INTELLI CHECK INC
Overview        We were  originally  incorporated  in the  state of New  York in 1994.  In August 1999, we reincorporated in Delaware.  We have developed and are currently marketing  an  advanced  document  verification  system as part of our  identity management   solutions  to  enable  a  user  to  detect   altered  and  tampered identification cards and to address problems such as:  o   Commercial  Fraud - which may lead to economic  losses to  merchants  from       check  cashing,  debit and  credit  card and other  types of fraud such as       identity theft that principally  utilizes fraudulent  identification cards       as proof of identity;  o   Unauthorized  Access  -  by  verifying  identification,  our  systems  and       software  are  designed  to  increase  security  and  deter  terrorism  at       airports, shipping ports, rail and bus terminals,  military installations,       high profile buildings and infrastructure where security is a concern;  o   Underage  Access to Age  Restricted  Products  and Services - by verifying       identification,  our systems and software  are  designed to determine  the       customer's  age and  validity  of the  identification  card to detect  and       prevent the use of fraudulent  identification for the purchase of alcohol,       tobacco and other  age-restricted  products and services and to reduce the       risk to the retailer of substantial monetary fines, criminal penalties and       the  potential  for  license  revocation  for the  sale of  age-restricted       products to minors; and  o   Inefficiencies Associated With Manual Data Entry - by reading encoded data       contained in the bar code and magnetic  stripe of an  identification  card       with a quick swipe or scan of the card, where permitted by law,  customers       are capable of accurately and instantaneously  inputting  information into       forms, applications and the like without the errors associated with manual       data entry.  Our Products and Services        ID-Check(TM) technology        Our patented ID-Check(TM) technology is our advanced document verification software.  ID-Check is  contained in our  software  products,  and is capable of reading and  verifying in one swipe or scan the encoded  data  contained on U.S. and Canadian driver licenses,  state issued non-driver  identification cards and military  IDs that,  in most cases,  comply with the  standards  of the American Association  of Motor  Vehicle  Administrators  (AAMVA),  the American  National Standards Institute (ANSI) and the International Standards Organization (ISO).        C-Link(R) software        Our C-Link(R) software, which is our networkable data management software, works in conjunction with the ID-Check terminal and our data collection  modules and may be used where permitted by law as certain  jurisdictions  restrict using this information  without customer consent. It allows the user to instantly view data from  driver  licenses  as well as from the  smart  chip  contained  on the military common access card (CAC), for further verification and archives it into a personal computer. C-Link(R) can be used on a stand alone personal computer or network  environment.  It contains  features  such as alerts,  watch lists,  and recurring entry.        ID-Check SDK        Our software product,  ID-Check SDK, formerly called IDN-DLL,  is designed for software developers that wish to incorporate  ID-Check technology into their applications.  It  contains  our  proprietary  technology,  as well as a  device controller,  and is capable of reading the smart chip  contained in the military CAC. We currently have multiple license  agreements  executed with third parties for integration and  sub-licensing of our software  applications into their core applications.                                         3         ID-Check(R) PC and ID-Check(R) PDA        Two software  solutions,  ID-Check(R) PC and ID-Check(R) PDA, are designed to replicate  the features of  ID-Check(R)  and to be  platform-independent  and compatible with stationary and mobile hardware  applications.  ID-Check(R) PC is designed to read the smart chip contained in the military CAC.        ID-Prove        ID-Prove is a software  solution that is intended to add additional layers to IDN's identity management suite of products.  ID-Prove,  when prompted,  will provide an end user a variable  number of "out of wallet"  questions  about that individual.  These  questions  seek to ensure that the individual in question is truly who they claim to be.  Currently,  the ID-Prove product is integrated into our  ID-Traveler  product as well as  available  for our  partners to  integrate directly into their product offering.        ID-Traveler        ID-Traveler  is a software  solution that can  electronically  compare two forms of government issued IDs  instantaneously and determine whether the common fields match (e.g. name, address,  date of birth).  Should the fields match, the information is  highlighted in one color.  If the fields do not produce a match, the information is highlighted in a different color. Two forms of identification that are  frequently  used  include  driver's  licenses,  state issued ID cards, military ID's, passports, borders crossing cards and visas. The program also has the ability to store the images of the  documents  provided  for proof of ID and has the  ID-Prove  module  embedded so that with  Internet  connectivity  it can generate a series of questions to test one's claimed identity.        Data Collection Devices        ID-Check(R)  PC,  ID-Check(R)  PDA and  C-Link(R) are all designed for use with our data collection  devices,  which are available in various forms,  which are compact,  and may contain either one or both of two-dimensional bar code and magnetic stripe readers.  These devices enable our new software  applications to be  used  on a  variety  of  commercially  available  data  processing  devices, including  credit  card  terminals,   PDAs,  Tablets,   Laptops,   Desktops  and Point-of-Sale  Computers.  As a result of these new  product  introductions,  we believe  that our  target  markets  will  enjoy  pricing  efficiencies  and more flexible and versatile technology options,  thereby negating the need to replace the IDC-1400 platform.        IDC-1400        The original product we designed and developed,  the IDC-1400, is based on our  ID-Check(TM)  technology.  Effective  as of  July  2003,  our  manufacturer discontinued manufacturing the IDC-1400 terminal.  However, we are offering this product for sale until current  inventory is sold. We have replaced this product with new software solutions compatible with new data collection devices that are capable of operating on multiple hardware platforms.  New Products and Services        ID-Check Mobile        ID-Check  Mobile is our first device that  provides  true mobility for our customers.  The  form-factor  is a small,  lightweight  mobile  computer  with a durable  housing design and an integrated 2-D bar code reader,  with an optional clip-on magnetic stripe reader. By allowing the user to move between  locations, ID-Check  Mobile  provides  the ability to check the validity of ID documents at multiple entry points.                                          4         ID-Check POS        ID-Check POS is a software  application  that runs on a VeriFone Omni 37XX device.  Our  Software  uses both the  onboard  magnetic  stripe  reader  and an optional  external  2-D bar code reader that plugs into an open port on the back of the unit. The terminal has an integrated,  high-speed  thermal  printer.  The Omni 37XX is a  multi-application  terminal that allows the ID-Check software to run side by side with credit card processing software.        Web Form Filler Product        This  software  product is a Browser  Helper  Object  ("BHO") for Internet Explorer.  It was  released in beta  version in late 2005 and is  scheduled  for commercial  release in the second  quarter of 2006. The BHO allows our customers to  seamlessly  integrate  our core  ID-Check  technology  into  their web based applications.  The BHO can be programmed  through a series of drop down menus to populate  driver  license  data in the fields of specific web pages based on web page URLs and web page  field  names.  The  technology  also  verifies  that the encoded information on the bar code or mag stripe matches to a proper format.  Upgrade Capability        Our software  requires  periodic  updates as states and provinces that did not previously conform to AAMVA standards begin to store electronically readable information  on their  driver  licenses  and as states and  provinces  adjust or modify the format of their  electronically  stored  information.  Jurisdictional updates can be  distributed  in as variety of ways  depending  on the product in use. Our  technology  can be upgraded with upgrade  cards by simply  scanning an upgrade  card sent by mail or  downloaded  from our website and printed  using a personal computer.  Other Intelli-check products can be upgraded by installation of a file sent on an SD card,  CD  and/or  e-mail  to the  customer.  One of our newest  products  can be  upgraded by modem  using a dial-up  phone  connection. Jurisdictional  Updates are  included  in the  purchase  price of  Intelli-Check products,  for the first year after purchase.  We sell upgrade  packages for the period commencing after the first year of purchase.  Background on Identification Documentation        Driver license        The driver license is the most widely used form of government issued photo identification.  The  Real  ID  Act,  which  became  federal  law in  May  2005, recognizes  that the driver  license  is also a  quasi-identification  card.  In addition to its primary function,  the driver license is used to verify identity for social  services,  firearm sales,  check cashing,  credit card use and other applications. There are approximately 228 million driver licenses in circulation in the U.S. and Canada. Our technology can read the data encoded on all licenses that in most cases comply with the AAMVA/ANSI/ISO standards, which we believe is over 200  million of those  issued at the  current  time.  Currently,  the fifty states,  the District of Columbia,  and eight  Canadian  Provinces  encode their licenses.  We believe that the number of readable licenses will continue to grow as the five Canadian Provinces that have either not yet encoded their license or completed a rotation with encoding begin to encode and  jurisdictions  that have recently begun to encode complete their rotations.  Additionally, we believe the Georgia license in its new rotation will be capable of being machine read.        Non-driver identification card        Although many people do not have a driver license, many jurisdictions that use AAMVA compliant  driver licenses offer other  identification  cards that may contain encoded  information.  These  identification  cards, as well as military ID's, are  fundamentally  identical to driver licenses.  Because driver licenses are the most widely used form of legally acceptable government documentation, we will refer to all these types of legally acceptable governmental  identification documents  as "driver  licenses."  Our ID-Check  software is equally  capable of performing its function with these other types of government identification.                                         5    Regulation of Retailers of Tobacco Products and Alcoholic Beverages        In an effort to combat the problems of underage drinking and smoking,  the federal  government,  many  states and  Canadian  provinces  have  enacted  laws requiring  businesses  that sell  age-restricted  products  to verify the IDs of potential  customers to determine  that they are of legal age to purchase  these products. These laws impose stringent penalties for violations. For example, new federal  regulations  have been enacted that place a greater burden on retailers to prevent the sale of tobacco products to minors.  Clerks are required to check the photo ID of anyone  trying to  purchase  tobacco  products  who appear to be under the age of 27,  and the  retailer  of  alcoholic  products  who sell to an underage  person could face potential  fines,  suspension of its license and the potential  outright  revocation  of its  license  to sell  alcoholic  beverages. Additionally,  in states  where  enacted,  dram shop laws  allow a person who is injured by any obviously intoxicated person to file a claim for relief for fault against any person who knowingly sells alcoholic beverages to a person less than 21  years  of  age.  As a  result  of law  enforcement  efforts  and  regulatory penalties,  we believe  retailers that sell alcohol and tobacco,  such as liquor stores,   bars  and  convenience  stores,  are  facing  increasing  pressure  to accurately verify the age of their customers.  Current Challenges Associated with Verifying Identification Documents        The high-tech revolution has created a major problem for those who rely on identification documents. In an age where scanners, computers and color printers are commonplace,  fake ID's of the highest quality are easily  obtainable from a number of locations  including  college  campuses and from thousands of sites on the Internet.  These fakes appear so real,  even law  enforcement  agencies have encountered  difficulty  distinguishing  them  from  legally  issued  documents. Additionally,  these high-tech devices have the ability to easily alter properly issued ID's.  Therefore,  anyone can gain access to a false  identity that gives them the ability, in a commercial transaction, to present fake and stolen credit cards or  checks  that are  supported  by  false  identification.  Additionally, starting with only a fraudulent  driver  license,  an individual  may be able to create multiple  identities,  commit fraud, buy age restricted  products such as alcohol and tobacco while  underage,  evade law  enforcement and engage in other criminal activities, such as:  o   committing identity theft;  o   improperly boarding airplanes;  o   committing credit card, debit card and check cashing fraud;  o   unlawfully obtaining welfare or other government benefits;  o   committing refund fraud,  o   committing pharmacy fraud, including false narcotic prescriptions,  o   gaining entrance to high profile buildings and sensitive  infrastructures,       such as nuclear facilities;  o   illegally purchasing firearms;  o   purchasing age restricted products such as alcohol and tobacco while under       age;  o   committing employee fraud, including employee theft and payroll theft; and  o   engaging in medical fraud.         Given the ease with which identification can be falsified,  simply looking at a  driver  license  may not be  sufficient  to  verify  age or  identity  and determine  whether  or  not  it  is  fraudulent.   Since  merchants  are  facing significant  economic  losses due to these  frauds,  we believe  that a document verification  system  which  can  accurately  read  the  electronically   stored information is needed.  We possess a patented  software  application  technology that  provides an  analysis  of all the data  contained  on these  documents  by reading and  comparing  the  information  encoded on the tracks of the  magnetic stripe or bar code on the driver license against known standards.  ID-Check Solutions and Benefits        We believe that ID-Check and our family of software  solutions contain the most advanced, reliable and effective technology,  providing users with an easy, reliable,  and cost-effective  method of document and age verification.  We have received  encoding  formats  from  most  jurisdictions  that  conform  to  AAMVA standards. This information,  combined with our patented technology, enables the ID Check software as well as our  ID-Check(R) PC and ID-Check(R) PDA software to read, decode, process and verify the information electronically stored on driver licenses.  As jurisdictions and AAMVA change their documents and guidelines,  we believe our software, together with our programmable terminal, can be adapted to these changes.                                          6         ID Check  terminals do not require a connection  to a central  database to operate,  thus negating  privacy  concerns.  Our  terminals  have the ability to operate add-on  peripherals  such as printers,  bar code  scanners,  fingerprint readers and other  devices.  Additionally,  our  terminals  and our new software solutions utilizing our DCM can communicate with personal computers, which could enhance  the  functionality  of  these  products  and  potentially   create  the opportunity for sales of other software products by us.        The ID Check process is quick,  simple and easy to use. After matching the (driver  license)   photograph  to  the  person   presenting  the  document  for identification,  the user  simply  swipes the driver  license  through  the data capture  device  if the card has a  magnetic  stripe or scans it if it has a bar code. The software quickly determines if the document:  o   is valid;  o   has been altered or tampered with;  o   has expired; and  o   has a date of birth equal to or greater than the legal age to purchase age       restricted  products,  such as  alcohol  and  tobacco,  in the  retailer's       location.  Then, the technology will automatically:  o   respond to the user by displaying  the results in words on the  hardware's       screen;  o   save information that is permissible by law to the hardware's own memory;  o   print a record of the transaction including the results on a roll of paper       similar to that used in cash  registers,  if an optional  printer has been       installed; and  o   send the  results  to a  personal  computer  which has  Microsoft  Windows       95/98/ME/NT/2000/XP  ("PC") for permanent storage when used in conjunction       with  our  software,   which  simplifies  record  keeping  by  downloading       comprehensive ID-Check due diligence data into a personal computer,  where       permitted by law. This provides a merchant with secure  back-up files that       include individual and cumulative transaction records.  Strategy        Our objective is to be a leading provider of productivity  enhancement and identity management solutions. These solutions include our identity verification technology  systems and software in the work-flow,  commercial fraud protection, access control and age verification markets. Key elements of our strategy are as follows:        Productivity  Enhancement.  Through  many of our recent  successes  in the retail vertical market and our entrance into the financial services vertical, we intended to market our technology as key  productivity  enhancement  tools.  Our patented ID-Check software can add functionality to virtually any given software application  to  automatically  populate  fields  within  a  given  form  when a government-issued  photo ID is presented.  The automation  that results from the intelligence  added  to the  form  dramatically  increases  throughput  and data integrity, and it significantly enhances the customer's experience.        Develop  Additional   Strategic   Alliances  with  Providers  of  Security Solutions. We have entered into strategic alliances with Bioscrypt Inc., Identix Corporation, Ultra-Scan Inc., and Cross-Match Technologies, biometric companies; Lenel  Systems  International,  a provider  of  integrated  security  solutions; Northrop Grumman and Anteon,  integrators in the defense industry;  Intermec and Metrologic hardware manufacturers; and Digimarc and Viisage, providers of driver licenses for approximately 90% of the jurisdictions in North America, to utilize our systems and software as the proposed or potential enrollment application for their technologies and to jointly market these security applications. We believe these relationships will broaden our marketing reach through their sales efforts and  we  intend  to  develop  additional  strategic  alliances  with  additional providers of security solutions.                                          7         Strengthen  Sales and  Marketing  Efforts.  We intend to capitalize on the growth in demand for age and document  verification  by continuing to market and support  our systems  and  software.  Our sales and  marketing  departments  are organized by target  market  rather than  geographic  area to provide  focus and create experts in each area.        Enter into  Additional  Licensing  Agreements.  We intend to  continue  to license  our  software  for  use  with a  customer's  system.  We are  currently licensing  our  ID-Check  SDK and  C-Link(R)  software  products for Windows and Windows CE platforms  and intend to  similarly  license our  ID-Check(R)  PC and ID-Check(R) PDA software  solutions.  Our software is intended to be used with a compatible  hardware device. We have entered into multiple licensing  agreements to date.        Protect  Intellectual   Property.   We  intend  to  strongly  protect  our intellectual  property portfolio in order to preserve value and obtain favorable settlements  where  warranted.  For  example,  in February  2003,  we filed suit against CardCom,  Inc. d/b/a CardCom Technology,  Inc. claiming that CardCom had infringed one of our patents.  Subsequently,  we entered into a patent licensing agreement with CardCom  effective  March 2003 which provides for a non-exclusive three year license in connection with the manufacture, use and sale of CardCom's age  verification  products in the United States and Canada.  On March 12, 2006, this licensing agreement expired and we are in discussions with CardCom to renew the terms of the  agreement.  We also have filed a patent  infringement  lawsuit against Tricom Card  Technologies,  Inc. in July 2003,  which is currently being litigated.  Our Revenue Sources        We derive our revenue from the following sources:  o   Sales of our systems by our own direct sales force and marketing partners;  o   Per  transaction  or  subscription  fees  from  the  licensed  use  of our       technology;  o   Royalties and  licensing  fees from  licensing our patented  technology to       third parties;  o   Revenue sharing and marketing arrangements through strategic alliances and       partnerships; and  o   Sale of software upgrades and extended maintenance programs  Our Target Markets        The use of false  identification  cards,  primarily  driver  licenses  and non-driver  identification  cards, to engage in commercial fraud, to gain access to  unauthorized  areas  and to  gain  entry  to,  or  purchase  products  from, establishments that sell age-restricted items, is prevalent. Given the ease with which  identification  can be  falsified,  we believe  that simply  looking at a driver's  license may not be  sufficient to verify age or identity and determine whether or not such an  identification  card is fraudulent.  Since merchants are facing  significant  economic  losses due to these frauds,  we believe that what they need is a  document  verification  system,  which can  accurately  read the electronically stored information. We target the markets that would most benefit from our systems and software.        In the past twelve months,  we have marketed our products to opportunities where our ID-Check technology can be used to enhance productivity.  We have made significant  progress  in the  marketplace  for the retail  issuance  of instant credit. We believe there is a financial benefit and a compelling  business model for customers in this marketplace to utilize our technology.  Productivity Enhancement  o   Mass merchandisers and retailers  o   Banks and other financial institutions  o   Credit unions  o   Credit card issuers  o   Check cashing services  o   Auto dealerships and rental car agencies  o   Casino for enrollment of guests  o   Hospital patient admissions  o   Lodging Industry  o   Airlines                                         8   Commercial fraud protection  o   Mass merchandisers and retailers  o   Banks and other financial institutions  o   Credit unions  o   Credit card issuers  o   Check cashing services  o   Pharmacies  o   Auto dealerships and rental car agencies  o   Casino cage operations  o   Hospitals, medical facilities and health plans  o   Lodging Industry  Access control  o   Airports and airlines  o   Departments of Motor Vehicles  o   Prisons  o   Law enforcement agencies  o   Notable buildings  o   Court houses  o   Nuclear facilities  o   Oil refineries and storage facilities  o   Military establishments  o   College Campuses  o   Department of Homeland Security  o   Bus, rail and port facilities  Age verification market  o   Bars and night clubs  o   Convenience stores  o   Grocery chains  o   Restaurants  o   Stadiums and arenas  o   Casinos and gaming establishments  o   Sellers of sexually explicit material  o   Firearm dealers  Current Customers        We have  generated  revenues from our customers  from the sale of systems, licensing   of  software   and  sale  of  software   upgrades.   The   following representative customers are using our systems and software for commercial fraud protection:  o   Certegy Check Services, Inc.  o   MGM Grand  o   Caesar's Palace  o   Foxwoods Resorts and Casino  o   Mohegan Sun Resort Casino        The following  representative customers are using our systems and software for access control:  o   JFK  Airport in New York,  O'Hare  International  Airport  in Chicago  and       Reagan National Airport in Washington DC  o   American Stock Exchange  o   Fort Sam Houston and Fort Hood  o   New York, Vermont and Delaware Department of Motor Vehicles  o   Port Authority of New York and New Jersey  o   United States Supreme Court        The following  representative customers are using our systems and software for age verification:  o   Integrated Solutions International LLC  o   Sunoco  o   Exxon/Mobil franchisees  o   Darden Restaurants  o   Houston's Restaurants  o   Anton Airfoods, Inc.   Marketing and Distribution        Our  objective  is to become the  leading  developer  and  distributor  of document and age verification products. To date, our marketing efforts have been through direct sales by our sales and marketing personnel, through resellers and license  agreements.  We are marketing  our products  through  direct  marketing approaches such as web marketing,  a small number of select trade shows and well known public interest and trade associations. During the second quarter of 2006, we expect to introduce  our newly  designed web site that will provide  enhanced customer support and the ability to order our products online.                                          9         We generate revenues from the licensing of our software and the selling of bundled solutions that contain hardware and software.  Depending on the specific needs of our  clients,  we tailor  the right  solution  for  them.  Our  bundled solutions,  which  include,  but are not  limited  to, our  ID-Check  Mobile and ID-Check POS offer  multiple  pricing  options.  We also generate  revenues from various  new  software  solutions  that  are  built  upon a per  transaction  or subscription model.        Our patented  ID-Check software is Microsoft Gold Certified and can run on a variety of Windows and  Windows CE  platforms  in addition to devices  such as credit card  terminals.  We are marketing our ID-Check(R) PC and ID-Check(R) PDA solutions to the  government,  airlines,  airports,  high  profile  buildings or infrastructure,  mass merchandisers,  grocery,  convenience and pharmacy chains, casinos and banks.        We  have  developed  a  comprehensive  marketing  plan to  build  customer awareness and develop brand  recognition in our target  markets.  We promote the advantages and ease of use of our products through:  o   Endorsements  by  nationally   known  public  interest  groups  and  trade       associations;  o   Trade publications;  o   Trade shows;  o   Direct mail;  o   Web seminars, as well as our own website;  o   Various conventions and industry specific seminars.        As we gain market  acceptance  for our ID-Check  technology,  we intend to develop and market other related software applications.        We further  intend to add  qualified  "value added"  remarketers  that are capable of reaching  smaller  customers.  We believe  this  represents  the most cost-effective  way to reach  numerous  "mom and  pop"  establishments  in North America involved in the sale of age restricted products.  Furthermore,  in order to broaden our sales "reach" into existing and new markets,  we will continue to enter into selective  agreements  with proven  application  solution  providers, system integrators, resellers and independent sales representatives.  Basically, we have  revamped  our entire  distribution  network to provide us with  greater effectiveness.  Competition        We compete in a market that is relatively new, intensely competitive,  and rapidly  changing.  Unless a device  can read,  decode  and  analyze  all of the information legally permitted to be analyzed which is electronically stored on a driver license, the user may not obtain accurate and reliable  confirmation that a driver  license is valid and has not been  altered or  tampered  with.  We are aware of several companies,  including Card Com, Tri Com Technologies,  Positive Access,  ID-Logix  and  Legal  Age that are  currently  offering  products  that electronically  read and calculate age from a driver license. We have tested and compared  some of these  products  to ID-Check  and believe  that our product is superior in quality and functionality.  We believe that units unable to read bar codes  are at a  significant  disadvantage  because  most  states  and  Canadian provinces  currently utilize bar codes to encode their driver licenses,  as well as all U.S.  military IDs and uniformed  services  cards.  In addition,  some of these other products cannot connect to a personal computer or use a printer.        We have  experienced  and  expect  to  continue  to  experience  increased competition in the age verification market, and have to date experienced limited competition from companies in the document  verification  market.  If any of our competitors were to become the industry standard or were to enter into or expand relationships with significantly larger companies through mergers,  acquisitions or otherwise,  our business and operating  results could be seriously harmed. In addition,  potential  competitors  could  bundle their  products or  incorporate functionality  into existing  products in a manner that  discourages  users from purchasing our products.  Manufacturing        In January 2004, we entered into a two year product  supply  agreement for the  purchase  of input  devices.  Under the terms,  these  devices,  which were private  labeled,  are programmed to work in conjunction  with our  ID-Check(TM) technology.  On December 30, 2005,  we entered into a new 2 year product  supply agreement  with the same  manufacturer  and with similar terms and conditions as the prior  agreement.  On March 14, 2006,  we signed a one year  product  supply agreement with another  manufacturer for the purchase of alternate input devices that are also programmed to work in conjunction with our ID-Check(TM) technology as well.                                          10   Intellectual Property        In January 1999, the U.S. Patent and Trademark  Office granted us a patent on our ID-Check  software  technology.  In October 2002, we were granted another patent relating to our document authentication and age verification  technology. At present,  we have other patent  applications  pending in the U.S.  Patent and Trademark  Office.  These patents cover  commercially  important  aspects of our capabilities  relating to the  authentication of a document,  such as a driver's license, along with the verification of the age of an individual associated with that  document.  Upon our  acquisition  of the  assets  of  IDentiScan,  we also received equitable ownership and sole ownership rights to intellectual property, including  other patents and patent  applications  relating to age  verification technology.  We currently hold five (5) U.S.  patents,  two (2) Canadian patents and one (1) United Kingdom patent.        We have also been granted multiple copyrights in the United States,  which are effective in Canada and in other major  industrial  countries.  In addition, the copyright  protection  covers software source codes and supporting  graphics relating to the operation of ID-Check and other software products.  We also have several trademarks relating to our company, its product names and logos.        In connection with the sales or licensing of our intellectual property, we have  entered  into an  agreement  with Mr.  Kevin  Messina,  our former  Senior Executive V.P. and Chief Technology  Officer,  under which we will pay royalties equal to 0.005% of cumulative gross sales for sales of $2,000,000 to $52,000,000 and  0.0025%  of  cumulative  gross  sales for  sales in excess of  $52,000,000. Cumulatively,  as of December 31, 2005,  total fees payable under this agreement amounted to $267.  Employees        As of  March  24,  2006,  we had  nineteen  full-time  employees  and  one part-time  employee.  Four  are  engaged  in  executive  management,   eight  in information technology, five in sales and marketing and three in administration. We believe our relations  with our  employees are generally  good and we have no collective bargaining agreements with any labor unions.
RISK FACTORS                     Risks Related to Our Business and Industry  We have incurred  losses since  inception  and losses may continue,  which could result  in a  decline  in  the  value  of our  securities  and a  loss  of  your investment.        We sustained net losses of $6,922,931  and $3,238,959 for the fiscal years ended December 31, 2004 and December 31, 2005, respectively.  Since we expect to incur additional  expenditures in line with the sales growth of our business, we cannot assure you that we will achieve operating profits in the near future.  We may be unable to meet our future capital requirements.        Our capital requirements have been and will continue to be significant. In the event that we do not  generate  meaningful  revenue,  we would need to raise additional  capital.  If we are unable to raise additional  capital,  we plan to implement  cost saving  measures  to sustain  business  activities  on a reduced level.   Unplanned   acquisition   and  development   opportunities   and  other contingencies may arise, which could require us to raise additional  capital. If we raise  additional  capital  through the sale of equity,  including  preferred stock,  or convertible  debt  securities,  the percentage  ownership of our then existing stockholders will be diluted.        We  currently  do not  have a  credit  facility  or  any  commitments  for additional financing. We cannot be certain that additional financing,  should it be needed, will be available when and to the extent required.  If adequate funds are not available on acceptable  terms,  we may be unable to fund our expansion, develop or enhance  our  products,  or respond to  competitive  pressures.  Such limitation  could  have a material  adverse  effect on our  business,  financial condition and results of operations.                                          11   We may not be able to keep up with rapid technological change.        Our market is  characterized  by frequent  new product  announcements  and rapid  advancements in hardware  technology.  Significant  technological  change could render our existing technology obsolete.  If we are unable to successfully respond to these  developments,  or do not respond in a cost-effective  way, our business,  financial  condition  and results of  operations  will be  materially adversely affected.  Our  proprietary  software  relies on reference  data provided by government and quasi-government  agencies. If these governmental and quasi-government  agencies were to stop sharing data with us, the utility of our proprietary software would be diminished in those jurisdictions and our business would be damaged.        Currently,  fifty  (50)  states,  eight  (8)  Canadian  provinces  and the District of Columbia,  which conform to the  guidelines  established  by certain organizations responsible for implementing industry standards, cooperate with us by  providing  sample  identification  cards  so that we may  modify  all of our hardware and software products to read and analyze the encoded information found on such jurisdiction's  identification  cards. We cannot assure you that each of these jurisdictions will continue to cooperate with us. In the event that one or more of these  jurisdictions do not continue to provide this reference data, the utility of our proprietary software may be diminished in those jurisdictions.  Future   government   regulation   restricting   the   capture  of   information electronically  stored  on  identification  cards  could  adversely  affect  our business.        Our proprietary software products are designed to read, verify and capture information from  identification  cards.  Currently,  those customers located in Nebraska, New Hampshire, North Carolina and Texas have some restrictions on what can be done with this information  without customer  consent.  Because issues of personal  privacy  continue to be a major topic of public policy  debate,  it is possible   that  in  the  future   additional   customers  in  these  and  other jurisdictions may be restricted from capturing this information.  Therefore, the implementation  of unfavorable  regulations or  unfavorable  interpretations  of existing  regulations  by courts or regulatory  bodies could require us to incur significant  compliance costs,  cause the development of the affected markets to become impractical and reduce our revenues and potential revenues.  Our business strategy exposes us to long sales and implementation cycles for our products.        Our target  customers in the commercial fraud  protection,  access control and age  verification  markets include large retailers and government  agencies, which typically require longer sales and implementation  cycles for our products than do our potential customer base solely interested in age verification,  such as  restaurant,  bar and  convenience  store  operators.  The  longer  sales and implementation  cycles for larger retail  companies  continue to have an adverse impact  on  the  timing  of  realizing  our  revenues.  In  addition,  budgetary constraints  and  potential  economic  slowdowns  may  also  continue  to  delay purchasing  decisions by these  prospective  customers.  These  initiatives have costs  associated  with them, and we cannot assure you that they ultimately will prove successful or result in, an increase to, our revenues or profitability.        In addition,  the loss or significant  reduction in government spending by government  entities  could  materially  limit our ability to obtain  government contracts. These limitations, if significant, could also have a material adverse effect on our  business,  financial  condition  and  results of  operations.  In addition, we will need to develop additional strategic  relationships with large government   contractors  in  order  to  successfully   compete  for  government contracts.  Should we lose or fail to develop these strategic  relationships  we may not be able to implement our business strategy.  The market for our systems and software is evolving and its growth is uncertain.        Demand and market acceptance for recently  introduced and existing systems and  software and sales from such  systems and  software,  are subject to a high level of uncertainty  and risk.  Our business may suffer if the market  develops more slowly than anticipated and does not sustain market acceptance.                                          12   Failure to manage our operations if they expand could impair our future growth.        If we are able to expand our  operations,  particularly  through  multiple sales to large  retailers and government  agencies in the document  verification market, the expansion will place significant strain on our management, financial controls,  operating  systems,  personnel  and other  resources.  Our ability to manage  future  growth,  should it occur,  will  depend to a large  extent  upon several factors, including our ability to do the following:  o   build and train our sales force;  o   establish and maintain relationships with distributors;  o   develop customer support systems;  o   develop expanded  internal  management and financial  controls adequate to       keep pace with growth in personnel and sales, if they occur; and  o   manage the use of third-party manufacturers and suppliers.  If we are able to grow our business  but do not manage our growth  successfully, we may experience increased operating expenses, loss of customers,  distributors or suppliers and declining or slowed growth of revenues.  We are subject to risks associated with product failure and technological flaws.        Products as complex as those offered by us may contain  undetected  errors or result in failures  when first  introduced or when new versions are released. Despite  vigorous  product  testing efforts and testing by current and potential customers,  it is  possible  that  errors  will be  found  in a new  product  or enhancement  after  commencement  of  commercial  shipments.  The  occurrence of product  defects or errors could result in adverse  publicity,  delay in product introduction,  diversion of resources to remedy defects,  loss of, or a delay in market  acceptance,  claims by customers  against us, or could cause us to incur additional costs, any of which could adversely affect our business.   Our failure to protect our  proprietary  technology  may impair our  competitive position.           We continue to allocate significant resources to develop new and innovative technologies which we utilize in our products and systems. We consider such allocation to be fundamental to our continued success as such success depends, to a significant degree, upon our ability to provide products and systems that provide superior functionality and performance compared to those of our competitors. Accordingly, we must protect our technology from unauthorized use. This is done by processes aimed at identifying and seeking appropriate protection for newly developed intellectual property, i.e., patents, trade secrets, copyrights and trademarks, as well as policies aimed at identifying unauthorized use of such property in the marketplace. These processes include:  o   contractual  arrangements  providing  for  non-disclosure  of  proprietary       information;  o   maintaining and enforcing issued patents and filing patent applications on       innovative  solutions to commercially  important problems;  o   protecting our trade secrets;  o   protecting  our  copyrights  and  trademarks  by  registration  and  other       appropriate means,  o   establishing   internal   processes  for  identifying  and   appropriately       protecting new and innovative technologies; and  o   establishing   practices   for   identifying   unauthorized   use  of  our       intellectual property.        While we actively  protect our intellectual  property,  it does not follow that others will not intentionally or innocently use such intellectual property. Accordingly,  at times we may be required to bring legal proceedings to preclude such  unauthorized use. We are mindful that such measures can be costly and time consuming and undertake such measures only as a last resort.        These  policies and practices  with respect to our  intellectual  property rights do not prevent our competitors  from  independently  developing  products similar or superior to our products  and  technologies.  It merely  protects our property  rights created as a result of our allocating  significant  portions of our technical and monetary resources.                                          13   If our future products  incorporate  technologies  that infringe the proprietary rights of third  parties,  and we do not secure  licenses from them, we could be liable for substantial damages.        We are not aware that our current products infringe the intellectual property rights of any third parties. We also are not aware of any third party intellectual property rights that may hamper our ability to provide future products and services. However, we recognize that the development of our services or products may require that we acquire intellectual property licenses from third parties so as to avoid infringement of those parties' intellectual property rights. These licenses may not be available at all or may only be available on terms that are not commercially reasonable. If third parties make infringement claims against us which, whether or not they are upheld, such claims could:  o   consume substantial time and financial resources;  o   divert the attention of management  from growing our business and managing       operations; and  o   disrupt product sales and shipments.        If any third party  prevails in an action against us for  infringement  of its  proprietary  rights,  we could be required to pay damages and either  enter into costly licensing arrangements or redesign our products so as to exclude any infringing use. As a result, we would incur substantial costs, delays in product development,  sales and shipments, our revenues may decline substantially and we may not be able to achieve  the  minimum,  necessary  growth  for our  continued success.  Failure to attract  and retain  management  and other  personnel  may damage our operations and financial results and cause our stock price to decline.        We depend to a significant degree on the skills, experience and efforts of our executive officers and other key management,  technical,  finance, sales and other personnel. Our failure to attract, integrate, motivate and retain existing or additional  personnel  could  disrupt or otherwise  harm our  operations  and financial results.  We do not carry key man life insurance policies covering any employees. The loss of services of certain of our key employees, an inability to attract  or  retain  qualified  personnel  in the  future,  or  delays in hiring additional personnel could delay the development of our business and could cause our stock price to decline.  Changes in accounting standards or our accounting policy relating to stock-based compensation may negatively affect our operating results.        During  December 2004, the Financial  Accounting  Standards Board ("FASB") issued SFAS No. 123R  requiring  that the  compensation  cost  relating to share based payment transactions be recognized in financial statements.  SFAS No. 123R becomes  effective  for us on January 1, 2006 and will require that  stock-based compensation  charges be  recorded  for the  unvested  portions  of options  and restricted  stock granted  through  December 31, 2005, as well as for all future grants,  based on the fair value of the options or warrants or restricted  stock as of their grant dates. This will require a change in our accounting policy and the amount of our operating expenses could increase.   Our share price may be volatile and could decline substantially        The  market  price of our  common  stock,  like the  price  of  shares  of technology companies generally,  has been and may continue to be volatile.  From January 1, 2002 to March 24, 2006, the closing bid price of our common stock has varied  from a high of $19.45 to a low of $2.10 per share,  as  reported  on the American Stock Exchange.  Many factors may cause the market price for our common stock to decline, including:  o   shortfalls in revenues, cash flows or continued losses from operations;  o   delays in development or roll-out of any of our products;  o   announcements  by one or more  competitors of new product  acquisitions or       technological innovations; and  o   unfavorable outcomes from outstanding litigation.                                          14         In addition,  the stock market experiences  extreme  fluctuations in price and volume  that  particularly  affect the  market  price of shares of  emerging technology  companies,  such as ours.  These price and volume  fluctuations  are often unrelated or disproportionate to the operating performance of the affected companies.  Because of this volatility,  we may fail to meet the expectations of our shareholders or of securities  analysts and our stock price could decline as a result.  Declines in our stock price for any  reason,  as well as  broad-based market  fluctuations or fluctuations  related to our financial  results or other developments,  may adversely  affect your ability to sell your shares at a price equal to or above the price at which you purchased them.  Decreases in the price of our common stock may also lead to de-listing of our common stock.
Not applicable.
Our executive offices are currently  located in Woodbury,  New York, where we currently occupy  approximately 7,100 square feet of leased space pursuant to an amended lease  expiring on December 31, 2010.  Payments  under the lease were $252,386 for 2003,  $243,577 for 2004,  $243,731 for 2005 and will be $1,061,448 for the  remaining  years of the  lease.  We believe  that our  office  space is sufficient for current operations.
On August 1, 2003,  we filed a summons and complaint  against  Tricom Card Technologies,  Inc. alleging  infringement on our patent and seeking  injunctive and monetary  relief.  On October 23, 2003,  we amended our complaint to include infringement on an additional patent. On May 18, 2004, we filed a Second Amended Complaint  alleging  infringement  and  inducement to infringe  against  certain principals of Tricom in their  personal  capacities,  as well as alleging in the alternative  false  advertising  claims  under the  Lanham Act  against  all the defendants.  The principals moved to dismiss the claims against them, and Tricom moved  to  dismiss  the  false  advertising  claims,  which  motions  have  been administratively terminated by the Court. On August 1, 2005, defendants filed an Answer and Affirmative Defenses to the Second Amended Complaint and Tricom filed a declaratory  counterclaim.  On November 2, 2005,  the Court allowed  Tricom to plead two additional defenses and declaratory  counterclaims in the case, and on January 3, 2006,  the parties filed a  Stipulation  of Dismissal of the Estoppel and  Unenforceability  Counterclaims and Affirmative  Defenses.  On February 28, 2006, the parties filed a Supplemental  Proposed  Joint Pretrial  Order,  and on March 1,  2006,  the Court  certified  that fact  discovery  in this  action was complete.
During the fourth quarter of our fiscal year ended December 31, 2005 there were no matters submitted to a vote of security holders.                                          15                                       PART II
(a) Our common stock is traded on the American  Stock  Exchange  under the symbol "IDN." The following  table  indicates high and low sales  quotations for the periods indicated based upon information supplied by AMEX.                                              Low               High 2004 First Quarter                              $3.90              $8.00 Second Quarter                             $4.40              $7.50 Third Quarter                              $4.60              $6.25 Fourth Quarter                             $3.91              $5.72  2005 First Quarter                              $4.36              $6.95 Second Quarter                             $3.85              $6.36 Third Quarter                              $4.01              $5.20 Fourth Quarter                             $2.90              $4.40  2006 January 1 - March 15, 2006*                $3.77              $7.25  *     Portion of first fiscal quarter of 2006.        (b) Number of Holders of Common Stock.  The number of holders of record of our Common  Stock on March 24, 2006 was 75,  which does not  include  individual participants in security position listings.        (c) Dividends.  There were no cash  dividends or other cash  distributions made by us during the fiscal  year ended  December  31,  2005.  Future  dividend policy  will be  determined  by our Board of  Directors  based on our  earnings, financial condition, capital requirements and other then existing conditions. It is anticipated that cash dividends will not be paid to the holders of our common stock in the foreseeable future.        (d) Recent Sales of Unregistered Securities        On August 9, 2005,  we  successfully  completed  our private  placement of 1,250,000  shares of common stock and  received  net  proceeds of  approximately $4,440,000.  In connection with the private  placement,  investors received five year warrants to purchase 500,000 shares of common stock at an exercise price of $5.40 per share. We purchased 110,000 of these warrants on December 13, 2005 for $25,000 and retired them, leaving 390,000 currently  outstanding.  Our placement agent received  $350,000 and a warrant to purchase  125,000 shares of our common stock at a price of $5.40  per  share  which  expires  on  August  8,  2010,  as compensation for services rendered in the private placement. On October 7, 2005, the Registration  Statement on Form S-3, which included the shares issued in our private  placement,  was  declared  effective  by the  Securities  and  Exchange Commission.   Such  securities  were  issued  pursuant  to  the  exemption  from registration contained in Section 4(2) of the Securities Act as they were issued to accredited investors.        On September  21, 2005,  we entered into a two (2) year  agreement  with a consulting firm to help with our public and investor  relations  activities.  We agreed to pay  $6,000  per month  for the first 12 months of the  agreement  and $9,000 per month for the following 12 months.  In addition,  we issued a warrant granting the right to purchase  100,000 shares of our common stock at a purchase price of $4.62 per share,  which vests ratably over a twelve month  period.  The fair  value  of this  warrant  amounted  to  $318,221  using  the  Black-Scholes valuation  method and was  recorded  in Deferred  Compensation  during the third quarter of 2005.  The contract is cancelable  after the first year under certain terms and conditions.  No underwriting  discounts or commissions  were paid with respect  to  such  securities.  Such  securities  were  issued  pursuant  to the exemption from  registration  contained in Section 4(2) of the Securities Act as they were issued to accredited investors.        (e) Repurchases of Equity Securities                                          16         In March  2001,  our Board of  Directors  authorized,  subject  to certain business and market  conditions,  the purchase of up to $1,000,000 of our common stock. As of December 31, 2005, we cumulatively purchased 40,200 shares totaling approximately  $222,000 and  subsequently  retired these  shares.  There were no shares purchased during 2005. We may purchase  additional  shares when warranted by certain conditions.
The  following  selected  financial  data  presented  under  the  captions "Statement of Operations Data" and "Balance Sheet Data" as of the end of each of the five  years  ended  December  31,  2005,  are  derived  from  the  financial statements of  Intelli-Check,  Inc. The financial  statements for the year ended December 31, 2003 were audited by Grant  Thornton,  LLP  independent  registered certified  public  accountants and the financial  statements for the years ended December  31, 2004 and  December  31, 2005 were  audited by Amper,  Politziner & Mattia, P.C. independent  registered certified public accountants.  The selected financial data should be read in conjunction with the financial statements as of December  31, 2005 and 2004 and for each of the three years in the period  ended December  31,  2005,  the  accompanying  notes  and the  report  of  independent registered public accounting firms thereon, which are included elsewhere in this Form 10-K.                                                                       Years Ended December 31,                                             -----------------------------------------------------------                                                 2001        2002        2003        2004        2005                                                 ----        ----        ----        ----        ----                                                                     (In thousands)       Statement of Operations Data: Revenue                                     $    886    $  1,139    $  1,236    $  1,119    $  2,384 Loss from operations                          (4,090)     (5,936)     (5,537)     (7,017)     (3,385) Net Loss                                      (3,963)     (5,550)     (6,451)     (6,923)     (3,239) Net loss per common share - basic and     diluted                                    (0.52)      (0.64)      (0.74)      (0.79)      (0.31) Common shares used in computing per share     amounts - basic and diluted                7,911       8,686       9,218      10,225      11,201                                                                            As of December 31,                                             -----------------------------------------------------------                                                 2001        2002        2003        2004        2005                                                 ----        ----        ----        ----        ----                                                                    (In thousands) Balance sheet data: Cash and cash equivalents                   $  4,061    $  1,911    $  3,307    $  1,750    $  2,514 Working capital                                5,303       2,634       8,350       3,594       5,289 Total assets                                   8,423       5,415      10,732       5,615       6,909 Total liabilities                              1,394       1,542       1,956       1,907       1,519 Stockholders equity                            7,030       3,873       6,901         868       5,390
Overview        Intelli-Check  was formed in 1994 to address a growing need for a reliable document  and age  verification  system that could be used to detect  fraudulent driver   licenses  and  other  widely   accepted   forms  of   government-issued identification documents.  Since then, our technology has been further developed for  application  in  the  commercial  fraud  protection,   access  control  and governmental  security  markets.  Additionally,  it is  currently  being used to increase productivity by addressing  inefficiencies and inaccuracies  associated with manual data entry.  The core of  Intelli-Check's  product  offerings is our proprietary  software  technology  that  verifies  the  authenticity  of  driver licenses,  state issued  non-driver  and military  identification  cards used as proof of identity. Our patented ID-Check(R) software technology instantly reads, analyzes,  and  verifies  the encoded  data in magnetic  stripes and barcodes on government-issue  IDs from approximately 60 jurisdictions in the U.S. and Canada to determine if the content and format is valid.  We have served as the national testing laboratory for the American Association of Motor Vehicle  Administrators (AAMVA) since 1999 and have access to all the currently available encoded driver license formats. After the tragic events that occurred on September 11, 2001, we believe  there has been a  significant  increase in  awareness  of our  software technology to help improve security across many industries,  including airlines, rail  transportation  and high profile  buildings and  infrastructure,  which we believe  should  enhance  future demand for our  technology.  The  adaptation of Homeland  Security  Presidential  Directive 12 (HSPD 12) and the promulgation of Federal Identity  Processing  Standards 201 (FIPS 201) have raised the awareness of our technology in the government  sector.  We, therefore,  have also begun to market to various  government and state  agencies,  which have long sales cycles including extended test periods.  Since inception,  we have incurred significant losses and negative cash flow from operating  activities and, as of December 31, 2005, we had an  accumulated  deficit of  $39,107,882.  We will continue to fund operating and capital  expenditures from proceeds that we received from sales of our equity  securities.  In view of the rapidly  evolving nature of our business and our limited operating history, we believe that period-to-period  comparisons of revenues and operating results are not necessarily  meaningful and should not be relied upon as indications of future performance.                                          17         Our  ID-Check's  unique  technology  provides  the  ability  to verify the validity of military ID's,  driver licenses and state issued non-driver ID cards that  contain  magnetic  stripes,  bar codes and SMART  chips that in most cases conform to AAMVA/ANSI/ISO  standards,  which enables us to target three distinct markets.  The original target market was focused on resellers of  age-restricted products, such as alcohol and tobacco, where the proliferation of high-tech fake IDs expose  merchants to fines and penalties for the  inadvertent  sale of these products to underage  purchasers.  We now also target  commercial  fraud,  which includes  identity theft,  and our technology is designed to help prevent losses from these frauds. We are also marketing our products for security  applications involving access control.  As a result of its applicability in these markets, we have sold our products to some of the largest  companies in the gaming industry, a significant retailer, several large financial service companies,  Certegy, one of the largest providers of check authorization services in the United States, a state port authority,  military establishments,  airports,  nuclear power plants and high profile buildings.  Our technology is currently being tested by several Fortune 50 Companies.  We have entered into  strategic  alliances with Verifone, the  largest  provider  of credit card  terminals  in the U.S.,  the two largest providers  of driver  licenses in North  America for their  compliance  with the provisions  of the  Real ID Act,  which is  intended  to set  standards  for the issuance  of  driver  licenses  and  identification   cards,  several  biometric companies, and Northrop Grumman and Anteon, integrators in the defense industry, Intermec  Technologies and Metrologic,  hardware  manufacturers,  to utilize our systems and  software as the proposed or potential  enrollment  application  for their  technologies  and to jointly  market  these  security  applications.  The passage of the Real ID ACT together with the  regulations  arising from HSPD-12, which sets the policy for a common identification standard for federal employees and contractors,  has additionally  created  opportunities  for our verification technology in the governmental market at the federal, state and local levels. In addition,  we have executed  agreements with some high profile  organizations to promote  the  use  of  our  technology  and  our  products.   We  believe  these relationships have broadened our marketing reach through their sales efforts and we intend to develop additional strategic alliances with additional high profile organizations and providers of security solutions.        We have developed  additional  software products that utilize our patented software  technology.  Our latest products include ID-Traveler and ID-Prove.  ID Traveler electronically verifies and matches two forms of government issued ID's instantaneously  while the ID Prove  product  offering  provides "out of wallet" questions to assist in proving a user's claimed  identity.  Additional  software solutions  include  ID-Check(R)  PC and  ID-Check(R)  PDA,  which  replicate the features of ID-Check. These products are designed to be platform-independent and compatible  with both  stationary  and  mobile  hardware  applications.  Another application is an enhanced version of C-Link(R), the company's net-workable data management software. Additionally, ID-Check(R) PC and the most recent release of C-Link are  designed to read the smart chip  contained  on the  military  Common Access Card (CAC). These products are all designed for use with  Intelli-Check's new data capture devices,  which are compact,  and contain either both or one of two-dimensional bar code and magnetic stripe readers. The devices enable the new software  applications  to be used on a variety of  commercially  available data processing devices, including PDAs, Tablets, Laptops, Desktops and Point-of-Sale Computers,  therefore  negating the need to replace the ID-Check  terminal.  Our C-Link(R) software product, which runs on a personal computer and was created to work in  conjunction  with the  ID-Check  technology  allows a user to instantly first analyze the data, then view the encoded data for further  verification and to generate various reports where permitted by law. We introduced a new product, ID-Mobile,  which gives the user the  additional  flexibility  of utilizing  our software in a hand-held product. We have additionally  introduced our technology to the Verifone 37XX to enable the user to do  verification  of a driver license as an  additional  function  of the  terminal.  To date,  we have  entered  into multiple licensing  agreements and are in discussions with additional  companies to license our software to be utilized within other existing systems.                                          18   Critical Accounting Policies and the Use of Estimates        The preparation of our financial  statements in conformity with accounting principles   generally  accepted  in  the  United  States  of  America  requires management to make estimates and assumptions that affect the amounts reported in our financial  statements and  accompanying  notes.  Actual results could differ materially from those estimates.        Significant  estimates and assumptions that affect amounts reported in our financial   statements  include  inventory  reserves,   deferred  tax  valuation allowances  and  doubtful   accounts  and   allowances.   Due  to  the  inherent uncertainties  involved in making  estimates,  actual results reported in future periods may be different from those estimates.        We believe that there are several accounting policies that are critical to understanding  our historical and future  performance,  as these policies affect the  reported  amounts  of  revenue  and the more  significant  areas  involving management's  judgments and estimates.  These  significant  accounting  policies relate to revenue recognition, valuation of inventory, stock based compensation, deferred  taxes  and  commitments  and  contingencies.  These  policies  and our procedures related to these policies are described in detail below.  Revenue Recognition        We sell  our  products  directly  through  our  sales  force  and  through distributors.  Revenue  from  direct  sales of our  product is  recognized  when shipped to the customer and title has passed.  Our products  require  continuing service or post contract customer support and performance by us; accordingly,  a portion of the revenue  pertaining to the service and support is deferred  based on its fair  value and  recognized  ratably  over the period in which the future service,  support and  performance  are  provided,  which is generally one year. Currently,  with  respect to sales of certain  of our  products,  we do not have enough experience to identify the fair value of each element and the full amount of the revenue and related gross margin is deferred and recognized  ratably over the one-year  period in which the future  service,  support and  performance are provided.        In addition, we recognize sales from licensing of our patented software to customers.  Our licensed software requires  continuing  service or post contract customer support and performance by us; accordingly, a portion of the revenue is deferred based on its fair value and recognized ratably over the period in which the future service, support and performance are provided, which is generally one year.        During the second  quarter of fiscal 2003,  we began  receiving  royalties from  licensing our  technology,  which are recognized as revenues in the period they are earned.  Inventory Valuation        Our current inventory  consists  primarily of our ID-Check  terminals that run our patented  software and input devices  purchased in 2004. We periodically evaluate  the current  market  value of our  inventory,  taking into account any technological  obsolescence that may occur due to changes in hardware technology and  the  acceptance  of  the  product  in the  marketplace.  Based  on  ongoing evaluation of our inventory,  prior to January 1, 2005, we recorded a cumulative inventory write down of $1,347,332 of the ID-Check  terminals that we originally acquired in 1999. The manufacturer discontinued the production of these ID-Check terminals  in 2003.  The  ID-Check  terminal  is fully  capable of  running  our patented  software as it utilizes a high  quality  imager/scanner  and  magnetic stripe reader and is currently  being marketed for sale.  During 2005, we sold a portion  of the  ID-Check  terminals  we held in  inventory  in  excess of their remaining value and recorded a recovery of inventory  totaling  $128,000,  which was previously written off.  Stock-Based Compensation        Options, warrants and stock awards issued to non-employees and consultants are recorded at their fair value as determined in accordance  with  Statement of Financial   Accounting   Standards   No.  123,   "Accounting   for   Stock-Based Compensation,"  and EITF No. 96-18,  "Accounting for Equity  Instrument That are Issued to Other Than  Employees for Acquiring,  or in Conjunction  with Selling, Goods or Services" and  recognized as expense over the related  vesting  period. SFAS 123R "Share  Based  Payments"  was issued in December  2004,  and  requires companies to expense the value of employee options and similar awards. SFAS 123R becomes  effective  for the  Company on January  1, 2006 and will  require  that stock-based  compensation  charges be  recorded  for the  unvested  portions  of options and restricted  stock granted through  December 31, 2005, as well as for all  future  grants,  based on the fair  value of the  options  or  warrants  or restricted stock as of their grant dates.  Based on the current unvested options outstanding  totaling  80,000 as of December  31,  2005,  the  Company's  pretax expense for those options is expected to be approximately  $326,000. This amount may increase to the extent that options are granted in 2006.                                          19   Deferred Income Taxes        Deferred  tax assets and  liabilities  are  recognized  for the  estimated future tax  consequences  attributable  to  differences  between  the  financial statement  carrying  amounts  of  existing  assets  and  liabilities  and  their respective tax bases and net operating loss carry forwards.  Deferred tax assets and  liabilities are measured using expected tax rates in effect for the year in which those temporary  differences  are expected to be recovered or settled.  We have recorded a full  valuation  allowance for our net deferred tax assets as of December 31, 2004 and 2005, due to the uncertainty of the realizability of those assets.  RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS        See footnote 2 of financial statements attached hereto following beginning on Page F-1.  Results of Operations        COMPARISON OF THE YEAR ENDED  DECEMBER 31, 2005 TO THE YEAR ENDED DECEMBER 31, 2004.        REVENUE. Revenue increased $1,264,183 or 113% from $1,119,349 for the year ended December 31, 2004 to $2,383,532 for the year ended December 31, 2005. Revenues for the period ended December 31, 2005 consisted of revenue from distributors of $573,920, revenues from direct sales to customers of $1,751,132 and royalty income of $58,480. Sales bookings, which represent shipments of products and contracted services which include revenues that are deferred in accordance with generally accepted accounting principles, increased by $1.4 million from the year ended December 31, 2004 to $2.5 million for the year ended December 31, 2005. Revenues and sales bookings increases are due to Intelli-Check's continuing success in penetrating certain key target markets. We are optimistic that sales opportunities should continue to increase as a result of our recent success in the retail market, the positive results of certain of our recent marketing tests and agreements and our introduction of additional products in 2004 and 2005, as well as legislative efforts to improve identity management and security and control sales of age restricted products. However, period to period comparisons may not be indicative of future operating results, since we still face long sales cycles, particularly in the government sector, and therefore, we cannot predict with certainty at this time, in which period the opportunities currently in the pipeline will develop into sales. As of December 31, 2005 we have a backlog, which represent products and services of non cancelable sales orders not yet shipped, of approximately $536,000.        GROSS PROFIT. Gross profits, excluding an inventory write down of $357,332 for 2004,  would have  increased by $913,152 or 126% from  $725,765 for the year ended  December 31, 2004 to $1,638,917 for the year ended December 31, 2005. Our gross profit  excluding  the  inventory  write downs for 2004 as a percentage of revenues  would have increased to 68.8% in the year ended December 31, 2005 from 64.8% for the year ended  December 31, 2004.  Our gross  profit  percentage  was positively  impacted  by an increase in revenues  from  licensing  our  patented technology  at higher  gross  margins  than our bundled  hardware  and  software products.        OPERATING EXPENSES.  Operating expenses, which consist of selling, general and administrative and research and development  expenses,  decreased 32.0% from $7,385,394 for the year ended December 31, 2004 to $5,023,724 for the year ended December 31, 2005.  Selling  expenses,  which consist  primarily of salaries and related costs for marketing,  increased 6.9% from  $1,176,911 for the year ended December 31, 2004 to $1,257,810  for the year ended  December 31, 2005 primarily due to an increase in salaries,  commissions and employee costs of approximately $39,000, increased travel and convention expenses of approximately $69,000 and a net  increase  of   non-recurring   expenses  of  $19,000  from  the  hiring  of professional  consultants to promote our products, which was partially offset by a decrease in  advertising  and  marketing  expenses of  approximately  $45,000. General and  administrative  expenses,  which consist  primarily of salaries and related costs for general corporate functions, including executive,  accounting, facilities and fees for legal and  professional  services,  decreased 43.9% from $5,032,207 for the year ended December 31, 2004 to $2,824,384 for the year ended December  31,  2005,  primarily  as a result of a decrease in non-cash  expenses primarily  related to the  extension of stock  options  totaling  $1,480,000,  a decrease in legal fees of approximately  $803,000 relating to decreased activity on our patent infringement  litigation, a decrease in employee costs and related expenses  of   approximately   $14,000,   a  decrease  in  insurance   costs  of approximately  $20,000, a decrease of bad debt expense of approximately  $20,000 and a decrease in depreciation and amortization expense of approximately $61,000 as a result of certain assets  becoming fully  depreciated  which were partially offset by  expensing  certain  non-recurring  costs  relating to equity  raising activities totaling approximately  $180,000.  Research and development expenses, which consist primarily of salaries and related costs for the development of our products,  decreased  20.0% from $1,176,276 for the year ended December 31, 2004 to  $941,530  for the year ended  December  31,  2005  primarily  as a result of decreases  in  salaries  and  related  expenses of  approximately  $230,000  and decreases in internal  development  costs of approximately  $26,000,  which were partially offset by an increase in consulting  expenses for product  development of approximately $26,000. We believe that we will require additional investments in development and operating  infrastructure as the Company grows. Therefore, we expect  that  expenses  will  continue  to  incrementally  increase in line with increases  in the growth of the  business as we may  increase  expenditures  for advertising,  brand promotion,  public relations and other marketing activities. Research and development expenses may also increase as we complete and introduce additional products based upon our patented ID-Check technology.                                          20         INTEREST INCOME. Interest income increased from $94,030 for the year ended December 31, 2004 to $145,848 for the year ended  December 31, 2005,  which is a result of an increase in our cash and cash  equivalents,  marketable  securities and short term  investments  available for investment from the completion of our private  placement,  as well as higher interest rates from  investments,  during 2005.        INCOME TAXES. We have incurred net losses to date and, therefore,  we have paid nominal income taxes.        NET LOSS. As a result of the factors noted above,  our net loss  decreased 53% from  $6,922,931  for the year  ended  December  31,  2004,  which  included $2,231,544 of non-cash  expenses to $3,238,959  for the year ended  December 31, 2005, which included $431,336 of non-cash expenses.  COMPARISON  OF THE YEAR ENDED  DECEMBER 31, 2004 TO THE YEAR ENDED  DECEMBER 31, 2003.        REVENUE. Revenue decreased $116,262 from $1,235,611 for the year ended December 31, 2003 to $1,119,349 for the year ended December 31, 2004. Revenues for the period ended December 31, 2004 consisted of revenue from distributors of $314,166, revenues from direct sales to customers of $738,070 and royalty income of $67,113. Sales bookings, which represent shipments of products and contracted services, which include revenues that are deferred in accordance with generally accepted accounting principles, increased 22.3% from $1,172,056 for the year ended December 31, 2003 to $1,433,381 for the year ended December 31, 2004. Sales growth has been limited due to our change in marketing focus from smaller customers to large commercial customers and government agencies which require an extended sales cycle. We believe that the time frame of the sales cycle associated with the refocus of our marketing efforts will continue to impact our sales. We are optimistic that sales opportunities should increase as a result of certain of our recent marketing tests and agreements, our introduction of additional products this year, as well as legislative efforts to enhance security and deal with the problem of under-age access to alcoholic products.        GROSS PROFIT. Gross profit,  excluding an inventory write down of $357,332 for 2004 and $990,000 for 2003,  would have  decreased by $55,814 from  $781,579 for the year ended December 31, 2003 to $725,765 for the year ended December 31, 2004. Our gross profit  excluding the inventory write downs for 2004 and 2003 as a  percentage  of  revenues  would  have  increased  to 64.8% in the year  ended December 31, 2004 from 63.3% for the year ended  December  31,  2003.  Our gross profit  percentage  was  positively  impacted by an  increase  in revenues  from licensing our patented technology at higher gross margins.        OPERATING EXPENSES.  Operating expenses, which consist of selling, general and administrative and research and development  expenses,  increased 38.6% from $5,328,742 for the year ended December 31, 2003 to $7,385,394 for the year ended December 31, 2004.  Selling  expenses,  which consist  primarily of salaries and related costs for marketing,  decreased 13.0% from $1,352,274 for the year ended December 31, 2003 to $1,176,911  for the year ended  December 31, 2004 primarily due to decreased travel and convention  expenses of approximately  $81,000 and a reduction of  non-recurring  expenses of $94,000 from the hiring of professional consultants.  General and  administrative  expenses,  which consist primarily of salaries and related costs for general corporate functions, including executive, accounting,  facilities and fees for legal and professional services,  increased 111% from  $2,386,088 for the year ended December 31, 2003 to $5,032,207 for the year ended  December 31, 2004,  primarily as a result of an increase in non-cash expenses from the extension of stock options totaling $1,347,000 and an increase in  legal  fees  of  approximately   $1,630,000  primarily  relating  to  patent infringement   litigation,   which  were  partially  offset  by  a  decrease  in depreciation and amortization  expense of approximately  $323,000 as a result of the write-off of intangible  assets  relating to the  IDentiScan  acquisition in 2003. Research and development expenses, which consist primarily of salaries and related  costs  for  the  development  of  our  products,  decreased  4.1%  from $1,226,725 for the year ended December 31, 2003 to $1,176,276 for the year ended December 31, 2004  primarily as a result of a decrease in employee  salaries and related expenses of approximately $75,000. During the fourth quarter of 2003, we determined that as a result of discontinuing the selling of IDentiScan products, certain of our intangible  assets with a remaining book value of $363,655 should be written off. No charges of a similar nature occurred in 2004. We believe that we  will  require   additional   investments   in   development   and  operating infrastructure  as the Company  grows.  Therefore,  we expect that expenses will continue to  incrementally  increase in line with increases in the growth of the business as we may  increase  expenditures  for  advertising,  brand  promotion, public  relations  and other  marketing  activities.  Research  and  development expenses may also  increase as we complete  and  introduce  additional  products based upon our patented ID-Check technology.                                          21         INTEREST  EXPENSE.  We did not incur  interest  expense for the year ended December 31, 2004 compared to the interest  expense of $43,487 in the year ended December 31, 2003, which resulted  primarily from interest accrued in 2003 on an arbitration decision awarding Early Bird Capital settlement on their demand.        INTEREST INCOME. Interest income increased from $51,437 for the year ended December 31, 2003 to $94,030 for the year ended  December  31, 2004,  which is a result of a higher  average  annual  balance  in our cash and cash  equivalents, marketable securities and short term investments available for investment during this  period  resulting  from  additional  cash  received  from  the  successful completion of our secondary offering in October 2003.        INCOME TAXES. We have incurred net losses to date and, therefore,  we have paid nominal income taxes.        NET LOSS. As a result of the factors noted above,  our net loss  increased from  $6,450,943  which  included  $2,314,627 of non-cash  expenses for the year ended  December  31, 2003 to  $6,922,931  for the year ended  December 31, 2004, which included $2,231,544 of non-cash expenses.  Liquidity and Capital Resources        Prior to our initial  public  offering in November  1999,  we financed our operations  primarily  through  several  private  placements  of equity and debt securities. We used the net proceeds of these financings for the primary purpose of funding working capital and general  corporate  purposes and for the purchase of hardware terminals.  As a result of our IPO and the underwriters  exercise of their  over  allotment  option,  we  received  approximately  $6,907,000  in net proceeds after deducting underwriter's commissions and offering expenses. During 2000, we received $3,426,374 from the issuance of common stock from the exercise of warrants and stock options.  During 2001 and 2002, we received $3,231,174 and $1,742,466, respectively, from the issuance of common stock from the exercise of warrants, stock options and rights. During 2003, we received net proceeds before legal expenses of $2,850,000,  from the issuance of convertible  preferred stock and we received  net proceeds of  approximately  $7,906,000  from our  secondary public  offering of 1,100,000  shares of common stock.  During 2004, we received net  proceeds of $427,979  from the  exercise of 142,700  options.  On August 9, 2005,  we  successfully  completed a private  placement of  1,250,000  shares of common stock and received net proceeds of approximately $4,440,000.        Cash used in operating  activities for the year ended December 31, 2005 of $3,143,805 was primarily attributable to the net loss of $3,238,959,  a decrease in accounts  payable and accrued expenses of $511,505  resulting  primarily from payment and reduction of our legal fees and an increase in other current  assets of $139,729 , which was primarily  offset by  recognition of noncash stock based compensation  expense  resulting  primarily  from the  extension and exercise of stock options of $228,450, amortization of deferred compensation of $143,758 and an increase in deferred revenue of $184,300.  Cash used in operating  activities for the year ended December 31, 2004 of $3,773,646 was primarily attributable to the net loss of  $6,922,931,  a decrease  in  litigation  settlement  payable of $921,700  resulting  from the payout of the legal  award  matter with Early Bird Capital  recorded in 2003 and an increase  in  accounts  receivable  of $288,946 resulting  from credit sales made towards the end of the year,  which was offset primarily by an increase in  certificates  of deposit,  restricted of $1,283,118 resulting  primarily from the payout of the legal award, an increase in accounts payable and accrued expenses of $667,086 primarily from legal accruals resulting from the patent litigation,  an inventory reserve of $357,332,  depreciation and amortization  of  $111,743,  recognition  of non cash stock  based  compensation expense  resulting  primarily  from the extension of stock options of $1,350,187 and amortization of deferred compensation of $363,407 from the granting of stock options to consultants. Cash used in investing activities was $1,181,420 for the year ended  December 31, 2005 and resulted  primarily from the net result of the investment in and sales of marketable  securities and short term  investments of $1,171,324.  Cash  provided by  investing  activities  was $741,963 for the year ended December 31, 2004 and resulted  primarily from the net result of the sales of and  investment  in  marketable  securities  and short  term  investments  of $741,963.  Cash provided by financing  activities  was  $4,486,178  for the year ended  December 31, 2005 and was primarily  related to proceeds of $168,900 from the  issuance of common  stock from the  exercise of stock  options and from our private  offering of  $4,439,593,  which was partially  offset by the payment of dividends  to preferred  stock  holders of $97,315.  Cash  provided by financing activities  was $91,989 for the year ended  December 31, 2004 and was  primarily related to  proceeds  of $431,167  from the  issuance  of common  stock from the exercise  of stock  options,  which  was  partially  offset  by the  payment  of dividends to preferred stock holders of $240,000.                                          22         As of  December  31,  2005,  warrants to  purchase  938,636  shares of the Company's common stock at an average exercise price of $6.11 were outstanding.        On August 9, 2005, we  successfully  completed  our secondary  offering of 1,250,000 shares of common stock at $4.00 per share and received net proceeds of approximately  $4,440,000.  In connection with the offering,  investors received five year  warrants to purchase  500,000  shares of common  stock at an exercise price of $5.40 per share.  In  addition,  we granted  to our  placement  agent a warrant to purchase  125,000 shares of our common stock at a price of $ 5.40 per share which expires on August 8, 2010.  During  December  2005, we purchased and retired 110,000 of the five year warrants  originally  issued in connection with the offering for $25,000.        On March 27, 2003, pursuant to a Securities  Purchase  Agreement,  we sold 30,000 shares of our Series A 8% Convertible  Redeemable  Preferred  Stock,  par value $.01 per share,  for  $3,000,000  before  expenses to Gryphon Master Fund, L.P. Each share of Preferred  Stock entitled the holder to receive  dividends of 8% per annum and was  convertible  into 15.1515 shares of our common stock for a total of 454,545  shares of common stock.  On February 25, 2005,  Gryphon Master Fund,  L.P.  converted  their  Preferred Stock into 454,545 shares of our common stock at a  conversion  price of $6.60 per share.  A final  dividend  payment of $97,315  was paid in 2005 for the  period  up to the  date of  conversion.  As a result of this conversion, the period we used in estimating the accretion of all of the costs  associated with the issuance of the Preferred Stock changed from 5 years to 1.9166  years.  Accordingly,  the  accretion was increased in the first quarter of 2005 by $119,956 and amounted to $160,722 for the quarter ended March 31, 2005.  Additionally,  as a result of this conversion,  we retired the 30,000 shares  of  preferred  stock,  issued  454,545  shares of our  common  stock and recorded  $3,000,000  as an  increase  to equity.  Gryphon  Master Fund was also issued  five year  warrants  to purchase  113,636  shares of common  stock at an exercise price of $6.78, which will expire on October 3, 2008.        In March 2001, we declared a dividend distribution of one non-transferable right to purchase one share of our common stock for every 10 outstanding  shares of common stock  continuously held from the record date to the date of exercise, as well as common stock  underlying  vested stock options and warrants,  held of record on March 30, 2001, at an exercise price of $8.50.  The rights were due to expire on October 4, 2002,  which was one year after the  effective  date of the registration  statement  related to the shares of common  stock  underlying  the rights.  We first  extended  the  expiration  date until April 4, 2003;  then we extended the rights until December 31, 2003; we further  extended the expiration date to June 30, 2004; we then again  extended the  expiration  date to June 30, 2005; and  subsequently  extended the expiration  date to June 30, 2006. We have the right to redeem  the  outstanding  rights for $.01 per right  under  certain conditions,  which were not met as of March 24, 2006. We reserved 970,076 shares of common stock for future issuance under this rights offering. Cumulatively, as of December 31, 2005, we received  $2,482,009  before expenses from the exercise of 292,001 of these rights.        In March  2001,  our Board of  Directors  authorized,  subject  to certain business and market  conditions,  the purchase of up to $1,000,000 of our common stock. As of December 31, 2005, we cumulatively purchased 40,200 shares totaling approximately  $222,000 and  subsequently  retired these  shares.  None of these shares were  purchased  during  2005.  We may  purchase  additional  shares when warranted by certain conditions.                                          23          During 2005, the Company's cash expense burn rate,  which does not include dividend  payments made on our Preferred Stock, was  approximately  $390,000 per month and we expect that it will  increase to  approximately  $425,000 per month due to the expected growth of our business during 2006. We currently  anticipate that our available  cash in hand and  marketable  securities  and cash resources from expected revenues from the sale of the units in inventory and the licensing of our technology will be sufficient to meet our anticipated working capital and capital  expenditure  requirements  for at least the next twelve  months.  These requirements  are  expected  to  include  the  purchase  of  inventory,  product development, sales and marketing, working capital requirements and other general corporate purposes.  We may need to raise additional funds,  however, to respond to  business  contingencies  which  may  include  the  need to fund  more  rapid expansion,  fund additional marketing expenditures,  develop new markets for our ID-Check   technology,   enhance  our  operating   infrastructure,   respond  to competitive  pressures,   or  acquire  complementary   businesses  or  necessary technologies.        We are  currently  involved in certain legal  proceedings  as discussed in Item 3 above.  We do not believe  these legal  proceedings  will have a material adverse effect on our financial position, results of operations or cash flows.        As of December  31, 2005,  we had a net  operating  loss carry  forward of approximately  $31.2  million,  which  expires  beginning in the year 2018.  The issuance  of  equity  securities  in  the  future,  together  with  our  earlier financings and our IPO, could result in an ownership  change and could limit our use of our prior net operating losses. If we achieve profitable operations,  any significant limitation on the utilization of our net operating losses would have the effect of increasing our tax liability and reducing net income and available cash  reserves.   We  are  unable  to  determine  the   availability   of  these net-operating  losses  since this  availability  is  dependent  upon  profitable operations,  which we have not  achieved  in prior  periods;  therefore  we have recorded a full  valuation  allowance  for the  benefit  from the  net-operating losses.  Contractual Obligations        The table below presents our  contractual  obligations  and commitments at December 31, 2005:                                  Payments Due by Period                                                               Less than        Contractual Obligations              Total            One Year         1-3 years         4-5 years        After 5 years - ------------------------------          -------------     -------------     -------------     -------------      -------------       Operating Leases                         $1,085,084        $  202,304        $  429,964        $  452,816                -- Consulting contracts                         72,000            72,000                --                --                -- Employment contracts                        162,086           162,086                --                --                --                                         -------------     -------------     -------------     -------------      ------------- Total Contractual Cash Obligation        $1,319,170        $  436,390        $  429,964        $  452,816                --    Off-Balance Sheet Arrangements        We have never entered into any off-balance  sheet  financing  arrangements and have never established any special purpose entities.  We have not guaranteed any debt or  commitments  of other  entities  or  entered  into any  options  on non-financial assets.  Forward Looking Statements        The foregoing contains certain forward-looking statements. Due to the fact that our business is characterized by rapidly changing technology,  high capital requirements  and an  influx of new  companies  trying to  respond  to  enhanced security  needs as a result of current  events,  actual results and outcomes may differ  materially from any such forward looking  statements and, in general are difficult  to  forecast.  The factors  which could  affect our business and such actual  results and  outcomes  include the  matters  discussed  in Item 1A "Risk Factors" above.  Non-GAAP Financial Measures        This 10-K contains disclosure of our "sales bookings" for certain periods, which may be deemed to be a non-GAAP  financial  measure  within the  meaning of Regulation G promulgated by the Securities and Exchange  Commission.  We believe that  discussion  of our  sales  bookings  provides  investors  with  additional information  regarding  revenues  it has  received  in respect of  products  and services  that have been  shipped to a  customer,  but which are  required to be deferred for a period of less than one year under applicable principles of GAAP. The  disclosure of "sales  bookings"  may not be comparable to similarly  titled measures  reported by other companies.  "Sales bookings," while providing useful information, should not be considered in isolation or as an alternative to other financial measures determined in accordance with GAAP.                                          24
Financial  instruments,  which  subject the Company to  concentrations  of credit  risk,  consist  primarily  of  cash,  cash  equivalents  and  marketable securities.  The Company maintains cash between two financial institutions.  The marketable  securities  consist of short term investment  grade corporate bonds. The Company  performs  periodic  evaluations of the relative  credit standing of these institutions
Financial statements are attached hereto following beginning on Page F-1.  Item  9.  Changes  in and  Disagreements  with  Accountants  on  Accounting  and Financial Disclosure        On April 21, 2004, the Company dismissed its independent  auditors,  Grant Thornton LLP ("Grant  Thornton"),  and engaged  Amper,  Politziner & Mattia P.C. ("Amper") as its new independent  registered  public accounting firm. The change in auditors  became  effective  immediately.  This  determination  followed  the Company's  decision to seek proposals from independent  accountants to audit the financial  statements of the Company, and was approved by the Company's Board of Directors upon the recommendation and approval of its Audit Committee. The audit report of Grant  Thornton on the  Company's  financial  statements  for the year ended  December 31, 2003 did not contain any adverse  opinion or  disclaimer  of opinion,  nor was it  qualified  or modified as to  uncertainty,  audit scope or accounting  principles.  During our fiscal year ended  December  31,  2003,  and through the date of Grant Thornton's  dismissal on April 21, 2004, there were no disagreements between the Company and Grant Thornton on any matter of accounting principles or practices,  financial statement  disclosure,  or auditing scope or procedure,   which   disagreements,   if  not   resolved  to  Grant   Thornton's satisfaction,  would have caused Grant Thornton to make reference to the subject matter of the disagreement in connection with its reports.
We maintain disclosure controls and procedures (as defined in Exchange Act Rules  13a-15(e) and 15d-15(e)) that are designed (i) to collect the information we are  required to  disclose  in the reports we file with the SEC,  and (ii) to process,  summarize  and  disclose  this  information  within  the time  periods specified  in the  rules  of  the  SEC.  Under  the  supervision  and  with  the participation of our management, including our Chief Executive Officer and Chief Financial  Officer,  we have  evaluated  the  effectiveness  of the  design  and operation  of our  disclosure  controls  and  procedures.  Such  evaluation  was conducted  as of the end of the  period  covered by this  report.  Based on such evaluation,  our Chief Executive and Chief Financial Officer have concluded that these procedures are effective.        Additionally,  there  were  no  changes  in  our  internal  controls  over financial  reporting  that  materially  affected  or are  reasonably  likely  to materially affect these controls  subsequent to the end of the period covered by this report.  We have not identified any  significant  deficiencies  or material weaknesses  in our internal  controls,  and  therefore  there were no corrective actions taken.
On  March  28,  2006,  Intelli-Check  entered  into  an  understanding  of employment with Frank Mandelbaum,  Intelli-Check's  Chairman and Chief Executive Officer,  effective as of January 1, 2006  providing  that:  o   Mr.  Mandelbaum would receive a salary of $250,000 for January 2006, which       would increase to $255,604 on February 1, 2006;  o   Mr.  Mandelbaum  would be  entitled  to  receive a bonus of  $75,000  upon       Intelli-Check achieving certain performance goals;  o   Mr.  Mandelbaum  would be entitled to receive an  automobile  allowance of       $1,500 per month; and  o   If a  change  of  control  occurred,  as  defined  in the  agreement,  Mr.       Mandelbaum  would be able to terminate  his  employment at any time and be       entitled  to  receive a payment  equal to 2.99  times his  average  annual       compensation, including bonuses, during the three years preceding the date       of  termination,  payable in cash to the extent of three months salary and       the balance in shares of our common  stock  based on a valuation  of $2.00       per share.                                          25                                       PART III
As of March 24, 2006, the Company's directors and executive officers were as follows:                                                 Position With the Company               Name                              And Principal Occupation                   Held Office Since               ----                              ------------------------                   -----------------     Frank Mandelbaum                   Chairman, Chief Executive Officer and Director                 1996  Edwin Winiarz                      Senior Executive Vice President, Treasurer, Chief              1999                                    Financial Officer and Director  Russell T. Embry                   Senior Vice President and Chief Technology Officer             2001  Todd Liebman                       Senior Vice President, Marketing and Operations                2004  Ashok Rao                          Vice Chairman, Director                                        2004  Jeffrey Levy                       Director                                                       1999  John E. (Jay) Maxwell              Director                                                       2005  Arthur L. Money                    Director                                                       2003  Guy L. Smith                       Director                                                       2005         Frank Mandelbaum, age 72, has served as our Chairman of the Board and Chief Executive Officer since July 1, 1996. He also served as Chief Financial Officer until September 1999. From January 1995 through May 1997, Mr. Mandelbaum served as a consultant providing strategic and financial advice to Pharmerica, Inc. (formerly Capstone Pharmacy Services, Inc.), a publicly held company. Prior to January 1995, Mr. Mandelbaum was Chairman of the Board, Chief Executive Officer and Chief Financial Officer of Pharmerica, Inc. From July 1994 through December 1995, Mr. Mandelbaum served as Director and Chairman of the Audit and Compensation Committees of Medical Technology Systems, Inc., also a publicly held company. From November 1991 through January 1995, Mr. Mandelbaum served as Director of the Council of Nursing Home Suppliers, a Washington, D.C. based lobbying organization. From 1974 to date, Mr. Mandelbaum has been Chairman of the Board and President of J.R.D. Sales, Inc., a privately held financial consulting company. As required by his employment agreement, Mr. Mandelbaum devotes substantially all his business time and attention to our business.        Edwin Winiarz, age 48, was elected Senior Executive Vice President in July 2000 and a director in August 1999 and became Executive Vice President, Treasurer and Chief Financial Officer on September 7, 1999. From July 1994 until August 1999, Mr. Winiarz was Treasurer and Chief Financial Officer of Triangle Service Inc., a privately held national service company. From November 1990 through July 1994, Mr. Winiarz served as Vice President Finance/Controller of Pharmerica, Inc. (formerly Capstone Pharmacy Services, Inc.). From March 1986 until November 1990, Mr. Winiarz was a manager with the accounting firm of Laventhal & Horwath. Mr. Winiarz is a certified public accountant and holds an MBA in management information systems from Pace University.        Russell T. Embry, age 42, was elected Senior Vice President and Chief Technology Officer in July 2001 and was Vice President, Information Technology, since July 1999. From January 1998 to July 1999, Mr. Embry was Lead Software Engineer with RTS Wireless. From April 1995 to January 1998, he served as Principal Engineer at GEC-Marconi Hazeltine Corporation. From August 1994 through April 1995, he was a staff software engineer at Periphonics Corporation. From September 1989 to August 1994, Mr. Embry served as Senior Software Engineer at MESC/Nav-Com. From July 1985 through September 1989, he was a software engineer at Grumman Aerospace. Mr. Embry holds a B.S. in Computer Science from Stony Brook and an M.S. in Computer Science from Polytechnic University, Farmingdale.                                          26         Todd Liebman, age 32, joined Intelli-Check, Inc. in December 2004 as its Senior Vice President of Marketing and Operations. Prior to joining Intelli-Check, Mr. Liebman served as President of Quick Kiosk, a Kinetics Company, LLC (QK), a self-service solution provider focused on the quick serve restaurant market industry from October 2000 to December 2004. In September 2004, Mr. Liebman completed the sale of QK to NCR Corporation (NYSE:NCR). Prior to founding QK, Mr. Liebman served as Director of Business Development of Trex Communications Corporation (TrexCom), a telecommunications start-up focused on satellite communications systems and multi-media interactive response systems, which was sold to L-3 Communications, Inc. in February 2000. TrexCom grew from a start-up in 1997 to $50 million in revenues and profitability in less than two years. Prior to joining Trex Communications, Mr. Liebman was Associate Director, Business Development for Thermo Electron Corporation (NYSE:TMO), a $4 billion conglomerate and parent company of Trex Communications. From 1996 to 1997, he worked as a Management Consultant at EMI Strategic Marketing, a strategic consulting firm. Mr. Liebman received his Bachelor's of Science in Management from Tulane University's A.B. Freeman School of Business. Mr. Liebman has also participated in an Executive Education program at the University of Pennsylvania's Wharton School of Business.        Ashok Rao, age 56, was appointed a director in December 2004 and Vice Chairman in January 2005. Mr. Rao is currently an angel investor in numerous high-tech start-ups as well as the producer of motion pictures. Mr. Rao was CEO of Prime Wave Communications, a broadband wireless access technology subsidiary of L3 from 2000 to 2003. Previously, he was the founder and chief executive officer of TrexCom. He was instrumental in the sale of TrexCom to L3 in 2000. Mr. Rao holds a bachelor's degree in mechanical engineering from the Indian Institute of Technology, New Delhi, a master's degree in systems engineering from Marquette University, and a diploma in Financial Management from the London School of Economics. Mr. Rao is also a trustee of numerous charitable organizations.        Jeffrey Levy, age 63, was elected a director in December 1999. He has been, since January 1997, President and Chief Executive Officer of LeaseLinc, Inc., a third-party equipment leasing company and lease brokerage company. Prior to 1997, Mr. Levy served as President and Chief Executive Officer of American Land Cycle, Inc. and Goose Creek Land Cycle, LLC, arboreal waste recycling companies. During that time he also served as Chief Operating Officer of ICC Technologies, Inc. and AWK Consulting Engineers, Inc. Mr. Levy has had a distinguished career as a member of the United States Air Force from which he retired as a colonel in 1988. He serves as a board member of the Northern Virginia Chapter of Mothers Against Drunk Driving, the Washington Regional Alcohol Program, the Zero Tolerance Coalition and the National Drunk and Drugged Driving Prevention Month Coalition and is a member of the Virginia Attorney General's Task Force on Drinking by College Students and MADD's National Commission on Underage Drinking. Mr. Levy holds a BS in International Relations from the United States Air Force Academy, a graduate degree in Economics from the University of Stockholm and an MBA from Marymount University.        John E. (Jay) Maxwell, age 52, was appointed a director in September 2005. Mr. Maxwell retired as the Senior Vice President of Technology and the Chief Information Officer (CIO) of the American Association of Motor Vehicle Administrators (AAMVA) in August 2005. He was responsible for all of the information systems developed, implemented and operated by AAMVA. At AAMVA, Mr. Maxwell had the responsibility to direct AAMVA's development of Driver License and ID Card Specifications intended to fight driver license and ID fraud and abuse. Prior to that, from 1997 to May 2002, he was the President and Chief Operating Officer of AAMVAnet, Inc., a subsidiary of AAMVA. Before joining AAMVA in July 1989, Mr. Maxwell spent 11 years with the U.S. Department of Transportation, working for the Federal Highway Administration and the National Highway Traffic Safety Administration developing information systems to improve highway safety.        Arthur L. Money, age 66, was elected a director in February 2003. Mr. Money was confirmed by the Senate and served as the Assistant Secretary of Defense for Command, Control, Communications and Intelligence from 1999 to 2001 and was also the Chief Information Officer for the Department of Defense from 1998 until 2001. Prior to that he served as the Senior Civilian Official, Office of the Assistant Secretary of Defense, from 1998 to 1999 and was earlier confirmed by the Senate as Assistant Secretary of the Air Force for Research, Development and Acquisition and served as Chief Information Officer, from 1996 to 1998. Mr. Money currently serves as a member of the advisory board of several corporations including the Boeing Company (NYSE: BA). He also serves on the Board of Directors of numerous companies including Silicon Graphics, Inc. (NYSE: SGI) and CACI International (NYSE: CAI) and has been recognized for his vision, leadership and commitment to excellence in systems and process re-engineering. Mr. Money, who holds a Master of Science Degree in Mechanical Engineering from the University of Santa Clara (Calif.) and a Bachelor of Science Degree in Mechanical Engineering from San Jose (Calif.) State University also currently serves on several U.S. Government Boards and Panels such as NIMA Advisory Board, Defense Science Board, US Air Force AC2ISR Center Advisory Board and the US Navy "DSAP" Special Advisory Panel. Prior to his government service, he had a distinguished business career having served as President of ESL Inc., a subsidiary of TRW, Inc., from 1990 to 1994 prior to its consolidation with its Avionics and Surveillance Group when he became Vice President and Deputy General Manager of the Group.                                          27         Guy L. Smith, age 57, was elected a director in June 2005. Mr. Smith has been the Executive Vice President of Diageo, the world's leading premium drinks company, since 2000 and is responsible for Corporate Relations and Marketing Public Relations. At Diageo, Mr. Smith's responsibilities include overseeing the corporation's civic and social responsibility efforts in North America, including the Diageo Marketing Code. The Code governs the company's social responsibility activities with regard to the marketing and sale of alcoholic beverages and the company's undertakings to reduce underage access and abuse of alcohol. From 1998 - 1999, prior to joining Diageo, Mr. Smith was Special Advisor to President Clinton on The White House staff, where he served on the impeachment defense team. Mr. Smith also served as an informal strategic communications advisor to President Clinton from the beginning of the Clinton Administration. From 1999 - 2000, Mr. Smith was associated with The Hawthorn Group, a Washington-based public affairs firm, as well as with his own firm, Smith Worldwide Inc., from 1994 - 1996, which focused on reputation and crisis management. He was Chief Operating Officer of Hill & Knowlton International Public Relations, from 1992 - 1993, where he consulted with the firm's largest consumer product, technology, and legal clients. Prior to that Mr. Smith was Vice President-Corporate Affairs, the senior public affairs and public relations officer, for Philip Morris Companies Inc. from 1975 - 1992. During his 17 years with Philip Morris, Mr. Smith led the Corporate Affairs departments of the Miller Brewing Company and The Seven-Up Company, both then Philip Morris operating companies. Mr. Smith began his career as a reporter and assistant city editor for The Knoxville Journal. He is currently chairman of the Barrier Island Trust, an environmental protection organization and sits on the Board of Advisors of Mount Vernon, George Washington's home outside Washington, DC. Mr. Smith also serves as an Honorary Battalion Chief of the Fire Department of New York.  Audit Committee of the Board of Directors        The board of directors has established a separately designated, stand-alone Audit Committee established in accordance with Section 3(a)(58)(A) of the Exchange Act, which is currently comprised of Mr. Rao, chairman, Mr. Smith and Mr. Maxwell. They are all considered "independent" under Section 121(A) of the listing standards of the American Stock Exchange. The audit committee recommends to the board of directors the annual engagement of a firm of independent accountants and reviews with the independent accountants the scope and results of audits, our internal accounting controls and audit practices and professional services rendered to us by our independent accountants.        The Board of Directors has determined that we have at least one audit committee financial expert serving on our audit committee. Mr. Rao, who holds a diploma in Financial Management from the London School of Economics, is an "audit committee financial expert" and is an independent member of the board of directors.  Section 16(a) Beneficial Ownership Reporting Compliance        The Securities and Exchange Commission has adopted rules relating to the filing of ownership reports under Section 16 (a) of the Securities Exchange Act of 1934. One such rule requires disclosure of filings, which under the Commission's rules, are not deemed to be timely. During the review of Forms 4, it was determined that: Mr. Rao failed to file a timely report concerning the grant of 7,500 stock options on July 27, 2005; however, such failure was remedied by the reporting of this transaction on August 5, 2005; Mr. Mandelbaum failed to file a timely report concerning the grant of 25,000 stock options on November 8, 2005, however, such failure was remedied by the reporting of this transaction on February 1, 2006; Mr. Winiarz failed to file a timely report in concerning the grant of 5,000 stock options on November 8, 20005, however, such failure was remedied by the reporting of this transaction on February 1, 2006; Guy L. Smith failed to file a timely report concerning the acquisition of 957 shares of our common stock on August 23, 2005, however such failure was remedied by the reporting of this transaction on March 29, 2006. All other transactions were reported in a timely fashion.                                          28   Code of Ethics           On March 22, 2004, we adopted a code of ethics that applies to our Chief Executive Officer and Chief Financial Officer, and other persons who perform similar functions. A copy of our Code of Ethics is incorporated by reference as an exhibit to this Annual Report on Form 10-K. Our Code of Ethics is intended to be a codification of the business and ethical principles which guide us, and to deter wrongdoing, to promote honest and ethical conduct, to avoid conflicts of interest, and to foster full, fair, accurate, timely and understandable disclosures, compliance with applicable governmental laws, rules and regulations, the prompt internal reporting of violations and accountability for adherence to this Code.
The following table sets forth compensation paid to executive officers whose compensation was in excess of $100,000 for any of the three fiscal years ended December 31, 2005. No other executive officers received total salary and bonus compensation in excess of $100,000 during any of such fiscal years.                             SUMMARY COMPENSATION TABLE                                                    Annual          Long-Term                                                Compensation      Compensation                                                                   Securities                                                                   Underlying Name and Principal Position        Year          Salary($)      Options/SARS (#) - ---------------------------        ----          ---------       ---------------  Frank Mandelbaum                   2005           250,000             25,000 Chairman and                       2004           250,000             75,000 Chief Executive Officer            2003           250,000             100,000  Edwin Winiarz                      2005           161,343             30,000 Senior Executive Vice President    2004           151,318             65,000 Chief Financial Officer            2003           141,750             30,000  Russell T. Embry                   2005           162,766              5,000 Senior Vice President              2004           152,063             10,000 Chief Technology Officer           2003           150,000             12,500  Todd Liebman                       2005           135,128               -- Senior Vice President              2004            4,231              175,000 Marketing and Operations  Option Grants           The following table summarizes options granted during the year ended December 31, 2005 to the named executive officers:                                                     Individual Grants - ------------------------- -------------- ------------------ -------------- ------------ -----------------------------                             Number of       % of Total         Exercise    Expiration   Potential Realizable Value                            Securities     Options Granted       Price         Date       Assumed Annual Rates of           Name             Underlying     to Employees In                               ppreciation for Option (1)                              Options     2005 Fiscal Year                              Granted                                                          5%            10%    A - ------------------------- -------------- ------------------ -------------- ------------ ----------------- -----------        Russell T. Embry                  5,000        3.3%            $ 3.18       11/17/10        $ 4,393        $ 9,707 Mandelbaum, Frank                25,000       16.5%            $ 3.22       12/30/15        $22,241        $49,146 Edwin Winiarz                     5,000        3.3%            $ 3.22       12/30/15        $ 4,448        $ 9,829 Edwin Winiarz                    25,000       16.5%            $ 5.64       06/08/17        $38,956        $86,082                                           29            (1) The amounts shown as potential realizable value represent hypothetical gains that could be achieved for the respective options if exercised at the end of the option term. The 5% and 10% assumed annual rates of compounded stock price appreciation are mandated by rules of the Securities and Exchange Commission and do not represent our estimate or projection of our future common stock prices. These amounts represent certain assumed rates of appreciation in the value of our common stock from the fair market value on the date of grant. Actual gains, if any, on stock option exercises are dependent on the future performance of the common stock and overall stock market conditions. The amounts reflected in the table may not necessarily be achieved.  Aggregated Option Exercises and Fiscal Year-End Option Value Table           The following table summarizes unexercised options granted through the year-end December 31, 2005 to the named executive officers:                                                     Aggregate                                          Value of Unexercised                              No. of Shares    Dollar Value          No. of Securities                  In-the-Money            Name              Received Upon    Received Upon       Underlying Unexercised            Options At Fiscal                                Exercise         Exercise            Options / Warrants            Year End 12/31/05 (1) - --------------------------- ---------------- ---------------- -------------- ---------------- -------------- ----------------                                                                Exercisable    Unexercisable    Exercisable    Unexercisable - --------------------------- ---------------- ---------------- -------------- ---------------- -------------- ----------------        Frank Mandelbaum Chairman & CEO                            9,277           $44,250            975,000         0           $378,250             0  Edwin Winiarz, Senior Executive VP & CFO                 0                0               225,000         0           $  3,350             0  Russell T. Embry, Senior VP & CTO                    0                0                59,000         0           $    875             0  Todd Liebman, Senior VP Marketing     & Operations                         0                0               145,000      30,000                0             0  (1) Based on the closing price of our common stock ($3.89) on December 30, 2005.   Compensation of Directors        Effective January 1, 2006, the board increased the fee non-employee directors receive to $3,000 for in-person attendance at board meetings and $500 for attendance at such meetings telephonically. Each non-employee director will also receive a fee of $250 for participation, either in-person or telephonically, at each separately convened committee meeting not held in conjunction with a board meeting. During 2003 and through 2005, non-employee directors received 25,000 options for each full year of service on the Company's board of directors. However, the board recommended that beginning in 2006 non-employee directors should be granted restricted shares of our common stock in lieu of stock options. In addition, the board further recommended that non-employee directors who are members of a committee should be granted restricted shares of our common stock in lieu of stock options. The number of restricted shares as proposed would be determined by the board at each annual board meeting. This proposed plan will be included in our proxy statement for a vote by our shareholders at the 2005 annual meeting of shareholders.        During 2005, non-employee directors received a fee of $500 for attending board meetings and $250 for attendance at such meetings telephonically. They also received a fee of $300 for each committee meeting held on a date other than that of a board meeting and are reimbursed for expenses incurred in connection with the performance of their respective duties as directors. In addition, non-employee directors who are members of a committee received grants of stock options for each year served. The chairperson of the audit committee received an option to purchase 7,500 shares of our common stock and audit committee members received an option to purchase 3,000 shares of our common stock. Of the remaining committees, each chairperson received an option to purchase 2,500 shares of our common stock, while a committee member received an option to purchase 1,500 shares of our common stock. These options are immediately exercisable during the committee members' term and expire ten years from date of grant, unless the Director does not complete his full term, in which case the options expire in ninety (90) days from the end of their service as a Director.                                          30   Employment Contracts, Termination of Employment and Change-in-Control Arrangements        On November 9, 2004, we entered into a new one-year employment contract with our Chairman and Chief Executive Officer, Frank Mandelbaum, effective January 1, 2005. The agreement provides for an annual base salary of $250,000. In addition, we granted to Mr. Mandelbaum an option to purchase 75,000 shares of common stock at an exercise price of $4.37 per share, of which 25,000 options became exercisable on January 1, 2005; 25,000 options became exercisable on January 1, 2006 and the remaining 25,000 options shall become exercisable on January 1, 2007.        Effective January 1, 2006, we entered into a letter of understanding with our Chairman and Chief Executive Officer that provides for an annual base salary of $255,604. In addition, on November 8, 2005, we granted to Mr. Mandelbaum an option to purchase 25,000 shares of common stock at an exercise price of $3.22 per share. We also agreed to provide a severance arrangement that in such case that we were to terminate Mr. Mandelbaum for any reason other than cause we would Mr. Mandelbaum pay 2 years of his annual cash base salary in 12 equal monthly installments.        If there shall occur a change of control, as defined in the agreement, Mr. Mandelbaum may terminate his employment at any time and be entitled to receive a payment equal to 2.99 times his average annual compensation, including bonuses, during the three years preceding the date of termination, payable in cash to the extent of three months salary and the balance in shares of our common stock based on a valuation of $2.00 per share.        On November 9, 2004, we entered into a new employment agreement with our Senior Executive Vice President and Chief Financial Officer, Edwin Winiarz, effective January 1, 2005. The agreement, which expires December 31, 2006, provides for a fixed base annual salary of $162,086. In addition, we granted to Mr. Winiarz an option to purchase 50,000 shares of common stock at an exercise price of $4.37 per share, of which 25,000 options became exercisable on January 1, 2005 and 25,000 options became exercisable during the fourth quarter of 2005.        Each of the agreements requires the executive to devote substantially all his time and efforts to our business and contains non-competition and nondisclosure covenants of the officer for the term of his employment and for a period of two years thereafter. Each agreement provides that we may terminate the agreement for cause.  Compensation Committee Interlocks and Insider Participation        The board of directors has established a compensation committee which is currently comprised of Mr. Money, chairman, Mr. Levy and Mr. Maxwell. No member of the Compensation Committee has a relationship that would constitute an interlocking relationship with Executive Officers or Directors of the Company or another entity.
The following table sets forth, as of March 1, 2006 certain information regarding beneficial ownership of Intelli-Check's common stock by each person who is known by us to beneficially own more than 5% of our common stock. The table also identifies the stock ownership of each of our directors, each of our officers, and all directors and officers as a group. Except as otherwise indicated, the stockholders listed in the table have sole voting and investment powers with respect to the shares indicated.        Unless otherwise indicated, the address for each of the named individuals is c/o Intelli-Check, Inc., 246 Crossways Park West, Woodbury, NY 11797-2015.        Shares of common stock which an individual or group has a right to acquire within 60 days pursuant to the exercise or conversion of options, warrants or other similar convertible or derivative securities are deemed to be outstanding for the purpose of computing the percentage ownership of such individual or group, but are not deemed to be outstanding for the purpose of computing the percentage ownership of any other person shown in the table.                                          31         The applicable percentage of ownership is based on 12,085,444 shares outstanding as of March 1, 2006.                                  Name                                  Shares Beneficially Owned      Percent - ---------------------------------------------------------------- ------------------------------- -----------    Frank Mandelbaum (1)                                                       1,627,330               12.39  Edwin Winiarz (2)                                                           225,000                 1.83  Todd Liebman (3)                                                            150,000                 1.23  Russell T. Embry (4)                                                         59,000                  *  Jeffrey Levy (5)                                                            130,980                 1.07  Arthur L. Money (6)                                                         157,000                 1.28  John  E. Maxwell (7)                                                         47,000                  *  Guy L. Smith (8)                                                             80,457                  *  Ashok Rao (9)                                                                98,500                  *  Todd Cohen (10)                                                             702,570                 5.78  Empire State Development Corporation, formerly New York State Science and Technology Foundation (11)                                      605,000                 4.98  All Executive Officers & Directors as a group (9 persons)                  2,575,267               18.29  * Indicates beneficial ownership of less than one percent of the total outstanding common stock.   (1)  Includes 1,047,549 shares issuable upon exercise of stock options and      rights exercisable within 60 days. Does not include 9,000 shares and 880      rights held by Mr. Mandelbaum's wife, for which Mr. Mandelbaum disclaims      beneficial ownership  (2)  Includes 225,000 shares issuable upon exercise of stock options exercisable      within 60 days.  (3)  Includes 150,000 shares issuable upon exercise of stock options exercisable      within 60 days.  (4)  Includes 59,000 shares issuable upon exercise of stock options exercisable      within 60 days.  (5)  Includes 128,580 shares issuable upon exercise of stock options exercisable      within 60 days.  (6)  Includes 157,000 shares issuable upon exercise of stock options exercisable      within 60 days.  (7)  Includes 47,000 shares issuable upon exercise of stock options exercisable      within 60 days.  (8)  Includes 79,500 shares issuable upon exercise of stock options exercisable      within 60 days.  (9)  Includes 98,500 shares issuable upon exercise of stock options exercisable      within 60 days.  (10) Includes 67,970 rights and 4,000 warrants which are exercisable within 60      days. The address is PO Box 20054, Huntington Station, NY 11746.  (11) Frances A. Walton, the Chief Financial Officer exercises voting and      dispositive power over the shares. The address is 30 South Pearl Street,      Albany, NY 12245.                                          32   Equity Compensation Plan Information     Plan Category                        Number of Securities       Weighted average      Number of securities remaining                                        to be issued upon       exercise price of      available for future issuance                                           exercise of             outstanding        under equity compensation plans                                       outstanding options,     options, warrants     (excluding securities reflected                                       warrants and rights          and rights                  in column a)                                              (a)                       (b)                           (c) - ----------------------------------- ------------------------ ----------------------- ---------------------------------     Equity compensation plans                  1,925,530                 $7.27                       728,361 approved by security holders  Equity compensation plans not                839,425                 $6.55                         None approved by security holders  Total                                      2,764,955                 $6.77                       728,361         From time to time the Board of Directors of the Company approves the grant of non-plan options to officers and employees of, or consultants to, the Company. The shares of common stock listed under equity compensation plans not approved by stockholders in the above table consist of shares of common stock issuable pursuant to such options. The vesting schedule of the options varies, with some vesting immediately and some vesting upon the completion of certain performance objectives. The non-plan options currently outstanding have been granted to nine (9) persons. These options have a weighted average exercise price per share equal to $6.55 and options to purchase 776,925 shares of common stock are currently exercisable.
On January 1, 2005, we renewed our agreement with Alexandros Partners LLC to act as consultants in advising us in financial and investor relation matters. A principal of Alexandros Partners LLC was a member of our Board of Directors. We agreed to pay a consulting fee of $50,000 payable in 12 equal monthly installments. The agreement terminated on December 31, 2005. This transaction was approved by all of the independent directors of our Board of Directors.
Until April 21, 2004, our principal independent auditor was Grant Thornton LLP. Thereafter, our principal independent auditor was Amper, Politziner & Mattia, P.C. The services of each were provided in the following categories and amount:  AUDIT FEES        We were billed $6,000 by Grant Thornton LLP for fees relating to the transition to Amper, Politziner and Mattia, P.C. as our auditors during 2004.        The aggregate fees billed by Amper, Politziner and Mattia, P.C. for professional services rendered for the audit of the Company's annual financial statements for the fiscal years ended December 31, 2004 and 2005 and for the reviews of the financial statements included in the Company's Quarterly Reports on Form 10-Q for fiscal years 2004 and 2005 amounted to $78,400 and $86,625, respectively.  AUDIT RELATED FEES        Other than the fees described under the caption "Audit Fees" above, Amper, Politziner and Mattia, P.C. did not bill any fees for services rendered to us during fiscal year 2004 or 2005 for assurance and related services in connection with the audit or review of our financial statements.                                          33   TAX FEES        Amper, Politziner and Mattia, P.C. billed us for tax related services for fiscal 2004 totaling $4,500, and will perform tax related services for us for fiscal 2005, which we estimate to be approximately $4,000.  ALL OTHER FEES        We were billed $18,725 by Grant Thornton LLP for fees relating to our private placement completed in 2005.        The aggregate fees billed by Amper, Politziner and Mattia, P.C. for professional services rendered in connection with our private placement completed August 9, 2005 and the filing of our Registration Statement on Form S-3 amounted to $24,000.        No other fees were billed by our auditors for 2004.  PRE-APPROVAL OF SERVICES        The Audit Committee pre-approves all services, including both audit and non-audit services, provided by our independent accountants. For audit services, each year the independent auditor provides the Audit Committee with an engagement letter outlining the scope of proposed audit services to be performed during the year, which must be formally accepted by the Committee before the audit commences. The independent auditor also submits an audit services fee proposal, which also must be approved by the Committee before the audit commences.                                       PART IV Item 15. Exhibits and Financial Statement Schedules           (a)(1)   Financial Statements                    Balance Sheets as of December 31, 2004 and 2005                   Statements of Operations for the years ended December 31,                   2003, 2004 and 2005                   Statements of Stockholders' Equity for the years ended                   December 31, 2003, 2004 and 2005                   Statements of Cash Flows for the years ended December 31,                   2003, 2004 and 2005           (2)      Schedule II - Valuation and Qualifying Accounts                                          34            (b)      Exhibits    Exhibit No.     Description   -----------     -----------   1               Form of Underwriting Agreement (1)   3.1             Certificate of Incorporation of the Company (1)   3.2             By-laws of the Company (1)   3.3             Certificate of Designation of Preferred Stock of                   Intelli-Check, Inc. (7)   4.1             Specimen Stock Certificate (2)   4.2             Form of Underwriters' Warrant Agreement (1)   4.3             Warrant to Gryphon Master Fund LLP (7)   4.4             Form of Underwriters Warrant Agreement including form of                   Warrant Certificate(8)   4.5             Warrant to JMP Securities, LLC   10.1            1998 Stock Option Plan (1) *   10.5            Agreement of Lease between the Company and Industrial and                   Research Associates, dated as of October 15, 2000 (5)   10.6            1999 Stock Option Plan (1) *   10.10           Agreement between the Company and Kevin Messina, individually                   and d/b/a K.M. Software Development, dated as of May 3, 1999                   (1) *   10.11           Memorandum of Understanding between AAMVAnet, Inc. and Intelli                   -Check, Inc. effective November 15, 2000 (5)   10.12           2001 Stock Option Plan (4)   10.15           Memorandum of Understanding between AAMVAnet, Inc. and                   Intelli-Check, Inc. effective January 29, 2002 (5)   10.16           Securities Purchase Agreement between Intelli-Check, Inc. and                   Gryphon Master Fund dated March 27, 2003. (7)   10.17           Registration Rights Agreement between Intelli-Check, Inc. and                   Gryphon Master Fund dated March 27, 2003. (7)   10.18           Employment Agreement between Frank Mandelbaum and the Company,                   dated as of December 15, 2004* (6)   10.19           Employment Agreement between Edwin Winiarz and the Company,                   dated as of December 15, 2004* (6)   10.20           Understanding of Employment between Frank Mandelbaum and the                   Company, dated as of January 1, 2006*   14.1            Code of Business Conduct and Ethics (7)   21              List of Subsidiaries (1)   23.1            Consent of Amper, Politziner and Mattia, P.C.   23.2            Consent of Grant Thornton LLP   31.1            Certification of Chief Executive Officer pursuant to Section                   302 of The Sarbanes-Oxley Act of 2002   31.2            Certification of Chief Financial Officer pursuant to Section                   302 of The Sarbanes-Oxley Act of 2002   32              Certification of Chief Executive Officer and Chief Financial                   pursuant to Section 906 of The Sarbanes-Oxley Act of 2002  - ---------------------------------    *Denotes a management contract or compensatory plan, contract or arrangement. (1)   Incorporated by reference to Registration Statement on Form SB-2 (File No.       333-87797) filed September 24, 1999. (2)   Incorporated by reference to Amendment No. 1 to the Registration Statement       filed November 1, 1999. (3)   Incorporated by reference to Amendment No. 2 to the Registration Statement       filed November 15, 1999. (4)   Incorporated by reference to Registrant's Proxy Statement on Schedule 14A       filed May 31, 2001. (5)   Incorporated by reference to Registrant's Annual Report on Form 10-K filed       March 29, 2001. (6)   Incorporated by reference from the Registrant's Current Report on Form 8-K       filed on December 16, 2004. (7)   Incorporated by reference to Registrant's Annual Report of Form 10-K filed       March 31, 2003. (8)   Incorporated by reference to Registration Statement on Form S-2 (File No.       333-108043) filed September 30, 2003.                                          35                                       SIGNATURES           Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the Registrant had duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.    Date:     March 29, 2006           INTELLI-CHECK, INC.                                     By:  /s/ Frank Mandelbaum                                    ------------------------------                                    Frank Mandelbaum                                    Chairman, Chief Executive Officer                                    and Director           Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.  Date:     March 29, 2006           INTELLI-CHECK, INC.                                     By:  /s/ Frank Mandelbaum                                    ------------------------------                                    Frank Mandelbaum                                    Chairman, Chief Executive Officer                                    and Director  Date:     March 29, 2006           /s/  Edwin Winiarz                                    ------------------------------                                    Edwin Winiarz                                    Senior Executive Vice President, Treasurer                                     and Chief Financial Officer  Date:     March 29, 2006           /s/  Ashok Rao                                    ------------------------------                                    Ashok Rao, Vice Chairman and Director  Date:     March 29, 2006           /s/  Jeffrey Levy                                    ------------------------------                                    Jeffrey Levy, Director  Date:     March 29, 2006           /s/  John E. Maxwell                                    ------------------------------                                    John E. Maxwell, Director  Date:     March 29, 2006           /s/  Arthur L. Money                                    ------------------------------                                    Arthur L. Money, Director  Date:     March 29, 2006           /s/  Guy L. Smith                                    ------------------------------                                    Guy L. Smith, Director     INDEX                                                                                                          Page                                                                                                       ----   REPORTS OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMS                                           F-1 - F-2  FINANCIAL STATEMENTS:     Balance Sheets as of December 31, 2004 and 2005                                                    F-3      Statements of Operations for the Years Ended December 31, 2003, 2004 and 2005                      F-4      Statements of Stockholders' Equity for the Years Ended December 31, 2003, 2004 and 2005            F-5      Statements of Cash Flows for the Years Ended December 31, 2003, 2004 and 2005                      F-6  NOTES TO FINANCIAL STATEMENTS                                                                      F-7 - F-22  Schedule II - Valuation and Qualifying Accounts                                                       F-22     REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM - -------------------------------------------------------   To the Board of Directors and Stockholders of Intelli-Check, Inc.  We have audited the accompanying statements of operations,  stockholders' equity and cash flows of  Intelli-Check,  Inc.  for the year ended  December  31, 2003. These financial  statements are the responsibility of the Company's  management. Our responsibility is to express an opinion on these financial  statements based on our audit.  We conducted  our audit in accordance  with the standards of the Public  Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements  are free of material  misstatement.  The Company is not  required to have,  nor were we  engaged to perform  an audit of its  internal  control  over financial reporting.  Our audit included  consideration of internal control over financial  reporting  as  a  basis  for  designing  audit  procedures  that  are appropriate  in the  circumstances,  but not for the  purpose of  expressing  an opinion on the  effectiveness  of the Company's  internal control over financial reporting.  Accordingly,  we express  no such  opinion.  An audit also  includes examining,  on a test basis,  evidence supporting the amounts and disclosures in the  financial   statements,   assessing  the  accounting  principles  used  and significant  estimates  made by  management,  as well as evaluating  the overall financial  statement  presentation.   We  believe  that  our  audit  provides  a reasonable basis for our opinion.  In our opinion,  the financial  statements  referred to above present fairly, in all  material   respects,   the  results  of   operations   and  cash  flows  of Intelli-Check,  Inc.  for the year ended  December 31, 2003 in  conformity  with accounting principles generally accepted in the United States of America.  Our audit was  conducted  for the  purpose  of  forming  an opinion on the basic financial statements taken as a whole. The accompanying schedule II for the year ended December 31, 2003 is presented for purposes of additional  analysis and is not a required part of the basic financial statements. Such information has been subjected to the auditing procedures applied in the audit of the basic financial statements  and, in our opinion,  is fairly  stated in all material  respects in relation to the basic financial statements taken as a whole.    /s/ Grant Thornton LLP - ---------------------- New York, New York March 5, 2004                                                                                F-1                 Report of Independent Registered Public Accounting Firm              -------------------------------------------------------   To the Board of Directors and Stockholders of Intelli-Check, Inc.   We have audited the  accompanying  balance  sheets of  Intelli-Check,  Inc. (the "Company")  as of  December  2005  and  2004,  and  the  related  statements  of operations, stockholders' equity, and cash flows for the years then ended. These financial  statements are the  responsibility of the Company's  management.  Our responsibility  is to express an opinion on these financial  statements based on our audits.  We conducted our audits in accordance  with the standards of the Public  Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements  are free of material  misstatement.  The Company is not  required to have,  nor were we engaged to perform,  an audit of its  internal  control  over financial reporting.  Our audit included  consideration of internal control over financial  reporting  as  a  basis  for  designing  audit  procedures  that  are appropriate  in the  circumstances,  but not for the  purpose of  expressing  an opinion on the  effectiveness  of the Company's  internal control over financial reporting.  Accordingly we express no such opinion. An audit includes examining, on a  test  basis,  evidence  supporting  the  amounts  and  disclosures  in the financial statements. An audit also includes assessing the accounting principles used and  significant  estimates made by  management,  as well as evaluating the overall financial statement  presentation.  We believe that our audits provide a reasonable basis for our opinion.  In our opinion,  the financial  statements  referred to above present fairly, in all material  respects,  the  financial  position of  Intelli-Check,  Inc. as of December 31, 2005 and 2004, and the results of its operations and its cash flows for the years then ended in  conformity  with  accounting  principles  generally accepted in the United States of America.  We have also audited the  financial  statement  schedule  listed in the index at item  15(a)(2),  schedule II for the years ended  December 31, 2005 and 2004. In our opinion,  such financial statement schedule,  when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.    /s/ Amper, Politziner & Mattia, P.C. - ------------------------------------ New York, New York March 3, 2006                                                                                F-2    INTELLI-CHECK, INC.  BALANCE SHEETS DECEMBER 31, 2004 and 2005                                       ASSETS                                                                                            2004            2005                                                                                     ------------    ------------    CURRENT ASSETS:     Cash and cash equivalents                                                       $    367,297    $    528,250     Marketable securities and short-term investments                                   4,091,984       5,263,308     Accounts receivable, net of allowance of $20,000 and $28,467           for 2004 and 2005, respectively                                                454,112         408,542     Inventory                                                                            211,163         125,981     Other current assets                                                                 279,550         419,279                                                                                     ------------    ------------                   Total current assets                                                  5,404,106       6,745,360   PROPERTY AND EQUIPMENT, net (Note 3)                                                     132,905          92,246  PATENT COSTS, net (Notes 4 and 9)                                                         42,589          36,379  OTHER  ASSETS                                                                                            34,916          34,916                                                                                     ------------    ------------                   Total assets                                                       $  5,614,516    $  6,908,901                                                                                     ============    ============                        LIABILITIES AND STOCKHOLDERS' EQUITY  CURRENT LIABILITIES:     Accounts payable                                                                $    759,218    $    371,521     Accrued expenses (Note 5)                                                            574,043         389,742     Deferred revenue                                                                     476,387         694,958                                                                                     ------------    ------------                  Total current liabilities                                             1,809,648       1,456,221                                                                                     ------------    ------------  OTHER LIABILITIES                                                                         97,266          62,995                                                                                     ------------    ------------                   Total liabilities                                                     1,906,914       1,519,216                                                                                     ------------    ------------  COMMITMENTS AND CONTINGENCIES (Note 10)                                                       --              --  SERIES A 8% CONVERTIBLE REDEEMABLE PREFERRED STOCK,     Net of beneficial  conversion feature,  warrants issued and issuance costs -     $.01 par value; 1,000,000 shares authorized; 30,000 and 0 shares issued and      outstanding as of December 31, 2004 and 2005, respectively (Note 7)               2,839,278              --                                                                                     ------------    ------------  STOCKHOLDERS' EQUITY:     Common stock - $.001 par value; 20,000,000 shares authorized; 10,290,418 and        12,058,240 shares issued and outstanding as of 2004 and 2005, respectively         10,290          12,058     Deferred compensation                                                               (126,469)       (263,460)     Additional paid-in capital                                                        36,655,882      44,748,969     Accumulated deficit                                                              (35,671,379)    (39,107,882)                                                                                     ------------    ------------                  Total stockholders' equity                                              868,324       5,389,685                                                                                     ------------    ------------                  Total liabilities and stockholders' equity                         $  5,614,516    $  6,908,901                                                                                     ============    ============   The accompanying notes are an integral part of these statements.                                                                                F-3    INTELLI-CHECK, INC.  STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2003, 2004 AND 2005                                                                        2003            2004            2005                                                                 ------------    ------------    ------------     REVENUES                                                        $  1,235,611    $  1,119,349       2,383,532 COST OF REVENUES                                                    (454,032)       (393,584)       (744,615) INVENTORY WRITEDOWN (Note 2)                                        (990,000)       (357,332)             --                                                                 ------------    ------------    ------------                  Gross profit (loss)                                (208,421)        368,433       1,638,917                                                                 ------------    ------------    ------------   OPERATING EXPENSES     Selling                                                        1,352,274       1,176,911       1,257,810     General and administrative                                     2,386,088       5,032,207       2,824,384     Research and development                                       1,226,725       1,176,276         941,530     Write off of intangible assets (Notes 2 and 9)                   363,655            --              --                                                                 ------------    ------------    ------------                  Total operating expenses                          5,328,742       7,385,394       5,023,724                                                                 ------------    ------------    ------------                   Loss from operations                             (5,537,163)     (7,016,961)     (3,384,807)                                                                 ------------    ------------    ------------  OTHER INCOME (EXPENSE):     Interest income                                                   51,437          94,030         145,848     Interest expense                                                 (43,487)             --              --     Other income (expense) (Note 10)                                (921,730)             --              --                                                                 ------------    ------------    ------------                                                                     (913,780)         94,030         145,848                                                                 ------------    ------------    ------------                   Net loss                                         (6,450,943)     (6,922,931)     (3,238,959)      Accretion of convertible redeemable preferred stock costs       (198,540)       (964,338)       (160,722)     Dividend on convertible redeemable  preferred stock             (183,451)       (240,000)        (36,822)                                                                 ------------    ------------    ------------      Net loss attributable to common stockholders                $ (6,832,934)   $ (8,127,269)   $ (3,436,503)                                                                 ============    ============    ============  PER SHARE INFORMATION:     Net loss per common share -        Basic and diluted                                        $      (0.74)   $      (0.79)   $      (0.31)                                                                 ============    ============    ============      Weighted average common shares used in computing       per share amounts -        Basic and diluted                                           9,217,856      10,224,730      11,201,404                                                                 ============    ============    ============   The accompanying notes are an integral part of these statements.                                                                                F-4     INTELLI-CHECK, INC.  STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 2003, 2004 AND 2005                                                                         Common Stock            Additional                                                              ----------------------------     Paid-in                                                                  Shares         Amount         Capital                                                              ------------    ------------    ------------      BALANCE, December 31, 2002                                      8,875,302    $      8,874    $ 22,399,029  Effect on extension of expiring options                                --              --         167,000 Issuance of common stock for the exercise of stock options        175,209             175         679,436 Issuance of common stock for the exercise of rights                 4,407               5          37,455 Issuance of common stock in connection with secondary           1,100,000           1,100       7,580,326 offering Effect on extension of expiring rights dividend                        --              --       2,000,000 Warrants issued in connection with the issuance of    convertible redeemable preferred stock                              --              --         497,700 Beneficial conversion feature embedded in    convertible redeemable preferred stock issued                                       --         540,000 Amortization of deferred compensation                                  --              --              -- Dividend on convertible redeemable preferred stock                     --              --              -- Recognition of deferred compensation                                   --              --         319,904 Accretion of convertible redeemable preferred stock                    --              --          66,781 Valuation adjustment of deferred compensation                          --              --              -- Net loss                                                               --              --              --                                                              ------------    ------------    ------------                                                                 10,154,918    $     10,154    $ 34,287,631 BALANCE, December 31, 2003  Effect on extension of expiring options                                --              --       1,347,000 Issuance of common stock for the exercise of stock options        142,700             143         427,836 Issuance of common stock under employment agreement                 1,500               2           6,373 Effect on extension of expiring rights dividend                        --              --         525,000 Purchase and retirement of common stock                           (20,200)            (20)        (98,731) Issuance of common stock for services rendered                     11,500              11          48,864 Amortization of deferred compensation                                  --              --              -- Dividend on convertible redeemable preferred stock                     --              --              -- Recognition of deferred compensation                                   --              --         542,648 Accretion of convertible redeemable preferred stock                    --              --              -- Valuation adjustment of deferred compensation                          --              --        (430,739) Net loss                                                               --              --              --                                                              ------------    ------------    ------------  BALANCE, December 31, 2004                                     10,290,418    $     10,290    $ 36,655,882  Effect on extension of expiring options                                --              --         184,200 Exercise of stock options                                          54,000              54         168,846 Issuance of common stock in connection with   secondary offering                                            1,250,000           1,250       4,438,343 Conversion of Convertible Redeemable Preferred Stock              454,545             455       2,999,545 Issuance of stock from cashless exercise of stock options           9,277               9          44,241 Purchase and retirement of outstanding warrants                        --              --         (25,000) Issuance of stock options for services rendered                        --              --           2,163 Amortization of deferred compensation                                  --              --              -- Dividend on convertible redeemable preferred stock                     --              --              -- Recognition of deferred compensation                                   --              --         402,995 Accretion of convertible redeemable preferred stock                    --              --              -- Valuation adjustment of deferred compensation                          --              --        (122,246) Net loss                                                               --              --              --                                                              ------------    ------------    ------------  BALANCE, December 31, 2005                                     12,058,240    $     12,058    $ 44,748,969                                                              ============    ============    ============                                                                  Deferred      Accumulated                                                              Compensation      Deficit           Total                                                              ------------    ------------    ------------      BALANCE, December 31, 2002                                   $   (348,476)   $(18,186,176)   $  3,873,251  Effect on extension of expiring options                                --              --         167,000 Issuance of common stock for the exercise of stock options             --              --         679,611 Issuance of common stock for the exercise of rights                    --              --          37,460 Issuance of common stock in connection with secondary offering                                                               --              --       7,581,426 Effect on extension of expiring rights dividend                        --      (2,000,000)             -- Warrants issued in connection with the issuance of    convertible redeemable preferred stock                              --              --         497,700 Beneficial conversion feature embedded in    convertible redeemable preferred stock issued                       --              --         540,000 Amortization of deferred compensation                             357,194              --         357,194 Dividend on convertible redeemable preferred stock                     --        (183,451)       (183,451) Recognition of deferred compensation                             (319,904)             --              -- Accretion of convertible redeemable preferred stock                    --        (198,540)       (198,540) Valuation adjustment of deferred compensation                     (66,781)             --              -- Net loss                                                               --      (6,450,943)     (6,450,943)                                                              ------------    ------------    ------------                                                               $   (377,967)   $(27,019,110)   $  6,900,708 BALANCE, December 31, 2003  Effect on extension of expiring options                                --              --       1,347,000 Issuance of common stock for the exercise of stock options             --              --         427,979 Issuance of common stock under employment agreement                    --              --           6,375 Effect on extension of expiring rights dividend                        --        (525,000)             -- Purchase and retirement of common stock                                --              --         (98,751) Issuance of common stock for services rendered                         --              --          48,875 Amortization of deferred compensation                             363,407              --         363,407 Dividend on convertible redeemable preferred stock                     --        (240,000)       (240,000) Recognition of deferred compensation                             (542,648)             --              -- Accretion of convertible redeemable preferred stock                    --        (964,338)       (964,338) Valuation adjustment of deferred compensation                     430,739              --              -- Net loss                                                               --      (6,922,931)     (6,922,931)                                                              ------------    ------------    ------------  BALANCE, December 31, 2004                                   $   (126,469)   $(35,671,379)   $    868,324  Effect on extension of expiring options                                --              --         184,200 Exercise of stock options                                              --              --         168,900 Issuance of common stock in connection with   secondary offering                                                   --              --       4,439,593 Conversion of Convertible Redeemable Preferred Stock                   --              --       3,000,000 Issuance of stock from cashless exercise of stock options              --              --          44,250 Purchase and retirement of outstanding warrants                        --              --         (25,000) Issuance of stock options for services rendered                        --              --           2,163 Amortization of deferred compensation                             143,758              --         143,758 Dividend on convertible redeemable preferred stock                     --         (36,822)        (36,822) Recognition of deferred compensation                             (402,995)             --              -- Accretion of convertible redeemable preferred stock                    --        (160,722)       (160,722) Valuation adjustment of deferred compensation                     122,246              --              -- Net loss                                                               --      (3,238,959)     (3,238,959)                                                              ------------    ------------    ------------  BALANCE, December 31, 2005                                   $   (263,460)   $(39,107,882)   $  5,389,685                                                              ============    ============    ============    The accompanying notes are an integral part of these statements.                                                                                F-5    INTELLI-CHECK, INC.  STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2003, 2004 AND 2005                                                                                             2003           2004            2005                                                                                     ------------    ------------    ------------     CASH FLOWS FROM OPERATING ACTIVITIES:     Net loss                                                                        $ (6,450,943)   $ (6,922,931)   $ (3,238,959)     Adjustments to reconcile net loss to net cash used in operating activities-           Depreciation and amortization                                                  436,778         111,743          52,265           Write off of intangible assets                                                 363,655              --              --           Non cash stock based compensation expense                                      167,000       1,350,187         228,450           Issuance of common stock for services rendered                                      --          48,875              --           Issuance of stock options for services rendered                                     --              --           2,163           Amortization of deferred compensation                                          357,194         363,407         143,758           Loss on sale of property and equipment                                              --              --           4,700           Writedown of inventory                                                         990,000         357,332              --           Changes in assets and liabilities-               (Increase) decrease in certificates of deposit, restricted              (1,009,801)      1,283,118              --               (Increase) decrease in accounts receivable, net                           (155,636)       (288,946)         45,570               Decrease (increase) decrease in inventory                                  259,130         (14,786)         85,182               Decrease (increase) in other current assets                                 56,383         (62,163)       (139,729)               (Increase) in other assets                                                      --         (34,916)             --               (Decrease) increase (decrease) in accounts payable and accrued                   expenses                                                              (464,354)        667,086        (511,505)               Increase (decrease) in litigation settlement payable                       921,700        (921,700)             --               (Decrease) increase in deferred revenue                                    (84,021)        290,050         184,300                                                                                     ------------    ------------    ------------                     Net cash used in operating activities                             (4,612,915)     (3,773,646)     (3,143,805)                                                                                     ------------    ------------    ------------  CASH FLOWS FROM INVESTING ACTIVITIES:     Purchases of property and equipment                                                   (4,352)        (22,441)        (12,096)     Proceeds from sale of property and equipment                                              --              --           2,000     Investment in marketable securities and short-term investments                    (4,856,388)    (11,677,991)     (8,037,905)     Sales of marketable securities and short-term investments                                 --      12,442,395       6,866,581                                                                                     ------------    ------------    ------------                     Net cash (used in) provided by investing activities               (4,860,740)        741,963      (1,181,420)                                                                                     ------------    ------------    ------------  CASH FLOWS FROM FINANCING ACTIVITIES:     Net proceeds from issuance of common stock                                           717,071         431,167         168,900     Net proceeds from issuance of common stock from secondary offering                 7,581,426              --       4,439,593     Net proceeds from issuance of convertible redeemable preferred stock               2,714,100              --     Payment of dividend to preferred stockholders                                       (122,958)       (240,000)        (97,315)     Repayment of capital lease obligations                                               (19,572)           (427)             --     Purchase of outstanding warrants                                                          --              --         (25,000)     Treasury stock purchased                                                                  --         (98,751)             --                                                                                     ------------    ------------    ------------                     Net cash provided by financing activities                         10,870,067          91,989       4,486,178                                                                                     ------------    ------------    ------------                      Net increase (decrease) increase in cash and cash equivalents      1,396,412      (2,939,694)        160,953  CASH AND CASH EQUIVALENTS, beginning of year                                           1,910,579       3,306,991         367,297                                                                                     ------------    ------------    ------------  CASH AND CASH EQUIVALENTS, end of year                                              $  3,306,991    $    367,297    $    528,250                                                                                     ============    ============    ============  SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:        Cash paid during the year for interest                                       $      1,487    $         --    $         --                                                                                     ============    ============    ============  SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING ACTIVITIES:     Stock options issued for services rendered                                      $    319,904    $    542,648    $    402,995     Beneficial conversion feature and warrants issued in connection         with issuance of convertible redeemable preferred stock                        1,037,700              --              --     Conversion of convertible redeemable preferred stock into Common Stock                    --              --       3,000,000     Accretion of convertible redeemable preferred stock cost                             198,540         964,338         160,722    The accompanying notes are an integral part of these statements.                                                                                F-6     INTELLI-CHECK, INC.  NOTES TO FINANCIAL STATEMENTS   1. NATURE OF BUSINESS AND LIQUIDITY  Business  Intelli-Check  ("the  Company"  or "we") was formed in 1994 to address a growing need for a reliable  document and age verification  system that could be used to detect   fraudulent   driver   licenses  and  other  widely  accepted  forms  of government-issued  identification documents. Since then, our technology has been further  developed for application in the commercial  fraud  protection,  access control and governmental security markets.  Additionally,  it is currently being used to increase  productivity  by addressing  inefficiencies  and  inaccuracies associated with manual data entry. The core of Intelli-Check's product offerings is our proprietary  software technology that verifies the authenticity of driver licenses,  state issued  non-driver  and military  identification  cards used as proof of identity. Our patented ID-Check(R) software technology instantly reads, analyzes,  and  verifies  the encoded  data in magnetic  stripes and barcodes on government-issue  IDs from approximately 60 jurisdictions in the U.S. and Canada to determine if the content and format is valid.  We have served as the national testing laboratory for the American Association of Motor Vehicle  Administrators (AAMVA) since 1999 and have access to all the currently available encoded driver license formats.  Our patented ID-Check(TM) software technology provides the ability to verify the validity of driver licenses,  state issued non-driver ID cards and military ID's that  contain  magnetic  stripes  or bar codes,  which in most cases  conform to AAMVA/ANSI/ISO  standards.  The ID-Check  software is contained in our platforms and some of our other software products.  Our C-Link(R) software product,  which runs on a personal computer was created to work in conjunction with the ID-Check unit, allows a user to instantly view the encoded data for further verification, analyze the data and generate various reports where permitted by law.  We also introduced two products, ID-Traveler(TM) and ID-Prove(TM), which provide "in-person  proofing" to meet the  credentialing  requirements  of  Presidential Directive  HSPD-12,  a policy for a Common  Identification  Standard for Federal Employees and  Contractors  and help in Patriot Act  compliance.  All of our new innovations  and product  roll-outs  are  designed for use with our data capture devices which are compact,  and contain either one or both  two-dimensional  bar code and magnetic  stripe  readers,  which  enables the new software  technology applications to be used on a variety of  commercially  available data processing devices, including PDAs, Tablets, Laptops, Desktops and Point-of-Sale Computers.  Liquidity  Since inception,  the Company has incurred  significant losses and negative cash flow  from  operating  activities,  and  as of  December  31,  2005  we  had  an accumulated  deficit of $39,107,882.  The Company  anticipates  that its current available  cash on hand  and  marketable  securities  and  cash  resources  from expected  revenues  from  the  sale of our  products  and the  licensing  of its technology  will be  sufficient  to meet its  anticipated  working  capital  and capital  expenditure  requirements  for at least the next twelve  months.  These requirements  are  expected  to  include  the  purchase  of  inventory,  product development,  sales and marketing  expenses,  working capital  requirements  and other general corporate purposes. The Company may need to raise additional funds to respond to  business  contingencies  which may  include the need to fund more rapid expansion, fund additional marketing expenditures, develop new markets for its  ID-Check  technology,  enhance  its  operating  infrastructure,  respond to competitive  pressures,   or  acquire  complementary   businesses  or  necessary technologies.  2. SIGNIFICANT ACCOUNTING POLICIES  Cash and Cash Equivalents  Cash and cash  equivalents  include  cash and  highly  liquid  investments  with original  maturities of three months or less when purchased.  As of December 31, 2004 and 2005, cash  equivalents  included money market funds,  commercial paper and  other  liquid  short-term  debt  instruments  (with  maturities  at date of purchase of three months or less) of $340,622 and $467,991, respectively.                                                                                F-7    INTELLI-CHECK, INC.  NOTES TO FINANCIAL STATEMENTS   Marketable Securities  The Company has classified its marketable  securities as held-to-maturity as the Company has the intent and ability to hold these  securities  to  maturity.  The securities  are  carried at  amortized  cost using the  specific  identification method.  Interest income is recorded using an effective  interest rate, with the associated  premium  or  discount  amortized  to  interest  income.  All  of the Company's  marketable  securities  have  maturities  of less  than 1 year with a weighted  average  interest rate of 4.04%.  The carrying value of the marketable securities as of December 31, 2004 and 2005 approximated the fair market value.  Doubtful Accounts and Allowances  The  Company  records  its  doubtful  accounts  and  allowances  based  upon its assessment of various factors. The Company considers historical experience,  the age of  the  accounts  receivable  balances,  credit  quality  of the  Company's customers,  current  economic  conditions  and  other  factors  that may  affect customers' ability to pay.  Inventory  Inventory is stated at the lower of cost or market and cost is determined  using the first-in,  first-out  method.  Inventory is primarily  comprised of finished goods.  Inventory Valuation  The Company's current  inventory  consists  primarily of its ID-Check  terminals that run our patented  software and input devices purchased in 2005. The Company periodically  evaluates the current market value of its  inventory,  taking into account any technological obsolescence that may occur due to changes in hardware technology  and the  acceptance  of the  product  in the  marketplace.  Based on ongoing  evaluation  of its  inventory,  prior to January 1, 2005,  The  Company recorded  a  cumulative  inventory  write  down of  $1,347,332  of the  ID-Check terminals  that  the  Company  originally  acquired  in 1999.  The  manufacturer discontinued  the production of these  ID-Check  terminals in 2003. The ID-Check terminal is fully capable of running our patented software as it utilizes a high quality  imager/scanner  and  magnetic  stripe  reader  and is  currently  being marketed for sale.  During 2005, we sold a portion of the ID-Check  terminals we held in inventory in excess of their  remaining value and recorded a recovery of inventory totaling $128,000, which was previously written off.  Long-Lived Assets and Impairment of Long-Lived Assets  The Company's  long-lived  assets include property and equipment,  patents,  and other intangibles.  In accordance with the provision of SFAS No. 142, "Goodwill and Other Intangible Assets",  with  indefinite  lives,  are no  longer  amortized  but are  reviewed annually (or more  frequently if impairment  indicators  arise) for  impairment. Separable  intangible  assets that are not deemed to have indefinite  lives will continue to be amortized  over their  useful  lives (but with no maximum  life). Pursuant to the adoption of SFAS No. 142, the Company has evaluated its goodwill and  other   intangibles   to  identify   additional   separately   identifiable intangibles;  no adjustment was warranted.  Intangible assets that will continue to be classified as goodwill will no longer be amortized.  This provision had no material impact on the Company's  financial  position and results of operations. At December 31, 2003, the Company  performed an impairment  test of its goodwill and  determined  that there was an  impairment of the recorded  goodwill,  which resulted  from  the  Company's  decision  to  discontinue  the  selling  of  its IDentiScan  products.  As a result,  the Company wrote off the original recorded value of goodwill  totaling $181,447 as of December 31, 2003, which affected the results of operations for the period then ended.  Under the provision of SFAS No. 144,  "Accounting for the Impairment or Disposal of  Long-lived  Assets"  which  supersedes  SFAS No.  121,  "Accounting  for the Impairment  or Disposal of  Long-lived  Assets to be Disposed  Of", SFAS No. 144 requires  that  identifiable  intangible  assets  that  are not  deemed  to have indefinite  lives will be reviewed for impairment  whenever events or changes in circumstances  indicate that the carrying amounts of the assets may be impaired. Furthermore,  these assets are evaluated for continuing  value and proper useful lives by comparison to undiscounted  expected future cash flow projections.  The Company  has  determined  that as a result of  discontinuing  the selling of its IDentiScan products,  certain of its intangible assets,  including patent costs, with a remaining book value of $182,208 has been impaired and was written off as of December 31, 2003,  which  affected the results of operations  for the period then ended.                                                                                F-8    INTELLI-CHECK, INC.  NOTES TO FINANCIAL STATEMENTS  Property and Equipment  Property  and  equipment  are  recorded at cost and are  depreciated  over their estimated  useful lives  ranging from two to ten-years  using the  straight-line basis.  Equipment  held under  capital  leases and  leasehold  improvements  are amortized utilizing the straight-line  method over the lesser of the term of the lease or estimated useful life of the asset.  Intangible Assets  Patent costs,  primarily consisting of legal costs and allocated costs are being amortized  over a period of 17 years using the  straight-line  method.  Acquired Software was amortized over a period of 2 years using the straight-line  method. Other  intangibles,  consisting of a covenant not to compete and copyrights were amortized over a period of 2 and 3 years,  respectively  using the straight-line method.  As discussed  above and in Note 9, certain of these  intangible  assets were written off as of December 31, 2003.  Costs of Computer Software Developed or Obtained for Internal Use  The Company  accounts  for certain  software  costs under  Statement of Position 98-1,  "Accounting for the Costs of Computer Software  Developed or Obtained for Internal Use" ("SOP 98-1"),  which  provides  guidance for  determining  whether computer  software is  internal-use  software and guidance on accounting for the proceeds of computer software originally  developed or obtained for internal use and  then  subsequently  sold  to the  public.  It  also  provides  guidance  on capitalization of the costs incurred for computer software developed or obtained for internal use.  Capitalized Software Development Costs  SFAS No. 86,  "Accounting for the Costs of Computer  Software to Be Sold, Leased or Otherwise  Marketed,"  specifies that costs incurred internally in creating a computer  software product shall be charged to expense when incurred as research and development  until  technological  feasibility has been  established for the product.  Software  production costs for computer software that is to be used as an integral part of a product or process shall not be capitalized until both (a) technological  feasibility  has been  established  for the  software and (b) all research and development  activities for the other  components of the product or process have been completed.  The Company has not capitalized any software costs for the years ended December 31, 2003, 2004 and 2005.  Revenue Recognition  The  Company  sells its  products  directly  through its sales force and through distributors.  Revenue  from  direct  sales of its  product is  recognized  when shipped to the customer and title has passed.  The  Company's  products  require continuing  service or post contract  customer  support and  performance  by the Company;  accordingly,  a portion of the revenue  pertaining  to the service and support is  deferred  based on its fair value and  recognized  ratably  over the period in which the future service,  support and performance are provided, which is  generally  one year.  Currently,  with  respect  to sales of  certain of the Company's products,  the Company does not have enough experience to identify the fair value of each  element,  the full amount of the  revenue and related  gross margin is deferred and recognized  ratably over the one-year period in which the future service, support and performance are provided.  In  addition,  the  Company  recognizes  sales from  licensing  of its  patented software to  customers.  The Company's  licensed  software  requires  continuing service or post  contract  customer  support  and  performance  by the  Company; accordingly,  a portion of the revenue is  deferred  based on its fair value and recognized  ratably  over the period in which the future  service,  support  and performance are provided, which is generally one year.  During the second quarter of fiscal 2003, the Company began receiving  royalties from  licensing its  technology,  which are recognized as revenues in the period they are earned.                                                                                F-9   INTELLI-CHECK, INC.  NOTES TO FINANCIAL STATEMENTS  Under  the  provisions  of  EITF  00-21,  "Revenue  Arrangements  with  Multiple Deliverables",  Revenue  arrangements  were  allocated to the separate  units of accounting  based on their  relative  fair values and revenue is  recognized  in accordance with its policy as stated above. The impact of adopting EITF 00-21 on the financial statements was immaterial.  Research and Development Costs  Research and development costs are charged to expense as incurred.  Shipping Costs  The Company's  shipping and handling costs are included in cost of sales for all periods presented.  Income Taxes  The Company accounts for income taxes under SFAS No. 109, "Accounting for Income Taxes."  Deferred tax assets and  liabilities  are  recognized for the estimated future tax  consequences  attributable  to  differences  between  the  financial statement  carrying  amounts  of  existing  assets  and  liabilities  and  their respective tax bases and net operating loss  carryforwards.  Deferred tax assets and  liabilities are measured using expected tax rates in effect for the year in which those temporary  differences are expected to be recovered or settled.  The Company has recorded a full valuation  allowance for its net deferred tax assets as of December 31, 2004 and 2005, due to the uncertainty of the realizability of those assets.  Fair Value of Financial Instruments  The Company adheres to the provisions of SFAS No. 107,  "Disclosures  about Fair Value of Financial  Instruments." This  pronouncement  requires that the Company calculate the fair value of financial  instruments  and include this  additional information  in the  notes  to  financial  statements  when  the  fair  value is different  than the book value of those  financial  instruments.  The  Company's financial  instruments  include  cash  and  cash  equivalents,   certificate  of deposits,  marketable  securities,  accounts receivable and accounts payable. At December  31,  2004 and 2005,  the  carrying  value of the  Company's  financial instruments approximated fair value, due to their short-term nature.  Business Concentrations and Credit Risk  Financial  instruments,  which subject the Company to  concentrations  of credit risk, consist primarily of cash, cash equivalents and marketable securities. The Company  maintains  cash  between two  financial  institutions.  The  marketable securities  consist of short term investment  grade corporate bonds. The Company performs  periodic   evaluations  of  the  relative  credit  standing  of  these institutions.  The  Company's  sales  to date  have  been  limited  due to the  refocus  of its marketing  efforts and introduction of new products to a number of clients which are  concentrated  in the United  States of America  and the long sales cycle to government entities. The Company performs ongoing credit evaluations,  generally does not require collateral,  and establishes an allowance for doubtful accounts based upon factors  surrounding the credit risk of customers,  historical trends and other information.  During  the year  ended  December  31,  2005,  the  Company  made sales to three customers  that  accounted for  approximately  57.3% of total sales for the year ended  December  31,  2005.  As a result,  the balance due from certain of these customers  accounted for approximately 73% of accounts receivable as of December 31, 2005, which was all collected by March 2006.  As of December 31, 2005,  the Company had one supplier for the production of its input  devices.  However,  in March 2006,  the Company  contracted  with another supplier for a product that performs bar code reading.  The Company has modified its  software  to  operate in  windows  based  systems  and can  integrate  with different hardware platforms that are readily available in the marketplace.  The Company  does  not  maintain  a  manufacturing  facility  of its  own and is not dependent on maintaining its production  relationships due to the flexibility of its software to run on multiple existing platforms.                                                                               F-10   INTELLI-CHECK, INC.  NOTES TO FINANCIAL STATEMENTS  Net Loss Attributable to Common Shareholders  The Company  computes net loss per common share in accordance with SFAS No. 128, "Earnings Per Share".  Under the  provisions of SFAS No. 128, basic net loss per common  share  ("Basic  EPS") is computed by dividing  net loss by the  weighted average number of common shares  outstanding.  Diluted net loss per common share ("Diluted EPS") is computed by dividing net loss by the weighted  average number of common shares and dilutive common share  equivalents then  outstanding.  SFAS No. 128 requires the  presentation of both Basic EPS and Diluted EPS on the face of the statements of operations.  Diluted EPS for the years  ended  December  31,  2003,  2004 and 2005,  does not include the impact of stock options and warrants then outstanding, as the effect of their inclusion would be antidilutive.  The following table  summarizes the equivalent  number of common shares assuming the related  securities that were  outstanding as of December 31, 2003, 2004 and 2005 had been converted:                                                 2003        2004        2005                                             ---------   ---------   ---------     Stock options                            2,701,124   2,777,474   2,764,955    Convertible redeemable preferred stock     454,545     454,545          --    Warrants                                   233,636     323,636     938,636                                             ---------   ---------   ---------            Total                            3,389,305   3,555,655   3,703,591                                             =========   =========   =========  Stock-Based Compensation  At December 31, 2005, the Company has stock based compensation  plans, which are described  more fully in Note 8. As permitted  by the SFAS No. 123,  "Accounting for Stock Based Compensation", the Company accounts for stock-based compensation arrangements   with  employees  in  accordance  with  provisions  of  Accounting Principles  Board  ("APB")  Opinion  No.  25  "Accounting  for  Stock  Issued to Employees".  Compensation expense for stock options issued to employees is based on the  difference  on the date of grant between the fair value of the Company's stock and the exercise price of the option. No stock based employee compensation cost is reflected in net loss,  as all options  granted under those plans had an exercise price equal to the market value of the  underlying  common stock at the date  of  grant.  The  Company  accounts  for  equity   instruments   issued  to non-employees  in  accordance  with the  provisions of SFAS No. 123 and Emerging Issues Task Force ("EITF") Issue No. 96-18,  "Accounting for Equity  Instruments That Are Issued to Other Than  Employees for Acquiring,  or in Conjunction  with Selling Goods or Services".  All transactions in which goods or services are the consideration  received for the issuance of equity instruments are accounted for based on the fair value of the  consideration  received or the fair value of the equity instrument issued, whichever is more reliably measurable.  In   accordance    with   SFAS   No.   148    "Accounting    for   Stock   Based Compensation-Transition  and  disclosure",  the following table  illustrates the effect on net loss and loss per share if the  Company had applied the fair value recognition provisions of SFAS No. 123 to employees stock based compensation:                                                                        Years Ended                                                    December 31,      December 31,      December 31,                                                       2003               2004              2005                                                 ---------------    ---------------    ---------------     Net loss attributable to common stockholders, as reported                                     $    (6,832,934)   $    (8,127,269)   $    (3,436,503)  Add: Total stock based employee compensation expense determined under fair value based method for all awards                                (2,970,686)        (2,107,593)        (2,878,820)                                                 ---------------    ---------------    --------------- Net loss, pro forma                             $    (9,803,620)   $   (10,234,862)   $    (6,315,323)  Basic and diluted loss per share, as reported   $         (0.74)   $         (0.79)   $         (0.31)  Basic and diluted loss per share, pro forma     $         (1.06)   $         (1.00)   $         (0.56)                                                                                F-11    INTELLI-CHECK, INC.  NOTES TO FINANCIAL STATEMENTS  Comprehensive Loss  The  Company's  comprehensive  net loss is  equal to its net loss for the  years ended December 31, 2003, 2004 and 2005.  Segment Information  The  Company  adheres to the  provisions  of SFAS No.  131,  "Disclosures  About Segments of an Enterprise and Related  Information." This statement  establishes standards  for the way public  business  enterprises  report  information  about operating  segments  in annual  financial  statements  and  requires  that those enterprises  report selected  information about operating  segments in financial statements  issued to  shareholders.  Management has determined that it only has one reporting segment.  Use of Estimates  The  preparation  of the  Company's  financial  statements  in  conformity  with accounting  principles  generally  accepted  in the  United  States  of  America requires  management to make estimates and  assumptions  that affect the amounts reported  in  the  Company's   financial   statements  and  accompanying  notes. Significant  estimates  and  assumptions  that  affect  amounts  reported in the financial   statements  include  inventory  reserves,   deferred  tax  valuation allowances  and  doubtful   accounts  and   allowances.   Due  to  the  inherent uncertainties  involved in making  estimates,  actual results reported in future periods may be different from those estimates.  Recently Issued Accounting Pronouncements  Except as discussed  below, the Company does not expect the impact of the future adoption of recently issued accounting  pronouncements to have a material impact on the Company's financial statements.  SFAS 123R "Share  Based  Payments"  was issued in December  2004,  and  requires companies to expense the value of employee options and similar awards.  In March 2005, the SEC staff issued Staff Accounting  Bulletin No. 107 (SAB 107) to defer the effective  date of SFAS 123R until  January 1, 2006 and provide  guidance on implementation  of SFAS 123R.  SFAS 123R  becomes  effective  for the Company on January  1, 2006 and will  require  that  stock-based  compensation  charges  be recorded  for the  unvested  portions of options and  restricted  stock  granted through  December 31, 2005, as well as for all future grants,  based on the fair value of the options or warrants or  restricted  stock as of their grant  dates. Based on the current unvested options outstanding totaling 80,000 as of December 31,  2005,  the  Company's  pretax  expense for those  options is expected to be approximately  $326,000. This amount may increase to the extent that options are granted in 2006.  In November 2004, the FASB issued SFAS No. 151,  "Inventory  Costs, an Amendment of ARB No. 43," Chapter 4 ("SFAS No. 151").  The amendments made by SFAS No. 151 clarify that abnormal amounts of idle facility expense, freight, handling costs, and wasted materials  (spoilage) should be recognized as current-period  charges and require the allocation of fixed  production  overheads to inventory based on the normal  capacity  of the  production  facilities.  SFAS No. 151 will  become effective beginning in fiscal 2006. The adoption of this Statement will not have a significant impact on our financial condition or results of operations.  In December 2004, the FASB issued SFAS No. 153, "Exchange of Nonmonetary Assets" an amendment of APB Opinion No. 29,  "Accounting for  Nonmonetary  Transactions" ("SFAS No. 153"). The amendments made by SFAS No. 153 are based on the principle that exchanges on nonmonetary  assets should be measured based on the fair value of the assets exchanged.  Further, the amendments eliminate the narrow exception for  nonmonetary  exchanges of similar  productive  assets and replace it with a broader  exception  for  exchanges  of  nonmonetary  assets  that  do  not  have commercial substance.  SFAS No. 153 is effective for nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005.  Earlier  application is permitted for nonmonetary  asset exchanges  occurring in fiscal periods after the  date of  issuance.  The  provisions  of  SFAS  No.  153  shall  be  applied prospectively. The adoption of this Statement will not have a significant impact on our financial condition or results of operations.  In May  2005,  the FASB  issued  SFAS No.  154  "Accounting  Changes  and  Error Corrections--A Replacement of APB Opinion No. 20 and FASB Statement No. 3". This Statement  requires  retrospective   application  to  prior  periods'  financial statements of changes in accounting  principle,  unless it is  impracticable  to determine  either the  period-specific  effects or the cumulative  effect of the change. This Statement does not change the guidance for reporting the correction of an error in previously issued financial  statements or a change in accounting estimate.  The  provisions of this  Statement  shall be effective for accounting changes and correction of errors made in fiscal years  beginning  after December 15,  2005.  The Company is not able to assess at this time the future  impact of this Statement on its financial position or results of operations.                                                                               F-12    INTELLI-CHECK, INC.  NOTES TO FINANCIAL STATEMENTS  Reclassifications  Certain  accounts in the 2004 financial  statements  have been  reclassified  to conform with the 2005 presentation.  3. PROPERTY AND EQUIPMENT  Property and  equipment  are  comprised of the following as of December 31, 2004 and 2005:                                                              2004         2005                                                          ---------    ---------  Computer equipment                                       $ 515,982    $ 525,128 Furniture and fixtures                                     152,252      137,251 Leasehold improvements                                     143,253      143,253 Office equipment                                            43,338       46,287                                                          ---------    ---------                                                            854,825      851,919  Less - Accumulated depreciation and amortization          (721,920)    (759,673)                                                          ---------    ---------                                                          $ 132,905    $  92,246                                                          =========    =========  Depreciation  expense  for the years  ended  December  31,  2003,  2004 and 2005 amounted to $118,057, $99,944 and $46,055, respectively.  4. INTANGIBLE ASSETS  The following  summarize the carrying  amounts of intangible  assets and related amortization:                                                As of December 31, 2004               As of December 31, 2005                                        --------------------------------    ---------------------------------                                        Gross Carrying     Accumulated      Gross Carrying      Accumulated                                             Amount        Amortization         Amount         Amortization                                        ---------------   ---------------   ---------------   ---------------      Amortized intangible assets      Patents                                   105,661            63,072           105,661            69,282      Copyrights                                 17,500            17,500            17,500            17,500                                        ---------------   ---------------   ---------------   ---------------              Total                      $       123,161   $        80,572   $       123,161   $        86,782                                        ===============   ===============   ===============   ===============   Amortization  expense for years ended  December  31, 2003,  2004,  and 2005 were $318,724, $11,799 and $6,210, respectively.  As of  December  31,  2005,  estimated  amortization  expense  for  each  of the succeeding five years is $6,210.  5. ACCRUED EXPENSES  Accrued  expenses  are  comprised  of the  following as of December 31, 2004 and 2005:                                            2004       2005                                         --------   --------                      Professional fees   $302,360   $159,635                     Payroll              131,661    158,252                     Rent                  20,523     17,102                     Other                119,499     54,753                                         --------   --------                                         $574,043   $389,742                                         ========   ========                                                                               F-13    INTELLI-CHECK, INC.  NOTES TO FINANCIAL STATEMENTS  6. INCOME TAXES  Deferred  income  taxes  reflect  the net tax effects of  temporary  differences between the carrying  amounts of assets and liabilities for financial  reporting purposes and the amounts used for income tax purposes. Significant components of the  Company's  deferred  tax assets for  federal and state  income  taxes as of December 31, 2004 and 2005 are as follows:                                                   2004            2005                                              ------------    ------------     Deferred tax assets, net:         Net operating loss carryforwards     $ 10,682,000    $ 12,467,000         Depreciation                              (20,000)        (15,000)         Reserves                                  779,000         307,000         Less- Valuation allowance             (11,441,000)    (12,759,000)                                              ------------    ------------                   Deferred tax assets, net   $         --    $         --                                              ============    ============  Realization  of deferred tax assets is dependent upon future  earnings,  if any. The Company has  recorded a full  valuation  allowance  against its deferred tax assets  since  management  believes  that it is more  likely than not that these assets will not be realized.  As of December 31, 2005 the Company had net operating loss carryforwards (NOL's) for  federal  and New York State  income tax  purposes  of  approximately  $31.2 million.  There can be no assurance that the Company will realize the benefit of the NOL's.  The federal NOL's are available to offset future  taxable income and expire from 2018 through 2025 if not utilized. Under Section 382 of the Internal Revenue Code, these NOL's may be limited due to ownership changes.  The effective tax rate for the years ended  December 31, 2003,  2004 and 2005 is different from the tax benefit that would result from applying the statutory tax rates primarily due to the recognition of valuation allowances.  7. SERIES A 8% CONVERTIBLE REDEEMABLE PREFERRED STOCK  On March 27, 2003, pursuant to a Securities  Purchase Agreement,  we sold 30,000 shares of our Series A 8% Convertible Redeemable Preferred Stock, par value $.01 per share,  for $3,000,000  before  expenses to Gryphon  Master Fund,  L.P. Each share of  Preferred  Stock  entitled  the holder to receive  dividends of 8% per annum and was convertible into 15.1515 shares of our common stock. Additionally, each investor  received one (1) five year warrant to purchase 3.787875 shares of common stock at an exercise  price of $6.78 with each share of  Preferred  Stock purchased.  The total amount of shares that may be issued upon conversion of the Preferred   Stock  and  exercise  of  the  warrants  are  454,545  and  113,636, respectively.  Dividend  payments  of  $120,000  in cash were due  semi-annually beginning  September  30, 2003 and,  accordingly,  the Company paid  $122,958 on September  30, 2003. In connection  with this  financing,  we paid agent fees of $150,000 and issued  warrants and options to purchase 8,854 shares of our common stock at a price of  $6.78.  We also  paid  professional  fees of  approximately $136,000.  We recorded  the relative  fair value of all the  warrants  issued in connection  with  this  transaction  of  $497,700  against  the  amount  of  the Convertible  Redeemable  Preferred  Stock  as  of  March  27,  2003,  which  was calculated  using the  Black-Scholes  valuation  method,  as well as $540,000 of beneficial  conversion  feature in  accordance  with EITF 00-27 and such amounts were being  accreted  along with  issuance  cost of $285,900  over the five year period until the mandatory  redemption  date of the Preferred  Stock,  the fifth anniversary of closing. We recorded dividend and accretion of $381,991 for 2003, and dividends of $240,000 for 2004. On February 25, 2005,  Gryphon  Master Fund, L.P.  converted  the  Company's  Preferred  Stock  into  454,545  shares  of the Company's  common  stock at a conversion  price of $6.60 per share.  The Company retired the 30,000  shares of  preferred  stock,  issued  454,545  shares of its common stock and recorded  $3,000,000 as an increase to stockholders  equity.  A final  dividend  payment  of  $97,315  was paid for the period up to the date of conversion.  Additionally, as a result of this conversion, the period we used in estimating the accretion of all of the costs associated with the issuance of the Preferred Stock changed from 5 years to 1.9166 years. Accordingly, the accretion was increased in the fourth quarter of 2004 by $669,618 and amounted to $964,338 for the year ended  December 31, 2004.  The effect of this change in  accounting estimate in 2004 was a reduction in equity.                                                                               F-14    INTELLI-CHECK, INC.  NOTES TO FINANCIAL STATEMENTS  8. STOCKHOLDERS' EQUITY  Series A Convertible Preferred Stock  In January 1997,  the Board of Directors  authorized  the creation of a class of Series A  Convertible  Preferred  Stock  with a par value of $.01.  The Series A Convertible Preferred Stock is convertible into an equal number of common shares at the holder's option, subject to adjustment for anti-dilution.  The holders of Series A Convertible Preferred Stock are entitled to receive dividends as and if declared by the Board of Directors.  In the event of  liquidation or dissolution of the Company, the holders of Series A Convertible Preferred Stock are entitled to receive all accrued dividends,  if applicable,  plus the liquidation price of $1.00 per share.  As of December  31, 2004 and 2005,  there were no  outstanding shares of Series A Convertible Preferred Stock.  Secondary Offerings  On October 8, 2003, the Company successfully consummated its private offering of 1,100,000 shares of common stock at $8.00 per share and received proceeds net of underwriting  discounts and  commissions  and before other offering  expenses of approximately $7,906,000. Offering expenses totaled $324,574 and were fully paid as of December 31, 2003. In connection  with this offering,  the Company granted to its  underwriter an option to purchase up to an additional  165,000 shares of its common stock at $8.00 per share less  underwriter  discounts and commissions for the purpose of covering over-allotments, which expired on November 16, 2003. In addition, the Company sold to the underwriter 110,000 warrants for a price of $110 to  purchase  110,000  shares of its  common  stock at a price of $9.60 per share and expire on October 8, 2008.  On August 9, 2005, the Company successfully  completed its secondary offering of 1,250,000 shares of common stock at $4.00 per share and received net proceeds of approximately  $4,440,000.  In connection with the offering,  investors received five year  warrants to purchase  500,000  shares of common  stock at an exercise price of $5.40 per share.  The Company  purchased  110,000 of these  warrants in December  2005  for  $25,000  and  retired  them,   leaving  390,000   currently outstanding.  In addition,  the Company granted to its placement agent a warrant to purchase  125,000  shares of our common  stock at a price of $ 5.40 per share which expires on August 8, 2010.  The fair value of these  warrants  amounted to approximately  $1,645,000 using the Black-Scholes  valuation  method,  which was recorded in Equity. On October 7, 2005, the Registration  Statement on Form S-3, which  included  the shares  issued in the  Company's  secondary  offering,  was declared  effective by the Securities and Exchange  Commission.  During December 2005,  the  Company  purchased  and  retired  110,000 of the five year  warrants originally issued in connection with the offering for $25,000.  Common Stock, Warrants and Rights  In  March  2001,   the  Company   declared  a  dividend   distribution   of  one non-transferable  right to purchase one share of the Company's  common stock for every 10 outstanding  shares of common stock  continuously  held from the record date to the date of exercise,  as well as common stock  underlying  vested stock options and warrants,  held of record on March 30, 2001, at an exercise price of $8.50.  The rights  were due to expire on  October  4, 2002,  which was one year after the effective date of the registration  statement related to the shares of common stock  underlying the rights.  The Company  extended the expiration  date until April 4, 2003,  further  extended the rights until December 31, 2003, June 30, 2004,  June 30, 2005 and have  additionally  extended the expiration date to June 30, 2006. Under certain conditions, the Company has the right to redeem the outstanding  rights for $.01 per right. Such conditions were not met as of March 24,  2006.  The  Company  reserved  970,076  shares of common  stock for  future issuance under this rights offering.  The Company has recorded the fair value of the rights of $1,082,000 as a dividend  during the quarter ended March 31, 2001, which was calculated using the Black-Scholes valuation method and recorded as an increase in additional  paid-in capital and a reduction in accumulated  deficit. The Company also recorded the fair value of the additional  rights extensions of $2,000,000  and  $525,000  during the years  ended  December  31, 2003 and 2004, respectively,  using the Black-Scholes valuation method and recorded an increase in additional  paid-in-capital  and a reduction in  accumulated  deficit.  As of December 31, 2005,  292,001 of these rights had been  exercised  and the Company received cumulatively $2,482,009 before expenses of $133,834.                                                                              F-15   INTELLI-CHECK, INC.  NOTES TO FINANCIAL STATEMENTS  In March 2001, the Board of Directors  authorized,  subject to certain  business and market conditions,  the purchase of up to $1,000,000 of our common stock. As of December 31, 2005, the Company  cumulatively  purchased  40,200 shares of the Company's common stock for approximately $222,000 and subsequently retired those shares.  The Company may purchase  additional  shares when  warranted by certain conditions.  All warrants  have been issued with an exercise  price that is equal to or above the fair market value of the Company's common stock on the date of grant.  Stock Options  In order to retain and attract qualified  personnel necessary for the success of the  Company,  the Company  adopted a Stock  Option Plan (the "1998 Stock Option Plan") covering up to 400,000 of the Company's common shares,  pursuant to which officers,  directors,  key employees and consultants to the Company are eligible to  receive  incentive  stock  options  and  nonqualified  stock  options.   The Compensation  Committee  of the Board of  Directors  administers  the 1998 Stock Option  Plan and  determines  the  terms  and  conditions  of  options  granted, including the exercise price. The 1998 Stock Option Plan provides that all stock options  will  expire  within  ten years of the date of grant.  Incentive  stock options  granted under the 1998 Stock Option Plan must be granted at an exercise price that is not less than the fair market value per share at the date of grant and the  exercise  price must not be less than 110% of the fair market value per share at the date of grant for  grants to  persons  owning  more than 10% of the voting  stock  of  the  Company.  The  1998  Stock  Option  Plan  also  entitles nonemployee  directors  to  receive  grants of  non-qualified  stock  options as approved by the Board of Directors.  In August 1999, the Company  adopted the 1999 Stock Option Plan (the "1999 Stock Option Plan") covering up to 1,000,000 of the Company's common shares,  pursuant to which officers,  directors,  key employees and consultants to the Company are eligible to receive incentive stock options and nonqualified stock options.  The Compensation  Committee  of the Board of  Directors  administers  the 1999 Stock Option  Plan and  determines  the  terms  and  conditions  of  options  granted, including the exercise price. The 1999 Stock Option Plan provides that all stock options  will  expire  within  ten years of the date of grant.  Incentive  stock options  granted under the 1999 Stock Option Plan must be granted at an exercise price that is not less than the fair market value per share at the date of grant and the  exercise  price must not be less than 110% of the fair market value per share at the date of grant for  grants to  persons  owning  more than 10% of the voting  stock  of  the  Company.  The  1999  Stock  Option  Plan  also  entitles nonemployee  directors  to  receive  grants of  non-qualified  stock  options as approved by the Board of Directors.  At the Company's Annual Meeting held on July 11, 2001, the stockholders approved the 2001 Stock  Option  Plan  covering  up to 500,000  of the  Company's  common shares, pursuant to which the officers, directors, key employees and consultants to the Company are eligible to receive  incentive stock options and nonqualified stock options. The Compensation  Committee of the Board of Directors administers the 2001 Stock Option Plan and  determines  the terms and  conditions of options granted,  including the exercise price. The 2001 Stock Option Plan provides that all stock options will expire  within ten years of the date of grant.  Incentive stock  options  granted  under the 2001 Stock  Option Plan must be granted at an exercise price that is not less than the fair market value per share at the date of the  grant  and the  exercise  price  must not be less  than 110% of the fair market  value per share at the date of the grant for  grants to  persons  owning more than 15% of the voting  stock of the  Company.  The 2001 Stock  Option Plan also entitles  non-employee  directors to receive grants on non-qualified  stock options as approved by the Board of Directors.  At the Company's Annual Meeting held on July 10, 2003, the stockholders approved the 2003 Stock  Option  Plan  covering  up to 500,000  of the  Company's  common shares, pursuant to which the officers, directors, key employees and consultants to the Company are eligible to receive  incentive stock options and nonqualified stock options. The Compensation  Committee of the Board of Directors administers the 2003 Stock Option Plan and  determines  the terms and  conditions of options granted,  including the exercise price. The 2003 Stock Option Plan provides that all stock options will expire  within ten years of the date of grant.  Incentive stock  options  granted  under the 2003 Stock  Option Plan must be granted at an exercise price that is not less than the fair market value per share at the date of the  grant  and the  exercise  price  must not be less  than 110% of the fair market  value per share at the date of the grant for  grants to  persons  owning more than 15% of the voting  stock of the  Company.  The 2003 Stock  Option Plan also entitles  non-employee  directors to receive grants on non-qualified  stock options as approved by the Board of Directors.                                                                               F-16   INTELLI-CHECK, INC.  NOTES TO FINANCIAL STATEMENTS  At the Company's Annual Meeting held on July 8, 2004, the stockholders  approved the 2004 Stock  Option  Plan  covering  up to 850,000  of the  Company's  common shares, pursuant to which the officers, directors, key employees and consultants to the Company are eligible to receive  incentive stock options and nonqualified stock options. The Compensation  Committee of the Board of Directors administers the 2004 Stock Option Plan and  determines  the terms and  conditions of options granted,  including the exercise price. The 2004 Stock Option Plan provides that all stock options will expire  within ten years of the date of grant.  Incentive stock  options  granted  under the 2004 Stock  Option Plan must be granted at an exercise price that is not less than the fair market value per share at the date of the  grant  and the  exercise  price  must not be less  than 110% of the fair market  value per share at the date of the grant for  grants to  persons  owning more than 15% of the voting  stock of the  Company.  The 2004 Stock  Option Plan also entitles  non-employee  directors to receive grants on non-qualified  stock options as approved by the Board of Directors.  During 2003, the Company  granted  additional  stock options to purchase  69,425 shares of common stock at exercise  prices ranging from $6.78 to $6.97 per share to  consultants  under  various  agreements.  During 2004,  the Company  granted warrants  to purchase  100,000  shares of common  stock at an exercise  price of $7.54 per share to  consultants  (see  footnote  10).  During 2005,  the Company granted  warrants  and options to  purchase  150,000  shares of common  stock at exercise  prices  ranging  from  $5.10 to $5.40 per share to  consultants  under various  agreements.  The fair market value of each option was  estimated on the date of grant using the Black-Scholes option pricing model. Accordingly, we have recorded  $319,904,  $542,648  and $402,995 as deferred  compensation  for these services as of December 31, 2003,  2004 and 2005,  respectively.  As a result of some of the granted options having varying vesting periods, the Company revalued certain  options and warrants either as of the vesting date or as of the balance sheet date for those options  unvested  using the Black Scholes  option  pricing model.  Accordingly,  the  Company  recorded  an  increase  in the fair value of $66,781 for the year ended  December 31, 2003 and reduction of the fair value of $430,739  and  $122,246  for  the  years  ended  December  31,  2004  and  2005, respectively.  During December 31, 2003,  2004 and 2005, the Company  recognized amortization  of deferred  compensation  of  $357,194,  $363,407  and  $143,758, respectively.  In March,  2006,  our  consultant  returned and cancelled a stock option  agreement which the Company issued in February 2002 that granted options to purchase  50,000  shares of common stock at an exercise  price of  $12.10.The remaining  unamortized  balance in  deferred  compensation  of  $82,812  will be reduced and offset against  additional paid in capital and amortization  expense of $52,075  recorded  through  December 31, 2005 will be recognized as income in the first quarter of 2006.  Stock option  activity under the 1998,  1999,  2001,  2003 and 2004 Stock Option Plans during the periods indicated below is as follows:                                             Number Of       Weighted Average                                             Options        Exercise Price                                         ---------------    ----------------      Outstanding at January 1, 2003           2,333,866    $           7.72            Granted                               713,650                7.73           Canceled                             (171,183)               8.86           Exercised                            (175,209)               3.88                                         ---------------    ----------------       Outstanding at December 31, 2003         2,701,124                7.97            Granted                               655,550                5.07           Canceled                             (436,500)               7.93           Exercised                            (142,700)               3.00                                         ---------------    ----------------       Outstanding at December 31, 2004         2,777,474                7.11            Granted                               476,980                5.02           Canceled                             (410,499)               7.78           Exercised                             (79,000)               3.09                                         ---------------    ----------------       Outstanding at December 31, 2005         2,764,955    $           6.77                                         ===============    ================  Included in the option schedule are 839,425 non-plan  options,  of which 776,925 are fully vested.                                                                               F-17    INTELLI-CHECK, INC.  NOTES TO FINANCIAL STATEMENTS   The  weighted-average  remaining life of the options outstanding at December 31, 2003, 2004 and 2005 is 2.89 years, 4.42 years and 3.94 years  respectively,  and the  weighted-average  fair value of the options  granted  during the year ended December 31, 2003, 2004 and 2005 is $5.58, $2.97 and $4.03 respectively.  As of December  31,  2003,  2004 and 2005,  the fair market value of each option grant has been  estimated  on the date of grant using the  Black-Scholes  option pricing  model based upon expected  option lives of 5, 5 and 5 years;  risk free interest rates of 4.50%, 4.0% and 4.3%; expected volatility of 90%, 60% and 74 % and a dividend yield of 0%, 0% and 0%, respectively.  As of December 31, 2005, the Company had 2,597,205  options  exercisable  with a weighted  average  exercise price of $6.77. As of December 31, 2005, the Company had 728,361 options  available for future grant under the 1998, 1999, 2001, 2003 and 2004 Stock Option Plans.  On November 12, 2003, a member of the Company's Board of Directors resigned. The Company  agreed to extend the  expiration  date of his options to  November  11, 2004, which originally were due to expire on February 10, 2004. As a result, the Company  recorded  the fair value of the  extension  of  $138,000  as a non cash expense during the fourth quarter ended December 31, 2003,  which was calculated using the Black-Scholes valuation method.  On July 8,  2004,  the  Company's  Board  of  Directors  agreed  to  extend  the expiration date of the Chief Executive Officer's options to July 15, 2008, which originally  were due to  expire  on July 15,  2004.  As a  result,  the  Company recorded  the fair value of the  extension of  $1,347,000  as a non cash expense during the second  quarter ended December 31, 2004,  which was calculated  using the Black-Scholes valuation method.  During  January  2005,  the Company's  Board of Directors  approved the cashless exercise of 25,000  options which were converted into 9,277 shares of its common stock for the Company's  Chairman and CEO. As a result, the Company recorded the fair value of the shares issued as a non-cash  expense totaling  $44,250,  which was calculated using the Black-Scholes valuation method.  During 2005, the Company's  Board of Directors  extended the expiration  date of 270,500 stock options for three of the Company's directors who resigned from the Board for an additional 9 months. As a result, we recorded the fair value of the extension of $184,200 as a non cash expense  during the year ended  December 31, 2005,  which was calculated in accordance with Financial  Interpretation  No. 44 "Accounting for Certain Transactions involving stock compensation".  On September 9, 2005, the Board of Directors agreed to accelerate the vesting of all employee,  officer and director unvested stock options outstanding under our stock  option  plans with  exercise  prices that are "out of the money" prior to December 31, 2005.  The total number of options that were earlier  vested amount to 347,500 and had a range of  exercise  prices of $4.37 to $6.30 and a weighted average  exercise  price of $5.03.  The high and low of the closing price of our common  stock  between  September  9, 2005 and  December  31, 2005 was $4.37 and $6.30.  The  purpose  of the  accelerated  vesting  was to  enable  us to  avoid recognizing  compensation expense associated with these options upon adoption of SFAS No. 123(R).  The fair value  associated with the  accelerated  options that would have been reflected in our financial statements amounted to $926,189 using the Black-Scholes  valuation method,  which is included in pro forma stock-based employee compensation expense for 2005.  In the  opinion  of  management,  all stock  options  have been  issued  with an exercise  price that is equal or above the fair  market  value of the  Company's Common Stock on the date of grant.  9. DISPOSAL  As of December 31, 2003, the Company  decided to discontinue  the selling of its IDentiScan products.  The Company has determined that there is no future benefit from these intangibles related to the IDentiScan  acquisition and,  accordingly, all of its intangible assets, except for $5,590 of copyrights,  with a remaining book value of $363,655, were written off as of December 31, 2003, which affected the results of operations for the period then ended.                                                                               F-18   INTELLI-CHECK, INC.  NOTES TO FINANCIAL STATEMENTS  10. COMMITMENTS AND CONTINGENCIES  Operating Leases  During July 2000, the Company entered into a 10-year lease agreement for its new office.  The lease  provided for monthly  rental  payments of $17,458  beginning December 15, 2000 with small annual  increases.  In connection  with this lease, the Company provided an irrevocable unconditional letter of credit in the amount of $250,000 as security,  which was  cancelled and replaced with a cash security payment of $34,916 for the remaining lease term. Effective October 16, 2005, the Company  amended its office lease that  provides for a reduction in office space from approximately  9,700 square feet to approximately 7,100 square feet for the remainder  of the lease term which  expires  December  31,  2010.  In  addition, payments  under the  amended  lease were  reduced to $16,244  per month and such reduction will be increased by approximately 4% per year.  In addition,  the Company has entered into various  leases for office  equipment and office space expiring through  December 2010.  Future minimum lease payments under these lease agreements are as follows:            Year Ending December 31:                2006                           $  202,304                2007                              210,644                2008                              219,320                2009                              222,440                2010                              230,376                                               ----------                                               $1,085,084  Rent expense for the years ended  December 31, 2003,  2004 and 2005  amounted to $252,386, $243,577 and $243,731, respectively.  Capital Lease Obligations  The Company leased  computer and office  equipment  under several capital leases that expired in 2004.  As of December 31, 2005,  the Company had no  outstanding Capital Lease obligations.  Royalty and License Agreements  The  Company  entered  into an  agreement  with a former  officer of the Company during 1996 to license certain software.  The agreement stipulated,  among other provisions,  that the officer would receive  royalties  equal to a percentage of the Company's  gross sales.  This  agreement was  terminated in May 1999 and was superceded by a new  agreement  which calls for payment of royalties of .005% on gross sales from  $2,000,000 to $52,000,000  and .0025% on gross sales in excess of $52,000,000. As of December 31, 2005, total fees payable under this agreement amounted to $267.  On February 19, 2003,  the Company  filed a summons and  complaint  upon CardCom Technology,  Inc. alleging infringement on its patent. During September 2003, as a result of a settlement  of a patent  infringement  suit,  the Company  granted CardCom  Technology,  Inc. a three year  royalty  license to use  certain of the Company's patents in connection with the manufacture,  use and sale of CardCom's age verification products in the United States and Canada. It also provides that CardCom will pay royalties of approximately  10% on its net sales. For the years ended December 31, 2003, 2004 and 2005, the Company  received  $65,165,  $67,113 and $58,480,  respectively, in royalty fees pursuant to this agreement. On March 12,  2006,  the  royalty  license  expired  and  the  Company  is  currently  in discussions with CardCom to renew the terms of the royalty license agreement.  Employment Agreements  On November 9, 2004, the Company entered into a new one-year employment contract with its Chairman  and Chief  Executive  Officer,  Frank  Mandelbaum,  effective January 1, 2005.  The agreement  provided for an annual base salary of $250,000. In addition,  the Company granted to Mr. Mandelbaum an option to purchase 75,000 shares of common stock at an exercise price of $4.37 per share,  of which 25,000 options  became  exercisable  on January 1, 2005;  25,000  options  that  became exercisable  on  January  1, 2006 and the  remaining  25,000  options  to become exercisable on January 1, 2007 all became  exercisable during the 4th quarter of 2005 as described in footnote 8 above.                                                                               F-19   INTELLI-CHECK, INC.  NOTES TO FINANCIAL STATEMENTS  Effective  January 1, 2006, the Company  entered into a letter of  understanding with its Chairman and Chief  Executive  Officer that provides for an annual base salary of $256,804. In addition, on November 8, 2005, the Company granted to Mr. Mandelbaum  an option to purchase  25,000  shares of common stock at an exercise price of $3.22 per share.  The Company  also agreed in case it were to terminate Mr.  Mandelbaum  for any reason  other than  cause,  the  Company  would pay Mr. Mandelbaum  two (2) years of cash  base  salary in  twelve  (12)  equal  monthly installments.  If  there  shall  occur a  change  of  control,  as  defined  in the  letter  of understanding,  the employee may  terminate  his  employment  at any time and be entitled  to  receive  a  payment  equal  to  2.99  times  his  average   annual compensation,  including  bonuses,  during the three years preceding the date of termination,  payable  in cash to the  extent  of three  months  salary  and the balance in shares of the  Company's  common  stock based on a valuation of $2.00 per share.  On November 9, 2004, the Company  entered into a new  employment  agreement with its Senior Executive Vice President and Chief Financial Officer,  Edwin Winiarz, effective  January 1, 2005.  The  agreement,  which  expires  December 31, 2006, provides for a fixed annual base salary of  $162,086.  In addition,  the Company granted to Mr. Winiarz an option to purchase 50,000 shares of common stock at an exercise price of $4.37 per share, of which 25,000 options became exercisable on January  1,  2005  and the  remaining  25,000  options,  which  were  to  become exercisable  on January 1, 2006,  became  exercisable  during the 4th quarter of 2005 as described in footnote 8 above.  Each of the employment agreements requires the executive to devote substantially all his time and  efforts  to our  business  and  contains  non-competition  and nondisclosure  covenants of the officer for the term of his employment and for a period of two years thereafter.  Each employment  agreement provides that we may terminate the agreement for cause.  Supplier Agreements  On January 2, 2004, the Company  entered into a 2 year product supply  agreement with a  manufacturer  of input devices.  Under the terms of the  agreement,  the Company  purchased  the minimum  required  number of units  during  2004.  These devices,  which were private labeled, are programmed to work in conjunction with the ID-Check technology.  On December 30, 2005, the Company entered into a new 2 year product supply agreement with the same  manufacturer and with similar terms and  conditions  as the  prior  agreement,  but  without  any  minimum  purchase requirement.  In March 2006, the Company  contracted with another  supplier for a product that performs bar code reading and works in conjunction with the ID-Check technology. This agreement expires December 31, 2006.  Investment Firm Relationships  On  January  21,  2004,  the  Company  entered  into a one year  agreement  with Alexandros  Partners  LLC to act as  consultants  in  advising  the  Company  in financial and investor relation matters.  The Company agreed to pay a consulting fee of $50,000  payable  in 12 equal  monthly  installments.  In  addition,  the Company  issued a warrant  granting the right to purchase  100,000 shares of the Company's  common  stock at a purchase  price of $7.54 per share,  which  vested ratably over the 12 month period.  A principal of Alexandros  Partners LLC was a member of the  Company's  Board of  Directors.  Effective  January 1, 2005,  the Company  renewed its agreement  with  Alexandros  Partners LLC for an additional year and agreed to pay a consulting  fee of $50,000  payable in 12 equal monthly installments.  This transaction was approved by all of the independent directors of the Company's  Board of Directors.  The agreement  terminated on December 31, 2005.  On  December 7, 2004,  the  Company  entered  into a one year  agreement  with a consulting  firm to help with its  investor  relations  activities.  The Company agreed to pay a consulting fee of $100,000  payable in 12 monthly  installments. In addition, the Company issued 11,500 restricted shares of its common stock. On August 6, 2005,  the Company  terminated  the agreement and ceased payment under the agreement.                                                                               F-20   INTELLI-CHECK, INC.  NOTES TO FINANCIAL STATEMENTS  On November 2, 2004,  the Company  entered into an exclusive  agreement  with an investment  banking firm for the purpose of investigating  the  opportunities in raising  additional  capital  for  the  Company.  On May 3,  2005,  the  Company terminated the agreement  eliminating the provision of exclusivity and signed an exclusive  agreement  with another  investment  banking firm as a lead placement agent in connection with the private placement described in Note 8 above.  On September 21, 2005, the Company  entered into a two (2) year agreement with a consulting firm to help with its public and investor relations  activities.  The Company  agreed to pay $6,000 per month for the first 12 months of the agreement and $9,000 per month for the  following  12 months.  In  addition,  the  Company issued a warrant  granting  the right to purchase  100,000  shares of its common stock at a purchase price of $4.62 per share,  which vests ratably over a twelve month  period.  The fair value of this  warrant  amounted to $318,221  using the Black-Scholes  valuation method and was recorded in Deferred Compensation during the third quarter of 2005. The contract is cancelable after the first year under certain terms and conditions.  Legal Proceedings  On  April  9,  2003,  the  Company  received   notification  from  the  American Arbitration  Association  that it had awarded Early Bird Capital $921,730 on the settlement  of their  demand.  The  Company  had filed  with the New York  State Supreme Court an application for setting aside the confirmation of the award. On October 14, 2003,  the court  confirmed  the award with interest at a rate of 9% per annum beginning April 9, 2003. The Company  recorded a charge of $921,730 in its  Statements of Operations  for the three month period ending March 31, 2003. The  Company  secured a one year  letter of  credit  for the full  amount of the charge along with interest in the form of a certificate of deposit.  On March 5, 2004, the Company paid $950,000, which included interest expense recorded in the year ended  December 31, 2003, to Early Bird Capital as full  settlement in this matter.  On August 1, 2003, the Company filed a summons and complaint against Tricom Card Technologies,  Inc. alleging  infringement on its patent and seeking  injunctive and monetary  relief.  On October 23, 2003, the Company amended its complaint to include infringement on an additional patent. On May 18, 2004, the Company filed a Second  Amended  Complaint  alleging  infringement  and inducement to infringe against certain  principals of Tricom in their personal  capacities,  as well as alleging  in the  alternative  false  advertising  claims  under the  Lanham Act against all the defendants.  The principals  moved to dismiss the claims against them, and Tricom moved to dismiss the false  advertising  claims,  which motions have  been  administratively  terminated  by  the  Court.  On  August  1,  2005, defendants  filed an Answer  and  Affirmative  Defenses  to the  Second  Amended Complaint and Tricom filed a declaratory counterclaim.  On November 2, 2005, the Court  allowed  Tricom  to  plead  two  additional   defenses  and   declaratory counterclaims  in the  case,  and on  January  3,  2006,  the  parties  filed  a Stipulation of Dismissal of the Estoppel and Unenforceability  Counterclaims and Affirmative  Defenses.  On February 28, 2006,  the parties filed a  Supplemental Proposed Joint Pretrial  Order,  and on March 1, 2006, the Court  certified that fact discovery in this action was complete.  We are not  aware of any  infringement  by our  products  or  technology  on the proprietary rights of others.  Other than as set forth  above,  we are not  currently  involved in any legal or regulatory proceeding, or arbitration,  the outcome of which is expected to have a material adverse effect on our business.                                                                               F-21   INTELLI-CHECK, INC.  NOTES TO FINANCIAL STATEMENTS  11. QUARTERLY FINANCIAL DATA (UNAUDITED)  The  following   table  sets  forth   unaudited   financial  data  for  each  of Intelli-Check's last eight fiscal quarters.                                                          Year Ended December 31, 2004                                         -----------------------------------------------------------                                           First        Second            Third            Fourth                                          Quarter       Quarter          Quarter           Quarter                                         ----------    ----------       ----------        ----------                                                         (Dollars in thousands)      Income Statement Data:    Revenues                             $      298    $      260       $      233        $      328     Gross profit (loss)                         195           144              (57)(1)            86(2)    Loss from operations                     (1,106)       (2,663)(3)       (1,694)           (1,554)    Net loss                                 (1,075)       (2,642)          (1,669)           (1,537)       stockholders                           (1,201)       (2,768)          (1,796)           (2,362)(4)    Net loss per share attributable to      Common stockholders:        Basic and diluted                     (0.12)        (0.27)           (0.17)            (0.23)                                                       Year Ended December 31, 2005                                          ----------------------------------------------------                                           First          Second        Third         Fourth                                          Quarter         Quarter      Quarter       Quarter                                          ----------    ----------    ----------    ----------                                                        (Dollars in thousands)      Income Statement Data:    Revenues                              $      297    $      997    $      430    $      660     Gross profit (loss)                          194           881           253           311    Loss from operations                      (1,586)         (202)         (812)         (785)    Net loss                                  (1,570)         (182)         (765)         (722)       stockholders                            (1,767)         (182)         (765)         (722)    Net loss per share attributable to      Common stockholders:        Basic and diluted                      (0.17)        (0.02)        (0.07)        (0.06)(5)        (1)  During  the  third  quarter,  an  inventory  reserve  of  $200,000  was          recorded.  (2) During  the  fourth  quarter,  an  inventory  reserve of          $157,000  was  recorded.  (3)  During the  second  quarter,  a non cash          expense of $1,347,000 was recorded for extension of options     (4)  Effective  in  the  fourth  quarter,  due  to  the  conversion  of  the          Convertible  Redeemable  Preferred  Stock on  February  25,  2005,  the          amortization of the accretion costs was increased by $669,618.     (5)  The sum of the net loss per  share for each of the  quarters  of fiscal          2005 exceeds by $0.01 the basic loss per share for fiscal  2005in total          due to the impact of stock issuances on the weighted  average number of          shares outstanding.           We have not  experienced  seasonality  in our sales volume or operating          expenses.  Schedule II - Valuation and Qualifying Accounts  Year Ended December 31, 2005, 2004 and 2003    - -------------------------------------------------------------------------------------------------------------------------                                                   Balance at                         Net Deductions       Balance at Year ended December 31, 2005                  Beginning of Period     Additions        and Other         End of Period - -------------------------------------------------------------------------------------------------------------------------      Doubtful accounts and allowances            $              20,000            8,467          --         $           28,467 Deferred tax assets valuation allowance     $          11,441,000    $   1,318,000          --         $       12,759,000 - -------------------------------------------------------------------------------------------------------------------------  - -------------------------------------------------------------------------------------------------------------------------                                                   Balance at                         Net Deductions       Balance at Year ended December 31, 2004                  Beginning of Period     Additions        and Other         End of Period - ------------------------------------------------------------------------------------------------------------------------- Doubtful accounts and allowances                               --    $      20,000          --         $           20,000 Deferred tax assets valuation allowance     $           9,520,550    $   1,920,450          --         $       11,441,000 - -------------------------------------------------------------------------------------------------------------------------  - -------------------------------------------------------------------------------------------------------------------------                                                   Balance at                         Net Deductions       Balance at Year ended December 31, 2003                  Beginning of Period     Additions        and Other         End of Period - ------------------------------------------------------------------------------------------------------------------------- Doubtful accounts and allowances                               --               --          --                         -- Deferred tax assets valuation allowance     $           6,722,540    $   2,798,010          --         $        9,520,550 - -------------------------------------------------------------------------------------------------------------------------                                                                                F-22                                      EXHIBIT INDEX    Exhibit No.     Description   -----------     -----------   1               Form of Underwriting Agreement (1)   3.1             Certificate of Incorporation of the Company (1)   3.2             By-laws of the Company (1)   3.3             Certificate of Designation of Preferred Stock of                   Intelli-Check, Inc. (7)   4.1             Specimen Stock Certificate (2)   4.2             Form of Underwriters' Warrant Agreement (1)   4.3             Warrant to Gryphon Master Fund LLP (7)   4.4             Form of Underwriters Warrant Agreement including form of                   Warrant Certificate(8)   4.5             Warrant to JMP Securities, LLC   10.1            1998 Stock Option Plan (1) *   10.5            Agreement of Lease between the Company and Industrial and                   Research Associates, dated as of October 15, 2000 (5)   10.6            1999 Stock Option Plan (1) *   10.10           Agreement between the Company and Kevin Messina, individually                   and d/b/a K.M. Software Development, dated as of May 3, 1999                   (1) *   10.11           Memorandum of Understanding between AAMVAnet, Inc. and Intelli                   -Check, Inc. effective November 15, 2000 (5)   10.12           2001 Stock Option Plan (4)   10.15           Memorandum of Understanding between AAMVAnet, Inc. and                   Intelli-Check, Inc. effective January 29, 2002 (5)   10.16           Securities Purchase Agreement between Intelli-Check, Inc. and                   Gryphon Master Fund dated March 27, 2003. (7)   10.17           Registration Rights Agreement between Intelli-Check, Inc. and                   Gryphon Master Fund dated March 27, 2003. (7)   10.18           Employment Agreement between Frank Mandelbaum and the Company,                   dated as of December 15, 2004* (6)   10.19           Employment Agreement between Edwin Winiarz and the Company,                   dated as of December 15, 2004* (6)   10.20           Understanding of Employment between Frank Mandelbaum and the                   Company, dated as of January 1, 2006*   14.1            Code of Business Conduct and Ethics (7)   21              List of Subsidiaries (1)   23.1            Consent of Amper, Politziner and Mattia, P.C.   23.2            Consent of Grant Thornton LLP   31.1            Certification of Chief Executive Officer pursuant to Section                   302 of The Sarbanes-Oxley Act of 2002   31.2            Certification of Chief Financial Officer pursuant to Section                   302 of The Sarbanes-Oxley Act of 2002   32              Certification of Chief Executive Officer and Chief Financial                   pursuant to Section 906 of The Sarbanes-Oxley Act of 2002  - ---------------------------------    *Denotes a management contract or compensatory plan, contract or arrangement. (1)   Incorporated by reference to Registration Statement on Form SB-2 (File No.       333-87797) filed September 24, 1999. (2)   Incorporated by reference to Amendment No. 1 to the Registration Statement       filed November 1, 1999. (3)   Incorporated by reference to Amendment No. 2 to the Registration Statement       filed November 15, 1999. (4)   Incorporated by reference to Registrant's Proxy Statement on Schedule 14A       filed May 31, 2001. (5)   Incorporated by reference to Registrant's Annual Report on Form 10-K filed       March 29, 2001. (6)   Incorporated by reference from the Registrant's Current Report on Form 8-K       filed on December 16, 2004. (7)   Incorporated by reference to Registrant's Annual Report of Form 10-K filed       March 31, 2003. (8)   Incorporated by reference to Registration Statement on Form S-2 (File No.       333-108043) filed September 30, 2003.     EX-4.5 2 v038898_ex4-5.txt                                                                       Exhibit 4.5  NEITHER THIS WARRANT NOR THE SHARES OF COMMON STOCK  ISSUABLE  UPON  EXERCISE OF THIS WARRANT HAVE BEEN  REGISTERED  UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE  "SECURITIES   ACT"),  OR  THE  SECURITIES  LAWS  OF  ANY  STATE  OR  OTHER JURISDICTION.  HOLDER MAY NOT OFFER,  SELL,  PLEDGE OR OTHERWISE  TRANSFER  THIS WARRANT,  OR ANY SHARES OF COMMON STOCK  ISSUABLE UPON EXERCISE OF THIS WARRANT, EXCEPT (1) PURSUANT TO AN EXEMPTION FROM  REGISTRATION  UNDER THE SECURITIES ACT OR (2) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT, IN EACH CASE IN ACCORDANCE WITH ALL APPLICABLE SECURITIES LAWS OF THE STATES AND OTHER JURISDICTIONS,  AND IN THE CASE OF A TRANSACTION EXEMPT FROM REGISTRATION, UNLESS THE COMPANY HAS RECEIVED AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO IT THAT SUCH TRANSACTION DOES NOT REQUIRE  REGISTRATION UNDER THE SECURITIES ACT AND SUCH OTHER APPLICABLE LAWS.                                 Intelli-Check, Inc.                 Warrant for the Purchase of Shares of Common Stock,                            par value $0.001 per Share  No. W-08042004-22                                                 125,000 Shares        THIS CERTIFIES that, for value received, JMP Securities LLC, whose address is 600 Montgomery Street,  San Francisco,  California 94411 (the " Holder" ), is entitled to subscribe  for and  purchase  from  Intelli-Check,  Inc., a Delaware corporation  (the " Company" ), upon the terms and  conditions set forth herein, 125,000  shares of the  Company's  Common  Stock,  par value $0.001 per share (" Common Stock" ), at a price of $5.40 per share (the " Exercise Price").  As used herein the term "this  Warrant"  shall mean and  include  this  Warrant  and any Common Stock or Warrants  hereafter  issued as a consequence  of the exercise or transfer of this Warrant in whole or in part.        The Exercise  Price may be adjusted from time to time as  hereinafter  set forth.  The  number of shares of Common  Stock  issuable  upon  exercise  of the Warrants (the "Warrant Shares") are entitled to the benefits, and subject to the obligations,  set forth in the  Purchase  Agreement  between the Company and the Holder dated concurrently herewith.          1. Exercise Price,  Exercise Period and Possible Mandatory Exercise.  This Warrant  may be  exercised  at any time or from time to time  during  the period commencing  on  August 9,  2005 and  ending  on  August  9, 2010 (the  "Exercise Period").  Notwithstanding  the  foregoing,  the Company may,  commencing on the third  anniversary of the Closing Date,  require the exercise of any outstanding Warrants if the Current  Market Price (as  hereinafter  defined) is equal to, or greater than, 175% of the Exercise  Price.        2. Procedure for Exercise; Effect of Exercise.        (a) Cash  Exercise.  Subject to the conditions and terms set forth herein, this Warrant may be exercised,  in whole or in part, by the Holder during normal business  hours on any  business  day  during  the  Exercise  Period  by (i) the presentation  and  surrender  of this  Warrant to the  Company at its  principal office along with a duly  executed  Notice of Exercise (in the form  attached to this  Agreement  duly executed by the Holder)  specifying  the number of Warrant Shares to be  purchased,  and (ii)  delivery  of payment  to the  Company of the Exercise  Price for the  number of  Warrant  Shares  specified  in the Notice of Exercise by cash, wire transfer of immediately available funds to a bank account specified by the Company, or by certified or bank cashier's check or by means of a cashless exercise pursuant to Section 2(c).        (b) Effect of Exercise.  Upon receipt by the Company of this Warrant and a Notice of  Exercise,  together  with proper  payment of the Exercise  Price,  as provided in this Section 2, the Company agrees that such Warrant Shares shall be deemed to be issued to the Holder as the record holder of such Warrant Shares as of the close of business on the date on which this Warrant has been  surrendered and  payment  has been  made for such  Warrant  Shares in  accordance  with this Agreement  and the  Holder  shall be  deemed  to be the  holder of record of the Warrant  Shares,  notwithstanding  that the stock  transfer books of the Company shall then be closed or that certificates representing such Warrant Shares shall not  then  be  actually   delivered  to  the  Holder.  A  stock  certificate  or certificates for the Warrant Shares specified in the Notice of Exercise shall be delivered to the Holder as promptly as practicable.  The stock certificate(s) so delivered shall be in any such  denominations as may be reasonably  specified by the Holder in the Notice of  Exercise.  If this  Warrant  should be exercised in part only, the Company shall,  upon surrender of this Warrant for  cancellation, execute and deliver a new Warrant evidencing the right of the Holder to purchase the balance of the Warrant Shares subject to purchase hereunder.        (c)  Cashless  Exercise.  If, but only if, at any time after one year from the  date of  issuance  of  this  Warrant  there  is no  effective  Registration Statement  registering  the resale of the  Warrant  Shares by the  Holder,  this Warrant may also be exercised at such time by means of a " cashless exercise" in which the Holder  shall be entitled to receive a  certificate  for the number of Warrant  Shares equal to the quotient  obtained by dividing  [(A-B) (X)] by (A), where:        (A) = the Current Market Price (as hereinafter defined) on the trading day       preceding the date of such election;        (B) = the Exercise Price of the Warrants, as adjusted; and        (X) = the number of Warrant Shares  issuable upon exercise of the Warrants       in accordance with the terms of this Warrant.                                          2         (d) Issuance of Certificates.  In addition to all other available remedies at law or in  equity,  if the  Company  fails to  deliver  certificates  for the Warrant  Shares  within five (5) business  days after this Warrant is exercised, then the Company shall pay to the holder in cash a penalty (the "Penalty") equal to 1% of the number of Warrant  Shares that the holder is entitled to multiplied by the  Current  Market  Price (as  hereinafter  defined)  for each day that the Company fails to deliver  certificates for the Warrant Shares.  For example,  if the holder is entitled to 100,000 Warrant Shares and the Current Market Price is $2.00,  then the  Company  shall pay to the holder  $2,000 for each day that the Company fails to deliver  certificates for the Warrant Shares. The Penalty shall be paid to the holder by the fifth (5th) day of the month following the month in which it has accrued.        3.  Registration  of Warrants;  Transfer of Warrants.  Any Warrants issued upon the  transfer  or exercise in part of this  Warrant  shall be numbered  and shall be registered in a Warrant Register as they are issued.  The Company shall be  entitled  to treat the  registered  holder  of any  Warrant  on the  Warrant Register as the owner in fact thereof for all purposes and shall not be bound to recognize  any  equitable  or other claim to or interest in such  Warrant on the part of any  other  person,  and shall not be  liable  for any  registration  or transfer of Warrants  which are  registered or to be registered in the name of a fiduciary  or the nominee of a fiduciary  unless made with the actual  knowledge that a fiduciary or nominee is committing a breach of trust in  requesting  such registration  or  transfer,  or with  the  knowledge  of  such  facts  that  its participation  therein amounts to bad faith.  This Warrant shall be transferable only on the books of the Company  upon  delivery  thereof  duly  endorsed by the Holder or by its duly authorized  attorney or representative,  or accompanied by proper  evidence of  succession,  assignment,  or authority to transfer.  In all cases of transfer by an attorney,  executor,  administrator,  guardian, or other legal representative,  duly authenticated evidence of his or its authority shall be produced.  Upon any registration of transfer, the Company shall deliver a new Warrant  or  Warrants  to the  person  entitled  thereto.  This  Warrant  may be exchanged,  at the option of the Holder thereof,  for another Warrant,  or other Warrants  of  different  denominations,  of like tenor and  representing  in the aggregate the right to purchase a like number of Warrant Shares,  upon surrender to the Company or its duly authorized agent.        4.  Restrictions on Transfer.  (a) The Holder,  as of the date of issuance hereof, represents to the Company that such Holder is acquiring the Warrants for its own account for investment  purposes and not with a view to the distribution thereof or of the Warrant Shares.  Notwithstanding  any provisions  contained in this Warrant to the contrary,  this Warrant and the related Warrant Shares shall not be transferable  except  pursuant to the proviso  contained in the following sentence or upon the  conditions  specified in this Section 4, which  conditions are intended,  among other things,  to insure  compliance with the provisions of the Securities Act of 1933, as amended (the " Securities  Act" ), and applicable state law in respect of the transfer of this Warrant or such Warrant Shares. The Holder by  acceptance  of this Warrant  agrees that the Holder will not transfer this Warrant or the related  Warrant  Shares prior to delivery to the Company of an opinion  of the  Holder's  counsel  (as such  opinion  and such  counsel  are described in Section 4(b) hereof) or until  registration  of such Warrant Shares under the Securities Act has become effective or after a sale of such Warrant or Warrant Shares has been consummated  pursuant to Rule 144 or Rule 144A under the Securities  Act;  provided,  however,  that the Holder may freely  transfer this Warrant or such Warrant Shares (without delivery to the Company of an opinion of Counsel) (i) to one of its nominees,  affiliates or a nominee thereof, (ii) to a pension or  profit-sharing  fund established and maintained for its employees or for  the  employees  of  any  affiliate,  (iii)  from  a  nominee  to any of the aforementioned  persons as  beneficial  owner of this  Warrant  or such  Warrant Shares, or (iv) to a qualified  institutional buyer, so long as such transfer is effected in compliance  with Rule 144A under the Securities Act.                                          3         (b) The  Holder,  by its  acceptance  hereof,  agrees  that  prior  to any transfer  of this  Warrant  or of the  related  Warrant  Shares  (other  than as permitted  by  Section  4(a)  hereof or  pursuant  to a  registration  under the Securities  Act),  the Holder  will give  written  notice to the  Company of its intention to effect such transfer,  together with an opinion of such counsel for the Holder as shall be reasonably  acceptable to the Company, to the effect that the proposed transfer of this Warrant and/or such Warrant Shares may be effected without  registration under the Securities Act. Upon delivery of such notice and opinion to the Company,  the Holder  shall be entitled to transfer  this Warrant and/or such Warrant Shares in accordance with the intended method of disposition specified in the notice to the Company.        (c)  Each  stock  certificate  representing  Warrant  Shares  issued  upon exercise or exchange of this Warrant shall bear the following  legend unless the opinion of  counsel  referred  to in  Section  4(b)  states  such  legend is not required:              " THE SHARES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN             REGISTERED  UNDER THE SECURITIES ACT OF 1933, AS AMENDED             (THE " SECURITIES  ACT" ), OR THE SECURITIES LAWS OF ANY             STATE  OR  OTHER  JURISDICTION.  THE  SHARES  MAY NOT BE             OFFERED,  SOLD, PLEDGED OR OTHERWISE  TRANSFERRED EXCEPT             (1) PURSUANT TO AN EXEMPTION FROM REGISTRATION UNDER THE             SECURITIES   ACT  OR  (2)   PURSUANT  TO  AN   EFFECTIVE             REGISTRATION STATEMENT UNDER THE SECURITIES ACT, IN EACH             CASE IN ACCORDANCE  WITH ALL APPLICABLE  SECURITIES LAWS             OF THE STATES AND OTHER  JURISDICTIONS,  AND IN THE CASE             OF A TRANSACTION  EXEMPT FROM  REGISTRATION,  UNLESS THE             COMPANY HAS  RECEIVED  AN OPINION OF COUNSEL  REASONABLY             SATISFACTORY  TO  IT  THAT  SUCH  TRANSACTION  DOES  NOT             REQUIRE  REGISTRATION  UNDER THE SECURITIES ACT AND SUCH             OTHER APPLICABLE LAWS."  The Holder understands that the Company may place, and may instruct any transfer agent or depository for the Warrant Shares to place, a stop transfer notation in the  securities  records in respect of the Warrant  Shares.        5.  Reservation  of  Shares.  The  Company  shall at all times  during the Exercise  Period  reserve and keep  available out of its authorized and unissued Common Stock, solely for the purpose of providing for the exercise of the rights to purchase all Warrant Shares granted pursuant to the Warrants,  such number of shares of Common Stock as shall, from time to time, be sufficient therefor.  The Company covenants that all shares of Common Stock issuable upon exercise of this Warrant,  upon receipt by the Company of the full Exercise Price  therefor,  and all shares of Common Stock  issuable upon  conversion of this Warrant,  shall be validly issued, fully paid, non-assessable, and free of preemptive rights.                                          4         6.  Exercise  Price  Adjustments.  The Exercise  Price shall be subject to adjustment from time to time as follows:        (a) (i) In the event that the  Company  shall (A) pay a dividend or make a distribution,  in shares of Common  Stock,  on any class of capital stock of the Company or any  subsidiary  which is not directly or indirectly  wholly owned by the Company,  (B) split or  subdivide  its  outstanding  Common Stock or reverse split into a greater  number of shares,  or (C) combine its  outstanding  Common Stock into a smaller number of shares, then in each such case the Exercise Price in effect  immediately  prior  thereto shall be adjusted so that the Holder of a Warrant  thereafter  surrendered  for exercise  shall be entitled to receive the number of shares of Common  Stock that such Holder would have owned or have been entitled to receive after the  occurrence of any of the events  described  above had such Warrant been  exercised  immediately  prior to the  occurrence  of such event.  An  adjustment  made  pursuant  to this  Section  6(a)(i)  shall  become effective immediately after the close of business on the record date in the case of a dividend or  distribution  (except as  provided in Section  6(e) below) and shall become effective  immediately after the close of business on the effective date in the case of such subdivision,  split or combination, as the case may be. Any shares of Common Stock  issuable in payment of a dividend shall be deemed to have been issued  immediately  prior to the close of business on the record date for such dividend for purposes of calculating  the number of outstanding  shares of Common Stock under clauses (ii) and (iii) below.        (ii) If, prior to the third  anniversary  of the Closing Date, the Company shall  commit to issue or  distribute  Common Stock or issue  rights,  warrants, options or convertible or exchangeable  securities  entitling the holder thereof to subscribe for or purchase,  convert into or exchange for Common Stock, in any such  case at a price per share  less than the  Exercise  Price per share on the earliest of (i) the date the Company  shall enter into a firm  contract for such issuance  or  distribution,  (ii)  the  record  date  for the  determination  of stockholders  entitled  to  receive  any  such  rights,  warrants,   options  or convertible or  exchangeable  securities,  if  applicable,  or (iii) the date of actual issuance or  distribution  of any such Common Stock or rights,  warrants, options or convertible or exchangeable securities (provided that the issuance of Common Stock upon the exercise of rights,  warrants,  options or  convertible or exchangeable securities will not cause an adjustment in the Exercise Price if no such adjustment would have been required at the time such right, warrant, option or convertible or exchangeable  security was issued), then the Exercise Price in effect  immediately  prior to such  earliest  date shall be  adjusted to a price equal to the price paid per share for such new securities.  Such  adjustment  shall be made  successively  whenever  any such Common  Stock, rights,  warrants,  options or convertible or exchangeable securities are issued or distributed.  In determining whether any rights,  warrants or options entitle the holders to  subscribe  for or purchase  shares of Common  Stock at less than such Exercise Price,  and in determining the aggregate  offering price of shares of Common Stock so issued or distributed,  there shall be taken into account any consideration  received by the Company for such Common Stock, rights,  warrants, options,  or  convertible  or  exchangeable   securities,   the  value  of  such consideration,  if other than cash,  to be determined by the Board of Directors,                                          5   whose  determination  shall be conclusive  and described in a certificate  filed with the records of corporate proceedings of the Company. If any right, warrant, option or  convertible  or  exchangeable  security to purchase or acquire Common Stock,  the issuance of which  resulted in an adjustment  in the Exercise  Price pursuant to this subsection (ii) shall expire and shall not have been exercised, the Exercise Price shall, immediately upon such expiration, be recomputed to the Exercise  Price  which  would  have been in  effect  had the  adjustment  of the Exercise  Price  made  upon the  issuance  of such  right,  warrant,  option  or convertible  or  exchangeable  security  been made on the basis of offering  for subscription,  purchase  or  issuance,  as the case may be,  only that number of shares of Common Stock actually  purchased or issued upon the actual exercise of such right, warrant, option or convertible or exchangeable securities.        (iii) No  adjustment  in the Exercise  Price shall be required  unless the adjustment  would require an increase or decrease of at least 1% in the Exercise Price then in effect; provided,  however, that any adjustments that by reason of this Section 6(a) are not required to be made shall be carried forward and taken into account in any subsequent  adjustment.  All calculations under this Section 6(a) shall be made to the nearest cent or nearest 1/100th of a share.        (iv)  Notwithstanding  anything to the  contrary set forth in this Section 6(a), no adjustment shall be made to the Exercise Price upon (A) the issuance of shares of Common  Stock  pursuant  to any  compensation  or  incentive  plan for officers, directors, employees or consultants of the Company which plan has been approved by the Compensation Committee of the Board of Directors (or if there is no such  committee  then serving,  by the majority  vote of the  Directors  then serving  who are not  employees  or  officers  of the  Company,  a 5% or greater stockholder  of the Company or an officer,  employee,  affiliate or associate of any such 5% or  greater  stockholder)  (unless  the  exercise  price  thereof is changed   after  the  date  hereof   other  than  solely  by  operation  of  the anti-dilution  provisions thereof or by the Compensation  Committee of the Board of Directors or, if applicable,  the Board of Directors and, if required by law, the  stockholders  of the Company as provided  in this clause  (A)),  or (B) the issuance  of Common  Stock  upon the  conversion  or  exercise  of the  options, warrants  or rights of the  Company  outstanding  on August 9, 2005,  unless the conversion or exercise price thereof is changed after August 9, 2005 (other than solely by operation of the anti-dilution provisions thereof).        (v) In the  event  that,  at any time as a result  of an  adjustment  made pursuant to Sections 6(a)(i) through  6(a)(iii) above, the Holder of any Warrant thereafter  surrendered for exercise shall become entitled to receive any shares of the Company other than shares of the Common Stock,  thereafter  the number of such other  shares so  receivable  upon  exercise of any such  Warrant  shall be subject  to  adjustment  from  time to time in a manner  and on terms as  nearly equivalent as  practicable  to the  provisions  with respect to the Common Stock contained in Sections  6(a)(i) through  6(a)(iv) above, and the other provisions of this  Section 6(a) with respect to the Common Stock shall apply on like terms to any such other shares.                                          6         (b) In case of any  reclassification  of the Common Stock (other than in a transaction to which Section 6(a)(i) applies),  any consolidation of the Company with,  or merger of the Company into,  any other  entity,  any merger of another entity  into the  Company  (other  than a merger  that  does not  result  in any reclassification,  conversion, exchange or cancellation of outstanding shares of Common Stock of the Company),  any sale or transfer of all or substantially  all of the assets of the Company or any compulsory share exchange, pursuant to which share  exchange  the Common Stock is converted  into other  securities,  cash or other property, then lawful provision shall be made as part of the terms of such transaction  whereby  the Holder of a Warrant  then  outstanding  shall have the right  thereafter,  during the period  such  Warrant  shall be  exercisable,  to exercise such Warrant only for the kind and amount of securities, cash and other property  receivable upon the  reclassification,  consolidation,  merger,  sale, transfer or share  exchange by a holder of the number of shares of Common  Stock of the  Company  into  which a Warrant  might  have been  able to  exercise  for immediately prior to the reclassification, consolidation, merger, sale, transfer or share  exchange  assuming that such holder of Common Stock failed to exercise rights of  election,  if any,  as to the kind or amount of  securities,  cash or other property  receivable  upon  consummation  of such  transaction  subject to adjustment as provided in Section 6(a) above  following the date of consummation of such  transaction.  The provisions of this Section 6(b) shall similarly apply to successive  reclassifications,  consolidations,  mergers, sales, transfers or share exchanges.        (c) If:              (i) the  Company  shall  take any  action  which  would  require  an       adjustment in the Exercise Price pursuant to Section 6(a); or              (ii) the Company shall  authorize the granting to the holders of its       Common Stock generally of rights,  warrants or options to subscribe for or       purchase any shares of any class or any other rights, warrants or options;       or              (iii)  there shall be any  reclassification  or change of the Common       Stock (other than a subdivision or combination of its  outstanding  Common       Stock or a change in par value) or any consolidation,  merger or statutory       share  exchange to which the Company is a party and for which  approval of       any  stockholders  of the Company is required,  or the sale or transfer of       all or substantially all of the assets of the Company; or              (iv)  there  shall  be  a  voluntary  or  involuntary   dissolution,       liquidation or winding up of the Company;  then,  the  Company  shall  cause to be filed  with the  transfer  agent for the Warrants and shall cause to be mailed to each Holder at such Holder's address as shown on the  books of the  transfer  agent for the  Warrants,  as  promptly  as possible,  but at  least  30  days  prior  to the  applicable  date  hereinafter specified,  a notice  stating  (A) the date on which a record is to be taken for the purpose of such dividend,  distribution  or granting of rights,  warrants or options, or, if a record is not to be taken, the date as of which the holders of Common Stock of record to be entitled to such dividend,  distribution or rights, warrants  or  options  are to be  determined,  or (B)  the  date on  which  such reclassification, change, consolidation, merger, statutory share exchange, sale, transfer, dissolution, liquidation or winding-up is expected to become effective or occur,  and the date as of which it is expected  that holders of Common Stock of record  shall be  entitled  to  exchange  their  shares  of Common  Stock for securities or other property  deliverable  upon such  reclassification,  change, consolidation,  merger, statutory share exchange,  sale, transfer,  dissolution, liquidation  or winding up.  Failure to give such  notice or any defect  therein shall not affect the legality or validity of the  proceedings  described in this Section 6(c).                                          7         (d)  Whenever  the  Exercise  Price is  adjusted as herein  provided,  the Company  shall  promptly  cause a notice of the  adjusted  Exercise  Price to be mailed to each Holder.        (e) In any case in which Section 6(a)  provides  that an adjustment  shall become effective immediately after a record date for an event and the date fixed for such  adjustment  pursuant to Section 6(a) occurs after such record date but before the  occurrence  of such  event,  the  Company may defer until the actual occurrence  of such event (i)  issuing to the Holder of any  Warrants  exercised after such record date and before the  occurrence  of such event the  additional shares of Common Stock issuable upon such conversion by reason of the adjustment required  by such  event  over and above the  Common  Stock  issuable  upon such exercise before giving effect to such adjustment, and (ii) paying to such holder any amount in cash in lieu of any fraction pursuant to Section 6(h).        (f) For the purpose of any computation  under Section 2 or this Section 6, the "Current Market Price" per share of Common Stock on any date shall be deemed to be the  closing  price of a single  share of Common  Stock on the trading day immediately  preceding  the date in question as reported on the  American  Stock Exchange.  If on any such dates the Common  Stock is not listed or  admitted  to trading on the American Stock Exchange or any other national securities exchange and is not  quoted by NASDAQ or any  similar  organization,  the fair value of a share of Common Stock on such date,  as determined in good faith by the board of directors  of the  Company,  whose  determination  shall  be  conclusive  absent manifest error, shall be used.        (g) The  Company  shall not be required  to issue  fractions  of shares of Common  Stock or other  capital  stock of the Company  upon the exercise of this Warrant.  If any  fraction of a share would be issuable on the  exercise of this Warrant (or  specified  portions  thereof),  the  Company  shall  purchase  such fraction for an amount in cash equal to the same fraction of the Current  Market Price of such share of Common Stock on the date of exercise of this Warrant.                                          8         7. Transfer Taxes. The issuance of any shares or other securities upon the exercise of this Warrant,  and the delivery of certificates or other instruments representing  such shares or other  securities,  shall be made without charge to the Holder for any tax or other charge in respect of such issuance.  The Company shall not,  however,  be required to pay any tax which may be payable in respect of any transfer  involved in the issue and delivery of any certificate in a name other than that of the Holder and the Company  shall not be required to issue or deliver any such certificate  unless and until the person or persons  requesting the issue thereof shall have paid to the Company the amount of such tax or shall have established to the satisfaction of the Company that such tax has been paid.        8. Loss or Mutilation of Warrant. Upon receipt of evidence satisfactory to the Company of the loss, theft,  destruction,  or mutilation of any Warrant (and upon  surrender  of any Warrant if  mutilated),  and upon  reimbursement  of the Company's reasonable incidental expenses,  the Company shall execute and deliver to the Holder thereof a new Warrant of like date, tenor, and denomination.        9. No Rights as a  Stockholder.  The Holder of any Warrant shall not have, solely on account of such status,  any rights of a  stockholder  of the Company, either at law or in equity,  or to any notice of meetings of  stockholders or of any other  proceedings of the Company,  except as provided in this Warrant.        10.  Governing Law. This Warrant shall be construed in accordance with the laws of the State of Delaware  applicable to contracts made and performed within such State, without regard to principles of conflicts of law.        11.  Notices.  All notices  and other  communications  under this  Warrant (except payment) shall be in writing and shall be sufficiently  given if sent to the  Holder  or the  Company,  as the case  may be,  by hand  delivery,  private overnight courier, with acknowledgement of receipt,  facsimile, or by registered or certified mail, return receipt requested, as follows:        If to Holder:     JMP Securities LLC                         600 Montgomery Street                         San Francisco, California 94411                         Attn:  David Fullerton        If to Company     Intelli-Check, Inc.                         246 Crossways Park West                         Woodbury, New York 11797                         Attention: Frank Mandelbaum  Or to such other  address as any of them,  by notice to the others may designate from time to time.  Time shall be counted  to, or from,  as the case may be, the date of delivery in person or by  overnight  courier or five (5)  business  days after mailing.        12.  Remedies.  The  Company  stipulates  that the  remedies at law of the Holder of this Warrant in the event of any default or threatened  default by the Company  in the  performance  of or  compliance  with  any of the  terms of this Warrant  are not and  will not be  adequate  and  that,  to the  fullest  extent permitted by law,  such terms may be  specifically  enforced by a decree for the specific  performance  of any  agreement  contained  herein or by an  injunction against a violation of any of the terms hereof or otherwise.                                          9         13.  Amendment  and Waiver.  Except as  otherwise  provided  herein,  this Warrant may not be  modified or amended  except  pursuant  to an  instrument  in writing  signed by the  Company  and the  holder of the  Warrant.  No  provision hereunder  may be waived  other  than in a written  instrument  executed  by the waiving party. Dated: August 9, 2005 Intelli-Check, Inc.                                      -----------------------                                     By: Frank Mandelbaum                                     Chief Executive Officer                                          10                                  FORM OF ASSIGNMENT  (To be executed by the registered  holder if such holder desires to transfer the attached Warrant.)  FOR  VALUE  RECEIVED,   ________hereby   sells,   assigns,  and  transfers  unto __________________  a Warrant to purchase __________ shares of Common Stock, par value $0.001 per share, of Intelli-Check,  Inc. (the " Company" ), together with all right, title, and interest therein,  and does hereby irrevocably  constitute and appoint attorney to transfer such Warrant on the books of the Company,  with full power of substitution.  Dated:        ------------------------------- By:     ---------------------------------- Signature        The signature on the foregoing  Assignment  must correspond to the name as written upon the face of this Warrant in every particular, without alteration or enlargement or any change whatsoever.                                          11   To:   Intelli-Check, Inc.       246 Crossways Park West       Woodbury, New York  11797       Attention:  Chief Financial Officer                                 NOTICE OF EXERCISE        The   undersigned   hereby   exercises  his  or  its  rights  to  purchase _______Warrant Shares in accordance with the terms thereof, and tenders herewith payment of the exercise  price in full,  together with all  applicable  transfer taxes, if any.  Payment shall take the form of (check applicable box):        [ ] in lawful money of the United States; or        [ ] the cancellation of such number of Warrant Shares as is necessary,  in       accordance  with the formula set forth in Section  2(c),  to exercise this       Warrant with respect to the maximum number of Warrant  Shares  purchasable       pursuant to the cashless exercise procedure set forth in subsection 2(c).        The undersigned  requests that  certificates for such securities be issued in the name of, and delivered to:                        ----------------------------------                        ----------------------------------                        ----------------------------------                     (Print Name, Address and Social Security                           or Tax Identification Number)  NOTICE: THE SIGNATURE TO THIS FORM MUST CORRESPOND WITH THE NAME AS WRITTEN UPON THE  FACE OF THE  WITHIN  WARRANT  IN EVERY  PARTICULAR  WITHOUT  ALTERATION  OR ENLARGEMENT OR ANY CHANGE WHATSOEVER.  and,  if such  number of  Warrant  Shares  shall not be all the  Warrant  Shares covered by the within Warrant, that a new Warrant for the balance of the Warrant Shares covered by the within Warrant be registered in the name of, and delivered to, the undersigned at the address stated below.  Dated:        -------------------------------  By:     ---------------------------------- Print Name  - -------------------------------------- Signature  Address:  - --------------------------------------  - --------------------------------------    EX-10.20 3 v038898_ex10-20.txt                                                                     Exhibit 10.20                              UNDERSTANDING OF EMPLOYMENT   To:      Frank Mandelbaum  From:    Regina Auletta  Date:    January 1, 2006  Re:      Understanding of Employment  ================================================================================  The  following  is the  understanding  as to the  agreement  of  our  terms  and conditions of employment as an Employee for Intelli-Check, Inc. (the "Company")  REPORTING STATUS  Your  position  with the  Company  will be Chief  Executive  Officer  (CEO)  and Chairman, reporting directly to the Board of Directors.  SALARY  Effective  January 1, 2006,  you will receive an annual salary of  $250,000.00** per year,  payable  bi-weekly  at the rate of  $9,615.38  per pay  period  which includes any applicable taxes and/or deductions.  **Effective  February 1, 2006, your salary will be $255,604.00 per year, payable bi-weekly at the rate of $9,830.92 per pay period which  includes any applicable taxes and/or deductions.  Your next  performance  review by the Board will be on January 1, 2007 according to company policy (see Employee Manual).  BONUS  Employee shall be entitled to receive bonus compensation in an amount of $75,000 based upon the Company completing a 12 consecutive month period during which the Company  experiences  positive  cash flow.  This bonus will  survive  beyond the agreement  period so long as the  beginning of the 12 month period is during the term of this agreement and employee is still employed with the Company.  AUTO ALLOWANCE  Employee shall be entitled to the use of a Company  vehicle,  however,  Employee may elect to provide  his own  vehicle  and if such  election  is made,  Company agrees to pay Employee One Thousand five hundred  Dollars  ($1,500) per month to cover cost of the vehicle,  insurance,  repairs and other  expenses,  pertaining thereto.    ENTERTAINMENT EXPENSES  The Company will  reimburse you 100% for all authorized  business  entertainment expenses  incurred by you, in accordance with IRS guidelines (See Expense Report Procedure for reimbursement policy).  BENEFITS  Medical                 You will be entitled to medical  benefits  according  to                         Company policy.  Holidays                You  will  be  entitled  to  observed  Company  holidays                         according to the Company policy.  Vacation                You will be entitled to vacation  pay  according  to the                         Company policy. However, based on your position with the                         Company,  we  will  add an  additional  week  above  the                         current policy up to a maximum  benefit of (4) weeks per                         year.  Personal Time           You will be eligible for personal time  according to the                         Company policy  Bereavement             You will be entitled to bereavement pay according to the                         Company policy  Jury  Duty              You will be  entitled  to serve as a juror in a court of                         law with pay according to the Company policy   Stock  Options          The Company  issued and granted  25,000 stock options on                         November 8, 2005 at fair market value as of the close on                         November 8, 2005. Vesting will be as follows:  25,000 to                         be vested immediately. Employee shall enter into a stock                         option agreement with the Company, under separate cover.  SEVERANCE  (A)   Amount of  Severance to be granted to employee  upon  Company  terminating       employee  for any reason  other  than cause  shall be 2 years of base cash       compensation  at the  time  of  termination  paid  over 12  equal  monthly       payments.  (B)   For Conditions relating to Change of Control:                          If during the term of this Agreement,  there shall occur                         a  Change  of  Control,   Employee  may   terminate  his                         employment  hereunder for Good Reason (as in hereinafter                         defined) at any time  during the term of this  Agreement                         in which case he shall be  entitled to receive a payment                         equal   to  2.99   times   Employee's   average   annual                         compensation paid by Company (including bonuses, if any)                         during the three years preceding the date of termination                         (the "Severance Payment"),  provided, however, that such                         Severance  Payment  shall be  reduced if and only to the                         extent  necessary to avoid the  imposition  of an excise                         tax on such Severance  Payment under Section 4999 of the                         Internal Revenue Code of 1986, as amended. The Severance                         Payment  shall be  payable  to  Employee  on the date of                         termination as follows:                    (i)   an amount equal to three months Fixed Salary at the rate                         prevailing  on  the  date  of   termination,   provided,                         however,  that such  amount  shall be  reduced  if three                         times such amount  would cause  Company to be in default                         of any of its covenants to any of its lenders,  in which                         event the amount payable to Employee shall be reduced so                         that  three  times  such  amount  would not  cause  such                         default; and                      (ii)  the balance remaining after the payment set forth in (i)                         above  shall be paid by Company  by issuing to  Employee                         that number of its  unregistered  common shares as shall                         equal the balance  divided by the exercise  price of the                         stock                          For  purposes of this  Agreement,  a "Change of Control"                         shall be  deemed  to have  occurred  on the first day on                         which a majority of the  Directors of the Company do not                         consist of individuals  recommended by Employee, and one                         outside  Director  of the  Company or if the  Company is                         sold.                          For purposes of this Agreement, "Good Reason: shall mean                         any of the following  (without  Employee's express prior                         written consent):                    (a)   The   assignment   to  Employee  by  Company  of  duties                         inconsistent  with Employee's  then  positions,  duties,                         responsibilities,  titles or offices or any reduction in                         his  duties  or   responsibilities  or  any  removal  of                         Employee from or any failure to re-elect Employee to any                         of  such  positions,   except  in  connection  with  the                         termination  of  Employee's  employment  for  Cause,  or                         disability (as described in Section 4.03 herein) or as a                         result  of  Employee's   death  or  by   termination  of                         employment  by  Employee  other  than for  Good  Reason,                         however,  nothing herein prevents the current Board from                         exercising its right to elect officers.                    (b)   A relocation of Company's principal executive offices to                         a  location  greater  than 50  miles  from  the  current                         operating   address  of  the   Company  or  the  Company                         requiring  Employee to be based  anywhere other than the                         location at which  Employee on the date hereof  performs                         Employee's   duties,   except  for  required  travel  on                         Company's business to an extent substantially consistent                         with Employee's  business travel obligations on the date                         hereof or any adverse change in the office assignment or                         secretarial  and other  support  accorded to Employee on                         the date hereof;                    (c)   A failure by Company to  continue  in effect any benefit                         or    compensation    plan   (including   any   pension,                         profit-sharing,  bonus,  life,  medical,  disability and                         other insurance and employee benefit plans and programs)                         in  which  Employee  is  then   participating  or  plans                         providing Employee with  substantially  similar benefits                         or the  taking of any  action  by  Company  which  would                         adversely affect  Employee's  participation in or reduce                         Employee's benefits under any of such plans;                    (d)   The taking of any action by Company  which would deprive                         Employee  of any  material  fringe  benefit  enjoyed  by                         Employee on the date hereof;                    (e)   The failure by Company to obtain the specific assumption                         of this  Agreement by any successor or assign of Company                         or any person acquiring  substantially  all of Company's                         assets;                    (f)   Any material  breach by Company of any  provision of the                         Agreement.  (C)   In no  event  may  the  employee  receive  severance  payment  under  both       conditions (A) and (B) as stated above.    All benefits  listed above may be changed  and/or deleted at any time as long as it changes for the entire Company policy.  Please review the Employee Manual for details.  DISABILITY  If  Employee,  by reason of  illness,  mental or  physical  incapacity  or other disability,  is  unable to  perform  his  regular  duties  hereunder  (as may be determined by the Board of  Directors),  Company  shall  continue to pay half of Employee's  salary  for the  balance  of the term of this  Agreement,  provided, however,  in the  event  Employee  recovers  from any such  illness,  mental  or physical  incapacity or other disability (as may be determined by an independent physician to which Employee shall make himself  available for examination at the reasonable request of the Board of Directors), Employee shall immediately resume his regular  duties  hereunder.  Any payments to Employee  under any  disability insurance  or plan  maintained  by Company  shall be applied  against  and shall reduce the amount of the salary payable by Company under this  Agreement.  In no event shall payment exceed 2 years of such disability  payments from the initial date of such disability.  DEATH BENEFIT  In the event of Employee's  death, the Company shall pay the amount equal to six (6) months of the  Employee's  current Fixed Base Annual Salary in equal monthly payments.  This payment will be made only to the  Employee's  surviving  spouse, provided,  however,  that, if Company is the  beneficiary  of life  insurance on Employee's  life, it shall use the proceeds of such insurance  promptly upon the receipt  thereof to prepay (in  inverse  order to  maturity),  half of the Fixed Salary  remaining  to be paid  discounted  to  present  value  using an  assumed interest  rate of 8% per  annum.  Company  shall  have  the  right  (but not the obligation) to obtain a life insurance  policy on Employee's  life. The proceeds of any such life  insurance  policy shall be payable to Company.  Employee shall cooperate  with  Company and use his best  efforts in all respects and regard to obtaining a life insurance policy, including,  without limitation,  undergoing a physical examination upon reasonable request.  This  benefit  is only  payable  as long as the time of death  occurs  while the Employee is still currently employed with the Company.  JOB RESPONSIBILITY  During the term of his employment,  Employee shall devote  substantially all his business  time,  best efforts and  attention  to the  business,  operations  and affairs  of  Company  and the  performance  of his  duties  hereunder  provided, however,  that  during  the  term of his  employment,  Employee  may  work for a non-competitive  Company so long as he devotes substantially all of his business time,  best efforts and attention to the business  operations and affairs of the Company and the performance of his duties hereunder.  Employee's job responsibilities  will be determined and directed by the Board of Directors.  NON-COMPETITION  During the term of this Agreement and for a period of two years after the sooner of the expiration  date of this Agreement or the date when Employee ceases to be employed  by  Company  as a result  of  either a  voluntary  termination  of his employment or a termination  for cause,  Employee  shall not,  within the United States, its territories  and/or,  possessions and countries in which the Company does  business,  without the prior written  consent of Company in each instance, directly or  indirectly,  in any manner or capacity,  whether for himself or any other person and whether as proprietor,  principal, owner, shareholder, partner, investor, director, officer, employee,  representative,  distributor consultant, independent  contractor  or otherwise  engage or have any interest in any entity which is engaged in any  business or activity  then  conducted  or engaged in by Company.  However,  Employee  may at any time own in the  aggregate as a passive (but not  active)  investment  not  more  than 5% of the  stock or other  equity interest of any publicly-traded  entity which engages in a business  competitive with Company.    SURVIVAL  The provisions of the Non-Competition section above shall survive the expiration or termination of this Agreement for any reason.  MANDATORY FINAL AND BINDING ARBITRATION  By signing this document in the place designated on page 3 hereof,  the Employee unconditionally  agrees  that all  disputes,  controversies,  disagreements,  or claims of whatever nature,  whether  contractual or statutory,  or arising under common law, except claims which would alter the employment at will  relationship or claims  covering the  enforcement of a  non-competition  agreement,  shall be resolved by mandatory final and binding arbitration in accordance with the final and binding  arbitration  as defined  below  under  Arbitration  Process.  It is expressly  provided  and  understood  that this  contemplates  inclusion  of all claims, actions, suits,  administrative  proceedings or controversies created by or arising  under Title VII of the Civil Rights Act, the Age  Discrimination  in Employment Act, the Americans with Disabilities Act (42 U.S.C.  s1981),  the New York Human  Rights law and all other  employment  or  employment  discrimination statutes,  ordinances or regulations  promulgated  by the United States,  or any other state, local or municipal or political  subdivision,  without exception. I further  understand  that this document is not a contract of employment with the Company and that my employment  with the Company is "at-will".  Either party may terminate the employment relationship without notice for any reason.  ARBITRATION PROCESS  Any  tortuous  or  malicious  interference  with or without  intent  towards the Company,  its  Employees,  its  Customers,  its Business  Relationships  and its Operations is considered a violation of your Confidentiality  Agreement and upon documentation of said interference,  employee hereby forfeits any and all rights to compensatory and punitive damages.  All matters to be  arbitrated  under this  Agreement  shall be  accomplished  in accordance  with  the  Labor  Arbitration  Rules  of  the  American  Arbitration Association  (AAA),  as those  rules  and  regulations  may from time to time be amended. All matters shall be submitted no later than one year after the accrual of the claim.  All fees and expenses  associated with the arbitration  procedure hereby  established  shall,  in the  first  instance,  be borne by the  Company. However,  arbitrators  shall have full  discretion and authority to allocate the costs of arbitration  between the Company and the Employee,  and such allocation shall be part of any award made. The arbitrator shall have no authority to award either party any punitive damages.  The costs and expenses of  arbitration,  including the filing fee charged by the American Arbitration Association (AAA), the fee of the arbitrator, the cost of a stenographic  transcript of the arbitration hearing, and the rental of a hearing room, shall, in the first instance, be borne by the Company,  except for the sum of  $100,  which  shall  be  contributed  in  advance  by the  Employee  seeking arbitration.  The  arbitrator  as part of his/her final binding award shall make the final allocation of expenses.    EXCLUSIVE REMEDY  The parties agree that  arbitration  as herein  provided  shall be the exclusive method for resolving all matters  outlined above, and no resort to courts or any other methods of resolution,  whether  judicial,  administrative or contractual, shall be permitted. If either party pursues a covered claim against the other by any action,  method,  or legal  proceeding  other than the arbitration  provided herein, the responding party shall be entitled to dismissal or injunctive relief regarding  such action and  recovery  of all costs,  losses an  attorney's  fees related to such other proceeding if such claim is dismissed or stayed.  I have  read the  foregoing  agreement  and  understand  that I am  agreeing  to arbitrate any and all claims arising out of my employment with the Company,  any successors, officers, directors, agents and shareholders.  INDEMNIFICATION  Employee shall indemnify and hold Company free and harmless from and against and shall  reimburse  it for any  and  all  claims,  liabilities,  damages,  losses, judgments,  costs and  expenses  (including  reasonable  counsel  fees and other reasonable  out-of-pocket  expenses) arising out of or resulting from any breach or default of any of his  representations,  warranties  and  agreements  in this Agreement.  Company shall indemnify and hold Employee free and harmless from and against and shall  reimburse him for any and all claims,  liabilities,  damages, losses,  judgments,  costs and expenses  (including  reasonable counsel fees and other reasonable  out-of-pocket  expenses)  arising out of or resulting from any breach or default of any of its  representations,  warranties  and agreements in this Agreement.  AGREEMENT; MODIFICATION; WAIVER; INTERPRETATION  This  Agreement  contains the entire  agreement  and  understanding  between the parties  with  respect to the subject  matter  hereof and  supersedes  all prior negotiations and oral understandings,  if any. Neither this Agreement nor any of its provisions may be modified,  amended, waived,  discharged or terminated,  in whole or in part, except in writing signed by the party to be charged. No waiver of any such provision or any breach of or default under this Agreement  shall be deemed or shall constitute a waiver of any other  provision,  breach or default. All pronouns and words used in this Agreement  shall be read in the  appropriate number and gender,  the  masculine,  feminine  and neuter  shall be  interpreted interchangeably and the singular shall include the plural and vice versa, as the circumstances may require.  /s/ Frank Mandelbaum - -------------------------------- Employee  /s/ Regina Auletta                              /s/ Edwin Winiarz - --------------------------------                -------------------------------- Human Resources Administrator                   Executive Officer     EX-23.1 4 v038898_ex23-1.txt                                                                      Exhibit 23.1              CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM  To the Board of Directors and Stockholders of Intelli-Check, Inc.  We consent to the  incorporation by reference in the Registration  Statements on Form S-8  (Nos.  333-85436  and  333-47882)  and on form S-3  (Nos.  333-127663, 333-104598 and 333-59494) of  Intelli-Check,  Inc., of our report dated March 3, 2006,  relating to the  financial  statements  contained in the Annual Report on Form 10-K for the years ended December 31, 2005 and 2004.    /s/ Amper, Politziner & Mattia, P.C. - ------------------------------------ New York, New York March 28, 2006    EX-23.2 5 v038898_ex23-2.txt                                                                      Exhibit 23.2              CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM  We have  issued  our report  dated  March 5, 2004,  accompanying  the  financial statements and schedule included in the Annual Report of Intelli-Check,  Inc. on Form  10-K for the year  ended  December  31,  2005.  We hereby  consent  to the incorporation  by reference  of said report in the  registration  statements  of Intelli-Check,  Inc. on Forms S-8 (File No.  333-85436,  effective April 3, 2002 and File No.  333-47882,  effective  October  13,  2000) and Forms S-3 (File No. 333-127663,  effective October 7, 2005, File No. 333-104598,  effective June 24, 2003 and File No. 333-59494, effective October 5, 2001).    /s/ Grant Thornton LLP - ---------------------- New York, New York March 28, 2006     EX-31.1 6 v038898_ex31-1.txt                                                                      Exhibit 31.1                                    Certification             Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                    I, Frank Mandelbaum, certify that:           1. I have reviewed this Form 10-K of Intelli-Check, Inc.;           2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;           3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;           4. The registrant's other certifying officers and I am responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we have:                    (a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, is made known to us by others within those entities, particularly during the period in which this report is being prepared;                    (b) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation;                    (c) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fourth fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and           5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function):                    (a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and                    (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls over financial reporting.  Date:    March 29, 2006                                       /s/ Frank Mandelbaum                                      ---------------------------                                      Name:    Frank Mandelbaum                                      Title:   Chief Executive Officer     EX-31.2 7 v038898_ex31-2.txt                                                                      Exhibit 31.2                                    Certification             Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                    I, Edwin Winiarz, certify that:           1. I have reviewed this Form 10-K of Intelli-Check, Inc.;           2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;           3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;           4. The registrant's other certifying officers and I am responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we have:                    (a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;                    (b) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation;                    (c) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most fourth fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and           5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function):                    (a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and                    (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls over financial reporting.  Date:    March 29, 2006                                          /s/ Edwin Winiarz                                         ---------------------------                                         Name: Edwin Winiarz                                         Title:   Chief Financial Officer     EX-32 8 v038898_ex32.txt                                                                       Exhibit 32                                    Certification             Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002           Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code), each of the undersigned officers of Intelli-Check, Inc. (the "Company"), does hereby certify, to such officer's knowledge, that:           The Annual Report on Form 10-K for the year ended December 31, 2005 of the Company fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and information contained in the Form 10-K fairly presents, in all material respects, the financial condition and results of operations of the Company.   Dated:          March 29, 2006              /s/ Frank Mandelbaum                                             ---------------------                                             Name:    Frank Mandelbaum                                             Title:   Chief Executive Officer  Dated:          March 29, 2006                                             /s/ Edwin Winiarz                                             ---------------------                                             Name:    Edwin Winiarz                                             Title:   Chief Financial Officer             The foregoing certification is being furnished solely pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code) and is not being filed as part of the Form 10-K or as a separate disclosure document.    -----END PRIVACY-ENHANCED MESSAGE-----