UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                          ----------------------------
                                    FORM 10-K
                        FOR ANNUAL AND TRANSITION REPORTS
                     PURSUANT TO SECTION 13 OR 15(d) OF THE
                         SECURITIES EXCHANGE ACT OF 1934

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

      For the transition period from ________________ to ________________

                         Commission File No.: 001-15465

                               Intelli-Check, Inc.
                               -------------------
             (Exact name of Registrant as specified in its charter)

          Delaware                                              11-3234779
          --------                                              ----------
(State or other jurisdiction of                              (I.R.S. Employer
incorporation or organization)                               Identification No.)

        246 Crossways Park West, Woodbury, New York              11797
       -------------------------------------------------------------------
          (address of principal executive offices)             (Zip Code)

       Registrant's telephone number, including area code: (516) 992-1900
                                                           --------------

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

                          Common Stock, $.001 par value
                          -----------------------------
                                (Title of Class)

        Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the  registrant is a well-known  seasoned  issuer,  as
defined in Rule 405 of the Securities Act. Yes |_|  No |X|

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

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

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

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

Large Accelerated Filer     Accelerated Filer          Non-Accelerated Filer |X|

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

State the  aggregate  market  value of the voting and  non-voting  stock held by
non-affiliates  of the Issuer:  $49,542,067  (based  upon the  closing  price of
Issuer's  Common  Stock,  $.001 par value,  as of the last  business  day of the
Issuer's most recently completed second fiscal quarter (June 30, 2005).

Indicate the number of shares outstanding of each of the Registrant's classes of
common stock, as of the latest practicable date.

Common Stock, $.001 Par Value                     12,114,444
-----------------------------                     ----------
      (Title of Class)             (No. of Shares Outstanding at March 24, 2006)

                   DOCUMENTS INCORPORATED BY REFERENCE: NONE

<PAGE>

<TABLE>
<CAPTION>

                                TABLE OF CONTENTS


                                     Part I
<S>                                                                                                                  <C>
   1.   Business                                                                                                     3
  1A.   Risk Factors                                                                                                11
  1B.   Unresolved Staff Comments                                                                                   15
   2.   Properties                                                                                                  15
   3.   Legal Proceedings                                                                                           15
   4.   Submission of Matters to a Vote of Security Holders                                                         15


                                     Part II
   5.   Market for Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities             16
   6.   Selected Financial Data                                                                                     17
   7.   Management's Discussion and Analysis                                                                        17
  7A.   Quantitative and Qualitative Disclosures About Market Risks                                                 25
   8.   Financial Statements and Supplementary Data                                                                 25
   9.   Changes In and Disagreements With Accountants on Accounting and Financial Disclosure                        25
  9A.   Controls and Procedures                                                                                     25
  9B.   Other Information                                                                                           25

                                    Part III
  10.   Directors and Executive Officers                                                                            26
  11.   Executive Compensation                                                                                      29
  12.   Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters              31
  13.   Certain Relationships and Related Transactions                                                              33
  14.   Principal Accountant and Fees                                                                               33

                                     Part IV
  15. Exhibits and Financial Statement Schedules                                                                    34

</TABLE>


                                       2
<PAGE>


                                     PART I

Item 1. Business

Overview

      We were  originally  incorporated  in the  state of New  York in 1994.  In
August 1999, we reincorporated in Delaware.  We have developed and are currently
marketing  an  advanced  document  verification  system as part of our  identity
management   solutions  to  enable  a  user  to  detect   altered  and  tampered
identification cards and to address problems such as:

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

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

o   Underage  Access to Age  Restricted  Products  and Services - by verifying
      identification,  our systems and software  are  designed to determine  the
      customer's  age and  validity  of the  identification  card to detect  and
      prevent the use of fraudulent  identification for the purchase of alcohol,
      tobacco and other  age-restricted  products and services and to reduce the
      risk to the retailer of substantial monetary fines, criminal penalties and
      the  potential  for  license  revocation  for the  sale of  age-restricted
      products to minors; and

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

Our Products and Services

      ID-Check(TM) technology

      Our patented ID-Check(TM) technology is our advanced document verification
software.  ID-Check is  contained in our  software  products,  and is capable of
reading and  verifying in one swipe or scan the encoded  data  contained on U.S.
and Canadian driver licenses,  state issued non-driver  identification cards and
military  IDs that,  in most cases,  comply with the  standards  of the American
Association  of Motor  Vehicle  Administrators  (AAMVA),  the American  National
Standards Institute (ANSI) and the International Standards Organization (ISO).

      C-Link(R) software

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

      ID-Check SDK

      Our software product,  ID-Check SDK, formerly called IDN-DLL,  is designed
for software developers that wish to incorporate  ID-Check technology into their
applications.  It  contains  our  proprietary  technology,  as well as a  device
controller,  and is capable of reading the smart chip  contained in the military
CAC. We currently have multiple license  agreements  executed with third parties
for integration and  sub-licensing of our software  applications into their core
applications.

                                       3
<PAGE>

      ID-Check(R) PC and ID-Check(R) PDA

      Two software  solutions,  ID-Check(R) PC and ID-Check(R) PDA, are designed
to replicate  the features of  ID-Check(R)  and to be  platform-independent  and
compatible with stationary and mobile hardware  applications.  ID-Check(R) PC is
designed to read the smart chip contained in the military CAC.

      ID-Prove

      ID-Prove is a software  solution that is intended to add additional layers
to IDN's identity management suite of products.  ID-Prove,  when prompted,  will
provide an end user a variable  number of "out of wallet"  questions  about that
individual.  These  questions  seek to ensure that the individual in question is
truly who they claim to be.  Currently,  the ID-Prove product is integrated into
our  ID-Traveler  product as well as  available  for our  partners to  integrate
directly into their product offering.

      ID-Traveler

      ID-Traveler  is a software  solution that can  electronically  compare two
forms of government issued IDs  instantaneously and determine whether the common
fields match (e.g. name, address,  date of birth).  Should the fields match, the
information is  highlighted in one color.  If the fields do not produce a match,
the information is highlighted in a different color. Two forms of identification
that are  frequently  used  include  driver's  licenses,  state issued ID cards,
military ID's, passports, borders crossing cards and visas. The program also has
the ability to store the images of the  documents  provided  for proof of ID and
has the  ID-Prove  module  embedded so that with  Internet  connectivity  it can
generate a series of questions to test one's claimed identity.

      Data Collection Devices

      ID-Check(R)  PC,  ID-Check(R)  PDA and  C-Link(R) are all designed for use
with our data collection  devices,  which are available in various forms,  which
are compact,  and may contain either one or both of two-dimensional bar code and
magnetic stripe readers.  These devices enable our new software  applications to
be  used  on a  variety  of  commercially  available  data  processing  devices,
including  credit  card  terminals,   PDAs,  Tablets,   Laptops,   Desktops  and
Point-of-Sale  Computers.  As a result of these new  product  introductions,  we
believe  that our  target  markets  will  enjoy  pricing  efficiencies  and more
flexible and versatile technology options,  thereby negating the need to replace
the IDC-1400 platform.

      IDC-1400

      The original product we designed and developed,  the IDC-1400, is based on
our  ID-Check(TM)  technology.  Effective  as of  July  2003,  our  manufacturer
discontinued manufacturing the IDC-1400 terminal.  However, we are offering this
product for sale until current  inventory is sold. We have replaced this product
with new software solutions compatible with new data collection devices that are
capable of operating on multiple hardware platforms.

New Products and Services

      ID-Check Mobile

      ID-Check  Mobile is our first device that  provides  true mobility for our
customers.  The  form-factor  is a small,  lightweight  mobile  computer  with a
durable  housing design and an integrated 2-D bar code reader,  with an optional
clip-on magnetic stripe reader. By allowing the user to move between  locations,
ID-Check  Mobile  provides  the ability to check the validity of ID documents at
multiple entry points.


                                       4
<PAGE>

      ID-Check POS

      ID-Check POS is a software  application  that runs on a VeriFone Omni 37XX
device.  Our  Software  uses both the  onboard  magnetic  stripe  reader  and an
optional  external  2-D bar code reader that plugs into an open port on the back
of the unit. The terminal has an integrated,  high-speed  thermal  printer.  The
Omni 37XX is a  multi-application  terminal that allows the ID-Check software to
run side by side with credit card processing software.

      Web Form Filler Product

      This  software  product is a Browser  Helper  Object  ("BHO") for Internet
Explorer.  It was  released in beta  version in late 2005 and is  scheduled  for
commercial  release in the second  quarter of 2006. The BHO allows our customers
to  seamlessly  integrate  our core  ID-Check  technology  into  their web based
applications.  The BHO can be programmed  through a series of drop down menus to
populate  driver  license  data in the fields of specific web pages based on web
page URLs and web page  field  names.  The  technology  also  verifies  that the
encoded information on the bar code or mag stripe matches to a proper format.

Upgrade Capability

      Our software  requires  periodic  updates as states and provinces that did
not previously conform to AAMVA standards begin to store electronically readable
information  on their  driver  licenses  and as states and  provinces  adjust or
modify the format of their  electronically  stored  information.  Jurisdictional
updates can be  distributed  in as variety of ways  depending  on the product in
use. Our  technology  can be upgraded with upgrade  cards by simply  scanning an
upgrade  card sent by mail or  downloaded  from our website and printed  using a
personal computer.  Other Intelli-check products can be upgraded by installation
of a file sent on an SD card,  CD  and/or  e-mail  to the  customer.  One of our
newest  products  can be  upgraded by modem  using a dial-up  phone  connection.
Jurisdictional  Updates are  included  in the  purchase  price of  Intelli-Check
products,  for the first year after purchase.  We sell upgrade  packages for the
period commencing after the first year of purchase.

Background on Identification Documentation

      Driver license

      The driver license is the most widely used form of government issued photo
identification.  The  Real  ID  Act,  which  became  federal  law in  May  2005,
recognizes  that the driver  license  is also a  quasi-identification  card.  In
addition to its primary function,  the driver license is used to verify identity
for social  services,  firearm sales,  check cashing,  credit card use and other
applications. There are approximately 228 million driver licenses in circulation
in the U.S. and Canada. Our technology can read the data encoded on all licenses
that in most cases comply with the AAMVA/ANSI/ISO standards, which we believe is
over 200  million of those  issued at the  current  time.  Currently,  the fifty
states,  the District of Columbia,  and eight  Canadian  Provinces  encode their
licenses.  We believe that the number of readable licenses will continue to grow
as the five Canadian Provinces that have either not yet encoded their license or
completed a rotation with encoding begin to encode and  jurisdictions  that have
recently begun to encode complete their rotations.  Additionally, we believe the
Georgia license in its new rotation will be capable of being machine read.

      Non-driver identification card

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

                                       5
<PAGE>


Regulation of Retailers of Tobacco Products and Alcoholic Beverages

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

Current Challenges Associated with Verifying Identification Documents

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

o   committing identity theft;

o   improperly boarding airplanes;

o   committing credit card, debit card and check cashing fraud;

o   unlawfully obtaining welfare or other government benefits;

o   committing refund fraud,

o   committing pharmacy fraud, including false narcotic prescriptions,

o   gaining entrance to high profile buildings and sensitive  infrastructures,
      such as nuclear facilities;

o   illegally purchasing firearms;

o   purchasing age restricted products such as alcohol and tobacco while under
      age;

o   committing employee fraud, including employee theft and payroll theft; and

o   engaging in medical fraud.


      Given the ease with which identification can be falsified,  simply looking
at a  driver  license  may not be  sufficient  to  verify  age or  identity  and
determine  whether  or  not  it  is  fraudulent.   Since  merchants  are  facing
significant  economic  losses due to these  frauds,  we believe  that a document
verification  system  which  can  accurately  read  the  electronically   stored
information is needed.  We possess a patented  software  application  technology
that  provides an  analysis  of all the data  contained  on these  documents  by
reading and  comparing  the  information  encoded on the tracks of the  magnetic
stripe or bar code on the driver license against known standards.

ID-Check Solutions and Benefits

      We believe that ID-Check and our family of software  solutions contain the
most advanced, reliable and effective technology,  providing users with an easy,
reliable,  and cost-effective  method of document and age verification.  We have
received  encoding  formats  from  most  jurisdictions  that  conform  to  AAMVA
standards. This information,  combined with our patented technology, enables the
ID Check software as well as our  ID-Check(R) PC and ID-Check(R) PDA software to
read, decode, process and verify the information electronically stored on driver
licenses.  As jurisdictions and AAMVA change their documents and guidelines,  we
believe our software, together with our programmable terminal, can be adapted to
these changes.


                                       6
<PAGE>

      ID Check  terminals do not require a connection  to a central  database to
operate,  thus negating  privacy  concerns.  Our  terminals  have the ability to
operate add-on  peripherals  such as printers,  bar code  scanners,  fingerprint
readers and other  devices.  Additionally,  our  terminals  and our new software
solutions utilizing our DCM can communicate with personal computers, which could
enhance  the  functionality  of  these  products  and  potentially   create  the
opportunity for sales of other software products by us.

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

o   is valid;

o   has been altered or tampered with;

o   has expired; and

o   has a date of birth equal to or greater than the legal age to purchase age
      restricted  products,  such as  alcohol  and  tobacco,  in the  retailer's
      location.

Then, the technology will automatically:

o   respond to the user by displaying  the results in words on the  hardware's
      screen;

o   save information that is permissible by law to the hardware's own memory;

o   print a record of the transaction including the results on a roll of paper
      similar to that used in cash  registers,  if an optional  printer has been
      installed; and

o   send the  results  to a  personal  computer  which has  Microsoft  Windows
      95/98/ME/NT/2000/XP  ("PC") for permanent storage when used in conjunction
      with  our  software,   which  simplifies  record  keeping  by  downloading
      comprehensive ID-Check due diligence data into a personal computer,  where
      permitted by law. This provides a merchant with secure  back-up files that
      include individual and cumulative transaction records.

Strategy

      Our objective is to be a leading provider of productivity  enhancement and
identity management solutions. These solutions include our identity verification
technology  systems and software in the work-flow,  commercial fraud protection,
access control and age verification markets. Key elements of our strategy are as
follows:

      Productivity  Enhancement.  Through  many of our recent  successes  in the
retail vertical market and our entrance into the financial services vertical, we
intended to market our technology as key  productivity  enhancement  tools.  Our
patented ID-Check software can add functionality to virtually any given software
application  to  automatically  populate  fields  within  a  given  form  when a
government-issued  photo ID is presented.  The automation  that results from the
intelligence  added  to the  form  dramatically  increases  throughput  and data
integrity, and it significantly enhances the customer's experience.

      Develop  Additional   Strategic   Alliances  with  Providers  of  Security
Solutions. We have entered into strategic alliances with Bioscrypt Inc., Identix
Corporation, Ultra-Scan Inc., and Cross-Match Technologies, biometric companies;
Lenel  Systems  International,  a provider  of  integrated  security  solutions;
Northrop Grumman and Anteon,  integrators in the defense industry;  Intermec and
Metrologic hardware manufacturers; and Digimarc and Viisage, providers of driver
licenses for approximately 90% of the jurisdictions in North America, to utilize
our systems and software as the proposed or potential enrollment application for
their technologies and to jointly market these security applications. We believe
these relationships will broaden our marketing reach through their sales efforts
and  we  intend  to  develop  additional  strategic  alliances  with  additional
providers of security solutions.


                                       7
<PAGE>

      Strengthen  Sales and  Marketing  Efforts.  We intend to capitalize on the
growth in demand for age and document  verification  by continuing to market and
support  our systems  and  software.  Our sales and  marketing  departments  are
organized by target  market  rather than  geographic  area to provide  focus and
create experts in each area.

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

      Protect  Intellectual   Property.   We  intend  to  strongly  protect  our
intellectual  property portfolio in order to preserve value and obtain favorable
settlements  where  warranted.  For  example,  in February  2003,  we filed suit
against CardCom,  Inc. d/b/a CardCom Technology,  Inc. claiming that CardCom had
infringed one of our patents.  Subsequently,  we entered into a patent licensing
agreement with CardCom  effective  March 2003 which provides for a non-exclusive
three year license in connection with the manufacture, use and sale of CardCom's
age  verification  products in the United States and Canada.  On March 12, 2006,
this licensing agreement expired and we are in discussions with CardCom to renew
the terms of the  agreement.  We also have filed a patent  infringement  lawsuit
against Tricom Card  Technologies,  Inc. in July 2003,  which is currently being
litigated.

Our Revenue Sources

      We derive our revenue from the following sources:

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

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

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

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

o   Sale of software upgrades and extended maintenance programs

Our Target Markets

      The use of false  identification  cards,  primarily  driver  licenses  and
non-driver  identification  cards, to engage in commercial fraud, to gain access
to  unauthorized  areas  and to  gain  entry  to,  or  purchase  products  from,
establishments that sell age-restricted items, is prevalent. Given the ease with
which  identification  can be  falsified,  we believe  that simply  looking at a
driver's  license may not be  sufficient to verify age or identity and determine
whether or not such an  identification  card is fraudulent.  Since merchants are
facing  significant  economic  losses due to these frauds,  we believe that what
they need is a  document  verification  system,  which can  accurately  read the
electronically stored information. We target the markets that would most benefit
from our systems and software.

      In the past twelve months,  we have marketed our products to opportunities
where our ID-Check technology can be used to enhance productivity.  We have made
significant  progress  in the  marketplace  for the retail  issuance  of instant
credit. We believe there is a financial benefit and a compelling  business model
for customers in this marketplace to utilize our technology.

Productivity Enhancement

o   Mass merchandisers and retailers

o   Banks and other financial institutions

o   Credit unions

o   Credit card issuers

o   Check cashing services

o   Auto dealerships and rental car agencies

o   Casino for enrollment of guests

o   Hospital patient admissions

o   Lodging Industry

o   Airlines

                                       8
<PAGE>

Commercial fraud protection

o   Mass merchandisers and retailers

o   Banks and other financial institutions

o   Credit unions

o   Credit card issuers

o   Check cashing services

o   Pharmacies

o   Auto dealerships and rental car agencies

o   Casino cage operations

o   Hospitals, medical facilities and health plans

o   Lodging Industry

Access control

o   Airports and airlines

o   Departments of Motor Vehicles

o   Prisons

o   Law enforcement agencies

o   Notable buildings

o   Court houses

o   Nuclear facilities

o   Oil refineries and storage facilities

o   Military establishments

o   College Campuses

o   Department of Homeland Security

o   Bus, rail and port facilities

Age verification market

o   Bars and night clubs

o   Convenience stores

o   Grocery chains

o   Restaurants

o   Stadiums and arenas

o   Casinos and gaming establishments

o   Sellers of sexually explicit material

o   Firearm dealers

Current Customers

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

o   Certegy Check Services, Inc.

o   MGM Grand

o   Caesar's Palace

o   Foxwoods Resorts and Casino

o   Mohegan Sun Resort Casino

      The following  representative customers are using our systems and software
for access control:

o   JFK  Airport in New York,  O'Hare  International  Airport  in Chicago  and
      Reagan National Airport in Washington DC

o   American Stock Exchange

o   Fort Sam Houston and Fort Hood

o   New York, Vermont and Delaware Department of Motor Vehicles

o   Port Authority of New York and New Jersey

o   United States Supreme Court

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

o   Integrated Solutions International LLC

o   Sunoco

o   Exxon/Mobil franchisees

o   Darden Restaurants

o   Houston's Restaurants

o   Anton Airfoods, Inc.


Marketing and Distribution

      Our  objective  is to become the  leading  developer  and  distributor  of
document and age verification products. To date, our marketing efforts have been
through direct sales by our sales and marketing personnel, through resellers and
license  agreements.  We are marketing  our products  through  direct  marketing
approaches such as web marketing,  a small number of select trade shows and well
known public interest and trade associations. During the second quarter of 2006,
we expect to introduce  our newly  designed web site that will provide  enhanced
customer support and the ability to order our products online.


                                       9
<PAGE>

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

      Our patented  ID-Check software is Microsoft Gold Certified and can run on
a variety of Windows and  Windows CE  platforms  in addition to devices  such as
credit card  terminals.  We are marketing our ID-Check(R) PC and ID-Check(R) PDA
solutions to the  government,  airlines,  airports,  high  profile  buildings or
infrastructure,  mass merchandisers,  grocery,  convenience and pharmacy chains,
casinos and banks.

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

o   Endorsements  by  nationally   known  public  interest  groups  and  trade
      associations;

o   Trade publications;

o   Trade shows;

o   Direct mail;

o   Web seminars, as well as our own website;

o   Various conventions and industry specific seminars.

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

      We further  intend to add  qualified  "value added"  remarketers  that are
capable of reaching  smaller  customers.  We believe  this  represents  the most
cost-effective  way to reach  numerous  "mom and  pop"  establishments  in North
America involved in the sale of age restricted products.  Furthermore,  in order
to broaden our sales "reach" into existing and new markets,  we will continue to
enter into selective  agreements  with proven  application  solution  providers,
system integrators, resellers and independent sales representatives.  Basically,
we have  revamped  our entire  distribution  network to provide us with  greater
effectiveness.

Competition

      We compete in a market that is relatively new, intensely competitive,  and
rapidly  changing.  Unless a device  can read,  decode  and  analyze  all of the
information legally permitted to be analyzed which is electronically stored on a
driver license, the user may not obtain accurate and reliable  confirmation that
a driver  license is valid and has not been  altered or  tampered  with.  We are
aware of several companies,  including Card Com, Tri Com Technologies,  Positive
Access,  ID-Logix  and  Legal  Age that are  currently  offering  products  that
electronically  read and calculate age from a driver license. We have tested and
compared  some of these  products  to ID-Check  and believe  that our product is
superior in quality and functionality.  We believe that units unable to read bar
codes  are at a  significant  disadvantage  because  most  states  and  Canadian
provinces  currently utilize bar codes to encode their driver licenses,  as well
as all U.S.  military IDs and uniformed  services  cards.  In addition,  some of
these other products cannot connect to a personal computer or use a printer.

      We have  experienced  and  expect  to  continue  to  experience  increased
competition in the age verification market, and have to date experienced limited
competition from companies in the document  verification  market.  If any of our
competitors were to become the industry standard or were to enter into or expand
relationships with significantly larger companies through mergers,  acquisitions
or otherwise,  our business and operating  results could be seriously harmed. In
addition,  potential  competitors  could  bundle their  products or  incorporate
functionality  into existing  products in a manner that  discourages  users from
purchasing our products.

Manufacturing

      In January 2004, we entered into a two year product  supply  agreement for
the  purchase  of input  devices.  Under the terms,  these  devices,  which were
private  labeled,  are programmed to work in conjunction  with our  ID-Check(TM)
technology.  On December 30, 2005,  we entered into a new 2 year product  supply
agreement  with the same  manufacturer  and with similar terms and conditions as
the prior  agreement.  On March 14, 2006,  we signed a one year  product  supply
agreement with another  manufacturer for the purchase of alternate input devices
that are also programmed to work in conjunction with our ID-Check(TM) technology
as well.


                                       10
<PAGE>

Intellectual Property

      In January 1999, the U.S. Patent and Trademark  Office granted us a patent
on our ID-Check  software  technology.  In October 2002, we were granted another
patent relating to our document authentication and age verification  technology.
At present,  we have other patent  applications  pending in the U.S.  Patent and
Trademark  Office.  These patents cover  commercially  important  aspects of our
capabilities  relating to the  authentication of a document,  such as a driver's
license, along with the verification of the age of an individual associated with
that  document.  Upon our  acquisition  of the  assets  of  IDentiScan,  we also
received equitable ownership and sole ownership rights to intellectual property,
including  other patents and patent  applications  relating to age  verification
technology.  We currently hold five (5) U.S.  patents,  two (2) Canadian patents
and one (1) United Kingdom patent.

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

      In connection with the sales or licensing of our intellectual property, we
have  entered  into an  agreement  with Mr.  Kevin  Messina,  our former  Senior
Executive V.P. and Chief Technology  Officer,  under which we will pay royalties
equal to 0.005% of cumulative gross sales for sales of $2,000,000 to $52,000,000
and  0.0025%  of  cumulative  gross  sales for  sales in excess of  $52,000,000.
Cumulatively,  as of December 31, 2005,  total fees payable under this agreement
amounted to $267.

Employees

      As of  March  24,  2006,  we had  nineteen  full-time  employees  and  one
part-time  employee.  Four  are  engaged  in  executive  management,   eight  in
information technology, five in sales and marketing and three in administration.
We believe our relations  with our  employees are generally  good and we have no
collective bargaining agreements with any labor unions.

Item 1A. Risk Factors

                                  RISK FACTORS

                   Risks Related to Our Business and Industry

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

      We sustained net losses of $6,922,931  and $3,238,959 for the fiscal years
ended December 31, 2004 and December 31, 2005, respectively.  Since we expect to
incur additional  expenditures in line with the sales growth of our business, we
cannot assure you that we will achieve operating profits in the near future.

We may be unable to meet our future capital requirements.

      Our capital requirements have been and will continue to be significant. In
the event that we do not  generate  meaningful  revenue,  we would need to raise
additional  capital.  If we are unable to raise additional  capital,  we plan to
implement  cost saving  measures  to sustain  business  activities  on a reduced
level.   Unplanned   acquisition   and  development   opportunities   and  other
contingencies may arise, which could require us to raise additional  capital. If
we raise  additional  capital  through the sale of equity,  including  preferred
stock,  or convertible  debt  securities,  the percentage  ownership of our then
existing stockholders will be diluted.

      We  currently  do not  have a  credit  facility  or  any  commitments  for
additional financing. We cannot be certain that additional financing,  should it
be needed, will be available when and to the extent required.  If adequate funds
are not available on acceptable  terms,  we may be unable to fund our expansion,
develop or enhance  our  products,  or respond to  competitive  pressures.  Such
limitation  could  have a material  adverse  effect on our  business,  financial
condition and results of operations.


                                       11
<PAGE>

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

      Our market is  characterized  by frequent  new product  announcements  and
rapid  advancements in hardware  technology.  Significant  technological  change
could render our existing technology obsolete.  If we are unable to successfully
respond to these  developments,  or do not respond in a cost-effective  way, our
business,  financial  condition  and results of  operations  will be  materially
adversely affected.

Our  proprietary  software  relies on reference  data provided by government and
quasi-government  agencies. If these governmental and quasi-government  agencies
were to stop sharing data with us, the utility of our proprietary software would
be diminished in those jurisdictions and our business would be damaged.

      Currently,  fifty  (50)  states,  eight  (8)  Canadian  provinces  and the
District of Columbia,  which conform to the  guidelines  established  by certain
organizations responsible for implementing industry standards, cooperate with us
by  providing  sample  identification  cards  so that we may  modify  all of our
hardware and software products to read and analyze the encoded information found
on such jurisdiction's  identification  cards. We cannot assure you that each of
these jurisdictions will continue to cooperate with us. In the event that one or
more of these  jurisdictions do not continue to provide this reference data, the
utility of our proprietary software may be diminished in those jurisdictions.

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

      Our proprietary software products are designed to read, verify and capture
information from  identification  cards.  Currently,  those customers located in
Nebraska, New Hampshire, North Carolina and Texas have some restrictions on what
can be done with this information  without customer  consent.  Because issues of
personal  privacy  continue to be a major topic of public policy  debate,  it is
possible   that  in  the  future   additional   customers  in  these  and  other
jurisdictions may be restricted from capturing this information.  Therefore, the
implementation  of unfavorable  regulations or  unfavorable  interpretations  of
existing  regulations  by courts or regulatory  bodies could require us to incur
significant  compliance costs,  cause the development of the affected markets to
become impractical and reduce our revenues and potential revenues.

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

      Our target  customers in the commercial fraud  protection,  access control
and age  verification  markets include large retailers and government  agencies,
which typically require longer sales and implementation  cycles for our products
than do our potential customer base solely interested in age verification,  such
as  restaurant,  bar and  convenience  store  operators.  The  longer  sales and
implementation  cycles for larger retail  companies  continue to have an adverse
impact  on  the  timing  of  realizing  our  revenues.  In  addition,  budgetary
constraints  and  potential  economic  slowdowns  may  also  continue  to  delay
purchasing  decisions by these  prospective  customers.  These  initiatives have
costs  associated  with them, and we cannot assure you that they ultimately will
prove successful or result in, an increase to, our revenues or profitability.

      In addition,  the loss or significant  reduction in government spending by
government  entities  could  materially  limit our ability to obtain  government
contracts. These limitations, if significant, could also have a material adverse
effect on our  business,  financial  condition  and  results of  operations.  In
addition, we will need to develop additional strategic  relationships with large
government   contractors  in  order  to  successfully   compete  for  government
contracts.  Should we lose or fail to develop these strategic  relationships  we
may not be able to implement our business strategy.

The market for our systems and software is evolving and its growth is uncertain.

      Demand and market acceptance for recently  introduced and existing systems
and  software and sales from such  systems and  software,  are subject to a high
level of uncertainty  and risk.  Our business may suffer if the market  develops
more slowly than anticipated and does not sustain market acceptance.


                                       12
<PAGE>

Failure to manage our operations if they expand could impair our future growth.

      If we are able to expand our  operations,  particularly  through  multiple
sales to large  retailers and government  agencies in the document  verification
market, the expansion will place significant strain on our management, financial
controls,  operating  systems,  personnel  and other  resources.  Our ability to
manage  future  growth,  should it occur,  will  depend to a large  extent  upon
several factors, including our ability to do the following:

o   build and train our sales force;

o   establish and maintain relationships with distributors;

o   develop customer support systems;

o   develop expanded  internal  management and financial  controls adequate to
      keep pace with growth in personnel and sales, if they occur; and

o   manage the use of third-party manufacturers and suppliers.

If we are able to grow our business  but do not manage our growth  successfully,
we may experience increased operating expenses, loss of customers,  distributors
or suppliers and declining or slowed growth of revenues.

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

      Products as complex as those offered by us may contain  undetected  errors
or result in failures  when first  introduced or when new versions are released.
Despite  vigorous  product  testing efforts and testing by current and potential
customers,  it is  possible  that  errors  will be  found  in a new  product  or
enhancement  after  commencement  of  commercial  shipments.  The  occurrence of
product  defects or errors could result in adverse  publicity,  delay in product
introduction,  diversion of resources to remedy defects,  loss of, or a delay in
market  acceptance,  claims by customers  against us, or could cause us to incur
additional costs, any of which could adversely affect our business.


Our failure to protect our  proprietary  technology  may impair our  competitive
position.

         We continue to allocate significant resources to develop new and
innovative technologies which we utilize in our products and systems. We
consider such allocation to be fundamental to our continued success as such
success depends, to a significant degree, upon our ability to provide products
and systems that provide superior functionality and performance compared to
those of our competitors. Accordingly, we must protect our technology from
unauthorized use. This is done by processes aimed at identifying and seeking
appropriate protection for newly developed intellectual property, i.e., patents,
trade secrets, copyrights and trademarks, as well as policies aimed at
identifying unauthorized use of such property in the marketplace. These
processes include:

o   contractual  arrangements  providing  for  non-disclosure  of  proprietary
      information;

o   maintaining and enforcing issued patents and filing patent applications on
      innovative  solutions to commercially  important problems;

o   protecting our trade secrets;

o   protecting  our  copyrights  and  trademarks  by  registration  and  other
      appropriate means,

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

o   establishing   practices   for   identifying   unauthorized   use  of  our
      intellectual property.

      While we actively  protect our intellectual  property,  it does not follow
that others will not intentionally or innocently use such intellectual property.
Accordingly,  at times we may be required to bring legal proceedings to preclude
such  unauthorized use. We are mindful that such measures can be costly and time
consuming and undertake such measures only as a last resort.

      These  policies and practices  with respect to our  intellectual  property
rights do not prevent our competitors  from  independently  developing  products
similar or superior to our products  and  technologies.  It merely  protects our
property  rights created as a result of our allocating  significant  portions of
our technical and monetary resources.


                                       13
<PAGE>

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

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

o   consume substantial time and financial resources;

o   divert the attention of management  from growing our business and managing
      operations; and

o   disrupt product sales and shipments.

      If any third party  prevails in an action against us for  infringement  of
its  proprietary  rights,  we could be required to pay damages and either  enter
into costly licensing arrangements or redesign our products so as to exclude any
infringing use. As a result, we would incur substantial costs, delays in product
development,  sales and shipments, our revenues may decline substantially and we
may not be able to achieve  the  minimum,  necessary  growth  for our  continued
success.

Failure to attract  and retain  management  and other  personnel  may damage our
operations and financial results and cause our stock price to decline.

      We depend to a significant degree on the skills, experience and efforts of
our executive officers and other key management,  technical,  finance, sales and
other personnel. Our failure to attract, integrate, motivate and retain existing
or additional  personnel  could  disrupt or otherwise  harm our  operations  and
financial results.  We do not carry key man life insurance policies covering any
employees. The loss of services of certain of our key employees, an inability to
attract  or  retain  qualified  personnel  in the  future,  or  delays in hiring
additional personnel could delay the development of our business and could cause
our stock price to decline.

Changes in accounting standards or our accounting policy relating to stock-based
compensation may negatively affect our operating results.

      During  December 2004, the Financial  Accounting  Standards Board ("FASB")
issued SFAS No. 123R  requiring  that the  compensation  cost  relating to share
based payment transactions be recognized in financial statements.  SFAS No. 123R
becomes  effective  for us on January 1, 2006 and will require that  stock-based
compensation  charges be  recorded  for the  unvested  portions  of options  and
restricted  stock granted  through  December 31, 2005, as well as for all future
grants,  based on the fair value of the options or warrants or restricted  stock
as of their grant dates. This will require a change in our accounting policy and
the amount of our operating expenses could increase.


Our share price may be volatile and could decline substantially

      The  market  price of our  common  stock,  like the  price  of  shares  of
technology companies generally,  has been and may continue to be volatile.  From
January 1, 2002 to March 24, 2006, the closing bid price of our common stock has
varied  from a high of $19.45 to a low of $2.10 per share,  as  reported  on the
American Stock Exchange.  Many factors may cause the market price for our common
stock to decline, including:

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

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

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

o   unfavorable outcomes from outstanding litigation.


                                       14
<PAGE>

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

Item 1B. Unresolved Staff Comments

      Not applicable.

Item 2. Properties

      Our executive offices are currently  located in Woodbury,  New York, where
we currently occupy  approximately 7,100 square feet of leased space pursuant to
an amended lease  expiring on December 31, 2010.  Payments  under the lease were
$252,386 for 2003,  $243,577 for 2004,  $243,731 for 2005 and will be $1,061,448
for the  remaining  years of the  lease.  We believe  that our  office  space is
sufficient for current operations.

Item 3. Legal Proceedings

      On August 1, 2003,  we filed a summons and complaint  against  Tricom Card
Technologies,  Inc. alleging  infringement on our patent and seeking  injunctive
and monetary  relief.  On October 23, 2003,  we amended our complaint to include
infringement on an additional patent. On May 18, 2004, we filed a Second Amended
Complaint  alleging  infringement  and  inducement to infringe  against  certain
principals of Tricom in their  personal  capacities,  as well as alleging in the
alternative  false  advertising  claims  under the  Lanham Act  against  all the
defendants.  The principals moved to dismiss the claims against them, and Tricom
moved  to  dismiss  the  false  advertising  claims,  which  motions  have  been
administratively terminated by the Court. On August 1, 2005, defendants filed an
Answer and Affirmative Defenses to the Second Amended Complaint and Tricom filed
a declaratory  counterclaim.  On November 2, 2005,  the Court allowed  Tricom to
plead two additional defenses and declaratory  counterclaims in the case, and on
January 3, 2006,  the parties filed a  Stipulation  of Dismissal of the Estoppel
and  Unenforceability  Counterclaims and Affirmative  Defenses.  On February 28,
2006, the parties filed a Supplemental  Proposed  Joint Pretrial  Order,  and on
March 1,  2006,  the Court  certified  that fact  discovery  in this  action was
complete.

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

      During the fourth quarter of our fiscal year ended December 31, 2005 there
were no matters submitted to a vote of security holders.


                                       15
<PAGE>

                                    PART II

Item 5. Market for Registrant's Common Equity and Related Stockholder Matters

      (a) Our common stock is traded on the American  Stock  Exchange  under the
symbol "IDN." The following  table  indicates high and low sales  quotations for
the periods indicated based upon information supplied by AMEX.

                                            Low               High
2004
First Quarter                              $3.90              $8.00
Second Quarter                             $4.40              $7.50
Third Quarter                              $4.60              $6.25
Fourth Quarter                             $3.91              $5.72

2005
First Quarter                              $4.36              $6.95
Second Quarter                             $3.85              $6.36
Third Quarter                              $4.01              $5.20
Fourth Quarter                             $2.90              $4.40

2006
January 1 - March 15, 2006*                $3.77              $7.25

*     Portion of first fiscal quarter of 2006.

      (b) Number of Holders of Common Stock.  The number of holders of record of
our Common  Stock on March 24, 2006 was 75,  which does not  include  individual
participants in security position listings.

      (c) Dividends.  There were no cash  dividends or other cash  distributions
made by us during the fiscal  year ended  December  31,  2005.  Future  dividend
policy  will be  determined  by our Board of  Directors  based on our  earnings,
financial condition, capital requirements and other then existing conditions. It
is anticipated that cash dividends will not be paid to the holders of our common
stock in the foreseeable future.

      (d) Recent Sales of Unregistered Securities

      On August 9, 2005,  we  successfully  completed  our private  placement of
1,250,000  shares of common stock and  received  net  proceeds of  approximately
$4,440,000.  In connection with the private  placement,  investors received five
year warrants to purchase 500,000 shares of common stock at an exercise price of
$5.40 per share. We purchased 110,000 of these warrants on December 13, 2005 for
$25,000 and retired them, leaving 390,000 currently  outstanding.  Our placement
agent received  $350,000 and a warrant to purchase  125,000 shares of our common
stock at a price of $5.40  per  share  which  expires  on  August  8,  2010,  as
compensation for services rendered in the private placement. On October 7, 2005,
the Registration  Statement on Form S-3, which included the shares issued in our
private  placement,  was  declared  effective  by the  Securities  and  Exchange
Commission.   Such  securities  were  issued  pursuant  to  the  exemption  from
registration contained in Section 4(2) of the Securities Act as they were issued
to accredited investors.

      On September  21, 2005,  we entered into a two (2) year  agreement  with a
consulting firm to help with our public and investor  relations  activities.  We
agreed to pay  $6,000  per month  for the first 12 months of the  agreement  and
$9,000 per month for the following 12 months.  In addition,  we issued a warrant
granting the right to purchase  100,000 shares of our common stock at a purchase
price of $4.62 per share,  which vests ratably over a twelve month  period.  The
fair  value  of this  warrant  amounted  to  $318,221  using  the  Black-Scholes
valuation  method and was  recorded  in Deferred  Compensation  during the third
quarter of 2005.  The contract is cancelable  after the first year under certain
terms and conditions.  No underwriting  discounts or commissions  were paid with
respect  to  such  securities.  Such  securities  were  issued  pursuant  to the
exemption from  registration  contained in Section 4(2) of the Securities Act as
they were issued to accredited investors.

      (e) Repurchases of Equity Securities


                                       16
<PAGE>

      In March  2001,  our Board of  Directors  authorized,  subject  to certain
business and market  conditions,  the purchase of up to $1,000,000 of our common
stock. As of December 31, 2005, we cumulatively purchased 40,200 shares totaling
approximately  $222,000 and  subsequently  retired these  shares.  There were no
shares purchased during 2005. We may purchase  additional  shares when warranted
by certain conditions.

Item 6. Selected Financial Data

      The  following  selected  financial  data  presented  under  the  captions
"Statement of Operations Data" and "Balance Sheet Data" as of the end of each of
the five  years  ended  December  31,  2005,  are  derived  from  the  financial
statements of  Intelli-Check,  Inc. The financial  statements for the year ended
December 31, 2003 were audited by Grant  Thornton,  LLP  independent  registered
certified  public  accountants and the financial  statements for the years ended
December  31, 2004 and  December  31, 2005 were  audited by Amper,  Politziner &
Mattia, P.C. independent  registered certified public accountants.  The selected
financial data should be read in conjunction with the financial statements as of
December  31, 2005 and 2004 and for each of the three years in the period  ended
December  31,  2005,  the  accompanying  notes  and the  report  of  independent
registered public accounting firms thereon, which are included elsewhere in this
Form 10-K.

<TABLE>
<CAPTION>
                                                                   Years Ended December 31,
                                            -----------------------------------------------------------
                                                2001        2002        2003        2004        2005
                                                ----        ----        ----        ----        ----
                                                                    (In thousands)
<S>                                         <C>         <C>         <C>         <C>         <C>
Statement of Operations Data:
Revenue                                     $    886    $  1,139    $  1,236    $  1,119    $  2,384
Loss from operations                          (4,090)     (5,936)     (5,537)     (7,017)     (3,385)
Net Loss                                      (3,963)     (5,550)     (6,451)     (6,923)     (3,239)
Net loss per common share - basic and
    diluted                                    (0.52)      (0.64)      (0.74)      (0.79)      (0.31)
Common shares used in computing per share
    amounts - basic and diluted                7,911       8,686       9,218      10,225      11,201

                                                                          As of December 31,
                                            -----------------------------------------------------------
                                                2001        2002        2003        2004        2005
                                                ----        ----        ----        ----        ----
                                                                   (In thousands)
Balance sheet data:
Cash and cash equivalents                   $  4,061    $  1,911    $  3,307    $  1,750    $  2,514
Working capital                                5,303       2,634       8,350       3,594       5,289
Total assets                                   8,423       5,415      10,732       5,615       6,909
Total liabilities                              1,394       1,542       1,956       1,907       1,519
Stockholders equity                            7,030       3,873       6,901         868       5,390

</TABLE>

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

Overview

      Intelli-Check  was formed in 1994 to address a growing need for a reliable
document  and age  verification  system that could be used to detect  fraudulent
driver   licenses  and  other  widely   accepted   forms  of   government-issued
identification documents.  Since then, our technology has been further developed
for  application  in  the  commercial  fraud  protection,   access  control  and
governmental  security  markets.  Additionally,  it is  currently  being used to
increase productivity by addressing  inefficiencies and inaccuracies  associated
with manual data entry.  The core of  Intelli-Check's  product  offerings is our
proprietary  software  technology  that  verifies  the  authenticity  of  driver
licenses,  state issued  non-driver  and military  identification  cards used as
proof of identity. Our patented ID-Check(R) software technology instantly reads,
analyzes,  and  verifies  the encoded  data in magnetic  stripes and barcodes on
government-issue  IDs from approximately 60 jurisdictions in the U.S. and Canada
to determine if the content and format is valid.  We have served as the national
testing laboratory for the American Association of Motor Vehicle  Administrators
(AAMVA) since 1999 and have access to all the currently available encoded driver
license formats. After the tragic events that occurred on September 11, 2001, we
believe  there has been a  significant  increase in  awareness  of our  software
technology to help improve security across many industries,  including airlines,
rail  transportation  and high profile  buildings and  infrastructure,  which we
believe  should  enhance  future demand for our  technology.  The  adaptation of
Homeland  Security  Presidential  Directive 12 (HSPD 12) and the promulgation of
Federal Identity  Processing  Standards 201 (FIPS 201) have raised the awareness
of our technology in the government  sector.  We, therefore,  have also begun to
market to various  government and state  agencies,  which have long sales cycles
including extended test periods.  Since inception,  we have incurred significant
losses and negative cash flow from operating  activities and, as of December 31,
2005, we had an  accumulated  deficit of  $39,107,882.  We will continue to fund
operating and capital  expenditures from proceeds that we received from sales of
our equity  securities.  In view of the rapidly  evolving nature of our business
and our limited operating history, we believe that period-to-period  comparisons
of revenues and operating results are not necessarily  meaningful and should not
be relied upon as indications of future performance.


                                       17
<PAGE>

      Our  ID-Check's  unique  technology  provides  the  ability  to verify the
validity of military ID's,  driver licenses and state issued non-driver ID cards
that  contain  magnetic  stripes,  bar codes and SMART  chips that in most cases
conform to AAMVA/ANSI/ISO  standards,  which enables us to target three distinct
markets.  The original target market was focused on resellers of  age-restricted
products, such as alcohol and tobacco, where the proliferation of high-tech fake
IDs expose  merchants to fines and penalties for the  inadvertent  sale of these
products to underage  purchasers.  We now also target  commercial  fraud,  which
includes  identity theft,  and our technology is designed to help prevent losses
from these frauds. We are also marketing our products for security  applications
involving access control.  As a result of its applicability in these markets, we
have sold our products to some of the largest  companies in the gaming industry,
a significant retailer, several large financial service companies,  Certegy, one
of the largest providers of check authorization services in the United States, a
state port authority,  military establishments,  airports,  nuclear power plants
and high profile buildings.  Our technology is currently being tested by several
Fortune 50 Companies.  We have entered into  strategic  alliances with Verifone,
the  largest  provider  of credit card  terminals  in the U.S.,  the two largest
providers  of driver  licenses in North  America for their  compliance  with the
provisions  of the  Real ID Act,  which is  intended  to set  standards  for the
issuance  of  driver  licenses  and  identification   cards,  several  biometric
companies, and Northrop Grumman and Anteon, integrators in the defense industry,
Intermec  Technologies and Metrologic,  hardware  manufacturers,  to utilize our
systems and  software as the proposed or potential  enrollment  application  for
their  technologies  and to jointly  market  these  security  applications.  The
passage of the Real ID ACT together with the  regulations  arising from HSPD-12,
which sets the policy for a common identification standard for federal employees
and contractors,  has additionally  created  opportunities  for our verification
technology in the governmental market at the federal, state and local levels. In
addition,  we have executed  agreements with some high profile  organizations to
promote  the  use  of  our  technology  and  our  products.   We  believe  these
relationships have broadened our marketing reach through their sales efforts and
we intend to develop additional strategic alliances with additional high profile
organizations and providers of security solutions.

      We have developed  additional  software products that utilize our patented
software  technology.  Our latest products include ID-Traveler and ID-Prove.  ID
Traveler electronically verifies and matches two forms of government issued ID's
instantaneously  while the ID Prove  product  offering  provides "out of wallet"
questions to assist in proving a user's claimed  identity.  Additional  software
solutions  include  ID-Check(R)  PC and  ID-Check(R)  PDA,  which  replicate the
features of ID-Check. These products are designed to be platform-independent and
compatible  with both  stationary  and  mobile  hardware  applications.  Another
application is an enhanced version of C-Link(R), the company's net-workable data
management software. Additionally, ID-Check(R) PC and the most recent release of
C-Link are  designed to read the smart chip  contained  on the  military  Common
Access Card (CAC). These products are all designed for use with  Intelli-Check's
new data capture devices,  which are compact,  and contain either both or one of
two-dimensional bar code and magnetic stripe readers. The devices enable the new
software  applications  to be used on a variety of  commercially  available data
processing devices, including PDAs, Tablets, Laptops, Desktops and Point-of-Sale
Computers,  therefore  negating the need to replace the ID-Check  terminal.  Our
C-Link(R) software product, which runs on a personal computer and was created to
work in  conjunction  with the  ID-Check  technology  allows a user to instantly
first analyze the data, then view the encoded data for further  verification and
to generate various reports where permitted by law. We introduced a new product,
ID-Mobile,  which gives the user the  additional  flexibility  of utilizing  our
software in a hand-held product. We have additionally  introduced our technology
to the Verifone 37XX to enable the user to do  verification  of a driver license
as an  additional  function  of the  terminal.  To date,  we have  entered  into
multiple licensing  agreements and are in discussions with additional  companies
to license our software to be utilized within other existing systems.


                                       18
<PAGE>

Critical Accounting Policies and the Use of Estimates

      The preparation of our financial  statements in conformity with accounting
principles   generally  accepted  in  the  United  States  of  America  requires
management to make estimates and assumptions that affect the amounts reported in
our financial  statements and  accompanying  notes.  Actual results could differ
materially from those estimates.

      Significant  estimates and assumptions that affect amounts reported in our
financial   statements  include  inventory  reserves,   deferred  tax  valuation
allowances  and  doubtful   accounts  and   allowances.   Due  to  the  inherent
uncertainties  involved in making  estimates,  actual results reported in future
periods may be different from those estimates.

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

Revenue Recognition

      We sell  our  products  directly  through  our  sales  force  and  through
distributors.  Revenue  from  direct  sales of our  product is  recognized  when
shipped to the customer and title has passed.  Our products  require  continuing
service or post contract customer support and performance by us; accordingly,  a
portion of the revenue  pertaining to the service and support is deferred  based
on its fair  value and  recognized  ratably  over the period in which the future
service,  support and  performance  are  provided,  which is generally one year.
Currently,  with  respect to sales of certain  of our  products,  we do not have
enough experience to identify the fair value of each element and the full amount
of the revenue and related gross margin is deferred and recognized  ratably over
the one-year  period in which the future  service,  support and  performance are
provided.

      In addition, we recognize sales from licensing of our patented software to
customers.  Our licensed software requires  continuing  service or post contract
customer support and performance by us; accordingly, a portion of the revenue is
deferred based on its fair value and recognized ratably over the period in which
the future service, support and performance are provided, which is generally one
year.

      During the second  quarter of fiscal 2003,  we began  receiving  royalties
from  licensing our  technology,  which are recognized as revenues in the period
they are earned.

Inventory Valuation

      Our current inventory  consists  primarily of our ID-Check  terminals that
run our patented  software and input devices  purchased in 2004. We periodically
evaluate  the current  market  value of our  inventory,  taking into account any
technological  obsolescence that may occur due to changes in hardware technology
and  the  acceptance  of  the  product  in the  marketplace.  Based  on  ongoing
evaluation of our inventory,  prior to January 1, 2005, we recorded a cumulative
inventory write down of $1,347,332 of the ID-Check  terminals that we originally
acquired in 1999. The manufacturer discontinued the production of these ID-Check
terminals  in 2003.  The  ID-Check  terminal  is fully  capable of  running  our
patented  software as it utilizes a high  quality  imager/scanner  and  magnetic
stripe reader and is currently  being marketed for sale.  During 2005, we sold a
portion  of the  ID-Check  terminals  we held in  inventory  in  excess of their
remaining value and recorded a recovery of inventory  totaling  $128,000,  which
was previously written off.

Stock-Based Compensation

      Options, warrants and stock awards issued to non-employees and consultants
are recorded at their fair value as determined in accordance  with  Statement of
Financial   Accounting   Standards   No.  123,   "Accounting   for   Stock-Based
Compensation,"  and EITF No. 96-18,  "Accounting for Equity  Instrument That are
Issued to Other Than  Employees for Acquiring,  or in Conjunction  with Selling,
Goods or Services" and  recognized as expense over the related  vesting  period.
SFAS 123R "Share  Based  Payments"  was issued in December  2004,  and  requires
companies to expense the value of employee options and similar awards. SFAS 123R
becomes  effective  for the  Company on January  1, 2006 and will  require  that
stock-based  compensation  charges be  recorded  for the  unvested  portions  of
options and restricted  stock granted through  December 31, 2005, as well as for
all  future  grants,  based on the fair  value of the  options  or  warrants  or
restricted stock as of their grant dates.  Based on the current unvested options
outstanding  totaling  80,000 as of December  31,  2005,  the  Company's  pretax
expense for those options is expected to be approximately  $326,000. This amount
may increase to the extent that options are granted in 2006.


                                       19
<PAGE>

Deferred Income Taxes

      Deferred  tax assets and  liabilities  are  recognized  for the  estimated
future tax  consequences  attributable  to  differences  between  the  financial
statement  carrying  amounts  of  existing  assets  and  liabilities  and  their
respective tax bases and net operating loss carry forwards.  Deferred tax assets
and  liabilities are measured using expected tax rates in effect for the year in
which those temporary  differences  are expected to be recovered or settled.  We
have recorded a full  valuation  allowance for our net deferred tax assets as of
December 31, 2004 and 2005, due to the uncertainty of the realizability of those
assets.

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

      See footnote 2 of financial statements attached hereto following beginning
on Page F-1.

Results of Operations

      COMPARISON OF THE YEAR ENDED  DECEMBER 31, 2005 TO THE YEAR ENDED DECEMBER
31, 2004.

      REVENUE. Revenue increased $1,264,183 or 113% from $1,119,349 for the year
ended December 31, 2004 to $2,383,532 for the year ended December 31, 2005.
Revenues for the period ended December 31, 2005 consisted of revenue from
distributors of $573,920, revenues from direct sales to customers of $1,751,132
and royalty income of $58,480. Sales bookings, which represent shipments of
products and contracted services which include revenues that are deferred in
accordance with generally accepted accounting principles, increased by $1.4
million from the year ended December 31, 2004 to $2.5 million for the year ended
December 31, 2005. Revenues and sales bookings increases are due to
Intelli-Check's continuing success in penetrating certain key target markets. We
are optimistic that sales opportunities should continue to increase as a result
of our recent success in the retail market, the positive results of certain of
our recent marketing tests and agreements and our introduction of additional
products in 2004 and 2005, as well as legislative efforts to improve identity
management and security and control sales of age restricted products. However,
period to period comparisons may not be indicative of future operating results,
since we still face long sales cycles, particularly in the government sector,
and therefore, we cannot predict with certainty at this time, in which period
the opportunities currently in the pipeline will develop into sales. As of
December 31, 2005 we have a backlog, which represent products and services of
non cancelable sales orders not yet shipped, of approximately $536,000.

      GROSS PROFIT. Gross profits, excluding an inventory write down of $357,332
for 2004,  would have  increased by $913,152 or 126% from  $725,765 for the year
ended  December 31, 2004 to $1,638,917 for the year ended December 31, 2005. Our
gross profit  excluding  the  inventory  write downs for 2004 as a percentage of
revenues  would have increased to 68.8% in the year ended December 31, 2005 from
64.8% for the year ended  December 31, 2004.  Our gross  profit  percentage  was
positively  impacted  by an increase in revenues  from  licensing  our  patented
technology  at higher  gross  margins  than our bundled  hardware  and  software
products.

      OPERATING EXPENSES.  Operating expenses, which consist of selling, general
and administrative and research and development  expenses,  decreased 32.0% from
$7,385,394 for the year ended December 31, 2004 to $5,023,724 for the year ended
December 31, 2005.  Selling  expenses,  which consist  primarily of salaries and
related costs for marketing,  increased 6.9% from  $1,176,911 for the year ended
December 31, 2004 to $1,257,810  for the year ended  December 31, 2005 primarily
due to an increase in salaries,  commissions and employee costs of approximately
$39,000, increased travel and convention expenses of approximately $69,000 and a
net  increase  of   non-recurring   expenses  of  $19,000  from  the  hiring  of
professional  consultants to promote our products, which was partially offset by
a decrease in  advertising  and  marketing  expenses of  approximately  $45,000.
General and  administrative  expenses,  which consist  primarily of salaries and
related costs for general corporate functions, including executive,  accounting,
facilities and fees for legal and  professional  services,  decreased 43.9% from
$5,032,207 for the year ended December 31, 2004 to $2,824,384 for the year ended
December  31,  2005,  primarily  as a result of a decrease in non-cash  expenses
primarily  related to the  extension of stock  options  totaling  $1,480,000,  a
decrease in legal fees of approximately  $803,000 relating to decreased activity
on our patent infringement  litigation, a decrease in employee costs and related
expenses  of   approximately   $14,000,   a  decrease  in  insurance   costs  of
approximately  $20,000, a decrease of bad debt expense of approximately  $20,000
and a decrease in depreciation and amortization expense of approximately $61,000
as a result of certain assets  becoming fully  depreciated  which were partially
offset by  expensing  certain  non-recurring  costs  relating to equity  raising
activities totaling approximately  $180,000.  Research and development expenses,
which consist primarily of salaries and related costs for the development of our
products,  decreased  20.0% from $1,176,276 for the year ended December 31, 2004
to  $941,530  for the year ended  December  31,  2005  primarily  as a result of
decreases  in  salaries  and  related  expenses of  approximately  $230,000  and
decreases in internal  development  costs of approximately  $26,000,  which were
partially offset by an increase in consulting  expenses for product  development
of approximately $26,000. We believe that we will require additional investments
in development and operating  infrastructure as the Company grows. Therefore, we
expect  that  expenses  will  continue  to  incrementally  increase in line with
increases  in the growth of the  business as we may  increase  expenditures  for
advertising,  brand promotion,  public relations and other marketing activities.
Research and development expenses may also increase as we complete and introduce
additional products based upon our patented ID-Check technology.


                                       20
<PAGE>

      INTEREST INCOME. Interest income increased from $94,030 for the year ended
December 31, 2004 to $145,848 for the year ended  December 31, 2005,  which is a
result of an increase in our cash and cash  equivalents,  marketable  securities
and short term  investments  available for investment from the completion of our
private  placement,  as well as higher interest rates from  investments,  during
2005.

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

      NET LOSS. As a result of the factors noted above,  our net loss  decreased
53% from  $6,922,931  for the year  ended  December  31,  2004,  which  included
$2,231,544 of non-cash  expenses to $3,238,959  for the year ended  December 31,
2005, which included $431,336 of non-cash expenses.

COMPARISON  OF THE YEAR ENDED  DECEMBER 31, 2004 TO THE YEAR ENDED  DECEMBER 31,
2003.

      REVENUE. Revenue decreased $116,262 from $1,235,611 for the year ended
December 31, 2003 to $1,119,349 for the year ended December 31, 2004. Revenues
for the period ended December 31, 2004 consisted of revenue from distributors of
$314,166, revenues from direct sales to customers of $738,070 and royalty income
of $67,113. Sales bookings, which represent shipments of products and contracted
services, which include revenues that are deferred in accordance with generally
accepted accounting principles, increased 22.3% from $1,172,056 for the year
ended December 31, 2003 to $1,433,381 for the year ended December 31, 2004.
Sales growth has been limited due to our change in marketing focus from smaller
customers to large commercial customers and government agencies which require an
extended sales cycle. We believe that the time frame of the sales cycle
associated with the refocus of our marketing efforts will continue to impact our
sales. We are optimistic that sales opportunities should increase as a result of
certain of our recent marketing tests and agreements, our introduction of
additional products this year, as well as legislative efforts to enhance
security and deal with the problem of under-age access to alcoholic products.

      GROSS PROFIT. Gross profit,  excluding an inventory write down of $357,332
for 2004 and $990,000 for 2003,  would have  decreased by $55,814 from  $781,579
for the year ended December 31, 2003 to $725,765 for the year ended December 31,
2004. Our gross profit  excluding the inventory write downs for 2004 and 2003 as
a  percentage  of  revenues  would  have  increased  to 64.8% in the year  ended
December 31, 2004 from 63.3% for the year ended  December  31,  2003.  Our gross
profit  percentage  was  positively  impacted by an  increase  in revenues  from
licensing our patented technology at higher gross margins.

      OPERATING EXPENSES.  Operating expenses, which consist of selling, general
and administrative and research and development  expenses,  increased 38.6% from
$5,328,742 for the year ended December 31, 2003 to $7,385,394 for the year ended
December 31, 2004.  Selling  expenses,  which consist  primarily of salaries and
related costs for marketing,  decreased 13.0% from $1,352,274 for the year ended
December 31, 2003 to $1,176,911  for the year ended  December 31, 2004 primarily
due to decreased travel and convention  expenses of approximately  $81,000 and a
reduction of  non-recurring  expenses of $94,000 from the hiring of professional
consultants.  General and  administrative  expenses,  which consist primarily of
salaries and related costs for general corporate functions, including executive,
accounting,  facilities and fees for legal and professional services,  increased
111% from  $2,386,088 for the year ended December 31, 2003 to $5,032,207 for the
year ended  December 31, 2004,  primarily as a result of an increase in non-cash
expenses from the extension of stock options totaling $1,347,000 and an increase
in  legal  fees  of  approximately   $1,630,000  primarily  relating  to  patent
infringement   litigation,   which  were  partially  offset  by  a  decrease  in
depreciation and amortization  expense of approximately  $323,000 as a result of
the write-off of intangible  assets  relating to the  IDentiScan  acquisition in
2003. Research and development expenses, which consist primarily of salaries and
related  costs  for  the  development  of  our  products,  decreased  4.1%  from
$1,226,725 for the year ended December 31, 2003 to $1,176,276 for the year ended
December 31, 2004  primarily as a result of a decrease in employee  salaries and
related expenses of approximately $75,000. During the fourth quarter of 2003, we
determined that as a result of discontinuing the selling of IDentiScan products,
certain of our intangible  assets with a remaining book value of $363,655 should
be written off. No charges of a similar nature occurred in 2004. We believe that
we  will  require   additional   investments   in   development   and  operating
infrastructure  as the Company  grows.  Therefore,  we expect that expenses will
continue to  incrementally  increase in line with increases in the growth of the
business as we may  increase  expenditures  for  advertising,  brand  promotion,
public  relations  and other  marketing  activities.  Research  and  development
expenses may also  increase as we complete  and  introduce  additional  products
based upon our patented ID-Check technology.


                                       21
<PAGE>

      INTEREST  EXPENSE.  We did not incur  interest  expense for the year ended
December 31, 2004 compared to the interest  expense of $43,487 in the year ended
December 31, 2003, which resulted  primarily from interest accrued in 2003 on an
arbitration decision awarding Early Bird Capital settlement on their demand.

      INTEREST INCOME. Interest income increased from $51,437 for the year ended
December 31, 2003 to $94,030 for the year ended  December  31, 2004,  which is a
result of a higher  average  annual  balance  in our cash and cash  equivalents,
marketable securities and short term investments available for investment during
this  period  resulting  from  additional  cash  received  from  the  successful
completion of our secondary offering in October 2003.

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

      NET LOSS. As a result of the factors noted above,  our net loss  increased
from  $6,450,943  which  included  $2,314,627 of non-cash  expenses for the year
ended  December  31, 2003 to  $6,922,931  for the year ended  December 31, 2004,
which included $2,231,544 of non-cash expenses.

Liquidity and Capital Resources

      Prior to our initial  public  offering in November  1999,  we financed our
operations  primarily  through  several  private  placements  of equity and debt
securities. We used the net proceeds of these financings for the primary purpose
of funding working capital and general  corporate  purposes and for the purchase
of hardware terminals.  As a result of our IPO and the underwriters  exercise of
their  over  allotment  option,  we  received  approximately  $6,907,000  in net
proceeds after deducting underwriter's commissions and offering expenses. During
2000, we received $3,426,374 from the issuance of common stock from the exercise
of warrants and stock options.  During 2001 and 2002, we received $3,231,174 and
$1,742,466, respectively, from the issuance of common stock from the exercise of
warrants, stock options and rights. During 2003, we received net proceeds before
legal expenses of $2,850,000,  from the issuance of convertible  preferred stock
and we received  net proceeds of  approximately  $7,906,000  from our  secondary
public  offering of 1,100,000  shares of common stock.  During 2004, we received
net  proceeds of $427,979  from the  exercise of 142,700  options.  On August 9,
2005,  we  successfully  completed a private  placement of  1,250,000  shares of
common stock and received net proceeds of approximately $4,440,000.

      Cash used in operating  activities for the year ended December 31, 2005 of
$3,143,805 was primarily attributable to the net loss of $3,238,959,  a decrease
in accounts  payable and accrued expenses of $511,505  resulting  primarily from
payment and reduction of our legal fees and an increase in other current  assets
of $139,729 , which was primarily  offset by  recognition of noncash stock based
compensation  expense  resulting  primarily  from the  extension and exercise of
stock options of $228,450, amortization of deferred compensation of $143,758 and
an increase in deferred revenue of $184,300.  Cash used in operating  activities
for the year ended December 31, 2004 of $3,773,646 was primarily attributable to
the net loss of  $6,922,931,  a decrease  in  litigation  settlement  payable of
$921,700  resulting  from the payout of the legal  award  matter with Early Bird
Capital  recorded in 2003 and an increase  in  accounts  receivable  of $288,946
resulting  from credit sales made towards the end of the year,  which was offset
primarily by an increase in  certificates  of deposit,  restricted of $1,283,118
resulting  primarily from the payout of the legal award, an increase in accounts
payable and accrued expenses of $667,086 primarily from legal accruals resulting
from the patent litigation,  an inventory reserve of $357,332,  depreciation and
amortization  of  $111,743,  recognition  of non cash stock  based  compensation
expense  resulting  primarily  from the extension of stock options of $1,350,187
and amortization of deferred compensation of $363,407 from the granting of stock
options to consultants. Cash used in investing activities was $1,181,420 for the
year ended  December 31, 2005 and resulted  primarily from the net result of the
investment in and sales of marketable  securities and short term  investments of
$1,171,324.  Cash  provided by  investing  activities  was $741,963 for the year
ended December 31, 2004 and resulted  primarily from the net result of the sales
of and  investment  in  marketable  securities  and short  term  investments  of
$741,963.  Cash provided by financing  activities  was  $4,486,178  for the year
ended  December 31, 2005 and was primarily  related to proceeds of $168,900 from
the  issuance of common  stock from the  exercise of stock  options and from our
private  offering of  $4,439,593,  which was partially  offset by the payment of
dividends  to preferred  stock  holders of $97,315.  Cash  provided by financing
activities  was $91,989 for the year ended  December 31, 2004 and was  primarily
related to  proceeds  of $431,167  from the  issuance  of common  stock from the
exercise  of stock  options,  which  was  partially  offset  by the  payment  of
dividends to preferred stock holders of $240,000.


                                       22
<PAGE>

      As of  December  31,  2005,  warrants to  purchase  938,636  shares of the
Company's common stock at an average exercise price of $6.11 were outstanding.

      On August 9, 2005, we  successfully  completed  our secondary  offering of
1,250,000 shares of common stock at $4.00 per share and received net proceeds of
approximately  $4,440,000.  In connection with the offering,  investors received
five year  warrants to purchase  500,000  shares of common  stock at an exercise
price of $5.40 per share.  In  addition,  we granted  to our  placement  agent a
warrant to purchase  125,000 shares of our common stock at a price of $ 5.40 per
share which expires on August 8, 2010.  During  December  2005, we purchased and
retired 110,000 of the five year warrants  originally  issued in connection with
the offering for $25,000.

      On March 27, 2003, pursuant to a Securities  Purchase  Agreement,  we sold
30,000 shares of our Series A 8% Convertible  Redeemable  Preferred  Stock,  par
value $.01 per share,  for  $3,000,000  before  expenses to Gryphon Master Fund,
L.P. Each share of Preferred  Stock entitled the holder to receive  dividends of
8% per annum and was  convertible  into 15.1515 shares of our common stock for a
total of 454,545  shares of common stock.  On February 25, 2005,  Gryphon Master
Fund,  L.P.  converted  their  Preferred Stock into 454,545 shares of our common
stock at a  conversion  price of $6.60 per share.  A final  dividend  payment of
$97,315  was paid in 2005 for the  period  up to the  date of  conversion.  As a
result of this conversion, the period we used in estimating the accretion of all
of the costs  associated with the issuance of the Preferred Stock changed from 5
years to 1.9166  years.  Accordingly,  the  accretion was increased in the first
quarter of 2005 by $119,956 and amounted to $160,722 for the quarter ended March
31, 2005.  Additionally,  as a result of this conversion,  we retired the 30,000
shares  of  preferred  stock,  issued  454,545  shares of our  common  stock and
recorded  $3,000,000  as an  increase  to equity.  Gryphon  Master Fund was also
issued  five year  warrants  to purchase  113,636  shares of common  stock at an
exercise price of $6.78, which will expire on October 3, 2008.

      In March 2001, we declared a dividend distribution of one non-transferable
right to purchase one share of our common stock for every 10 outstanding  shares
of common stock  continuously held from the record date to the date of exercise,
as well as common stock  underlying  vested stock options and warrants,  held of
record on March 30, 2001, at an exercise price of $8.50.  The rights were due to
expire on October 4, 2002,  which was one year after the  effective  date of the
registration  statement  related to the shares of common  stock  underlying  the
rights.  We first  extended  the  expiration  date until April 4, 2003;  then we
extended the rights until December 31, 2003; we further  extended the expiration
date to June 30, 2004; we then again  extended the  expiration  date to June 30,
2005; and  subsequently  extended the expiration  date to June 30, 2006. We have
the right to redeem  the  outstanding  rights for $.01 per right  under  certain
conditions,  which were not met as of March 24, 2006. We reserved 970,076 shares
of common stock for future issuance under this rights offering. Cumulatively, as
of December 31, 2005, we received  $2,482,009  before expenses from the exercise
of 292,001 of these rights.

      In March  2001,  our Board of  Directors  authorized,  subject  to certain
business and market  conditions,  the purchase of up to $1,000,000 of our common
stock. As of December 31, 2005, we cumulatively purchased 40,200 shares totaling
approximately  $222,000 and  subsequently  retired these  shares.  None of these
shares were  purchased  during  2005.  We may  purchase  additional  shares when
warranted by certain conditions.


                                       23
<PAGE>


      During 2005, the Company's cash expense burn rate,  which does not include
dividend  payments made on our Preferred Stock, was  approximately  $390,000 per
month and we expect that it will  increase to  approximately  $425,000 per month
due to the expected growth of our business during 2006. We currently  anticipate
that our available  cash in hand and  marketable  securities  and cash resources
from expected revenues from the sale of the units in inventory and the licensing
of our technology will be sufficient to meet our anticipated working capital and
capital  expenditure  requirements  for at least the next twelve  months.  These
requirements  are  expected  to  include  the  purchase  of  inventory,  product
development, sales and marketing, working capital requirements and other general
corporate purposes.  We may need to raise additional funds,  however, to respond
to  business  contingencies  which  may  include  the  need to fund  more  rapid
expansion,  fund additional marketing expenditures,  develop new markets for our
ID-Check   technology,   enhance  our  operating   infrastructure,   respond  to
competitive  pressures,   or  acquire  complementary   businesses  or  necessary
technologies.

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

      As of December  31, 2005,  we had a net  operating  loss carry  forward of
approximately  $31.2  million,  which  expires  beginning in the year 2018.  The
issuance  of  equity  securities  in  the  future,  together  with  our  earlier
financings and our IPO, could result in an ownership  change and could limit our
use of our prior net operating losses. If we achieve profitable operations,  any
significant limitation on the utilization of our net operating losses would have
the effect of increasing our tax liability and reducing net income and available
cash  reserves.   We  are  unable  to  determine  the   availability   of  these
net-operating  losses  since this  availability  is  dependent  upon  profitable
operations,  which we have not  achieved  in prior  periods;  therefore  we have
recorded a full  valuation  allowance  for the  benefit  from the  net-operating
losses.

Contractual Obligations

      The table below presents our  contractual  obligations  and commitments at
December 31, 2005:

<TABLE>
<CAPTION>

                             Payments Due by Period

                                                             Less than
       Contractual Obligations              Total            One Year         1-3 years         4-5 years        After 5 years
------------------------------          -------------     -------------     -------------     -------------      -------------
<S>                                      <C>               <C>               <C>               <C>                <C>
Operating Leases                         $1,085,084        $  202,304        $  429,964        $  452,816                --
Consulting contracts                         72,000            72,000                --                --                --
Employment contracts                        162,086           162,086                --                --                --
                                        -------------     -------------     -------------     -------------      -------------
Total Contractual Cash Obligation        $1,319,170        $  436,390        $  429,964        $  452,816                --

</TABLE>

Off-Balance Sheet Arrangements

      We have never entered into any off-balance  sheet  financing  arrangements
and have never established any special purpose entities.  We have not guaranteed
any debt or  commitments  of other  entities  or  entered  into any  options  on
non-financial assets.

Forward Looking Statements

      The foregoing contains certain forward-looking statements. Due to the fact
that our business is characterized by rapidly changing technology,  high capital
requirements  and an  influx of new  companies  trying to  respond  to  enhanced
security  needs as a result of current  events,  actual results and outcomes may
differ  materially from any such forward looking  statements and, in general are
difficult  to  forecast.  The factors  which could  affect our business and such
actual  results and  outcomes  include the  matters  discussed  in Item 1A "Risk
Factors" above.

Non-GAAP Financial Measures

      This 10-K contains disclosure of our "sales bookings" for certain periods,
which may be deemed to be a non-GAAP  financial  measure  within the  meaning of
Regulation G promulgated by the Securities and Exchange  Commission.  We believe
that  discussion  of our  sales  bookings  provides  investors  with  additional
information  regarding  revenues  it has  received  in respect of  products  and
services  that have been  shipped to a  customer,  but which are  required to be
deferred for a period of less than one year under applicable principles of GAAP.
The  disclosure of "sales  bookings"  may not be comparable to similarly  titled
measures  reported by other companies.  "Sales bookings," while providing useful
information, should not be considered in isolation or as an alternative to other
financial measures determined in accordance with GAAP.


                                       24
<PAGE>

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

      Financial  instruments,  which  subject the Company to  concentrations  of
credit  risk,  consist  primarily  of  cash,  cash  equivalents  and  marketable
securities.  The Company maintains cash between two financial institutions.  The
marketable  securities  consist of short term investment  grade corporate bonds.
The Company  performs  periodic  evaluations of the relative  credit standing of
these institutions

Item 8. Financial Statements and Supplementary Data

       Financial statements are attached hereto following beginning on Page F-1.

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

      On April 21, 2004, the Company dismissed its independent  auditors,  Grant
Thornton LLP ("Grant  Thornton"),  and engaged  Amper,  Politziner & Mattia P.C.
("Amper") as its new independent  registered  public accounting firm. The change
in auditors  became  effective  immediately.  This  determination  followed  the
Company's  decision to seek proposals from independent  accountants to audit the
financial  statements of the Company, and was approved by the Company's Board of
Directors upon the recommendation and approval of its Audit Committee. The audit
report of Grant  Thornton on the  Company's  financial  statements  for the year
ended  December 31, 2003 did not contain any adverse  opinion or  disclaimer  of
opinion,  nor was it  qualified  or modified as to  uncertainty,  audit scope or
accounting  principles.  During our fiscal year ended  December  31,  2003,  and
through the date of Grant Thornton's  dismissal on April 21, 2004, there were no
disagreements between the Company and Grant Thornton on any matter of accounting
principles or practices,  financial statement  disclosure,  or auditing scope or
procedure,   which   disagreements,   if  not   resolved  to  Grant   Thornton's
satisfaction,  would have caused Grant Thornton to make reference to the subject
matter of the disagreement in connection with its reports.

Item 9A. Controls and Procedures

      We maintain disclosure controls and procedures (as defined in Exchange Act
Rules  13a-15(e) and 15d-15(e)) that are designed (i) to collect the information
we are  required to  disclose  in the reports we file with the SEC,  and (ii) to
process,  summarize  and  disclose  this  information  within  the time  periods
specified  in the  rules  of  the  SEC.  Under  the  supervision  and  with  the
participation of our management, including our Chief Executive Officer and Chief
Financial  Officer,  we have  evaluated  the  effectiveness  of the  design  and
operation  of our  disclosure  controls  and  procedures.  Such  evaluation  was
conducted  as of the end of the  period  covered by this  report.  Based on such
evaluation,  our Chief Executive and Chief Financial Officer have concluded that
these procedures are effective.

      Additionally,  there  were  no  changes  in  our  internal  controls  over
financial  reporting  that  materially  affected  or are  reasonably  likely  to
materially affect these controls  subsequent to the end of the period covered by
this report.  We have not identified any  significant  deficiencies  or material
weaknesses  in our internal  controls,  and  therefore  there were no corrective
actions taken.

Item 9B. Other Information

      On  March  28,  2006,  Intelli-Check  entered  into  an  understanding  of
employment with Frank Mandelbaum,  Intelli-Check's  Chairman and Chief Executive
Officer,  effective as of January 1, 2006  providing  that:

o   Mr.  Mandelbaum would receive a salary of $250,000 for January 2006, which
      would increase to $255,604 on February 1, 2006;

o   Mr.  Mandelbaum  would be  entitled  to  receive a bonus of  $75,000  upon
      Intelli-Check achieving certain performance goals;

o   Mr.  Mandelbaum  would be entitled to receive an  automobile  allowance of
      $1,500 per month; and

o   If a  change  of  control  occurred,  as  defined  in the  agreement,  Mr.
      Mandelbaum  would be able to terminate  his  employment at any time and be
      entitled  to  receive a payment  equal to 2.99  times his  average  annual
      compensation, including bonuses, during the three years preceding the date
      of  termination,  payable in cash to the extent of three months salary and
      the balance in shares of our common  stock  based on a valuation  of $2.00
      per share.


                                       25
<PAGE>

                                    PART III

Item 10. Directors and Executive Officers of the Company


<TABLE>
<CAPTION>

         As of March 24, 2006, the Company's directors and executive officers
were as follows:

                                               Position With the Company
              Name                              And Principal Occupation                   Held Office Since
              ----                              ------------------------                   -----------------

<S>                                <C>                                                            <C>
Frank Mandelbaum                   Chairman, Chief Executive Officer and Director                 1996

Edwin Winiarz                      Senior Executive Vice President, Treasurer, Chief              1999
                                   Financial Officer and Director

Russell T. Embry                   Senior Vice President and Chief Technology Officer             2001

Todd Liebman                       Senior Vice President, Marketing and Operations                2004

Ashok Rao                          Vice Chairman, Director                                        2004

Jeffrey Levy                       Director                                                       1999

John E. (Jay) Maxwell              Director                                                       2005

Arthur L. Money                    Director                                                       2003

Guy L. Smith                       Director                                                       2005
</TABLE>

      Frank Mandelbaum, age 72, has served as our Chairman of the Board and
Chief Executive Officer since July 1, 1996. He also served as Chief Financial
Officer until September 1999. From January 1995 through May 1997, Mr. Mandelbaum
served as a consultant providing strategic and financial advice to Pharmerica,
Inc. (formerly Capstone Pharmacy Services, Inc.), a publicly held company. Prior
to January 1995, Mr. Mandelbaum was Chairman of the Board, Chief Executive
Officer and Chief Financial Officer of Pharmerica, Inc. From July 1994 through
December 1995, Mr. Mandelbaum served as Director and Chairman of the Audit and
Compensation Committees of Medical Technology Systems, Inc., also a publicly
held company. From November 1991 through January 1995, Mr. Mandelbaum served as
Director of the Council of Nursing Home Suppliers, a Washington, D.C. based
lobbying organization. From 1974 to date, Mr. Mandelbaum has been Chairman of
the Board and President of J.R.D. Sales, Inc., a privately held financial
consulting company. As required by his employment agreement, Mr. Mandelbaum
devotes substantially all his business time and attention to our business.

      Edwin Winiarz, age 48, was elected Senior Executive Vice President in July
2000 and a director in August 1999 and became Executive Vice President,
Treasurer and Chief Financial Officer on September 7, 1999. From July 1994 until
August 1999, Mr. Winiarz was Treasurer and Chief Financial Officer of Triangle
Service Inc., a privately held national service company. From November 1990
through July 1994, Mr. Winiarz served as Vice President Finance/Controller of
Pharmerica, Inc. (formerly Capstone Pharmacy Services, Inc.). From March 1986
until November 1990, Mr. Winiarz was a manager with the accounting firm of
Laventhal & Horwath. Mr. Winiarz is a certified public accountant and holds an
MBA in management information systems from Pace University.

      Russell T. Embry, age 42, was elected Senior Vice President and Chief
Technology Officer in July 2001 and was Vice President, Information Technology,
since July 1999. From January 1998 to July 1999, Mr. Embry was Lead Software
Engineer with RTS Wireless. From April 1995 to January 1998, he served as
Principal Engineer at GEC-Marconi Hazeltine Corporation. From August 1994
through April 1995, he was a staff software engineer at Periphonics Corporation.
From September 1989 to August 1994, Mr. Embry served as Senior Software Engineer
at MESC/Nav-Com. From July 1985 through September 1989, he was a software
engineer at Grumman Aerospace. Mr. Embry holds a B.S. in Computer Science from
Stony Brook and an M.S. in Computer Science from Polytechnic University,
Farmingdale.


                                       26
<PAGE>

      Todd Liebman, age 32, joined Intelli-Check, Inc. in December 2004 as its
Senior Vice President of Marketing and Operations. Prior to joining
Intelli-Check, Mr. Liebman served as President of Quick Kiosk, a Kinetics
Company, LLC (QK), a self-service solution provider focused on the quick serve
restaurant market industry from October 2000 to December 2004. In September
2004, Mr. Liebman completed the sale of QK to NCR Corporation (NYSE:NCR). Prior
to founding QK, Mr. Liebman served as Director of Business Development of Trex
Communications Corporation (TrexCom), a telecommunications start-up focused on
satellite communications systems and multi-media interactive response systems,
which was sold to L-3 Communications, Inc. in February 2000. TrexCom grew from a
start-up in 1997 to $50 million in revenues and profitability in less than two
years. Prior to joining Trex Communications, Mr. Liebman was Associate Director,
Business Development for Thermo Electron Corporation (NYSE:TMO), a $4 billion
conglomerate and parent company of Trex Communications. From 1996 to 1997, he
worked as a Management Consultant at EMI Strategic Marketing, a strategic
consulting firm. Mr. Liebman received his Bachelor's of Science in Management
from Tulane University's A.B. Freeman School of Business. Mr. Liebman has also
participated in an Executive Education program at the University of
Pennsylvania's Wharton School of Business.

      Ashok Rao, age 56, was appointed a director in December 2004 and Vice
Chairman in January 2005. Mr. Rao is currently an angel investor in numerous
high-tech start-ups as well as the producer of motion pictures. Mr. Rao was CEO
of Prime Wave Communications, a broadband wireless access technology subsidiary
of L3 from 2000 to 2003. Previously, he was the founder and chief executive
officer of TrexCom. He was instrumental in the sale of TrexCom to L3 in 2000.
Mr. Rao holds a bachelor's degree in mechanical engineering from the Indian
Institute of Technology, New Delhi, a master's degree in systems engineering
from Marquette University, and a diploma in Financial Management from the London
School of Economics. Mr. Rao is also a trustee of numerous charitable
organizations.

      Jeffrey Levy, age 63, was elected a director in December 1999. He has
been, since January 1997, President and Chief Executive Officer of LeaseLinc,
Inc., a third-party equipment leasing company and lease brokerage company. Prior
to 1997, Mr. Levy served as President and Chief Executive Officer of American
Land Cycle, Inc. and Goose Creek Land Cycle, LLC, arboreal waste recycling
companies. During that time he also served as Chief Operating Officer of ICC
Technologies, Inc. and AWK Consulting Engineers, Inc. Mr. Levy has had a
distinguished career as a member of the United States Air Force from which he
retired as a colonel in 1988. He serves as a board member of the Northern
Virginia Chapter of Mothers Against Drunk Driving, the Washington Regional
Alcohol Program, the Zero Tolerance Coalition and the National Drunk and Drugged
Driving Prevention Month Coalition and is a member of the Virginia Attorney
General's Task Force on Drinking by College Students and MADD's National
Commission on Underage Drinking. Mr. Levy holds a BS in International Relations
from the United States Air Force Academy, a graduate degree in Economics from
the University of Stockholm and an MBA from Marymount University.

      John E. (Jay) Maxwell, age 52, was appointed a director in September 2005.
Mr. Maxwell retired as the Senior Vice President of Technology and the Chief
Information Officer (CIO) of the American Association of Motor Vehicle
Administrators (AAMVA) in August 2005. He was responsible for all of the
information systems developed, implemented and operated by AAMVA. At AAMVA, Mr.
Maxwell had the responsibility to direct AAMVA's development of Driver License
and ID Card Specifications intended to fight driver license and ID fraud and
abuse. Prior to that, from 1997 to May 2002, he was the President and Chief
Operating Officer of AAMVAnet, Inc., a subsidiary of AAMVA. Before joining AAMVA
in July 1989, Mr. Maxwell spent 11 years with the U.S. Department of
Transportation, working for the Federal Highway Administration and the National
Highway Traffic Safety Administration developing information systems to improve
highway safety.

      Arthur L. Money, age 66, was elected a director in February 2003. Mr.
Money was confirmed by the Senate and served as the Assistant Secretary of
Defense for Command, Control, Communications and Intelligence from 1999 to 2001
and was also the Chief Information Officer for the Department of Defense from
1998 until 2001. Prior to that he served as the Senior Civilian Official, Office
of the Assistant Secretary of Defense, from 1998 to 1999 and was earlier
confirmed by the Senate as Assistant Secretary of the Air Force for Research,
Development and Acquisition and served as Chief Information Officer, from 1996
to 1998. Mr. Money currently serves as a member of the advisory board of several
corporations including the Boeing Company (NYSE: BA). He also serves on the
Board of Directors of numerous companies including Silicon Graphics, Inc. (NYSE:
SGI) and CACI International (NYSE: CAI) and has been recognized for his vision,
leadership and commitment to excellence in systems and process re-engineering.
Mr. Money, who holds a Master of Science Degree in Mechanical Engineering from
the University of Santa Clara (Calif.) and a Bachelor of Science Degree in
Mechanical Engineering from San Jose (Calif.) State University also currently
serves on several U.S. Government Boards and Panels such as NIMA Advisory Board,
Defense Science Board, US Air Force AC2ISR Center Advisory Board and the US Navy
"DSAP" Special Advisory Panel. Prior to his government service, he had a
distinguished business career having served as President of ESL Inc., a
subsidiary of TRW, Inc., from 1990 to 1994 prior to its consolidation with its
Avionics and Surveillance Group when he became Vice President and Deputy General
Manager of the Group.


                                       27
<PAGE>

      Guy L. Smith, age 57, was elected a director in June 2005. Mr. Smith has
been the Executive Vice President of Diageo, the world's leading premium drinks
company, since 2000 and is responsible for Corporate Relations and Marketing
Public Relations. At Diageo, Mr. Smith's responsibilities include overseeing the
corporation's civic and social responsibility efforts in North America,
including the Diageo Marketing Code. The Code governs the company's social
responsibility activities with regard to the marketing and sale of alcoholic
beverages and the company's undertakings to reduce underage access and abuse of
alcohol. From 1998 - 1999, prior to joining Diageo, Mr. Smith was Special
Advisor to President Clinton on The White House staff, where he served on the
impeachment defense team. Mr. Smith also served as an informal strategic
communications advisor to President Clinton from the beginning of the Clinton
Administration. From 1999 - 2000, Mr. Smith was associated with The Hawthorn
Group, a Washington-based public affairs firm, as well as with his own firm,
Smith Worldwide Inc., from 1994 - 1996, which focused on reputation and crisis
management. He was Chief Operating Officer of Hill & Knowlton International
Public Relations, from 1992 - 1993, where he consulted with the firm's largest
consumer product, technology, and legal clients. Prior to that Mr. Smith was
Vice President-Corporate Affairs, the senior public affairs and public relations
officer, for Philip Morris Companies Inc. from 1975 - 1992. During his 17 years
with Philip Morris, Mr. Smith led the Corporate Affairs departments of the
Miller Brewing Company and The Seven-Up Company, both then Philip Morris
operating companies. Mr. Smith began his career as a reporter and assistant city
editor for The Knoxville Journal. He is currently chairman of the Barrier Island
Trust, an environmental protection organization and sits on the Board of
Advisors of Mount Vernon, George Washington's home outside Washington, DC. Mr.
Smith also serves as an Honorary Battalion Chief of the Fire Department of New
York.

Audit Committee of the Board of Directors

      The board of directors has established a separately designated,
stand-alone Audit Committee established in accordance with Section 3(a)(58)(A)
of the Exchange Act, which is currently comprised of Mr. Rao, chairman, Mr.
Smith and Mr. Maxwell. They are all considered "independent" under Section
121(A) of the listing standards of the American Stock Exchange. The audit
committee recommends to the board of directors the annual engagement of a firm
of independent accountants and reviews with the independent accountants the
scope and results of audits, our internal accounting controls and audit
practices and professional services rendered to us by our independent
accountants.

      The Board of Directors has determined that we have at least one audit
committee financial expert serving on our audit committee. Mr. Rao, who holds a
diploma in Financial Management from the London School of Economics, is an
"audit committee financial expert" and is an independent member of the board of
directors.

Section 16(a) Beneficial Ownership Reporting Compliance

      The Securities and Exchange Commission has adopted rules relating to the
filing of ownership reports under Section 16 (a) of the Securities Exchange Act
of 1934. One such rule requires disclosure of filings, which under the
Commission's rules, are not deemed to be timely. During the review of Forms 4,
it was determined that: Mr. Rao failed to file a timely report concerning the
grant of 7,500 stock options on July 27, 2005; however, such failure was
remedied by the reporting of this transaction on August 5, 2005; Mr. Mandelbaum
failed to file a timely report concerning the grant of 25,000 stock options on
November 8, 2005, however, such failure was remedied by the reporting of this
transaction on February 1, 2006; Mr. Winiarz failed to file a timely report in
concerning the grant of 5,000 stock options on November 8, 20005, however, such
failure was remedied by the reporting of this transaction on February 1, 2006;
Guy L. Smith failed to file a timely report concerning the acquisition of 957
shares of our common stock on August 23, 2005, however such failure was remedied
by the reporting of this transaction on March 29, 2006. All other transactions
were reported in a timely fashion.


                                       28
<PAGE>

Code of Ethics

         On March 22, 2004, we adopted a code of ethics that applies to our
Chief Executive Officer and Chief Financial Officer, and other persons who
perform similar functions. A copy of our Code of Ethics is incorporated by
reference as an exhibit to this Annual Report on Form 10-K. Our Code of Ethics
is intended to be a codification of the business and ethical principles which
guide us, and to deter wrongdoing, to promote honest and ethical conduct, to
avoid conflicts of interest, and to foster full, fair, accurate, timely and
understandable disclosures, compliance with applicable governmental laws, rules
and regulations, the prompt internal reporting of violations and accountability
for adherence to this Code.

Item 11. Executive Compensation

         The following table sets forth compensation paid to executive officers
whose compensation was in excess of $100,000 for any of the three fiscal years
ended December 31, 2005. No other executive officers received total salary and
bonus compensation in excess of $100,000 during any of such fiscal years.

                           SUMMARY COMPENSATION TABLE

                                                  Annual          Long-Term
                                               Compensation      Compensation
                                                                  Securities
                                                                  Underlying
Name and Principal Position        Year          Salary($)      Options/SARS (#)
---------------------------        ----          ---------       ---------------

Frank Mandelbaum                   2005           250,000             25,000
Chairman and                       2004           250,000             75,000
Chief Executive Officer            2003           250,000             100,000

Edwin Winiarz                      2005           161,343             30,000
Senior Executive Vice President    2004           151,318             65,000
Chief Financial Officer            2003           141,750             30,000

Russell T. Embry                   2005           162,766              5,000
Senior Vice President              2004           152,063             10,000
Chief Technology Officer           2003           150,000             12,500

Todd Liebman                       2005           135,128               --
Senior Vice President              2004            4,231              175,000
Marketing and Operations

Option Grants

         The following table summarizes options granted during the year ended
December 31, 2005 to the named executive officers:

<TABLE>
<CAPTION>
                                                 Individual Grants
------------------------- -------------- ------------------ -------------- ------------ -----------------------------
                            Number of       % of Total         Exercise    Expiration   Potential Realizable Value
                           Securities     Options Granted       Price         Date       Assumed Annual Rates of
          Name             Underlying     to Employees In                               ppreciation for Option (1)
                             Options     2005 Fiscal Year
                             Granted                                                          5%            10%    A
------------------------- -------------- ------------------ -------------- ------------ ----------------- -----------
<S>                               <C>          <C>             <C>          <C>             <C>            <C>
Russell T. Embry                  5,000        3.3%            $ 3.18       11/17/10        $ 4,393        $ 9,707
Mandelbaum, Frank                25,000       16.5%            $ 3.22       12/30/15        $22,241        $49,146
Edwin Winiarz                     5,000        3.3%            $ 3.22       12/30/15        $ 4,448        $ 9,829
Edwin Winiarz                    25,000       16.5%            $ 5.64       06/08/17        $38,956        $86,082
</TABLE>


                                       29
<PAGE>

         (1) The amounts shown as potential realizable value represent
hypothetical gains that could be achieved for the respective options if
exercised at the end of the option term. The 5% and 10% assumed annual rates of
compounded stock price appreciation are mandated by rules of the Securities and
Exchange Commission and do not represent our estimate or projection of our
future common stock prices. These amounts represent certain assumed rates of
appreciation in the value of our common stock from the fair market value on the
date of grant. Actual gains, if any, on stock option exercises are dependent on
the future performance of the common stock and overall stock market conditions.
The amounts reflected in the table may not necessarily be achieved.

Aggregated Option Exercises and Fiscal Year-End Option Value Table

         The following table summarizes unexercised options granted through the
year-end December 31, 2005 to the named executive officers:

<TABLE>
<CAPTION>

                                                Aggregate                                          Value of Unexercised
                             No. of Shares    Dollar Value          No. of Securities                  In-the-Money
           Name              Received Upon    Received Upon       Underlying Unexercised            Options At Fiscal
                               Exercise         Exercise            Options / Warrants            Year End 12/31/05 (1)
--------------------------- ---------------- ---------------- -------------- ---------------- -------------- ----------------
                                                               Exercisable    Unexercisable    Exercisable    Unexercisable
--------------------------- ---------------- ---------------- -------------- ---------------- -------------- ----------------
<S>                              <C>             <C>                <C>           <C>          <C>                 <C>
Frank Mandelbaum Chairman
& CEO                            9,277           $44,250            975,000         0           $378,250             0

Edwin Winiarz, Senior
Executive VP & CFO                 0                0               225,000         0           $  3,350             0

Russell T. Embry,
Senior VP & CTO                    0                0                59,000         0           $    875             0

Todd Liebman,
Senior VP Marketing     &
Operations                         0                0               145,000      30,000                0             0

(1) Based on the closing price of our common stock ($3.89) on December 30, 2005.
</TABLE>

Compensation of Directors

      Effective January 1, 2006, the board increased the fee non-employee
directors receive to $3,000 for in-person attendance at board meetings and $500
for attendance at such meetings telephonically. Each non-employee director will
also receive a fee of $250 for participation, either in-person or
telephonically, at each separately convened committee meeting not held in
conjunction with a board meeting. During 2003 and through 2005, non-employee
directors received 25,000 options for each full year of service on the Company's
board of directors. However, the board recommended that beginning in 2006
non-employee directors should be granted restricted shares of our common stock
in lieu of stock options. In addition, the board further recommended that
non-employee directors who are members of a committee should be granted
restricted shares of our common stock in lieu of stock options. The number of
restricted shares as proposed would be determined by the board at each annual
board meeting. This proposed plan will be included in our proxy statement for a
vote by our shareholders at the 2005 annual meeting of shareholders.

      During 2005, non-employee directors received a fee of $500 for attending
board meetings and $250 for attendance at such meetings telephonically. They
also received a fee of $300 for each committee meeting held on a date other than
that of a board meeting and are reimbursed for expenses incurred in connection
with the performance of their respective duties as directors. In addition,
non-employee directors who are members of a committee received grants of stock
options for each year served. The chairperson of the audit committee received an
option to purchase 7,500 shares of our common stock and audit committee members
received an option to purchase 3,000 shares of our common stock. Of the
remaining committees, each chairperson received an option to purchase 2,500
shares of our common stock, while a committee member received an option to
purchase 1,500 shares of our common stock. These options are immediately
exercisable during the committee members' term and expire ten years from date of
grant, unless the Director does not complete his full term, in which case the
options expire in ninety (90) days from the end of their service as a Director.


                                       30
<PAGE>

Employment Contracts, Termination of Employment and Change-in-Control
Arrangements

      On November 9, 2004, we entered into a new one-year employment contract
with our Chairman and Chief Executive Officer, Frank Mandelbaum, effective
January 1, 2005. The agreement provides for an annual base salary of $250,000.
In addition, we granted to Mr. Mandelbaum an option to purchase 75,000 shares of
common stock at an exercise price of $4.37 per share, of which 25,000 options
became exercisable on January 1, 2005; 25,000 options became exercisable on
January 1, 2006 and the remaining 25,000 options shall become exercisable on
January 1, 2007.

      Effective January 1, 2006, we entered into a letter of understanding with
our Chairman and Chief Executive Officer that provides for an annual base salary
of $255,604. In addition, on November 8, 2005, we granted to Mr. Mandelbaum an
option to purchase 25,000 shares of common stock at an exercise price of $3.22
per share. We also agreed to provide a severance arrangement that in such case
that we were to terminate Mr. Mandelbaum for any reason other than cause we
would Mr. Mandelbaum pay 2 years of his annual cash base salary in 12 equal
monthly installments.

      If there shall occur a change of control, as defined in the agreement, Mr.
Mandelbaum may terminate his employment at any time and be entitled to receive a
payment equal to 2.99 times his average annual compensation, including bonuses,
during the three years preceding the date of termination, payable in cash to the
extent of three months salary and the balance in shares of our common stock
based on a valuation of $2.00 per share.

      On November 9, 2004, we entered into a new employment agreement with our
Senior Executive Vice President and Chief Financial Officer, Edwin Winiarz,
effective January 1, 2005. The agreement, which expires December 31, 2006,
provides for a fixed base annual salary of $162,086. In addition, we granted to
Mr. Winiarz an option to purchase 50,000 shares of common stock at an exercise
price of $4.37 per share, of which 25,000 options became exercisable on January
1, 2005 and 25,000 options became exercisable during the fourth quarter of 2005.

      Each of the agreements requires the executive to devote substantially all
his time and efforts to our business and contains non-competition and
nondisclosure covenants of the officer for the term of his employment and for a
period of two years thereafter. Each agreement provides that we may terminate
the agreement for cause.

Compensation Committee Interlocks and Insider Participation

      The board of directors has established a compensation committee which is
currently comprised of Mr. Money, chairman, Mr. Levy and Mr. Maxwell. No member
of the Compensation Committee has a relationship that would constitute an
interlocking relationship with Executive Officers or Directors of the Company or
another entity.

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

      The following table sets forth, as of March 1, 2006 certain information
regarding beneficial ownership of Intelli-Check's common stock by each person
who is known by us to beneficially own more than 5% of our common stock. The
table also identifies the stock ownership of each of our directors, each of our
officers, and all directors and officers as a group. Except as otherwise
indicated, the stockholders listed in the table have sole voting and investment
powers with respect to the shares indicated.

      Unless otherwise indicated, the address for each of the named individuals
is c/o Intelli-Check, Inc., 246 Crossways Park West, Woodbury, NY 11797-2015.

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


                                       31
<PAGE>

      The applicable percentage of ownership is based on 12,085,444 shares
outstanding as of March 1, 2006.

<TABLE>
<CAPTION>

                             Name                                  Shares Beneficially Owned      Percent
---------------------------------------------------------------- ------------------------------- -----------
<S>                                                                        <C>                     <C>
Frank Mandelbaum (1)                                                       1,627,330               12.39

Edwin Winiarz (2)                                                           225,000                 1.83

Todd Liebman (3)                                                            150,000                 1.23

Russell T. Embry (4)                                                         59,000                  *

Jeffrey Levy (5)                                                            130,980                 1.07

Arthur L. Money (6)                                                         157,000                 1.28

John  E. Maxwell (7)                                                         47,000                  *

Guy L. Smith (8)                                                             80,457                  *

Ashok Rao (9)                                                                98,500                  *

Todd Cohen (10)                                                             702,570                 5.78

Empire State Development Corporation, formerly New York State
Science and Technology Foundation (11)                                      605,000                 4.98

All Executive Officers & Directors as a group (9 persons)                  2,575,267               18.29

* Indicates beneficial ownership of less than one percent of the total
outstanding common stock.
</TABLE>

(1)  Includes 1,047,549 shares issuable upon exercise of stock options and
     rights exercisable within 60 days. Does not include 9,000 shares and 880
     rights held by Mr. Mandelbaum's wife, for which Mr. Mandelbaum disclaims
     beneficial ownership

(2)  Includes 225,000 shares issuable upon exercise of stock options exercisable
     within 60 days.

(3)  Includes 150,000 shares issuable upon exercise of stock options exercisable
     within 60 days.

(4)  Includes 59,000 shares issuable upon exercise of stock options exercisable
     within 60 days.

(5)  Includes 128,580 shares issuable upon exercise of stock options exercisable
     within 60 days.

(6)  Includes 157,000 shares issuable upon exercise of stock options exercisable
     within 60 days.

(7)  Includes 47,000 shares issuable upon exercise of stock options exercisable
     within 60 days.

(8)  Includes 79,500 shares issuable upon exercise of stock options exercisable
     within 60 days.

(9)  Includes 98,500 shares issuable upon exercise of stock options exercisable
     within 60 days.

(10) Includes 67,970 rights and 4,000 warrants which are exercisable within 60
     days. The address is PO Box 20054, Huntington Station, NY 11746.

(11) Frances A. Walton, the Chief Financial Officer exercises voting and
     dispositive power over the shares. The address is 30 South Pearl Street,
     Albany, NY 12245.


                                       32
<PAGE>

Equity Compensation Plan Information

<TABLE>
<CAPTION>

Plan Category                        Number of Securities       Weighted average      Number of securities remaining
                                       to be issued upon       exercise price of      available for future issuance
                                          exercise of             outstanding        under equity compensation plans
                                      outstanding options,     options, warrants     (excluding securities reflected
                                      warrants and rights          and rights                  in column a)
                                             (a)                       (b)                           (c)
----------------------------------- ------------------------ ----------------------- ---------------------------------
<S>                                        <C>                       <C>                         <C>
Equity compensation plans                  1,925,530                 $7.27                       728,361
approved by security holders

Equity compensation plans not                839,425                 $6.55                         None
approved by security holders

Total                                      2,764,955                 $6.77                       728,361
</TABLE>

      From time to time the Board of Directors of the Company approves the grant
of non-plan options to officers and employees of, or consultants to, the
Company. The shares of common stock listed under equity compensation plans not
approved by stockholders in the above table consist of shares of common stock
issuable pursuant to such options. The vesting schedule of the options varies,
with some vesting immediately and some vesting upon the completion of certain
performance objectives. The non-plan options currently outstanding have been
granted to nine (9) persons. These options have a weighted average exercise
price per share equal to $6.55 and options to purchase 776,925 shares of common
stock are currently exercisable.

Item 13. Certain Relationships and Related Transactions

      On January 1, 2005, we renewed our agreement with Alexandros Partners LLC
to act as consultants in advising us in financial and investor relation matters.
A principal of Alexandros Partners LLC was a member of our Board of Directors.
We agreed to pay a consulting fee of $50,000 payable in 12 equal monthly
installments. The agreement terminated on December 31, 2005. This transaction
was approved by all of the independent directors of our Board of Directors.

Item 14. Principal Accountant Fees and Services

      Until April 21, 2004, our principal independent auditor was Grant Thornton
LLP. Thereafter, our principal independent auditor was Amper, Politziner &
Mattia, P.C. The services of each were provided in the following categories and
amount:

AUDIT FEES

      We were billed $6,000 by Grant Thornton LLP for fees relating to the
transition to Amper, Politziner and Mattia, P.C. as our auditors during 2004.

      The aggregate fees billed by Amper, Politziner and Mattia, P.C. for
professional services rendered for the audit of the Company's annual financial
statements for the fiscal years ended December 31, 2004 and 2005 and for the
reviews of the financial statements included in the Company's Quarterly Reports
on Form 10-Q for fiscal years 2004 and 2005 amounted to $78,400 and $86,625,
respectively.

AUDIT RELATED FEES

      Other than the fees described under the caption "Audit Fees" above, Amper,
Politziner and Mattia, P.C. did not bill any fees for services rendered to us
during fiscal year 2004 or 2005 for assurance and related services in connection
with the audit or review of our financial statements.


                                       33
<PAGE>

TAX FEES

      Amper, Politziner and Mattia, P.C. billed us for tax related services for
fiscal 2004 totaling $4,500, and will perform tax related services for us for
fiscal 2005, which we estimate to be approximately $4,000.

ALL OTHER FEES

      We were billed $18,725 by Grant Thornton LLP for fees relating to our
private placement completed in 2005.

      The aggregate fees billed by Amper, Politziner and Mattia, P.C. for
professional services rendered in connection with our private placement
completed August 9, 2005 and the filing of our Registration Statement on Form
S-3 amounted to $24,000.

      No other fees were billed by our auditors for 2004.

PRE-APPROVAL OF SERVICES

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

                                     PART IV
Item 15. Exhibits and Financial Statement Schedules

         (a)(1)   Financial Statements

                  Balance Sheets as of December 31, 2004 and 2005
                  Statements of Operations for the years ended December 31,
                  2003, 2004 and 2005
                  Statements of Stockholders' Equity for the years ended
                  December 31, 2003, 2004 and 2005
                  Statements of Cash Flows for the years ended December 31,
                  2003, 2004 and 2005

         (2)      Schedule II - Valuation and Qualifying Accounts


                                       34
<PAGE>

         (b)      Exhibits

  Exhibit No.     Description
  -----------     -----------
  1               Form of Underwriting Agreement (1)
  3.1             Certificate of Incorporation of the Company (1)
  3.2             By-laws of the Company (1)
  3.3             Certificate of Designation of Preferred Stock of
                  Intelli-Check, Inc. (7)
  4.1             Specimen Stock Certificate (2)
  4.2             Form of Underwriters' Warrant Agreement (1)
  4.3             Warrant to Gryphon Master Fund LLP (7)
  4.4             Form of Underwriters Warrant Agreement including form of
                  Warrant Certificate(8)
  4.5             Warrant to JMP Securities, LLC
  10.1            1998 Stock Option Plan (1) *
  10.5            Agreement of Lease between the Company and Industrial and
                  Research Associates, dated as of October 15, 2000 (5)
  10.6            1999 Stock Option Plan (1) *
  10.10           Agreement between the Company and Kevin Messina, individually
                  and d/b/a K.M. Software Development, dated as of May 3, 1999
                  (1) *
  10.11           Memorandum of Understanding between AAMVAnet, Inc. and Intelli
                  -Check, Inc. effective November 15, 2000 (5)
  10.12           2001 Stock Option Plan (4)
  10.15           Memorandum of Understanding between AAMVAnet, Inc. and
                  Intelli-Check, Inc. effective January 29, 2002 (5)
  10.16           Securities Purchase Agreement between Intelli-Check, Inc. and
                  Gryphon Master Fund dated March 27, 2003. (7)
  10.17           Registration Rights Agreement between Intelli-Check, Inc. and
                  Gryphon Master Fund dated March 27, 2003. (7)
  10.18           Employment Agreement between Frank Mandelbaum and the Company,
                  dated as of December 15, 2004* (6)
  10.19           Employment Agreement between Edwin Winiarz and the Company,
                  dated as of December 15, 2004* (6)
  10.20           Understanding of Employment between Frank Mandelbaum and the
                  Company, dated as of January 1, 2006*
  14.1            Code of Business Conduct and Ethics (7)
  21              List of Subsidiaries (1)
  23.1            Consent of Amper, Politziner and Mattia, P.C.
  23.2            Consent of Grant Thornton LLP
  31.1            Certification of Chief Executive Officer pursuant to Section
                  302 of The Sarbanes-Oxley Act of 2002
  31.2            Certification of Chief Financial Officer pursuant to Section
                  302 of The Sarbanes-Oxley Act of 2002
  32              Certification of Chief Executive Officer and Chief Financial
                  pursuant to Section 906 of The Sarbanes-Oxley Act of 2002

---------------------------------
   *Denotes a management contract or compensatory plan, contract or arrangement.
(1)   Incorporated by reference to Registration Statement on Form SB-2 (File No.
      333-87797) filed September 24, 1999.
(2)   Incorporated by reference to Amendment No. 1 to the Registration Statement
      filed November 1, 1999.
(3)   Incorporated by reference to Amendment No. 2 to the Registration Statement
      filed November 15, 1999.
(4)   Incorporated by reference to Registrant's Proxy Statement on Schedule 14A
      filed May 31, 2001.
(5)   Incorporated by reference to Registrant's Annual Report on Form 10-K filed
      March 29, 2001.
(6)   Incorporated by reference from the Registrant's Current Report on Form 8-K
      filed on December 16, 2004.
(7)   Incorporated by reference to Registrant's Annual Report of Form 10-K filed
      March 31, 2003.
(8)   Incorporated by reference to Registration Statement on Form S-2 (File No.
      333-108043) filed September 30, 2003.


                                       35
<PAGE>


                                   SIGNATURES

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



Date:     March 29, 2006           INTELLI-CHECK, INC.

                                   By:  /s/ Frank Mandelbaum
                                   ------------------------------
                                   Frank Mandelbaum
                                   Chairman, Chief Executive Officer
                                   and Director

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

Date:     March 29, 2006           INTELLI-CHECK, INC.

                                   By:  /s/ Frank Mandelbaum
                                   ------------------------------
                                   Frank Mandelbaum
                                   Chairman, Chief Executive Officer
                                   and Director

Date:     March 29, 2006           /s/  Edwin Winiarz
                                   ------------------------------
                                   Edwin Winiarz
                                   Senior Executive Vice President, Treasurer
                                    and Chief Financial Officer

Date:     March 29, 2006           /s/  Ashok Rao
                                   ------------------------------
                                   Ashok Rao, Vice Chairman and Director

Date:     March 29, 2006           /s/  Jeffrey Levy
                                   ------------------------------
                                   Jeffrey Levy, Director

Date:     March 29, 2006           /s/  John E. Maxwell
                                   ------------------------------
                                   John E. Maxwell, Director

Date:     March 29, 2006           /s/  Arthur L. Money
                                   ------------------------------
                                   Arthur L. Money, Director

Date:     March 29, 2006           /s/  Guy L. Smith
                                   ------------------------------
                                   Guy L. Smith, Director


<PAGE>

INDEX

<TABLE>
<CAPTION>
                                                                                                      Page
                                                                                                      ----
<S>                                                                                                 <C>
REPORTS OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMS                                           F-1 - F-2

FINANCIAL STATEMENTS:
    Balance Sheets as of December 31, 2004 and 2005                                                    F-3

    Statements of Operations for the Years Ended December 31, 2003, 2004 and 2005                      F-4

    Statements of Stockholders' Equity for the Years Ended December 31, 2003, 2004 and 2005            F-5

    Statements of Cash Flows for the Years Ended December 31, 2003, 2004 and 2005                      F-6

NOTES TO FINANCIAL STATEMENTS                                                                      F-7 - F-22

Schedule II - Valuation and Qualifying Accounts                                                       F-22
</TABLE>


<PAGE>


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
-------------------------------------------------------


To the Board of Directors and Stockholders of
Intelli-Check, Inc.

We have audited the accompanying statements of operations,  stockholders' equity
and cash flows of  Intelli-Check,  Inc.  for the year ended  December  31, 2003.
These financial  statements are the responsibility of the Company's  management.
Our responsibility is to express an opinion on these financial  statements based
on our 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 the financial
statements  are free of material  misstatement.  The Company is not  required to
have,  nor were we  engaged to perform  an audit of its  internal  control  over
financial reporting.  Our audit included  consideration of internal control over
financial  reporting  as  a  basis  for  designing  audit  procedures  that  are
appropriate  in the  circumstances,  but not for the  purpose of  expressing  an
opinion on the  effectiveness  of the Company's  internal control over financial
reporting.  Accordingly,  we express  no such  opinion.  An audit also  includes
examining,  on a test basis,  evidence supporting the amounts and disclosures in
the  financial   statements,   assessing  the  accounting  principles  used  and
significant  estimates  made by  management,  as well as evaluating  the overall
financial  statement  presentation.   We  believe  that  our  audit  provides  a
reasonable basis for our opinion.

In our opinion,  the financial  statements  referred to above present fairly, in
all  material   respects,   the  results  of   operations   and  cash  flows  of
Intelli-Check,  Inc.  for the year ended  December 31, 2003 in  conformity  with
accounting principles generally accepted in the United States of America.

Our audit was  conducted  for the  purpose  of  forming  an opinion on the basic
financial statements taken as a whole. The accompanying schedule II for the year
ended December 31, 2003 is presented for purposes of additional  analysis and is
not a required part of the basic financial statements. Such information has been
subjected to the auditing procedures applied in the audit of the basic financial
statements  and, in our opinion,  is fairly  stated in all material  respects in
relation to the basic financial statements taken as a whole.



/s/ Grant Thornton LLP
----------------------
New York, New York
March 5, 2004


                                                                             F-1
<PAGE>


             Report of Independent Registered Public Accounting Firm
             -------------------------------------------------------


To the Board of Directors and Stockholders of
Intelli-Check, Inc.


We have audited the  accompanying  balance  sheets of  Intelli-Check,  Inc. (the
"Company")  as of  December  2005  and  2004,  and  the  related  statements  of
operations, stockholders' equity, and cash flows for the years then ended. These
financial  statements are the  responsibility of the Company's  management.  Our
responsibility  is to express an opinion on these financial  statements based on
our audits.

We conducted our audits in accordance  with the standards of the Public  Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements  are free of material  misstatement.  The Company is not  required to
have,  nor were we engaged to perform,  an audit of its  internal  control  over
financial reporting.  Our audit included  consideration of internal control over
financial  reporting  as  a  basis  for  designing  audit  procedures  that  are
appropriate  in the  circumstances,  but not for the  purpose of  expressing  an
opinion on the  effectiveness  of the Company's  internal control over financial
reporting.  Accordingly we express no such opinion. An audit includes examining,
on a  test  basis,  evidence  supporting  the  amounts  and  disclosures  in the
financial statements. An audit also includes assessing the accounting principles
used and  significant  estimates made by  management,  as well as evaluating the
overall financial statement  presentation.  We believe that our audits provide a
reasonable basis for our opinion.

In our opinion,  the financial  statements  referred to above present fairly, in
all material  respects,  the  financial  position of  Intelli-Check,  Inc. as of
December 31, 2005 and 2004, and the results of its operations and its cash flows
for the years then ended in  conformity  with  accounting  principles  generally
accepted in the United States of America.

We have also audited the  financial  statement  schedule  listed in the index at
item  15(a)(2),  schedule II for the years ended  December 31, 2005 and 2004. In
our opinion,  such financial statement schedule,  when considered in relation to
the basic financial statements taken as a whole, presents fairly in all material
respects the information set forth therein.



/s/ Amper, Politziner & Mattia, P.C.
------------------------------------
New York, New York
March 3, 2006


                                                                             F-2
<PAGE>


INTELLI-CHECK, INC.

BALANCE SHEETS
DECEMBER 31, 2004 and 2005

                                     ASSETS
<TABLE>
<CAPTION>
                                                                                         2004            2005
                                                                                    ------------    ------------
<S>                                                                                 <C>             <C>
CURRENT ASSETS:
    Cash and cash equivalents                                                       $    367,297    $    528,250
    Marketable securities and short-term investments                                   4,091,984       5,263,308
    Accounts receivable, net of allowance of $20,000 and $28,467
          for 2004 and 2005, respectively                                                454,112         408,542
    Inventory                                                                            211,163         125,981
    Other current assets                                                                 279,550         419,279
                                                                                    ------------    ------------

                 Total current assets                                                  5,404,106       6,745,360


PROPERTY AND EQUIPMENT, net (Note 3)                                                     132,905          92,246

PATENT COSTS, net (Notes 4 and 9)                                                         42,589          36,379

OTHER  ASSETS

                                                                                          34,916          34,916
                                                                                    ------------    ------------

                 Total assets                                                       $  5,614,516    $  6,908,901
                                                                                    ============    ============

                      LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:
    Accounts payable                                                                $    759,218    $    371,521
    Accrued expenses (Note 5)                                                            574,043         389,742
    Deferred revenue                                                                     476,387         694,958
                                                                                    ------------    ------------
                 Total current liabilities                                             1,809,648       1,456,221
                                                                                    ------------    ------------

OTHER LIABILITIES                                                                         97,266          62,995
                                                                                    ------------    ------------

                 Total liabilities                                                     1,906,914       1,519,216
                                                                                    ------------    ------------

COMMITMENTS AND CONTINGENCIES (Note 10)                                                       --              --

SERIES A 8% CONVERTIBLE REDEEMABLE PREFERRED STOCK,
    Net of beneficial  conversion feature,  warrants issued and issuance costs -
    $.01 par value; 1,000,000 shares authorized; 30,000 and 0 shares issued and
     outstanding as of December 31, 2004 and 2005, respectively (Note 7)               2,839,278              --
                                                                                    ------------    ------------

STOCKHOLDERS' EQUITY:
    Common stock - $.001 par value; 20,000,000 shares authorized; 10,290,418 and
       12,058,240 shares issued and outstanding as of 2004 and 2005, respectively         10,290          12,058
    Deferred compensation                                                               (126,469)       (263,460)
    Additional paid-in capital                                                        36,655,882      44,748,969
    Accumulated deficit                                                              (35,671,379)    (39,107,882)
                                                                                    ------------    ------------
                 Total stockholders' equity                                              868,324       5,389,685
                                                                                    ------------    ------------
                 Total liabilities and stockholders' equity                         $  5,614,516    $  6,908,901
                                                                                    ============    ============
</TABLE>

The accompanying notes are an integral part of these statements.


                                                                             F-3
<PAGE>


INTELLI-CHECK, INC.

STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2003, 2004 AND 2005

<TABLE>
<CAPTION>
                                                                    2003            2004            2005
                                                                ------------    ------------    ------------
<S>                                                             <C>             <C>             <C>
REVENUES                                                        $  1,235,611    $  1,119,349       2,383,532
COST OF REVENUES                                                    (454,032)       (393,584)       (744,615)
INVENTORY WRITEDOWN (Note 2)                                        (990,000)       (357,332)             --
                                                                ------------    ------------    ------------
                 Gross profit (loss)                                (208,421)        368,433       1,638,917
                                                                ------------    ------------    ------------


OPERATING EXPENSES
    Selling                                                        1,352,274       1,176,911       1,257,810
    General and administrative                                     2,386,088       5,032,207       2,824,384
    Research and development                                       1,226,725       1,176,276         941,530
    Write off of intangible assets (Notes 2 and 9)                   363,655            --              --
                                                                ------------    ------------    ------------
                 Total operating expenses                          5,328,742       7,385,394       5,023,724
                                                                ------------    ------------    ------------

                 Loss from operations                             (5,537,163)     (7,016,961)     (3,384,807)
                                                                ------------    ------------    ------------

OTHER INCOME (EXPENSE):
    Interest income                                                   51,437          94,030         145,848
    Interest expense                                                 (43,487)             --              --
    Other income (expense) (Note 10)                                (921,730)             --              --
                                                                ------------    ------------    ------------
                                                                    (913,780)         94,030         145,848
                                                                ------------    ------------    ------------

                 Net loss                                         (6,450,943)     (6,922,931)     (3,238,959)

    Accretion of convertible redeemable preferred stock costs       (198,540)       (964,338)       (160,722)
    Dividend on convertible redeemable  preferred stock             (183,451)       (240,000)        (36,822)
                                                                ------------    ------------    ------------

    Net loss attributable to common stockholders                $ (6,832,934)   $ (8,127,269)   $ (3,436,503)
                                                                ============    ============    ============

PER SHARE INFORMATION:
    Net loss per common share -
       Basic and diluted                                        $      (0.74)   $      (0.79)   $      (0.31)
                                                                ============    ============    ============

    Weighted average common shares used in computing
      per share amounts -
       Basic and diluted                                           9,217,856      10,224,730      11,201,404
                                                                ============    ============    ============
</TABLE>

The accompanying notes are an integral part of these statements.


                                                                             F-4
<PAGE>



INTELLI-CHECK, INC.

STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2003, 2004 AND 2005

<TABLE>
<CAPTION>
                                                                     Common Stock            Additional
                                                             ----------------------------     Paid-in
                                                                 Shares         Amount         Capital
                                                             ------------    ------------    ------------

<S>                                                          <C>             <C>             <C>
BALANCE, December 31, 2002                                      8,875,302    $      8,874    $ 22,399,029

Effect on extension of expiring options                                --              --         167,000
Issuance of common stock for the exercise of stock options        175,209             175         679,436
Issuance of common stock for the exercise of rights                 4,407               5          37,455
Issuance of common stock in connection with secondary           1,100,000           1,100       7,580,326
offering
Effect on extension of expiring rights dividend                        --              --       2,000,000
Warrants issued in connection with the issuance of
   convertible redeemable preferred stock                              --              --         497,700
Beneficial conversion feature embedded in
   convertible redeemable preferred stock issued                                       --         540,000
Amortization of deferred compensation                                  --              --              --
Dividend on convertible redeemable preferred stock                     --              --              --
Recognition of deferred compensation                                   --              --         319,904
Accretion of convertible redeemable preferred stock                    --              --          66,781
Valuation adjustment of deferred compensation                          --              --              --
Net loss                                                               --              --              --
                                                             ------------    ------------    ------------

                                                               10,154,918    $     10,154    $ 34,287,631
BALANCE, December 31, 2003

Effect on extension of expiring options                                --              --       1,347,000
Issuance of common stock for the exercise of stock options        142,700             143         427,836
Issuance of common stock under employment agreement                 1,500               2           6,373
Effect on extension of expiring rights dividend                        --              --         525,000
Purchase and retirement of common stock                           (20,200)            (20)        (98,731)
Issuance of common stock for services rendered                     11,500              11          48,864
Amortization of deferred compensation                                  --              --              --
Dividend on convertible redeemable preferred stock                     --              --              --
Recognition of deferred compensation                                   --              --         542,648
Accretion of convertible redeemable preferred stock                    --              --              --
Valuation adjustment of deferred compensation                          --              --        (430,739)
Net loss                                                               --              --              --
                                                             ------------    ------------    ------------

BALANCE, December 31, 2004                                     10,290,418    $     10,290    $ 36,655,882

Effect on extension of expiring options                                --              --         184,200
Exercise of stock options                                          54,000              54         168,846
Issuance of common stock in connection with
  secondary offering                                            1,250,000           1,250       4,438,343
Conversion of Convertible Redeemable Preferred Stock              454,545             455       2,999,545
Issuance of stock from cashless exercise of stock options           9,277               9          44,241
Purchase and retirement of outstanding warrants                        --              --         (25,000)
Issuance of stock options for services rendered                        --              --           2,163
Amortization of deferred compensation                                  --              --              --
Dividend on convertible redeemable preferred stock                     --              --              --
Recognition of deferred compensation                                   --              --         402,995
Accretion of convertible redeemable preferred stock                    --              --              --
Valuation adjustment of deferred compensation                          --              --        (122,246)
Net loss                                                               --              --              --
                                                             ------------    ------------    ------------

BALANCE, December 31, 2005                                     12,058,240    $     12,058    $ 44,748,969
                                                             ============    ============    ============

<CAPTION>
                                                               Deferred      Accumulated
                                                             Compensation      Deficit           Total
                                                             ------------    ------------    ------------

<S>                                                          <C>             <C>             <C>
BALANCE, December 31, 2002                                   $   (348,476)   $(18,186,176)   $  3,873,251

Effect on extension of expiring options                                --              --         167,000
Issuance of common stock for the exercise of stock options             --              --         679,611
Issuance of common stock for the exercise of rights                    --              --          37,460
Issuance of common stock in connection with secondary
offering                                                               --              --       7,581,426
Effect on extension of expiring rights dividend                        --      (2,000,000)             --
Warrants issued in connection with the issuance of
   convertible redeemable preferred stock                              --              --         497,700
Beneficial conversion feature embedded in
   convertible redeemable preferred stock issued                       --              --         540,000
Amortization of deferred compensation                             357,194              --         357,194
Dividend on convertible redeemable preferred stock                     --        (183,451)       (183,451)
Recognition of deferred compensation                             (319,904)             --              --
Accretion of convertible redeemable preferred stock                    --        (198,540)       (198,540)
Valuation adjustment of deferred compensation                     (66,781)             --              --
Net loss                                                               --      (6,450,943)     (6,450,943)
                                                             ------------    ------------    ------------

                                                             $   (377,967)   $(27,019,110)   $  6,900,708
BALANCE, December 31, 2003

Effect on extension of expiring options                                --              --       1,347,000
Issuance of common stock for the exercise of stock options             --              --         427,979
Issuance of common stock under employment agreement                    --              --           6,375
Effect on extension of expiring rights dividend                        --        (525,000)             --
Purchase and retirement of common stock                                --              --         (98,751)
Issuance of common stock for services rendered                         --              --          48,875
Amortization of deferred compensation                             363,407              --         363,407
Dividend on convertible redeemable preferred stock                     --        (240,000)       (240,000)
Recognition of deferred compensation                             (542,648)             --              --
Accretion of convertible redeemable preferred stock                    --        (964,338)       (964,338)
Valuation adjustment of deferred compensation                     430,739              --              --
Net loss                                                               --      (6,922,931)     (6,922,931)
                                                             ------------    ------------    ------------

BALANCE, December 31, 2004                                   $   (126,469)   $(35,671,379)   $    868,324

Effect on extension of expiring options                                --              --         184,200
Exercise of stock options                                              --              --         168,900
Issuance of common stock in connection with
  secondary offering                                                   --              --       4,439,593
Conversion of Convertible Redeemable Preferred Stock                   --              --       3,000,000
Issuance of stock from cashless exercise of stock options              --              --          44,250
Purchase and retirement of outstanding warrants                        --              --         (25,000)
Issuance of stock options for services rendered                        --              --           2,163
Amortization of deferred compensation                             143,758              --         143,758
Dividend on convertible redeemable preferred stock                     --         (36,822)        (36,822)
Recognition of deferred compensation                             (402,995)             --              --
Accretion of convertible redeemable preferred stock                    --        (160,722)       (160,722)
Valuation adjustment of deferred compensation                     122,246              --              --
Net loss                                                               --      (3,238,959)     (3,238,959)
                                                             ------------    ------------    ------------

BALANCE, December 31, 2005                                   $   (263,460)   $(39,107,882)   $  5,389,685
                                                             ============    ============    ============
</TABLE>


The accompanying notes are an integral part of these statements.


                                                                             F-5
<PAGE>


INTELLI-CHECK, INC.

STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2003, 2004 AND 2005

<TABLE>
<CAPTION>
                                                                                         2003           2004            2005
                                                                                    ------------    ------------    ------------
<S>                                                                                 <C>             <C>             <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
    Net loss                                                                        $ (6,450,943)   $ (6,922,931)   $ (3,238,959)
    Adjustments to reconcile net loss to net cash used in operating activities-
          Depreciation and amortization                                                  436,778         111,743          52,265
          Write off of intangible assets                                                 363,655              --              --
          Non cash stock based compensation expense                                      167,000       1,350,187         228,450
          Issuance of common stock for services rendered                                      --          48,875              --
          Issuance of stock options for services rendered                                     --              --           2,163
          Amortization of deferred compensation                                          357,194         363,407         143,758
          Loss on sale of property and equipment                                              --              --           4,700
          Writedown of inventory                                                         990,000         357,332              --
          Changes in assets and liabilities-
              (Increase) decrease in certificates of deposit, restricted              (1,009,801)      1,283,118              --
              (Increase) decrease in accounts receivable, net                           (155,636)       (288,946)         45,570
              Decrease (increase) decrease in inventory                                  259,130         (14,786)         85,182
              Decrease (increase) in other current assets                                 56,383         (62,163)       (139,729)
              (Increase) in other assets                                                      --         (34,916)             --
              (Decrease) increase (decrease) in accounts payable and accrued
                  expenses                                                              (464,354)        667,086        (511,505)
              Increase (decrease) in litigation settlement payable                       921,700        (921,700)             --
              (Decrease) increase in deferred revenue                                    (84,021)        290,050         184,300
                                                                                    ------------    ------------    ------------
                    Net cash used in operating activities                             (4,612,915)     (3,773,646)     (3,143,805)
                                                                                    ------------    ------------    ------------

CASH FLOWS FROM INVESTING ACTIVITIES:
    Purchases of property and equipment                                                   (4,352)        (22,441)        (12,096)
    Proceeds from sale of property and equipment                                              --              --           2,000
    Investment in marketable securities and short-term investments                    (4,856,388)    (11,677,991)     (8,037,905)
    Sales of marketable securities and short-term investments                                 --      12,442,395       6,866,581
                                                                                    ------------    ------------    ------------
                    Net cash (used in) provided by investing activities               (4,860,740)        741,963      (1,181,420)
                                                                                    ------------    ------------    ------------

CASH FLOWS FROM FINANCING ACTIVITIES:
    Net proceeds from issuance of common stock                                           717,071         431,167         168,900
    Net proceeds from issuance of common stock from secondary offering                 7,581,426              --       4,439,593
    Net proceeds from issuance of convertible redeemable preferred stock               2,714,100              --
    Payment of dividend to preferred stockholders                                       (122,958)       (240,000)        (97,315)
    Repayment of capital lease obligations                                               (19,572)           (427)             --
    Purchase of outstanding warrants                                                          --              --         (25,000)
    Treasury stock purchased                                                                  --         (98,751)             --
                                                                                    ------------    ------------    ------------
                    Net cash provided by financing activities                         10,870,067          91,989       4,486,178
                                                                                    ------------    ------------    ------------

                    Net increase (decrease) increase in cash and cash equivalents      1,396,412      (2,939,694)        160,953

CASH AND CASH EQUIVALENTS, beginning of year                                           1,910,579       3,306,991         367,297
                                                                                    ------------    ------------    ------------

CASH AND CASH EQUIVALENTS, end of year                                              $  3,306,991    $    367,297    $    528,250
                                                                                    ============    ============    ============

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
       Cash paid during the year for interest                                       $      1,487    $         --    $         --
                                                                                    ============    ============    ============

SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING ACTIVITIES:
    Stock options issued for services rendered                                      $    319,904    $    542,648    $    402,995
    Beneficial conversion feature and warrants issued in connection
        with issuance of convertible redeemable preferred stock                        1,037,700              --              --
    Conversion of convertible redeemable preferred stock into Common Stock                    --              --       3,000,000
    Accretion of convertible redeemable preferred stock cost                             198,540         964,338         160,722
</TABLE>


The accompanying notes are an integral part of these statements.


                                                                             F-6
<PAGE>



INTELLI-CHECK, INC.

NOTES TO FINANCIAL STATEMENTS


1. NATURE OF BUSINESS AND LIQUIDITY

Business

Intelli-Check  ("the  Company"  or "we") was formed in 1994 to address a growing
need for a reliable  document and age verification  system that could be used to
detect   fraudulent   driver   licenses  and  other  widely  accepted  forms  of
government-issued  identification documents. Since then, our technology has been
further  developed for application in the commercial  fraud  protection,  access
control and governmental security markets.  Additionally,  it is currently being
used to increase  productivity  by addressing  inefficiencies  and  inaccuracies
associated with manual data entry. The core of Intelli-Check's product offerings
is our proprietary  software technology that verifies the authenticity of driver
licenses,  state issued  non-driver  and military  identification  cards used as
proof of identity. Our patented ID-Check(R) software technology instantly reads,
analyzes,  and  verifies  the encoded  data in magnetic  stripes and barcodes on
government-issue  IDs from approximately 60 jurisdictions in the U.S. and Canada
to determine if the content and format is valid.  We have served as the national
testing laboratory for the American Association of Motor Vehicle  Administrators
(AAMVA) since 1999 and have access to all the currently available encoded driver
license formats.

Our patented ID-Check(TM) software technology provides the ability to verify the
validity of driver licenses,  state issued non-driver ID cards and military ID's
that  contain  magnetic  stripes  or bar codes,  which in most cases  conform to
AAMVA/ANSI/ISO  standards.  The ID-Check  software is contained in our platforms
and some of our other software products.  Our C-Link(R) software product,  which
runs on a personal computer was created to work in conjunction with the ID-Check
unit, allows a user to instantly view the encoded data for further verification,
analyze the data and generate various reports where permitted by law.

We also introduced two products, ID-Traveler(TM) and ID-Prove(TM), which provide
"in-person  proofing" to meet the  credentialing  requirements  of  Presidential
Directive  HSPD-12,  a policy for a Common  Identification  Standard for Federal
Employees and  Contractors  and help in Patriot Act  compliance.  All of our new
innovations  and product  roll-outs  are  designed for use with our data capture
devices which are compact,  and contain either one or both  two-dimensional  bar
code and magnetic  stripe  readers,  which  enables the new software  technology
applications to be used on a variety of  commercially  available data processing
devices, including PDAs, Tablets, Laptops, Desktops and Point-of-Sale Computers.

Liquidity

Since inception,  the Company has incurred  significant losses and negative cash
flow  from  operating  activities,  and  as of  December  31,  2005  we  had  an
accumulated  deficit of $39,107,882.  The Company  anticipates  that its current
available  cash on hand  and  marketable  securities  and  cash  resources  from
expected  revenues  from  the  sale of our  products  and the  licensing  of its
technology  will be  sufficient  to meet its  anticipated  working  capital  and
capital  expenditure  requirements  for at least the next twelve  months.  These
requirements  are  expected  to  include  the  purchase  of  inventory,  product
development,  sales and marketing  expenses,  working capital  requirements  and
other general corporate purposes. The Company may need to raise additional funds
to respond to  business  contingencies  which may  include the need to fund more
rapid expansion, fund additional marketing expenditures, develop new markets for
its  ID-Check  technology,  enhance  its  operating  infrastructure,  respond to
competitive  pressures,   or  acquire  complementary   businesses  or  necessary
technologies.

2. SIGNIFICANT ACCOUNTING POLICIES

Cash and Cash Equivalents

Cash and cash  equivalents  include  cash and  highly  liquid  investments  with
original  maturities of three months or less when purchased.  As of December 31,
2004 and 2005, cash  equivalents  included money market funds,  commercial paper
and  other  liquid  short-term  debt  instruments  (with  maturities  at date of
purchase of three months or less) of $340,622 and $467,991, respectively.


                                                                             F-7
<PAGE>


INTELLI-CHECK, INC.

NOTES TO FINANCIAL STATEMENTS


Marketable Securities

The Company has classified its marketable  securities as held-to-maturity as the
Company has the intent and ability to hold these  securities  to  maturity.  The
securities  are  carried at  amortized  cost using the  specific  identification
method.  Interest income is recorded using an effective  interest rate, with the
associated  premium  or  discount  amortized  to  interest  income.  All  of the
Company's  marketable  securities  have  maturities  of less  than 1 year with a
weighted  average  interest rate of 4.04%.  The carrying value of the marketable
securities as of December 31, 2004 and 2005 approximated the fair market value.

Doubtful Accounts and Allowances

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

Inventory

Inventory is stated at the lower of cost or market and cost is determined  using
the first-in,  first-out  method.  Inventory is primarily  comprised of finished
goods.

Inventory Valuation

The Company's current  inventory  consists  primarily of its ID-Check  terminals
that run our patented  software and input devices purchased in 2005. The Company
periodically  evaluates the current market value of its  inventory,  taking into
account any technological obsolescence that may occur due to changes in hardware
technology  and the  acceptance  of the  product  in the  marketplace.  Based on
ongoing  evaluation  of its  inventory,  prior to January 1, 2005,  The  Company
recorded  a  cumulative  inventory  write  down of  $1,347,332  of the  ID-Check
terminals  that  the  Company  originally  acquired  in 1999.  The  manufacturer
discontinued  the production of these  ID-Check  terminals in 2003. The ID-Check
terminal is fully capable of running our patented software as it utilizes a high
quality  imager/scanner  and  magnetic  stripe  reader  and is  currently  being
marketed for sale.  During 2005, we sold a portion of the ID-Check  terminals we
held in inventory in excess of their  remaining value and recorded a recovery of
inventory totaling $128,000, which was previously written off.

Long-Lived Assets and Impairment of Long-Lived Assets

The Company's  long-lived  assets include property and equipment,  patents,  and
other intangibles.

In accordance with the provision of SFAS No. 142, "Goodwill and Other Intangible
Assets",  with  indefinite  lives,  are no  longer  amortized  but are  reviewed
annually (or more  frequently if impairment  indicators  arise) for  impairment.
Separable  intangible  assets that are not deemed to have indefinite  lives will
continue to be amortized  over their  useful  lives (but with no maximum  life).
Pursuant to the adoption of SFAS No. 142, the Company has evaluated its goodwill
and  other   intangibles   to  identify   additional   separately   identifiable
intangibles;  no adjustment was warranted.  Intangible assets that will continue
to be classified as goodwill will no longer be amortized.  This provision had no
material impact on the Company's  financial  position and results of operations.
At December 31, 2003, the Company  performed an impairment  test of its goodwill
and  determined  that there was an  impairment of the recorded  goodwill,  which
resulted  from  the  Company's  decision  to  discontinue  the  selling  of  its
IDentiScan  products.  As a result,  the Company wrote off the original recorded
value of goodwill  totaling $181,447 as of December 31, 2003, which affected the
results of operations for the period then ended.

Under the provision of SFAS No. 144,  "Accounting for the Impairment or Disposal
of  Long-lived  Assets"  which  supersedes  SFAS No.  121,  "Accounting  for the
Impairment  or Disposal of  Long-lived  Assets to be Disposed  Of", SFAS No. 144
requires  that  identifiable  intangible  assets  that  are not  deemed  to have
indefinite  lives will be reviewed for impairment  whenever events or changes in
circumstances  indicate that the carrying amounts of the assets may be impaired.
Furthermore,  these assets are evaluated for continuing  value and proper useful
lives by comparison to undiscounted  expected future cash flow projections.  The
Company  has  determined  that as a result of  discontinuing  the selling of its
IDentiScan products,  certain of its intangible assets,  including patent costs,
with a remaining book value of $182,208 has been impaired and was written off as
of December 31, 2003,  which  affected the results of operations  for the period
then ended.


                                                                             F-8
<PAGE>


INTELLI-CHECK, INC.

NOTES TO FINANCIAL STATEMENTS

Property and Equipment

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

Intangible Assets

Patent costs,  primarily consisting of legal costs and allocated costs are being
amortized  over a period of 17 years using the  straight-line  method.  Acquired
Software was amortized over a period of 2 years using the straight-line  method.
Other  intangibles,  consisting of a covenant not to compete and copyrights were
amortized over a period of 2 and 3 years,  respectively  using the straight-line
method.  As discussed  above and in Note 9, certain of these  intangible  assets
were written off as of December 31, 2003.

Costs of Computer Software Developed or Obtained for Internal Use

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

Capitalized Software Development Costs

SFAS No. 86,  "Accounting for the Costs of Computer  Software to Be Sold, Leased
or Otherwise  Marketed,"  specifies that costs incurred internally in creating a
computer  software product shall be charged to expense when incurred as research
and development  until  technological  feasibility has been  established for the
product.  Software  production costs for computer software that is to be used as
an integral part of a product or process shall not be capitalized until both (a)
technological  feasibility  has been  established  for the  software and (b) all
research and development  activities for the other  components of the product or
process have been completed.  The Company has not capitalized any software costs
for the years ended December 31, 2003, 2004 and 2005.

Revenue Recognition

The  Company  sells its  products  directly  through its sales force and through
distributors.  Revenue  from  direct  sales of its  product is  recognized  when
shipped to the customer and title has passed.  The  Company's  products  require
continuing  service or post contract  customer  support and  performance  by the
Company;  accordingly,  a portion of the revenue  pertaining  to the service and
support is  deferred  based on its fair value and  recognized  ratably  over the
period in which the future service,  support and performance are provided, which
is  generally  one year.  Currently,  with  respect  to sales of  certain of the
Company's products,  the Company does not have enough experience to identify the
fair value of each  element,  the full amount of the  revenue and related  gross
margin is deferred and recognized  ratably over the one-year period in which the
future service, support and performance are provided.

In  addition,  the  Company  recognizes  sales from  licensing  of its  patented
software to  customers.  The Company's  licensed  software  requires  continuing
service or post  contract  customer  support  and  performance  by the  Company;
accordingly,  a portion of the revenue is  deferred  based on its fair value and
recognized  ratably  over the period in which the future  service,  support  and
performance are provided, which is generally one year.

During the second quarter of fiscal 2003, the Company began receiving  royalties
from  licensing its  technology,  which are recognized as revenues in the period
they are earned.


                                                                             F-9
<PAGE>

INTELLI-CHECK, INC.

NOTES TO FINANCIAL STATEMENTS

Under  the  provisions  of  EITF  00-21,  "Revenue  Arrangements  with  Multiple
Deliverables",  Revenue  arrangements  were  allocated to the separate  units of
accounting  based on their  relative  fair values and revenue is  recognized  in
accordance with its policy as stated above. The impact of adopting EITF 00-21 on
the financial statements was immaterial.

Research and Development Costs

Research and development costs are charged to expense as incurred.

Shipping Costs

The Company's  shipping and handling costs are included in cost of sales for all
periods presented.

Income Taxes

The Company accounts for income taxes under SFAS No. 109, "Accounting for Income
Taxes."  Deferred tax assets and  liabilities  are  recognized for the estimated
future tax  consequences  attributable  to  differences  between  the  financial
statement  carrying  amounts  of  existing  assets  and  liabilities  and  their
respective tax bases and net operating loss  carryforwards.  Deferred tax assets
and  liabilities are measured using expected tax rates in effect for the year in
which those temporary  differences are expected to be recovered or settled.  The
Company has recorded a full valuation  allowance for its net deferred tax assets
as of December 31, 2004 and 2005, due to the uncertainty of the realizability of
those assets.

Fair Value of Financial Instruments

The Company adheres to the provisions of SFAS No. 107,  "Disclosures  about Fair
Value of Financial  Instruments." This  pronouncement  requires that the Company
calculate the fair value of financial  instruments  and include this  additional
information  in the  notes  to  financial  statements  when  the  fair  value is
different  than the book value of those  financial  instruments.  The  Company's
financial  instruments  include  cash  and  cash  equivalents,   certificate  of
deposits,  marketable  securities,  accounts receivable and accounts payable. At
December  31,  2004 and 2005,  the  carrying  value of the  Company's  financial
instruments approximated fair value, due to their short-term nature.

Business Concentrations and Credit Risk

Financial  instruments,  which subject the Company to  concentrations  of credit
risk, consist primarily of cash, cash equivalents and marketable securities. The
Company  maintains  cash  between two  financial  institutions.  The  marketable
securities  consist of short term investment  grade corporate bonds. The Company
performs  periodic   evaluations  of  the  relative  credit  standing  of  these
institutions.

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

During  the year  ended  December  31,  2005,  the  Company  made sales to three
customers  that  accounted for  approximately  57.3% of total sales for the year
ended  December  31,  2005.  As a result,  the balance due from certain of these
customers  accounted for approximately 73% of accounts receivable as of December
31, 2005, which was all collected by March 2006.

As of December 31, 2005,  the Company had one supplier for the production of its
input  devices.  However,  in March 2006,  the Company  contracted  with another
supplier for a product that performs bar code reading.  The Company has modified
its  software  to  operate in  windows  based  systems  and can  integrate  with
different hardware platforms that are readily available in the marketplace.  The
Company  does  not  maintain  a  manufacturing  facility  of its  own and is not
dependent on maintaining its production  relationships due to the flexibility of
its software to run on multiple existing platforms.


                                                                            F-10
<PAGE>

INTELLI-CHECK, INC.

NOTES TO FINANCIAL STATEMENTS

Net Loss Attributable to Common Shareholders

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

Diluted EPS for the years  ended  December  31,  2003,  2004 and 2005,  does not
include the impact of stock options and warrants then outstanding, as the effect
of their inclusion would be antidilutive.

The following table  summarizes the equivalent  number of common shares assuming
the related  securities that were  outstanding as of December 31, 2003, 2004 and
2005 had been converted:

                                               2003        2004        2005
                                            ---------   ---------   ---------

   Stock options                            2,701,124   2,777,474   2,764,955
   Convertible redeemable preferred stock     454,545     454,545          --
   Warrants                                   233,636     323,636     938,636
                                            ---------   ---------   ---------
           Total                            3,389,305   3,555,655   3,703,591
                                            =========   =========   =========

Stock-Based Compensation

At December 31, 2005, the Company has stock based compensation  plans, which are
described  more fully in Note 8. As permitted  by the SFAS No. 123,  "Accounting
for Stock Based Compensation", the Company accounts for stock-based compensation
arrangements   with  employees  in  accordance  with  provisions  of  Accounting
Principles  Board  ("APB")  Opinion  No.  25  "Accounting  for  Stock  Issued to
Employees".  Compensation expense for stock options issued to employees is based
on the  difference  on the date of grant between the fair value of the Company's
stock and the exercise price of the option. No stock based employee compensation
cost is reflected in net loss,  as all options  granted under those plans had an
exercise price equal to the market value of the  underlying  common stock at the
date  of  grant.  The  Company  accounts  for  equity   instruments   issued  to
non-employees  in  accordance  with the  provisions of SFAS No. 123 and Emerging
Issues Task Force ("EITF") Issue No. 96-18,  "Accounting for Equity  Instruments
That Are Issued to Other Than  Employees for Acquiring,  or in Conjunction  with
Selling Goods or Services".  All transactions in which goods or services are the
consideration  received for the issuance of equity instruments are accounted for
based on the fair value of the  consideration  received or the fair value of the
equity instrument issued, whichever is more reliably measurable.

In   accordance    with   SFAS   No.   148    "Accounting    for   Stock   Based
Compensation-Transition  and  disclosure",  the following table  illustrates the
effect on net loss and loss per share if the  Company had applied the fair value
recognition provisions of SFAS No. 123 to employees stock based compensation:

<TABLE>
<CAPTION>
                                                                    Years Ended
                                                   December 31,      December 31,      December 31,
                                                      2003               2004              2005
                                                ---------------    ---------------    ---------------
<S>                                             <C>                <C>                <C>
Net loss attributable to common stockholders,
as reported                                     $    (6,832,934)   $    (8,127,269)   $    (3,436,503)

Add:
Total stock based employee compensation
expense determined under fair value based
method for all awards                                (2,970,686)        (2,107,593)        (2,878,820)
                                                ---------------    ---------------    ---------------
Net loss, pro forma                             $    (9,803,620)   $   (10,234,862)   $    (6,315,323)

Basic and diluted loss per share, as reported   $         (0.74)   $         (0.79)   $         (0.31)

Basic and diluted loss per share, pro forma     $         (1.06)   $         (1.00)   $         (0.56)
</TABLE>


                                                                            F-11
<PAGE>


INTELLI-CHECK, INC.

NOTES TO FINANCIAL STATEMENTS

Comprehensive Loss

The  Company's  comprehensive  net loss is  equal to its net loss for the  years
ended December 31, 2003, 2004 and 2005.

Segment Information

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

Use of Estimates

The  preparation  of the  Company's  financial  statements  in  conformity  with
accounting  principles  generally  accepted  in the  United  States  of  America
requires  management to make estimates and  assumptions  that affect the amounts
reported  in  the  Company's   financial   statements  and  accompanying  notes.
Significant  estimates  and  assumptions  that  affect  amounts  reported in the
financial   statements  include  inventory  reserves,   deferred  tax  valuation
allowances  and  doubtful   accounts  and   allowances.   Due  to  the  inherent
uncertainties  involved in making  estimates,  actual results reported in future
periods may be different from those estimates.

Recently Issued Accounting Pronouncements

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

SFAS 123R "Share  Based  Payments"  was issued in December  2004,  and  requires
companies to expense the value of employee options and similar awards.  In March
2005, the SEC staff issued Staff Accounting  Bulletin No. 107 (SAB 107) to defer
the effective  date of SFAS 123R until  January 1, 2006 and provide  guidance on
implementation  of SFAS 123R.  SFAS 123R  becomes  effective  for the Company on
January  1, 2006 and will  require  that  stock-based  compensation  charges  be
recorded  for the  unvested  portions of options and  restricted  stock  granted
through  December 31, 2005, as well as for all future grants,  based on the fair
value of the options or warrants or  restricted  stock as of their grant  dates.
Based on the current unvested options outstanding totaling 80,000 as of December
31,  2005,  the  Company's  pretax  expense for those  options is expected to be
approximately  $326,000. This amount may increase to the extent that options are
granted in 2006.

In November 2004, the FASB issued SFAS No. 151,  "Inventory  Costs, an Amendment
of ARB No. 43," Chapter 4 ("SFAS No. 151").  The amendments made by SFAS No. 151
clarify that abnormal amounts of idle facility expense, freight, handling costs,
and wasted materials  (spoilage) should be recognized as current-period  charges
and require the allocation of fixed  production  overheads to inventory based on
the normal  capacity  of the  production  facilities.  SFAS No. 151 will  become
effective beginning in fiscal 2006. The adoption of this Statement will not have
a significant impact on our financial condition or results of operations.

In December 2004, the FASB issued SFAS No. 153, "Exchange of Nonmonetary Assets"
an amendment of APB Opinion No. 29,  "Accounting for  Nonmonetary  Transactions"
("SFAS No. 153"). The amendments made by SFAS No. 153 are based on the principle
that exchanges on 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.  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 after
the  date of  issuance.  The  provisions  of  SFAS  No.  153  shall  be  applied
prospectively. The adoption of this Statement will not have a significant impact
on our financial condition or results of operations.

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". This
Statement  requires  retrospective   application  to  prior  periods'  financial
statements of changes in accounting  principle,  unless it is  impracticable  to
determine  either the  period-specific  effects or the cumulative  effect of the
change. This Statement does not change the guidance for reporting the correction
of an error in previously issued financial  statements or a change in accounting
estimate.  The  provisions of this  Statement  shall be effective for accounting
changes and correction of errors made in fiscal years  beginning  after December
15,  2005.  The Company is not able to assess at this time the future  impact of
this Statement on its financial position or results of operations.


                                                                            F-12
<PAGE>


INTELLI-CHECK, INC.

NOTES TO FINANCIAL STATEMENTS

Reclassifications

Certain  accounts in the 2004 financial  statements  have been  reclassified  to
conform with the 2005 presentation.

3. PROPERTY AND EQUIPMENT

Property and  equipment  are  comprised of the following as of December 31, 2004
and 2005:

                                                            2004         2005
                                                         ---------    ---------

Computer equipment                                       $ 515,982    $ 525,128
Furniture and fixtures                                     152,252      137,251
Leasehold improvements                                     143,253      143,253
Office equipment                                            43,338       46,287
                                                         ---------    ---------
                                                           854,825      851,919

Less - Accumulated depreciation and amortization          (721,920)    (759,673)
                                                         ---------    ---------
                                                         $ 132,905    $  92,246
                                                         =========    =========

Depreciation  expense  for the years  ended  December  31,  2003,  2004 and 2005
amounted to $118,057, $99,944 and $46,055, respectively.

4. INTANGIBLE ASSETS

The following  summarize the carrying  amounts of intangible  assets and related
amortization:

<TABLE>
<CAPTION>
                                            As of December 31, 2004               As of December 31, 2005
                                       --------------------------------    ---------------------------------
                                       Gross Carrying     Accumulated      Gross Carrying      Accumulated
                                            Amount        Amortization         Amount         Amortization
                                       ---------------   ---------------   ---------------   ---------------
<S>                                    <C>               <C>               <C>               <C>
Amortized intangible assets
     Patents                                   105,661            63,072           105,661            69,282
     Copyrights                                 17,500            17,500            17,500            17,500
                                       ---------------   ---------------   ---------------   ---------------

            Total                      $       123,161   $        80,572   $       123,161   $        86,782
                                       ===============   ===============   ===============   ===============
</TABLE>

Amortization  expense for years ended  December  31, 2003,  2004,  and 2005 were
$318,724, $11,799 and $6,210, respectively.

As of  December  31,  2005,  estimated  amortization  expense  for  each  of the
succeeding five years is $6,210.

5. ACCRUED EXPENSES

Accrued  expenses  are  comprised  of the  following as of December 31, 2004 and
2005:

                                          2004       2005
                                        --------   --------

                    Professional fees   $302,360   $159,635
                    Payroll              131,661    158,252
                    Rent                  20,523     17,102
                    Other                119,499     54,753
                                        --------   --------
                                        $574,043   $389,742
                                        ========   ========


                                                                            F-13
<PAGE>


INTELLI-CHECK, INC.

NOTES TO FINANCIAL STATEMENTS

6. INCOME TAXES

Deferred  income  taxes  reflect  the net tax effects of  temporary  differences
between the carrying  amounts of assets and liabilities for financial  reporting
purposes and the amounts used for income tax purposes. Significant components of
the  Company's  deferred  tax assets for  federal and state  income  taxes as of
December 31, 2004 and 2005 are as follows:

                                                 2004            2005
                                             ------------    ------------
    Deferred tax assets, net:
        Net operating loss carryforwards     $ 10,682,000    $ 12,467,000
        Depreciation                              (20,000)        (15,000)
        Reserves                                  779,000         307,000
        Less- Valuation allowance             (11,441,000)    (12,759,000)
                                             ------------    ------------
                  Deferred tax assets, net   $         --    $         --
                                             ============    ============

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

As of December 31, 2005 the Company had net operating loss carryforwards (NOL's)
for  federal  and New York State  income tax  purposes  of  approximately  $31.2
million.  There can be no assurance that the Company will realize the benefit of
the NOL's.  The federal NOL's are available to offset future  taxable income and
expire from 2018 through 2025 if not utilized. Under Section 382 of the Internal
Revenue Code, these NOL's may be limited due to ownership changes.

The effective tax rate for the years ended  December 31, 2003,  2004 and 2005 is
different from the tax benefit that would result from applying the statutory tax
rates primarily due to the recognition of valuation allowances.

7. SERIES A 8% CONVERTIBLE REDEEMABLE PREFERRED STOCK

On March 27, 2003, pursuant to a Securities  Purchase Agreement,  we sold 30,000
shares of our Series A 8% Convertible Redeemable Preferred Stock, par value $.01
per share,  for $3,000,000  before  expenses to Gryphon  Master Fund,  L.P. Each
share of  Preferred  Stock  entitled  the holder to receive  dividends of 8% per
annum and was convertible into 15.1515 shares of our common stock. Additionally,
each investor  received one (1) five year warrant to purchase 3.787875 shares of
common stock at an exercise  price of $6.78 with each share of  Preferred  Stock
purchased.  The total amount of shares that may be issued upon conversion of the
Preferred   Stock  and  exercise  of  the  warrants  are  454,545  and  113,636,
respectively.  Dividend  payments  of  $120,000  in cash were due  semi-annually
beginning  September  30, 2003 and,  accordingly,  the Company paid  $122,958 on
September  30, 2003. In connection  with this  financing,  we paid agent fees of
$150,000 and issued  warrants and options to purchase 8,854 shares of our common
stock at a price of  $6.78.  We also  paid  professional  fees of  approximately
$136,000.  We recorded  the relative  fair value of all the  warrants  issued in
connection  with  this  transaction  of  $497,700  against  the  amount  of  the
Convertible  Redeemable  Preferred  Stock  as  of  March  27,  2003,  which  was
calculated  using the  Black-Scholes  valuation  method,  as well as $540,000 of
beneficial  conversion  feature in  accordance  with EITF 00-27 and such amounts
were being  accreted  along with  issuance  cost of $285,900  over the five year
period until the mandatory  redemption  date of the Preferred  Stock,  the fifth
anniversary of closing. We recorded dividend and accretion of $381,991 for 2003,
and dividends of $240,000 for 2004. On February 25, 2005,  Gryphon  Master Fund,
L.P.  converted  the  Company's  Preferred  Stock  into  454,545  shares  of the
Company's  common  stock at a conversion  price of $6.60 per share.  The Company
retired the 30,000  shares of  preferred  stock,  issued  454,545  shares of its
common stock and recorded  $3,000,000 as an increase to stockholders  equity.  A
final  dividend  payment  of  $97,315  was paid for the period up to the date of
conversion.  Additionally, as a result of this conversion, the period we used in
estimating the accretion of all of the costs associated with the issuance of the
Preferred Stock changed from 5 years to 1.9166 years. Accordingly, the accretion
was increased in the fourth quarter of 2004 by $669,618 and amounted to $964,338
for the year ended  December 31, 2004.  The effect of this change in  accounting
estimate in 2004 was a reduction in equity.


                                                                            F-14
<PAGE>


INTELLI-CHECK, INC.

NOTES TO FINANCIAL STATEMENTS

8. STOCKHOLDERS' EQUITY

Series A Convertible Preferred Stock

In January 1997,  the Board of Directors  authorized  the creation of a class of
Series A  Convertible  Preferred  Stock  with a par value of $.01.  The Series A
Convertible Preferred Stock is convertible into an equal number of common shares
at the holder's option, subject to adjustment for anti-dilution.  The holders of
Series A Convertible Preferred Stock are entitled to receive dividends as and if
declared by the Board of Directors.  In the event of  liquidation or dissolution
of the Company, the holders of Series A Convertible Preferred Stock are entitled
to receive all accrued dividends,  if applicable,  plus the liquidation price of
$1.00 per share.  As of December  31, 2004 and 2005,  there were no  outstanding
shares of Series A Convertible Preferred Stock.

Secondary Offerings

On October 8, 2003, the Company successfully consummated its private offering of
1,100,000 shares of common stock at $8.00 per share and received proceeds net of
underwriting  discounts and  commissions  and before other offering  expenses of
approximately $7,906,000. Offering expenses totaled $324,574 and were fully paid
as of December 31, 2003. In connection  with this offering,  the Company granted
to its  underwriter an option to purchase up to an additional  165,000 shares of
its common stock at $8.00 per share less  underwriter  discounts and commissions
for the purpose of covering over-allotments, which expired on November 16, 2003.
In addition, the Company sold to the underwriter 110,000 warrants for a price of
$110 to  purchase  110,000  shares of its  common  stock at a price of $9.60 per
share and expire on October 8, 2008.

On August 9, 2005, the Company successfully  completed its secondary offering of
1,250,000 shares of common stock at $4.00 per share and received net proceeds of
approximately  $4,440,000.  In connection with the offering,  investors received
five year  warrants to purchase  500,000  shares of common  stock at an exercise
price of $5.40 per share.  The Company  purchased  110,000 of these  warrants in
December  2005  for  $25,000  and  retired  them,   leaving  390,000   currently
outstanding.  In addition,  the Company granted to its placement agent a warrant
to purchase  125,000  shares of our common  stock at a price of $ 5.40 per share
which expires on August 8, 2010.  The fair value of these  warrants  amounted to
approximately  $1,645,000 using the Black-Scholes  valuation  method,  which was
recorded in Equity. On October 7, 2005, the Registration  Statement on Form S-3,
which  included  the shares  issued in the  Company's  secondary  offering,  was
declared  effective by the Securities and Exchange  Commission.  During December
2005,  the  Company  purchased  and  retired  110,000 of the five year  warrants
originally issued in connection with the offering for $25,000.

Common Stock, Warrants and Rights

In  March  2001,   the  Company   declared  a  dividend   distribution   of  one
non-transferable  right to purchase one share of the Company's  common stock for
every 10 outstanding  shares of common stock  continuously  held from the record
date to the date of exercise,  as well as common stock  underlying  vested stock
options and warrants,  held of record on March 30, 2001, at an exercise price of
$8.50.  The rights  were due to expire on  October  4, 2002,  which was one year
after the effective date of the registration  statement related to the shares of
common stock  underlying the rights.  The Company  extended the expiration  date
until April 4, 2003,  further  extended the rights until December 31, 2003, June
30, 2004,  June 30, 2005 and have  additionally  extended the expiration date to
June 30, 2006. Under certain conditions, the Company has the right to redeem the
outstanding  rights for $.01 per right. Such conditions were not met as of March
24,  2006.  The  Company  reserved  970,076  shares of common  stock for  future
issuance under this rights offering.  The Company has recorded the fair value of
the rights of $1,082,000 as a dividend  during the quarter ended March 31, 2001,
which was calculated using the Black-Scholes valuation method and recorded as an
increase in additional  paid-in capital and a reduction in accumulated  deficit.
The Company also recorded the fair value of the additional  rights extensions of
$2,000,000  and  $525,000  during the years  ended  December  31, 2003 and 2004,
respectively,  using the Black-Scholes valuation method and recorded an increase
in additional  paid-in-capital  and a reduction in  accumulated  deficit.  As of
December 31, 2005,  292,001 of these rights had been  exercised  and the Company
received cumulatively $2,482,009 before expenses of $133,834.

                                                                            F-15
<PAGE>

INTELLI-CHECK, INC.

NOTES TO FINANCIAL STATEMENTS

In March 2001, the Board of Directors  authorized,  subject to certain  business
and market conditions,  the purchase of up to $1,000,000 of our common stock. As
of December 31, 2005, the Company  cumulatively  purchased  40,200 shares of the
Company's common stock for approximately $222,000 and subsequently retired those
shares.  The Company may purchase  additional  shares when  warranted by certain
conditions.

All warrants  have been issued with an exercise  price that is equal to or above
the fair market value of the Company's common stock on the date of grant.

Stock Options

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

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

At the Company's Annual Meeting held on July 11, 2001, the stockholders approved
the 2001 Stock  Option  Plan  covering  up to 500,000  of the  Company's  common
shares, pursuant to which the officers, directors, key employees and consultants
to the Company are eligible to receive  incentive stock options and nonqualified
stock options. The Compensation  Committee of the Board of Directors administers
the 2001 Stock Option Plan and  determines  the terms and  conditions of options
granted,  including the exercise price. The 2001 Stock Option Plan provides that
all stock options will expire  within ten years of the date of grant.  Incentive
stock  options  granted  under the 2001 Stock  Option Plan must be granted at an
exercise price that is not less than the fair market value per share at the date
of the  grant  and the  exercise  price  must not be less  than 110% of the fair
market  value per share at the date of the grant for  grants to  persons  owning
more than 15% of the voting  stock of the  Company.  The 2001 Stock  Option Plan
also entitles  non-employee  directors to receive grants on non-qualified  stock
options as approved by the Board of Directors.

At the Company's Annual Meeting held on July 10, 2003, the stockholders approved
the 2003 Stock  Option  Plan  covering  up to 500,000  of the  Company's  common
shares, pursuant to which the officers, directors, key employees and consultants
to the Company are eligible to receive  incentive stock options and nonqualified
stock options. The Compensation  Committee of the Board of Directors administers
the 2003 Stock Option Plan and  determines  the terms and  conditions of options
granted,  including the exercise price. The 2003 Stock Option Plan provides that
all stock options will expire  within ten years of the date of grant.  Incentive
stock  options  granted  under the 2003 Stock  Option Plan must be granted at an
exercise price that is not less than the fair market value per share at the date
of the  grant  and the  exercise  price  must not be less  than 110% of the fair
market  value per share at the date of the grant for  grants to  persons  owning
more than 15% of the voting  stock of the  Company.  The 2003 Stock  Option Plan
also entitles  non-employee  directors to receive grants on non-qualified  stock
options as approved by the Board of Directors.


                                                                            F-16
<PAGE>

INTELLI-CHECK, INC.

NOTES TO FINANCIAL STATEMENTS

At the Company's Annual Meeting held on July 8, 2004, the stockholders  approved
the 2004 Stock  Option  Plan  covering  up to 850,000  of the  Company's  common
shares, pursuant to which the officers, directors, key employees and consultants
to the Company are eligible to receive  incentive stock options and nonqualified
stock options. The Compensation  Committee of the Board of Directors administers
the 2004 Stock Option Plan and  determines  the terms and  conditions of options
granted,  including the exercise price. The 2004 Stock Option Plan provides that
all stock options will expire  within ten years of the date of grant.  Incentive
stock  options  granted  under the 2004 Stock  Option Plan must be granted at an
exercise price that is not less than the fair market value per share at the date
of the  grant  and the  exercise  price  must not be less  than 110% of the fair
market  value per share at the date of the grant for  grants to  persons  owning
more than 15% of the voting  stock of the  Company.  The 2004 Stock  Option Plan
also entitles  non-employee  directors to receive grants on non-qualified  stock
options as approved by the Board of Directors.

During 2003, the Company  granted  additional  stock options to purchase  69,425
shares of common stock at exercise  prices ranging from $6.78 to $6.97 per share
to  consultants  under  various  agreements.  During 2004,  the Company  granted
warrants  to purchase  100,000  shares of common  stock at an exercise  price of
$7.54 per share to  consultants  (see  footnote  10).  During 2005,  the Company
granted  warrants  and options to  purchase  150,000  shares of common  stock at
exercise  prices  ranging  from  $5.10 to $5.40 per share to  consultants  under
various  agreements.  The fair market value of each option was  estimated on the
date of grant using the Black-Scholes option pricing model. Accordingly, we have
recorded  $319,904,  $542,648  and $402,995 as deferred  compensation  for these
services as of December 31, 2003,  2004 and 2005,  respectively.  As a result of
some of the granted options having varying vesting periods, the Company revalued
certain  options and warrants either as of the vesting date or as of the balance
sheet date for those options  unvested  using the Black Scholes  option  pricing
model.  Accordingly,  the  Company  recorded  an  increase  in the fair value of
$66,781 for the year ended  December 31, 2003 and reduction of the fair value of
$430,739  and  $122,246  for  the  years  ended  December  31,  2004  and  2005,
respectively.  During December 31, 2003,  2004 and 2005, the Company  recognized
amortization  of deferred  compensation  of  $357,194,  $363,407  and  $143,758,
respectively.  In March,  2006,  our  consultant  returned and cancelled a stock
option  agreement which the Company issued in February 2002 that granted options
to purchase  50,000  shares of common stock at an exercise  price of  $12.10.The
remaining  unamortized  balance in  deferred  compensation  of  $82,812  will be
reduced and offset against  additional paid in capital and amortization  expense
of $52,075  recorded  through  December 31, 2005 will be recognized as income in
the first quarter of 2006.

Stock option  activity under the 1998,  1999,  2001,  2003 and 2004 Stock Option
Plans during the periods indicated below is as follows:

                                           Number Of       Weighted Average
                                            Options        Exercise Price
                                        ---------------    ----------------
     Outstanding at January 1, 2003           2,333,866    $           7.72

          Granted                               713,650                7.73
          Canceled                             (171,183)               8.86
          Exercised                            (175,209)               3.88
                                        ---------------    ----------------

     Outstanding at December 31, 2003         2,701,124                7.97

          Granted                               655,550                5.07
          Canceled                             (436,500)               7.93
          Exercised                            (142,700)               3.00
                                        ---------------    ----------------

     Outstanding at December 31, 2004         2,777,474                7.11

          Granted                               476,980                5.02
          Canceled                             (410,499)               7.78
          Exercised                             (79,000)               3.09
                                        ---------------    ----------------

     Outstanding at December 31, 2005         2,764,955    $           6.77
                                        ===============    ================

Included in the option schedule are 839,425 non-plan  options,  of which 776,925
are fully vested.


                                                                            F-17
<PAGE>


INTELLI-CHECK, INC.

NOTES TO FINANCIAL STATEMENTS


The  weighted-average  remaining life of the options outstanding at December 31,
2003, 2004 and 2005 is 2.89 years, 4.42 years and 3.94 years  respectively,  and
the  weighted-average  fair value of the options  granted  during the year ended
December 31, 2003, 2004 and 2005 is $5.58, $2.97 and $4.03 respectively.

As of December  31,  2003,  2004 and 2005,  the fair market value of each option
grant has been  estimated  on the date of grant using the  Black-Scholes  option
pricing  model based upon expected  option lives of 5, 5 and 5 years;  risk free
interest rates of 4.50%, 4.0% and 4.3%; expected volatility of 90%, 60% and 74 %
and a dividend yield of 0%, 0% and 0%, respectively.

As of December 31, 2005, the Company had 2,597,205  options  exercisable  with a
weighted  average  exercise price of $6.77. As of December 31, 2005, the Company
had 728,361 options  available for future grant under the 1998, 1999, 2001, 2003
and 2004 Stock Option Plans.

On November 12, 2003, a member of the Company's Board of Directors resigned. The
Company  agreed to extend the  expiration  date of his options to  November  11,
2004, which originally were due to expire on February 10, 2004. As a result, the
Company  recorded  the fair value of the  extension  of  $138,000  as a non cash
expense during the fourth quarter ended December 31, 2003,  which was calculated
using the Black-Scholes valuation method.

On July 8,  2004,  the  Company's  Board  of  Directors  agreed  to  extend  the
expiration date of the Chief Executive Officer's options to July 15, 2008, which
originally  were due to  expire  on July 15,  2004.  As a  result,  the  Company
recorded  the fair value of the  extension of  $1,347,000  as a non cash expense
during the second  quarter ended December 31, 2004,  which was calculated  using
the Black-Scholes valuation method.

During  January  2005,  the Company's  Board of Directors  approved the cashless
exercise of 25,000  options which were converted into 9,277 shares of its common
stock for the Company's  Chairman and CEO. As a result, the Company recorded the
fair value of the shares issued as a non-cash  expense totaling  $44,250,  which
was calculated using the Black-Scholes valuation method.

During 2005, the Company's  Board of Directors  extended the expiration  date of
270,500 stock options for three of the Company's directors who resigned from the
Board for an additional 9 months. As a result, we recorded the fair value of the
extension of $184,200 as a non cash expense  during the year ended  December 31,
2005,  which was calculated in accordance with Financial  Interpretation  No. 44
"Accounting for Certain Transactions involving stock compensation".

On September 9, 2005, the Board of Directors agreed to accelerate the vesting of
all employee,  officer and director unvested stock options outstanding under our
stock  option  plans with  exercise  prices that are "out of the money" prior to
December 31, 2005.  The total number of options that were earlier  vested amount
to 347,500 and had a range of  exercise  prices of $4.37 to $6.30 and a weighted
average  exercise  price of $5.03.  The high and low of the closing price of our
common  stock  between  September  9, 2005 and  December  31, 2005 was $4.37 and
$6.30.  The  purpose  of the  accelerated  vesting  was to  enable  us to  avoid
recognizing  compensation expense associated with these options upon adoption of
SFAS No. 123(R).  The fair value  associated with the  accelerated  options that
would have been reflected in our financial statements amounted to $926,189 using
the Black-Scholes  valuation method,  which is included in pro forma stock-based
employee compensation expense for 2005.

In the  opinion  of  management,  all stock  options  have been  issued  with an
exercise  price that is equal or above the fair  market  value of the  Company's
Common Stock on the date of grant.

9. DISPOSAL

As of December 31, 2003, the Company  decided to discontinue  the selling of its
IDentiScan products.  The Company has determined that there is no future benefit
from these intangibles related to the IDentiScan  acquisition and,  accordingly,
all of its intangible assets, except for $5,590 of copyrights,  with a remaining
book value of $363,655, were written off as of December 31, 2003, which affected
the results of operations for the period then ended.


                                                                            F-18
<PAGE>

INTELLI-CHECK, INC.

NOTES TO FINANCIAL STATEMENTS

10. COMMITMENTS AND CONTINGENCIES

Operating Leases

During July 2000, the Company entered into a 10-year lease agreement for its new
office.  The lease  provided for monthly  rental  payments of $17,458  beginning
December 15, 2000 with small annual  increases.  In connection  with this lease,
the Company provided an irrevocable unconditional letter of credit in the amount
of $250,000 as security,  which was  cancelled and replaced with a cash security
payment of $34,916 for the remaining lease term. Effective October 16, 2005, the
Company  amended its office lease that  provides for a reduction in office space
from approximately  9,700 square feet to approximately 7,100 square feet for the
remainder  of the lease term which  expires  December  31,  2010.  In  addition,
payments  under the  amended  lease were  reduced to $16,244  per month and such
reduction will be increased by approximately 4% per year.

In addition,  the Company has entered into various  leases for office  equipment
and office space expiring through  December 2010.  Future minimum lease payments
under these lease agreements are as follows:

          Year Ending December 31:
               2006                           $  202,304
               2007                              210,644
               2008                              219,320
               2009                              222,440
               2010                              230,376
                                              ----------
                                              $1,085,084

Rent expense for the years ended  December 31, 2003,  2004 and 2005  amounted to
$252,386, $243,577 and $243,731, respectively.

Capital Lease Obligations

The Company leased  computer and office  equipment  under several capital leases
that expired in 2004.  As of December 31, 2005,  the Company had no  outstanding
Capital Lease obligations.

Royalty and License Agreements

The  Company  entered  into an  agreement  with a former  officer of the Company
during 1996 to license certain software.  The agreement stipulated,  among other
provisions,  that the officer would receive  royalties  equal to a percentage of
the Company's  gross sales.  This  agreement was  terminated in May 1999 and was
superceded by a new  agreement  which calls for payment of royalties of .005% on
gross sales from  $2,000,000 to $52,000,000  and .0025% on gross sales in excess
of $52,000,000. As of December 31, 2005, total fees payable under this agreement
amounted to $267.

On February 19, 2003,  the Company  filed a summons and  complaint  upon CardCom
Technology,  Inc. alleging infringement on its patent. During September 2003, as
a result of a settlement  of a patent  infringement  suit,  the Company  granted
CardCom  Technology,  Inc. a three year  royalty  license to use  certain of the
Company's patents in connection with the manufacture,  use and sale of CardCom's
age verification products in the United States and Canada. It also provides that
CardCom will pay royalties of approximately  10% on its net sales. For the years
ended December 31, 2003, 2004 and 2005, the Company  received  $65,165,  $67,113
and $58,480,  respectively, in royalty fees pursuant to this agreement. On March
12,  2006,  the  royalty  license  expired  and  the  Company  is  currently  in
discussions with CardCom to renew the terms of the royalty license agreement.

Employment Agreements

On November 9, 2004, the Company entered into a new one-year employment contract
with its Chairman  and Chief  Executive  Officer,  Frank  Mandelbaum,  effective
January 1, 2005.  The agreement  provided for an annual base salary of $250,000.
In addition,  the Company granted to Mr. Mandelbaum an option to purchase 75,000
shares of common stock at an exercise price of $4.37 per share,  of which 25,000
options  became  exercisable  on January 1, 2005;  25,000  options  that  became
exercisable  on  January  1, 2006 and the  remaining  25,000  options  to become
exercisable on January 1, 2007 all became  exercisable during the 4th quarter of
2005 as described in footnote 8 above.


                                                                            F-19
<PAGE>

INTELLI-CHECK, INC.

NOTES TO FINANCIAL STATEMENTS

Effective  January 1, 2006, the Company  entered into a letter of  understanding
with its Chairman and Chief  Executive  Officer that provides for an annual base
salary of $256,804. In addition, on November 8, 2005, the Company granted to Mr.
Mandelbaum  an option to purchase  25,000  shares of common stock at an exercise
price of $3.22 per share.  The Company  also agreed in case it were to terminate
Mr.  Mandelbaum  for any reason  other than  cause,  the  Company  would pay Mr.
Mandelbaum  two (2) years of cash  base  salary in  twelve  (12)  equal  monthly
installments.

If  there  shall  occur a  change  of  control,  as  defined  in the  letter  of
understanding,  the employee may  terminate  his  employment  at any time and be
entitled  to  receive  a  payment  equal  to  2.99  times  his  average   annual
compensation,  including  bonuses,  during the three years preceding the date of
termination,  payable  in cash to the  extent  of three  months  salary  and the
balance in shares of the  Company's  common  stock based on a valuation of $2.00
per share.

On November 9, 2004, the Company  entered into a new  employment  agreement with
its Senior Executive Vice President and Chief Financial Officer,  Edwin Winiarz,
effective  January 1, 2005.  The  agreement,  which  expires  December 31, 2006,
provides for a fixed annual base salary of  $162,086.  In addition,  the Company
granted to Mr. Winiarz an option to purchase 50,000 shares of common stock at an
exercise price of $4.37 per share, of which 25,000 options became exercisable on
January  1,  2005  and the  remaining  25,000  options,  which  were  to  become
exercisable  on January 1, 2006,  became  exercisable  during the 4th quarter of
2005 as described in footnote 8 above.

Each of the employment agreements requires the executive to devote substantially
all his time and  efforts  to our  business  and  contains  non-competition  and
nondisclosure  covenants of the officer for the term of his employment and for a
period of two years thereafter.  Each employment  agreement provides that we may
terminate the agreement for cause.

Supplier Agreements

On January 2, 2004, the Company  entered into a 2 year product supply  agreement
with a  manufacturer  of input devices.  Under the terms of the  agreement,  the
Company  purchased  the minimum  required  number of units  during  2004.  These
devices,  which were private labeled, are programmed to work in conjunction with
the ID-Check technology.  On December 30, 2005, the Company entered into a new 2
year product supply agreement with the same  manufacturer and with similar terms
and  conditions  as the  prior  agreement,  but  without  any  minimum  purchase
requirement.

In March 2006, the Company  contracted with another  supplier for a product that
performs bar code reading and works in conjunction with the ID-Check technology.
This agreement expires December 31, 2006.

Investment Firm Relationships

On  January  21,  2004,  the  Company  entered  into a one year  agreement  with
Alexandros  Partners  LLC to act as  consultants  in  advising  the  Company  in
financial and investor relation matters.  The Company agreed to pay a consulting
fee of $50,000  payable  in 12 equal  monthly  installments.  In  addition,  the
Company  issued a warrant  granting the right to purchase  100,000 shares of the
Company's  common  stock at a purchase  price of $7.54 per share,  which  vested
ratably over the 12 month period.  A principal of Alexandros  Partners LLC was a
member of the  Company's  Board of  Directors.  Effective  January 1, 2005,  the
Company  renewed its agreement  with  Alexandros  Partners LLC for an additional
year and agreed to pay a consulting  fee of $50,000  payable in 12 equal monthly
installments.  This transaction was approved by all of the independent directors
of the Company's  Board of Directors.  The agreement  terminated on December 31,
2005.

On  December 7, 2004,  the  Company  entered  into a one year  agreement  with a
consulting  firm to help with its  investor  relations  activities.  The Company
agreed to pay a consulting fee of $100,000  payable in 12 monthly  installments.
In addition, the Company issued 11,500 restricted shares of its common stock. On
August 6, 2005,  the Company  terminated  the agreement and ceased payment under
the agreement.


                                                                            F-20
<PAGE>

INTELLI-CHECK, INC.

NOTES TO FINANCIAL STATEMENTS

On November 2, 2004,  the Company  entered into an exclusive  agreement  with an
investment  banking firm for the purpose of investigating  the  opportunities in
raising  additional  capital  for  the  Company.  On May 3,  2005,  the  Company
terminated the agreement  eliminating the provision of exclusivity and signed an
exclusive  agreement  with another  investment  banking firm as a lead placement
agent in connection with the private placement described in Note 8 above.

On September 21, 2005, the Company  entered into a two (2) year agreement with a
consulting firm to help with its public and investor relations  activities.  The
Company  agreed to pay $6,000 per month for the first 12 months of the agreement
and $9,000 per month for the  following  12 months.  In  addition,  the  Company
issued a warrant  granting  the right to purchase  100,000  shares of its common
stock at a purchase price of $4.62 per share,  which vests ratably over a twelve
month  period.  The fair value of this  warrant  amounted to $318,221  using the
Black-Scholes  valuation method and was recorded in Deferred Compensation during
the third quarter of 2005. The contract is cancelable after the first year under
certain terms and conditions.

Legal Proceedings

On  April  9,  2003,  the  Company  received   notification  from  the  American
Arbitration  Association  that it had awarded Early Bird Capital $921,730 on the
settlement  of their  demand.  The  Company  had filed  with the New York  State
Supreme Court an application for setting aside the confirmation of the award. On
October 14, 2003,  the court  confirmed  the award with interest at a rate of 9%
per annum beginning April 9, 2003. The Company  recorded a charge of $921,730 in
its  Statements of Operations  for the three month period ending March 31, 2003.
The  Company  secured a one year  letter of  credit  for the full  amount of the
charge along with interest in the form of a certificate of deposit.  On March 5,
2004, the Company paid $950,000, which included interest expense recorded in the
year ended  December 31, 2003, to Early Bird Capital as full  settlement in this
matter.

On August 1, 2003, the Company filed a summons and complaint against Tricom Card
Technologies,  Inc. alleging  infringement on its patent and seeking  injunctive
and monetary  relief.  On October 23, 2003, the Company amended its complaint to
include infringement on an additional patent. On May 18, 2004, the Company filed
a Second  Amended  Complaint  alleging  infringement  and inducement to infringe
against certain  principals of Tricom in their personal  capacities,  as well as
alleging  in the  alternative  false  advertising  claims  under the  Lanham Act
against all the defendants.  The principals  moved to dismiss the claims against
them, and Tricom moved to dismiss the false  advertising  claims,  which motions
have  been  administratively  terminated  by  the  Court.  On  August  1,  2005,
defendants  filed an Answer  and  Affirmative  Defenses  to the  Second  Amended
Complaint and Tricom filed a declaratory counterclaim.  On November 2, 2005, the
Court  allowed  Tricom  to  plead  two  additional   defenses  and   declaratory
counterclaims  in the  case,  and on  January  3,  2006,  the  parties  filed  a
Stipulation of Dismissal of the Estoppel and Unenforceability  Counterclaims and
Affirmative  Defenses.  On February 28, 2006,  the parties filed a  Supplemental
Proposed Joint Pretrial  Order,  and on March 1, 2006, the Court  certified that
fact discovery in this action was complete.

We are not  aware of any  infringement  by our  products  or  technology  on the
proprietary rights of others.

Other than as set forth  above,  we are not  currently  involved in any legal or
regulatory proceeding, or arbitration,  the outcome of which is expected to have
a material adverse effect on our business.


                                                                            F-21
<PAGE>

INTELLI-CHECK, INC.

NOTES TO FINANCIAL STATEMENTS

11. QUARTERLY FINANCIAL DATA (UNAUDITED)

The  following   table  sets  forth   unaudited   financial  data  for  each  of
Intelli-Check's last eight fiscal quarters.

<TABLE>
<CAPTION>
                                                      Year Ended December 31, 2004
                                        -----------------------------------------------------------
                                          First        Second            Third            Fourth
                                         Quarter       Quarter          Quarter           Quarter
                                        ----------    ----------       ----------        ----------
                                                        (Dollars in thousands)
<S>                                     <C>           <C>              <C>               <C>
Income Statement Data:
   Revenues                             $      298    $      260       $      233        $      328

   Gross profit (loss)                         195           144              (57)(1)            86(2)
   Loss from operations                     (1,106)       (2,663)(3)       (1,694)           (1,554)
   Net loss                                 (1,075)       (2,642)          (1,669)           (1,537)

     stockholders                           (1,201)       (2,768)          (1,796)           (2,362)(4)
   Net loss per share attributable to
     Common stockholders:
       Basic and diluted                     (0.12)        (0.27)           (0.17)            (0.23)

<CAPTION>
                                                    Year Ended December 31, 2005
                                         ----------------------------------------------------
                                          First          Second        Third         Fourth
                                         Quarter         Quarter      Quarter       Quarter
                                         ----------    ----------    ----------    ----------
                                                       (Dollars in thousands)
<S>                                      <C>           <C>           <C>           <C>
Income Statement Data:
   Revenues                              $      297    $      997    $      430    $      660

   Gross profit (loss)                          194           881           253           311
   Loss from operations                      (1,586)         (202)         (812)         (785)
   Net loss                                  (1,570)         (182)         (765)         (722)

     stockholders                            (1,767)         (182)         (765)         (722)
   Net loss per share attributable to
     Common stockholders:
       Basic and diluted                      (0.17)        (0.02)        (0.07)        (0.06)(5)
</TABLE>


    (1)  During  the  third  quarter,  an  inventory  reserve  of  $200,000  was
         recorded.  (2) During  the  fourth  quarter,  an  inventory  reserve of
         $157,000  was  recorded.  (3)  During the  second  quarter,  a non cash
         expense of $1,347,000 was recorded for extension of options
    (4)  Effective  in  the  fourth  quarter,  due  to  the  conversion  of  the
         Convertible  Redeemable  Preferred  Stock on  February  25,  2005,  the
         amortization of the accretion costs was increased by $669,618.
    (5)  The sum of the net loss per  share for each of the  quarters  of fiscal
         2005 exceeds by $0.01 the basic loss per share for fiscal  2005in total
         due to the impact of stock issuances on the weighted  average number of
         shares outstanding.

         We have not  experienced  seasonality  in our sales volume or operating
         expenses.

Schedule II - Valuation and Qualifying Accounts

Year Ended December 31, 2005, 2004 and 2003

<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------------
                                                  Balance at                         Net Deductions       Balance at
Year ended December 31, 2005                  Beginning of Period     Additions        and Other         End of Period
-------------------------------------------------------------------------------------------------------------------------
<S>                                         <C>                      <C>                   <C>         <C>
Doubtful accounts and allowances            $              20,000            8,467          --         $           28,467
Deferred tax assets valuation allowance     $          11,441,000    $   1,318,000          --         $       12,759,000
-------------------------------------------------------------------------------------------------------------------------

-------------------------------------------------------------------------------------------------------------------------
                                                  Balance at                         Net Deductions       Balance at
Year ended December 31, 2004                  Beginning of Period     Additions        and Other         End of Period
-------------------------------------------------------------------------------------------------------------------------
Doubtful accounts and allowances                               --    $      20,000          --         $           20,000
Deferred tax assets valuation allowance     $           9,520,550    $   1,920,450          --         $       11,441,000
-------------------------------------------------------------------------------------------------------------------------

-------------------------------------------------------------------------------------------------------------------------
                                                  Balance at                         Net Deductions       Balance at
Year ended December 31, 2003                  Beginning of Period     Additions        and Other         End of Period
-------------------------------------------------------------------------------------------------------------------------
Doubtful accounts and allowances                               --               --          --                         --
Deferred tax assets valuation allowance     $           6,722,540    $   2,798,010          --         $        9,520,550
-------------------------------------------------------------------------------------------------------------------------
</TABLE>


                                                                            F-22
<PAGE>


                                  EXHIBIT INDEX

  Exhibit No.     Description
  -----------     -----------
  1               Form of Underwriting Agreement (1)
  3.1             Certificate of Incorporation of the Company (1)
  3.2             By-laws of the Company (1)
  3.3             Certificate of Designation of Preferred Stock of
                  Intelli-Check, Inc. (7)
  4.1             Specimen Stock Certificate (2)
  4.2             Form of Underwriters' Warrant Agreement (1)
  4.3             Warrant to Gryphon Master Fund LLP (7)
  4.4             Form of Underwriters Warrant Agreement including form of
                  Warrant Certificate(8)
  4.5             Warrant to JMP Securities, LLC
  10.1            1998 Stock Option Plan (1) *
  10.5            Agreement of Lease between the Company and Industrial and
                  Research Associates, dated as of October 15, 2000 (5)
  10.6            1999 Stock Option Plan (1) *
  10.10           Agreement between the Company and Kevin Messina, individually
                  and d/b/a K.M. Software Development, dated as of May 3, 1999
                  (1) *
  10.11           Memorandum of Understanding between AAMVAnet, Inc. and Intelli
                  -Check, Inc. effective November 15, 2000 (5)
  10.12           2001 Stock Option Plan (4)
  10.15           Memorandum of Understanding between AAMVAnet, Inc. and
                  Intelli-Check, Inc. effective January 29, 2002 (5)
  10.16           Securities Purchase Agreement between Intelli-Check, Inc. and
                  Gryphon Master Fund dated March 27, 2003. (7)
  10.17           Registration Rights Agreement between Intelli-Check, Inc. and
                  Gryphon Master Fund dated March 27, 2003. (7)
  10.18           Employment Agreement between Frank Mandelbaum and the Company,
                  dated as of December 15, 2004* (6)
  10.19           Employment Agreement between Edwin Winiarz and the Company,
                  dated as of December 15, 2004* (6)
  10.20           Understanding of Employment between Frank Mandelbaum and the
                  Company, dated as of January 1, 2006*
  14.1            Code of Business Conduct and Ethics (7)
  21              List of Subsidiaries (1)
  23.1            Consent of Amper, Politziner and Mattia, P.C.
  23.2            Consent of Grant Thornton LLP
  31.1            Certification of Chief Executive Officer pursuant to Section
                  302 of The Sarbanes-Oxley Act of 2002
  31.2            Certification of Chief Financial Officer pursuant to Section
                  302 of The Sarbanes-Oxley Act of 2002
  32              Certification of Chief Executive Officer and Chief Financial
                  pursuant to Section 906 of The Sarbanes-Oxley Act of 2002

---------------------------------
   *Denotes a management contract or compensatory plan, contract or arrangement.
(1)   Incorporated by reference to Registration Statement on Form SB-2 (File No.
      333-87797) filed September 24, 1999.
(2)   Incorporated by reference to Amendment No. 1 to the Registration Statement
      filed November 1, 1999.
(3)   Incorporated by reference to Amendment No. 2 to the Registration Statement
      filed November 15, 1999.
(4)   Incorporated by reference to Registrant's Proxy Statement on Schedule 14A
      filed May 31, 2001.
(5)   Incorporated by reference to Registrant's Annual Report on Form 10-K filed
      March 29, 2001.
(6)   Incorporated by reference from the Registrant's Current Report on Form 8-K
      filed on December 16, 2004.
(7)   Incorporated by reference to Registrant's Annual Report of Form 10-K filed
      March 31, 2003.
(8)   Incorporated by reference to Registration Statement on Form S-2 (File No.
      333-108043) filed September 30, 2003.