................      1,931       1,030
  Deferred revenue .....................................        863         188
  Accrued taxes and other expenses .....................         66         102
                                                           --------    --------
    Total current liabilities ..........................      8,745       7,452
                                                           --------    --------

Long-term debt, net of current portion .................        154         405
Commitments and contingencies
Stockholders' equity:
 Preferred stock, $5.00 par value
     (100 shares authorized, none issued and
     outstanding) ......................................       --          --
 Common stock, $0.00001 par value
     (50,000 shares authorized, 13,754
     and 13,676 issued and outstanding
     at December 31, 2005 and 2004, respectively) ......     50,740      50,413
  Due from stockholders ................................       (157)       (429)
  Accumulated other comprehensive loss .................       (490)       (377)
  Accumulated deficit ..................................    (25,821)    (17,516)
                                                           --------    --------
      Total stockholders' equity .......................     24,272      32,091
                                                           --------    --------
         Total Liabilities and Stockholders' Equity ....   $ 33,171    $ 39,948
                                                           ========    ========


See accompanying notes to the consolidated financial statements.

(1) As restated


                                      F-3
<PAGE>


INTERLINK ELECTRONICS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share data)

                                                    YEARS ENDED DECEMBER 31,
                                               --------------------------------
                                                 2005       2004(1)      2003(1)
                                               --------    --------    --------
Revenues ...................................   $ 38,239    $ 35,406    $ 31,042
Cost of revenues ...........................     30,181      24,811      19,676
                                               --------    --------    --------
   Gross profit ............................      8,058      10,595      11,366
                                               --------    --------    --------

Operating expenses:
   Product development and research ........      4,586       4,158       3,418
   Selling, general and administrative .....     11,733      10,238       8,172
                                               --------    --------    --------
        Total operating expenses ...........     16,319      14,396      11,590
                                               --------    --------    --------
Operating loss .............................     (8,261)     (3,801)       (224)
                                               --------    --------    --------

Other income (expense):
    Interest income (expense), net .........        162          15         (44)
    Other income (expense) .................        (95)         17          48
                                               --------    --------    --------
      Total other income, net ..............         67          32           4
                                               --------    --------    --------

Loss before provision for income
   tax expense .............................     (8,194)     (3,769)       (220)

Provision for income tax expense ...........        111        --            28
                                               --------    --------    --------

Net loss ...................................   $ (8,305)   $ (3,769)   $   (248)
                                               ========    ========    ========

Loss per share--basic ......................   $  (0.61)   $  (0.31)   $  (0.02)
Loss per share--diluted ....................   $  (0.61)   $  (0.31)   $  (0.02)

Weighted average shares--basic .............     13,721      11,972      10,339
Weighted average shares--diluted ...........     13,721      11,972      10,339


See accompanying notes to the consolidated financial statements.

(1) As restated


                                      F-4
<PAGE>


<TABLE>
INTERLINK ELECTRONICS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME (LOSS)
(In thousands)

<CAPTION>
                                                                        ACCUMULATED
                                                                         COMPREHEN-                TOTAL
                                            COMMON STOCK      DUE FROM     SIVE                    STOCK-
                                       ---------------------   STOCK-     INCOME    ACCUMULATED   HOLDER'S
                                         SHARES      AMOUNT   HOLDERS     (LOSS)     DEFICIT(1)   EQUITY(1)
                                       ---------- ---------- ----------  ----------  ----------  ----------
<S>                                        <C>    <C>        <C>         <C>         <C>         <C>
Balance, December 31, 2002 .........        9,778 $   31,433 $     (797) $     (837) $  (13,499) $   16,300
  Comprehensive income:
    Net loss .......................         --         --         --          --          (248)       (248)
    Foreign currency translation
           adjustment ..............         --         --         --           446        --           446
                                                                                                 ----------
       Comprehensive income ........         --         --         --          --          --           198
  Loan payments from stockholders ..         --         --          277        --          --           277
  Exercise of employee stock options        1,377      2,594       --          --          --         2,594
                                       ---------- ---------- ----------  ----------  ----------  ----------
Balance, December 31, 2003 .........       11,155     34,027       (520)       (391)    (13,747)     19,369
                                       ---------- ---------- ----------  ----------  ----------  ----------
  Comprehensive loss:
    Net loss .......................         --         --         --          --        (3,769)     (3,769)
    Foreign currency translation
           adjustment ..............         --         --         --            14        --            14
                                                                                                 ----------
      Comprehensive loss ...........         --         --         --          --          --        (3,755)
  Loan payments from stockholders ..         --         --           91        --          --            91
  Issuance of common stock,
       net of issuance costs .......        1,830     13,503       --          --          --        13,503
  Exercise of employee stock options          691      2,883       --          --          --         2,883
                                       ---------- ---------- ----------  ----------  ----------  ----------
Balance, December 31, 2004 .........       13,676     50,413       (429)       (377)    (17,516)     32,091
                                       ---------- ---------- ----------  ----------  ----------  ----------
  Comprehensive loss:
    Net loss .......................         --         --         --          --        (8,305)     (8,305)
    Foreign currency translation
           adjustment ..............         --         --         --          (113)       --          (113)
                                                                                                 ----------
      Comprehensive loss ...........         --         --         --          --          --        (8,418)
    Interest due from stockholders .         --         --          (79)       --          --           (79)
  Write-off of stockholder loans and
        interest ...................         --         --          351        --          --           351
  Exercise of employee stock
           options .................           78        327       --          --          --           327
                                       ---------- ---------- ----------  ----------  ----------  ----------
Balance, December 31, 2005 .........       13,754 $   50,740 $     (157) $     (490) $  (25,821) $   24,272
                                       ========== ========== ==========  ==========  ==========  ==========
</TABLE>


See accompanying notes to the consolidated financial statements.

(1) As restated


                                      F-5
<PAGE>


<TABLE>
INTERLINK ELECTRONICS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands)

<CAPTION>
                                                                    YEARS ENDED DECEMBER 31,
                                                               --------------------------------
Cash flows from operating activities:                            2005       2004(1)     2003(1)
                                                               --------    --------    --------
<S>                                                            <C>         <C>         <C>
  Net loss .................................................   $ (8,305)   $ (3,769)   $   (248)
  Adjustments to reconcile net loss to
     net cash provided by (used in) operating activities:
    Provision for (recovery of) allowance for
     doubtful accounts receivable ..........................        284         (22)        176
    Provision for loans and interest due from stockholders .        352        --          --
    Increase (decrease) in reserves for excess inventories .      1,433        (425)       (195)
    Stock-based compensation ...............................        108         220        --
    Interest due from stockholders .........................        (79)       --          --
    Depreciation and amortization ..........................        989         609         593
    Changes in operating assets and liabilities:
      Accounts receivable ..................................     (1,219)        897      (3,991)
      Inventories ..........................................        705      (1,193)     (1,437)
      Prepaid expenses and other current assets ............       (121)        (82)          6
      Other assets .........................................         40         (47)          7
      Accounts payable .....................................         90       1,864       1,743
      Deferred revenue .....................................        675         188        --
      Accrued payroll and other accrued expenses ...........        863         503        (188)
                                                               --------    --------    --------
         Net cash used in operating activities .............     (4,185)     (1,257)     (3,534)
                                                               --------    --------    --------
Cash flows from investing activities:
   Sales (purchase) of marketable securities ...............      3,000     (11,001)     (1,999)
   Purchases of property and equipment .....................       (362)       (973)       (643)
   Costs of patents and trademarks .........................       (101)       (123)       (177)
                                                               --------    --------    --------
         Net cash provided by (used in) investing activities      2,537     (12,097)     (2,819)
                                                               --------    --------    --------
 Cash flows from financing activities:
    Principal payments on long term debt ...................       (588)       (820)       (618)
    Payments from stockholders .............................       --          --            87
    Proceeds from the issuance of common stock,
        net of issuance costs ..............................       --        13,503        --
    Proceeds from exercise of employee stock options .......        220       2,662       2,594
                                                               --------    --------    --------
       Net cash provided by (used in) financing activities .       (368)     15,345       2,063
                                                               --------    --------    --------
Effect of exchange rate changes on cash and cash equivalents       (113)         14         446
                                                               --------    --------    --------
      Increase (decrease) in cash and cash equivalents .....     (2,129)      2,005      (3,844)
Cash and cash equivalents:
      Beginning of year ....................................      6,067       4,062       7,906
                                                               --------    --------    --------
      End of year ..........................................   $  3,938    $  6,067    $  4,062
                                                               ========    ========    ========
Supplemental disclosure of cash flow information:
   Interest paid ...........................................   $     36    $     84    $     91
   Income taxes paid .......................................   $     45    $      1    $      1
Non-cash transactions:
    Repayment of amounts due from stockholders via offset
     of accrued amounts due to stockholders ................   $   --      $     91    $    190
</TABLE>


See accompanying notes to the consolidated financial statements.

(1) As restated


                                      F-6
<PAGE>


INTERLINK ELECTRONICS,  INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER
31, 2005

1.       DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

         Interlink  Electronics,  Inc. and its  subsidiaries  are engaged in the
development of intuitive  interface  technologies and solutions for business and
home applications.  Our products include  interactive remote input devices,  pen
input pads, and  integrated  cursor  control  devices.  Our remote input devices
enable  a user  to  control  and  communicate  with  various  products  such  as
computers,  digital projection systems, digital televisions and other electronic
products,  by providing an intuitive device on which the user can remotely input
a variety of  commands.  We also design and sell  products  that record and bind
signatures to legal documents.  Our products incorporate  proprietary sensor and
wireless communication  technologies and ergonomic designs. We record revenue in
four market segments that we refer to as our  e-transactions  (input devices for
the electronic signature markets),  specialty components  (integrated  FSR-based
sensors,  subassemblies  and modules that support cursor control and other input
functions),  OEM remote  controls  (wireless  intuitive  input device and sensor
products for use with presentation  projectors and advanced viewing devices) and
Interlink  branded  products  (aftermarket  remote control  devices sold through
retail channels).

SIGNIFICANT ACCOUNTING POLICIES

         REVENUE RECOGNITION--We  recognize revenue in accordance with SEC Staff
Accounting Bulletin ("SAB") No. 104, "Revenue Recognition." SAB No. 104 requires
that four basic  criteria  must be met before  revenue  can be  recognized:  (1)
persuasive  evidence of an  arrangement  exists;  (2)  delivery  has occurred or
services rendered; (3) the fee is fixed and determinable; and (4) collectibility
is  reasonably   assured.   Determination   of  criteria  (3)  and  (4)  require
management's  judgments  regarding  the  fixed  nature  of the fee  charged  for
services rendered and products  delivered and the  collectibility of those fees.
To satisfy the  criteria,  we: (1) input orders based upon receipt of a customer
purchase order;  (2) record revenue upon shipment of goods and when risk of loss
and title transfer; (3) confirm pricing through the customer purchase order; and
(4)  validate  creditworthiness  through  past payment  history,  credit  agency
reports and other  financial  data. All customers have warranty  rights and some
customers  also have  explicit  or  implicit  rights of return.  We comply  with
Statement of Financial  Accounting Standards No. 48 with respect to sell-through
and  returns and the  related  recording  of  reserves  for  potential  customer
returns.  Should changes in conditions cause management to determine the revenue
recognition  criteria  are not met for certain  future  transactions,  such as a
determination that collectibility was not reasonably  assured,  revenue would be
recognized at a later time.

         ACCOUNTS RECEIVABLE AND ALLOWANCE FOR DOUBTFUL  ACCOUNTS--Our  accounts
receivable are  unsecured,  and we are at risk to the extent such amounts become
uncollectible.  We continually  monitor individual account receivable  balances,
and provide for an allowance  of doubtful  accounts at the time  collection  may
become  questionable  based on payment  performance or age of the receivable and
other  factors  related to the  customer's  ability to pay. We  generally  offer
30-day  payment  terms.  However,  some  of our  distributors  in  the  business
communications-branded  market and some of our Japanese OEM customers require as
long as 180-day  payment  terms.  We recorded an increase to the  allowance  for
doubtful accounts of $176,000 and $284,000 for 2003 and 2005, respectively;  and
a decrease to the allowance of $22,000 in 2004. Write-offs against the allowance
for doubtful  accounts  totaled $7,000,  $589,000 and $3,000 for the years ended
December 31, 2005, 2004 and 2003, respectively.


                                      F-7
<PAGE>


         RESERVE FOR ESTIMATED  PRODUCT  RETURNS--While  not an explicit part of
the Company's  terms and conditions of product sales except for some  customers,
it does, on a discretionary  basis, grant product exchanges for its distribution
and reseller customers in its branded business communications market for similar
products of equal value if these  exchanges  meet certain  other  criteria.  The
Company records  provisions for the estimated amounts of products to be returned
in such  exchanges  through  adjustments  to revenues and cost of revenues.  The
Company  estimates  future  product  returns  based on  recent  return  history,
inventory status and product  "sell-through"  statistics received from its major
distributors,  discussions  regarding  product  activity with its major reseller
customers, and current industry product and technology trends.

         INVENTORY  RESERVE--At  each balance sheet date, we evaluate our ending
inventories for excess  quantities and  obsolescence.  This evaluation  includes
analyses of forecast sales levels by product and historical demand. We write off
inventories  that are  considered  obsolete.  Remaining  inventory  balances are
adjusted to  approximate  the lower of our cost or market  value and result in a
new cost  basis in such  inventory  until  sold.  If  future  demand  or  market
conditions  are  less  favorable  than  our  projections,  additional  inventory
write-down  may be  required,  and  would be  reflected  in cost of sales in the
period the revision is made. Based on lowered  expectations for future demand in
the OEM Remotes segment as well as limitations on the use of certain  restricted
raw  materials  prompted  by early  adoption  of the  Restriction  of  Hazardous
Substances  Act of 2002 by many of our  customers,  we increased our reserve for
excess and obsolete inventory by approximately $1.9 million in the third quarter
of 2005.

         PROVISION  FOR INCOME  TAX--As  part of the  process of  preparing  our
financial statements, as required by Statement of Financial Accounting Standards
("SFAS") No. 109 "Accounting For Income Taxes",  we are required to estimate our
income  taxes in each of the  jurisdictions  in which we operate.  This  process
involves  estimating  our actual  current tax exposure  together with  assessing
temporary  differences  resulting from differing  treatment of items for tax and
accounting  purposes.  These  differences  result in  deferred  tax  assets  and
liabilities,  which are included in our balance  sheet.  We must then assess the
likelihood  that our deferred tax assets will be recovered  from future  taxable
income  and to the  extent we  believe  that  recovery  is not  likely,  we must
establish a valuation reserve.  To the extent we establish a reserve or increase
this reserve in a period, we must include an expense within the tax provision in
the statements of operation.

         Significant   management   judgment  is  required  in  determining  our
provision for income taxes, deferred tax asset and liabilities and any valuation
reserve  recorded  against our net deferred tax assets.  Management  continually
evaluates  its  deferred  tax asset as to whether it is likely that the deferred
tax asset will be realized.

         As of December 31,  2005,  the Company had net  operating  loss ("NOL")
carryforwards  for  federal,  state and  foreign  income tax  purposes  of $39.8
million,  $23.9 million and $5.9 million,  respectively,  which are available to
offset future taxable income in those jurisdictions through 2025.

         FOREIGN EXCHANGE EXPOSURE--Many of our OEM customers are based in Japan
and  approximately  20%,  28% and  23% of our  2005,  2004  and  2003  revenues,
respectively,  came from Japanese  customers.  Revenues from these customers are
denominated  in Japanese yen and as a result we are subject to foreign  currency
exchange  rate  fluctuations  in the  yen/dollar  exchange  rate. We use foreign
currency forward contracts to hedge this exposure. We use revenue forecasts from
our  Japanese  subsidiary  to determine  the amount of our forward  contracts to
purchase  and we expect to enter into these  contracts  when we believe  the yen
value is relatively strong against the U.S. dollar. To


                                      F-8
<PAGE>


the extent  that our  receivable  forecast  may be  inaccurate  or the timing of
forecasting the yen's strength is wrong,  our actual holding gains or losses may
not necessarily  correlate with the effect of foreign currency rate fluctuations
on our  revenues.  We mark these  contracts to market value and the gain or loss
from  these  contracts  is  recorded  in  business  communications  revenue.  In
addition,  because our Japanese subsidiary's functional currency is the yen, the
translation of the net assets of that subsidiary into the  consolidated  results
will fluctuate with the yen/dollar exchange rate.

         The changes in the fair values of our foreign currency contracts are as
follows (in thousands):

                                            2005       2004         2003
                                          --------   --------    ---------
         Hedging gains (losses) .......   $     47   $    (57)   $   (211)
                                          ========   ========    ========

         CONSOLIDATION POLICY--The consolidated financial statements include the
accounts of the Company, its 100 percent-owned Japanese subsidiary,  and its 100
percent-owned  Hong Kong  subsidiary.  All  material  intercompany  accounts and
transactions have been eliminated.

         SHIPPING AND  HANDLING--The  Company accounts for shipping and handling
costs in accordance with EITF 00-10,  "Accounting for Shipping and Handling Fees
and Costs"  which  requires  fees billed to customers to be included in revenue.
During 2005, 2004 and 2003 related  shipping and handling  expenses of $222,000,
$220,000  and  $167,000,  respectively,  are  included in  selling,  general and
administrative   expenses  in  the  accompanying   consolidated   statements  of
operations.

         FOREIGN   CURRENCY   TRANSLATION/TRANSACTIONS--The   accounts   of  the
Company's Japanese subsidiary has been translated according to the provisions of
SFAS No. 52, "Foreign  Currency  Translation." The books and records of the Hong
Kong  subsidiary  are maintained in the U.S.  dollar.  Management has determined
that the functional  currency of its Japanese subsidiary is the Japanese yen and
is the U.S. dollar for the Hong Kong subsidiary. Translation gains or losses for
the  Japanese  subsidiary  are  reflected as other  comprehensive  income in the
consolidated  statement of stockholders' equity and comprehensive income (loss).
All  of  the  accumulated  other  comprehensive  income  represents   cumulative
translation  adjustments.  The Japanese  subsidiary's assets and liabilities are
translated into U.S.  dollars using the period-end  exchange rate.  Revenues and
expenses are  translated at average  rates during the year.  Any gains or losses
resulting from foreign  currency  transactions are reflected in the consolidated
statements of operations for the period in which they occur.

         CASH AND CASH  EQUIVALENTS--The  Company  invests excess cash in highly
liquid  commercial paper.  Investments of original  maturities less than 90 days
are classified as cash  equivalents.  At December 31, 2005, the Company had cash
and cash  equivalents  of $3.9  million at financial  institutions  in excess of
federally insured limits.


                                      F-9
<PAGE>


         MARKETABLE SECURITIES--The Company invests excess cash in highly liquid
short-term investments available for sale. The debt and equity securities listed
below are auction rate securities that typically can be auctioned and liquidated
within a 30 day  period.  At December  31,  2005,  the  Company  had  short-term
investments available for sale as follows:

      Short-term Investments Available for Sale

                             ORIGINAL    MARKET   UNREALIZED
                               COST      VALUE    GAIN (LOSS)   MATURITY DATE
                              -------   -------   ----------    -------------
2005:

   Debt Securities            $ 4,000   $ 4,000      $0         Dec. 2039 -
                                                                Dec. 2040

   Equity Securities            6,000     6,000      $0         N/A
                              -------   -------

                              $10,000   $10,000
                              =======   =======

2004:

   Equity Securities          $ 6,000   $ 6,000      $0         N/A

   US Treasury Securities       7,000     7,000      $0         January 06, 2005
                              -------   -------

                              $13,000   $13,000
                              =======   =======


         FINANCIAL INSTRUMENTS--The carrying amounts of the Company's short-term
trade receivables and payables and long-term debt obligations  approximate their
fair value as interest rates approximate  market rates for similar  instruments.
During 2005, 2004 and 2003, the Company entered into foreign  currency  exchange
contracts  in the  normal  course of  business  to manage its  exposure  against
foreign currency fluctuations on revenues denominated in foreign currencies. The
principal  objective  of such  contracts  is to  minimize  the  risks  and costs
associated with financial and global operating activities.  The Company does not
utilize  financial  instruments for trading or other speculative  purposes.  The
fair value of foreign  currency  contracts is estimated by obtaining quotes from
bankers.  At December  31,  2005,  the Company  had foreign  currency  contracts
outstanding  with a notional  value of $900,000.  During  fiscal 2005,  2004 and
2003, the Company recognized a $47,000 gain, a $57,000 loss and a $211,000 loss,
respectively,  on foreign  exchange  contracts  that are  included  in  business
communication revenue in the accompanying consolidated statements of operations.

         INVENTORIES--Inventories  are stated at the lower of cost or market and
include  material,  labor,  and factory  overhead.  Cost is determined using the
average cost method.

         PROPERTY AND EQUIPMENT--Property and equipment are carried at cost less
accumulated  depreciation  and  amortization.  Depreciation  is  recorded on the
straight-line  basis over the estimated useful lives of the assets,  which range
from three to ten years.  Amortization  of leasehold  improvements is based upon
the  estimated  useful  lives of the assets or the term of the lease  (including
appropriate renewal options),  whichever is shorter. Maintenance and repairs are
charged  to  operations  as  incurred,   while   significant   improvements  are
capitalized.  Upon retirement or disposition of property,  the asset and related
accumulated  depreciation  or  amortization is removed from the accounts and any
resulting gain or loss is charged to operations.  The carrying value of property
and equipment


                                      F-10
<PAGE>


is assessed  periodically  and/or when  factors  indicating  an  impairment  are
present. The Company recognizes  impairment losses when the expected future cash
flows are less  than the  asset's  carrying  value,  in which  case the asset is
written down to its estimated fair value.

         PATENTS AND  TRADEMARKS--The  costs of acquiring patents and trademarks
are  amortized  on a  straight-line  basis over their  estimated  useful  lives,
ranging from seven to seventeen years.  Amortization expense for the years ended
December 31, 2005, 2004 and 2003 was $57,000, $35,000 and $9,000, respectively.

         Amortization  expense on existing costs for patents and trademarks over
the next 5 years is summarized as follows:

         2006-------------------------------- $     85
         2007--------------------------------       83
         2008--------------------------------       82
         2009--------------------------------       43
         2010--------------------------------       15
                                              --------
         Total------------------------------- $    308
                                              ========

         RESEARCH AND  DEVELOPMENT--Research  and development costs are expensed
as incurred.

         ADVERTISING  COSTS--Advertising  costs were  $899,000,  $1,000,000  and
$1,200,000 for 2005, 2004 and 2003,  respectively  and were expensed as incurred
in accordance with Statement of Position (SOP) 93-7.

         RECLASSIFICATIONS--Certain prior year amounts have been reclassified to
conform to the current year presentation.

         STOCK-BASED COMPENSATION-- Interlink has adopted the provisions of SFAS
No. 123, "Accounting for Stock-Based  Compensation." In accordance with SFAS No.
123,  Interlink has elected the  disclosure-only  provisions related to employee
stock options and follows the Accounting Principles Board ("APB") Opinion No. 25
in accounting for stock options  issued to employees.  Under APB Opinion No. 25,
compensation  expense,  if any,  is  recognized  as the  difference  between the
exercise price and the fair value of the common stock on the  measurement  date,
which is typically the date of grant, and is recognized over the service period,
which is typically the vesting period.

         For all options  granted during 2005,  2004 and 2003, the fair value of
the  Company's  stock  equaled  the  option  price  at  the  measurement   date.
Accordingly, no compensation cost has been recognized for these plans except for
the restatement  amounts referenced in "Management's  Discussion and Analysis of
Financial  Condition and Results of Operations." Had  compensation  cost for the
Company's plans been  determined  based on the fair value at the grant dates for
awards under the plans  consistent with the method of SFAS No. 123,  "Accounting
for  Stock-Based  Compensation,"  the Company  would have  recorded  stock-based
compensation expense as follows (in thousands, except per share information):


                                      F-11
<PAGE>


<TABLE>
<CAPTION>
                                                            2005          2004(1)       2003
                                                         ----------    ----------   ----------
<S>                                                      <C>           <C>          <C>
Net loss - as reported ...............................   $   (8,305)   $   (3,769)  $     (248)
Stock-based compensation expense included in reported
   net income, net of related tax effects ............          108           221         --
Stock-based compensation expense determined under fair
   value based method, net of related tax effects ....       (3,182)       (2,422)      (6,329)
                                                         ----------    ----------   ----------
            Net loss-pro forma .......................   $  (11,379)   $   (5,970)  $   (6,577)
                                                         ==========    ==========   ==========

Basic loss per share - as reported ...................   $    (0.61)   $    (0.31)  $    (0.02)
                     - pro forma .....................        (0.83)        (0.50)       (0.64)
Diluted loss per share - as reported .................   $    (0.61)   $    (0.31)  $    (0.02)
                       - pro forma ...................        (0.83)        (0.50)       (0.64)
</TABLE>

(1) As restated

         USE OF ESTIMATES--The  preparation of consolidated financial statements
in conformity with accounting principles generally accepted in the United States
of America requires management to make estimates and assumptions that affect the
reported  amounts of assets and liabilities and disclosure of contingent  assets
and liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the reported period. Actual results could differ
from those estimates.

2. RECENT ACCOUNTING PRONOUNCEMENTS

         In December 2004, the FASB issued SFAS No. 123R, "Share-Based Payment."
This  statement  is a revision  to SFAS No.  123,  "Accounting  for  Stock-Based
Compensation"  and  APB  Opinion  No.  25,   "Accounting  for  Stock  Issued  to
Employees."  This  statement   establishes  standards  for  the  accounting  for
transactions  in which an entity  exchanges its equity  instruments for goods or
services,  primarily  focusing on the  accounting for  transactions  in which an
entity obtains employee services in share-based payment  transactions.  Entities
will be required to measure the cost of employee  services  received in exchange
for an award of equity  instruments  based on the  grant-date  fair value of the
award (with limited  exceptions).  That cost will be recognized  over the period
during which an employee is required to provide service,  the requisite  service
period (usually the vesting  period),  in exchange for the award. The grant-date
fair value of employee share options and similar  instruments  will be estimated
using  option-pricing  models.  If an equity  award is modified  after the grant
date, incremental compensation cost will be recognized in an amount equal to the
excess  of the  fair  value of the  modified  award  over the fair  value of the
original award immediately before the modification.  This statement is effective
as of the beginning of the first annual  reporting period that begins after June
15,  2005.  We adopted  SFAS No.  123R as of January 1, 2006.  We are  currently
assessing the impact of this accounting standard on our consolidated  results of
operations or financial  position for 2006.  Based on current  calculations,  we
expect that we will incur non cash  expenses of  approximately  $4.0  million in
2006.

         In  December  2004,  the  FASB  issued  SFAS  No.  153,  "Exchanges  of
Nonmonetary  Assets,"  an  amendment  of APB  Opinion  No. 29,  "Accounting  for
Nonmonetary  Transactions." The amendments made by SFAS No. 153 are based on the
principle that  exchanges of nonmonetary  assets should be measured based on the
fair value of the assets exchanged. Further, the amendments eliminate the narrow
exception for nonmonetary  exchanges of similar productive assets and replace it
with a broader  exception for exchanges of  nonmonetary  assets that do not have
commercial  substance.   Previously,  APB  Opinion  No.  29  required  that  the
accounting for an exchange of a productive asset for a similar  productive asset
or an  equivalent  interest in the same or similar  productive  asset  should be
based  on the  recorded  amount  of the  asset  relinquished.  SFAS  No.  153 is
effective for nonmonetary asset


                                      F-12
<PAGE>


exchanges  occurring in fiscal periods  beginning  after June 15, 2005.  Earlier
application is permitted for  nonmonetary  asset  exchanges  occurring in fiscal
periods  beginning  after the date of  issuance.  We adopted  SFAS No. 153 as of
January 1, 2006.  The  adoption  of this  statement  is not  expected  to have a
material impact on the Company's consolidated results or operations or financial
position.

         In October 2004,  the American Jobs Creation Act of 2004 ("Act") became
effective  in the  U.S.  Two  provisions  of the Act may  impact  the  Company's
provision (benefit) for income taxes in future periods,  namely those related to
the  Qualified  Production  Activities  deduction  ("QPA") and Foreign  Earnings
Repatriation ("FER").

         The QPA will be effective  for the  Company's  U.S.  federal tax return
year  beginning  after  December  31, 2004.  In summary,  the Act provides for a
percentage  deduction  of earnings  from  qualified  production  activities,  as
defined,  commencing  with an initial  deduction of three  percent for tax years
beginning in 2005 and increasing to nine percent for tax years  beginning  after
2009, with the result that the Statutory  federal tax rate currently  applicable
to the Company's qualified production  activities of 35 percent could be reduced
initially to 33.95 percent and  ultimately to 31.85  percent.  However,  the Act
also  provides  for  the  phased  elimination  of  the  Extraterritorial  Income
Exclusion provisions of the Internal Revenue code. Due to the interaction of the
law  provisions  noted above as well as the  particulars  of the  Company's  tax
position,  the  ultimate  effect  of the QPA on the  Company'  future  provision
(benefit) for income taxes has not been determined at this time. The FASB issued
FASB Staff Position FAS 109-1, Application of FASB Statement No. 109, Accounting
for Income  Taxes,  to the Tax  Deduction  on  Qualified  Production  Activities
Provided by the American  Jobs Creation Act of 2004 ("FSP  109-1"),  in December
2004.  FSP 109-1  required  that tax benefits  resulting  from the QPA should be
recognized  no earlier  than the year in which they are reported in the entity's
tax return,  and that there is to be no  revaluation  of recorded  deferred  tax
assets  and  liabilities  as would be the case  had  there  been a change  in an
applicable statutory rate.

         The FER  provision  of the Act  provides  generally  for a one-time  85
percent  dividends  received  deduction for qualifying  repatriations of foreign
earnings to the U.S. Qualified  repatriated funds must be reinvested in the U.S.
in certain  qualifying  activities and  expenditures,  as defined by the Act. In
December  2004,  the FASB issued FASB Staff  Position FAS 109-2,  Accounting and
Disclosure  Guidance for the Foreign  Earnings  Repatriation  Provision with the
American Jobs Creation Act of 2004 ("FSP  109-2").  FSP 109-2 allows  additional
time for entities potentially impacted by the FER provision to determine whether
any foreign earnings will be repatriated  under said  provisions.  At this time,
the Company has not  undertaken  an  evaluation  of the  application  of the FER
provision  and any  potential  benefits of  effecting  repatriations  under said
provision.  Numerous factors, including previous actual and deemed repatriations
under federal tax law provisions,  are factors impacting the availability of the
FER provision to the Company and its potential  benefit to the Company,  if any.
The Company  intends to examine the issue and will provide updates in subsequent
periods.

         In May 2005,  the FASB  issued SFAS No.  154,  "Accounting  Changes and
Error  Corrections--a  replacement  of APB Opinion No. 20 and FASB Statement No.
3." SFAS No. 154 requires  retrospective  application  of a voluntary  change in
accounting  principle to prior periods'  financial  statements and also requires
that a  change  in  method  of  depreciation,  amortization,  or  depletion  for
long-lived,  non-financial  assets be  accounted  for as a change in  accounting
estimate that is affected by a change in accounting  principle.  SFAS No. 154 is
effective for accounting  changes and corrections of errors made in fiscal years
beginning  after December 15, 2005. We believe the adoption of SFAS No. 154 will
not have a material impact on our results of operations or financial condition.


                                      F-13
<PAGE>


         In  March  2005,  the  FASB  issued  Financial  Interpretation  No.  47
"Accounting for Conditional  Asset Retirements  Obligations"  ("FIN 47"). FIN 47
clarifies that the term  "conditional  asset  retirement  obligation" as used in
FASB Statement No. 143 "Accounting for Asset Retirement  Obligations," refers to
a legal obligation to perform an asset  retirement  activity in which the timing
or method of settlement are conditional on a future event that may or may not be
within the control of the entity. The obligation to perform the asset retirement
activity is  unconditional  even though  uncertainty  exists about the timing or
method  of  settlement.  Thus,  the  timing  or  method  of  settlement  may  be
conditional on a future event. Accordingly, an entity is required to recognize a
liability for the fair value of a conditional asset retirement obligation if the
fair value of the liability can be reasonably  estimated.  FIN 47 also clarifies
when an entity would have sufficient information to reasonably estimate the fair
value of an asset retirement  obligation.  FIN 47 is effective no later than the
end of fiscal  years  ending  after  December  15,  2005.  We do not  expect the
adoption  of  this  statement  to  have a  material  impact  on our  results  of
operations or financial position.

3.       INVENTORIES

         Inventories consisted of the following at (in thousands):

                                                          DECEMBER 31,
                                                     --------------------
                                                       2005        2004
                                                     --------    --------
         Raw material ............................   $  4,475    $  5,217
         Work in process .........................      1,230       1,908
         Finished goods ..........................      4,153       3,543
         Reserve for excess and obsolete inventory     (1,739)       (412)
                                                     --------    --------
         Total inventories .......................   $  8,119    $ 10,256
                                                     ========    ========

4.       PROPERTY AND EQUIPMENT

         Property and equipment consisted of the following at (in thousands):

                                                               DECEMBER 31,
                                                          --------------------
                                                            2005        2004
                                                          --------    --------
         Furniture, machinery and equipment ...........   $  7,685    $  7,497
         Leasehold improvements .......................        511         337
                                                          --------    --------
                                                             8,196       7,834
         Less accumulated depreciation and amortization     (7,097)     (6,165)
                                                          --------    --------
         Property and equipment, net ..................   $  1,099    $  1,669
                                                          ========    ========

         Depreciation and leasehold  amortization  expense charged to operations
amounted to $932,000,  $574,000  and  $584,000 for the years ended  December 31,
2005, 2004 and 2003, respectively.

5.       DUE FROM STOCKHOLDERS

         During May 2001,  the Company loaned  certain  directors,  officers and
members  of senior  management  a combined  total of  $469,000  for open  market
purchases of Company Common Stock. The loans have an interest rate of 5% and are
secured by the stock purchased. As subsequently amended upon the approval of the
Board of  Directors  in June 2002,  the notes are due and payable on November 1,
2006.  These notes are referred to collectively as the  "Shareholder  Loans." In
June 2001,  certain officers were required to remit to the Company $369,000,  as
required  under  Section  16(b) of the  Securities  Exchange  Act of 1934 and in
settlement of that obligation the Company accepted


                                      F-14
<PAGE>


promissory  notes that accrue interest at 7% per year and are due and payable in
three equal annual  installments.  In June 2002, the Board of Directors approved
the  extension of these  officer loans to require the first payment to be due in
2006.  These  loans are  referred  to  collectively  as the "16(b)  Loans."  The
Shareholder  Loans and the 16(b) Loans are included in  stockholders'  equity in
the  accompanying  balance  sheet.  In 2005,  2004 and 2003,  certain  officers,
directors and members of the senior  management repaid a combined total of $900,
$93,000 and $280,000,  respectively,  primarily via an offset of accrued amounts
due to them.

         Due to concerns about the nature of  collectability  of certain amounts
stated  above  and in an  effort to treat the  Company's  current  officers  and
directors in an  equivalent  fashion,  the Company has reserved  $385,480 of the
outstanding  balance of  principal  and accrued and unpaid  interest  due on the
Shareholder  and 16(b) Loans. Of the reserved  amount,  $261,820 is due from the
Company's current and former executive officers and directors.  This reserve was
recorded as of December 31, 2005 and is reflected in the  financial  statements.
Additionally, on June 21, 2006, the disinterested members of the Company's Board
of Directors  approved a proposal to eliminate the Shareholder Loans by allowing
each of the borrowers to surrender the shares pledged as collateral as a payment
against his or her loan. The remaining  amount of the shareholder  loan would be
forgiven by the Company. Each borrower has agreed to the Board's proposal.

6.       LINE OF CREDIT

         In June 2004,  the Company  renewed its $3 million  domestic  revolving
line of credit with Wells  Fargo Bank,  which  remained  unused at December  31,
2005. In May 2006, the Company terminated the line of credit.

7.       LONG-TERM DEBT

         The Company's Japanese  subsidiary,  Interlink  Electronics,  K.K., has
borrowed unsecured loans from three banks. The loans have interest rates ranging
from  1.875% to 2.5% and are  payable in  Japanese  yen in monthly  installments
through the year 2007. The combined balance  outstanding as of December 31, 2005
and 2004 was $308,000 and $896,000, respectively.

         At December 31, 2005,  scheduled  maturities of long-term  debt for the
next three years and thereafter are as follows (in thousands):

                                                  DEBT
                                               --------
         2006--------------------------------- $    154
         2007---------------------------------      154
         2008---------------------------------       --
         Thereafter---------------------------       --
                                               --------
         Total                                      308
         Less current portion-----------------     (154)
                                               ---------
         Long term portion-------------------- $    154
                                               ========

         During 2005, 2004 and 2003, the Company incurred  $23,000,  $84,000 and
$77,000, respectively, in interest expense.


                                      F-15
<PAGE>


8.       STOCKHOLDERS' EQUITY

         PREFERRED  STOCK--The  Company is authorized to issue 100,000 shares of
Preferred  Stock. As of December 31, 2005,  none were issued or outstanding.  In
the future,  the  Preferred  Stock may be issued in one or more series with such
rights and preferences as may be fixed and determined by the Board of Directors.

         COMMON  STOCK--The  Company is authorized to issue 50,000,000 shares of
Common Stock.

9.       STOCK OPTIONS

         Under the terms of the Company's 1996 Stock  Incentive Plan, as amended
(the  "Plan"),  officers  and key  employees  may be  granted  non-qualified  or
incentive stock options and outside directors and independent contractors of the
Company may be granted  non-qualified  stock  options.  The aggregate  number of
shares, which may be issued under the Plan, is 7,250,000. Options are granted at
fair market value on the date of grant and generally vest ratably over 36 months
and  have a five or  ten-year  term  but  terminate  earlier  if  employment  is
terminated.  As of December 31, 2005, 6,827,000 have been granted (4,062,000 are
outstanding and 2,765,000 have either been exercised,  forfeited or expired) and
there were 423,000 options available for grant.

         In 2006, the Company  determined it had improperly  accounted for stock
option exercises of certain terminated  employees during 2001 through 2005. When
the Company was in an internally  defined blackout period, it allowed terminated
employees  to extend their stock option  exercise  privileges  beyond the Plan's
stated 30 days. The Company evaluated all stock options that have been exercised
from 2001 through 2005 and  determined  who exercised  stock options  beyond the
30-day period specified in the Plan. It was determined that the termination date
constituted a  re-measurement  date,  as defined  under stock option  accounting
rules which  require a  revaluation  of any stock  options  that were given this
benefit.

         The amount of expense related to certain stock options  exercised after
the 30-day  period was $2.4  million,  $220,000 and  $108,000 in 2001,  2004 and
2005,  respectively.  These amounts are reflected in our financial statements in
the appropriate periods.

         Information  concerning  stock  options under the Plan is summarized as
follows (in thousands, except price per share information):

<TABLE>
<CAPTION>
                                         2005                  2004                   2003
                                --------------------   --------------------   --------------------
                                            WTD. AVG.              WTD. AVG.              WTD. AVG.
                                            EXERCISE               EXERCISE               EXERCISE
                                 SHARES       PRICE     SHARES       PRICE     SHARES       PRICE
                                --------    --------   --------    --------   --------    --------
<S>                                <C>      <C>           <C>      <C>           <C>      <C>
Outstanding beginning of year      3,563    $   6.08      3,416    $   4.66      3,617    $   3.72
Granted .....................        812        5.89        948        9.45      1,201        4.49
Exercised ...................        (78)       2.81       (691)       3.85     (1,377)       2.01
Forfeited and expired .......       (235)       8.26       (110)       5.37        (25)       6.13
                                --------    --------   --------    --------   --------    --------
Outstanding end of year .....      4,062    $   5.98      3,563    $   6.08      3,416    $   4.66
                                ========    ========   ========    ========   ========    ========
Exercisable end of year .....      2,739    $   5.50      2,449    $   5.03      2,442    $   4.49
                                ========    ========   ========    ========   ========    ========
</TABLE>


                                      F-16
<PAGE>


         The  following  table  summarizes   information   about  stock  options
outstanding as of December 31, 2005 (in thousands,  except  contractual life and
exercise price per share information):

------------- ------------- ------------- ------------- -------------
                              Months
                             Remaining
  Exercise       # of           On                       Options
  Price Per     Options     Contractual     Options         Un-
    Share      Outstanding      Life      Exercisable   exercisable
------------- ------------- ------------- ------------- -------------
      $ 2.40           382            10           382             0
------------- ------------- ------------- ------------- -------------
        2.70            42            27            36             6
------------- ------------- ------------- ------------- -------------
        2.94           454            26           454             0
------------- ------------- ------------- ------------- -------------
        3.04            39            21            39             0
------------- ------------- ------------- ------------- -------------
        3.30             5            26             5             0
------------- ------------- ------------- ------------- -------------
        3.54             3            14             3             0
------------- ------------- ------------- ------------- -------------
        4.30            14            24            14             0
------------- ------------- ------------- ------------- -------------
        4.42           276            12           276             0
------------- ------------- ------------- ------------- -------------
        5.49            12           114             2            10
------------- ------------- ------------- ------------- -------------
        5.50            13             0            13             0
------------- ------------- ------------- ------------- -------------
        5.51            80             4            80             0
------------- ------------- ------------- ------------- -------------
        5.56             7           113             1             6
------------- ------------- ------------- ------------- -------------
        5.65            15            33             9             6
------------- ------------- ------------- ------------- -------------
        5.70           500           114            83           417
------------- ------------- ------------- ------------- -------------
        6.14            18           111             4            14
------------- ------------- ------------- ------------- -------------
        6.15           252           111            56           196
------------- ------------- ------------- ------------- -------------
        6.45           462            35           321           141
------------- ------------- ------------- ------------- -------------
        6.87           659             2           659             0
------------- ------------- ------------- ------------- -------------
        7.54            31            33            23             8
------------- ------------- ------------- ------------- -------------
        7.82            13           110             4             9
------------- ------------- ------------- ------------- -------------
        7.98             5           107             2             3
------------- ------------- ------------- ------------- -------------
        9.40           742           102           370           372
------------- ------------- ------------- ------------- -------------
       10.60            38            39            22            16
------------- ------------- ------------- ------------- -------------
       Total         4,062                       2,858         1,204
------------- ------------- ------------- ------------- -------------

         The weighted  average fair value at the date of grant for stock options
granted  during  2005,  2004 and 2003 was  $4.21,  $4.62 and  $2.27 per  option,
respectively. The fair value of options at the date of grant was estimated using
the Black-Scholes model with the following weighted average assumptions:

                                                      2005      2004      2003
                                                      ----      ----      ----
   Estimated weighted average life (years).......      3.0       2.7       3.0
   Interest rate.................................     3.3%      3.5%      3.0%
   Volatility....................................     119%       60%       63%
   Dividend yield................................       0%        0%        0%

10.      EARNINGS PER SHARE

         For all periods presented,  per share information was computed pursuant
to provisions of SFAS No. 128 "Earnings Per Share." The  computation of earnings
per  share--basic  is based upon the weighted  average  number of common  shares
outstanding  during the periods  presented.  Earnings  per  share--diluted  also
includes  the effect of common  shares  contingently  issuable  from options and
warrants (in periods which they have a dilutive effect).


                                      F-17
<PAGE>


         Common  stock  equivalents  are  calculated  using the  treasury  stock
method.  Under  the  treasury  stock  method,  the  proceeds  from  the  assumed
conversion  of options and warrants are used to repurchase  outstanding  shares,
using a yearly average market price.

         The  following  table  contains  information   necessary  to  calculate
earnings per share (in thousands):

<TABLE>
<CAPTION>
                                                            YEARS ENDED DECEMBER 31,
                                                        ------------------------------
                                                          2005       2004       2003
                                                        --------   --------   --------
<S>                                                       <C>        <C>        <C>
Weighted average shares outstanding .................     13,721     11,972     10,339
Effect of dilutive securities; options and warrants .      --(1)      --(1)      --(1)
                                                        --------   --------   --------
Weighted average shares--diluted ....................     13,721     11,972     10,339
                                                        ========   ========   ========
</TABLE>

-----------
(1)      Due  to  the  net  loss,  the  diluted  share  calculation  result  was
         anti-dilutive.  Thus,  the basic  weighted  average  shares  were used.
         Shares of common stock  equivalents of approximately 3.6 million shares
         2005 and 2004,  respectively  and 1.0  million  shares  for 2003,  were
         excluded  from  the  diluted  share   calculation   because  they  were
         anti-dilutive.

11.      COMMITMENTS AND CONTINGENCIES

         OPERATING   LEASES--The  Company  leases  its  facilities  and  certain
equipment  under operating  leases  expiring  through 2009. Rent expense totaled
approximately  $467,000,   $452,000  and  $382,000  for  2005,  2004  and  2003,
respectively.  Minimum lease  commitments at December 31, 2005 are summarized as
follows (in thousands):

                  2006-----------------------------    $    469
                  2007-----------------------------         415
                  2008-----------------------------         421
                  2009-----------------------------         408
                                                       --------
                                                       $  1,713
                                                       ========

         LEGAL   MATTERS--  On  November  15,  2005,  a  class  action  alleging
violations of federal  securities  laws was filed against the Company and two of
its current  and former  officers in the United  States  District  Court for the
Central District of California.  The complaint  alleges that,  between April 24,
2003 and  November  1,  2005,  the  Company  and two of its  current  and former
officers made false and misleading  statements  and failed to disclose  material
information   regarding  the  Company's  results  of  operations  and  financial
condition.  The complaint  includes claims under the Securities Act and Exchange
Act and seeks unspecified damages and legal expenses.

         To date,  the  Court  has not  certified  a class,  and the  litigation
remains in its early stages.

         On  January  24,  2006,  a  shareholder's  derivative  action was filed
against two of the Company's  current and former officers and the members of its
Board of  Directors  in the  Central  District  of  California.  The  derivative
complaint  contains the same factual  allegations as the class action  complaint
and  sought to  recover  unspecified  damages  from the  defendants,  as well as
forfeiture of their equity-based  compensation and contribution from them in the
event that the Company is found to have  violated the federal  securities  laws.
Following a motion made by the  defendants  to dismiss,  or in the  alternative,
stay the derivative action, the plaintiff  voluntarily  dismissed the derivative
action without prejudice on June 14, 2006.


                                      F-18
<PAGE>


         In  connection  with the class  action and the  derivative  proceedings
described above, an independent investigation was undertaken at the direction of
the Audit  Committee  by Dorsey & Whitney,  LLP.  Dorsey & Whitney  retained the
services of  PricewaterhouseCoopers  LLP with  respect to various  forensic  and
electronic  procedures performed in the course of the investigation.  Related to
this internal investigation,  the Company has recorded approximately $147,000 in
expense  for 2005 and  $690,000  in  expense  for 2006 to date for  amounts  not
covered by insurance.

         In  connection  with the  class  action  proceeding,  the  Company  has
recorded  approximately  $127,000  in expense  for 2006 to date for  amounts not
covered by insurance.

         Other than the amounts described above, the Company cannot estimate the
possible loss or range of loss, if any,  associated  with the  resolution of the
class action and derivative  proceedings.  While it intends to vigorously defend
against these  allegations,  the Company cannot predict the final disposition of
these  matters or whether the Company  will be liable for amounts not covered by
insurance. There is no assurance, however, that the ultimate resolution of these
matters will not result in a material adverse effect on the Company's  business,
financial condition or results of operations.

         In addition to the matters  identified  above,  from time to time,  the
Company is involved in various legal  actions that arise in the ordinary  course
of business.

12.      INCOME TAXES

         The provision  for income taxes for the years ended  December 31, 2005,
2004 and 2003 is as follows (in thousands):

                                                 2005       2004       2003
                                               --------   --------   --------
         Current taxes:
                  Federal ..................   $   --     $   --     $   --
                  State ....................       --         --         --
                  Foreign ..................        111       --           28
                                               --------   --------   --------
                         Sub Total .........        111       --           28
         Deferred taxes:
                  Federal ..................       --         --         --
                  State ....................       --         --         --
                  Foreign ..................       --         --         --
                                               --------   --------   --------
                        Sub Total ..........       --         --         --
                                               --------   --------   --------

                  Provision for income taxes   $    111   $   --     $     28
                                               ========   ========   ========

         Differences  between the provision for income taxes and income taxes at
statutory  federal income tax rate for the years ended  December 31, 2005,  2004
and 2003 are as follows (in thousands):

<TABLE>
<CAPTION>
                                                         2005       2004       2003
                                                       -------    -------    -------
<S>                                                    <C>        <C>        <C>
Income tax benefit at the statutory federal rate ...   $(2,786)   $(1,281)   $   (84)
State income taxes, net of federal income tax effect      (324)      (181)        31
Foreign taxes at rates different than U.S. taxes ...        96        126        326
Valuation allowance ................................     2,646      1,187       (245)
Other ..............................................       479        149       --
                                                       -------    -------    -------
             Total provision for income taxes ......   $   111    $  --      $    28
                                                       =======    =======    =======
</TABLE>


                                      F-19
<PAGE>


         The tax effects of temporary  differences and  carryforwards  that give
rise to a  significant  portion of the  deferred  tax assets are  summarized  as
follows (in thousands):

         Deferred tax assets:                      2005         2004
                                                 --------     --------
         Net operating loss carryforwards ...    $ 17,958     $ 15,695
         Credits ............................         220          228
         Accruals ...........................         373          206
         Reserves ...........................       1,078          736
         State taxes ........................        (911)        (703)
         Other ..............................         108           18
                                                 --------     --------
         Total deferred tax assets ..........      18,826       16,180
         Valuation allowance ................     (18,826)     (16,180)
                                                 --------     --------
          Net deferred tax assets ...........    $   --       $   --
                                                 ========     ========

         As of  December  31,  2005,  approximately  $8.2  million  of the total
deferred  tax assets  result  from  "excess"  tax  benefits  resulting  from the
exercise of employee stock options and will be recorded to stockholders'  equity
if recognized.

         In  assessing  the  realizability  of deferred  tax assets,  management
considered  whether it is more likely than not that some  portions or all of the
deferred tax assets will be realized.  The ultimate  realization of deferred tax
assets is  dependent  on the  generation  of future  taxable  income  during the
periods in which those temporary  differences  become deductible and the periods
before the carryforwards expire. Based on the level of historical taxable income
and projections for future taxable income over the periods in which the deferred
tax assets are deductible, management believes there is insufficient evidence to
conclude  that it is more likely than not that the results of future  operations
will generate sufficient taxable income to realize a portion of the net deferred
tax assets. Accordingly,  the Company has recorded a valuation allowance against
its entire net deferred  tax asset during the years ended  December 31, 2005 and
2004.

         Consolidated   U.S.  income  (loss)  before  taxes  was   $(4,914,000),
$(3,341,000)  and $506,000 for the years ended December 31, 2005, 2004 and 2003,
respectively.  The  corresponding  income (loss) before taxes for non U.S. based
operations  was  $(3,391,000),  $(428,000)  and  $(754,000)  for the years ended
December 31, 2005, 2004 and 2003, respectively.

         The Company has not provided  withholding and U.S. federal income taxes
on  undistributed  earnings  of its  foreign  subsidiaries  because  the Company
intends to reinvest  those earnings  indefinitely  or they will be offset by the
approximate credits for foreign taxes paid. It is not practical to determine the
U.S. federal tax liability, if any, which would be payable if such earnings were
not invested indefinitely.

         As of December 31, 2005, the Company had NOL carryforwards for federal,
state and foreign income tax purposes of $39.7  million,  $23.9 million and $5.9
million,  respectively,  which are available to offset future  taxable income in
those jurisdictions through 2025.

         Section 382  ("Section  382") of the Internal  Revenue Code of 1986, as
amended (the "Code"), places a limitation on the realizability of NOLs in future
periods if the  ownership  of the  company  has  changed  more than 50% within a
three-year  period.  Under Section 382, we have  experienced an approximate  43%
change in ownership  for the  three-year  period ended  December 31, 2005. As of
December 31, 2005, none of our NOLs have been limited by the Section 382 rules.


                                      F-20
<PAGE>


13.      SEGMENT INFORMATION

         BUSINESS SEGMENTS--The Company has four business segments: (i) business
communications;  (ii) OEM  remotes;  (iii)  e-transactions;  and (iv)  specialty
components.  The  accounting  policies  of the  segments  are the  same as those
described in the significant accounting policies; however, the Company evaluates
performance  based on revenue and gross  profit.  The Company  does not allocate
depreciation,  any other income,  expenses or assets to these segments, nor does
it track revenue by product.

         Reportable  segment  information for the years ended December 31, 2005,
2004 and 2003 is as follows (in thousands):

<TABLE>
<CAPTION>
                                                                          SPECIALTY
                                 BUSINESS        OEM            E-        COMPONENTS
                              COMMUNICATIONS   REMOTES     TRANSACTIONS    AND OTHER      TOTAL
                              --------------   -------     ------------    ---------      -----
<S>                               <C>          <C>            <C>           <C>         <C>
2005
   Revenue................        $6,552       $17,846        $8,326        $5,515      $38,239
   Gross profit...........         3,407          (632)        3,233         2,050        8,058
2004
   Revenue................        $6,070       $18,762        $5,328        $5,246      $35,406
   Gross profit(1)........         3,511         1,731         2,583         2,769       10,595
2003
   Revenue................        $8,133       $14,114        $4,165        $4,630      $31,042
   Gross profit(1)........         4,312         2,075         2,005         2,974       11,366
</TABLE>

(1) As restated

         GEOGRAPHIC  INFORMATION--The  Company attributes  revenues to different
geographic  areas on the basis of the location of the  customer.  The  Company's
revenues and long-lived  assets by geographic  area for the years ended December
31, 2005, 2004 and 2003 are as follows (in thousands):

                                        YEARS ENDED DECEMBER 31,
                       ---------------------------------------------------------
                             2005                2004                2003
                       -----------------   -----------------   -----------------
                                  LONG-               LONG-               LONG-
                                  LIVED               LIVED               LIVED
                      REVENUES    ASSETS  REVENUES    ASSETS  REVENUES    ASSETS
                       -------   -------   -------   -------   -------   -------
United States ......   $17,135   $ 1,245   $14,087   $ 1,246   $15,210   $   911
Japan ..............     7,571       107    10,040       587     7,140       522
Asia ...............     9,492        55     3,883     6,208        14
(other than Japan) .       101
Europe and other ...     4,041      --       7,396      --       2,484      --
                       -------   -------   -------   -------   -------   -------
                       $38,239   $ 1,407   $35,406   $ 1,934   $31,042   $ 1,447
                       =======   =======   =======   =======   =======   =======


         MAJOR  CUSTOMERS--In  2005, 2004 and 2003, no single customer  exceeded
10% of total revenues. One customer accounted for 11% of the accounts receivable
at December 31, 2005, 15% at December 31, 2004, and 20% at December 31, 2003.

14.      401K SAVINGS PLAN

         In 1995  the  Company  implemented  a  savings  plan  for all  eligible
employees,  which qualifies  under Section 401(k) of the Internal  Revenue Code.
Participating employees may contribute up to 25% of their pretax salary, but not
more than statutory limits. The Company matches 50% of the first $1,000


                                      F-21
<PAGE>


a participant contributes.  The Company expensed $36,000, $35,000 and $37,000 in
2005, 2004 and 2003, respectively, related to this plan.

15.      MATERIAL ADJUSTMENTS

         In the fourth  quarter of 2004,  the  Company  reduced  its revenue and
accounts  receivable  by $704,000 and reduced its cost of sales and gross profit
by $351,000 for a customer  contract  that did not meet the revenue  recognition
requirements of the SEC's guidelines for "bill and hold" contracts.  The Company
also  recorded a reduction in its  inventory and an increase in cost of sales of
$257,000 for a correction of its inventory  valuation method.  Additionally,  in
the third and fourth  quarters of 2004, the Company  increased its cost of sales
and  decreased  its gross  profit by $249,000  and  $178,000,  respectively  for
certain  invoices  received  from a major  vendor  that  had not  been  properly
recorded in the Company's accounting system.

         In 2005, the Company recorded restatement adjustments for the following
items:

         o        The first item  involves a key vendor and was  identified in a
                  recent reconciliation of accounts with that vendor. This issue
                  relates  to  a  net  write-off  of  $1.1  million  of  certain
                  receivables  primarily  originating  in the fourth  quarter of
                  2003  due  from  the  vendor,  with  $167,000  of that  amount
                  originating  in the fourth  quarter of 2002, and the recording
                  of $1.0  million in payables due to that same vendor that were
                  not properly  recorded in the Company's  accounting system for
                  the third and fourth quarters of 2004 and the first and second
                  quarters of 2005.

         o        The second item relates to the understatement of cost of sales
                  in the  second  quarter  of 2005 of  $372,000  as a result  of
                  certain inventory  components being doubled counted,  and thus
                  overstated in inventory as of June 30, 2005.

         o        The third item relates to the  understatement of cost of sales
                  in the first and second quarters of 2005 totaling  $616,000 as
                  a result of certain  licensing  charges that were not properly
                  recorded in cost of sales and inventory.

         o        The fourth item relates to a balance sheet reclassification of
                  $1.3 million in cash  payments  made by a customer  during the
                  second  and fourth  quarters  of 2004 as well as the first and
                  second  quarters  of 2005 in  advance of future  shipments  of
                  product.  These  payments  were  incorrectly  applied  against
                  accounts  receivable rather than recorded as deferred revenue.
                  The  cash  prepayments  have  been  properly  reclassified  to
                  deferred revenue.

         o        The fifth item relates to a terminated  employee's  ability to
                  extend the time to exercise any stock options  vested  through
                  their  respective  termination date in a blackout period to 30
                  days after the blackout period is lifted as opposed to 30 days
                  after  termination  as stated in the terms of our stock option
                  plan  resulting  in  a  re-measurement  date  and  a  non-cash
                  compensation  expense  related to 2001,  2004 and 2005 of $2.4
                  million, $220,000 and $108,000 respectively.

         o        The sixth item relates to the  understatement of cost of sales
                  of $837,000 in 2004 and an  overstatement  of cost of sales of
                  $748,000 in 2005 as a result of certain  inventory  in transit
                  from the  parent  company  to its Hong Kong  subsidiary  being
                  overvalued at December 31, 2004.


                                      F-22
<PAGE>


         These  restatement  adjustments  reduced  stockholders'  equity  by  an
aggregate of $5.5 million and  affected  prior years as follows:

         o        Our net loss for 2001 was  increased  by $2.4 million to a net
                  loss of $4.4 million.

         o        Gross  profit for 2002 was  increased  by  $167,000 to a gross
                  profit  of $8.1  million  and our net  loss was  decreased  by
                  $167,000 to a net loss of $4.1 million.

         o        Gross  profit  and net  income  for 2003 were  reduced by $1.3
                  million to a gross  profit of $11.4  million and a net loss of
                  $248,000.

         o        Gross  profit for 2004 was reduced by $1.3  million to a gross
                  profit of $10.6 million and our net loss was increased by $1.5
                  million to a net loss of $3.8 million.

         o        Gross  profit  for 2005 was  reduced  by  $357,000  to a gross
                  profit  of $8.1  million  and our net  loss was  increased  by
                  $465,000 to a net loss of $8.3 million.


                                      F-23
<PAGE>


             REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM


Board of Directors and Stockholders
Interlink Electronics, Inc.
Camarillo, California

The  audits  referred  to in our  report  dated July 21,  2006  relating  to the
consolidated  financial  statements  of Interlink  Electronics,  Inc.,  which is
contained  in Item 15 of this Form  10-K,  included  the audit of the  financial
statement  schedule listed in the accompanying  index.  The financial  statement
schedule is the responsibility of the Company's  management.  Our responsibility
is to express an opinion on this  financial  statement  schedule  based upon our
audits.

In our  opinion  such  financial  statement  schedule  presents  fairly,  in all
material aspects, the information set forth therein.



/s/ BDO Seidman, LLP
-----------------------
    BDO Seidman, LLP

Los Angeles, California


                                                   July 21, 2006


                                      F-24
<PAGE>


                                   SCHEDULE II

                        VALUATION AND QUALIFYING ACCOUNTS
              FOR THE YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003

                                 (in thousands)

                                           ADDITIONS
                              BALANCE AT    CHARGED
                               BEGINNING   TO COSTS &                BALANCE AT
DESCRIPTION                     OF YEAR    EXPENSE(1)   DEDUCTIONS   END OF YEAR
                              ----------   ----------   ----------   ----------
ALLOWANCE FOR
  DOUBTFUL ACCOUNTS:

  December 31, 2005 .......   $       59          284             7   $      336

  December 31, 2004 .......   $      670          (22)          589   $       59

  December 31, 2003 .......   $      497          176             3   $      670

RESERVE FOR INVENTORY
  OBSOLESCENCE:

  December 31, 2005 .......   $      658        1,433           352   $    1,739

  December 31, 2004 .......   $    1,420         (425)          337   $      658

  December 31, 2003 .......   $    1,818         (195)          202   $    1,420

DEFERRED TAX ASSET
  VALUATION ALLOWANCE:

  December 31, 2005 .......   $   16,180        2,646          --     $   18,826

  December 31, 2004 .......   $   14,401        1,779          --     $   16,180

  December 31, 2003 .......   $   13,229        1,171          --     $   14,401


(1)      THE ADDITIONS FOR THE DEFERRED TAX ASSET  VALUATION  ALLOWANCE  INCLUDE
         ADDITIONAL  PAID IN  CAPITAL  (APIC) OF $1,283  FOR 2004 AND $1,416 FOR
         2005.


                                      F-25
<PAGE>


                                  EXHIBIT INDEX

       EXHIBIT
        NUMBER

           3.1 Certificate  of  Incorporation,   as  amended   (incorporated  by
               reference  to Exhibit 3.1 to the  Registrant's  Annual  Report on
               Form 10-K for the year ended December 31, 2000).
           3.2 Bylaws   (incorporated   by  reference  to  Exhibit  3.2  to  the
               Registrant's  Annual  Report  on Form  10-K  for the  year  ended
               December 31, 2000).
         10.1* 1996 Stock Incentive Plan, as amended  (incorporated by reference
               to Exhibit 10.2 to the  Registrant's  Annual  Report on Form 10-K
               for the year ended December 31, 2000).
         10.2* Form  of  Incentive  Stock  Option  Agreement   (incorporated  by
               reference to Exhibit 10.2 to the  Registrant's  Annual  Report on
               Form 10-K for the year ended December 31, 2004).
         10.3* Form of  Non-Statutory  Stock Option  Agreement  (incorporated by
               reference to Exhibit 10.3 to the  Registrant's  Annual  Report on
               Form 10-K for the year ended December 31, 2004).
          10.4 Lease  Agreement  dated  August  15,  1998 to lease  premises  in
               Camarillo,  California (incorporated by reference to Exhibit 10.8
               to the Registrant's Annual Report on Form 10-K for the year ended
               December 31,  1998),  as amended by the First  Amendment to Lease
               dated July 23, 2003 between Mobile Park Investment,  Inc. and the
               Registrant,  as amended by the Second  Amendment  to Lease  dated
               January 23, 2004  between  Mobile Park  Investment,  Inc. and the
               Registrant  (incorporated  by  reference  to Exhibit  10.4 to the
               Registrant's  Annual  Report  on Form  10-K  for the  year  ended
               December 31,  2003),  as amended by the Third  Amendment to Lease
               dated October 14, 2004 between Mobile Park  Investment,  Inc. and
               the Registrant  (incorporated by reference to Exhibit 10.4 to the
               Registrant's  Annual  Report  on Form  10-K  for the  year  ended
               December 31, 2004),  as amended by the Fourth  Amendment to Lease
               dated March 24, 2005 between Mobile Park Investment, Inc. and the
               Registrant.
          10.5 Pledge  Agreement  between George Gu and the Registrant dated May
               1,  2001  (incorporated  by  reference  to  Exhibit  10.13 to the
               Registrant's  Annual  Report  on Form  10-K  for the  year  ended
               December 31, 2003).
          10.6 Pledge  Agreement  between E. Michael  Thoben and the  Registrant
               dated May 1, 2001  (incorporated by reference to Exhibit 10.15 to
               the  Registrant's  Annual  Report on Form 10-K for the year ended
               December 31, 2003).
          10.7 Pledge  Agreement  between Paul D. Meyer and the Registrant dated
               May 1, 2001  (incorporated  by reference to Exhibit  10.16 to the
               Registrant's  Annual  Report  on Form  10-K  for the  year  ended
               December 31, 2003).
          10.8 Pledge  Agreement  between  Michael W. Ambrose and the Registrant
               dated May 1, 2001  (incorporated by reference to Exhibit 10.17 to
               the  Registrant's  Annual  Report on Form 10-K for the year ended
               December 31, 2003).
          10.9 Secured Promissory Note of George Gu, as Borrower,  in the amount
               of $40.883  dated as of May 1, 2001,  in favor of the  Registrant
               (incorporated  by reference to Exhibit 10.18 to the  Registrant's
               Annual Report on Form 10-K for the year ended December 31, 2003).
         10.10 Secured  Promissory Note of Merritt M. Lutz, as Borrower,  in the
               amount  of  $42,892  dated  as of May 1,  2001,  in  favor of the
               Registrant  (incorporated  by reference  to Exhibit  10.19 to the
               Registrant's  Annual  Report  on Form  10-K  for the  year  ended
               December 31, 2003).
         10.11 Secured  Promissory Note of Michael Thoben,  as Borrower,  in the
               amount  of  $42,892  dated  as of May 1,  2001,  in  favor of the
               Registrant  (incorporated  by reference  to Exhibit  10.20 to the
               Registrant's  Annual  Report  on Form  10-K  for the  year  ended
               December 31, 2003).


                                      F-26
<PAGE>


         10.12 Secured  Promissory  Note of Paul D. Meyer,  as Borrower,  in the
               amount  of  $42,892  dated  as of May 1,  2001,  in  favor of the
               Registrant  (incorporated  by reference  to Exhibit  10.21 to the
               Registrant's  Annual  Report  on Form  10-K  for the  year  ended
               December 31, 2003).
         10.13 Secured  Promissory Note of Michael W. Ambrose,  as Borrower,  in
               the  amount of $42,892  dated as of May 1, 2001,  in favor of the
               Registrant  (incorporated  by reference  to Exhibit  10.22 to the
               Registrant's  Annual  Report  on Form  10-K  for the  year  ended
               December 31, 2003).
         10.14 First  Amendment to Secured  Promissory  Note dated June 11, 2002
               between the  Registrant,  George Gu, Paul D. Meyer and Michael W.
               Ambrose  (incorporated  by  reference  to  Exhibit  10.23  to the
               Registrant's  Annual  Report  on Form  10-K  for the  year  ended
               December 31, 2003).
         10.15 Pledge  Agreement  between Paul D. Meyer and the Registrant dated
               June 11, 2001  (incorporated by reference to Exhibit 10.25 to the
               Registrant's  Annual  Report  on Form  10-K  for the  year  ended
               December 31, 2003).
         10.16 Pledge  Agreement  between Mike Ambrose and the Registrant  dated
               June 11, 2001  (incorporated by reference to Exhibit 10.26 to the
               Registrant's  Annual  Report  on Form  10-K  for the  year  ended
               December 31, 2003).
         10.17 Secured  Promissory  Note of Paul D. Meyer,  as Borrower,  in the
               amount of  $132,109  dated as of June 11,  2001,  in favor of the
               Registrant  (incorporated  by reference  to Exhibit  10.28 to the
               Registrant's  Annual  Report  on Form  10-K  for the  year  ended
               December 31, 2003).
         10.18 Secured  Promissory  Note of Mike  Ambrose,  as Borrower,  in the
               amount of  $104,050  dated as of June 11,  2001,  in favor of the
               Registrant  (incorporated  by reference  to Exhibit  10.29 to the
               Registrant's  Annual  Report  on Form  10-K  for the  year  ended
               December 31, 2003).
         10.19 First  Amendment to Secured  Promissory  Note dated June 11, 2002
               between the Registrant, E. Michael Thoben, Paul D. Meyer and Mike
               Ambrose  (incorporated  by  reference  to  Exhibit  10.30  to the
               Registrant's  Annual  Report  on Form  10-K  for the  year  ended
               December 31, 2003).
          21.1 Subsidiaries of the Registrant.
          23.1 Consent of BDO Seidman, LLP.
          24.1 Power of Attorney (see signature page).
          31.1 Certification of Chief Executive  Officer of Registrant  Pursuant
               to SEC Rule  13a-14(a)/15d-14(a),  as Adopted Pursuant to Section
               302 of the Sarbanes-Oxley Act of 2002.
          31.2 Certification of Chief Financial  Officer of Registrant  Pursuant
               to SEC Rule  13a-14(a)/15d-14(a),  as Adopted Pursuant to Section
               302 of the Sarbanes-Oxley Act of 2002.
          32.1 Certification of Chief Executive  Officer of Registrant  Pursuant
               to 18 U.S.C.  Section 1350, as Adopted Pursuant to Section 906 of
               the Sarbanes-Oxley Act of 2002.
          32.2 Certification of Chief Financial  Officer of Registrant  Pursuant
               to 18 U.S.C.  Section 1350, as Adopted Pursuant to Section 906 of
               the Sarbanes-Oxley Act of 2002.

* Management contract or compensatory plan or arrangement.


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