UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-Q

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

                  For the quarterly period ended June 30, 2006
                                       or

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

                  For the transition period from      to
                                                 ----    -----

                           Commission File No. 0-21858

                           INTERLINK ELECTRONICS, INC.
             (Exact name of registrant as specified in its charter)

            Delaware                                   77-0056625
(State or other jurisdiction of          (I.R.S. Employer Identification Number)
 incorporation or organization)

              546 Flynn Road                             93012
          Camarillo, California                        (Zip Code)
 (Address of principal executive offices)

                                 (805) 484-8855
              (Registrant's telephone number, including area code)

                                 Not applicable.
               (Former name, former address and former fiscal year
                          if changed since last report)

         Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the  Securities  Exchange  Act of
1934  during  the  preceding  12 months  (or for such  shorter  period  that the
registrant was required to file such reports);  and (2) has been subject to such
filing requirements for the past 90 days.

         Yes |_|    No |X|

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

Large accelerated filer |_|  Accelerated filer |X|  Non-accelerated filer |_|

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

         Yes |_|    No |X|

Shares of Common Stock Outstanding, at November 2, 2006: 13,755,561


<PAGE>


                           INTERLINK ELECTRONICS, INC.
                                TABLE OF CONTENTS


 PART I.   FINANCIAL INFORMATION

           ITEM 1.    Financial Statements (Unaudited)

                      Condensed Consolidated Balance Sheets--June 30, 2006     3
                         and December 31, 2005

                      Condensed Consolidated Statements of Operations--
                         Three Months and Six Months Ended June 30, 2006       4
                         and June 30, 2005

                      Condensed Consolidated Statements of Cash Flows--
                         Six Months Ended June 30, 2006 and June 30, 2005      5

                      Notes to Condensed Consolidated Financial
                         Statements--June 30, 2006                             6

           ITEM 2.    Management's Discussion and Analysis of Financial
                         Condition and Results of Operations                  16

           ITEM 3.    Quantitative and Qualitative Disclosures about
                         Market Risk                                          27

           ITEM 4.    Controls and Procedures                                 27

PART II.   OTHER INFORMATION

           ITEM 1.    Legal Proceedings                                       29

           ITEM 1A.   Risk Factors                                            30

           ITEM 6.    Exhibits                                                37

SIGNATURES                                                                    38


                                       2
<PAGE>


PART I - FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

<TABLE>
INTERLINK ELECTRONICS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(IN THOUSANDS, EXCEPT PAR VALUE)

<CAPTION>
                                                                  June 30,   December 31,
                                                                    2006        2005
                                                                  --------    --------
<S>                                                               <C>         <C>
ASSETS
Current assets:
   Cash and cash equivalents ..................................   $  3,102    $  3,938
   Short-term investments, available for sale .................      5,200      10,000
   Accounts receivable, less allowance for doubtful accounts
     and product returns of $447 and $423 at June 30, 2006 and
     December 31, 2005, respectively ..........................      6,775       9,184
   Inventories, net of reserves of $2,332 and $1,739 at June
     30, 2006 and December 31, 2005, respectively .............     10,187       8,119
   Prepaid expenses and other current assets ..................        474         456
                                                                  --------    --------

     Total current assets .....................................     25,738      31,697

Property and equipment, net ...................................      1,211       1,099
Patents and trademarks, less accumulated amortization of $1,246
   and $1,201 at June 30, 2006 and December 31, 2005,
   respectively ...............................................        290         308
Other assets ..................................................         87          67
                                                                  --------    --------

Total assets ..................................................   $ 27,326    $ 33,171
                                                                  ========    ========

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
   Current maturities of long-term debt .......................   $    165    $    154
   Accounts payable ...........................................      4,070       5,731
   Accrued payroll and related expenses .......................      1,898       1,931
   Deferred revenue ...........................................        655         863
   Other accrued expenses .....................................        276          66
                                                                  --------    --------
     Total current liabilities ................................      7,064       8,745
                                                                  --------    --------

Long-term debt, net of current portion ........................         81         154
Commitments and contingencies
Stockholders' equity:
   Preferred stock, $5.00 par value (100 shares authorized,
     none issued and outstanding) .............................       --          --
   Common stock, $0.00001 par value (50,000 shares authorized,
     13,774 and 13,754 shares issued and outstanding at June
     30, 2006 and December 31, 2005, respectively) ............     52,934      50,740
   Due from stockholders ......................................        (80)       (157)
   Accumulated other comprehensive loss .......................       (628)       (490)
   Accumulated deficit ........................................    (32,045)    (25,821)
                                                                  --------    --------

     Total stockholders' equity ...............................     20,181      24,272
                                                                  --------    --------

Total liabilities and stockholders' equity ....................   $ 27,326    $ 33,171
                                                                  ========    ========
</TABLE>

The  accompanying  notes are an integral  part of these  consolidated  financial
statements.


                                       3
<PAGE>

<TABLE>
INTERLINK ELECTRONICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)

<CAPTION>
                                          Three Month Period       Six Month Period
                                            Ended June 30,          Ended June 30,
                                         --------------------    --------------------
                                           2006       2005(1)      2006       2005(1)
                                         --------    --------    --------    --------
<S>                                      <C>         <C>         <C>         <C>
Revenues .............................   $  8,517    $ 10,263    $ 17,048    $ 19,532
Cost of revenues .....................      6,553       8,444      11,402      14,457
                                         --------    --------    --------    --------
Gross profit .........................      1,964       1,819       5,646       5,075

Operating expenses:
   Product development and research ..      1,424       1,180       2,839       2,208
   Selling, general and administrative      4,247       2,688       9,147       5,377
                                         --------    --------    --------    --------
     Total operating expenses ........      5,671       3,868      11,986       7,585
                                         --------    --------    --------    --------

Operating loss .......................     (3,707)     (2,049)     (6,340)     (2,510)
                                         --------    --------    --------    --------

Other income (expense):
   Interest income, net ..............        107         123         234         204
   Other (expense) ...................        (23)        (35)        (39)        (53)
                                         --------    --------    --------    --------
     Total other income ..............         84          88         195         151
                                         --------    --------    --------    --------


Loss before income taxes .............       (623)     (1,961)     (6,145)     (2,359)


Provision for taxes ..................          8        --            79        --
                                         --------    --------    --------    --------

Net loss .............................   $ (3,631)   $ (1,961)   $ (6,224)   $ (2,359)
                                         ========    ========    ========    ========

Loss per share - basic ...............   $  (0.26)   $  (0.14)   $  (0.45)   $  (0.17)
                                         ========    ========    ========    ========
Loss per share - diluted .............   $  (0.26)   $  (0.14)   $  (0.45)   $  (0.17)
                                         ========    ========    ========    ========

Weighted average shares - basic ......     13,765      13,705      13,760      13,699
                                         ========    ========    ========    ========
Weighted average shares - diluted ....     13,765      13,705      13,760      13,699
                                         ========    ========    ========    ========
</TABLE>

The  accompanying  notes are an integral  part of these  consolidated  financial
statements.


--------
(1) As restated. See Note 1 to the consolidated financial statements

                                       4
<PAGE>


<TABLE>
INTERLINK ELECTRONICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)

<CAPTION>
                                                                       Six Month Period
                                                                        Ended June 30,
                                                                     ------------------
                                                                       2006      2005(1)
                                                                     -------    -------
<S>                                                                  <C>        <C>
Cash flows from operating activities:
   Net loss ......................................................   $(6,224)   $(2,359)
   Adjustments to reconcile net loss to net cash used in operating
     activities:
     Provision for allowance for doubtful accounts receivable and
       product returns ...........................................        24          8
     Increase (decrease) in reserves for excess inventories ......       593        (13)
     Stock-based compensation ....................................     2,144        106
     Stockholder loan reduction ..................................        35       --
     Depreciation and amortization ...............................       321        260
     Changes in operating assets and liabilities:
       Accounts receivable .......................................     2,385       (795)
       Prepaid expenses and other current assets .................       (18)       (92)
       Inventories ...............................................    (2,661)       342
       Other assets ..............................................       (20)         8
       Accounts payable ..........................................    (1,661)    (1,269)
       Deferred revenue ..........................................      (208)       653
       Accrued payroll and other accrued expenses ................       177        186
                                                                     -------    -------
         Net cash used in operating activities ...................    (5,113)    (2,965)
                                                                     -------    -------

Cash flows from investing activities:
   Sales of marketable securities ................................     4,800      3,000
   Purchases of property and equipment ...........................      (389)       (58)
   Costs of patents and trademarks ...............................       (26)       (74)
                                                                     -------    -------
         Net cash provided by investing activities ...............     4,385      2,868
                                                                     -------    -------

Cash flows from financing activities:
   Principal payments on debt ....................................       (62)      (341)
   Proceeds from exercise of employee/director stock options .....        50        120
   Proceeds from payment of shareholder notes ....................        42       --
                                                                     -------    -------
         Net cash provided by (used in) financing activities .....        30       (221)
                                                                     -------    -------

Effect of exchange rate changes on cash and cash equivalents .....      (138)       (70)
                                                                     -------    -------

Decrease in cash and cash equivalents ............................      (836)      (388)

Cash and cash equivalents:
       Beginning of period .......................................     3,938      6,067
                                                                     -------    -------
       End of period .............................................   $ 3,102    $ 5,679
                                                                     =======    =======

Supplemental disclosures of cash flow information:
       Interest paid .............................................   $    12    $     9
                                                                     =======    =======
       Income taxes paid .........................................   $    79    $     1
                                                                     =======    =======
</TABLE>

The  accompanying  notes are an integral  part of these  consolidated  financial
statements.


--------
(1) As restated. See Note 1 to the consolidated financial statements

                                       5
<PAGE>


INTERLINK ELECTRONICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THREE AND SIX MONTHS ENDED JUNE 30, 2005 AND 2006 AND AS OF JUNE 30, 2006
AND DECEMBER 31, 2005 (UNAUDITED)

1.       BASIS OF PRESENTATION OF INTERIM FINANCIAL DATA

         The financial  information  as of June 30, 2006,  and for the three and
six month  periods  ended June 30, 2006 and 2005,  included in this  report,  is
unaudited. Such information,  however, reflects all adjustments (consisting only
of normal  recurring  adjustments)  which are,  in the  opinion  of  management,
necessary for a fair presentation of results for the interim periods.

         On November 2, 2005, the Company  announced that it intended to restate
its  financial  results for the years ended  December  31, 2003 and December 31,
2004 and the first two  quarters  of 2005 to reflect a matter  that the  Company
identified in a reconciliation  of accounts with a key vendor in China, a second
matter  related to  double-counting  of  inventory,  a third matter  relating to
unrecorded  licensing  costs and a fourth  matter  relating  to a balance  sheet
reclassification for certain cash prepayments. The first matter relates to a net
write-off of $1.1 million of certain  receivables  primarily  originating in the
fourth quarter of 2003,  with $167,000 of that amount  originating in the fourth
quarter  of 2002,  due from a key  vendor  in China  and the  recording  of $1.0
million in payables due to that same vendor that were not  properly  recorded in
the Company's  accounting  system for the third and fourth  quarters of 2004 and
the first and second  quarters  of 2005 in the  amounts of  $249,000,  $224,000,
$205,000  and  $331,000,   respectively.   The  second  matter  relates  to  the
understatement  of cost of sales in the second  quarter of 2005 of $372,000 as a
result of certain inventory  components being double-counted and thus overstated
in inventory as of June 30, 2005. The third matter relates to an  understatement
of cost of sales  in the  first  and  second  quarters  of 2005 of  $51,000  and
$565,000,  respectively,  as a result of certain licensing charges that were not
properly recorded in cost of sales and inventory. The fourth matter relates to a
balance  sheet  reclassification  of $1.3  million  in cash  payments  made by a
customer  during the second and fourth quarters of 2004 as well as the first and
second  quarters  of 2005 in  advance  of future  shipments  of  product.  These
payments  were  incorrectly  applied  against  accounts  receivable  rather than
recorded  as  deferred   revenue.   The  cash  prepayments  have  been  properly
reclassified to deferred revenue.

         On March 30, 2006,  the Company  announced  that it had  discovered two
additional  discrepancies  in its  historical  financial  statements.  The first
matter  relates to  accounting  for stock  options of  terminated  employees and
resulted in an unrecorded, non-cash expense of $2.4 million in 2001, $220,000 in
2004 and $108,000 in 2005,  $106,000 of which was in the first half of 2005. The
second matter  relates to overstated  valuation of certain  inventory in transit
between the parent company and its Hong Kong subsidiary as of December 31, 2004.
This matter resulted in the  understatement  of cost of sales of $837,000 in the
fourth  quarter of 2004 and an  overstatement  of cost of sales of  $748,000  in
2005,  $687,000  of which was in the first half of 2005,  for a net  increase in
cost of sales of $89,000.

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

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

         Based on the findings of the independent and company investigations, as
well as senior  management's  evaluation of the  effectiveness of the design and
operation of the company's  controls and  procedures,  the Committee  determined
that inadequate  internal controls  contributed to the restatement  issues.  The
primary control deficiencies are identified on pages 23 to 24 of this Form 10-Q.

         The information  included herein  reflects the  restatements  discussed
above  and  should  be read  in  conjunction  with  the  consolidated  financial
statements and the related notes, as restated,  which are included in our Annual
Report on Form 10-K for the year ended December 31, 2005.


                                       6
<PAGE>


         The results of  operations  for the interim  periods  presented are not
necessarily indicative of the results to be expected for the full year.

         The accompanying  consolidated  financial statements have been prepared
assuming that the Company will continue as a going concern,  which  contemplates
the  realization  of assets and the  satisfaction  of  liabilities in the normal
course of business.  As of June 30, 2006, the Company had cash, cash equivalents
and short term investments of $8.3 million. Based on the Company's business plan
and related estimates of cash  requirements,  that amount may be insufficient to
fund the Company's  operations  for the next 12 months.  The Company  expects to
require  additional  cash in the fourth  quarter  of 2006 to pursue its  planned
operations.  If the Company were to be unable to raise additional capital in the
form of  commercial or  securitized  debt,  sales of equity  securities or other
alternatives,  it would be required to curtail  its  operations.  As of June 30,
2006,  the Company's  total  consolidated  indebtedness  for money  borrowed was
$246,000.  The  Company is in  discussions  with  respect  to various  financing
alternatives. However, there is no assurance that the Company will be successful
in obtaining the required capital.  Any financing  arrangements that the Company
may  enter  into  may   increase   future  costs  or  be  dilutive  to  existing
stockholders.  The Company's  independent  registered public accounting firm has
informed  the  Company  that  it may  include  in its  report  on the  Company's
financial  statements  for the year  ending  December  31,  2006 an  explanatory
paragraph  expressing  substantial doubt about the Company's ability to continue
as a going  concern  if the  Company  fails to  successfully  fund  its  current
operations.

2.       SIGNIFICANT ACCOUNTING POLICIES

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

         ACCOUNTS RECEIVABLE AND ALLOWANCE FOR DOUBTFUL ACCOUNTS.  The Company's
accounts  receivable are  unsecured,  and are at risk to the extent such amounts
become  uncollectible.  The  Company  continually  monitors  individual  account
receivable  balances,  and provides for an allowance of doubtful accounts at the
time collection may become  questionable based on payment  performance or age of
the receivable and other factors related to the customer's ability to pay.

         RESERVE FOR ESTIMATED  PRODUCT  RETURNS.  While not an explicit part of
the Company's  terms and conditions of product sales except for some  customers,
it does, on a discretionary  basis, grant product exchanges for its distribution
and reseller customers in its Business  Communications - branded products market
for similar  products  of equal  value if these  exchanges  meet  certain  other
criteria.  The Company  estimates  future product returns based on recent return
history,  inventory status and product  "sell-through"  statistics received from
its major  distributors,  discussions  regarding product sales activity with its
major reseller  customers,  and current industry product and technology  trends.
Management  judgment is required in evaluating the relative  significance of the
aforementioned  data  and in the  determination  of the  estimated  value of the
returns reserve.  If actual returns are greater than management's  estimate then
revenues in the subsequent period will be adversely affected.

         INVENTORY  RESERVE.  At each balance sheet date, the Company  evaluates
its ending  inventories for excess quantities and obsolescence.  This evaluation
includes analyses of forecast sales levels by product and historical demand. The
Company writes off inventories that are considered obsolete. Remaining inventory
balances are adjusted to  approximate  the lower of our cost or market value and
result in a new cost basis in such  inventory  until sold.  If future  demand or
market  conditions  are less favorable than  projections,  additional  inventory


                                       7
<PAGE>


write-downs  may be  required,  and would be  reflected  in cost of sales in the
period the revision is made. Based on lowered  expectations for future demand in
the OEM Remotes segment as well as limitations on the use of certain  restricted
raw  materials  prompted  by early  adoption  of the  Restriction  of  Hazardous
Substances  Act of 2002 by many of our  customers,  we increased our reserve for
excess and obsolete inventory by approximately $1.9 million in the third quarter
of 2005.  The reserve is discussed in detail in the  BUSINESS  SEGMENT  OVERVIEW
under OEM Remotes in our Annual Report on Form 10-K for the year ended  December
31, 2005.

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

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

         Based on historical and prospective evidence, the Company has concluded
that it did not have sufficient  evidence to be able to recognize any of its net
tax assets,  primarily its net  operating  loss (NOL)  carryforward  benefits as
assets and thus it has recorded a 100% valuation allowance against the Company's
net deferred tax asset balance. If the Company achieves profitable operations in
the future,  it will reevaluate its deferred tax asset balance and may reduce or
eliminate the valuation allowance.

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

         FOREIGN EXCHANGE  EXPOSURE.  The Company has established  relationships
with most of the major OEMs in the OEM  remotes  market.  Many of these OEMs are
based in Japan and approximately  15%, 20% and 28% of the Company's revenues for
the first  half of 2006 and the years  2005 and  2004,  respectively,  came from
Japanese  customers.  Revenues from these  customers are denominated in Japanese
yen and as a result the  Company is subject to foreign  currency  exchange  rate
fluctuations  in the yen/dollar  exchange  rate.  From time to time, the Company
uses foreign  currency  forward and average rate option  contracts to hedge this
exposure.  The Company uses revenue  forecasts  from its Japanese  subsidiary to
determine the amount of forward or option  contracts to purchase and the Company
attempts  to enter  into  these  contracts  when it  believes  the yen  value is
relatively  strong  against the U.S.  dollar.  To the extent that the  Company's
revenue  forecast  may be  inaccurate  or the  timing of  forecasting  the yen's
strength  is  wrong,  the  Company's  actual  hedge  gains  or  losses  may  not
necessarily  correlate with the effect of foreign currency rate  fluctuations on
its revenues.  The Company marks these contracts to market value and the gain or
loss from these  contracts  is  recorded  in OEM  remotes  revenue.  These hedge
transactions  are  classified  as  economic  hedges and do not qualify for hedge
accounting  under  Statement  of  Financial  Accounting  Standards  No.  133. In
addition, because the Company's Japanese subsidiary's functional currency is the
yen, the translation of the net assets of that subsidiary into the  consolidated
results will fluctuate with the  yen/dollar  exchange rate. The following  table
illustrates  the  impact  of  foreign  currency  fluctuations  on the  Company's
yen-denominated  revenues and the  effectiveness of its foreign currency hedging
activity (in thousands).

                                                                 SIX MONTHS
                                                               ENDED JUNE 30,
                                                            --------------------
                                                              2006        2005
                                                            --------    --------

Increase (decrease) in revenues resulting
   from foreign currency fluctuations ...................   $   --      $     77
Hedging gains ...........................................         (1)         38
                                                            --------    --------
     Net revenue impact .................................   $     (1)   $    115
                                                            ========    ========


                                       8
<PAGE>


         The Company  calculates the "increase  (decrease) in revenues resulting
from foreign currency fluctuations" by calculating the U.S. dollar equivalent of
its yen-denominated revenues using the yen/dollar exchange rate at the beginning
of  the  period.   The   resulting   product  is   compared  to  the   Company's
yen-denominated  revenues  converted to U.S.  dollars  according to GAAP and the
difference is shown in the table above.  As of June 30, 2006 the Company did not
have any contracts outstanding to hedge its foreign exchange exposure.

         STOCK-BASED  COMPENSATION.  On  January 1, 2006,  the  Company  adopted
Statement of Accounting Standards No. 123R, "Share-Based Payment" ("SFAS 123R"),
which requires the measurement  and recognition of compensation  expense for all
share-based  payment  awards made to employees and directors  based on estimated
fair values.  SFAS 123R  supersedes  the  Company's  previous  accounting  under
Accounting  Principles  Board  Opinion No. 25,  "Accounting  for Stock Issued to
Employees"  ("APB 25") for periods  beginning in fiscal 2006. In March 2005, the
Securities  and Exchange  Commission  issued Staff  Accounting  Bulletin No. 107
("SAB 107") relating to SFAS 123R. The Company has applied the provisions of SAB
107 in its adoption of SFAS 123R.

         The Company adopted SFAS 123R using the modified prospective transition
method,  which requires the application of the accounting standard as of January
1, 2006.  The  Company's  financial  statements  as of and for the three and six
months ended June 30, 2006 reflect the impact of SFAS 123R. In  accordance  with
the modified  prospective  transition method, the Company's financial statements
for prior  periods have not been  restated to reflect,  and do not include,  the
impact of SFAS 123R. Stock-based compensation expense recognized under SFAS 123R
for employees and directors for the three and six months ended June 30, 2006 was
$1,074,000 and $2,144,000 respectively. The effect on basic and diluted earnings
per share for the three and six  months  ended  June 30,  2006 was  $(0.08)  and
$(0.16) per share respectively.  As of June 30, 2006, the Company has $4,714,000
of  unrecognized  stock based  compensation  cost  related to  non-vested  stock
options.  This cost is expected to be recognized over a weighted  average period
of 2.75 years.

         During  the three and six  months  ended  June 30,  2006,  the  Company
granted  options to  acquire  46,000 and  1,131,050  shares of its common  stock
respectively  at an  average  exercise  price  of  $2.96  and  $3.14  per  share
respectively.  The estimated  fair value of all awards  granted during the three
months ended June 30, 2006 was $94,000,  of which $9,000 was recorded as of June
30, 2006.  The estimated  fair value of all awards granted during the six months
ended June 30, 2006 was  $2,401,000 of which $586,000 was accrued for as of June
30, 2006.  There were 20,000 stock options  exercised during the quarter and six
months ended June 30, 2006, respectively with an intrinsic value of $9,000.

         The  following  table  illustrates  the effect on net loss and loss per
share if the  Company had  applied  the fair value  recognition  of SFAS 123R to
stock-based  awards granted under the Company's  stock option plan for the three
and six  months  ended  June  30,  2005.  For the  purposes  of this  pro  forma
disclosure,  the fair value of the options is estimated using the  Black-Scholes
option  pricing  formula   ("Black-Scholes  model")  and  amortized  to  expense
generally over the options'  requisite  service  periods  (vesting  periods) (in
thousands, except per share information):

                                                                  SIX MONTHS
                                                                     ENDED
                                                                   JUNE 30,
                                                                    2005 (1)
                                                                  ----------

Net loss - as reported ........................................   $   (2,359)
Stock-based compensation expense included in
   reported net loss, net of related tax effects ..............          106
Total stock-based compensation expense determined
   under fair value based method for all awards,
   net of related tax effects .................................       (1,747)(2)
                                                                  ----------
         Net loss - pro forma .................................   $   (4,000)
                                                                  ==========
       Basic and diluted loss per share - as reported .........   $    (0.17)
                                        - pro forma ...........   $    (0.29)

(1) As restated. See Note 1.

(2) As restated.  As part of the  Company's  implementation  of SFAS 123R,  we
discovered  that  amounts  previously  stated in footnote  disclosure  under the
requirements of SFAS 123 for stock based compensation expense were calculated in
error. For the six months ended June 30, 2005, the Company previously recorded a
stock based compensation amount of $1,088,000.  This amount is now calculated to
be $1,747,000.  The effect on the pro forma basic and diluted earnings per share
was $(.05), changing from $(.24) to $(.29).


                                       9
<PAGE>


         SFAS 123R requires  companies to estimate the fair value of share-based
payment  awards  to  employees  and  directors  on the  date of  grant  using an
option-pricing  model.  The value of the portion of the award that is ultimately
expected to vest is recognized as expense over the requisite  service periods in
the  Company's  Statement  of  Operations.   Stock-based   compensation  expense
recognized in the  Statement of Operations  for the three months ended March 31,
2006 included  compensation expense for share-based payment awards granted prior
to,  but not yet vested as of January 1, 2006 based on the grant date fair value
estimated in accordance  with the pro forma  provisions of SFAS 123 and included
compensation  expense for the share-based  payment awards granted  subsequent to
January 1, 2006 based on the grant date fair value  estimated in accordance with
the  provisions  of SFAS 123R.  For  stock-based  awards issued to employees and
directors,   stock-based   compensation  is  attributed  to  expense  using  the
straight-line  single  option  method,  which is  consistent  with how the prior
period pro formas were provided. As stock-based  compensation expense recognized
in the Statement of Operations for March 31, 2006 is based on awards expected to
vest,  SFAS 123R requires  forfeitures  to be estimated at the time of grant and
revised,  if necessary,  in subsequent periods if actual forfeitures differ from
those  estimates.  For  both the  three  and six  months  ended  June 30,  2006,
forfeitures  are  estimated  at 9%. For the three and six months  ended June 30,
2006 the forfeiture amount totaled $1,000 and $31,000  respectively.  In the pro
forma information provided under SFAS 123R for the periods prior to fiscal 2006,
the Company accounted for forfeitures as they occurred.

         Prior  to  the  adoption  of  SFAS  123R,  the  Company  accounted  for
stock-based  awards to employees and directors  using the intrinsic value method
in accordance  with APB 25, and complied with the disclosure  provisions of SFAS
123.  Under the  intrinsic  value  method,  the Company  recognized  share-based
compensation  equal to the award's intrinsic value at the time of the grant over
the requisite service periods using the straight-line  method.  Forfeitures were
recognized  as  incurred.  During the three and six months  ended June 30, 2005,
there was  $84,000  and  $106,000,  respectively,  of  stock-based  compensation
expense  recognized in the Statement of Operations  for awards issued to certain
employees and directors.

         The Company's determination of fair value of share-based payment awards
to employees  and directors on the date of grant uses the  Black-Scholes  model,
which is affected by the Company's stock price as well as assumptions  regarding
a number of complex and subjective  variables.  These variables include, but are
not limited to, the expected  stock price  volatility  over the expected term of
the awards, and actual and projected  employee stock option exercise  behaviors.
The Company  estimates  expected  volatility using historical data. The expected
term is estimated using the "safe harbor" provisions under SAB 107.

         The weighted  average fair value at the date of grant for stock options
granted  during  the six  months  ended  June 30,  2006 was  $2.24 and $2.35 (as
restated)  per  option  respectively.  The fair  value of options at the date of
grant was estimated using the  Black-Scholes  model with the following  weighted
average assumptions:

                                                              SIX MONTHS
                                                            ENDED JUNE 30,
                                                        --------------------
                                                          2006        2005(1)
                                                        --------    --------
Expected life (years)...............................        5.5         5.7
Interest rate.......................................        4.6%        4.6%
Volatility..........................................         90%         74%
Dividend yield......................................          0%          0%

(1) As Restated


                                       10
<PAGE>


         A summary of the Company's nonvested shares as of December 31, 2005 and
changes  during the quarter and six months  ended June 30,  2006,  is  presented
below:

                                                                       Wgt. Avg.
                                                                        Exercise
                                                          Options        Price
                                                          --------      --------
Nonvested December 31, 2005 .........................        1,301      $   7.24
Granted .............................................        1,085          3.15
Vested ..............................................         (190)         7.39
Forfeited or expired ................................            0          0.00
                                                          --------      --------
Nonvested - March 31, 2006 ..........................        2,196          5.21
Granted .............................................           46          2.96
Vested ..............................................         (342)         5.76
Forfeited or expired ................................          (11)         8.92
                                                          --------      --------
Nonvested - June 30, 2006 ...........................        1,889      $   5.05
                 === ====                                 ========      ========


         The  Company is  evaluating  and has not yet  determined  which  method
provided  in SFAS  123R to use for  calculating  the  beginning  balance  of the
additional  paid in capital  pool  ("APIC  pool")  related to the tax effects of
employee stock-based compensation, and to determine the subsequent impact on the
APIC pool and Statement of Cash Flows of the tax effects of employee stock-based
compensation awards that are outstanding upon adoption of SFAS 123R. The Company
has until December 31, 2006 to make this decision.

3.       EARNINGS PER SHARE

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

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

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

<TABLE>
<CAPTION>
                                                 THREE MONTHS             SIX MONTHS
                                                ENDED JUNE 30,          ENDED JUNE 30,
                                              ------------------      ------------------
                                               2006        2005        2006        2005
                                              ------      ------      ------      ------
<S>                                           <C>         <C>         <C>         <C>
Weighted average shares outstanding - basic   13,765      13,705      13,760      13,699
Effect of dilutive securities
   (employee/director stock options) ......       -- (1)      -- (1)      -- (1)      -- (1)
                                              ------      ------      ------      ------
Weighted average shares - diluted .........   13,765      13,705      13,760      13,699
                                              ======      ======      ======      ======
</TABLE>

(1) Due to the net loss for the three and six month  periods ended June 30, 2006
and 2005  respectively,  the diluted share calculation result was anti-dilutive.
Thus,  the basic  weighted  average  shares were used and shares of common stock
equivalents  of  approximately  4.0 million and  4.1million  shares for 2006 and
2005, respectively, were excluded from the calculations.

4.       LINE OF CREDIT

         At March 31,  2006,  the Company had a $3.0 million bank line of credit
which was secured by cash  investments  at the bank.  The line was unused and in
May 2006, the Company terminated the line of credit.


                                       11
<PAGE>


5.       COMMITMENTS AND CONTINGENCIES

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

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

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

         On August 17, 2006,  the  plaintiff  refiled the  derivative  action in
California  state  court.  The  refiled  complaint  alleges   securities-related
violations of the  California  Corporations  Code, as well as various common law
and  Delaware  corporate  law  claims.  The  members of the  Company's  board of
directors  are no longer named as  defendants.  Plaintiffs  seek treble  damages
based on the difference  between the prices at which the named  defendants  sold
their  shares and the market  value that those shares would have had at the time
of such sales but for the allegedly false and misleading  financial  statements,
as well as  contribution  from the  defendants  in the event that the Company is
found  to have  violated  the  federal  securities  laws and  other  unspecified
damages.

         In  connection  with the class  action and the  derivative  proceedings
described above, an independent investigation was undertaken at the direction of
the Audit  Committee  by Dorsey & Whitney,  LLP.  Dorsey & Whitney  retained the
services  of  PricewaterhouseCoopers   LLP  with  respect  to  various  forensic
accounting   and   electronic   procedures   performed  in  the  course  of  the
investigation.  Related to this internal investigation, the Company has recorded
approximately  $147,000 in expense for 2005 and  $615,000 in expense for 2006 to
date for amounts not covered by insurance.  Additionally, in connection with the
class  action  proceeding,  the Company has recorded  approximately  $266,000 in
expense for 2006 to date for amounts not covered by insurance.

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

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


                                       12
<PAGE>


6.       COMPREHENSIVE INCOME (LOSS)

         The   following   table   provides  the  data   required  to  calculate
comprehensive loss in thousands:

                                                   Accumulated
                                                      Other
                                                  Comprehensive   Comprehensive
                                                       Loss            Loss
                                                   ------------    ------------
Balance at December 31, 2004 ...................   $       (377)           --
Translation adjustment .........................            (70)   $        (70)
Net loss (1) ...................................                         (2,359)
                                                   ------------    ------------

Balance at June 30, 2005 .......................   $       (447)   $     (2,429)
                                                   ============    ============

Balance at December 31, 2005 ...................   $       (490)

Translation adjustment .........................           (138)   $       (138)
Net loss .......................................                         (6,224)
                                                   ------------    ------------

Balance at June 30, 2006 .......................   $       (628)   $     (6,362)
                                                   ============    ============

(1) As restated. See Note 1.

7.       SEGMENT INFORMATION

         The Company has four business segments:  (i) Business  Communications -
branded products;  (ii) OEM Remotes;  (iii)  E-transactions;  and (iv) Specialty
Components.  The  accounting  policies  of the  segments  are the  same as those
described in  "Management's  Discussion and Analysis of Financial  Condition and
Results  of  Operations  -  Application  of  Critical  Accounting  Policies  and
Estimates";  however,  the Company  evaluates  performance  based on revenue and
gross profit. The Company does not allocate any other income, expenses or assets
to these  segments  nor does it track  revenue by  product.  Reportable  segment
information  for the six months  ended June 30,  2006 and 2005 is as follows (in
thousands):

<TABLE>
<CAPTION>
                            BUSINESS
                            COMMUNI-
                            CATIONS -
                             BRANDED       OEM       E-TRANS-   SPECIALTY
SIX MONTHS ENDED:           PRODUCTS     REMOTES     ACTIONS   COMPONENTS     TOTAL
-------------------------   ---------   ---------   ---------   ---------   ---------
<S>                         <C>         <C>         <C>         <C>         <C>
June 30, 2006
   Revenue ..............   $   3,668   $   6,955   $   3,817   $   2,608   $  17,048
   Gross profit .........       1,617       1,347       1,764         918       5,646
June 30, 2005(1)
   Revenue ..............   $   3,452   $   9,610   $   3,356   $   3,114   $  19,532
   Gross profit .........       1,459       1,676         492       1,448       5,075
</TABLE>

(1) As restated. See Note 1.

         The  Business   Communications  -  branded  products  business  segment
consists  specifically of branded  products.  The OEM Remotes  business  segment
consists of OEM products.


                                       13
<PAGE>


         GEOGRAPHIC  INFORMATION--The  Company attributes  revenues to different
geographic  areas on the basis of the location of the  customer.  The  Company's
revenues and long-lived  assets by geographic area for the six months ended June
30, 2006 and 2005 are as follows (in thousands):

                                              SIX MONTHS ENDED AND AS OF
                                                       JUNE 30,
                                   ---------------------------------------------
                                            2006                    2005
                                   ---------------------   ---------------------
                                    REVENUES     ASSETS     REVENUES     ASSETS
                                   ---------   ---------   ---------   ---------
United States ..................   $   9,477   $   1,240   $   7,394   $   1,231
Japan ..........................       2,559         152       4,173         487
Asia (other than Japan) ........       2,955         109       5,189          89
Europe and other ...............       2,057        --         2,776        --
                                   ---------   ---------   ---------   ---------
                                   $  17,048   $   1,501   $  19,532   $   1,807
                                   =========   =========   =========   =========


         MAJOR  CUSTOMERS--  In the  first  half of 2006  and  2005,  no  single
customer exceeded 10% of total revenues. Two customers accounted for 12% and 13%
of the accounts  receivable at June 30, 2006 and two customers accounted for 20%
and 11% of the accounts receivable at June 30, 2005.

8.       INVENTORIES

         Net inventories consisted of the following (in thousands):

                                                       JUNE 30,     DECEMBER 31,
                                                         2006           2005
                                                      ----------     ----------

Raw material .....................................    $    8,133     $    4,475
Work in process ..................................         1,836          1,230
Finished goods ...................................         2,550          4,153
Reserve for excess and obsolete
   inventory .....................................        (2,332)        (1,739)
                                                      ----------     ----------
Total inventories ................................    $   10,187     $    8,119
                                                      ==========     ==========

9.       STOCK OPTIONS

         Under the terms of the Plan,  officers and key employees may be granted
non-qualified  or incentive stock options and outside  directors and independent
contractors  of the  Company may be granted  non-qualified  stock  options.  The
aggregate number of shares which may be issued under the Plan is 7,250,000.  New
options are granted at fair market value on the date of grant and generally vest
ratably  over 36  months  and have a  ten-year  term but  terminate  earlier  if
employment is terminated.  As of June 30, 2006,  options for 6,831,000 shares of
stock have been granted  (3,955,000  are  outstanding  and  2,876,000  have been
exercised,  forfeited or expired) and there were 419,000  options  available for
grant.

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

         The amount of expense related to certain stock options  exercised after
the 30-day period was $2,400,000 in 2001, $220,000 in 2004 and $108,000 in 2005.
These  amounts are  reflected in our  financial  statements  in the  appropriate
periods.


                                       14
<PAGE>


         Activity  under the Plan for the first  half of 2006 is  summarized  as
follows (in thousands, except per share information):

                                                                       Wgt. Avg.
                                                                       Exercise
                                                          Options        Price
                                                        ----------    ----------
Outstanding - beginning of period ...................        4,053    $     5.98
Granted .............................................        1,131          3.14
Exercised ...........................................          (20)         2.54
Forfeited or expired ................................       (1,209)         6.35
                                                        ----------    ----------
Outstanding - end of period .........................        3,955    $     5.06
                                                        ==========    ==========
Exercisable - end of period .........................        2,238    $     5.28
                                                        ==========    ==========

         The intrinsic value of vested and exercisable stock options outstanding
as of June 30, 2006 is $337,000 and the weighted average  remaining  contractual
life of exercisable options outstanding is 57 months.

         The  following  table  summarizes   information   about  stock  options
outstanding under the Plan as of June 30, 2006 (in thousands, except contractual
life and exercise price per share information):

<TABLE>
<CAPTION>
----------------- -------------- ------------------- ------------- -------------------
                                  Months Remaining
 Exercise Price    # of Options     On Contractual      Options          Options
   Per Share        Outstanding          Life         Exercisable     Un-exercisable
----------------- -------------- ------------------- ------------- -------------------
<S>                       <C>                   <C>         <C>                 <C>
     $ 2.40                 314                   4           314                   0
----------------- -------------- ------------------- ------------- -------------------
      2.70                   41                  21            41                   0
----------------- -------------- ------------------- ------------- -------------------
      2.80                   30                 119             1                  29
----------------- -------------- ------------------- ------------- -------------------
      2.94                  378                  20           378                   0
----------------- -------------- ------------------- ------------- -------------------
      3.04                   36                  15            36                   0
----------------- -------------- ------------------- ------------- -------------------
      3.15                1,076                 114           135                 941
----------------- -------------- ------------------- ------------- -------------------
      3.25                   16                 118             1                  15
----------------- -------------- ------------------- ------------- -------------------
      3.30                    5                  20             5                   0
----------------- -------------- ------------------- ------------- -------------------
      4.30                   14                  18            14                   0
----------------- -------------- ------------------- ------------- -------------------
      4.42                  235                   6           235                   0
----------------- -------------- ------------------- ------------- -------------------
      5.49                   12                 108             4                   8
----------------- -------------- ------------------- ------------- -------------------
      5.50                    2                   0             2                   0
----------------- -------------- ------------------- ------------- -------------------
      5.56                    7                 107             2                   5
----------------- -------------- ------------------- ------------- -------------------
      5.65                   15                  24            15                   0
----------------- -------------- ------------------- ------------- -------------------
      5.70                  440                 108           147                 293
----------------- -------------- ------------------- ------------- -------------------
      6.14                   19                 105             7                  12
----------------- -------------- ------------------- ------------- -------------------
      6.15                  212                 105            82                 130
----------------- -------------- ------------------- ------------- -------------------
      6.45                  392                  29           337                  55
----------------- -------------- ------------------- ------------- -------------------
      7.54                   30                  27            28                   2
----------------- -------------- ------------------- ------------- -------------------
      7.82                   13                 104             6                   7
----------------- -------------- ------------------- ------------- -------------------
      7.98                    4                 101             2                   2
----------------- -------------- ------------------- ------------- -------------------
      9.40                  628                  96           419                 209
----------------- -------------- ------------------- ------------- -------------------
     10.60                   36                  33            27                   9
----------------- -------------- ------------------- ------------- -------------------
     Total                3,955                             2,238               1,717
----------------- -------------- ------------------- ------------- -------------------
</TABLE>


                                       15
<PAGE>

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

OVERVIEW

         We develop,  manufacture,  market and sell intuitive  interface devices
and  components  for a variety of business  and home  applications.  We generate
revenues from the sale of our hardware products,  such as force sensing resistor
("FSR")  sensors,  FSR-based  subassemblies  and complete  advanced input device
products.  To a lesser  extent,  we  derive  revenue  from the sale of  software
combined with our hardware.  Depending on the application,  this software may be
internally developed or purchased from software partners.

         We record  our  revenue in four  different  market  segments:  Business
Communications  - branded  products  (wireless  intuitive  input device products
addressing the  presentation  market);  OEM Remotes  (wireless  intuitive  input
device and sensor  products  addressing  primarily the advanced TV viewing video
projector and home entertainment  media center markets);  E-transactions  (input
devices for the electronic signature markets);  and Specialty Components (custom
FSR-based sensors, subassemblies and complete products for a variety of vertical
markets). Effective October 1, 2005, the Company combined its Home Entertainment
and Business  Communications  OEM business  segments  into the current  business
segment  entitled  OEM Remotes.  The current  Business  Communications  business
segment now refers to our branded  products.  All references in this document to
business  segments  are using  our  re-aligned  business  segments  that  became
effective October 1, 2005.

         We have addressed our Specialty  Components  market since our inception
in 1985.  Our other three markets have evolved out of our  Specialty  Components
market. We have addressed our Business  Communications - branded products market
as a separate  market since 1994, our  E-transactions  market since 1999 and our
OEM  Remotes  market  since  1994.   The  relative   revenue  and  gross  profit
contributions  of each of these segments is provided  below in BUSINESS  SEGMENT
OVERVIEW - THREE AND SIX MONTHS  ENDED JUNE 30,  2006  COMPARED TO THREE AND SIX
MONTHS ENDED JUNE 30, 2005.

                         QUARTERLY FINANCIAL PERFORMANCE
          The following table presents certain financial information for each of
the following quarters:

<TABLE>
                            QUARTER ENDED (UNAUDITED)
                      (IN THOUSANDS, EXCEPT PER SHARE DATA)

<CAPTION>
                   MAR. 31,    DEC. 31,    SEP. 30,    JUN. 30,    MAR. 31,    DEC. 31,    SEP. 30,    JUN. 30,    JUN. 30,
                     2006        2006        2005        2005       2005(1)     2005(1)     2004(1)     2004(1)     2004(1)
                   --------    --------    --------    --------    --------    --------    --------    --------    --------
<S>                <C>         <C>         <C>         <C>         <C>         <C>         <C>         <C>         <C>
Revenues .......   $  8,517    $  8,531    $  8,484    $ 10,223    $ 10,263    $  9,269    $  9,682    $  9,556    $  8,232

Gross profit ...   $  1,964    $  3,682    $  1,691    $  1,292    $  1,819    $  3,256    $  2,190    $  2,088    $  3,183

Net loss .......   $ (3,631)   $ (2,593)   $ (3,256)   $ (2,689)   $ (1,961)   $   (398)   $ (2,067)   $ (1,690)   $    (78)

Loss per share -
   basic .......   $  (0.26)   $  (0.19)   $  (0.24)   $  (0.20)   $  (0.14)   $  (0.03)   $  (0.15)   $  (0.15)   $  (0.01)

Loss per share -
   diluted .....   $  (0.26)   $  (0.19)   $  (0.24)   $  (0.20)   $  (0.14)   $  (0.03)   $  (0.15)   $  (0.15)   $  (0.01)
</TABLE>

(1) As restated. See Note 1 to the consolidated financial statements.

         Quarterly  revenues  increased  from the second to fourth  quarters  of
2004. Though there was a slight decline in the first quarter of 2005 compared to
the fourth  quarter of 2004, the second and third quarters of 2005 saw increased
growth from the fourth quarter of 2004. Revenues decreased in the fourth quarter
of 2005 due  primarily  to declines  in our  Business  Communications  - branded
products and our  E-transactions  business  segments.  The first two quarters of
2006 had revenues  slightly higher that the fourth quarter of 2005 due to higher
business  communication  - branded  product and  specialty  sales.  Gross profit
margins fluctuate  significantly  from quarter to quarter due to varying factors
including  allocation of unabsorbed  overhead costs and the mix of products that
are produced and sold. Gross profit margin from the first quarter of 2006 to the
second  quarter of 2006 were down  significantly  due  primarily  to lower gross
profit  margins in the Company's  Japan  subsidiary in the second quarter and to


                                       16
<PAGE>


incrementally more indirect  manufacturing  costs incurred in the second quarter
compared  to the first  quarter  of 2006.  We expect  gross  profit  margins  to
continue to fluctuate,  but not at the levels experienced  between the first and
second quarters of 2006. The Company has incurred losses in each of the previous
nine quarters as a result of various factors,  including  fluctuating  quarterly
sales  levels  due  to  market  conditions  and  customer   ordering   patterns,
fluctuations in gross profit margins,  increases in operating  costs,  inventory
reserve  adjustments,  increased  compliance and regulatory  costs, and internal
investigation costs.

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

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

         o        The  first  item  involved  a key  vendor  in  China  and  was
                  identified in a  reconciliation  of accounts with that vendor.
                  This  matter  relates to a net  write-off  of $1.1  million of
                  certain  receivables   primarily  originating  in  the  fourth
                  quarter of 2003,  with $167,000 of that amount  originating in
                  the  fourth  quarter  of 2002,  due from  the  vendor  and the
                  recording  of $1.0 million in payables due to that same vendor
                  that were not properly  recorded in the  Company's  accounting
                  system for the third and fourth quarters of 2004 and the first
                  and  second  quarters  of 2005  in the  amounts  of  $249,000,
                  $224,000, $205,000 and $331,000, respectively.

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

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

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

         These  additional  restatements  reduced  stockholders'  equity  by  an
aggregate $2.9 million and affected prior periods as follows:

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

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

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

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


                                       17
<PAGE>


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

         On  March  30,  2006,  we  reported  the  discovery  of two  additional
discrepancies   to  the   Company's   historical   financial   statements.   The
discrepancies  affect  financial  information  for the years ended  December 31,
2001,  December 31, 2004 and December 31, 2005.  These  additional  restatements
reflect adjustments to correctly account for the following two items:

         o        The first item was  discovered  during the 2005 year-end audit
                  process and involves accounting for stock options exercised by
                  terminated employees whose termination  coincided with a black
                  out period.  The Company  extended the  terminated  employees'
                  time to exercise  stock options to 30 days after the black out
                  period as opposed to 30 days  after  termination  as stated in
                  the terms of the Company's  stock option plan.  This treatment
                  results in a re-measurement date as defined under stock option
                  accounting  rules,  which require a  revaluation  of any stock
                  options that were given this benefit. The extension of time to
                  exercise  resulted  in  additional  non-cash  expense  of $2.4
                  million for 2001,  $220,000  for 2004 and  $108,000  for 2005,
                  $106,000 of which was in the first half of 2005,  which due to
                  an error were not recorded in the Company's accounting system.

         o        The  second  item  related  to  an  error   resulting  in  the
                  understatement  of cost of sales  of  $837,000  in the  fourth
                  quarter  of 2004  and the  overstatement  of cost of  sales of
                  $748,000 in 2005,  $687,000 of which was in the first  quarter
                  of 2005, as a result of certain  inventory in transit from the
                  parent company to its Hong Kong subsidiary being overvalued at
                  December 31, 2004.

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

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

         o        Gross  profit  for 2004 was  reduced  by  $837,000  to a gross
                  profit of $10.6 million and our net loss for 2004 increased by
                  $1 million, to a net loss of $3.8 million.

         o        For the first three months of 2005, gross profit was increased
                  by $534,000 to a gross profit of $3.3 million and our net loss
                  decreased by $511,000 to a net loss of $398,000.  Gross profit
                  for the year ended December 31, 2005 was increased by $748,000
                  to a gross profit of $8.1  million and our net loss  decreased
                  by $640,000 to a net loss of $8.3 million.

CURRENT OPPORTUNITIES AND CHALLENGES

         A considerable  portion of our effort is directed at emerging  markets,
such as our  E-transactions  market where our success  depends on our ability to
accurately  forecast the nature,  amount and timing of market requirements in an
environment in which historical precedent is limited or non-existent. We rely on
information  generated  by our  internal  staff  and  industry  partners  and on
independent  market  studies for  forecasts of market demand in our focus areas,
but these studies are themselves based on limited  empirical data. An inaccurate
forecast  of market  demand in any of our core  market  areas  would  impact our
short-term performance and could impact our competitive position and, therefore,
our long-term performance.

         Our quarterly  results are often affected by volatility in orders for a
particular  product.  For  example,   sales  of  remote  controls  constitute  a
significant  source of revenue,  but are substantially  dependent on advanced TV
sales that we cannot control or accurately forecast.  Similarly,  sales to large
institutions of our  E-transactions  products typically come in relatively large
orders that can be one-time events or can occur at widely-dispersed intervals.

         Other  factors  that  could  cause our  estimates  to be wrong or could
result  in  trends  that are not  apparent  from our  financial  statements  are
described  under "Risk Factors" in our Annual Report on Form 10-K for the fiscal
year ended December 31, 2005 and in Part II below.

         Management faces the constant  challenge of balancing its investment in
new  technology,  product  development  and  marketing  initiatives  against the
objective of steady earnings growth. A decision to make a significant investment
in a new technology, product or marketing effort may have a short-to-medium term


                                       18
<PAGE>


negative  impact on  earnings  even if the  investment  proves to be  justified.
Because we intend to pursue a growth strategy,  it is probable that we will make
investments in new business  opportunities  that will increase  operating costs,
decrease  margins and negatively  impact earnings until the investment  produces
significant revenue growth.

         The accompanying  consolidated  financial statements have been prepared
assuming that the Company will continue as a going concern,  which  contemplates
the  realization  of assets and the  satisfaction  of  liabilities in the normal
course of business.  As of June 30, 2006, the Company had cash, cash equivalents
and short term investments of $8.3 million. Based on the Company's business plan
and related estimates of cash  requirements,  that amount may be insufficient to
fund the Company's  operations  for the next 12 months.  The Company  expects to
require  additional  cash in the fourth  quarter  of 2006 to pursue its  planned
operations.  If the Company were to be unable to raise additional capital in the
form of  commercial or  securitized  debt,  sales of equity  securities or other
alternatives,  it would be required to curtail  its  operations.  As of June 30,
2006,  the Company's  total  consolidated  indebtedness  for money  borrowed was
$246,000.  The  Company is in  discussions  with  respect  to various  financing
alternatives. However, there is no assurance that the Company will be successful
in obtaining the required capital.  Any financing  arrangements that the Company
may  enter  into  may   increase   future  costs  or  be  dilutive  to  existing
stockholders.  The Company's  independent  registered public accounting firm has
informed  the  Company  that  it may  include  in its  report  on the  Company's
financial  statements  for the year  ending  December  31,  2006 an  explanatory
paragraph  expressing  substantial doubt about the Company's ability to continue
as a going  concern if the Company fails to  successfully  implement its current
operations.

BUSINESS SEGMENT OVERVIEW - THREE AND SIX MONTHS ENDED JUNE 30, 2006 COMPARED TO
THREE AND SIX MONTHS ENDED JUNE 30, 2005

         For the three and six months ended June 30, 2006 and 2005,  revenue and
gross profit by market segment are shown in the following table:

<TABLE>
<CAPTION>
                                 THREE MONTHS           THREE MONTHS             SIX MONTHS               SIX MONTHS
                                    ENDED                  ENDED                    ENDED                   ENDED
                                JUNE 30, 2006          JUNE 30, 2005 (1)        JUNE 30, 2006           JUNE 30, 2005 (1)
                            --------------------    ---------------------    --------------------    --------------------
                                         PERCENT                  PERCENT                 PERCENT                 PERCENT
                                        OF TOTAL                 OF TOTAL                OF TOTAL                OF TOTAL
MARKET SEGMENT               $000'S       SALES      $000'S        SALES      $000'S       SALES      $000'S       SALES
                            --------    --------    --------     --------    --------    --------    --------    --------
<S>                         <C>              <C>    <C>               <C>    <C>              <C>    <C>              <C>
Business Communications -
  branded products:
- Revenue ...............   $  1,882          22%   $  1,797           18%   $  3,668          22%   $  3,452          18%
- Gross Profit ..........        596                     467                    1,617                   1,459
- Gross Profit % of .....         32%                     26%                      44%                     42%
  Segment Revenue

OEM Remotes:
- Revenue ...............   $  2,953          35%   $  4,693           46%   $  6,955          41%   $  9,610          49%
- Gross Profit ..........        331                     738                    1,347                   1,676
- Gross Profit % of .....         11%                     16%                      19%                     17%
  Segment Revenue

E-transactions:
- Revenue ...............   $  2,206          26%   $  1,999           19%   $  3,817          22%   $  3,356          17%
- Gross Profit ..........        744                    (131)                   1,764                     492
- Gross Profit % of .....         34%                     (7)%                     47%                     15%
  Segment Revenue

Specialty Components:
-Revenue ................   $  1,476          17%   $  1,774           17%   $  2,608          15%   $  3,114          16%
-Gross Profit ...........        293                     745                      918                   1,448
-Gross Profit % of ......         20%                     42%                      35%                     47%
  Segment Revenue

All Segments:
- Revenue ...............   $  8,517         100%   $ 10,263          100%   $ 17,048         100%   $ 19,532         100%
- Gross Profit ..........      1,964                   1,819                    5,646                   5,075
- Gross Profit % ........         23%                     18%                      33%                     26%
</TABLE>

(1) As restated. See Note 1 to the consolidated financial statements.


                                       19
<PAGE>


BUSINESS COMMUNICATIONS - BRANDED PRODUCTS

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

         Overall,  Business  Communications - branded products  revenues for the
second  quarter  and first half of 2006  increased  5% and 6% as compared to the
second  quarter  and first half of 2005,  respectively.  Revenues  from  branded
products  for the  second  quarter  and first half of 2006 had  average  selling
prices of approximately $30 TO $470. The increase in revenues is the result of a
change in the mix of  products  being sold and a  corresponding  increase in the
average selling prices.

         Business   Communications-   branded   products  gross  profit  margins
increased to 32% for the three  months  ended June 30, 2006  compared to 26% for
the three months ended June 30, 2005. Gross margins increased to 44% for the six
months  ended June 30, 2006  compared  to 42% for the six months  ended June 30,
2005. These increases were due primarily to product mix

OEM REMOTES

         In our OEM Remotes segment,  we sell wireless remote controls on an OEM
basis to manufacturers of advanced  viewing devices,  including  projectors sold
for  TV  viewing  and  for  use  with  certain  computer  software  presentation
applications.  Our OEM Remotes revenues three and six months ended June 30, 2006
declined to 37% and 28%, respectively when compared to the three and for the six
months ended June 30, 2005 due  primarily to a reduced  number of products  sold
per customer order.

         OEM Remotes  gross  profit  margin for the three  months ended June 30,
2006 was 11%, a decrease of 5% compared to the three months ended June 30, 2005.
This decrease in gross margin is  attributable  to lower average  selling prices
and general lower margins per  transaction.  The gross profit margin for the six
months ended June 30, 2006 remained relatively constant,  increasing slightly to
19% from 17% for the six months  ended June 30,  2005.  This slight gross margin
increase  is  attributable  to normal  selling  and margin  patterns  related to
customers product sales activities.

E-TRANSACTIONS

         In our  E-transactions  segment,  we sell electronic  signature capture
devices and, depending on the customer requirement,  signature-capture software.
We offer annual software maintenance agreements and hardware upgrade programs to
our existing customers;  however,  historically we have not recorded significant
revenues from those types of sales.

         In the three and six months ended June 30, 2006, E-transaction revenues
increased 10% and 14%,  respectively  compared to the three and six months ended
June  30,  2005  primarily  as a  result  of  increased  and  relatively  larger
transactions  in the 2006  period.  Our  E-transactions  results  from period to
period  are  greatly  affected  by  individually  significant  sales,  which are
negotiated independently.

         E-transaction  gross profit margins for the three months ended June 30,
2006 were 34% compared to -7% for the three  months  ended June 30,  2005.  This
large  variance in gross  margins  resulted  from an  incrementally  significant
amount of unabsorbed  manufacturing  costs  allocated to  E-transactions  in the
second quarter of 2005 related to new product development compared to the second
quarter of 2006.  Gross margins for the six months ended June 30, 2006 increased
to 47% from 15% for the six months  ended  June 30,  2005.  The six month  gross
margin for 2005 encompasses the large unabsorbed costs described above.


                                       20
<PAGE>


SPECIALTY COMPONENTS

         In our Specialty Components segment, we sell our MICRONAV(TM)  products
and  custom  FSR's and  FSR-based  subassemblies  to many  customers  in several
vertical markets,  such as medical devices,  industrial input and military input
products.

         Specialty  components  revenues for the three and six months ended June
30, 2006  decreased  17% and 16% when compared to the three and six months ended
June 30, 2005 due primarily to lower volume of sales.

         Specialty component gross profit margin for the three months ended June
30, 2006 was 20% compared to 42% for the three months ended June 30, 2005.  This
is  attributable to lower sales and more  unabsorbed  manufacturing  costs being
allocated  in the second  quarter  of 2006 than in the  second  quarter of 2005.
Gross  margins for the six months  ended June 30, 2006  decreased to 35% for the
six months ended June 30, 2006 compared to 47% for the six months ended June 30,
2005.  The overall  margin  decrease for the six months ended June 30, 2006 when
compared to the six months ended June 30, 2005 is primarily due to a greater mix
of relatively lower margin revenues related to our MICRONAV products in the 2006
period and to more unabsorbed  manufacturing  costs being allocated in the first
six months of 2006 than in the first six months of 2005.

OPERATING EXPENSES

         Operating  expenses for the three months ended June 30, 2006  increased
$1,803,000  when  compared to the three months ended June 30, 2005 due primarily
to $871,000 of non-cash expense attributable to the implementation of SFAS 123R,
$267,000 of costs related to additional  consulting fees,  $118,000 of increased
payroll and related costs,  $210,000 costs related to ongoing legal matters, and
$227,000  related to increases in normal  general and  administrative  expenses,
including bad debts and insurance costs.

         Operating  expenses  for the six months  ended June 30, 2006  increased
$4,401,000  compared to the six months ended June 30, 2005.  This was  primarily
attributable   to   $1,739,000   of  non  cash  expense   attributable   to  the
implementation  of SFAS 123R,  $603,000  attributable to costs  associated to an
internal investigation, $530,000 of costs related to additional consulting fees,
$386,000 of accounting fees and costs related to ongoing legal matters, $172,000
of research and development  outside  development costs,  $115,000 of additional
facilities  and related costs and $338,000 due to increased  payroll and related
costs  due in  part  to  ongoing  infrastructure  building  within  the  finance
department.

         Product  development  and research costs include  internal  engineering
labor,  contract  engineering  and outside  processing  costs for the design and
development of our OEM and branded  designs and products and the research of our
technologies.  For the  second  quarter of 2006,  our  product  development  and
research  costs  increased 21% or $244,000 as compared to the second  quarter of
2005  due  primarily  to  a  $223,000  non-cash  expense   attributable  to  the
implementation of SFAS 123R.

         For the six months ended June 30,  2006,  our product  development  and
research  costs  increased  29% or $631,000 as compared to the six months  ended
June 30, 2005 due primarily to a $448,000  non-cash expense  attributable to the
implementation  of SFAS 123R and to $172,000 of  increased  outside  development
costs.

         As a percentage of revenues,  product  development  and research  costs
increased to 17% for both the second  quarter and first half of 2006 compared to
11% for the second quarter and first half of 2005.

         Selling,   General  &   Administrative   (SG&A)  costs  include  sales,
marketing,  legal,  accounting  and  administrative  labor,  sales  commissions,
advertising, general marketing, Business Communications - branded and OEM Remote
products channel  marketing and travel and  entertainment  costs. For the second
quarter  and  first  half of 2006,  respectively,  SG&A  grew  58% and  70%,  to
$4,247,000 and $9,147,000 from $2,688,000 and $5,377,000  respectively  over the
same periods of 2005.

         For the three months ended June 30, 2006,  SG&A costs increased 58%, to
$4,247,000  from  $2,688,000  for the three  months  ended  June 30,  2006.  The
$1,559,000  increase of SG&A costs in the second quarter of 2006 compared to the
second  quarter of 2005 is  primarily  attributable  to  $564,000  of a non-cash
expense  attributable  to the non cash stock  based  compensation,  $232,000  of
increased  payroll and related  costs,  $14,000 of costs  related to an internal
investigation   undertaken  by  the  Company,  and  increased  professional  and


                                       21
<PAGE>


increased   consulting  fees  of  $218,000  due  to  increased  demands  on  the
administrative  staff, and increased  general and  administrative  and sales and
marketing  costs,  including  commissions,  advertising,  marketing  development
costs,  insurance and bad debts. As a percentage of revenues,  SG&A increased to
50% in the second quarter of 2006 compared to 26%, in the same period of 2005.

         For the six months ended June 30, 2006,  SG&A costs  increased  70%, to
$9,147,000 from  $5,377,000  compared to the six months ended June 30, 2006. The
$3,770,000  increase  of SG&A  costs  for the six  months  ended  June 30,  2006
compared to the six months  ended June 30,  2005 is  primarily  attributable  to
$1,186,000 of a non-cash stock based compensation, $471,000 of increased payroll
and related costs,  $118,000 of Sarbanes-Oxley  related costs, $603,000 of costs
related to an internal  investigation  undertaken by the Company,  and increased
professional and increased  consulting fees of $716,000 due to increased demands
on the administrative  staff, and increased general and administrative and sales
and marketing costs, including commissions,  advertising,  marketing development
costs,  insurance and bad debts. As a percentage of revenues,  SG&A increased to
54% for the six months  ended June 30,  2006  compared to 28%, in the six months
ended June 30, 2005.

OPERATING RESULTS

         In summary,  our  operating  results for the six months  ended June 30,
2006 were attributable to the following factors:

         o        A  $2,144,000  non-cash  charge for  stock-based  compensation
                  related to the  implementation  of SFAS 123R.  This  charge is
                  split among  several  expense  line items in our  Consolidated
                  Statement of Operations  including  cost of sales  ($404,000),
                  research & development ($448,000) and SG&A ($1,292,000).

         o        A $2,484,000  or 13% decline in revenues for the first half of
                  2006 compared to the first half of 2005 due primarily to lower
                  OEM Remote revenues.

         o        An increase in gross profit  margin  percentage  to 33% in the
                  first half of 2006  compared  to 26% in the first half of 2005
                  primarily   attributable   to   increased   revenues   in  the
                  E-transactions  and Business  Communication - branded products
                  business  segments,  which have higher gross profit margins in
                  the first six months of 2006  compared to the first six months
                  of  2005.  In  addition,   certain  inventory  costing  issues
                  attributed to lower overall gross profit  margins in the first
                  six months of 2005.

         o        Increased  operating  expenses of  $4,401,000 in the first six
                  months of 2006 compared to the first six months of 2005 due to
                  increased   compensation  costs,   related  to  SFAS  123R  as
                  mentioned above,  and increased audit and professional  fees.,
                  costs related to an internal  investigation,  compliance  with
                  the  Sarbanes-Oxley  Act of 2002,  and ongoing  infrastructure
                  building within the finance  department,  primarily through an
                  increase in personnel.

         Total other  income,  net increased to $195,000 in the six months ended
June 30, 2006 versus other income, net of $151,000 for the six months ended June
30,  2005 due to  interest  earned on a  greater  net cash  balance  in the 2006
periods.

         We have  approximately  $39.7  million in net  operating  loss  ("NOL")
carryforwards  available for U.S. federal tax purposes, of which $666,000 expire
in 2006.  In  determining  whether or not a  valuation  allowance  is  necessary
against the deferred tax asset related to these NOL carryforwards,  forecasts of
future  taxable  income are not  considered  sufficient  evidence  to outweigh a
history of losses.  Accordingly, we have maintained the full valuation allowance
against our deferred  tax assets as of June 30, 2006.  This has no effect on the
Company's NOL  carryforwards  for tax purposes and they continue to be available
for up to 20 years.

LIQUIDITY AND CAPITAL RESOURCES

         Working capital  decreased to $18.7 million at June 30, 2006 from $23.0
million at the end of 2005 due primarily to the loss from  operations  and a use
from operations attributable primarily to increased inventory levels.


                                       22
<PAGE>


         Operations  used $5.1  million in cash in the first six months  2006 as
compared to $3.0 million in the first six months of 2005.  The greater  usage of
cash is due primarily to the loss from operations.

         We spent  $389,000  in the first  half of 2006 to  purchase  additional
manufacturing  and computer  equipment  compared to $58,000 in the first half of
2005. We also invested $26,000 in new patent and trademark activity in the first
six months of 2006 as compared to $74,000 in the first six months of 2005.

         We made  payments on long-term  debt of $62,000 in the first six months
of 2006 and  $341,000  in the first six months of 2005.  Net  proceeds  from the
exercise of employee and director stock options were $50,000 and $120,000 in the
first six months of 2006 and 2005, respectively.

         We currently have minor  commitments  for capital  expenditures  and no
material  purchase  obligations.  We have a software license  agreement that has
minimum quarterly payments through 2007.

         Our minimum  long-term debt,  licensing and operating lease obligations
as of December  31, 2005,  the last fiscal  year-end  date,  were as follows (in
thousands):

<TABLE>
<CAPTION>
                                                   Less than      1-3         4th
                                         Total     One Year      Years        Year
                                       ---------   ---------   ---------   ---------
<S>                                    <C>         <C>         <C>         <C>
Long-term debt obligations .........   $     308   $     154   $     154   $    --
Software licensing .................         900         600         300        --
Operating lease obligations ........       1,713         469         836         408
                                       ---------   ---------   ---------   ---------
Total ..............................   $   2,921   $   1,223   $   1,290   $     408
                                       =========   =========   =========   =========
</TABLE>


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

         The accompanying  consolidated  financial statements have been prepared
assuming that the Company will continue as a going concern,  which  contemplates
the  realization  of assets and the  satisfaction  of  liabilities in the normal
course of business.  As of June 30, 2006, the Company had cash, cash equivalents
and short term investments of $8.3 million. Based on the Company's business plan
and related estimates of cash  requirements,  that amount may be insufficient to
fund the Company's  operations  for the next 12 months.  The Company  expects to
require  additional  cash in the fourth  quarter  of 2006 to pursue its  planned
operations.  If the Company were to be unable to raise additional capital in the
form of  commercial or  securitized  debt,  sales of equity  securities or other
alternatives,  it would be required to curtail  its  operations.  As of June 30,
2006,  the Company's  total  consolidated  indebtedness  for money  borrowed was
$246,000.  The  Company is in  discussions  with  respect  to various  financing
alternatives. However, there is no assurance that the Company will be successful
in obtaining the required capital.  Any financing  arrangements that the Company
may  enter  into  may   increase   future  costs  or  be  dilutive  to  existing
stockholders.  The Company's  independent  registered public accounting firm has
informed  the  Company  that  it may  include  in its  report  on the  Company's
financial  statements  for the year  ending  December  31,  2006 an  explanatory
paragraph  expressing  substantial doubt about the Company's ability to continue
as a going  concern if the Company fails to  successfully  implement its current
operations.

DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS

         This Quarterly Report on Form 10-Q contains forward-looking  statements
within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the  Securities  Exchange Act of 1934, as amended (the  "Exchange
Act"),  that involve  substantial risks and uncertainties and which are intended
to be covered by the safe  harbors  created  thereby.  These  statements  can be
identified  by  the  fact  that  they  do  not  relate  strictly  to  historical
information  and may include  the words  "expects",  "believes",  "anticipates",
"plans",  "may",  "will",  "intends",  "estimates",  "continue" or other similar
expressions.  These forward-looking  statements are subject to various risks and
uncertainties  that could cause actual results to differ  materially  from those
currently  anticipated.  These  risks  and  uncertainties  include,  but are not
limited  to,   items   discussed   under  the  headings   "Overview",   "Current
Opportunities  and  Challenges" and "Business  Segment  Overview - Three and Six
Months  Ended June 30,  2006  Compared  to Three and Six  Months  Ended June 30,
2005."  Forward-looking  statements speak only as of the date made. We undertake
no obligation to publicly release or update forward-looking statements,  whether
as a result of new information, future events or otherwise.


                                       23
<PAGE>


APPLICATION OF CRITICAL ACCOUNTING POLICIES AND ESTIMATES

         Management's  discussion  and analysis of our  financial  condition and
results of  operations  are based upon the  consolidated  financial  statements,
which have been  prepared in accordance  with  accounting  principles  generally
accepted in the United States.  The  preparation of these  financial  statements
requires  management to make  estimates  and judgments  that affect the reported
amounts of assets,  liabilities,  revenues and expenses, and related disclosures
of contingent assets and liabilities. On an on-going basis, management evaluates
estimates,  including  those  related  to the  valuation  of  inventory  and the
allowance  for  uncollectible  accounts  receivable.  We base our  estimates  on
historical  experience and on various other  assumptions that are believed to be
reasonable  under the  circumstances,  the  results  of which form the basis for
making  judgments about the carrying  values of assets and liabilities  that are
not readily  apparent from other  sources.  Actual results may differ from these
estimates  under different  assumptions or conditions.  We believe the following
critical accounting policies affect our more significant judgments and estimates
used in the preparation of our consolidated financial statements:

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

         STOCK BASED COMPENSATION.  On January 1, 2006, we adopted the provision
of  SFAS  123R,  which  requires  that  compensation  expense  be  measured  and
recognized at an amount equal to the fair value of share-based  payments granted
under compensation arrangements. We calculate the fair value of stock options by
using the  Black-Scholes  option-pricing  model.  The  determination of the fair
value of  share-based  awards at the grant date requires  judgment in developing
assumptions,  which involve a number of variables.  These variables include, but
are not limited to, the  expected  stock-price  volatility  over the term of the
awards,  the  expected  dividend  yield and the expected  stock option  exercise
behavior.  Additionally,  judgment is also required in estimating  the number of
share-based  awards  that are  expected  to be  forfeited.  Our  computation  of
expected  volatility is based on a combination  of historical  and  market-based
implied  volatility.  The  expected  term of  options  granted  was  derived  by
averaging the vesting term with the contractual term.

         We  recorded   stock-based   compensation   expense  net  of  estimated
forfeitures.  In determining  the estimated  forfeiture  rates, we consider many
factors  including  the  type  of  award,  the  employee  class  and  historical
experience.  The  estimation  of stock awards that will  ultimately be forfeited
requires  significant  judgment and to the extent that actual results or updated
estimates differ from our current estimates,  such amounts will be recorded as a
cumulative adjustment in the period such estimates are revised.

         If any of the  assumptions  used  in  the  Black-Scholes  model  change
significantly,  stock-based  compensation  expense may differ  materially in the
future from that recorded in the current  period.  We believe the accounting for
stock-based compensation is a critical accounting policy because it requires the
use of complex judgment in its application.

         ACCOUNTS  RECEIVABLE AND ALLOWANCE FOR DOUBTFUL ACCOUNTS.  Our accounts
receivable are  unsecured,  and we are at risk to the extent such amounts become
uncollectible.  We continually  monitor individual account receivable  balances,
and provide for an allowance  of doubtful  accounts at the time  collection  may
become  questionable  based on payment  performance or age of the receivable and
other factors related to the customer's ability to pay.


                                       24
<PAGE>


         RESERVE FOR ESTIMATED  PRODUCT  RETURNS.  While not an explicit part of
our terms and conditions of product sales except for some customers, we do, on a
discretionary  basis,  grant product exchanges for our distribution and reseller
customers in our Business  Communications  - branded products market for similar
products of equal value if these  exchanges  meet  certain  other  criteria.  We
estimate future product returns based on recent return history, inventory status
and product  "sell-through"  statistics  received  from our major  distributors,
discussions  regarding product sales activity with our major reseller customers,
and current  industry  product and  technology  trends.  Management  judgment is
required in evaluating the relative  significance of the aforementioned data and
in the  determination of the estimated value of the returns  reserve.  If actual
returns are greater than  management's  estimate then revenues in the subsequent
period will be adversely affected.

         INVENTORY  RESERVE.  At each balance sheet date, we evaluate our ending
inventories for excess  quantities and  obsolescence.  This evaluation  includes
analyses of forecast sales levels by product and historical demand. We write off
inventories  that are  considered  obsolete.  Remaining  inventory  balances are
adjusted to  approximate  the lower of our cost or market  value and result in a
new cost  basis in such  inventory  until  sold.  If  future  demand  or  market
conditions  are  less  favorable  than  our  projections,  additional  inventory
write-downs  may be  required,  and would be  reflected  in cost of sales in the
period the revision is made. Based on lowered  expectations for future demand in
the OEM Remotes segment as well as limitations on the use of certain  restricted
raw  materials  prompted  by early  adoption  of the  Restriction  of  Hazardous
Substances  Act of 2002 by many of our  customers,  we increased our reserve for
excess and obsolete inventory by approximately $1.9 million in the third quarter
of 2005.  The reserve is discussed in detail in the  BUSINESS  SEGMENT  OVERVIEW
under OEM Remotes in our Annual Report on Form 10-K for the year ended  December
31, 2005.

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

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

         Based on historical and prospective evidence, we have concluded that we
did not have  sufficient  evidence to be able to recognize our NOL  carryforward
benefits as assets and thus we have recorded a valuation  allowance  against our
deferred tax asset balance.  If we achieve profitable  operations in the future,
we will  reevaluate  our deferred tax asset  balance and may reduce or eliminate
the valuation allowance.

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

         FOREIGN EXCHANGE EXPOSURE. We have established  relationships with most
of the major OEMs in OEM Remotes  market.  Many of these OEMs are based in Japan
and  approximately  15%,  20% and 28% of our revenues for the first half of 2006
and the  years  2005 and  2004,  respectively,  came  from  Japanese  customers.
Revenues from these customers are denominated in Japanese yen and as a result we
are subject to foreign  currency  exchange rate  fluctuations  in the yen/dollar
exchange rate. We use foreign currency forward and average rate option contracts
to hedge this exposure. We use revenue forecasts from our Japanese subsidiary to
determine  the amount of our  forward or option  contracts  to  purchase  and we
attempt  to  enter  into  these  contracts  when we  believe  the yen  value  is
relatively  strong  against  the U.S.  dollar.  To the extent  that our  revenue
forecast may be inaccurate or the timing of  forecasting  the yen's  strength is
wrong,  our actual hedge gains or losses may not necessarily  correlate with the
effect of foreign  currency rate  fluctuations  on our  revenues.  We mark these
contracts to market value and the gain or loss from these  contracts is recorded
in OEM Remote  revenue.  These hedge  transactions  are  classified  as economic
hedges and do not qualify for hedge  accounting  under  Statement  of  Financial
Accounting  Standards  No. 133. In addition,  because our Japanese  subsidiary's
functional  currency  is the yen,  the  translation  of the net  assets  of that
subsidiary  into the  consolidated  results will  fluctuate  with the yen/dollar
exchange rate.


                                       25
<PAGE>


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

                                                                   Six Months
                                                                 Ended June 30,
                                                                ----------------
                                                                 2006      2005
                                                                ------    ------
Increase (decrease) in revenues resulting from
     foreign currency fluctuations ..........................   $ --      $   77
Hedging gains (losses) ......................................       (1)       38
                                                                ------    ------
     Net revenue impact .....................................   $   (1)   $  115
                                                                ======    ======

         We  calculate  the  "increase  (decrease)  in revenues  resulting  from
foreign currency  fluctuations" by calculating the U.S. dollar equivalent of our
yen-denominated  revenues using the yen/dollar exchange rate at the beginning of
the period.  The resulting product is compared to our  yen-denominated  revenues
converted to U.S.  dollars  according to GAAP and the difference is shown in the
table above.  As of June 30, 2006, we did not have any contracts  outstanding to
hedge our foreign exchange exposure.

RECENT ACCOUNTING PRONOUNCEMENTS

         In February  2006,  the FASB issued  Statement of Financial  Accounting
Standards No. 155, "Accounting for Certain Hybrid Financial  Instruments" ("SFAS
155"),  which amends SFAS No. 133,  "Accounting for Derivatives  Instruments and
Hedging Activities" ("SFAS 133") and SFAS No. 140, "Accounting for Transfers and
Servicing of Financial Assets and  Extinguishment of Liabilities"  ("SFAS 140").
SFAS 155 amends SFAS 133 to narrow the scope  exception  for  interest-only  and
principal-only   strips  on  debt   instruments  to  include  only  such  strips
representing  rights to receive a specified portion of the contractual  interest
or  principle  cash flows.  SFAS 155 also  amends  SFAS 140 to allow  qualifying
special-purpose  entities  to hold a  passive  derivative  financial  instrument
pertaining to beneficial interests that itself is a derivative instrument.  This
statement is effective for instruments  that are acquired on or issued after the
beginning of an entity's first fiscal year that begins after September 15, 2006.
We are currently evaluating the impact of this new Standard, but believe that it
will not have a material impact on the Company's financial position,  or results
of operations.

         In March 2006, the FASB issued SFAS No. 156,  "Accounting for Servicing
of Financial  Assets"  ("SFAS No. 156"),  which provides an approach to simplify
efforts to obtain  hedge-like  (offset)  accounting.  This Statement amends FASB
Statement No. 140,  "Accounting for Transfers and Servicing of Financial  Assets
and  Extinguishments  of  Liabilities",  with  respect  to  the  accounting  for
separately recognized servicing assets and servicing liabilities.  The Statement
(1)  requires an entity to recognize a servicing  asset or  servicing  liability
each time it undertakes  an obligation to service a financial  asset by entering
into a servicing contract in certain situations;  (2) requires that a separately
recognized  servicing asset or servicing liability be initially measured at fair
value, if practicable;  (3) permits an entity to choose either the  amortization
method or the fair value  method for  subsequent  measurement  for each class of
separately recognized servicing assets or servicing liabilities;  (4) permits at
initial adoption a one-time reclassification of available-for-sale securities to
trading securities by an entity with recognized  servicing rights,  provided the
securities  reclassified  offset the  entity's  exposure  to changes in the fair
value  of the  servicing  assets  or  liabilities;  and  (5)  requires  separate
presentation of servicing assets and servicing liabilities subsequently measured
at fair value in the balance sheet and additional disclosures for all separately
recognized servicing assets and servicing liabilities. SFAS No. 156 is effective
for  all  separately  recognized  servicing  assets  and  liabilities  as of the
beginning of an entity's  fiscal year that begins after September 15, 2006, with
earlier  adoption  permitted  in  certain  circumstances.   The  Statement  also
describes the manner in which it should be initially  applied.  We are currently
evaluating the impact of this Statement.

         In June 2006, the FASB issued  Interpretation  No. 48,  "Accounting for
Uncertainty  in Income Taxes -- An  Interpretation  of FASB  Statement No. 109",
(FIN 48).  FIN 48  clarifies  the  accounting  for  uncertainty  in income taxes
recognized in an  enterprise's  financial  statements  in  accordance  with FASB
Statement  No. 109,  "Accounting  for Income  Taxes".  FIN 48 also  prescribes a
recognition  threshold and  measurement  attribute  for the financial  statement
recognition and measurement of a tax position taken or expected to be taken in a
tax return that results in a tax benefit. Additionally, FIN 48 provides guidance
on  de-recognition,  income statement  classification of interest and penalties,
accounting in interim periods,  disclosure, and transition.  This interpretation
is effective for fiscal years  beginning after December 15, 2006. The Company is
currently  evaluating the effect that the application of FIN 48 will have on its
results of operations and financial condition.


                                       26
<PAGE>


         In September 2006, the Securities and Exchange  Commission (SEC) issued
Staff  Accounting  Bulletin  ("SAB") No. 108  "Quantifying  Financial  Statement
Misstatements",  (SAB 108). Due to diversity in practice among registrants,  SAB
108 expresses SEC staff views  regarding the process by which  misstatements  in
financial statements are evaluated for purposes of determining whether financial
statement restatement is necessary. SAB 108 is effective for fiscal years ending
after November 15, 2006, and early  application is encouraged.  The Company does
not believe SAB 108 will have a material impact on its financial condition,  its
results of operations or liquidity

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

         FOREIGN  CURRENCY  EXCHANGE  RATE  RISK  -  Our  Japanese   subsidiary,
Interlink  Electronics  K.K.,  generally  makes sales and  collects its accounts
receivable in Japanese yen. To hedge these revenues  against future movements in
exchange rates,  we purchase  foreign  exchange  forward and average rate option
contracts. Gains or losses on these contracts are then offset by gains or losses
on the  underlying  revenue  exposure and  consequently  a sudden or significant
change of foreign  exchange rates would not have a material impact on net income
or cash flows to the extent future  revenues are  protected by forward  currency
contracts. These contracts,  however, typically have a six-month duration. Thus,
yen/dollar  fluctuations lasting more than six months will have an impact on our
revenues.  For the six month  periods  ended June 30, 2006 and 2005,  we did not
enter into foreign currency exchange  contracts in the normal course of business
to manage  our  exposure  against  foreign  currency  fluctuations  on  revenues
denominated in foreign currencies.  The principal objective of such contracts is
to minimize the risks and costs  associated with financial and global  operating
activities.  We do not  utilize  financial  instruments  for  trading  or  other
speculative  purposes.  The fair value of foreign currency exchange contracts is
estimated by obtaining  quotes from  bankers.  During the first half of 2006, we
recognized no gains on foreign currency  exchange  contracts which are reflected
in  revenue in the  accompanying  consolidated  statements  of  operations.  Our
hedging  policies are designed to offset the effect of a yen  devaluation on our
revenues;  thus, a hypothetical  10% devaluation of the yen would reduce our yen
denominated revenues by 10%; but our theoretical hedging gains would offset that
effect  for a period  of time,  to the  extent  we have  such  foreign  currency
exchange contacts outstanding. As of June 30, 2006, we do not have any contracts
outstanding  to hedge our foreign  exchange  exposure and thus we are exposed to
foreign currency exchange rate risk.

         INTEREST RATE EXPOSURE - Based on our overall interest rate exposure at
June 30,  2006,  a  hypothetical  10% change in  interest  rates  applied to our
outstanding  debt as of June 30, 2006, would have no material impact on earnings
or cash flows over a one-year period.

ITEM 4.  CONTROLS AND PROCEDURES

EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES

         In connection  with the  preparation  of this Form 10-Q,  the Company's
senior  management,  with the  participation  of the Company's  Chief  Executive
Officer and Chief Financial  Officer,  evaluated the effectiveness of the design
and operation of the Company's disclosure controls and procedures as of June 30,
2006.  Based upon that  evaluation,  the Company's Chief  Executive  Officer and
Chief Financial  Officer  concluded that the Company's  disclosure  controls and
procedures  were  ineffective,  as of  June  30,  2006,  to  provide  reasonable
assurance  that  information  required to be disclosed by the Company in reports
that it files or  submits  under  the  Exchange  Act,  is  recorded,  processed,
summarized and reported within the time periods specified in the SEC's rules and
forms and to ensure that information  required to be disclosed by the Company in
the reports that it files or submits under the Exchange Act is  accumulated  and
communicated  to  management,  including the Company's  principal  executive and
principal  financial  officers,  or persons  performing  similar  functions,  as
appropriate  to allow timely  decisions  regarding  required  disclosures.  This
conclusion is based  primarily on the fact that the Company's  internal  control
over financial  reporting was  ineffective as of such date.  Through the date of
the  filing  of this Form  10-Q the  Company  has  adopted  additional  remedial
measures described below to address deficiencies in its disclosure controls that
existed  on June 30,  2006 and has  taken  additional  measures  to  verify  the
information in its financial statements.  The Company believes that, as a result
of these  remedial  and other  measures,  this Form 10-Q  properly  reports  all
information required to be included in such report.


                                       27
<PAGE>


CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING

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

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

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

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

                  While these adjustments were correctly  identified and made as
                  a  result  of a  review  of  the  financial  statements,  this
                  material  weakness  prevented  us from  filing  our  Quarterly
                  Report on Form 10-Q for the quarter ended  September 30, 2005,
                  our Annual Report on Form 10-K for the year ended December 31,
                  2005 and our  Quarterly  Reports on Form 10-Q for the quarters
                  ended March 31, 2006 and June 30, 2006 in a timely manner.  At
                  the  direction  of our Chief  Executive  and  Chief  Financial
                  Officers, we are adopting new closing processes and procedures
                  that we believe will remediate this material weakness.

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

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

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

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

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

         o        Due to the number of deficiencies and significant deficiencies
                  found  within the Sales Order to Cash,  Procure to Payment and
                  Stockholders'  Equity  processes,  in  addition  to the  items
                  discussed  above,  we  have  assessed  the  financial  control
                  environment as a whole as a material weakness. We are adopting
                  new processes and  procedures  that we believe will  remediate
                  this material weakness.


                                       28
<PAGE>


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

LIMITATIONS ON THE EFFECTIVENESS OF CONTROLS

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

PART II - OTHER INFORMATION

ITEM 5.  LEGAL PROCEEDINGS

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

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

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

         On August 17, 2006,  the  plaintiff  refiled the  derivative  action in
California  state  court.  The  refiled  complaint  alleges   securities-related
violations of the  California  Corporations  Code, as well as various common law
and  Delaware  corporate  law  claims.  The  members of the  Company's  board of
directors  are no longer named as  defendants.  Plaintiffs  seek treble  damages
based on the difference  between the prices at which the named  defendants  sold
their  shares and the market  value that those shares would have had at the time
of such sales but for the allegedly false and misleading  financial  statements,
as well as  contribution  from the  defendants  in the event that the Company is
found  to have  violated  the  federal  securities  laws and  other  unspecified
damages.

         In  connection  with the class  action and the  derivative  proceedings
described above, an independent investigation was undertaken at the direction of
the Audit  Committee  by Dorsey & Whitney,  LLP.  Dorsey & Whitney  retained the
services  of  PricewaterhouseCoopers   LLP  with  respect  to  various  forensic
accounting   and   electronic   procedures   performed  in  the  course  of  the
investigation.

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


                                       29
<PAGE>


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

Item 5(A).  Risk Factors

         WE HAVE  INCURRED  NET LOSSES  FOR THE PAST NINE  FISCAL  QUARTERS  AND
EXPECT FUTURE LOSSES. AS A RESULT,  WE WILL NEED ADDITIONAL  CAPITAL IN THE NEAR
FUTURE.

         We have  incurred  losses in each of the  previous  nine  quarters as a
result of various factors,  including  fluctuating quarterly sales levels due to
market conditions and customer ordering  patterns,  fluctuations in gross profit
margins, increases in operating costs, inventory reserve adjustments,  increased
compliance and regulatory costs, and internal  investigation costs. We expect to
continue  to incur net losses as we  complete  the  implementation  of  enhanced
internal  controls  over  financial  reporting  and  continue  to  invest in new
technology  and  emerging  markets.  As a result of these  losses,  our  capital
requirements have increased and we expect to require additional financing in the
fourth  quarter of 2006 to fund our  operations.  We currently have no financing
facility  in place.  Although  we are in  discussions  with  respect  to various
financing  alternatives,  we cannot  assure  you that we will be  successful  in
obtaining the required  capital.  Any financing  arrangements  that we may enter
into may increase  future  costs,  involve  restrictions  on our  financing  and
operating activities or be dilutive to existing  stockholders.  If we are unable
to obtain additional financing as needed, we may be required to reduce the scope
of, or curtail,  our operations.  Our independent  registered  public accounting
firm  has  informed  us that  it may  include  in its  report  on the  Company's
financial  statements  for the year  ending  December  31,  2006 an  explanatory
paragraph  expressing  substantial doubt about the Company's ability to continue
as a going  concern  if the  Company  fails to  successfully  fund  its  current
operations.

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

Certain former Interlink stockholders have filed a class action lawsuit claiming
damages  under  various  federal  securities  laws based on our  restatement  of
historical  financial  statements.  Other stockholders have brought a derivative
action  against  our Chief  Executive  Officer  and our former  Chief  Financial
Officer that alleges, among other things,  securities-related  violations of the
California  Corporations Code. These actions will require a vigorous defense and
could result in a settlement  or adverse  award that is not covered by insurance
or that exceeds  applicable  insurance limits.  The time and expense required to
defend these claims may also affect our ability to pursue our strategy. There is
also no  assurance  that  additional  lawsuits  will  not be  filed  or that the
ultimate  resolution  of these  matters  will not result in a  material  adverse
effect on our business, financial condition or results of operations.

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

         In our Annual Report for the year ended  December 31, 2005, we reported
material  weaknesses  in our internal  control over  financial  reporting.  As a
result of these material weaknesses,  we were required to restate several of our
historical financial  statements.  We have taken significant measures to improve
our financial  reporting process but, despite these measures,  continued to have
material  weaknesses as of June 30, 2006. These matters are more fully described
elsewhere  in this  Report  under  the  captions  "Management's  Discussion  and
Analysis of Financial  Condition  and Results of  Operations"  and "Controls and
Procedures--Changes in Internal Control Over Financial Reporting."

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


                                       30
<PAGE>


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

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

         Our OEM Remote  Controls  business is focused on consumer  markets that
are  intensely  price  competitive.  If we cannot  generate  volume and  related
manufacturing  efficiencies required to compete in these markets, our results of
operations will be adversely affected.

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

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

         Sales to OEMs  constituted  41% of our total  sales for the six  months
ended  June  30,  2006.  If  we  fail  to  maintain,   develop  and  expand  our
relationships  with  significant  OEMs,  or if those OEMs are not  successful in
their  marketing and sales  efforts,  demand for our products may decrease.  For
example, our OEM Remote Controls products are sold to OEMs and consist primarily
of remote devices that are packaged with advanced viewing  devices,  televisions
or presentation systems. If our OEM customers experience a significant reduction
in demand for advanced viewing devices,  televisions or presentation  systems it
will significantly decrease demand for our remote devices.

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

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

         For the first half of 2006,  approximately  41% of our total sales were
to our OEM  Remote  Controls  customers  and  most of  these  sales  were to OEM
customers. With the advent of our MICRONAV family of sensors, we expect that our
reliance on OEM sales will  increase.  The loss of any key OEM  customers,  or a
significant  reduction in sales to those customers,  could significantly  reduce
our revenue below anticipated levels. From time to time, we expect to lose other
significant  revenue  streams  and  will be  required  constantly  to  seek  new
opportunities  with new and existing  customers.  Because our expense levels are
based on our expectations as to future revenue and are, to a large extent, fixed
in the short term, a substantial  reduction or delay in sales of our products to
an OEM customer,  the unexpected  loss of any significant OEM or other customer,
or unexpected returns from customers, could harm our business.


                                       31
<PAGE>


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

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

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

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

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

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

         o        we must accurately predict the evolving needs of our customers
                  and develop,  in a timely manner,  the technology  required to
                  support those needs;

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

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

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

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

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

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


                                       32
<PAGE>


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

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

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

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

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

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

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

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

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

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

         Our revenue from  international  sales accounted for approximately 43%,
55% and 60% of net  sales for the six  months  ended  June 30,  2006 and for the
years  ended  December  31,  2005  and  2004,  respectively.   We  believe  that
international  sales will  represent a substantial  portion of our sales for the


                                       33
<PAGE>


foreseeable  future. Our non-FSR  manufacturing is currently  performed by third
parties  in  China.  Our  international  operations  involve  a number of risks,
including:

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

         o        difficulty in staffing and managing foreign operations;

         o        ability to secure credit and funding;

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

         o        foreign collection problems;

         o        reduced protection of intellectual property rights;

         o        international unrest and terrorism;

         o        political and economic instability; and

         o        transportation risks.

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

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

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

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

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

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

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


                                       34
<PAGE>


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

         ROHS  went into  effect on July 1,  2006.  ROHS  limits  the use of six
hazardous raw materials in the  production of electronic  and  electrical  goods
that are sold in Europe.  Many of these  restricted  materials  are found in our
products  and in the  components  we  have  in our  inventory.  Many  of our OEM
customers have implemented  ROHS  restrictions and are requiring our products to
be  ROHS-compliant.  In  2005,  we  determined  that  we  would  not be  able to
adequately reduce our inventory of non-compliant  materials and, as a result, we
recorded an expense of $900,000 to create a reserve for  obsolescence.  While we
currently  believe our  inventory  reserve is adequate,  we may have  additional
inventory write downs due to ROHS or other similar  restrictions  implemented by
other markets.

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

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

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

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

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

         We  consider  our  intellectual  property  to be a key  element  of our
ability to compete in our chosen  markets.  We rely on a combination of patents,
trade secrets and proprietary software to establish and protect our intellectual
property  rights.  We cannot  assure you that patents will be issued from any of
our pending  applications  or that any claims  allowed from  existing or pending
patents will be  sufficiently  broad to protect our  technology.  We also cannot
assure you that any patents issued to us will not be challenged,  invalidated or
circumvented,  or that the rights granted will provide  proprietary  protection.
Litigation  may be  necessary to enforce our  patents,  trade  secrets and other
intellectual  property  rights,  to  determine  the  validity  and  scope of the
proprietary  rights of others or to defend against claims of infringement.  Such
litigation  could result in  substantial  costs and  diversion of resources  and
could have a material  adverse  effect on our business,  regardless of the final
outcome of the litigation.

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


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<PAGE>


WE RELY ON OTHERS FOR ASPECTS OF OUR TECHNOLOGY DEVELOPMENT.

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

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

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

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

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

         o        unanticipated costs and liabilities;

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

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

         o        difficulties in maintaining customer relationships;

         o        diversion of management's attention;

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

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

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

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


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<PAGE>


ITEM 6.  EXHIBITS

         3.1      Certificate  of  Incorporation,  as amended  (incorporated  by
                  reference to Exhibit 3.1 to the Registrant's  Annual Report on
                  Form 10-K for the year ended December 31, 2000).

         3.2      Bylaws  (incorporated  by  reference  to  Exhibit  3.2  to the
                  Registrant's  Current  Report on Form 8-K filed on October 10,
                  2006).

         31.1     Certification   of  Chief  Executive   Officer  of  Registrant
                  Pursuant to SEC Rule 13a-14(a)/15d-14(a),  as Adopted Pursuant
                  to Section 302 of the Sarbanes-Oxley Act of 2002.

         31.2     Certification   of  Chief  Financial   Officer  of  Registrant
                  Pursuant to SEC Rule 13a-14(a)/15d-14(a),  as Adopted Pursuant
                  to Section 302 of the Sarbanes-Oxley Act of 2002.

         32.1     Certification   of  Chief  Executive   Officer  of  Registrant
                  Pursuant to 18 U.S.C.  Section  1350,  as Adopted  Pursuant to
                  Section 906 of the Sarbanes-Oxley Act of 2002.

         32.2     Certification   of  Chief  Financial   Officer  of  Registrant
                  Pursuant to 18 U.S.C.  Section  1350,  as Adopted  Pursuant to
                  Section 906 of the Sarbanes-Oxley Act of 2002.


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<PAGE>


                                   SIGNATURES

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


                                      INTERLINK ELECTRONICS, INC.



DATE: November 16, 2006                /S/ CHARLES C. BEST
                                      ------------------------------------------
                                      Charles C. Best
                                      Chief Financial Officer


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<PAGE>


                                  EXHIBIT INDEX

The following  exhibits are filed with or  incorporated  by reference  into this
Quarterly Report:

EXHIBIT
NUMBER         DESCRIPTION
-------        -----------

3.1            Certificate  of  Incorporation,   as  amended   (incorporated  by
               reference  to Exhibit 3.1 to the  Registrant's  Annual  Report on
               Form 10-K for the year ended December 31, 2000).

3.2            Bylaws   (incorporated   by  reference  to  Exhibit  3.2  to  the
               Registrant's  Current  Report  on Form 8-K filed on  October  10,
               2006).

31.1           Certification of Chief Executive  Officer of Registrant  Pursuant
               to SEC Rule  13a-14(a)/15d-14(a),  as Adopted Pursuant to Section
               302 of the Sarbanes-Oxley Act of 2002.

31.2           Certification of Chief Financial  Officer of Registrant  Pursuant
               to SEC Rule  13a-14(a)/15d-14(a),  as Adopted Pursuant to Section
               302 of the Sarbanes-Oxley Act of 2002.

32.1           Certification of Chief Executive  Officer of Registrant  Pursuant
               to 18 U.S.C.  Section 1350, as Adopted Pursuant to Section 906 of
               the Sarbanes-Oxley Act of 2002.

32.2           Certification of Chief Financial  Officer of Registrant  Pursuant
               to 18 U.S.C.  Section 1350, as Adopted Pursuant to Section 906 of
               the Sarbanes-Oxley Act of 2002.


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