##### Table of Contents



SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, DC 20549
 FORM 10-Q
  þ
    
    Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934.
 For the quarterly period ended March 31, 2006
 or
 o
    
    Transition report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
 For the transition period from to
 Commission
File Number: 1-9641
 IDENTIX INCORPORATED
  Delaware
    
    94-2842496(State
or other jurisdiction of
incorporation of organization)
    

(IRS
Employer Identification No.)5600 Rowland Road, Minnetonka, Minnesota
(Address of principal executive offices)
    
    55343
(Zip Code)
  þ o
  Large accelerated filer o
    
    Accelerated filer þ
    
    Non-accelerated filer o
 o þ




---



##### 



PART I
    
    FINANCIAL INFORMATIONItem 1
    
    Unaudited Financial StatementsCondensed
Consolidated Balance Sheets 
March 31, 2006 and June 30, 2005
    
    
    3Condensed
Consolidated Statements of Operations 
Three and Nine months ended March 31, 2006 and
2005
    
    
    4Condensed Consolidated Statements of Cash Flows 
Nine months ended March 31, 2006 and
2005
    
    
    5Notes to Condensed Consolidated Financial Statements
    
    
    6Item 2
    
    Managements Discussion and Analysis of Financial
Condition and Results of Operations
    
    
    17Item 3
    
    Quantitative and Qualitative Disclosures
About Market Risk
    
    
    31Item 4
    
    Controls and Procedures
    
    
    31PART II
    
    OTHER INFORMATIONItem 1
    
    Legal Proceedings
    
    
    32Item 6
    
    Exhibits
    
    
    32Signature
    
    
    33Relocation AgreementCEO CertificationCFO Certification906 Certification
  2




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##### Table of Contents



IDENTIX INCORPORATED
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per amounts)
(Unaudited)
 March 31,
    
    
    June 30,2006
    
    
    2005ASSETSCurrent assets:Cash and cash equivalents
    
    $
    24,093
    
    
    $
    22,445Marketable securities
    
    
    9,827
    
    
    
    9,753Restricted cash
    
    
    549
    
    
    
    2,649Accounts receivable, net
    
    
    17,801
    
    
    
    15,376Inventories
    
    
    5,502
    
    
    
    6,340Prepaid expenses and other assets
    
    
    936
    
    
    
    928Total current assets
    
    
    58,708
    
    
    
    57,491Restricted cash
    
    
    633
    
    
    
    933Property and equipment, net
    
    
    3,086
    
    
    
    1,738Goodwill
    
    
    141,213
    
    
    
    141,213Acquired intangible assets, net
    
    
    10,852
    
    
    
    13,363Other assets
    
    
    314
    
    
    
    317Total assets
    
    $
    214,806
    
    
    $
    215,055LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    6,899
    
    
    $
    6,597Accrued compensation
    
    
    3,601
    
    
    
    3,894Other accrued liabilities
    
    
    3,775
    
    
    
    3,634Deferred revenue
    
    
    7,245
    
    
    
    6,738Total current liabilities
    
    
    21,520
    
    
    
    20,863Deferred revenue
    
    
    3,040
    
    
    
    1,947Other liabilities
    
    
    495
    
    
    
    159Total liabilities
    
    
    25,055
    
    
    
    22,969Commitments and contingencies (Note 13 and 14)Stockholders equity:Common stock, $0.01 par value; 200,000,000 shares
authorized 89,637,525 and 88,976,326 shares issued
and outstanding, respectively
    
    
    896
    
    
    
    889Additional paid-in capital
    
    
    556,252
    
    
    
    552,507Accumulated deficit
    
    
    (367,246
    )
    
    
    (361,159
    )Accumulated other comprehensive loss
    
    
    (151
    )
    
    
    (151
    )Total stockholders equity
    
    
    189,751
    
    
    
    192,086Total liabilities and stockholders equity
    
    $
    214,806
    
    
    $
    215,055
  3




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IDENTIX INCORPORATED
 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(Unaudited)
 Three Months Ended March 31,
    
    
    Nine Months Ended March 31,2006
    
    
    2005
    
    
    2006
    
    
    2005Revenues:Product revenues
    
    $
    13,698
    
    
    $
    12,119
    
    
    $
    44,445
    
    
    $
    30,683Service revenues
    
    
    7,099
    
    
    
    8,133
    
    
    
    21,247
    
    
    
    24,750Total revenues
    
    
    20,797
    
    
    
    20,252
    
    
    
    65,692
    
    
    
    55,433Cost and expenses:Cost of product revenues
    
    
    7,396
    
    
    
    7,318
    
    
    
    23,881
    
    
    
    21,661Cost of service revenues
    
    
    5,803
    
    
    
    6,140
    
    
    
    17,390
    
    
    
    18,249Research and development
    
    
    3,650
    
    
    
    3,029
    
    
    
    9,867
    
    
    
    8,345Marketing and selling
    
    
    3,445
    
    
    
    3,179
    
    
    
    9,737
    
    
    
    8,744General and administrative
    
    
    3,121
    
    
    
    3,013
    
    
    
    10,033
    
    
    
    9,215Amortization of acquired intangible assets
    
    
    202
    
    
    
    250
    
    
    
    622
    
    
    
    754Restructuring and other, net
    
    
    1,335
    
    
    
    
    
    
    
    1,335
    
    
    
    (620
    )Total costs and expenses
    
    
    24,952
    
    
    
    22,929
    
    
    
    72,865
    
    
    
    66,348Loss from operations
    
    
    (4,155
    )
    
    
    (2,677
    )
    
    
    (7,173
    )
    
    
    (10,915
    )Interest and other income, net
    
    
    319
    
    
    
    763
    
    
    
    829
    
    
    
    1,425Loss from continuing operations before income taxes
    
    
    (3,836
    )
    
    
    (1,914
    )
    
    
    (6,344
    )
    
    
    (9,490
    )Benefit (provision) for income taxes
    
    
    6
    
    
    
    (11
    )
    
    
    44
    
    
    
    (33
    )Loss from continuing operations
    
    
    (3,830
    )
    
    
    (1,925
    )
    
    
    (6,300
    )
    
    
    (9,523
    )Discontinued operations:Gain on sale of IPS, net of taxes
    
    
    
    
    
    
    
    
    
    
    213
    
    
    
    Income from discontinued operations
    
    
    
    
    
    
    
    
    
    
    213
    
    
    
    Net loss
    
    $
    (3,830
    )
    
    $
    (1,925
    )
    
    $
    (6,087
    )
    
    $
    (9,523
    )Basic and diluted loss per share from continuing
operations
    
    $
    (0.04
    )
    
    $
    (0.02
    )
    
    $
    (0.07
    )
    
    $
    (0.11
    )Basic and
diluted (loss) income per share from
discontinued
operations
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Basic and diluted net loss per share
    
    $
    (0.04
    )
    
    $
    (0.02
    )
    
    $
    (0.07
    )
    
    $
    (0.11
    )Weighted average common shares used in basic and
diluted loss per share computation
    
    
    89,406
    
    
    
    88,834
    
    
    
    89,158
    
    
    
    88,620
  4




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IDENTIX INCORPORATED
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
 Nine Months Ended March 31,2006
    
    
    2005Cash flows from operating activities:Net loss
    
    $
    (6,087
    )
    
    $
    (9,523
    )Adjustments to reconcile net loss to net cash used in operating
activities:Depreciation and amortization
    
    
    4,488
    
    
    
    4,836Realized gain on sales of marketable securities
    
    
    (234
    )
    
    
    (90
    )Gain on sale of discontinued IPS operations, pre-tax
    
    
    (350
    )
    
    
    Stock-based compensation expense
    
    
    742
    
    
    
    14Bad debt expense (recoveries), net
    
    
    64
    
    
    
    (32
    )Loss on disposal of equipment
    
    
    10
    
    
    
    11Inventory obsolescence provision
    
    
    646
    
    
    
    1,086Restructuring and other, net
    
    
    677
    
    
    
    (620
    )Changes in assets and liabilities:Restricted cash
    
    
    2,400
    
    
    
    Accounts receivable
    
    
    (2,489
    )
    
    
    (4,566
    )Inventories
    
    
    192
    
    
    
    (190
    )Prepaid expenses and other assets
    
    
    (5
    )
    
    
    1,248Accounts payable
    
    
    (343
    )
    
    
    256Accrued compensation
    
    
    (325
    )
    
    
    1,212Other accrued liabilities
    
    
    (308
    )
    
    
    (6,047
    )Deferred revenue
    
    
    1,600
    
    
    
    2,265Net cash provided by (used in) operating activities
    
    
    678
    
    
    
    (10,140
    )Cash flows from investing activities:Net proceeds from the sales of marketable securities
    
    
    14,900
    
    
    
    19,300Purchases of marketable securities
    
    
    (14,740
    )
    
    
    (19,433
    )Cash proceeds related to final payment on the sale of IPS
    
    
    350
    
    
    
    Additions of intangible assets
    
    
    (600
    )
    
    
    Capital expenditures
    
    
    (1,892
    )
    
    
    (526
    )Net cash used in investing activities
    
    
    (1,982
    )
    
    
    (659
    )Cash flows from financing activities:Proceeds from the exercise of stock options and warrants and
issuance of stock under employee retirement plans
    
    
    3,010
    
    
    
    2,305Payment under capital lease obligations
    
    
    (58
    )Net cash provided by financing activities
    
    
    2,952
    
    
    
    2,305Net increase (decrease) in cash and cash equivalents
    
    
    1,648
    
    
    
    (8,494
    )Cash and cash equivalents at period beginning
    
    
    22,445
    
    
    
    35,944Cash and cash equivalents at period end
    
    $
    24,093
    
    
    $
    27,450Schedule of non-cash investing and financing activities:Property and equipment acquired under capital lease
    
    $
    193
    
    
    $
    Accrued obligation for acquisition of intangible assets
    
    $
    650
    
    
    $
    
  5




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IDENTIX INCORPORATED
 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 1.
    
    Basis of Presentation
   2.
    
    Revenue Recognition Policy
   Product Revenues
   6




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##### Table of Contents



Service Revenues
    3.
    
    Stock Based Compensation
  7




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8




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Three months ended March 31, 2006
    
    Nine months ended March 31, 2006Directors and
    
    
    
    Directors andEmployees
    
    Officers
    
    Employees
    
    OfficersExpected volatility
    
    65.72%
    
    
    
    67.34%
    
    77.91%Expected dividends
    
    
    
    
    
    
    
    Expected term (in years)
    
    4.00
    
    
    
    4.01
    
    5.46Risk-free interest rate
    
    4.62%
    
    
    
    4.43%
    
    4.44%
 9




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##### Table of Contents



Weighted AverageWeighted Average
    
    Remaining Contractual
    
    AggregateOptions
    
    Shares
    
    Exercise Price
    
    Term (Years)
    
    Intrinsic ValueOutstanding at July 1, 2005
    
    
    7,058,681
    
    
    $
    6.09
    
    
    
    6.87Granted
    
    
    52,800
    
    
    $
    5.26
    
    
    
    9.84Exercised
    
    
    41,276
    
    
    $
    1.70
    
    
    
    Forfeited or expired
    
    
    55,392
    
    
    $
    6.77
    
    
    
    Outstanding at September 30,
2005
    
    
    7,014,813
    
    
    $
    6.11
    
    
    
    6.69
    
    
    $
    12,155,000Granted
    
    
    47,000
    
    
    $
    4.56
    
    
    
    9.87Exercised
    
    
    51,357
    
    
    $
    3.09
    
    
    
    Forfeited or expired
    
    
    50,257
    
    
    $
    5.80
    
    
    
    Outstanding at December 31,
2005
    
    
    6,960,199
    
    
    $
    6.12
    
    
    
    6.48
    
    
    $
    10,532,000Granted
    
    
    124,550
    
    
    $
    7.87
    
    
    
    9.83Exercised
    
    
    360,144
    
    
    $
    4.88
    
    
    
    Forfeited or expired
    
    
    63,378
    
    
    $
    5.85
    
    
    
    Outstanding at March 31, 2006
    
    
    6,661,227
    
    
    $
    6.22
    
    
    
    6.29
    
    
    $
    15,042,000Excercisable at March 31, 2006
    
    
    5,978,046
    
    
    $
    6.34
    
    
    
    6.10
    
    
    $
    13,163,000
  2006
    
    2005Three months ended March 31,
    
    
    4.21
    
    
    $
    3.89Nine months ended March 31,
    
    
    3.59
    
    
    $
    4.11
   Weighted AverageGrant Date FairNonvested Restricted Stock
    
    Shares
    
    ValueNonvested at July 1, 2005
    
    
    
    
    
    $
    Granted
    
    
    
    
    
    $
    Vested
    
    
    
    
    
    $
    Forfeited
    
    
    
    
    
    $
    Nonvested at October 1, 2005
    
    
    
    
    
    $
    Granted
    
    
    50,000
    
    
    $
    4.56Vested
    
    
    
    
    
    $
    Forfeited
    
    
    
    
    
    $
    Nonvested at December 31, 2005
    
    
    50,000
    
    
    $
    4.56Granted
    
    
    
    
    
    $
    Vested
    
    
    12,500
    
    
    $
    4.56Forfeited
    
    
    
    
    
    $
    Nonvested at March 31, 2006
    
    
    37,500
    
    
    $
    4.56
   10




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##### Table of Contents



For the Three Months Ended
    
    
    For the Nine Months EndedMarch 31, 2005
    
    
    March 31, 2005Net Loss as reported
    
    $
    (1,925
    )
    
    $
    (9,523
    )Add: Employee stock-based compensation
expense included in reported
net loss
    
    
    
    
    
    
    14Deduct: Total employee stock-based compensation
expense determined under fair value
based method for all awards
    
    
    (1,503
    )
    
    
    (3,756
    )Proforma net loss
    
    $
    (3,428
    )
    
    $
    (13,265
    )Basic and diluted net loss per share:As Reported
    
    $
    (0.02
    )
    
    $
    (0.11
    )Proforma
    
    $
    (0.04
    )
    
    $
    (0.15
    )Shares
    
    
    88,834
    
    
    
    88,620
  Three months ended March 31, 2005
    
    Nine months ended March 31, 2005Directors and
    
    
    
    
    
    Directors andEmployees
    
    Officers
    
    Employees
    
    OfficersExpected volatility
    
    
    83.11
    %
    
    
    83.11
    %
    
    
    84.32
    %
    
    
    85.05
    %Expected dividends
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Expected term (in years)
    
    
    4.96
    
    
    
    4.96
    
    
    
    4.96
    
    
    
    4.46Risk-free interest rate
    
    
    4.00
    %
    
    
    4.00
    %
    
    
    3.87
    %
    
    
    3.78
    %
 4.
    
    Warrants
   5.
    
    Discontinued Operations
  11




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6.
    
    Credit Facility
   7.
    
    Inventories
  March 31,
    
    
    June 30,2006
    
    
    2005(In thousands)Purchased parts and materials
    
    $
    3,493
    
    
    $
    3,403Work-in-process
    
    
    1,488
    
    
    
    2,008Finished goods, including spares
    
    
    521
    
    
    
    929$
    5,502
    
    
    $
    6,340
  8.
    
    Restructuring and other, net
  Three Months Ended March 31,
    
    
    Nine Months Ended March 31,2006
    
    
    2005
    
    
    2006
    
    
    2005(in thousands)
    
    
    (in thousands)Charges related to restructuring actions initiated in 2002:Lease exit costs
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    (620
    )Charges related to restructuring actions initiated in 2006:Severance and benefits
    
    
    232
    
    
    
    
    
    
    
    232
    
    
    
    Merger related costs
    
    
    1,103
    
    
    
    
    
    
    
    1,103
    
    
    
    Total
    
    $
    1,335
    
    
    $
    
    
    
    $
    1,335
    
    
    $
    (620
    )
 2006 Restructuring Actions
  12




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##### Table of Contents



2005 Restructuring Actions
  2002 Restructuring Program
          13




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##### Table of Contents



Total Charges
    
    
    
    
    
    
    
    
    
    
    Restructuringfrom Continuing
    
    
    
    
    
    
    
    
    
    
    Liability as ofOperations
    
    
    Non-Cash Charges
    
    
    Cash Payments
    
    
    March 31, 2006(in thousands)Severance and benefits
    
    $
    8,604
    
    
    $
    900
    
    
    $
    7,628
    
    
    $
    76Disposal of property and equipment
    
    
    1,664
    
    
    
    1,664
    
    
    
    
    
    
    
    Lease exit costs
    
    
    10,558
    
    
    
    388
    
    
    
    10,134
    
    
    
    36Internal merger costs and other
    
    
    3,684
    
    
    
    
    
    
    
    3,684
    
    
    
    Total
    
    $
    24,510
    
    
    $
    2,952
    
    
    $
    21,446
    
    
    $
    112
  Restructuring
    
    
    Total Charges
    
    
    
    
    
    
    RestructuringLiabiliity as of
    
    
    from Continuing
    
    
    
    
    
    
    Liability as ofJune 30, 2005
    
    
    Operations
    
    
    Cash Payments
    
    
    March 31, 2006(in thousands)Severance and benefits
    
    $
    108
    
    
    $
    
    
    
    $
    32
    
    
    $
    76Lease exit costs
    
    
    361
    
    
    
    
    
    
    
    325
    
    
    
    36Total
    
    $
    469
    
    
    $
    
    
    
    $
    357
    
    
    $
    112
  9.
    
    Net Income (Loss) Per Share
   10.
    
    Comprehensive Loss
  11.
    
    Segment Data
  14




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##### Table of Contents



Three Months Ended March 31,
    
    
    Nine Months Ended March 31,2006
    
    
    2005
    
    
    2006
    
    
    2005(in thousands)
    
    
    (in thousands)Total revenues:Biometric systems
    
    $
    18,222
    
    
    $
    17,921
    


    $
    58,315
    
    
    $
    48,885Finger Printing Services
    
    
    2,151
    
    
    
    1,682
    
    
    
    6,239
    
    
    
    5,248Other
    
    
    424
    
    
    
    649
    
    
    
    1,138
    
    
    
    1,300$
    20,797
    
    
    $
    20,252
    
    
    $
    65,692
    
    
    $
    55,433Operating income/loss:Biometric systems
    
    $
    (4,076
    )
    
    $
    (2,772
    )
    
    $
    (6,795
    )
    
    $
    (10,880
    )Finger Printing Services
    
    
    (6
    )
    
    
    163
    
    
    
    (122
    )
    
    
    476Other
    
    
    (73
    )
    
    
    (68
    )
    
    
    (256
    )
    
    
    (511
    )$
    (4,155
    )
    
    $
    (2,677
    )
    
    $
    (7,173
    )
    
    $
    (10,915
    )March 31,
    
    
    June 30,2006
    
    
    2005(in thousands)Identifiable assets:Biometric systems
    
    $
    205,822
    
    
    $
    208,441Finger Printing Services
    
    
    8,079
    
    
    
    5,756Other
    
    
    905
    
    
    
    858$
    214,806
    
    
    $
    215,055
 12.  Foreign Operations Data
  Three Months Ended March 31,
    
    
    Nine Months Ended March 31,2006
    
    
    2005
    
    
    2006
    
    
    2005(in thousands)
    
    
    (in thousands)Total revenues:United States
    
    $
    17,517
    
    
    $
    16,466
    


    $
    58,055
    
    
    $
    48,227International
    
    
    3,280
    
    
    
    3,786
    
    
    
    7,637
    
    
    
    7,206$
    20,797
    
    
    $
    20,252
    
    
    $
    65,692
    
    
    $
    55,433March 31,
    
    
    June 30,2006
    
    
    2005(in thousands)*Identifiable long lived assets:United States
    
    $
    3,076
    
    
    $
    1,712International
    
    
    10
    
    
    
    26$
    3,086
    
    
    $
    1,738
 
 *
    
    Long lived assets consist of property and equipment. 13.  Indemnification Arrangements
and Product Warranties
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Three Months Ended
    
    
    Nine Months EndedMarch 31,
    
    
    March 31,2006
    
    
    2005
    
    
    2006
    
    
    2005(in thousands)
    
    
    (in thousands)Balance at beginning of period
    
    $
    1,469
    
    
    $
    1,139
    
    
    $
    1,416
    
    
    $
    921Warranty Expense
    
    
    197
    
    
    
    501
    
    
    
    345
    
    
    
    1,391Closed Warranty Claims
    
    
    (21
    )
    
    
    (250
    )
    
    
    (116
    )
    
    
    (922
    )Balance at end of period
    
    $
    1,645
    
    
    $
    1,390
    
    
    $
    1,645
    
    
    $
    1,390
 14.  Commitments and Contingencies
    15.
    
    New Accounting Pronouncements
  16




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16.
    
    Proposed Merger with Viisage Technology, Inc.
     17.
    
    Subsequent Event
  
      17




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18




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Revenues, and Gross Margins
       19




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Research and Development
  Marketing and Selling
  General and Administrative
  20




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Amortization of Acquired Intangible Assets
  Restructuring and other, net
  Three Months Ended March 31,
    
    
    Nine Months Ended March 31,2006
    
    
    2005
    
    
    2006
    
    
    2005(in thousands)
    
    
    (in thousands)Charges related to restructuring actions initiated in 2002:Lease exit costs
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    (620
    )Charges related to restructuring actions initiated in 2006:Severance and benefits
    
    
    232
    
    
    
    
    
    
    
    232
    
    
    
    Merger related costs
    
    
    1,103
    
    
    
    
    
    
    
    1,103
    
    
    
    Total
    
    $
    1,335
    
    
    $
    
    
    
    $
    1,335
    
    
    $
    (620
    )
    Interest and Other Income, net
  Income Taxes
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Discontinued Operations
  New Accounting Pronouncements
  Liquidity and Capital Resources
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Occupied
    
    
    Unoccupied or Sublet
    
    
    TotalPeriods or fiscal years ending June 30:2006
    
    $
    438
    
    
    $
    36
    
    
    $
    4742007
    
    
    1,600
    
    
    
    
    
    
    
    1,6002008
    
    
    1,309
    
    
    
    
    
    
    
    1,3092009
    
    
    358
    
    
    
    
    
    
    
    358Total
    
    $
    3,705
    
    
    $
    36
    
    
    $
    3,741
     RISK FACTORS
 This report on Form 10-Q contains forward-looking statements that involve risks and uncertainties.
The Companys business, operating results, financial performance and share price may be materially
adversely affected by a number of factors, including but not limited to the following risk factors,
any one of which could cause actual results to vary materially from anticipated results or from
those expressed in any
forward-looking statements made by the Company in this quarterly report on Form 10-Q or in other
reports, press releases or other statements issued from time to time. Additional factors that may
cause our results to vary are set forth in the Companys Annual Report on Form 10-K.
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We face intense competition from other biometric solution providers as well as identification and
security systems providers.
    The biometrics industry is characterized by rapid technological change and requires introduction of
new and enhanced products at competitive prices.
   Our business will not grow unless the market for biometric products and services expands both
domestically and internationally.
  
    
    national or international events which may affect the need for or interest in biometric products or
services;
    
    the cost, performance and reliability of our products and services and those of our
competitors;
    
    customers perception of the perceived benefit of biometric products and services and their
satisfaction with our products and services;
    
    public perceptions of the intrusiveness of these products and services and the manner in which
firms are using the information collected;
    
    public perceptions regarding the confidentiality of private information;
    
    proposed or enacted legislation related to privacy of information; and
    
    marketing efforts and publicity regarding these products and services.
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We derive a significant amount of our revenue from government contracts, which are often
non-standard, involve competitive bidding, may be subject to cancellation without penalty and may
produce volatility in earnings and revenue.
  
    
    include provisions that allow the government agency to terminate the contract without penalty under some circumstances;
    
    be subject to purchasing decisions of agencies that are subject to political influence;
    
    include bonding requirements;
    
    contain onerous procurement procedures; and
    
    be subject to cancellation if government funding becomes unavailable.
     Our financial and operating results often vary significantly from quarter to quarter and may be
negatively affected by a number of factors.
  
    
    unavailability or delays in authorization of government funding or cancellations, delays or
contract amendments by
government agency customers;
    
    reduced demand for products and services caused, for example, by product offerings from new
competitors;
    
    the inability to timely and successfully (i) complete development of complex designs, components
and products,
(ii) complete new product introductions that may result in improved gross margins, (iii)
manufacture in volume or
install certain of our complex products or (iv) obtain relevant government agency certifications
for newly introduced
products on a timely basis;
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
    
    changes in the mix of products and services we or our distributors sell;
    
    the readiness of customers to accept delivery of new products on a timely basis;
    
    protests of federal, state or local government contract awards by competitors;
    
    unforeseen legal expenses, including litigation and/or administrative protest costs;
    
    expenses related to acquisitions or mergers;
    
    impairment charges arising out of our assessments of goodwill and intangibles;
    
    other one-time financial charges;
    
    the lack of availability or increase in cost of key components and subassemblies;
    
    competitive pricing pressures; and
    
    unpredictable product installation schedules
  Our results of operations may be harmed by governmental credit and other policies.
   A security breach or failure in systems that we sell could result in the disclosure of private
personal information that could harm our business by adversely affecting the markets perception of
our products and services.
  The terrorist attacks of September 11, 2001, and the continuing threat of global terrorism, have
increased financial expectations that may not materialize.
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We may need to raise additional equity or debt financing in the future.
  Our lengthy and variable sales cycle will make it difficult to predict operating results.
   The substantial lead-time required for ordering parts and materials may lead to inventory problems.
  We rely in part upon original equipment manufacturers (OEM) and distribution partners to
distribute our products, and we may be adversely affected if those parties do not actively promote
our products or pursue installations that use our equipment.
   Loss of sole or limited source suppliers may result in delays or additional expenses.
   Our plan to pursue sales in international markets may be limited by risks related to conditions in
such markets.
    
    
    regional economic instabilities or political conditions;
    
    delays in or absolute prohibitions on exporting products resulting from export restrictions for
certain products and technologies,
including crime control products and encryption technology;
    
    loss of, or delays in importing products, services and intellectual property developed abroad,
resulting from unstable or fluctuating social, political or governmental conditions;
    
    fluctuations in foreign currencies and the U.S. dollar;
    
    loss of revenue, property (including intellectual property) and equipment from expropriation,
nationalization, war, insurrection,
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terrorism, criminal acts and other political and social risks;
    
    the overlap of different tax structures;
    
    seasonal reductions in business activity;
    
    risks of increases in taxes and other government fees; and
    
    involuntary renegotiations of contracts with foreign governments, or outright termination of
contracts by such governments.
 Individual stockholders owning a significant portion of our stock may have the ability to delay or
prevent a change in control or adversely affect the stock price through sales in the open market.
  We may be subject to loss in market share and market acceptance as a result of performance
failures, manufacturing errors, delays or shortages.
  We may be subject to repair, replacement, reimbursement and liability claims as a result of
products that fail to work or to meet applicable performance criteria.
  Failure by us to maintain the proprietary nature of our technology, intellectual property and
manufacturing processes could have a material adverse effect on our business, operating results,
financial condition, stock price, and on our ability to compete effectively.
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Our proposed merger with Viisage subjects us to certain significant risks and may result in
disruptions to our business.
  
    
    the exchange ratio for the shares of Viisage common stock to be received by our
stockholder is fixed, and will not be adjusted in the event of changes in the market prices
of either our stock or the stock of Viisage;
    
    the costs of the merger will be substantial, delays in completing the merger are likely
to increase our costs and many of the costs associated with the merger will be incurred
whether or not it is successfully completed;
    
    delays in closing the merger may further divert managerial resources from day to day
operations, which could adversely affect our business and operations and financial results,
and which could also possibly result in the loss of key employees, customers and suppliers;
    
    failure to complete the merger could adversely affect our stock price, future business
and operations and under certain circumstances we could be required to pay a termination
fee of $20 million; and
    
    even if the merger is successfully completed, integration of the two businesses may be
difficult to achieve, and will be complex, time-consuming and expensive.
 If we fail to attract and retain qualified senior executive and key technical personnel, our
business will not be able to expand.
    Possible additional acquisitions and dispositions of companies, assets or technologies may result
in disruptions to our business.
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
    
    exposure to unknown liabilities of acquired companies or assets;
    
    higher than anticipated acquisition costs and expenses;
    
    effects of costs and expenses of acquiring and integrating new businesses and/or technologies on our
operating results and financial condition;
    
    effects of consolidated revenue loss associated with dispositions of material subsidiaries or assets;
    
    effects of costs and expenses of integrating and introducing new technologies and entering into new markets;
    
    the difficulty and expense of assimilating the operations and personnel of the companies;
    
    disruption of our ongoing business;
    
    diversion of management time and attention;
    
    failure to maximize our financial and strategic position by the successful incorporation, integration and
launch of acquired technology;
    
    failure to realize the potential of acquired technologies, complete product development, or properly obtain
or secure appropriate protection of intellectual property rights;
    
    the maintenance of uniform standards, controls, procedures and policies;
    
    loss of key employees and customers as a result of changes in management;
    
    incurring amortization expenses;
    
    incurring impairment charges arising out of our assessments of goodwill and intangibles; and
    
    possible dilution to our stockholders.
  The manner of accounting for our merger with Visionics Corporation, which was completed in June
2002, may affect our reported results of operations.
  If we are unable to successfully address the material weakness in our internal controls as
described in Item 9A of the Form 10-K for the fiscal year ended June 30, 2005 and updated for the
three and nine months ended March 31, 2006 on our Form 10-Q, our ability to report our financial
results on a timely and accurate basis may be adversely affected. As a result, current and
potential stockholders could lose confidence in our financial reporting which could have a material
adverse effect on our business, operating results and stock price.
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Compliance with changing regulation of corporate governance and public disclosure may result in
additional expenses.
  If we fail to adequately manage the size of our business, it could have a severe negative effect on
our financial results or stock price.
  
  Interest Rate Risk.
  Foreign Currency Exchange Rate Risk.
 
  Evaluation of Disclosure Controls and Procedures.
 Changes in Internal Control Over Financial Reporting.
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ExhibitNumber
    
    Description10.62
    
    Relocation Agreement, dated March 1, 2006, among Registrant, Viisage Technology, Inc., and
Mark S. Molina31.1
    
    CEO Certification31.2
    
    CFO Certification32
    
    906 Certifications
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IDENTIX INCORPORATEDBY:
    /s/ Elissa J. LindsoeElissa J. LindsoeChief Financial Officer
 33