##### Table of Contents



SECURITIES AND EXCHANGE
COMMISSION WASHINGTON, DC
20549
 FORM 10-Q
 (Mark one) þQuarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934.
 For the quarterly period ended December 31, 2004 or oTransition 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.)553435600 Rowland Road, Minnetonka, Minnesota
(Address of principal executive offices)
    
    (Zip Code)
 Registrants telephone number, including area code: (952) 932-0888 Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirement for the past 90 days. YES þ NO o Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule
12b-2 of the Exchange Act). YES þ NO o APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuers classes of common stock, as
of the latest practicable date: 88,790,733 shares of Common Stock
as of January 31, 2005 1




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IDENTIX INCORPORATED INDEX PART I
    
    FINANCIAL INFORMATIONItem 1
    
    Unaudited Financial StatementsCondensed Consolidated Balance Sheets December 31, 2004 and June 30, 2004
    
    
    3Condensed Consolidated Statements of Operations -Three and Six months ended December 31, 2004 and 2003
    
    
    4Condensed Consolidated Statements of Cash Flows Six months ended December 31, 2004 and 2003
    
    
    5Notes to Condensed Consolidated Financial Statements
    
    
    6Item 2
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    13Item 3
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    26Item 4
    
    Controls and Procedures
    
    
    26PART II
    
    OTHER INFORMATIONItem 4
    
    Submission of Matters to a Vote of Security holders
    
    
    27Item 6
    
    Exhibits and Reports on Form 8-K
    
    
    28Signature
    
    
    
    
    29Lease Termination AgreementCEO CertificationCFO Certification906 Certification
 2




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IDENTIX INCORPORATED 
 CONDENSED CONSOLIDATED BALANCE SHEETS
 (in thousands, except share amounts)
 (Unaudited)
 December 31,
    
    
    June 30,2004
    
    
    2004ASSETSCurrent assets:Cash and cash equivalents
    
    $
    33,331
    
    
    $
    35,944Marketable securities
    
    
    9,438
    
    
    
    9,472Accounts receivable, net
    
    
    13,587
    
    
    
    11,412Inventories
    
    
    5,848
    
    
    
    7,171Prepaid expenses and other assets
    
    
    579
    
    
    
    1,052Total current assets
    
    
    62,783
    
    
    
    65,051Property and equipment, net
    
    
    1,874
    
    
    
    2,153Goodwill
    
    
    141,213
    
    
    
    141,213Acquired intangible assets, net
    
    
    15,930
    
    
    
    18,497Other assets
    
    
    929
    
    
    
    1,913Total assets
    
    $
    222,729
    
    
    $
    228,827LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    4,979
    
    
    $
    4,881Accrued compensation
    
    
    3,755
    
    
    
    2,948Other accrued liabilities
    
    
    8,693
    
    
    
    4,992Deferred revenue
    
    
    7,044
    
    
    
    6,408Total current liabilities
    
    
    24,471
    
    
    
    19,229Deferred revenue
    
    
    696
    
    
    
    462Other liabilities
    
    
    202
    
    
    
    5,647Total liabilities
    
    
    25,369
    
    
    
    25,338Stockholders equity:Common stock, $0.01 par value; 200,000,000 shares authorized
88,739,256 and 88,429,821 shares issued and outstanding,
respectively
    
    
    887
    
    
    
    884Additional paid-in capital
    
    
    551,406
    
    
    
    549,956Accumulated deficit
    
    
    (354,791
    )
    
    
    (347,193
    )Deferred stock-based compensation
    
    
    
    
    
    
    (14
    )Accumulated other comprehensive loss
    
    
    (142
    )
    
    
    (144
    )Total stockholders equity
    
    
    197,360
    
    
    
    203,489Total liabilities and stockholders equity
    
    $
    222,729
    
    
    $
    228,827
 The accompanying notes are an integral part of these condensed consolidated financial statements. 3




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IDENTIX INCORPORATED 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 (in thousands, except per share amounts)
 (Unaudited)
 Three Months Ended December 31,
    
    
    Six Months Ended December 31,2004
    
    
    2003
    
    
    2004
    
    
    2003Revenues:Product Revenues
    
    $
    10,284
    
    
    $
    5,423
    
    
    $
    18,564
    
    
    $
    11,147Service Revenues
    
    
    8,274
    
    
    
    6,633
    
    
    
    16,617
    
    
    $
    13,376Total Revenues
    
    $
    18,558
    
    
    $
    12,056
    
    
    $
    35,181
    
    
    $
    24,523Cost and expenses:Cost of Product revenues
    
    
    6,904
    
    
    
    3,160
    
    
    
    12,561
    
    
    
    6,327Cost of Service revenues
    
    
    5,792
    
    
    
    4,567
    
    
    
    11,826
    
    
    
    9,071Research and development
    
    
    2,787
    
    
    
    2,768
    
    
    
    5,316
    
    
    
    5,023Marketing and selling
    
    
    2,903
    
    
    
    2,755
    
    
    
    5,565
    
    
    
    5,492General and administrative
    
    
    3,113
    
    
    
    3,165
    
    
    
    6,202
    
    
    
    6,714Amortization of acquired intangible assets
    
    
    1,285
    
    
    
    1,375
    
    
    
    2,569
    
    
    
    2,757Restructuring and other, net
    
    
    (1,071
    )
    
    
    
    
    
    
    (620
    )
    
    
    Total costs and expenses
    
    
    21,713
    
    
    
    17,790
    
    
    
    43,419
    
    
    
    35,384Loss from operations
    
    
    (3,155
    )
    
    
    (5,734
    )
    
    
    (8,238
    )
    
    
    (10,861
    )Interest and other income, net
    
    
    399
    
    
    
    364
    
    
    
    662
    
    
    
    671Equity interest in loss of joint venture
    
    
    
    
    
    
    (142
    )
    
    
    
    
    
    
    (247
    )Loss from continuing operations before income taxes
    
    
    (2,756
    )
    
    
    (5,512
    )
    
    
    (7,576
    )
    
    
    (10,437
    )Provision for income taxes
    
    
    (9
    )
    
    
    (10
    )
    
    
    (22
    )
    
    
    (19
    )Loss from continuing operations
    
    
    (2,765
    )
    
    
    (5,522
    )
    
    
    (7,598
    )
    
    
    (10,456
    )Discontinued operations:Income (loss) from discontinued operations
    
    
    
    
    
    
    (37
    )
    
    
    
    
    
    
    241Net loss
    
    $
    (2,765
    )
    
    $
    (5,559
    )
    
    $
    (7,598
    )
    
    $
    (10,215
    )Basic and diluted loss per share from continuing
operations
    
    $
    (0.03
    )
    
    $
    (0.06
    )
    
    $
    (0.09
    )
    
    $
    (0.12
    )Basic and diluted income (loss) per share from discontinued
operations
    
    $
    
    
    
    $
    (0.00
    )
    
    $
    
    
    
    $
    0.00Basic and
diluted net loss per share
    
    $
    (0.03
    )
    
    $
    (0.06
    )
    
    $
    (0.09
    )
    
    $
    (0.12
        )Weighted
average common shares used in basic and diluted loss per
share computation
    
    
    88,591
    
    
    
    86,143
    
    
    
    88,514
    
    
    
    86,079
 The accompanying notes are an integral part of these condensed consolidated financial statements. 4




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IDENTIX INCORPORATED 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 (in thousands)
 (Unaudited)
 Six Months Ended December 31,2004
    
    
    2003Cash flows from operating activities:Net loss
    
    $
    (7,598
    )
    
    $
    (10,215
    )Adjustments to reconcile net loss to net cash used in operating
activities:Depreciation and amortization
    
    
    3,276
    
    
    
    3,891Equity interest in loss of joint venture
    
    
    
    
    
    
    247Realized gain on sales of marketable securities
    
    
    (51
    )
    
    
    (39
    )Stock-based compensation expense
    
    
    14
    
    
    
    413Bad debt recoveries  net
    
    
    (172
    )
    
    
    (696
    )Loss on property and equipment
    
    
    8
    
    
    
    38Inventory obsolescence and revaluation provision
    
    
    582
    
    
    
    698Restructuring and other, net
    
    
    (620
    )
    
    
    Changes in assets and liabilities:Accounts receivable
    
    
    (2,001
    )
    
    
    3,037Inventories
    
    
    741
    
    
    
    (1,165
    )Prepaid expenses and other assets
    
    
    1,457
    
    
    
    1,024Accounts payable
    
    
    98
    
    
    
    (2,214
    )Accrued compensation
    
    
    807
    
    
    
    310Other accrued liabilities
    
    
    (1,124
    )
    
    
    (1,872
    )Deferred revenue
    
    
    870
    
    
    
    1,219Net cash used in operating activities
    
    
    (3,713
    )
    
    
    (5,324
    )Cash flows from investing activities:Net proceeds from the sales of marketable securities
    
    
    12,000
    
    
    
    9,000Purchases of marketable securities
    
    
    (11,915
    )
    
    
    (8,961
    )Capital expenditures
    
    
    (438
    )
    
    
    (606
    )Net cash used in investing activities
    
    
    (353
    )
    
    
    (567
    )Cash flows from financing activities:Proceeds from excerise of stock options and the sale of stock
under employee benefit plans
    
    
    1,453
    
    
    
    921Net cash provided by financing activities
    
    
    1,453
    
    
    
    921Net decrease in cash and cash equivalents
    
    
    (2,613
    )
    
    
    (4,970
    )Cash and cash equivalents at period beginning
    
    
    35,944
    
    
    
    34,712Cash and cash equivalents at period end
    
    $
    33,331
    
    
    $
    29,742
 The accompanying notes are an integral part of these condensed consolidated financial statements. 5




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IDENTIX INCORPORATED 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)
 1. Basis of Presentation The accompanying condensed consolidated financial statements and related notes are unaudited.
However, in the opinion of management, all adjustments (consisting only of normal recurring
adjustments, unless otherwise noted), which are necessary for a fair presentation of the
financial position and results of operations for the interim periods presented, have been
included. These condensed consolidated financial statements should be read in conjunction with
the audited consolidated financial statements and notes thereto for the fiscal year ended June
30, 2004 included in the Identix Incorporated Form 10-K. Identix Incorporated is hereinafter
referred to as Identix or the Company. The results of operations for the three and six
months ended December 31, 2004 are not necessarily indicative of results to be expected for the
entire fiscal year, which ends on June 30, 2005. The preparation of financial statements in conformity with accounting principles generally
accepted in the United States of America requires management to make estimates and assumptions
that affect the reported amounts therein. Estimates are used for, but not limited to, the
accounting for the allowance for doubtful accounts and sales returns, goodwill and other
intangible asset impairments, inventory allowances, warranty costs, revenue recognition as well
as loss contingencies and restructurings. Actual results could differ from these estimates. 2. Revenue Recognition Policy Significant management judgments and estimates are made in connection with the revenues
recognized in any accounting period. The Company must assess whether the fee associated with a
revenue transaction is fixed or determinable and whether or not collection is probable.
Material differences could result in the amount and timing of revenues for any period if
management were to make different judgments or utilize different estimates. Certain of the Companys equipment sales such as its TouchPrint Live Scan Systems generally
require installation subsequent to shipment and transfer of title. The Company recognizes
revenue on such sales in accordance with Staff Accounting Bulletin (SAB) 104, Revenue
Recognition. Revenue related to equipment sales that are contingent on installation is
deferred until installation is complete, title has transferred and customer acceptance has been
obtained. Due to current Company policy and practices, the Company considers acceptance of the
TouchPrint Live Scan Systems contingent upon successful installation of the product. Revenue
related to product sales that require no installation such as the Companys TP3000A and TP3100A
products as well as printers and other peripheral devices including DFR-300, DFR-200 and
FingerScan V20 are recognized in accordance with the terms of the sale, generally upon shipment
and transfer of title by the Company, provided no significant obligations remain and collection
of the receivable is deemed reasonably assured. Revenues from sales of products via authorized
representatives, dealers, distributors or other third party sales channels are recognized at the
time of title transfer, generally upon shipment. Sales of the Companys Integrated Biometric Information Systems (IBIS), and certain other
products, are considered multiple element arrangements and involve the sale of hardware and
services. The Company accounts for multiple element arrangements under Emerging Issues Task
Force Issue No. 00-21, (EITF 00-21) Accounting for Revenue Arrangements with Multiple
Deliverables, effective April 1, 2003. Under EITF 00-21, a company must determine whether any
or all of the deliverables of a multiple deliverable agreement can be separated from one
another. If separation is possible, revenue is recognized for each deliverable (based on
objective and reliable evidence of the fair value) as the applicable revenue recognition
criteria are achieved for that specific deliverable. Alternatively, if separation is not
possible, revenue recognition may need to be spread evenly over the performance of all
deliverables, or deferred until all elements of the arrangement have been delivered to the
customer. The Company also sells several stand-alone software products including ABIS systems, BioLogon
and software developer kits. Revenue is recognized on software products in accordance with
Statement of Position (SOP) 97-2, Software Revenue Recognition, as amended. The Company
recognizes revenue on software products when persuasive evidence of an arrangement exists,
delivery has occurred, the vendors fee is fixed or determinable and vendor-specific objective
evidence (VSOE) exists to allocate the total fee to all undelivered elements of the
arrangement and collection is deemed reasonably assured. VSOE is established based upon either
sales of the element (e.g. maintenance, training or consulting) in individual transactions, or,
in certain cases for maintenance, based upon substantive renewal rates. 6




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In cases where the Company does not have VSOE for all delivered elements in the transaction (e.g., for licenses),
the fees from these multiple-element agreements are allocated using the residual value method.
In circumstances when the software and services being sold include services to provide
significant production, modification or customization of the software, and the services cannot
be segregated into separate units of accounting, the Company accounts for the software sales
under SOP 97-2 and SOP 81-1 Accounting for performance of construction-type and certain
production-type contracts. In the cases where SOP 81-1 is applied, the Company uses the
cost-to-cost method of percentage of completion. Under this method, sales, including estimated
earned fees or profits, are recorded based on the percentage that total costs incurred bear to
total estimated costs. Maintenance revenue is deferred and recognized ratably over the life of
the service period of the related agreement. Revenues related to Identix Identification Services (IIS) (See Note 5), which was acquired in
February 2004, are recognized as services are performed. 3. Stock Based Compensation The Company accounts for its employee and director stock option plans and employee stock
purchase plans in accordance with provisions of the Accounting Principles Board Opinion (APB)
No. 25, Accounting for Stock Issued to Employees. The Company accounts for stock options
issued to non-employees in accordance with the provisions of Statement of Financial Accounting
Standards (SFAS) No. 123 and Emerging Issues Task Force (EITF) 96-18 Accounting for Equity
Instruments that are Issued to Other Than Employees for Acquiring or in Conjunction with Selling
Goods or Services. As permitted by SFAS No. 123, Accounting for Stock Based Compensation, the
Company continues to measure employee compensation cost for its stock option plans using the
intrinsic value method of accounting. Had compensation cost for the Companys employee stock plans been recognized based upon the
estimated fair value on the grant date under the fair value methodology prescribed by SFAS No.
123, as amended by SFAS No. 148, the Companys net loss and net loss per share would have been
as follows: For the three Months ended December 31,
    
    
    For the six Months ended December 31,2004
    
    
    2003
    
    
    2004
    
    
    2003(in thousands)
    
    
    (in thousands)Net Loss as reported
    
    $
    (2,765
    )
    
    $
    (5,559
    )
    
    $
    (7,598
    )
    
    $
    (10,215
    )Add: Stock Based compensation
expense included in reported
net loss
    
    
    
    
    
    
    179
    
    
    
    14
    
    
    
    413Deduct: Total stock based compensation
expense determined under fair value
based method for all awards
    
    
    (1,046
    )
    
    
    (1,475
    )
    
    
    (2,253
    )
    
    
    (3,306
    )Proforma net loss
    
    $
    (3,811
    )
    
    $
    (6,855
    )
    
    $
    (9,837
    )
    
    $
    (13,108
    )Net Loss per share:As Reported
    
    $
    (0.03
    )
    
    $
    (0.06
    )
    
    $
    (0.09
    )
    
    $
    (0.12
    )Proforma
    
    $
    (0.04
    )
    
    $
    (0.08
    )
    
    $
    (0.11
    )
    
    $
    (0.15
    )Shares
    
    
    88,591
    
    
    
    86,143
    
    
    
    88,514
    
    
    
    86,079
 In December 2004, the Financial Accounting Standards Board published SFAS No. 123 (revised 2004),
Share-Based Payment. SFAS No. 123R revised SFAS 123, Accounting for Stock-Based Compensation,
and supercedes APB Opinion No. 25, Accounting for Stock Issued to Employees. The revised
statement addresses the accounting for share-based payment transactions with employees and other
third parties, eliminates the ability to account for share-based payments using APB Opinion No.
25 and requires that the compensation costs relating to such transactions be recognized in the
consolidated statement of operations based upon the grant-date fair value of those instruments.
The revised statement is effective as of the first interim period beginning after June 15, 2005.
The Company is currently determining what impact the newly issued statement will have on its
results of operations and financial position. See the Stock Based Compensation discussion
above, which includes the pro forma impact of recognizing stock-based compensation under SFAS No. 123, on the Companys
net loss and loss per common
share for the three and six months ended December 31, 2004. 7




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4. Discontinued Operations On February 13, 2004, the Company consummated the sale of Identix Public Sector (IPS) to Alion
Science and Technology Corporation (Alion). These operations for the three and six months ended
December 31, 2003 are presented in the Companys Consolidated Statements of Operations as
discontinued operations. Under the terms of the agreement, upon closing Alion paid the Company
$8,850,000 million in cash. The terms of the sale include the potential for additional future
payments to the Company of up to $500,000 pending satisfaction of certain conditions. As of
December 31, 2004, none of the required conditions for additional payment had been achieved.
The terms of the sale also include an obligation on the part of the Company to indemnify Alion
against liabilities, including for breaches of representations and warranties made by the
Company in the sales agreement, for an amount not to exceed $2,125,000. The following table represents the summarized results for the discontinued operations for the
three and six months ended December 31, 2003: For the three
    
    
    For the sixmonths ended
    
    
    months endedDecember 31,
    
    
    December 31,2003
    
    
    2003(in thousands)
    
    
    (in thousands)Revenue
    
    $
    7,912
    
    
    $
    16,777Cost of sales
    
    
    7,181
    
    
    
    14,989Operating expenses
    
    
    768
    
    
    
    1,547Net (loss) income
    
    $
    (37
    )
    
    $
    241
 5. Acquisition On February 23, 2004, the Company acquired the remaining 50% ownership of Sylvan Identix
Fingerprint Centers (SIFC) from Sylvan Learning Centers. SIFC is now known as Identix
Identification Services (IIS). The Company had previously held a 50% interest in this joint
venture and accounted for its investment under the equity method of accounting. The complete
results of operations of IIS have been included in the Companys consolidated statement of
operations since February 23, 2004. IIS provides services to corporations and government
agencies capturing fingerprints and transmitting the data for applicant background checks. IIS
maintains a network of Identix live scan systems at processing centers across the country where
certified technicians process applicants. In consideration for Sylvans 50% interest in the
joint venture, Identix paid Sylvan $875,000 in cash and paid acquisition costs of $50,000. At
the date of acquisition, Identix had a negative investment in the joint venture of $235,000.
The purchase price was allocated to other intangible assets of $840,000, goodwill of $268,000
and net liabilities of $418,000. 6. Cash and Credit Facilities The Company financed its operations during the six months ended December 31, 2004 primarily from
cash provided by its operations. As of December 31, 2004, the Companys principal sources of
liquidity consisted of $38,312,000 of working capital including $42,769,000 in cash and cash
equivalents and short-term marketable securities. The Companys existing line of credit was entered into on May 30, 2003 and renewed in October
2004. This line of credit provides for up to the lesser of $15,000,000 or the cash collateral
base or the borrowing base. Borrowings under the line of credit are collateralized by
substantially all of the assets of the Company and bear interest at the banks prime rate of
interest, which was 5.25% at December 31, 2004. The line of credit expires on October 1, 2005.
Until the Company generates positive net income before income taxes for two consecutive fiscal
quarters, the Company will be required to deposit with the lender an amount equal to the sum of
the aggregate outstanding principal amount of all prior advances plus any portion of the line of
credit reserved to support unexpired letters of credit plus the amount of the requested advance
before an advance will be given. In addition, all advances must be used for working capital.
At June 30, 2004 and December 31, 2004, there were no amounts outstanding under this line of
credit. The line of credit agreement contains financial, operating and reporting covenants that are not
binding until the Company draws on the line of credit. 8




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7. Inventories Inventories are stated at the lower of standard cost (which approximates actual cost determined
on a first-in, first-out method) or market and consisted of the following: December 31,
    
    
    June 30,2004
    
    
    2004Purchased parts and materials
    
    $
    2,353,000
    
    
    $
    1,620,000Work-in-process
    
    
    2,939,000
    
    
    
    4,361,000Finished goods, including spares
    
    
    556,000
    
    
    
    1,190,000$
    5,848,000
    
    
    $
    7,171,000
 During the three and six months ended December 31, 2004 the Company recorded provisions for
excess, obsolete and revaluation inventory items in the amount of $368,000 and $582,000
respectively and $450,000 and $698,000 for the same periods in the prior fiscal year 8. Restructuring and other, net At the time of the Companys merger with Visionics in June 2002, Identix recorded restructuring
charges of $18,798,000 for the termination of 110 employees, and the closure of its facilities
in Dublin and Los Gatos California. From period of June 2002 to June 2004 the Company incurred
total merger costs of $29,864,000. The following is a summary of the charges incurred and payments made from the time of the merger
through June 30, 2004: Activity during the period June 25, 2002 to June 30, 2004Liabilities satisfied
    
    
    
    
    
    
    Cash Paymentsin Connection with IPS
    
    
    Non-Cash
    
    
    through June 30,
    
    
    Liability as ofTotal Charges
    
    
    Disposition
    
    
    Charges
    
    
    2004
    
    
    June 30, 2004(in thousands)Severance and benefits
    
    $
    8,626
    
    
    $
    
    
    
    $
    900
    
    
    $
    7,606
    
    
    $
    120Lease exit costs
    
    
    15,890
    
    
    
    2,267
    
    
    
    388
    
    
    
    5,635
    
    
    
    7,600Disposal of fixed assets
    
    
    1,664
    
    
    
    
    
    
    
    1,664
    
    
    
    
    
    
    
    Internal merger costs & other
    
    
    3,684
    
    
    
    
    
    
    
    
    
    
    
    3,684
    
    
    
    Total
    
    $
    29,864
    
    
    $
    2,267
    
    
    $
    2,952
    
    
    $
    16,925
    
    
    $
    7,720
 Fiscal 2005 During the three months ended December 31, 2004, the Company realized a restructuring gain of
$1,071,000 related to the negotiated release of the Company from its Los Gatos facilities lease.
The restructuring gain represents the difference between the Companys accrued lease exit costs
of $6,363,000, reduced by the negotiated payoff amount and associated transactions costs of
$5,292,000. The $6,363,000 of accrued lease exit costs is included in the total restructuring
liability of $7,720,000 at June 30, 2004 and the $5,292,000 representing the lease settlement
amount is included in the restructuring liability at of $6,021,000 at December 31, 2004. The
lease settlement amount was paid in January 2005. During the first quarter of fiscal 2005, the
Company recorded a restructuring charge of $451,000 related to a reduction in the estimated
amount of lease recoveries associated with this lease. Management believed that this charge in
the first quarter was necessary because at that time the real estate markets in Northern
California had continued their decline and it was not anticipated that the Company would be able
to negotiate an exit to the lease and no such discussions between the Company and the lessor had
commenced. The first quarter charge combined with the second quarter gain resulted in a net
restructuring gain of $620,000 for the six months ended December 31, 2004. 9




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The following table represents a summary of restructuring and other, net between June 30, 2004
and December 31, 2004: For the six months ended December 31, 2004RestructuringRestructuring Liability
    
    
    
    
    
    
    
    
    
    
    Liability as ofas of June 30, 2004
    
    
    Additions/(reductions)
    
    
    Cash Payments
    
    
    December 31, 2004(in thousands)Severance and benefits
    
    $
    120
    
    
    $
    
    
    
    $
    7
    
    
    $
    113*Lease exit costs
    
    
    7,600
    
    
    
    (620
    )
    
    
    1,072
    
    
    
    5,908Total
    
    $
    7,720
    
    
    $
    (620
    )
    
    $
    1,079
    
    
    $
    6,021
 The restructuring liability is classified in the consolidated balance sheet based on the
anticipated timing of the respective payments. In January 2005, $5,292,000 was paid to settle
the remaining lease obligation and related transaction costs associated with the Los Gatos
facility. The remaining lease obligation for the Dublin California facility will be paid out
through March 2006. Fiscal 2004 The following table represents a summary of the restructuring and other, net for the six months
ended December 31, 2003: For the six months ended December 31, 2003RestructuringRestructuring Liability
    
    
    
    
    
    
    Liability as ofas of June 30, 2003
    
    
    Cash Payments
    
    
    December 31, 2003(in thousands)Severance and benefits
    
    $
    614
    
    
    $
    241
    
    
    $
    373Lease exit costs
    
    
    12,151
    
    
    
    1,657
    
    
    
    10,494Internal merger costs and other
    
    
    31
    
    
    
    
    
    
    
    31Total
    
    $
    12,796
    
    
    $
    1,898
    
    
    $
    10,898
 9. Earnings Per Share Basic earnings per share are computed by dividing net income (loss) by the weighted average
number of common shares outstanding during the period. Diluted earnings per share gives effect
to all dilutive potential common shares outstanding during the period, including convertible
preferred stock as well as stock options and warrants, using the treasury stock method. Options and warrants to purchase 8,121,205 and 8,711,000 shares of common stock were outstanding
at December 31, 2004 and 2003, respectively, but were not included in the computation of diluted
net loss per share as their effect was anti-dilutive. Also 234,558 shares of convertible
preferred stock were outstanding at December 31, 2003. Such shares of preferred stock were
convertible into 234,558 shares of the Companys common stock, but were not included in the
computation of diluted net loss per share as their effect was anti-dilutive. The convertible
preferred stock was converted to common stock during the third quarter of fiscal year 2004. 10. Comprehensive Loss Comprehensive loss for the three and six months ended December 31, 2004 was $2,764,000 and
$7,597,000 compared to a loss of $5,555,000 and $10,206,000 for the same periods in the prior
fiscal year. Accumulated other comprehensive loss for the Company consisted of unrealized gain
(loss) on available-for-sale marketable securities and cumulative translation adjustments. 10




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11. Reportable Segment Data The Companys reportable segments are strategic business groups that offer different products
and services and include inter-segment revenues, corporate allocations and administrative
expenses. Due to the disposition of IPS and the acquisition of 100% ownership of IIS, the
business segments of Identix have correspondingly been changed from previously reported periods
to reflect this activity. Revenues are attributed to the reportable segment that is responsible
for generating the revenue and the direct and indirect costs incurred are similarly assigned. Three Months Ended December 31,
    
    
    Six Months Ended December 31,2004
    
    
    2003
    
    
    2004
    
    
    2003(in thousands)
    
    
    (in thousands)Total revenues:Biometric systems
    
    $
    16,465
    
    
    $
    11,508
    
    
    $
    30,963
    
    
    $
    23,275*Other
    
    
    2,093
    
    
    
    548
    
    
    
    4,218
    
    
    
    1,248$
    18,558
    
    
    $
    12,056
    
    
    $
    35,181
    
    
    $
    24,523Loss from operations:Biometric systems
    
    $
    (3,061
    )
    
    $
    (5,531
    )
    
    $
    (8,110
    )
    
    $
    (10,618
    )*Other
    
    
    (94
    )
    
    
    (203
    )
    
    
    (128
    )
    
    
    (243
    )$
    (3,155
    )
    
    $
    (5,734
    )
    
    $
    (8,238
    )
    
    $
    (10,861
    )
 December 31,
    
    
    June 30,2004
    
    
    2004(in thousands)Identifiable assets:Biometric systems
    
    $
    216,965
    
    
    $
    223,400Other
    
    
    5,764
    
    
    
    5,427$
    222,729
    
    
    $
    228,827
   *Revenue related to IIS is included in the Companys consolidated revenues from the date date of acquisition
on February 23, 2004 12. Foreign Operations Data In geographical reporting, revenues are attributed to the geographical location of the sales
and service organizations: Three Months Ended December 31,
    
    
    Six Months Ended December 31,2004
    
    
    2003
    
    
    2004
    
    
    2003(in thousands)
    
    
    (in thousands)Total revenues:North America
    
    $
    16,854
    
    
    $
    10,701
    
    
    $
    31,761
    
    
    $
    22,435International
    
    
    1,704
    
    
    
    1,355
    
    
    
    3,420
    
    
    
    2,088$
    18,558
    
    
    $
    12,056
    
    
    $
    35,181
    
    
    $
    24,523
 December 31,
    
    
    June 30,2004
    
    
    2004(in thousands)Identifiable assets:North America
    
    $
    221,202
    
    
    $
    227,768International
    
    
    1,527
    
    
    
    1,059$
    222,729
    
    
    $
    228,827
 13. Indemnification Arrangements and Product Warranties The terms of the sale of IPS (see Note 4), include an obligation on the part of the
Company to indemnify Alion against liabilities, including for breaches of representations and
warranties made by the Company in the sales agreement, for an amount not to exceed $2,125,000.
This indemnification expires in February 2006. From time to time, the Company agrees to indemnify its customers against liability if the
Companys products infringe a third partys intellectual property rights. As of December 31,
2004, the Company was not subject to any pending litigation alleging that the Companys products infringe the intellectual
property rights of any third parties. 11




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The Company offers a 90-day and one year warranty on various products and services. The
majority of the warranty liability that the Company has recorded is due to the one-year
warranties. The Company estimates the costs that may be incurred under its warranties and
records a liability in the amount of such costs at the time the product is sold. Factors that
affect the Companys warranty liability include the number of units sold, historical and
anticipated rates of warranty claims and cost per claim. The Company periodically assesses the
adequacy of its recorded warranty liabilities and adjusts the amounts as necessary. The amount
of the reserve recorded is equal to the estimated costs to repair or otherwise satisfy the
claim. The following table presents changes in the Companys warranty liability for the six
months ended December 31, 2004: As of December 31,2004(in thousands)Balance at June 30, 2004
    
    $
    921Warranty Expense
    
    
    890Closed Warranty Claims
    
    
    (672
    )Balance at December 31, 2004
    
    $
    1,139
 14. Legal Matters On February 5, 2003, Roger Benson, an individual, filed a lawsuit seeking
unspecified damages against the Company, Digital Biometrics, Inc. (DBI),
and Visionics Corporation in California Superior Court, alleging that in 1998
he was issued a duplicate electronic fingerprint number that was also held by
a convicted felon. Mr. Bensons complaint alleged that the fingerprint
number was generated by a live scan system manufactured by DBI and operated
by a Sheriffs office in the State of Oregon, and also alleged that the
plaintiff suffered injuries from a 43-day incarceration after the plaintiffs
identity was allegedly mistaken for that of the felon because of the
duplicate fingerprint number. Mr. Benson alleged liability under strict
product liability, failure to warn, breach of implied warranty, negligence,
and unfair business practices, among other theories of liability. Since the inception of Mr. Bensons lawsuit, Identix has vigorously defended
itself on the grounds that any alleged misidentification of Mr. Benson was
not the result of any design, manufacturing or product defect or malfunction,
or any other error, omission or fault on the part the Company or affiliated
defendants. On February 2, 2005, Mr. Benson voluntarily dismissed the case
in its entirety against Identix and its affiliated defendants. (Mr. Benson
has not dismissed the State of California, which remains a defendant in the
action.) Mr. Bensons voluntary dismissal of claims follows Identix recent
successful motion for, and award of, monetary sanctions against each of Mr.
Benson and his attorney. Mr. Bensons voluntary dismissal also follows
Identix flat rejection of a recent offer of settlement made by Mr. Benson.
As the prevailing party in this lawsuit for judicial purposes, Identix will
now seek from the court an award of recoverable costs against the plaintiff,
which the Company believes will be immaterial. On July 22, 2004, the Company was served with a class action complaint naming Miguel
Espinoza as a purported class action plaintiff. Mr. Espinoza is also one of the individual
plaintiffs added to the Benson litigation via the January 2004 amended complaints in that
litigation. Mr. Espinoza claims that he was denied a liquor license for his business in Oregon
on August 1, 2002 because he was misidentified as a convicted felon. He alleges the
misidentification was a result of duplicate fingerprint identification number also held by a
convicted felon, and that the duplicate number was generated by a live scan system manufactured
by DBI and operated by a Sheriffs office in the State of Oregon. The complaint alleges
liability under strict product liability, failure to warn, breach of implied warranty,
negligence, product misrepresentation and 42 U.S.C §1983 among other theories of liability.
While the case is in its early stages, based on currently available information, the Company
believes that the issuance of any duplicate fingerprint numbers was not the result of any
design, manufacturing or product defect or malfunction, or any other error, omission or fault on
the part the Company or affiliated defendants. The Company believes that any alleged
misidentification of Mr. Espinoza was not the result of any design, manufacturing or product
defect or malfunction, or any other error, omission or fault on the part the Company or
affiliated defendants and the Company intends to vigorously defend this lawsuit. While
it is not possible at this early stage of the proceeding to predict with precision and
certainty the outcome of the action discussed above, based on the facts and information
currently available to the Company (which are subject to change based on discovery of further
facts and information) the Company believes that liabilities and costs arising out of such
action will not have a material adverse impact on the Companys consolidated financial
position, results of operations or cash flows. 12




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##### Table of Contents



15. New Accounting Pronouncements In November 2004, the FASB issued FASB Statement No. 151, Inventory Costs  an Amendment of
ARB No. 43, Chapter 4 (FAS 151). FAS 151 amends ARB 43, Chapter 4, to clarify that abnormal
amounts of idle facility expense, freight, handling costs, and wasted materials (spoilage) should
be recognized as current-period charges. In addition, this Statement requires that allocation of
fixed production overheads to the costs of conversion be based on the normal capacity of the
production facilities. The provisions of this Statement are effective for inventory costs incurred
during after June 30, 2005. The adoption of the provisions of FAS 151 is not expected to have a
material impact on the Companys financial position or results of operations. In October 2004, the EITF issued EITF Issue No. 04-10, Applying Paragraph 19 of Statement of
Financial Accounting Standards No. 131 in Determining Whether to Aggregate Operating Segments that
do not meet the Quantitative Thresholds. SFAS No. 131 Disclosures About Segments of an Enterprise
and Related Information requires that a public business enterprise report financial and descriptive
information about its reportable operating segments. This issue addresses how to aggregate
operating segments that do not meet the quantitative thresholds in SFAS No. 131. The effective date
of the standard has been delayed. When effective, the adoption of this standard will require the
Company to reexamine how segments are disclosed and will likely result in the Company identifying
its Identix Identification Services (IIS) subsidiary separately as a reportable segment.
Currently, the Company has two segments, Biometric systems and other, with IIS currently classified
as other along with the Companys Legislative Demographic Services subsidiary as other. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL  CONDITION AND RESULTS OF OPERATIONS 
 Item 2. The statements in this report on Form 10-Q that relate to future plans, events, or performance are
forward-looking statements. Actual results, events and performance may differ materially due to a
variety of factors including the factors described under Risk Factors below. The Company
undertakes no obligation to publicly update these forward-looking statements to reflect events or
circumstances that occur after the date hereof or to reflect the occurrence of unanticipated
events. OVERVIEW Identix Incorporated (Identix or the Company) provides a broad range of fingerprint and facial
recognition technology offerings that empower the identification of individuals who wish to gain
access to information or facilities, conduct transactions and obtain identifications.
Additionally, the Companys products and solution offerings can help identify those who perpetrate
fraud and otherwise pose a threat to public safety. Identix products serve a broad range of
industries and markets most notably, government, law enforcement, aviation, financial, healthcare
and corporate enterprise. A world leader in multi-biometric technology, Identix believes it has
more fingerprint and facial biometric installations worldwide than any other company. The second quarter of fiscal year 2005 was highlighted by the following events. Identix received
an additional order from the U.S. Customs and Border Protection Agency (CBPA) for its TouchPrint
ten-print live scan technology for deployment as part of the U.S. Visitor and Immigrant Status
Indicator Technology (VISIT) program. Identix technology was selected by Pennsylvania to help
meet the requirements of the Transportation Security Administration (TSA) under the U.S. Patriot
Act to conduct focused background checks, including fingerprint-based biometric criminal history
checks, of all commercial drivers who apply for, renew or transfer an endorsement to transport
hazardous materials (HAZMAT), including explosives. The Pennsylvania State Police (PSP) ordered
more than $1.8 million of Identix live scan systems for deployment at PSP offices throughout the
State. Identix experienced increased order flow from all sectors, with announced purchase orders
during the fiscal 2005 second quarter, including the CBP and PSP orders, of more than $6.8 million
for its TouchPrint® 3000 line of 10-print and full hand live scan systems. Identix real-time,
mobile identification IBIS system adoption and successful deployment by Hennepin County Sheriffs
Office and the Minnesota BCA was recognized by Government Computer News for an Agency Award. CRITICAL ACCOUNTING POLICIES The preparation of financial statements and related disclosures in conformity with accounting
principles generally accepted in the United States of America requires management to make
judgments, assumptions and estimates that affect the amounts reported in the Consolidated Financial 13




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Statements and accompanying notes. Note
1 to the Consolidated Financial Statements in the Companys Annual Report on Form 10-K for the fiscal year ended
June 30, 2004 describes the
significant accounting policies and methods used in the preparation of the Consolidated Financial
Statements. Estimates are used for, but not limited to, the accounting for the allowance for
doubtful accounts and sales returns, goodwill and other intangible asset impairments, inventory
allowances, warranty costs, revenue recognition as well as loss contingencies and restructurings.
Actual results could differ materially from these estimates. Managements Discussion and Analysis
of Financial Condition and Results of Operations in the Companys Annual Report on Form 10-K for
the fiscal year ended June 30, 2004 describes the critical accounting policies that are affected
significantly by judgments, assumptions and estimates used in the preparation of the Consolidated
Financial Statements. At December 31, 2004, the Companys critical accounting policies and
estimates continue to include revenue recognition, allowance for doubtful accounts and sales
returns, goodwill impairments, inventory allowances, warranty costs and loss contingencies and
restructurings. The Companys annual impairment analysis was performed during the fourth quarter
of fiscal year 2004 which did not result in an impairment charge. RESULTS OF OPERATIONS Revenues, and Gross Margins Total revenue for the three and six months ended December 31, 2004, were $18,558,000 and
$35,181,000 respectively compared to $12,056,000 and $24,523,000 for the same periods in the prior
fiscal year. Revenue from products was $10,284,000 and $18,564,000 for the three and six months ended December
31, 2004, compared to $5,423,000 and $11,147,000 for the same periods in the prior fiscal year.
The increase in revenue for the three and six months ended 2004, is due primarily to an increase in
sales of biometric hardware and software products, these increases were partially driven by several
contracts from United States government agencies. Revenues associated with product sales are
primarily derived from the sale of hardware and software. Revenues from service for the three and six months ended December 31, 2004, were $8,274,000 and
$16,617,000 compared to $6,633,000 and $13,376,000 for the same periods in the prior fiscal year.
The increase in service revenue was driven mainly by the acquisition of IIS. The service revenue
for the three and six months ended December 31, 2003 does not contain any revenue from the
Companys IIS subsidiary which was acquired in the third quarter of fiscal 2004. Service revenues
are derived primarily from activities surrounding the servicing of the Companys hardware and
software under maintenance agreements as well as revenue derived from the Companys
IIS subsidiary, which provides fingerprinting services. Revenue from biometric systems was $16,465,000 and $30,963,000 for the three and six months ended
December 31, 2004, compared to $11,508,000 and $23,275,000 for the same periods in the prior fiscal
year. The increase in revenue for the three and six months ended is due primarily to an increase
in sales of biometric hardware and software during the quarter of approximately $4,000,000 and
$8,000,000 respectively which was partially offset by a reduction of biometric related maintenance
and professional services revenue of approximately $800,000 and $1,400,000 respectively. The
increase in biometric revenues was due to the growth in the federal and international markets. The
Company had one customer, the U.S. Government that accounted for 27% of the total revenue for the
three and six months ended December 31, 2004, compared to 13% for the same periods in the prior
fiscal year. Revenue from the Companys Identix Identification Services (IIS) and Legislative Demographic
Services (LDS) subsidiaries aggregated $2,093,000 and $4,218,000 for the three and six months
ended December 31, 2004, and $548,000 and $1,248,000 for the same periods in the prior fiscal year.
The increase was primarily due to the addition of IIS, which was acquired, in the third quarter of
fiscal year 2004. For the three and six months ended December 31, 2004, Identix derived approximately 27% of total
revenue from contracts relating to the U.S. Federal Government with one government agency making up
19% and 16% of total revenues during the respective periods. For the three and six months ended
December 31, 2003, the Company derived 13% and 9% of its revenue from the U.S. Federal Government
with no one agency consisting of more than 10% of total revenue. The loss of a material government
contract due to budget cuts or otherwise could have a material negative impact on the Companys
financial results. The Company is currently awaiting the results of a recent General Services Administration
post-award audit arising out of the renewal of its GSA Multiple Award Schedule contract. While the
Company believes that the results of such audit will have no material effect on the results of
operation, if there is a material adverse finding or adjustment arising out of such an audit it may
have a material adverse effect on our business, financial condition and results of operations. 14




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##### Table of Contents



International sales accounted for
$1,704,000 and $3,420,000 or 9% and 10% of the
Companys revenues for the three and six months ended December 31, 2004, compared to $1,355,000 and
$2,088,000 or 11% and 9% of the
Companys revenue for the same periods in the prior fiscal year. The increase in international
revenue is due primarily to the Companys continued efforts to actively pursue business in the
international biometric market place. The Companys international sales are predominately
denominated in U.S. dollars, and the Company actively monitors its foreign currency exchange
exposure and, if significant, will take action to reduce foreign exchange risk. To date, the
Company has not entered into any hedging transactions. Gross margins on product revenues were 33% and 32% respectively for the three and six months ended
December 31, 2004, compared to 41% and 43% for the same periods in the prior fiscal year. The
decrease in product gross margins was expected due to the investment in specific customer programs.
In addition, competitive pricing pressures played a partial role in the reduction of gross
margins. The Company believes that the investment in the specific customer programs combined with
a shift in the product mix and a stabilized pricing environment will lead to higher gross margins
in the second half of its fiscal 2005. The expected increase in product gross margin in the second
half of fiscal year 2005 will be conditioned in part upon an increase in the Companys higher
margin Automated Biometric Information System (ABIS) revenue during the third and fourth quarters
of fiscal year 2005. The Company expects gross margins may fluctuate in future periods due to
changes in the product mix, the costs of components and the competition in the industry. Services gross margins were 30% and 29% respectively for the three and six months ended December
31, 2004, compared to 31% and 32% for the same periods in the prior fiscal year. The decrease in
margins from fiscal 2004 to fiscal 2005 is the result of decreased pricing on the maintenance
contracts. The Company expects gross margins may fluctuate in future periods due to changes in the
product mix, the costs of components and the competition in the industry. Research and Development Research and development expense was $2,787,000 and $5,316,000 or 15% of revenues for the three and
six months ended December 31, 2004, compared to $2,768,000 and $5,023,000 or 23% and 20% of
revenues for the same period in the prior fiscal year. Research and development expenses remained
consistent with the same periods in the prior fiscal year. Now and in the foreseeable future,
Identix is committed to continue its focus on the investment in research and development, which is
critical to developing new and innovative products intended to allow the Company to maintain a
strong technological position in the industry. Marketing and Selling Marketing and selling expenses were $2,903,000 and $5,565,000 or 16% of revenue for the three and
six months ended December 31, 2004, compared to $2,755,000 and $5,492,000 or 23% and 22% of revenue
for the same period in the prior fiscal year. The increase in marketing and selling expense was
the result of bad debt recoveries that took place in fiscal 2004 that did not occur with the same
significance in fiscal 2005. General and Administrative General and administrative expense was $3,113,000 and $6,202,000 or approximately 17% and 18% of
revenues for the three and six months ended December 31, 2004, compared to $3,165,000 and
$6,714,000 or approximately 26% and 27% of revenues for the same periods in the prior fiscal year.
General and administrative expense declined while revenue increased during the three and six months
ending December 31, 2004 due to the Company retaining tight control over discretionary spending
during these periods. This despite the Company expending
approximately $163,000 and $225,000 on
Sarbanes-Oxely compliance for the three and six months ended December 31, 2004. These amounts
consist primarily of costs generated by consultants and the Companys external auditors. Amortization of Acquired Intangible Assets Amortization expense of acquired intangible assets is primarily related to developed technology,
and patents attained through the Companys acqusition of IIS, Delean technology and Visionics. The
amortization expense related to acquired intangible assets was $1,285,000 and $2,569,000 for the
three and six months ended December 31, 2004, compared to $1,375,000 and $2,757,000 for the same
period in the prior fiscal year. The decrease is due to an intangible asset becoming fully
amortized in the first quarter of fiscal 2005. The Company expects amortization expense to remain
flat for the remaining quarters of fiscal year 2005. Restructuring and other,
net At the time of the Companys merger with Visionics in June 2002, Identix
recorded restructuring charges of $18,798,000 for the termination of 110 employees, and the closure of its facilities in Dublin and
Los Gatos
California. From period of June 2002 to June 2004 the Company incurred total merger costs of
$29,864,000. 15




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##### Table of Contents



The following is a summary of the charges incurred and payments made from the time of the merger
through June 30, 2004: Activity during the period June 25, 2002 to June 30, 2004Liabilities Satisfied in
    
    
    
    
    
    
    Cash PaymentsConnection with IPS
    
    
    Non-Cash
    
    
    through June 30,
    
    
    Liability as ofTotal Charges
    
    
    Disposition
    
    
    Charges
    
    
    2004
    
    
    June 30, 2004(in thousands)Severance and benefits
    
    $
    8,626
    
    
    $
    
    
    
    $
    900
    
    
    $
    7,606
    
    
    $
    120Lease exit costs
    
    
    15,890
    
    
    
    2,267
    
    
    
    388
    
    
    
    5,635
    
    
    
    7,600Disposal of fixed assets
    
    
    1,664
    
    
    
    
    
    
    
    1,664
    
    
    
    
    
    
    
    Internal merger costs & other
    
    
    3,684
    
    
    
    
    
    
    
    
    
    
    
    3,684
    
    
    
    Total
    
    $
    29,864
    
    
    $
    2,267
    
    
    $
    2,952
    
    
    $
    16,925
    
    
    $
    7,720
 Fiscal 2005 During the three months ended December 31, 2004, the Company realized a restructuring gain of
$1,071,000 related to the negotiated release of the Company from its Los Gatos facilities lease.
The restructuring gain represents the difference between the Companys accrued lease exit costs of
$6,363,000, reduced by the negotiated payoff amount and associated transactions costs of
$5,292,000. The $6,363,000 of accrued lease exit costs is included in the total restructuring
liability of $7,720,000 at June 30, 2004 and the $5,292,000 representing the lease settlement
amount is included in the restructuring liability at of $6,021,000 at December 31, 2004. The lease
settlement amount was paid in January 2005. During the first quarter of fiscal 2005, the Company
recorded a restructuring charge of $451,000 related to a reduction in the estimated amount of lease
recoveries associated with this lease. Management believed that this charge in the first quarter
was necessary because at that time the real estate markets in Northern California had continued
their decline and it was not anticipated that the Company would be able to negotiate an exit to the
lease and no such discussions between the Company and the lessor had commenced. The first quarter
charge combined with the second quarter gain resulted in a net restructuring gain of $620,000 for
the six months ended December 31, 2004. The following table represents a summary of restructuring and other, net between June 30, 2004 and
December 31, 2004: For the six months ended December 31, 2004RestructuringRestructuring Liability
    
    
    
    
    
    
    Cash
    
    
    Liability as ofas of June 30, 2004
    
    
    Additions/(reductions)
    
    
    Payments
    
    
    December 31, 2004(in thousands)Severance and benefits
    
    $
    120
    
    
    $
    
    
    
    $
    7
    
    
    $
    113*Lease exit costs
    
    
    7,600
    
    
    
    (620
    )
    
    
    1,072
    
    
    
    5,908Total
    
    $
    7,720
    
    
    $
    (620
    )
    
    $
    1,079
    
    
    $
    6,021
 The restructuring liability is classified in the consolidated balance sheet based on the
anticipated timing of the respective payments. In January 2005, $5,292,000 was paid to settle the
remaining lease obligation and related transaction costs associated with the Los Gatos facility.
The remaining lease obligation for the Dublin California facility will be paid out through March
2006. 16




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Fiscal 2004 The following table represents a
summary of the restructuring and other, net for the six
months ended December 31, 2003: For the six months ended December 31, 2003RestructuringRestructuring Liability
    
    
    
    
    
    
    Liability as ofas of June 30, 2003
    
    
    Cash Payments
    
    
    December 31, 2003(in thousands)Severance and benefits
    
    $
    614
    
    
    $
    241
    
    
    $
    373Lease exit costs
    
    
    12,151
    
    
    
    1,657
    
    
    
    10,494Internal merger costs and other
    
    
    31
    
    
    
    
    
    
    
    31Total
    
    $
    12,796
    
    
    $
    1,898
    
    
    $
    10,898
 Interest and Other Income, net For the three and six months ended December 31, 2004, interest and other income, net was $399,000
and $662,000 respectively, compared to $364,000 and $671,000 respectively, for the same periods in
the prior fiscal year. Equity Interest in Loss of Joint Venture The equity interest in the loss of the joint venture represents the Companys 50% share of the
results of Sylvan Identix Fingerprint Centers, LLC (SIFC) through February 23, 2004 when Identix
acquired the remaining 50% interest in SIFC. For the three and six months ended December 31, 2004,
the Companys equity interest in the joint venture loss was $0. For the same periods in the prior
fiscal year the Companys equity interest in the joint venture loss was $142,000 and $247,000
respectively. Provision for Income Taxes The Company recorded a provision for income tax expense of $9,000 and $22,000 for the three and six
months ended December 31, 2004 and a provision of $10,000 and $19,000 for the same periods in prior
fiscal year. The tax amounts recorded for both fiscal years are related to state income taxes. Discontinued Operations On February 13, 2004, the Company consummated the sale of Identix Public Sector (IPS) to Alion
Science and Technology Corporation (Alion). The operations for the three months ended September 30,
2003 are presented in the Companys Consolidated Statements of Operations as discontinued
operations. Under the terms of the agreement, upon closing Alion paid the Company $8,850,000
million in cash. The terms of the sale include the potential for additional future payments to the
Company of up to $500,000 pending satisfaction of certain conditions. As of December 31, 2004,
none of the required conditions for additional payment had been achieved. The terms of the sale
also include an obligation on the part of the Company to indemnify Alion against liabilities,
including for breaches of representations and warranties made by the Company in the sales
agreement, for an amount not to exceed $2,125,000. The following table represents the summarized results for the discontinued operations for the three
and six months ended December 31, 2003: For the three
    
    
    For the sixmonths ended
    
    
    months endedDecember 31,
    
    
    December 31,2003
    
    
    2003(in thousands)
    
    
    (in thousands)Revenue
    
    $
    7,912
    
    
    $
    16,777Cost of sales
    
    
    7,181
    
    
    
    14,989Operating expenses
    
    
    768
    
    
    
    1,547Net (loss) income
    
    $
    (37
    )
    
    $
    241
 Liquidity and Capital Resources The Company financed its operations during the six months ended December 31, 2004, primarily from
cash provided by its operations. As of December 31, 2004, the Companys principal sources of
liquidity consisted of $38,312,000 of working capital including $42,769,000 in
cash and cash equivalents and short-term marketable
securities. 17




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The Companys existing line of credit was entered into on May 30, 2003 and was extended in October
2004. This line of credit provides for up to the lesser of $15,000,000 or the cash collateral base
or the borrowing base. Borrowings under the line of credit are collateralized by substantially all
of the assets of the Company and bear interest at the banks prime rate of interest, which was
5.25% at December 31, 2004. The line of credit expires on October 1, 2005. Until the Company
generates positive net income before income taxes for two consecutive fiscal quarters, the Company
will be required to deposit with the lender an amount equal to the sum of the aggregate outstanding
principal amount of all prior advances plus any portion of the line of credit reserved to support
unexpired letters of credit plus the amount of the requested advance before an advance will be
given. In addition, all advances must be used for working capital. At June 30, 2004 and December
31, 2004, there were no amounts outstanding under this line of credit. The line of credit agreement contains financial, operating and reporting covenants that are not
binding until the Company draws on the line of credit. For the six months ended December 31, 2004, $3,713,000 of cash was used in operating activities.
The cash used in operations consisted primarily of the net loss of $7,598,000; an increase in
accounts receivable of $2,001,000 driven by increased sales partially offset by collections; and
decreased other liabilities of $1,124,000 which was due primarily to the release of the Companys
lease obligations for the Los Gatos facility. These uses of cash were partially offset by
decreased inventory of $741,000, decreased prepaid expenses and other assets of $1,457,000 which
was primarily the result of the disposal of certificates of deposit that were being held as
collateral for letters of credit; increased accrued compensation of $807,000; increased deferred
revenue of $870,000 and non-cash charges from depreciation and amortization of $3,276,000. The
cash used in investing activities of $353,000 consisted primarily of purchases of marketable
securities and fixed assets of $11,915,000 and $438,000 respectively. These usages were partially
offset by the sale of marketable securities totaling $12,000,000. Financing activities consisted
primarily of stock option exercises, which generated $1,453,000 in cash. A use of cash subsequent
to the end of the current quarter was a $5,292,000 payment made in January 2005, to complete the
buyout of the Companys Los Gatos lease. This amount is reported as an accrued liability on the
Companys balance sheet at December 31, 2004. For the six months ended December 31, 2003, $5,324,000 of cash was used by operating activities.
The cash used in operations consisted primarily of the net loss of $10,215,00; decreased accounts
payable of $2,214,000 and decreased accrued liabilities which was the result of the payment of
several large invoices. These decreases were partially offset by decreased accounts receivable of
$3,037,000, which was the result of decreased sales, combined with collections; decreased prepaid
expenses of $1,024,000; and increased deferred revenue of $1,219,000. The cash consumed in
investing activities was $567,000 that consisted of the purchase of marketable securities and fixed
assets of $8,961,000 and $606,000 respectively which was partially offset by the sale of securities
of $9,000,000. Financing activities consisted primarily of stock option exercises, which generated
$921,000 in cash. The Company currently occupies its Minnesota headquarters under a lease that expires in March 2008,
and is required to pay taxes, insurance, and maintenance as well as monthly rental payments. The
Company also leases space for its corporate research and development lab in New Jersey under a
lease that expires in May 2006, and is required to pay taxes, insurance, and maintenance as well as
monthly rental payments. In addition, the Company leases space in Dublin, California for its
former research, development and engineering activities that expire in March 2006. Further, the
Company leases office space for its sales force and customer support activities under operating
leases, which expire at various dates through 2008. The leases contain escalation provisions
requiring rental increases for increases in operating expense and real estate taxes. In the latter
half of December 2004, the Company negotiated a release from its obligations under the lease
agreement for its former corporate headquarters in Los Gatos California. In exchange for a payment
of $5,292,000, the landlord released Identix from its net lease obligations totaling approximately
$6,363,000. which also relieves the Company of the requirement to pay taxes, insurance and
maintenance on this facility. Future minimum lease payments for operating leases are as follows: Periods or fiscal years ending June 30:
    
    Occupied
    
    
    Sublet
    
    
    Total2005
    
    $
    1,040
    
    
    $
    203
    
    
    $
    1,8642006
    
    
    1,887
    
    
    
    386
    
    
    
    2,2732007
    
    
    1,575
    
    
    
    
    
    
    
    1,5752008
    
    
    1,284
    
    
    
    
    
    
    
    1,2842009
    
    
    341
    
    
    
    
    
    
    
    341Thereafter
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    6,127
    
    
    $
    589
    
    
    $
    6,716
 18




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The future minimum payments of $589,000 for sublet space relate to the Companys Dublin, California
facility that was vacated in connection with the Companys merger with Visionics. The Company has
accrued for the estimated losses on this lease at December 31, 2004. The table above does not
include the $5,292,000 payment that was made in January 2005 to buyout the Los Gatos lease. The
Dublin, California facility is sublet under a lease expiring in March 2006. While the Company believes that existing working capital will be adequate to fund the Companys
current cash requirements for at least the next twelve months, the Company may need to raise
additional debt or equity financing in the future. The Company may not be able to obtain additional
debt or equity financing on favorable terms that are not excessively dilutive to existing
stockholders. Failure to secure additional financing in a timely manner and on favorable terms in
the future could have a material adverse impact on the Companys financial performance and stock
price and require the Company to implement certain cost reduction initiatives and curtail certain
of its operations. 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 such a difference are set forth in the Companys Annual Report on
Form 10-K. Our business will not grow unless the market for biometric products and services expands both
domestically and internationally. Our revenues are derived from the sale of biometric products and services. Biometric products have
not gained widespread commercial acceptance. We cannot accurately predict the future growth rate,
if any, or the ultimate size of the biometric technology market. The expansion of the market for
our products depends on a number of factors including without limitation:  
    National or international events which increase or decrease the need 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;
    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;
    customers satisfaction with our products and services; and
    marketing efforts and publicity regarding these products and services. Certain groups have publicly objected to the use of biometric products for some applications
on civil liberties grounds and legislation has been proposed to regulate the use of biometric
security products. From time to time, biometrics technologies have been the focus of organizations
and individuals seeking to curtail or eliminate such technologies on the grounds that they may be
used to diminish personal privacy rights. If such initiatives result in restrictive legislation,
the market for biometric solutions may be adversely affected. Even if biometric solutions gain wide
market acceptance, our products and services may not adequately address the requirements of the
market and may not gain wide market acceptance. We face intense competition from other biometric solution providers as well as identification and
security systems providers. A significant number of established and startup companies have developed or are developing and
marketing software and hardware for facial and/or fingerprint biometric products and applications
that currently compete or will compete directly with our current facial and fingerprint offerings.
Some of these companies have developed or are developing and marketing semiconductor or optically
based direct contact fingerprint image capture devices, or retinal blood vessel, iris pattern, hand
geometry, voice or various types of facial structure solutions. If one or more of these
technologies or approaches were widely adopted, it would significantly reduce the potential market
for our products. Our security and identity related line of products and applications also compete
with non-biometric technologies such as certificate authorities, smart card security solutions, and
traditional key, card, surveillance systems and passwords. Many competitors offering products that
are competitive with our security and identity related line of products and applications have
significantly more financial and other resources than the Company. The biometric security market is
a rapidly evolving and intensely competitive market, and we believe that additional competitors
will continue to enter the market and become significant long-term competitors. Our facial biometric products face intense competition from a number of competitors who are
actively engaged in developing and marketing facial-based recognition or security products. Among
these competitors are Viisage Technology, Inc., Cognitec Systems GmbH and Imagis Technologies, Inc.
The products designed, developed and sold under our line of products known as our live scan
products also face intense 19




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competition from a number of competitors who are actively engaged in
developing and marketing similar products. Included among these are; Smiths Heimann Biometrics
GmbH, and CrossMatch Technologies, Inc. We expect competition to increase and intensify in the near term in the biometrics markets.
Companies competing with us may introduce products that are competitively priced, have increased
performance or functionality or incorporate technological advances not yet developed or implemented
by us. Some present and potential competitors have financial, marketing, research, and
manufacturing resources substantially greater than ours. Other players in the biometric industry
who offer complementary products or private label products manufactured by our direct competitors
do have the potential to directly compete with us. Among these companies are Sagem Morpho, Inc.,
Cogent Systems Inc., NEC Corporation, Printrak International, Inc.,
(a Motorola company), and safLink. In order to compete effectively in this environment, we must continually design, develop and market
new and enhanced products at competitive prices and we must have the resources available to invest
in significant research and development activities. The failure to do so could have a material
adverse effect on our business operations, financial results and stock price. 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. Our performance in any one reporting period is not necessarily indicative of sale trends or future
operating or earnings performance because of our reliance on a small number of large customers, the
majority of which are government agencies. Government contracts frequently include provisions that
are not standard in private commercial transactions. For example, government contracts may include
bonding requirements and provisions permitting the purchasing agency to cancel the contract for
convenience at any time without penalty in certain circumstances. As public agencies, our
prospective customers are also subject to public agency contract requirements that vary from
jurisdiction to jurisdiction. Some of these requirements may be onerous or impossible to satisfy. Additionally, public agency contracts are frequently awarded only after formal competitive bidding
processes, which are often protracted, and typically impose provisions that permit cancellation in
the event that funds are unavailable to the public agency. In some cases, unsuccessful bidders for
public agency contracts are provided the opportunity to formally protest certain contract awards
through various agency, administrative and judicial channels. The protest process may delay a
successful bidders contract performance for a number of weeks, months or more, or result in the
cancellation of the contract award entirely. There is a risk that we may not be awarded contracts
for which we bid or, if awarded, that substantial delays or cancellation of purchases may follow as
a result of third party protests. For example, in October 2003, the Company announced that is had
been awarded a Blanket Purchase Order (BPO) from the Department of Homeland Security (DHS) with
an estimated value of approximately $27 million. The award was subsequently protested by one of our
competitors who had been an unsuccessful participant in the bidding process for the BPO. Though
the protest was ultimately resolved in favor of Identix, the protest resulted in substantial delays
in DHS procurement of our technology under the BPO. Similar protests, and similar delays,
regarding any future government contracts of a material nature that may be awarded to Identix could
result in materially adverse revenue volatility, making management of inventory levels, cash flow
and profitability or loss inherently difficult. Outright loss of any material government contract,
such as the BPO award to Identix, through the protest process or otherwise, could have a material
adverse effect on our financial results and stock price. Similar to federal government contracts, state and local government agency contracts may be
contingent upon availability of matching funds from federal, state or local entities. State and
local law enforcement and other government agencies are subject to political, budgetary, purchasing
and delivery constraints which may continue to result in quarterly and annual revenues and
operating results that may be irregular and difficult to predict. Such revenue volatility makes
management of inventory levels, cash flow and profitability inherently difficult. In addition, if
we are successful in winning such procurements, there may be unevenness in shipping schedules, as
well as potential delays and schedule changes in the timing of deliveries and recognition of
revenue, or cancellation of such procurements. For the three and six months ended December 31, 2004, we derived approximately 27% of our revenue
directly from contracts relating to the U.S. Federal Government with one agency making up 19% and
16% of total revenues during the respective periods. The loss of a material government contract
due to budget cuts or otherwise could have a severe negative impact on our financial results and
stock price. Our financial and operating results often vary significantly from quarter to quarter and may be
negatively affected by a number of factors. Our financial and operating results may fluctuate from quarter to quarter because of the following
reasons:  
    the lack of or delays in authorization for availability of government funds;
    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 or the inability to manufacture in volume or install certain of our complex products, on a timely basis or (iii) obtain relevant government agency certifications for newly introduced products on a timely basis; manufacture in volume
and install certain of
our products.
    changes in the mix of products and services we or our distributors sell; 20




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
    the readiness of customers to accept delivery of new products on a timely basis
or the cancellations, delays or contract amendments by government agency customers;
    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; and
    the lack of availability or increase in cost of key components and subassemblies.
    competitive pricing pressures
    unpredictable product installation schedules Particularly important is the need to invest in planned technical development programs to maintain
and enhance our competitiveness, and to successfully develop and launch new products and services
on a timely basis. Managing and improving the likelihood of success of such programs requires the
development of budgets, plans and schedules for the execution of these programs and the adherence
to such budgets, plans and schedules. The majority of such program costs are payroll and related
staff expenses, and secondarily materials, subcontractors and promotional expenses. These costs are
very difficult to adjust in response to short-term fluctuations in our revenues, compounding the
difficulty of achieving profitability in the event of a revenue downturn. Our results of operations may be harmed by lack of governmental funding, credit and other policies. In many instances, the procurements of our federal, state and local customers are dependent on the
availability or continued availability of federal, state or local government funds or grants and
general tax funding. Such funding may not be approved or, if approved, it may not be available for
the purchase of our products or solutions, and even if such funding is approved and available, such
funds may be subject to termination at any time at the sole discretion of the government body
providing or receiving such funds. We also extend substantial credit to federal, state and local governments in connection with sales
of our products and services. Sales to sizeable customers requiring large and sophisticated
networks of fingerprint recognition and Live Scan systems and peripheral equipment often include
technical requirements which may not be fully known at the time requirements are specified by the
customer. In addition, contracts may specify performance criteria that must be satisfied before the
customer accepts the products and services. Collection of accounts receivable may be dependent on
completion of customer requirements, which may be unpredictable, subject to change by the customer,
and not fully understood by us at the time of acceptance of the order, and may involve investment
of additional resources. These investments of additional resources are accrued when amounts can be
estimated but may be uncompensated and negatively affect profit margins and our liquidity. Additionally, without regard to termination of funding, government agencies both domestically and
internationally may successfully assert the right to terminate business or funding relationships
with us at their sole discretion without adequate or any compensation or recourse for us. The substantial costs of our merger with Visionics Corporation, which was completed in June 2002,
and the manner of accounting for the merger may affect Identix reported results of operations. Approximately $30 million of costs have been incurred in connection with our merger with Visionics.
These include costs associated with combining the businesses of the two companies, including
integration and restructuring costs, costs associated with the consolidation of operations and the
fees of financial advisors, attorneys and accountants. While the vast majority of costs associated
with the merger are behind us, we may incur additional integration costs, for example, costs
associated with the sublease of our former office and manufacturing space in California, and these
costs may be higher than anticipated. In connection with the Visionics merger, we recorded a substantial amount of goodwill. Generally
accepted accounting principles requires that goodwill be tested for impairment at least annually
and a non-cash charge to earnings must be recognized in the period any impairment of goodwill is
determined. While we did not record an impairment of goodwill in fiscal year 2004, during the
fourth quarter of fiscal year 2003, we recorded an impairment charge to goodwill in the amount of
$154,799,000. The market price of our common stock could decline if:  
    our merger with Visionics ultimately proves to be unsuccessful;
    the combined company is unable to successfully market its products and services to both companies customers; 21




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
    the combined company does not achieve the perceived benefits of the merger as rapidly as, or to the extent, anticipated by
financial or industry analysts, or such analysts do not perceive the same benefits to the merger as do we; or
    the effect of the merger on our financial results is not consistent with the expectations of financial or industry analysts. The terrorist attacks of September 11, 2001, and the continuing threat of global terrorism, have
increased financial expectations that may not materialize. The September 11, 2001 terrorist attacks, and continuing concerns about global terrorism, may have
created an increase in awareness for biometric security solutions generally. However, it is
uncertain whether the actual level of demand for our biometric products and services will grow as a
result of such increased awareness. Increased demand may not result in an actual increase in our
revenues. In addition, it is uncertain which security solutions, if any, will be adopted as a
result of the terrorism and whether our products will be a part of those solutions. Efforts in the
war against terrorism, the war in Iraq, and the post-war reconstruction efforts in Iraq, may
actually delay funding for the implementation of biometric solutions generally. Even if our
products are considered or adopted as solutions to the terrorism, the level and timeliness of
available funding are unclear. These factors may adversely impact us and create unpredictability in
revenues and operating results. We may need to raise additional equity or debt financing in the future. While we believe existing working capital will be adequate to fund our operating cash requirements
for at least the next 12 months, we may need to raise additional debt or equity financing in the
future, which may not be available to us. Even if we are successful in raising additional
financing, we may not be able to do so on terms that are not excessively dilutive to existing
stockholders or less costly than existing sources of financing. Failure to secure additional
financing in a timely manner and on favorable terms could have a material adverse effect on our
financial performance and stock price and require us to implement certain cost reduction
initiatives resulting in the curtailment of our operations. The biometrics industry is characterized by rapid technological change and evolving industry
standards, which could render existing products obsolete. Our future success will depend upon our ability to develop and introduce a variety of new products
and services and enhancements to these new product and services in order to address the changing
and sophisticated needs of the marketplace. Frequently, technical development programs in the
biometric industry require assessments to be made of the future directions of technology and
technology markets generally, which are inherently risky and difficult to predict. Delays in
introducing new products, services and enhancements, the failure to choose correctly among
technical alternatives or the failure to offer innovative products and services at competitive
prices may cause customers to forego purchases of our products and services and purchase those of
our competitors. Continued participation by us in the market for Live Scan systems that are linked to forensic
quality databases under the jurisdiction of governmental agencies may require the investment of our
resources in upgrading our products and technology for us to compete and to meet regulatory and
statutory standards. We may not have adequate resources available to us or may not adequately keep
pace with appropriate requirements in order to effectively compete in the marketplace. Our lengthy and variable sales cycle will make it difficult to predict operating results. Certain of our products often have a lengthy sales cycle while the customer evaluates and
receives approvals for purchase. If, after expending significant funds and effort, we fail to
receive an order, a negative impact on our financial results and stock price could result. It is difficult to predict accurately the sales cycle of any large order for any of our products.
If we do not ship and or install one or more large orders as forecast for a fiscal quarter, our
total revenues and operating results for that quarter could be materially and adversely affected. The substantial lead-time required for ordering parts and materials may lead to excess or
insufficient inventory. The lead-time for ordering parts and materials and building many of our products can be many
months. As a result, we must order parts and materials and build our products based on forecasted
demand. If demand for our products lags significantly behind our forecasts, we may produce more
products than we can sell, which can result in cash flow problems and write-offs or write-downs of
obsolete inventory. 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. A significant portion of our revenue comes from sales to partners including OEMs, systems
integrators, distributors and resellers. Some, but not all, of these relationships are formalized
in written agreements. Even where these relationships are formalized in written agreements, the
agreements are often terminable with little or no notice and subject to periodic amendment. We
cannot control the amount and timing of resources that our partners devote to activities on our
behalf. 22




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We intend to continue to seek strategic relationships to distribute, license and sell certain of
our products. We, however, may not be able to negotiate acceptable relationships in the future and
cannot predict whether current or future relationships will be successful. Loss of sole or limited source suppliers may result in delays or additional expenses. We obtain certain hardware components and complete products, as well as software applications, from
a single source or a limited group of suppliers. We do not have long-term agreements with any of
our suppliers. We will experience significant delays in manufacturing and shipping of products to
customers if we lose these sources or if supplies from these sources are delayed. As a result, we may be required to incur additional development, manufacturing and other costs
to establish alternative sources of supply. It may take several months to locate alternative
suppliers, if required, or to re-tool our products to accommodate components from different
suppliers. We cannot predict if we will be able to obtain replacement components within the time
frames we require at an affordable cost, or at all. Any delays resulting from suppliers failing to
deliver components or products on a timely basis in sufficient quantities and of sufficient quality
or any significant increase in the price of components from existing or alternative suppliers could
have a severe negative impact on our financial results and stock price. The success of our strategic plan to pursue sales in international markets may be limited by risks
related to conditions in such markets. For the three and six months ended December 31, 2004 we derived approximately 9% and 10% of our
product revenues from international sales. We currently have a local presence in the United
Kingdom. There is a risk that we may not be able to successfully market, sell and deliver our products in
foreign countries, or successfully rely on supplemental offshore research and development
resources. Risks inherent in marketing, selling and delivering products in foreign and international
markets, each of which could have a severe negative impact on our financial results and stock
price, include those associated with:  
    regional economic 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,
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. In addition, foreign laws treat the protection of proprietary rights differently from laws in the
United States and may not protect our proprietary rights to the same extent as U.S. laws. The
failure of foreign laws or judicial systems to adequately protect our proprietary rights or
intellectual property, including intellectual property developed on our behalf by foreign
contractors or subcontractors may have a material adverse effect on our business, operations,
financial results and stock price. 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. As of December 31, 2004, the State of Wisconsin Investment Board, Kern Capital Management LLC and
Artemis Investment Management LLC owned approximately 8%, 4% and 4% of the Companys outstanding
common stock, respectively. The concentration of large percentages of ownership in any single
stockholder, or in any series of single stockholders, may delay or prevent change in control of the
Company. Additionally, the sale of a significant number of our shares in the open market by single
stockholders or otherwise could adversely affect our stock price. We may be subject to loss in market share and market acceptance as a result of manufacturing
errors, delays or shortages. 23




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Performance failure in our products may cause loss of market share, delay in or loss of market
acceptance, additional warranty expense or product recall, or other contractual liabilities. The
complexity of certain of our fingerprint readers makes the manufacturing and assembly process of
such products, especially in volume, complex. This may in turn lead to delays or shortages in the
availability of certain products, or, in some cases, the unavailability of certain products. The
negative effects of any delay or failure could be exacerbated if the delay or failure occurs in
products that provide personal security, secure sensitive computer data, authorize significant
financial transactions or perform other functions where a security breach could have significant
consequences. If a product launch is delayed or is the subject of an availability shortage because
of problems with our ability to manufacture or assemble the product successfully on a timely basis,
or if a product or service otherwise fails to meet performance criteria, we may lose revenue
opportunities entirely and/or experience delays in revenue recognition associated with a product or
service in addition to incurring higher operating expenses during the period required to correct
the defects. There is a risk that for unforeseen reasons we may be required to repair or replace a
substantial number of products in use or to reimburse customers for products that fail to work or
meet strict performance criteria. We carry product liability insurance, but existing coverage may
not be adequate to cover potential claims. 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. There is a risk that for unforeseen reasons we may be required to repair or replace a substantial
number of products in use or to reimburse customers for products that fail to work or meet strict
performance criteria. We attempt to limit remedies for product failure to the repair or replacement
of malfunctioning or noncompliant products or services, and also attempt to exclude or minimize
exposure to product and related liabilities by including in our standard agreements warranty
disclaimers and disclaimers for consequential and related damages as well as limitations on our
aggregate liability. From time to time, in certain complex sale or licensing transactions, we may
negotiate liability provisions that vary from such standard forms. There is a risk that our
contractual provisions may not adequately minimize our product and related liabilities or that such
provisions may be unenforceable. We carry product liability insurance, but existing coverage may
not be adequate to cover potential claims. We maintain warranty reserves as deemed adequate by
management. 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. We principally rely upon patent, trademark, copyright, trade secret and contract law to establish
and protect our proprietary rights. There is a risk that claims allowed on any patents or
trademarks we hold may not be broad enough to protect our technology. In addition, our patents or
trademarks may be challenged, invalidated or circumvented and we cannot be certain that the rights
granted thereunder will provide competitive advantages to us. Moreover, any current or future
issued or licensed patents, or trademarks, or currently existing or future developed trade secrets
or know-how may not afford sufficient protection against competitors with similar technologies or
processes, and the possibility exists that certain of our already issued patents or trademarks may
infringe upon third party patents or trademarks or be designed around by others. In addition, there
is a risk that others may independently develop proprietary technologies and processes, which are
the same as, substantially equivalent or superior to ours, or become available in the market at a
lower price. There is a risk that we have infringed or in the future will infringe patents or trademarks
owned by others, that we will need to acquire licenses under patents or trademarks belonging to
others for technology potentially useful or necessary to us, and that licenses will not be
available to us on acceptable terms, if at all. We may have to litigate to enforce our patents or trademarks or to determine the scope and validity
of other parties proprietary rights. Litigation could be very costly and divert managements
attention. An adverse outcome in any litigation may have a severe negative effect on our financial
results and stock price. To determine the priority of inventions, we may have to participate in
interference proceedings declared by the United States Patent and Trademark Office or oppositions
in foreign patent and trademark offices, which could result in substantial cost and limitations on
the scope or validity of our patents or trademarks. We also rely on trade secrets and proprietary know-how, which we seek to protect by confidentiality
agreements with our employees, consultants, service providers and third parties. There is a risk
that these agreements may be breached, and that the remedies available to us may not be adequate.
In addition, our trade secrets and proprietary know-how may otherwise become known to or be
independently discovered by others. 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. Our management believes that in order to be successful we must appropriately manage the size of our
business. This may mean reducing costs and overhead in certain economic periods, and selectively
growing in periods of economic expansion. In addition, we will be required to implement
operational, financial and management information procedures and controls that are efficient and
appropriate for the size and
scope of our operations. The management skills and systems currently in place may not be adequate
and we may not be able to manage any significant cost reductions or effectively provide for our
growth. Acquisitions and dispositions of companies, assets or technologies may result in disruptions to our
business. As part of our business roadmap, we may from time to time acquire businesses, assets or
technologies relating to, or complementary to, our current strategies or operations, and we may
also divest certain businesses or assets that we consider non-complementary to our current
strategies or operations. 24




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In March 2004, we acquired certain technology and intellectual property rights of Delean Vision
Worldwide, Inc. In February 2004, we acquired the remaining 50% percent interest in Sylvan Identix
Fingerprint Centers, LLC (SIFC) that we didnt already own. We subsequently re-named SIFC to
Identix Identification Services, LLC. In February 2004, we sold our wholly owned subsidiary,
Identix Public Sector, Inc., whose business principally consisted of providing project management
and facilities engineering services to government agencies. We acquired certain proprietary
software and source code assets from a third party in October 2002. We merged with Visionics in
June 2002 and acquired Identicator Technology, Inc. in fiscal 1999. We also acquired one company in
fiscal 1998 and two companies in fiscal 1996. These and any other acquisitions, mergers and
divestitures by Identix are and will be accompanied by the risks commonly encountered in such
transactions. These risks include, among other things:  
    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 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;
    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 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;
    the incurrence of amortization expenses;
    incurring impairment charges arising out of our assessments of goodwill and intangibles; and
    possible dilution to our stockholders. In addition, geographic distances may make integration of businesses or the acquisition of
assets more difficult. We may not be successful in overcoming these risks or any other problems
encountered in connection with any mergers or acquisitions. Failure to achieve and maintain effective internal controls in accordance
with Section 404 of the Sarbanes-Oxley Act could have a material adverse effect
on our business and stock price. Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, beginning with our Annual Report on
Form 10-K for the fiscal year ending June 30, 2005, we will be required to furnish a report by our
management on our internal control over financial reporting. The internal control report must
contain (i) a statement of managements responsibility for establishing and maintaining adequate
internal control over financial reporting, (ii) a statement identifying the framework used by
management to conduct the required evaluation of the effectiveness of our internal control over
financial reporting, (iii) managements assessment of the effectiveness of our internal control
over financial reporting as of the end of our most recent fiscal year, including a statement as to
whether or not internal control over financial reporting is effective, and
(iv) a statement that our independent registered public accounting firm has issued an attestation
report on managements assessment of internal control over financial reporting. Management acknowledges its responsibility for internal controls over financial reporting and seeks
to continually improve those controls. In order to achieve compliance with Section 404 within the
prescribed period, we are engaged in a process to document and evaluate our internal control over
financial reporting, which is both costly and challenging. In this regard, management will need to
dedicate internal resources, engage outside consultants and adopt a detailed work plan to (i)
assess and document the adequacy of internal control over financial reporting, (ii) take steps to
improve control processes where appropriate, (iii) validate through testing that controls are
functioning as documented, and (iv) implement a continuous reporting and improvement process for
internal control over financial reporting. Despite our efforts, we can provide no assurance as to
our, or our independent registered public accounting firm, conclusions as of June 30, 2005 with
respect to the effectiveness of our internal control over financial reporting under Section 404.
There is a risk that neither we nor our independent registered public accounting firm will be able
to conclude at or around June 30, 2005 that our internal controls over financial 25




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reporting are
effective as required by Section 404. This could result in an adverse reaction in the financial
markets due to a loss of confidence in the reliability of our financial statements. If we fail to attract and retain qualified senior executive and key technical personnel, our
business will not be able to expand. We are dependent on the continued availability of the services of our employees, many of whom are
individually key to our future success, and the availability of new employees to implement our
business plans. The market for skilled employees is highly competitive, especially for employees in
technical fields. Although our compensation programs are intended to attract and retain the
employees required for us to be successful, there can be no assurance that we will be able to
retain the services of all our key employees or a sufficient number to execute our plans, nor can
there be any assurance we will be able to continue to attract new employees as required. Our personnel may voluntarily terminate their relationship with us at any time, and competition for
qualified personnel, especially engineers, is intense. The process of locating additional personnel
with the combination of skills and attributes required to carry out our strategy could be lengthy,
costly and disruptive. If we lose the services of key personnel, or fail to replace the services of key personnel who
depart, we could experience a severe negative effect on our financial results and stock price. In
addition, there is intense competition for highly qualified engineering and marketing personnel in
the locations where we principally operate. The loss of the services of any key engineering,
marketing or other personnel or our failure to attract, integrate, motivate and retain additional
key employees could have a material adverse effect on our business, operating and financial results
and stock price. 
 Item 3. Quantitative and Qualitative Disclosures about Market Risk Interest Rate Risk.The Companys exposure to market risk for changes in interest rates
relates primarily to the Companys cash equivalents, marketable securities and line of credit.The
Company does not use derivative financial instruments. The
Companys cash equivalents and marketable securities are invested
in money market accounts and high quality bonds with major financial institutions. Due to the
short duration and conservative nature of the Companys cash equivalents and marketable securities,
their carrying value approximates fair market value. The Company has performed an analysis to
assess the potential effect of reasonably possible near-term changes in interest rates. The effect
of such rate changes is not expected to be material to the Companys results of operations, cash
flows or financial condition. If the Company enters into debt obligations it is primarily to support general corporate
purposes including working capital requirements and capital expenditures. The Company is subject
to fluctuating interest rates that may impact, adversely or otherwise, its results of operation or
cash flows for its variable rate lines of credit and cash equivalents. As noted previously, the
Company has not drawn on its line of credit during the periods presented. Foreign Currency Exchange Rate Risk.Certain of the Companys foreign revenues, cost of
revenues and marketing expenses are transacted in local currencies, primarily the British Pound. As
a result, the Companys results of operations and certain receivables and payables are subject to
foreign exchange rate fluctuations. The Company does not currently hedge against foreign currency
rate fluctuations. Gains and losses from such fluctuations have not been material to the Companys
consolidated results of operations or balance sheet. 
 Item 4. Controls and Procedures Evaluation of Disclosure Controls and Procedures.Based on their evaluation as of the end of
the period covered by this Quarterly Report on Form 10-Q, our chief executive officer and chief
financial officer have concluded that our disclosure controls and procedures (as defined in Rules
13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934) are effective to ensure that
information required to be disclosed by us in reports that we file or submit under the Securities
Exchange Act of
1934 is recorded, processed, summarized and reported within the time periods specified in
Securities and Exchange Commission rules and forms. Changes in Internal Control Over Financial Reporting.There were no changes in our internal
control over financial reporting identified in connection with our evaluation that occurred during
our first fiscal quarter that have materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting. 
 26




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PART II OTHER INFORMATION Item 1. Legal Proceedings On February 5, 2003, Roger Benson, an individual, filed a lawsuit seeking
unspecified damages against the Company, Digital Biometrics, Inc. (DBI),
and Visionics Corporation in California Superior Court, alleging that in 1998
he was issued a duplicate electronic fingerprint number that was also held by
a convicted felon. Mr. Bensons complaint alleged that the fingerprint
number was generated by a live scan system manufactured by DBI and operated
by a Sheriffs office in the State of Oregon, and also alleged that the
plaintiff suffered injuries from a 43-day incarceration after the plaintiffs
identity was allegedly mistaken for that of the felon because of the
duplicate fingerprint number. Mr. Benson alleged liability under strict
product liability, failure to warn, breach of implied warranty, negligence,
and unfair business practices, among other theories of liability. Since the inception of Mr. Bensons lawsuit, Identix has vigorously defended
itself on the grounds that any alleged misidentification of Mr. Benson was
not the result of any design, manufacturing or product defect or malfunction,
or any other error, omission or fault on the part the Company or affiliated
defendants. On February 2, 2005, Mr. Benson voluntarily dismissed the case
in its entirety against Identix and its affiliated defendants. (Mr. Benson
has not dismissed the State of California, which remains a defendant in the
action.) Mr. Bensons voluntary dismissal of claims follows Identix recent
successful motion for, and award of, monetary sanctions against each of Mr.
Benson and his attorney. Mr. Bensons voluntary dismissal also follows
Identix flat rejection of a recent offer of settlement made by Mr. Benson.
As the prevailing party in this lawsuit for judicial purposes, Identix will
now seek from the court an award of recoverable costs against the plaintiff,
which the Company believes will be immaterial. On July 22, 2004, the Company was served with a class action complaint naming Miguel Espinoza
as a purported class action plaintiff. Mr. Espinoza is also one of the individual plaintiffs added
to the Benson litigation via the January 2004 amended complaints in that litigation. Mr. Espinoza
claims that he was denied a liquor license for his business in Oregon on August 1, 2002 because he
was misidentified as a convicted felon. He alleges the misidentification was a result of duplicate
fingerprint identification number also held by a convicted felon, and that the duplicate number was
generated by a live scan system manufactured by DBI and operated by a Sheriffs office in the State
of Oregon. The complaint alleges liability under strict product liability, failure to warn, breach
of implied warranty, negligence, product misrepresentation and 42 U.S.C §1983 among other theories
of liability. While the case is in its early stages, based on currently available information, the
Company believes that the issuance of any duplicate fingerprint numbers was not the result of any
design, manufacturing or product defect or malfunction, or any other error, omission or fault on
the part the Company or affiliated defendants. The Company believes that any alleged
misidentification of Mr. Espinoza was not the result of any design, manufacturing or product defect
or malfunction, or any other error, omission or fault on the part the Company or affiliated
defendants and the Company intends to vigorously defend this lawsuit. While it is not possible at this
early stage of the proceeding to predict with precision and
certainty the outcome of the action discussed above, based on the facts and information currently
available to the Company (which are subject to change based on discovery of further facts and
information) the Company believes that liabilities and costs arising out of such action will not
have a material adverse impact on the Companys consolidated financial position, results of
operations or cash flows. 
 Item 4. Submission of Matters to a Vote of Security Holders  (a)
    The Annual Meeting of Shareholders was held on October 28, 2004.(b)
    All Board of Directors nominees referenced in Item 4 (c) below
were elected at the Annual Meeting of Shareholders on October 28, 2004.(c)
    The matters voted upon and the results of the voting were as
follows:  (1)
    The following seven persons were elected to the
Board of Directors: Name
    
    Votes For
    
    
    Votes WithheldMilton E. Cooper
    
    
    83,733,584
    
    
    
    1,093,234Dr. Joseph J. Atick
    
    
    83,715,025
    
    
    
    1,111,793Malcolm J. Gudis
    
    
    76,517,366
    
    
    
    8,309,452Dr. John E. Haugo
    
    
    83,727,110
    
    
    
    1,099,708George Latimer
    
    
    76,476,706
    
    
    
    8,350,112John E. Lawler
    
    
    76,519,062
    
    
    
    8,307,756Patrick H. Morton
    
    
    72,577,320
    
    
    
    11,192,762
 The appointment of PricewaterhouseCoopers LLP as independent registered public accounting firm of
the Company for the fiscal year ending June 30, 2005 was ratified. The number of shares voted in
favor of the appointment was 83,946,917 the number of shares voted against were 677,639 and the
number of shares that abstained was 202,261. 27




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6. Exhibits and Reports on Form 8-K.  (a)
    Exhibits ExhibitNumber
    
    Description10.63
    
    Lease Termination Agreement31.1
    
    CEO Certification31.2
    
    CFO Certification32
    
    906 Certifications
  (b)
    A Form 8-K was filed on October 28, 2004, which contained the Companys
press release announcing its the financial results for the quarter ending September
30, 2004.  (c)
    A Form 8-K was filed on December 16, 2004, which disclosed a material
agreement between the Company and Vasona Buisness Park that announced the
termination of the lease between the Company and Vasona Buisness Park. 28




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SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934,
the Registrant, Identix Incorporated, a corporation organized and existing under the laws of the
State of Delaware, has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized, in the City of Minnetonka, State of Minnesota, on February 9, 2005. IDENTIX INCORPORATEDBY: /s/ Elissa J. LindsoeElissa J. LindsoeChief Financial Officer 29