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SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549


FORM 10-Q


|                                                                                              
|----------------------------------------------------------------------------------------------
|(Mark one)                                                                                    
|[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.  
|                                                                                              
|For the quarterly period ended December 31, 2003 or                                           
|                                                                                              
|[   ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
|                                                                                              
|For the transition period
from____________to_____________                                     
|                                                                                              
|Commission File Number: 1-9641                                                                

IDENTIX INCORPORATED




(Exact name of registrant as specified in its charter)


|                                                                                  |  |                                  
|--------------------------------------------------------------------------------- |  | ---------------------------------
|Delaware                                                                          |  | 94-2842496                       
|                                                                                  |  |                                  
|(State or other jurisdiction of
incorporation of organization)                    |  | (IRS Employer Identification No.)
|                                                                                  |  |                                  
|5600 Rowland Road, Minnetonka, Minnesota
(Address of principal executive offices) |  | 55343
(Zip Code)                 

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 [X]   NO [   ]

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). YES [X]   NO [   ]

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:

86,294,125 shares of Common Stock
as of January 31, 2003

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TABLE OF CONTENTS



|                          |                                                                                               |                                                      |  |  |  |  |  | 
|------------------------- | --------------------------------------------------------------------------------------------- | ---------------------------------------------------- |  |  |  |  |  | 
|                          |                                                                                               | CONDENSED CONSOLIDATED BALANCE SHEETS               
|                          |                                                                                               | CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS     
|                          |                                                                                               | CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS     
|                          |                                                                                               | NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|                          | Item 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|                          | Item 3. Quantitative and Qualitative Disclosures about Market Risk                           
|                          | Item 4. Controls and Procedures                                                              
|PART II OTHER INFORMATION
|                          | Item 4. Submission of Matters to a Vote of Security Holders                                  
|                          | Item 6. Exhibits and Reports on Form 8-K                                                     
|SIGNATURES               
|Indemnification Agreement
|CEO Certification        
|CFO Certification        
|906 Certifications       



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IDENTIX INCORPORATED

INDEX

|        |  |           |  |                                                                                                         |  |    | 
|------- |  | --------- |  | ------------------------------------------------------------------------------------------------------- |  | -- | 
|PART I  |  |           |  | FINANCIAL INFORMATION                                                                                   |  |    | 
|        |  | Item 1    |  | Unaudited Financial Statements                                                                          |  |    | 
|        |  |           |  | Condensed Consolidated Balance Sheets -
December 31, 2003 and June 30, 2003                             |  | 3  | 
|        |  |           |  | Condensed Consolidated Statements of Operations -
Three and six months ended December 31, 2003 and
2002 |  | 4  | 
|        |  |           |  | Condensed Consolidated Statements of Cash Flows -
Three and Six months ended December 31, 2003 and
2002 |  | 5  | 
|        |  |           |  | Notes to Condensed Consolidated Financial Statements                                                    |  | 6  | 
|        |  | Item 2    |  | Managements Discussion and Analysis of Financial
Condition and Results of Operations                   |  | 12 | 
|        |  | Item 3    |  | Quantitative and Qualitative Disclosures
About Market Risk                                              |  | 25 | 
|        |  | Item 4    |  | Controls and Procedures                                                                                 |  | 25 | 
|PART II |  |           |  | OTHER INFORMATION                                                                                       |  |    | 
|        |  | Item 4    |  | Submission of Matters to a Vote of Security Holders                                                     |  | 26 | 
|        |  | Item 6    |  | Exhibits and Reports on Form 8-K                                                                        |  | 26 | 
|        |  | Signature |  |                                                                                                         |  | 27 | 

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##### Table of Contents






IDENTIX INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)

|                                     |                                                                                                                                    |                            |                                            |              |             |              |             |              |             |             |  | 
|------------------------------------ | ---------------------------------------------------------------------------------------------------------------------------------- | -------------------------- | ------------------------------------------ | ------------ | ----------- | ------------ | ----------- | ------------ | ----------- | ----------- |  | 
|                                     |                                                                                                                                    |                            |                                            |              |             | December 31, |             | June 30,    
|                                     |                                                                                                                                    |                            |                                            |              |             | 2003         |             | 2003        
|                                     |                                                                                                                                    |                            |                                            |              |             |              |             |             
|ASSETS                               |                                                                                                                                    |                            |                                            |              |             |              |             |             
|Current assets:                      |                                                                                                                                    |                            |                                            |              |             |              |             |             
|                                     | Cash and cash equivalents                                                                                                          |                            | $                                          | 29,742,000   |             |              | $           | 34,712,000   |            
|                                     | Marketable
securities - short-term                                                                                                 |                            |                                            | 7,993,000    |             |              |             | 8,991,000    |            
|                                     | Accounts receivable, net                                                                                                           |                            |                                            | 19,101,000   |             |              |             | 21,434,000   |            
|                                     | Inventories                                                                                                                        |                            |                                            | 10,387,000   |             |              |             | 9,920,000    |            
|                                     | Prepaid expenses and other assets                                                                                                  |                            |                                            | 897,000      |             |              |             | 1,677,000    |            
|                                     |                                                                                                                                    |                            |                                            |              |             |              |             |              |            
|                                     |                                                                                                                                    | Total current assets       |                                            |              | 68,120,000  |              |             |              | 76,734,000  |            
|Marketable securities - long-term    |                                                                                                                                    |                            | 1,504,000                                  |              |             |              | 505,000     |             
|Property and equipment, net          |                                                                                                                                    |                            | 3,693,000                                  |              |             |              | 4,157,000   |             
|Goodwill                             |                                                                                                                                    |                            | 140,945,000                                |              |             |              | 140,945,000 |             
|Acquired intangible assets, net      |                                                                                                                                    |                            | 16,995,000                                 |              |             |              | 19,854,000  |             
|Other assets                         |                                                                                                                                    |                            | 2,584,000                                  |              |             |              | 3,075,000   |             
|                                     |                                                                                                                                    |                            |                                            |              |             |              |             |              |            
|                                     |                                                                                                                                    | Total assets               |                                            | $            | 233,841,000 |              |             | $            | 245,270,000 |            
|                                     |                                                                                                                                    |                            |                                            |              |             |              |             |             
|LIABILITIES AND STOCKHOLDERS EQUITY |                                                                                                                                    |                            |                                            |              |             |              |             |             
|Current liabilities:                 |                                                                                                                                    |                            |                                            |              |             |              |             |             
|                                     | Accounts payable                                                                                                                   |                            | $                                          | 5,811,000    |             |              | $           | 8,025,000    |            
|                                     | Accrued compensation                                                                                                               |                            |                                            | 3,903,000    |             |              |             | 3,593,000    |            
|                                     | Other accrued liabilities                                                                                                          |                            |                                            | 4,132,000    |             |              |             | 4,522,000    |            
|                                     | Deferred revenue                                                                                                                   |                            |                                            | 8,745,000    |             |              |             | 7,197,000    |            
|                                     |                                                                                                                                    |                            |                                            |              |             |              |             |              |            
|                                     |                                                                                                                                    | Total current liabilities  |                                            |              | 22,591,000  |              |             |              | 23,337,000  |            
|Deferred revenue                     |                                                                                                                                    |                            | 90,000                                     |              |             |              | 419,000     |             
|Other liabilities                    |                                                                                                                                    |                            | 8,768,000                                  |              |             |              | 10,250,000  |             
|                                     |                                                                                                                                    |                            |                                            |              |             |              |             |              |            
|                                     |                                                                                                                                    | Total liabilities          |                                            |              | 31,449,000  |              |             |              | 34,006,000  |            
|                                     |                                                                                                                                    |                            |                                            |              |             |              |             |              |            
|Stockholders equity:                |                                                                                                                                    |                            |                                            |              |             |              |             |             
|                                     | Convertible preferred stock, $0.01 par value;
2,000,000 shares authorized; 234,558 shares issued and
outstanding                   |                            |                                            | 3,702,000    |             |              |             | 3,702,000    |            
|                                     | Common stock, $0.01 par value; 200,000,000 shares authorized
86,264,683 and 85,944,951 shares issued and outstanding,
respectively |                            |                                            | 863,000      |             |              |             | 859,000      |            
|                                     | Additional paid-in capital                                                                                                         |                            |                                            | 537,086,000  |             |              |             | 536,173,000  |            
|                                     | Accumulated deficit                                                                                                                |                            |                                            | (338,866,000 | )           |              |             | (328,651,000 | )          
|                                     | Deferred stock-based compensation                                                                                                  |                            |                                            | (246,000     | )           |              |             | (663,000     | )          
|                                     | Accumulated other comprehensive loss                                                                                               |                            |                                            | (147,000     | )           |              |             | (156,000     | )          
|                                     |                                                                                                                                    |                            |                                            |              |             |              |             |              |            
|                                     |                                                                                                                                    | Total stockholders equity |                                            |              | 202,392,000 |              |             |              | 211,264,000 |            
|                                     |                                                                                                                                    |                            |                                            |              |             |              |             |              |            
|                                     |                                                                                                                                    |                            | Total liabilities and stockholders equity |              | $           | 233,841,000  |             |              | $           | 245,270,000 | 
|                                     |                                                                                                                                    |                            |                                            |              |             |              |             |              |            

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

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IDENTIX INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)

|                                                                                    |                                      |                                                            |                          |       |                                 |            |                               |       |            |            |             |       |            |            |             |       |            |            | 
|----------------------------------------------------------------------------------- | ------------------------------------ | ---------------------------------------------------------- | ------------------------ | ----- | ------------------------------- | ---------- | ----------------------------- | ----- | ---------- | ---------- | ----------- | ----- | ---------- | ---------- | ----------- | ----- | ---------- | ---------- | 
|                                                                                    |                                      |                                                            |                          |       | Three Months Ended December 31, |            | Six Months Ended December 31,
|                                                                                    |                                      |                                                            |                          |       |                                 |            |                              
|                                                                                    |                                      |                                                            |                          |       | 2003                            |            | 2002                          |       | 2003       |            | 2002       
|                                                                                    |                                      |                                                            |                          |       |                                 |            |                               |       |            |            |            
|Revenues:                                                                           |                                      |                                                            |                          |       |                                 |            |                               |       |            |            |             |       |            |            |             |      
|                                                                                    |                                      | Product revenues                                           |                          | $     | 12,460,000                      |            |                               | $     | 12,512,000 |            |             | $     | 25,178,000 |            |             | $     | 26,664,000 |           
|                                                                                    |                                      | Services revenues                                          |                          |       | 7,508,000                       |            |                               |       | 10,004,000 |            |             |       | 16,122,000 |            |             |       | 20,914,000 |           
|                                                                                    |                                      |                                                            |                          |       |                                 |            |                               |       |            |            |             |       |            |            |             |      
|                                                                                    |                                      |                                                            | Total revenues           |       |                                 | 19,968,000 |                               |       |            | 22,516,000 |             |       |            | 41,300,000 |             |       |            | 47,578,000 | 
|                                                                                    |                                      |                                                            |                          |       |                                 |            |                               |       |            |            |             |       |            |            |             |      
|Cost and expenses:                                                                  |                                      |                                                            |                          |       |                                 |            |                               |       |            |            |             |       |            |            |             |      
|                                                                                    |                                      | Cost of product revenues                                   |                          |       | 8,008,000                       |            |                               |       | 8,781,000  |            |             |       | 16,016,000 |            |             |       | 19,086,000 |           
|                                                                                    |                                      | Cost of services revenues                                  |                          |       | 6,900,000                       |            |                               |       | 8,787,000  |            |             |       | 14,371,000 |            |             |       | 18,631,000 |           
|                                                                                    |                                      | Research, development and engineering                      |                          |       | 2,768,000                       |            |                               |       | 2,690,000  |            |             |       | 5,023,000  |            |             |       | 5,778,000  |           
|                                                                                    |                                      | Marketing and selling                                      |                          |       | 2,769,000                       |            |                               |       | 3,401,000  |            |             |       | 5,446,000  |            |             |       | 6,652,000  |           
|                                                                                    |                                      | General and administrative                                 |                          |       | 3,923,000                       |            |                               |       | 4,056,000  |            |             |       | 8,312,000  |            |             |       | 8,939,000  |           
|                                                                                    |                                      | Amortization of acquired intangible assets                 |                          |       | 1,375,000                       |            |                               |       | 1,373,000  |            |             |       | 2,757,000  |            |             |       | 2,919,000  |           
|                                                                                    |                                      | Restructuring, write-offs and other merger related charges |                          |       |                                |            |                               |       | 1,550,000  |            |             |       |           |            |             |       | 8,305,000  |           
|                                                                                    |                                      |                                                            |                          |       |                                 |            |                               |       |            |            |             |       |            |            |             |      
|                                                                                    |                                      |                                                            | Total costs and expenses |       |                                 | 25,743,000 |                               |       |            | 30,638,000 |             |       |            | 51,925,000 |             |       |            | 70,310,000 | 
|                                                                                    |                                      |                                                            |                          |       |                                 |            |                               |       |            |            |             |       |            |            |             |      
|Loss from operations                                                                |                                      |                                                            | (5,775,000               | )     |                                 |            | (8,122,000                    | )     |            |            | (10,625,000 | )     |            |            | (22,732,000 | )    
|Interest and other income, net                                                      |                                      |                                                            | 367,000                  |       |                                 |            | 673,000                       |       |            |            | 683,000     |       |            |            | 1,047,000   |      
|Interest expense                                                                    |                                      |                                                            |                         |       |                                 |            | (5,000                        | )     |            |            | (8,000      | )     |            |            | (4,000      | )    
|                                                                                    |                                      |                                                            |                          |       |                                 |            |                               |       |            |            |             |       |            |            |             |      
|Loss before income taxes and equity interest in loss of
joint venture               |                                      |                                                            | (5,408,000               | )     |                                 |            | (7,454,000                    | )     |            |            | (9,950,000  | )     |            |            | (21,689,000 | )    
|(Provision) Benefit for income taxes                                                |                                      |                                                            | (9,000                   | )     |                                 |            | 8,000                         |       |            |            | (18,000     | )     |            |            | (14,000     | )    
|                                                                                    |                                      |                                                            |                          |       |                                 |            |                               |       |            |            |             |       |            |            |             |      
|Loss before equity interest in loss of joint venture                                |                                      |                                                            | (5,417,000               | )     |                                 |            | (7,446,000                    | )     |            |            | (9,968,000  | )     |            |            | (21,703,000 | )    
|Equity interest in loss of joint venture                                            |                                      |                                                            | (142,000                 | )     |                                 |            | (106,000                      | )     |            |            | (247,000    | )     |            |            | (48,000     | )    
|                                                                                    |                                      |                                                            |                          |       |                                 |            |                               |       |            |            |             |       |            |            |             |      
|Net loss                                                                            |                                      | $                                                          | (5,559,000               | )     |                                 | $          | (7,552,000                    | )     |            | $          | (10,215,000 | )     |            | $          | (21,751,000 | )    
|                                                                                    |                                      |                                                            |                          |       |                                 |            |                               |       |            |            |             |       |            |            |             |      
|                                                                                    | Basic and diluted net loss per share |                                                            | $                        | (0.06 | )                               |            | $                             | (0.09 | )          |            | $           | (0.12 | )          |            | $           | (0.26 | )         
|                                                                                    |                                      |                                                            |                          |       |                                 |            |                               |       |            |            |             |       |            |            |             |      
|Weighted average common shares used in basic
and diluted loss per share computation |                                      |                                                            | 86,143,000               |       |                                 |            | 85,124,000                    |       |            |            | 86,079,000  |       |            |            | 84,962,000  |      

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

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IDENTIX INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

|                                              |                                                                             |                                                     |            |                               |            |      |             |             |            |  
|--------------------------------------------- | --------------------------------------------------------------------------- | --------------------------------------------------- | ---------- | ----------------------------- | ---------- | ---- | ----------- | ----------- | ---------- | -
|                                              |                                                                             |                                                     |            | Six Months Ended December 31,
|                                              |                                                                             |                                                     |            |                              
|                                              |                                                                             |                                                     |            | 2003                          |            | 2002
|                                              |                                                                             |                                                     |            |                               |            |     
|Cash flows from operating activities:         |                                                                             |                                                     |            |                               |            |      |             |            
|                                              | Net loss                                                                    |                                                     | $          | (10,215,000                   | )          |      | $           | (21,751,000 | )         
|                                              | Adjustments to reconcile net loss to net cash used in operating
activities: |                                                     |            |                               |            |      |             |             |           
|                                              |                                                                             | Depreciation and amortization                       |            |                               | 3,891,000  |      |             |             | 4,167,000  |  
|                                              |                                                                             | Equity interest in loss of joint venture            |            |                               | 247,000    |      |             |             | 48,000     |  
|                                              |                                                                             | Realized gain on sales of marketable securities     |            |                               | (39,000    | )    |             |             | (236,000   | )
|                                              |                                                                             | Stock-based compensation expense                    |            |                               | 413,000    |      |             |             | 932,000    |  
|                                              |                                                                             | Amortization of premiums on marketable securities   |            |                               |           |      |             |             | 88,000     |  
|                                              |                                                                             | Bad debt (recoveries) expense                       |            |                               | (696,000   | )    |             |             | 589,000    |  
|                                              |                                                                             | Loss on disposal of equipment                       |            |                               | 38,000     |      |             |             |           |  
|                                              |                                                                             | Non-cash restructuring write-offs and other charges |            |                               |           |      |             |             | 441,000    |  
|                                              | Changes in assets and liabilities:                                          |                                                     |            |                               |            |      |             |             |           
|                                              |                                                                             | Accounts receivable                                 |            |                               | 3,037,000  |      |             |             | (3,013,000 | )
|                                              |                                                                             | Inventories                                         |            |                               | (467,000   | )    |             |             | 2,358,000  |  
|                                              |                                                                             | Prepaid expenses and other assets                   |            |                               | 1,024,000  |      |             |             | 273,000    |  
|                                              |                                                                             | Accounts payable                                    |            |                               | (2,214,000 | )    |             |             | (2,270,000 | )
|                                              |                                                                             | Accrued compensation                                |            |                               | 310,000    |      |             |             | (2,200,000 | )
|                                              |                                                                             | Other accrued liabilities                           |            |                               | (1,872,000 | )    |             |             | 2,383,000  |  
|                                              |                                                                             | Deferred revenue                                    |            |                               | 1,219,000  |      |             |             | (221,000   | )
|                                              |                                                                             |                                                     |            |                               |            |      |             |            
|                                              | Net cash used in operating activities                                       |                                                     |            | (5,324,000                    | )          |      |             | (18,412,000 | )         
|                                              |                                                                             |                                                     |            |                               |            |      |             |            
|Cash flows from investing activities:         |                                                                             |                                                     |            |                               |            |      |             |            
|                                              | Net proceeds from the sales of marketable securities                        |                                                     |            | 9,000,000                     |            |      |             | 15,599,000  |           
|                                              | Purchases of marketable securities                                          |                                                     |            | (8,961,000                    | )          |      |             | (9,492,000  | )         
|                                              | Additions of intangibles and other assets                                   |                                                     |            |                              |            |      |             | (500,000    | )         
|                                              | Capital expenditures                                                        |                                                     |            | (606,000                      | )          |      |             | (820,000    | )         
|                                              |                                                                             |                                                     |            |                               |            |      |             |            
|                                              | Net cash (used in) provided by investing activities                         |                                                     |            | (567,000                      | )          |      |             | 4,787,000   |           
|                                              |                                                                             |                                                     |            |                               |            |      |             |            
|Cash flows from financing activities:         |                                                                             |                                                     |            |                               |            |      |             |            
|                                              | Proceeds from sales of common stock                                         |                                                     |            | 921,000                       |            |      |             | 1,346,000   |           
|                                              |                                                                             |                                                     |            |                               |            |      |             |            
|                                              | Net cash provided by financing activities                                   |                                                     |            | 921,000                       |            |      |             | 1,346,000   |           
|                                              |                                                                             |                                                     |            |                               |            |      |             |            
|Net decrease in cash and cash equivalents     |                                                                             |                                                     | (4,970,000 | )                             |            |      | (12,279,000 | )          
|Cash and cash equivalents at period beginning |                                                                             |                                                     | 34,712,000 |                               |            |      | 53,346,000  |            
|                                              |                                                                             |                                                     |            |                               |            |      |             |            
|Cash and cash equivalents at period end       |                                                                             | $                                                   | 29,742,000 |                               |            | $    | 41,067,000  |            
|                                              |                                                                             |                                                     |            |                               |            |      |             |            

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

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##### Table of Contents






IDENTIX INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)



|1. |  | Basis of Presentation                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | These 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, 2003 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, 2003 are not necessarily indicative of results to
be expected for the entire fiscal year, which ends on June 30, 2004.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|  
|   |  | 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                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|  
|   |  | The Company recognizes revenues in accordance with the provisions of the
Securities and Exchange Commission Staff Accounting Bulletin (SAB) No. 104,
Revenue Recognition, which superceded SAB No. 101, and of the American
Institute of Certified Public Accountants Statement of Position (SOP) 97-2,
Software Revenue Recognition, as amended by SOP 98-4 and SOP 98-9, as well
as Technical Practice Aids issued from time to time by the American Institute
of Certified Public Accountants.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|  
|   |  | The Company adopted Emerging Issues Task Force Issue No. 00-21 Accounting
for Revenue Arrangements with Multiple Deliverables,(EITF 00-21) effective
April 1, 2003. There was no cumulative effect of a change in accounting
policy upon the adoption of EITF 00-21. 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s product revenue is derived from the sale of equipment and
software, as well as maintenance contracts related to the Companys product
lines. Certain of the Companys equipment sales such as its Live Scan
Systems generally require installation and training subsequent to shipment
and transfer of title. Product revenue related to equipment sales that
require installation is deferred until installation is complete and customer
acceptance has been obtained. Revenue related to product sales that require
no installation such as printers and other peripheral devices as well as
certain security products including DFR-2080, DFR-300, DFR-200 and FingerScan
V20 are recognized in accordance with the terms of the sale, generally upon
shipment 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 the risks and
rewards have transferred or, in the case of Live Scan Systems that generally
require installation, upon the final installation, training and acceptance
from the end user. The Company was audited by the Defense Contract Audit
Agency for the period from July 1, 1997 to June 30, 2000 and the results of
the audit did not have a material effect on the Companys financial position
or results of operations for these periods. The Company is currently
undergoing a General Services Administration pre-award audit for the renewal
of a 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, any material adverse findings or adjustments arising out of such
audit may have a material adverse effect on our business, financial condition
and results of operations.

6



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|   |  | The Company also sells several stand-alone software products including
BioLogon®, BioEngine® and Faceit® software developer kits. 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) of fair value
exists to allocate the total fee to all undelivered elements of the
arrangement and collection is
determined to be probable. 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. 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. Maintenance revenue is deferred and recognized rateably over the
life of the service period of the related agreement.
|-- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | The majority of the Companys service revenues are generated from the U.S.
Government under various firm fixed-price (FFP), time-and-material (T&M)
and cost reimbursement contracts. Revenues on FFP contracts are generally
recognized on the percentage-of-completion method based on costs incurred in
relation to total estimated costs. Revenues on T&M contracts are recognized
to the extent of billable rates multiplied by hours worked plus materials
expense incurred. Revenues for cost plus fixed fee (CPFF) contracts are
recognized as costs are incurred, including a proportionate amount of the fee
earned. Unbilled accounts receivable represent accrued revenue that becomes
billable per the terms of contract. Provisions for estimated contract losses
are recorded in the period such losses are determined.                                                                                                                                                                                                             
|  
|   |  | Services revenues from contracts directly with the U.S. Government,
principally with the Department of Defense (DOD), and from subcontracts
with other U.S. Government contractors, were approximately 71% of total
services revenue for both the three and six months ending December 31, 2003
compared to 80% and 82% for the same periods in the prior fiscal year.
Contract costs for services revenues to the U.S. Government, including
indirect expenses, are subject to audit and subsequent adjustment by
negotiation between the Company and U.S. Government representatives.
Revenues are recorded in amounts expected to be realized upon final
settlement.                                                                                                                                                                                                                                                                                                                                                                                
|  
|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 SFAS 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 options been
recognized 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:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        

|                     |                                                                                                                                    |   |                                 |            |                               |   |            |            |      |   |             |            |   |   |             |            |  
|-------------------- | ---------------------------------------------------------------------------------------------------------------------------------- | - | ------------------------------- | ---------- | ----------------------------- | - | ---------- | ---------- | ---- | - | ----------- | ---------- | - | - | ----------- | ---------- | -
|                     |                                                                                                                                    |   | Three Months Ended December 31, |            | Six Months Ended December 31,
|                     |                                                                                                                                    |   |                                 |            |                              
|                     |                                                                                                                                    |   | 2003                            |            | 2002                          |   | 2003       |            | 2002
|                     |                                                                                                                                    |   |                                 |            |                               |   |            |            |     
|Net loss as reported |                                                                                                                                    | $ | (5,559,000                      | )          |                               | $ | (7,552,000 | )          |      | $ | (10,215,000 | )          |   | $ | (21,751,000 | )         
|                     | Add: Stock based compensation
expense included in reported
net loss, net of related tax
effects                                    |   |                                 | 179,000    |                               |   |            | 409,000    |      |   |             | 413,000    |   |   |             | 932,000    |  
|                     | Deduct: Total stock based compensation
expense determined under fair value
based method for all awards, net
of related tax effects |   |                                 | (1,475,000 | )                             |   |            | (2,064,000 | )    |   |             | (3,306,000 | ) |   |             | (4,128,000 | )
|                     |                                                                                                                                    |   |                                 |            |                               |   |            |            |      |   |             |            |   |   |             |           
|Proforma net loss    |                                                                                                                                    | $ | (6,855,000                      | )          |                               | $ | (9,207,000 | )          |      | $ | (13,108,000 | )          |   | $ | (24,947,000 | )         
|                     |                                                                                                                                    |   |                                 |            |                               |   |            |            |      |   |             |            |   |   |             |           
|Net loss per share:  |                                                                                                                                    |   |                                 |            |                               |   |            |            |      |   |             |            |   |   |             |           
|                     | As reported                                                                                                                        |   | $                               | (0.06      | )                             |   | $          | (0.09      | )    |   | $           | (0.12      | ) |   | $           | (0.26      | )
|                     | Proforma                                                                                                                           |   | $                               | (0.08      | )                             |   | $          | (0.11      | )    |   | $           | (0.15      | ) |   | $           | (0.29      | )
|Shares               |                                                                                                                                    |   | 86,143,000                      |            |                               |   | 85,124,000 |            |      |   | 86,079,000  |            |   |   | 84,962,000  |           

7



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##### Table of Contents





|4. |  | Cash and Credit Facilities                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | The Company financed its operations during the six months ended December 31,
2003 primarily from cash provided by its working capital. As of December 31,
2003, the Companys principal sources of liquidity consisted of $45,529,000
of working capital including $37,735,000 in cash and cash equivalents and
short-term marketable securities. In addition, the Company if needed, has
$1,504,000 in long-term marketable securities that can be used to finance
operations.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|  
|   |  | The Companys existing line of credit (the Identix Line of Credit) was
entered into on May 30, 2003. 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 Identix 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 4.00% at December 31, 2003. The
Identix Line of Credit expires on October 30, 2004. Until the Company
establishes a 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 December 31, 2003, there were no amounts outstanding under this line of
credit.
|  
|   |  | The Identix Line of Credit agreement contains financial, operating and
reporting covenants. At December 31, 2003, the Company was in compliance
with all covenants.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|  
|5. |  | 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,
|                                 |  | 2003         |            | 2003    
|                                 |  |              |            |         
|Purchased parts and materials    |  | $            | 4,260,000  |          |  | $ | 3,351,000 | 
|Work-in-process                  |  |              | 4,779,000  |          |  |   | 4,893,000 | 
|Finished goods, including spares |  |              | 1,348,000  |          |  |   | 1,676,000 | 
|                                 |  |              |            |          |  |   |           | 
|                                 |  | $            | 10,387,000 |          |  | $ | 9,920,000 | 
|                                 |  |              |            |          |  |   |           | 



|6. |  | Restructuring, Write-offs and Other Merger Related Charges                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|-- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | In June 2002, the Company merged with Visionics and in connection with the
merger 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. During the year ended June 30, 2003, the Company recorded
additional restructuring and other merger related charges of $10,206,000,
including a loss of $186,000 on the sublease portion of its Dublin facility.
In conjunction with the restructuring related charges recorded, the Company
made certain estimates regarding future sublease income that have a
significant impact on its anticipated cash obligations and restructuring
reserves. Although the Company believes that the lease commitment estimates
are appropriate in the circumstances, future changes in real estate markets
could impact the ultimate amount of cash paid to resolve these obligations.
The following is a summary of the charges incurred and payments made from the
time of the merger through June 30, 2003:

|                              |       |   |                                                           |            |                  |   |           |           |               |   |                  |            |                 |   |            |            | 
|----------------------------- | ----- | - | --------------------------------------------------------- | ---------- | ---------------- | - | --------- | --------- | ------------- | - | ---------------- | ---------- | --------------- | - | ---------- | ---------- | 
|                              |       |   | Activity during the period June 25, 2002 to June 30, 2003
|                              |       |   |                                                          
|                              |       |   |                                                           |            |                  |   |           |           |               |   | Cash Payments    |            |                 |   |           
|                              |       |   |                                                           |            |                  |   |           |           |               |   | through June 30, |            | Liability as of
|                              |       |   | Total Charges                                             |            | Non-Cash Charges |   | 2003      |           | June 30, 2003
|                              |       |   |                                                           |            |                  |   |           |           |              
|Severance and benefits        |       | $ | 8,376,000                                                 |            |                  | $ | 900,000   |           |               | $ | 6,862,000        |            |                 | $ | 614,000    |           
|Disposal of fixed assets      |       |   | 1,664,000                                                 |            |                  |   | 1,664,000 |           |               |   |                 |            |                 |   |           |           
|Lease exit costs              |       |   | 15,280,000                                                |            |                  |   | 388,000   |           |               |   | 2,741,000        |            |                 |   | 12,151,000 |           
|Internal merger costs & other |       |   | 3,684,000                                                 |            |                  |   |          |           |               |   | 3,653,000        |            |                 |   | 31,000     |           
|                              |       |   |                                                           |            |                  |   |           |           |               |   |                  |            |                 |   |            |           
|                              | Total |   | $                                                         | 29,004,000 |                  |   | $         | 2,952,000 |               |   | $                | 13,256,000 |                 |   | $          | 12,796,000 | 
|                              |       |   |                                                           |            |                  |   |           |           |               |   |                  |            |                 |   |            |           

8



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| |  | Fiscal 2004                                                                                                                                                                                      
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | The following table represents a summary of restructuring, write-offs and
other merger related charges which relate to the merger of Identix and
Visionics that was consummated on June 25, 2002:

|                                |       |   |                                            |            |           |   |         |   |               |   |                      |   |  |   |                            |           |  |   |            |            | 
|------------------------------- | ----- | - | ------------------------------------------ | ---------- | --------- | - | ------- | - | ------------- | - | -------------------- | - |  | - | -------------------------- | --------- |  | - | ---------- | ---------- | 
|                                |       |   | For the six months ended December 31, 2003
|                                |       |   |                                           
|                                |       |   | Restructuring Liability                    |            |           |   |         |   | Non-Cash      |   |                      |   |  |   | Restructuring Liability as
|                                |       |   | as of June 30, 2003                        |            | Additions |   | Charges |   | Cash Payments |   | of December 31, 2003
|                                |       |   |                                            |            |           |   |         |   |               |   |                     
|Severance and benefits          |       | $ | 614,000                                    |            |           | $ |        |   |               | $ |                     |   |  | $ | 241,000                    |           |  | $ | 373,000    |           
|Disposal of fixed assets        |       |   |                                           |            |           |   |        |   |               |   |                     |   |  |   |                           |           |  |   |           |           
|Lease exit costs                |       |   | 12,151,000                                 |            |           |   |        |   |               |   |                     |   |  |   | 1,657,000                  |           |  |   | 10,494,000 |           
|Internal merger costs and other |       |   | 31,000                                     |            |           |   |        |   |               |   |                     |   |  |   |                           |           |  |   | 31,000     |           
|                                |       |   |                                            |            |           |   |         |   |               |   |                      |   |  |   |                            |           |  |   |            |           
|                                | Total |   | $                                          | 12,796,000 |           |   | $       |  |               |   | $                    |  |  |   | $                          | 1,898,000 |  |   | $          | 10,898,000 | 
|                                |       |   |                                            |            |           |   |         |   |               |   |                      |   |  |   |                            |           |  |   |            |           



|   |  | The restructuring liability is classified in the consolidated balance sheet
based on the anticipated timing of the respective payment. As of December
31, 2003, $7,973,000 of the above restructuring liability is classified as
long-term. Management currently believes that of the $373,000 accrued for
severance and benefits, $260,000 will be paid over the next twelve months
with the remaining balance being paid through 2013 with the lease exit costs
being paid over the remaining term of the leases. The leases expire at
various dates through 2011.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | Fiscal 2003                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|  
|   |  | During the three and six months ended December 31, 2002, the Company recorded
merger related expenses totaling $1,550,000 and $8,305,000 respectively. For
the three months ended December 31, 2002 these costs consisted of $397,000 in
relocation costs for Identix employees and facilities, $194,000 associated
with the disposal of fixed assets, $299,000 related to lease exit costs and
$660,000 related to employees with extended terminations to assist in the
integration. Such costs were expensed as incurred. For the six months ended
December 31, 2002, these costs consisted of $2,041,000 in relocation costs,
$194,000 associated with the disposal of fixed assets, $4,065,000 related to
lease exit costs and $2,005,000 related to employees with extended
terminations to assist in the integration. Such costs were expensed as
incurred.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|  
|   |  | Of the lease exit costs of $4,065,000 recorded during the six months ended
December 31, 2002, $3,766,000 of the loss was due to the sublease of a
portion of its Fairfax, Virginia facility. The loss represented the
difference between the remaining lease obligation of $5,222,000, abandoned
property and equipment of $445,000 and costs to sublet the facility of
$375,000, partially offset by estimated sublease income of $2,276,000. In
conjunction with the restructuring related charges recorded, the Company made
certain estimates regarding future sublease income that have a significant
impact on its anticipated cash obligations and restructuring reserves.
Although the Company believes that the lease commitment estimates are
appropriate in the circumstances, future changes in real estate markets could
impact the ultimate amount of cash paid to resolve these obligations. During
the six months ended December 31, 2002, the Company reversed an earlier
reserve of $182,000 relating to the shut down of the Companys Virginia
Beach-based Law Enforcement Solutions Division (LESD) as the actual costs
to dispose of the operations were less than estimated. In addition, the
Company recorded a loss of $299,000 related to lease exit costs at the
Companys Dublin, California facility. The loss is associated with revised
estimated lease exit costs.
|  
|7. |  | 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     

9



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##### Table of Contents





|   |  | Options and warrants to purchase 8,711,000 and 9,690,000 shares of common
stock were outstanding at December 31, 2003 and 2002, 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 and 2002. Such shares of preferred stock
are convertible into 236,000 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.
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|8. |  | Comprehensive Loss                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|  
|   |  | Comprehensive loss for the three and six months ended December 31, 2003, was
$5,555,000 and $10,206,000 compared to a loss of $7,821,000 and $21,763,000
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.                                                                                                                                                                                  
|  
|9. |  | 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. Revenues are attributed to the
reportable segment of the sales or service organizations, and costs directly
and indirectly incurred in generating revenues are similarly assigned.                                                                                                                                                                                  

|                      |          |   |                                 |            |                               |   |            |            |      |   |             |             |   |   |             |             |  
|--------------------- | -------- | - | ------------------------------- | ---------- | ----------------------------- | - | ---------- | ---------- | ---- | - | ----------- | ----------- | - | - | ----------- | ----------- | -
|                      |          |   | Three Months Ended December 31, |            | Six Months Ended December 31,
|                      |          |   |                                 |            |                              
|                      |          |   | 2003                            |            | 2002                          |   | 2003       |            | 2002
|                      |          |   |                                 |            |                               |   |            |            |     
|Total revenues:       |          |   |                                 |            |                               |   |            |            |      |   |             |             |   |   |             |            
|                      | Product  |   | $                               | 12,460,000 |                               |   | $          | 12,512,000 |      |   | $           | 25,178,000  |   |   | $           | 26,664,000  |  
|                      | Services |   |                                 | 7,508,000  |                               |   |            | 10,004,000 |      |   |             | 16,122,000  |   |   |             | 20,914,000  |  
|                      |          |   |                                 |            |                               |   |            |            |      |   |             |             |   |   |             |            
|                      |          | $ | 19,968,000                      |            |                               | $ | 22,516,000 |            |      | $ | 41,300,000  |             |   | $ | 47,578,000  |            
|                      |          |   |                                 |            |                               |   |            |            |      |   |             |             |   |   |             |            
|Loss from operations: |          |   |                                 |            |                               |   |            |            |      |   |             |             |   |   |             |            
|                      | Products |   | $                               | (5,461,000 | )                             |   | $          | (7,991,000 | )    |   | $           | (10,485,000 | ) |   | $           | (18,668,000 | )
|                      | Services |   |                                 | (314,000   | )                             |   |            | (131,000   | )    |   |             | (140,000    | ) |   |             | (4,064,000  | )
|                      |          |   |                                 |            |                               |   |            |            |      |   |             |             |   |   |             |            
|                      |          | $ | (5,775,000                      | )          |                               | $ | (8,122,000 | )          |      | $ | (10,625,000 | )           |   | $ | (22,732,000 | )          
|                      |          |   |                                 |            |                               |   |            |            |      |   |             |             |   |   |             |            

|                     |          |   |              |             |          |   |             |             | 
|-------------------- | -------- | - | ------------ | ----------- | -------- | - | ----------- | ----------- | 
|                     |          |   | December 31, |             | June 30,
|                     |          |   |              |             |         
|                     |          |   | 2003         |             | 2003    
|                     |          |   |              |             |         
|Identifiable assets: |          |   |              |             |          |   |             |            
|                     | Product  |   | $            | 226,386,000 |          |   | $           | 235,719,000 | 
|                     | Services |   |              | 7,455,000   |          |   |             | 9,551,000   | 
|                     |          |   |              |             |          |   |             |            
|                     |          | $ | 233,841,000  |             |          | $ | 245,270,000 |            
|                     |          |   |              |             |          |   |             |            



|10. |  | Foreign Operations Data
|--- |  | -----------------------

In geographical reporting, revenues are attributed to the geographical
location of the sales and service organizations:

|                |               |   |                                         |            |                                       |   |            |            |      |   |            |            |  |   |            |            | 
|--------------- | ------------- | - | --------------------------------------- | ---------- | ------------------------------------- | - | ---------- | ---------- | ---- | - | ---------- | ---------- |  | - | ---------- | ---------- | 
|                |               |   | For the Three Months Ended December 31, |            | For the Six Months Ended December 31,
|                |               |   |                                         |            |                                      
|                |               |   | 2003                                    |            | 2002                                  |   | 2003       |            | 2002
|                |               |   |                                         |            |                                       |   |            |            |     
|Total revenues: |               |   |                                         |            |                                       |   |            |            |      |   |            |            |  |   |            |           
|                | North America |   | $                                       | 18,613,000 |                                       |   | $          | 21,432,000 |      |   | $          | 39,212,000 |  |   | $          | 45,549,000 | 
|                | International |   |                                         | 1,355,000  |                                       |   |            | 1,084,000  |      |   |            | 2,088,000  |  |   |            | 2,029,000  | 
|                |               |   |                                         |            |                                       |   |            |            |      |   |            |            |  |   |            |           
|                |               | $ | 19,968,000                              |            |                                       | $ | 22,516,000 |            |      | $ | 41,300,000 |            |  | $ | 47,578,000 |           
|                |               |   |                                         |            |                                       |   |            |            |      |   |            |            |  |   |            |           

|                     |               |   |              |             |          |   |             |             | 
|-------------------- | ------------- | - | ------------ | ----------- | -------- | - | ----------- | ----------- | 
|                     |               |   | December 31, |             | June 30,
|                     |               |   |              |             |         
|                     |               |   | 2003         |             | 2003    
|                     |               |   |              |             |         
|Identifiable assets: |               |   |              |             |          |   |             |            
|                     | North America |   | $            | 232,827,000 |          |   | $           | 244,115,000 | 
|                     | International |   |              | 1,014,000   |          |   |             | 1,155,000   | 
|                     |               |   |              |             |          |   |             |            
|                     |               | $ | 233,841,000  |             |          | $ | 245,270,000 |            
|                     |               |   |              |             |          |   |             |            

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|11. |  | Indemnification Arrangements and Product Warranties                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|    |  | As part of the Visionics acquisition in June 2002, the Company undertook, and
assumed from Visionics, obligations to indemnify the officers and directors
of the acquired company for certain events or occurrences while the officer
or director served in such capacity. The maximum potential amount of future
payments the Company could be required to make under this indemnification
obligation is unlimited; however, the Company purchased a directors and
officers insurance policy to cover former directors and officers of
Visionics that provides coverage until June 25, 2007 and may enable Identix
to recover a portion of any future amounts paid. Assuming the applicability
of the coverage and the willingness of the insurer to assume coverage and
subject to certain retention, loss limits and other policy provisions and
except as provided below, the Company believes the estimated fair value of
the indemnification obligations to Visionics directors and officers is not
material. However, no assurances can be given that the covering insurers will
not attempt to dispute the validity, applicability or amount of coverage
without expensive and time-consuming litigation against the insurers. As of
October 30, 2003, the Company also entered into indemnification agreements
with its then current directors and executive officers. The maximum
potential amount of future payments the Company could be required to make
under these indemnification obligations is unlimited; however, the Company
purchased certain directors and officers insurance policies, effective
August 19, 2003 and September 21, 2003, respectively, to cover its directors
and officers, and such policies may enable Identix to recover a portion of
any covered claims under the agreements. Assuming the applicability of the
coverage and the willingness of the insurer to assume coverage and subject to
certain retention, loss limits and other policy provisions, the Company
believes the estimated fair value of the indemnification obligations to its
directors and officers is not material. However, no assurances can be given
that the covering insurers will not attempt to dispute the validity,
applicability or amount of coverage without expensive and time-consuming
litigation against the insurers.
|   
|    |  | 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, 2003, the Company was not subject to any
pending litigation alleging that the Companys products infringe the
intellectual property rights of any third parties.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|   
|    |  | The Company offers a warranty on various products and services. 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 costs to repair or otherwise satisfy the
claim. The following table presents changes in the Companys warranty
liability during the first six months of fiscal 2004:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             

|                             |  |   |          |  
|---------------------------- |  | - | -------- | -
|Balance at July 1, 2003      |  | $ | 374,000  |  
|Warranty Expense             |  |   | 517,000  |  
|Closed Warranty Claims       |  |   | (377,000 | )
|                             |  |   |          |  
|Balance at December 31, 2003 |  | $ | 514,000  |  
|                             |  |   |          |  



|12. |  | Recent Accounting Pronouncements                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|    |  | In January 2003, the FASB issued FASB Interpretation No. (FIN) 46,
Consolidation of Variable Interest Entities. FIN 46 addresses the
requirements for business enterprises to consolidate related entities, for
which they do not have controlling interests through voting or other rights,
if they are determined to be the primary beneficiary as a result of variable
economic interests. FIN 46 provides guidance for determining the primary
beneficiary for entities with multiple economic interests. FIN 46 is
effective at the time of investment for interests obtained in a variable
economic entity after January 31, 2003. Beginning in the Companys third
quarter of fiscal year 2004, FIN 46, as amended, will be applied to interests
in variable interest entities (VIEs) acquired prior to February 1, 2003.
Management believes the adoption of FIN 46 will not have a material impact on
the Companys consolidated results of operations, financial position, or cash
flows.
|   
|13. |  | Subsequent Events                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|   
|    |  | Mr. Milton E. Cooper, a member of the Companys Board of Directors since
2001, was appointed Chairman of the Board effective February 1, 2004.
Concurrent with such appointment, Mr. Robert McCashin, the former Chairman of
the Board of Directors, retired and resigned from the Board of Directors

as a result of his resignation Mr. McCashins agreement entitled
him to receive payment of
approximately $890,000 of which approximately $400,000 was previously
accrued. As a result the Company will record a charge to the statement of
operations for approximately $490,000 during the three months ended
March 31, 2004.                                                                                                                                                                                                                                                                                                                                                                 

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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 market segments - 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 Company also provides project management and facilities
engineering services to government agencies through Identix Public Sector, Inc.
(IPS), a wholly owned subsidiary of the Company.

On June 25, 2002, the Company completed its merger with Visionics Corporation
(Visionics), a leading provider of biometric technologies and identification
information systems. The Visionics results of operations have been included in
the Companys consolidated financial statements since the date of acquisition.
In connection with this stock-for-stock merger transaction, each outstanding
share of Visionics common stock was exchanged for 1.3436 shares of the
Companys common stock, resulting in the issuance of an aggregate of 39,422,000
shares of the Companys common stock for all outstanding shares of Visionics
common stock. In addition, all options and warrants to purchase shares of
Visionics common stock outstanding immediately prior to the consummation of
the merger were converted into options and warrants to purchase 3,860,000
shares of the Companys common stock. The total purchase price was
$334,818,000.

For the quarter ended December 31, 2003, while Identix continued to win major
awards in the biometrics industry, revenue was less than expected by
management. The shortfall was due to a combination of factors including a
stop work order by the Department of Homeland Security on the initial purchase
order under the previously awarded Blanket Purchase Agreement in response to a
protest by a competitor, customer infrastructure development requirements on
the major awards received by Identix during the quarter ended December 31,
2003. and additional softness in its Service business where year-end holiday
hours limit the opportunities for billable hours. Identix remained focused
internally on executing well on cost controls and does not anticipate that
fluctuations in revenue from expectations will affect operating costs or
Identix ability to win industry awards or meet the markets demand for new and
improved finger and facial recognition technology. The focus on cost
controls was demonstrated during the quarter by the decrease in cash, cash
equivalents and marketable securities of $3,911,000 and a decrease in working
capital of $5,094,000 compared to a net loss of $5,559,000 for the quarter
ended December 31, 2003. At December 31, 2003, the Company maintained cash,
cash equivalents and marketable securities of $39,200,000 and working capital
of $45,529,000. Currently, the Companys anticipated cash requirements relate
primarily to funding operations and paying remaining obligations related to
restructuring and other merger related charges recorded in fiscal years 2003
and 2002.

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 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, 2003 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, 2003
describes the critical accounting

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policies that are impacted significantly by
judgments, assumptions and estimates used in the preparation of the
Consolidated Financial Statements. At December 31, 2003, 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 2003 and resulted in an
impairment charge to goodwill of $154,799,000.

RESULTS OF OPERATIONS

Revenues, Cost of Revenues and Gross Margins

Revenues for the three and six months ended December 31, 2003 were $19,968,000
and $41,300,000 compared to $22,516,000 and $47,578,000 for the same periods in
the prior fiscal year. The Company had one customer, the Department of Defense
(DOD) that accounted for 20% of the total revenue for the three and six months
ended December 31, 2003, compared to 30% for the same periods in the prior
fiscal year.

Product revenues were $12,460,000 and $25,178,000 for the three months and six
months ended December 31, 2003, compared to $12,512,000 and $26,664,000 for the
same periods in the prior fiscal year. The 6% decrease in product revenue when
comparing the first six months of fiscal year 2003 to the same period for
fiscal year 2004, is primarily due to the Visionics merger in June 2002; as a
result of the merger, there was, a build up of orders that were recognized as
revenue in the first quarter of fiscal year 2003 which did not occur during the
same time period in fiscal year 2004. In addition, a decrease in sales volume
from the Companys Live Scan products and competitive pricing pressures also
contributed to this decrease. This decrease was partially offset by increased
maintenance revenue in the first and second quarters of fiscal year 2004 as
well as increased sales of the Companys Software Development Kits and the
Companys Identification Based Information System (IBIS) in the first quarter
of fiscal year 2004. The Company may continue to experience downward
competitive pricing pressures in the future. The Company is currently
undergoing a General Services Administration pre-award audit for the renewal of
a 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,
any material adverse findings or adjustments arising out of such audit may have
a material adverse effect on our business, financial condition and results of
operations.

International sales accounted for $1,355,000 and $2,088,000 or 11% and 8% of
the Companys product revenues for the three months and six months ended
December 31, 2003, respectively, compared to $1,084,000 and $2,029,000 or 9%
and 8% of the Companys product revenues for the same periods in the prior
fiscal year. Identix is actively pursuing business in the international
biometric market. 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.

Services revenues of $7,508,000 and $16,122,000 for the three and six months
ended December 31, 2003, were down 25% and 23%, respectively, when compared to
services revenues of $10,004,000 and $20,914,000 for the same periods in the
prior fiscal year. The decrease in service revenues for the three and six
months ended December 31, 2003, is primarily the result of the lack of revenues
from the Naval Sea Systems Command contracts that were in effect for the same
periods last fiscal year. The contracts period of performance ended June 30,
2003. The majority of the Companys services revenues are generated directly
from contracts with the U.S. Government, principally the DOD. For the three
and six months ended December 31, 2003, revenues directly from the DOD and from
other U. S. Government agencies accounted for 71% of the Companys total
services revenues compared to 80% and 82% for the same periods in the prior
fiscal year.

In January 2003, the Company was notified that its service business would not
be awarded a contract to continue providing professional support services and
material acquisition support to the Naval Sea Systems Command under contract
PMS-325. The original contract was a cost plus fixed fee award that expired on
June 30, 2003. The contract that was not awarded would have generated an
estimated $3,250,000 per quarter of additional revenue over the life of the
contract. During the three and six months ended December 31, 2002 the Company
recognized revenues of approximately $3,100,000 and $5,500,000 respectively,
under this contract. Due to the low margins on this contract, its loss did not
materially affect the Companys cash flows.

The Companys services business generates a significant amount of its revenues
from firm fixed-price (FFP) contracts and from time-and-materials (T&M)
contracts. During the three and six months ended December 31, 2003, the
Company derived 83% and 86% of services revenues from FFP and T&M contracts.
During the three and six months ended December 31, 2002, the Company derived
90% and 91% of services revenues from FFP and T&M contracts. FFP contracts
provide for a fixed price for stipulated services or products, regardless of
the

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costs incurred, which may result in losses from
cost overruns. T&M contracts typically provide for payment of negotiated hourly rates for labor
incurred plus reimbursement of other allowable direct and indirect costs. The
Company assumes greater performance risk on T&M and FFP contracts and the
failure to accurately estimate ultimate costs or to control costs during
performance of the work can result in reduced profit margins or
losses. There can be no assurance that the Companys services business will
not incur cost overruns for any FFP and T&M contracts it is awarded. The
Companys services business also generates revenues from cost plus fixed fee
(CPFF) contracts, which accounted for approximately 17% and 14% of its
services revenues for the three and six months ended December 31, 2003 and
approximately 10% and 9% of its services revenues for the same periods in the
prior fiscal year. CPFF contracts provide for the reimbursement of allowable
costs, including indirect costs plus a fee or profit. Revenues generated from
contracts with government agencies are subject to audit and subsequent
adjustment by negotiation between the Company and representatives of such
government agencies. The Company was audited by the Defense Contract Audit
Agency for the period from July 1, 1997 to June 30, 2000 and the results of the
audit did not have a material effect on the Companys financial position or
results of operations for these periods.

Gross margin on product revenues was 36% for the three and six months ended
December 31, 2003 and 30% and 28% for the same periods of the prior fiscal
year. The increase of the product gross margins for the three months ended
December 31, 2003, is primarily the result of fewer sales which required lower
margin professional services, as well as a lower reserve related to excess and
obsolete inventory items. The increase in gross margins for the six months
ended is a combination of the factors previously explained and due to unusually
low gross margins for the first part of fiscal year 2003 because of inventory
purchase accounting adjustments made in connection with the Visionics merger
that did not occur in fiscal year 2004. The Company expects gross margins to
fluctuate in future periods due to changes in the product mix, the costs of
components and the competition in the industry.

Gross margin on services revenues was 8% and 11% for the three and six months
ended December 31, 2003 as compared to 12% and 11% for the same periods in the
prior fiscal year. The decrease in gross margins in the second quarter of
fiscal year 2004 from the second quarter of fiscal year 2003 is primarily the
result of certain fixed costs of on-site overhead expenses and indirect costs
remaining the same as fiscal year 2003 yet the Company generated less revenue
to absorb these costs in fiscal year 2004.

Research, Development and Engineering

Research, development and engineering expenses were $2,768,000 and $5,023,000
or 22% and 20% of product revenues for the three and six months ended December
31, 2003 compared to $2,690,000 and $5,778,000 or 21% and 22% of product
revenues for the same periods in the prior fiscal year. The decrease of
$755,000 in research and development expense in fiscal year 2004 from fiscal
year 2003, is the result of several development projects ongoing in the first
quarter of fiscal year 2003 that were completed before the start of fiscal year
2004. In addition, there has been a concerted effort by the Company to
decrease its reliance on its principle subcontractor, which has resulted in an
additional reduction of research and development expense year over year.

Marketing and Selling

Marketing and selling expenses were $2,769,000 and $5,446,000 or 14% and 13% of
total revenues for the three and months ended December 31, 2003, compared to
$3,401,000 and $6,652,000 or 15% and 14% of total revenues for the same periods
in the prior fiscal year. The decrease in marketing and selling expenses
expressed in dollars was driven primarily by a significant reduction in bad
debt expense for the first quarter and second quarters of fiscal year 2004.
The reduction of bad debt expense in the first and second quarters of fiscal year
2004 was due to the cash collections of several large accounts receivable which
had been previously fully reserved. The specific receivables in both quarters
had been in dispute for more than one year and consistent with Company policy,
were fully reserved.

General and Administrative

General and administrative expenses were $3,923,000 and $8,312,000 for the
three and six months ended December 31, 2003, compared to $4,056,000 and
$8,939,000 for the same periods in the prior fiscal year. The decreases in
general and administrative expense for the two fiscal 2004 periods were due to
a number of different factors. Deferred compensation expense decreased by
$230,000 from the second quarter of fiscal 2003 to the second quarter of fiscal
2004 and $519,000 on a year to date basis from fiscal 2003 to fiscal 2004 as
the number of unvested options continues to decline. In addition, for the six
months ended December 31, 2003, the Company reduced its reliance on outside
recruiters and temporary employees, lowering expenses in each category by
$168,000 and $57,000 respectively. Finally, during the six months
ended December 31, 2003, the Company experienced lower
costs associated with its board and annual meetings totaling $246,000. These
decreases were partially offset by certain professional services and increased
 insurance costs totaling $575,000 for the six months ended December 31, 2003.

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Amortization of Acquired Intangible Assets

The amortization expense is primarily related to acquired intangible assets
such as developed technology, and patents. The amortization expense related to
acquired intangible assets was $1,375,000 and $2,757,000 for the three and six
months ended December 31, 2003 compared to $1,373,000 and $2,919,000 for the
same periods in the prior fiscal year. The decrease is primarily the result of
certain intangibles being fully amortized by September 30, 2002.

Restructuring Write-offs and Other Merger Related Charges

In June 2002, the Company merged with Visionics and in connection with the
merger 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. During the year ended June 30, 2003, the Company recorded
additional restructuring and other merger related charges of $10,206,000,
including a loss of $186,000 on the sublease portion of its Dublin facility.
In conjunction with the restructuring related charges recorded, the Company
made certain estimates regarding future sublease income that have a significant
impact on its anticipated cash obligations and restructuring reserves.
Although the Company believes that the lease commitment estimates are
appropriate in the circumstances, future changes in real estate markets could
impact the ultimate amount of cash paid to resolve these obligations. The
following is a summary of the charges incurred and payments made from the time
of the merger through June 30, 2003:

|                              |       |   |                                                           |            |                  |   |           |           |               |   |                  |            |                 |   |            |            | 
|----------------------------- | ----- | - | --------------------------------------------------------- | ---------- | ---------------- | - | --------- | --------- | ------------- | - | ---------------- | ---------- | --------------- | - | ---------- | ---------- | 
|                              |       |   | Activity during the period June 25, 2002 to June 30, 2003
|                              |       |   |                                                          
|                              |       |   |                                                           |            |                  |   |           |           |               |   | Cash Payments    |            |                 |   |           
|                              |       |   |                                                           |            |                  |   |           |           |               |   | through June 30, |            | Liability as of
|                              |       |   | Total Charges                                             |            | Non-Cash Charges |   | 2003      |           | June 30, 2003
|                              |       |   |                                                           |            |                  |   |           |           |              
|Severance and benefits        |       | $ | 8,376,000                                                 |            |                  | $ | 900,000   |           |               | $ | 6,862,000        |            |                 | $ | 614,000    |           
|Disposal of fixed assets      |       |   | 1,664,000                                                 |            |                  |   | 1,664,000 |           |               |   |                 |            |                 |   |           |           
|Lease exit costs              |       |   | 15,280,000                                                |            |                  |   | 388,000   |           |               |   | 2,741,000        |            |                 |   | 12,151,000 |           
|Internal merger costs & other |       |   | 3,684,000                                                 |            |                  |   |          |           |               |   | 3,653,000        |            |                 |   | 31,000     |           
|                              |       |   |                                                           |            |                  |   |           |           |               |   |                  |            |                 |   |            |           
|                              | Total |   | $                                                         | 29,004,000 |                  |   | $         | 2,952,000 |               |   | $                | 13,256,000 |                 |   | $          | 12,796,000 | 
|                              |       |   |                                                           |            |                  |   |           |           |               |   |                  |            |                 |   |            |           

Fiscal 2004

Merger costs decreased by $1,550,000 and $8,305,000 when comparing the three
and six months ended December 31, 2003 to the same periods in the prior fiscal
year. The decrease is due entirely to merger costs being fully recognized
during fiscal year 2003.

The following table represents a summary of restructuring, write-offs and other
merger related charges:

|                                |       |   |                                            |            |           |   |                  |   |               |   |                      |   |  |   |           |           |                            |   |            |            | 
|------------------------------- | ----- | - | ------------------------------------------ | ---------- | --------- | - | ---------------- | - | ------------- | - | -------------------- | - |  | - | --------- | --------- | -------------------------- | - | ---------- | ---------- | 
|                                |       |   | For the six months ended December 31, 2003
|                                |       |   |                                           
|                                |       |   | Restructuring Liability                    |            |           |   |                  |   |               |   |                      |   |  |   |           |           | Restructuring Liability as
|                                |       |   | as of June 30, 2003                        |            | Additions |   | Non-Cash Charges |   | Cash Payments |   | of December 31, 2003
|                                |       |   |                                            |            |           |   |                  |   |               |   |                     
|Severance and benefits          |       | $ | 614,000                                    |            |           | $ |                 |   |               | $ |                     |   |  | $ | 241,000   |           |                            | $ | 373,000    |           
|Disposal of fixed assets        |       |   |                                           |            |           |   |                 |   |               |   |                     |   |  |   |          |           |                            |   |           |           
|Lease exit costs                |       |   | 12,151,000                                 |            |           |   |                 |   |               |   |                     |   |  |   | 1,657,000 |           |                            |   | 10,494,000 |           
|Internal merger costs and other |       |   | 31,000                                     |            |           |   |                 |   |               |   |                     |   |  |   |          |           |                            |   | 31,000     |           
|                                |       |   |                                            |            |           |   |                  |   |               |   |                      |   |  |   |           |           |                            |   |            |           
|                                | Total |   | $                                          | 12,796,000 |           |   | $                |  |               |   | $                    |  |  |   | $         | 1,898,000 |                            |   | $          | 10,898,000 | 
|                                |       |   |                                            |            |           |   |                  |   |               |   |                      |   |  |   |           |           |                            |   |            |           

The restructuring liability is classified in the consolidated balance sheet
based on the anticipated timing of the respective payment. As of December 31,
2003, $7,973,000 of the above restructuring liability is classified as
long-term. Management currently believes that of the $373,000 accrued for
severance and benefits, $260,000 will be paid over the next twelve months with
the remaining balance being paid through 2013 with the lease exit costs being
paid over the remaining term of the leases. The leases expire at various dates
through 2011.

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Fiscal 2003

During the three and six months ended December 31, 2002, the Company recorded
merger related expenses totaling $1,550,000 and $8,305,000 respectively. For
the three months ended December 31, 2002 these costs consisted of $397,000 in
relocation costs for Identix employees and facilities, $194,000 associated with
the disposal of fixed assets, $299,000 related to
lease exit costs and $660,000 related to employees with extended terminations
to assist in the integration. Such costs were expensed as incurred. For the
six months ended December 31, 2002, these costs consisted of $2,041,000 in
relocation costs, $194,000 associated with the disposal of fixed assets,
$4,065,000 related to lease exit costs and $2,005,000 related to employees with
extended terminations to assist in the integration. Such costs were expensed
as incurred.

Of the lease exit costs of $4,065,000 recorded during the six months ended
December 31, 2002, $3,766,000 of the loss was due to the sublease of a portion
of its Fairfax, Virginia facility. The loss represented the difference between
the remaining lease obligation of $5,222,000, abandoned property and equipment
of $445,000 and costs to sublet the facility of $375,000, partially offset by
estimated sublease income of $2,276,000. In conjunction with the restructuring
related charges recorded, the Company made certain estimates regarding future
sublease income that have a significant impact on its anticipated cash
obligations and restructuring reserves. Although the Company believes that the
lease commitment estimates are appropriate in the circumstances, future changes
in real estate markets could impact the ultimate amount of cash paid to resolve
these obligations. During the six months ended December 31, 2002, the Company
reversed an earlier reserve of $182,000 relating to the shut down of the
Companys Virginia Beach-based Law Enforcement Solutions Division (LESD) as
the actual costs to dispose of the operations were less than estimated. In
addition, the Company recorded a loss of $299,000 related to lease exit costs
at the Companys Dublin, California facility. The loss is associated with
revised estimated lease exit costs.

Interest and Other Income, net

For the three and six months ended December 31, 2003, interest and other
income, net were $367,000 and $683,000 respectively, compared to $673,000 and
$1,047,000 for the same periods in the prior fiscal year. The decrease is
primarily the result of lower cash balances in fiscal year 2004 and realized
gains on investments of $236,000 that occurred in the first six months of
fiscal year 2003 that did not occur in fiscal year 2004.

Interest Expense

Interest expense was $8,000 for the six months ended December 31, 2003,
compared to $4,000 for the same period in the prior fiscal year. There have
been no borrowings under the Companys line of credit during the six months
ended December 31, 2003. Interest expense is comprised primarily of interest
costs associated with the Companys leased vehicles in the United Kingdom as
well as interest connected to leased equipment in the U.S.

Provision for Income Taxes

The Company recorded a provision for income tax expense of $9,000 and $18,000
for the three and six months ended December 31, 2003 and a benefit of $8,000
and provision of $14,000 for the same periods in prior fiscal year. The tax
amounts recorded for both fiscal years are related to state income taxes.

Equity Interest in Loss of Joint Venture

The equity interest in loss of the joint venture represents the Companys 50%
share of the results of Sylvan Identix Fingerprint Center. For the three and
six months ended December 31, 2003, the Companys equity interest in the joint
venture loss was $142,000 and $247,000. For the same periods in the prior
fiscal year the Companys equity interest in the joint venture loss was
$106,000 and $48,000.

Liquidity and Capital Resources

The Company financed its operations during the six months ended December 31,
2003, primarily from cash provided by its working capital. As of December 31,
2003, the Companys principal sources of liquidity consisted of $45,529,000 of
working capital including $37,735,000 in cash and cash equivalents and
short-term marketable securities. In addition, the Company has $1,504,000 in
long-term securities that can be used to finance operations.

16



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The Companys existing line of credit (the Identix Line of Credit) was
entered into on May 30, 2003. 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 Identix 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 4.00% at December 31, 2003. The Identix Line of Credit
expires on October 30, 2004. Until the Company establishes a 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 December 31, 2003, there were no
amounts
outstanding under this line of credit.

The Identix Line of Credit agreement contains financial, operating and
reporting covenants. At December 31, 2003, the Company was in compliance with
all covenants.

For the six months ended December 31, 2003, $5,324,000 and $567,000 of cash was
used in operating and investing activities respectively, which was partially
offset by $921,000 of cash generated from financing activities. The net result
of the Companys cash flow activities resulted in $4,970,000 of cash and cash
equivalents being consumed. The Company used $12,279,000 of cash and cash
equivalents during the six months ended December 31, 2002. For the six months
ended December 31, 2002, operating activities used $18,412,000 that was
partially offset by the Companys investing and financing activities that
generated cash flows of $4,787,000 and $1,346,000 respectively. Cash provided
by financing activities for the periods presented was due solely to proceeds
from the sale of the Companys equity securities and the exercise of employee
stock options.

The Company did not have any material capital expenditure commitments as of
December 31, 2003. Currently, the Companys anticipated cash requirements
relate primarily to funding operations and paying remaining obligations related
to restructuring and other merger related charges recorded in fiscal years 2003
and 2002. As discussed in note 13 to Notes to Condensed Consolidated Financial
Statements, Mr. Robert McCashin, the former Chairman of the Board of Directors,
retired from the Board of Directors effective February 1, 2004
as a result of his resignation Mr. McCashins agreement entitled
him to receive a payment of
approximately $890,000 of which $400,000 was previously accrued. As a result
the Company will record a charge to the statement of operations for
approximately $490,000 during the three months ended March 31, 2004.

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. In addition, the Company leases space for
its former headquarters in Los Gatos, California under a lease that expires in
December of 2007; and a 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. IPS leases
office space for its service business under operating leases expiring at various dates through 2011. The
leases contain escalation provisions requiring rental increases for increases
in operating expense and real estate taxes.

Future minimum lease payments for operating leases are as follows:

|                                        |       |          |           |                      |  |       |           |            |  |   |           |            | 
|--------------------------------------- | ----- | -------- | --------- | -------------------- |  | ----- | --------- | ---------- |  | - | --------- | ---------- | 
|Periods or fiscal years ending June 30: |       | Occupied |           | Unoccupied or Sublet |  | Total
|                                        |       |          |           |                      |  |      
|2004                                    |       | $        | 2,004,000 |                      |  | $     | 1,286,000 |            |  | $ | 3,290,000 |           
|2005                                    |       |          | 4,122,000 |                      |  |       | 2,780,000 |            |  |   | 6,902,000 |           
|2006                                    |       |          | 3,462,000 |                      |  |       | 2,959,000 |            |  |   | 6,421,000 |           
|2007                                    |       |          | 3,309,000 |                      |  |       | 2,604,000 |            |  |   | 5,913,000 |           
|2008                                    |       |          | 1,864,000 |                      |  |       | 1,569,000 |            |  |   | 3,433,000 |           
|Thereafter                              |       |          | 3,375,000 |                      |  |       | 3,140,000 |            |  |   | 6,515,000 |           
|                                        |       |          |           |                      |  |       |           |            |  |   |           |           
|                                        | Total |          | $         | 18,136,000           |  |       | $         | 14,338,000 |  |   | $         | 32,474,000 | 
|                                        |       |          |           |                      |  |       |           |            |  |   |           |           

Included in the above future minimum payments is $9,787,000 related to two
leased facilities in Northern California that were vacated in connection with
the Companys merger with Visionics. The Company has accrued for the estimated
losses on these leases at December 31, 2002 and 2003. The Company is
attempting to sublease the unoccupied facilities.

While the Company believes that existing working capital may be adequate to
fund the Companys current cash requirements, 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.

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If successful in raising
additional financing, the Company 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 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.

Recent Accounting Pronouncements

In January 2003, the FASB issued FASB Interpretation No. (FIN) 46,
Consolidation of Variable Interest Entities. FIN 46 addresses the
requirements for business enterprises to consolidate related entities, for
which they do not have controlling
interests through voting or other rights, if they are determined to be the
primary beneficiary as a result of variable economic interests. FIN 46 provides
guidance for determining the primary beneficiary for entities with multiple
economic interests. FIN 46 is effective at the time of investment for interests
obtained in a variable economic entity after January 31, 2003. Beginning in the
Companys third quarter of fiscal year 2004, FIN 46, as amended, will be
applied to interests in variable interest entities (VIEs) acquired prior to
February 1, 2003. Management believes the adoption of FIN 46 will not have a
material impact on the Companys consolidated results of operations, financial
position, or cash flows.

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 solutions expands
both domestically and internationally.

Our product revenues and a portion of our service revenues are derived
from the sale of biometric products and services. Biometric solutions 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 and services depends on a
number of factors including without limitation:



| |  | the cost, performance and reliability of our products and services and the products and services of our competitors;         
|- |  | -----------------------------------------------------------------------------------------------------------------------------
| 
| |  | customers perception of the perceived benefit of biometric solutions;                                                       
| 
| |  | public perceptions of the intrusiveness of these solutions 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

18



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contact fingerprint image capture devices, or retinal
blood vessel, iris pattern, hand geometry, voice or 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, including Viisage Technology, Inc., Cognitech
and Imagis Technologies, Inc. The products designed, developed and sold under
our line of products known as our Live Scan products also face intense
competition from a
number of competitors who are actively engaged in developing and marketing
Live Scan products, including Heimann Biometric Systems GmbH, Sagem Morpho,
Inc., Printrak International, Inc., (a Motorola company), 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, that have increased performance or functionality or that
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.

In order to compete effectively in this environment, we must continually
design, develop and market new and enhanced products at competitive prices and
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 majority of our services 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.

In addition, public agency contracts are frequently awarded only after
formal competitive bidding processes, which have been and may continue to be
protracted, and typically impose provisions that permit cancellation in the
event that funds are unavailable to the public agency. There is a risk that we
may not be awarded any of the competitive bidding processes, which have been
and may continue to be protracted and expensive. 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 cancel the contract award
entirely. Although we have not previously experienced a substantial number of
contract delays or cancellations due to protest initiated by losing bidders,
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 such protests. For example, the Company was recently awarded a
Blanket Purchase Order from the Department of Homeland Security (DHS) with an
estimated value of approximately $27 million, and such award was the subject of
a formal protest by one of our competitors. As a result of the protest, DHS
decided to undertake a new evaluation of previously submitted proposals. There
can be no assurance such new evaluation process will not result in substantial
delays in purchases under the DHA award or in the cancellation of all or part
of the Blanket Purchase Award itself. In addition, local government agency
contracts may be contingent upon availability of matching funds from federal or
state entities. Also, 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, 2003, we derived
approximately 71% of our services revenue directly from contracts relating to
the Department of Defense and other U.S. Government agencies. 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. For example,
in January 2003, we were notified that our service business would not be
awarded a contract to continue providing professional support services and
material acquisition support to the Naval Sea Systems Command. The original
contract was a cost plus fixed fee award that expired on June 30, 2003.
During the twelve months ended June 30, 2003, $7,300,000 was recognized under
the contract. The contract that was not awarded to the Company would have
generated an estimated $3,250,000 per quarter of additional revenue over the
life of the contract.

For the three and six months ended December 31, 2003, we derived
approximately 83% and 86% of our services revenue from time-and-materials
(T&M) contracts and firm-fixed-price (FFP) contracts. We assume certain
performance risk on these contracts. If we fail to estimate accurately ultimate
costs or to control costs during performance of the work, our profit margins
may be reduced and we may suffer losses. In addition, revenues generated from
government contracts are subject to audit and subsequent adjustment by
negotiation with representatives of the government agencies. We were audited
by the Defense Contract Audit Agency for the period from July 1, 1997 to June
30, 2000 and the results of the audit did not have a material effect on the
Companys financial position or results of operations.

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We are currently undergoing a General Services Administration pre-award
audit for the renewal of a GSA Multiple Award Schedule contract related to our
product business. While we believe that the results of such audit will have no
material effect on our results of operations, any material adverse findings or
adjustments arising out of such audit may have a material adverse effect on our
business, financial condition and results of operations.

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 availability of government funds;                                                                                                                 
|- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------
| 
| |  | reduced demand for products and services caused, for example, by competitors;                                                                                 
| 
| |  | price reductions, new competitors, or the introduction of
enhanced products or services from new or existing competitors;                                     
| 
| |  | changes in the mix of products and services we or our distributors sell;                                                                                      
| 
| |  | 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;                                                                                                                             
| 
| |  | the lack of availability or increase in cost of key components and subassemblies; and                                                                         
| 
| |  | the inability to timely and successfully complete development
of complex designs and components, or manufacture in volume and
install certain of our products.

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.
Improving the manageability and 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 availability 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.

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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.

Goodwill is required to be tested for impairment at least annually and we
will be required to record a non-cash charge to earnings in the period any
impairment of goodwill is determined. 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.

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;                                                                                                                           
|
| |  |  | 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 have increased financial
expectations that may not materialize.

The September 11, 2001 terrorist attacks 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 product or services 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 with Iraq, and the post-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 may be adequate to fund our
operating cash requirements for at least the next twelve months, we may need to
raise additional debt or equity financing in the future. We may not be able to
obtain additional debt or equity financing. If 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 in the future could have a material adverse impact on our
financial performance and stock price and require us to implement certain cost
reduction initiatives and curtail certain of our operations.

We face substantial competition from professional service providers of all
sizes in the government marketplace.

Our wholly owned subsidiary, Identix Public Sector, Inc. (IPS), is
increasingly being required to bid on firm fixed price and similar contracts
that result in greater performance risk to IPS. If IPS is not able to maintain
a competitive cost structure, support specialized market niches, retain highly
qualified personnel or align with technology leaders, we may lose our ability
to compete successfully in the services business.

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.

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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 product revenue comes from sales to partners
including OEM, 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.

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 2003, we derived
approximately 11% and 8% of our product revenues from international sales. We
currently have a local presence in the United Kingdom and the Commonwealth of
Australia.

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;                                                                                                                                         

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| |  |  | 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.

Three stockholders own a significant portion of our stock and may delay or
prevent a change in control or adversely affect the stock price through sales
in the open market.

As of December 31, 2003, the State of Wisconsin Investment Board, Kern
Capital Management LLC, and Mazama Capital Management, Inc. owned approximately
9%, 5%, and 5% respectively of the Companys outstanding common stock. The
concentration of large percentages of ownership in any single stockholder 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 a single stockholder 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.

Performance failure in our products or certain of our services 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 or services 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 or service launch is delayed or is the subject of an
availability shortage because of problems with our ability to manufacture or
assemble the product or service 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 or service 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 and 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.

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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 impact 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 us 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 impact 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 reductions or growth effectively.

Acquisitions of companies or technologies may result in disruptions to our
business.

As part of our business strategy, we may acquire assets and businesses
principally relating to or complementary to our current operations. We merged
with Visionics in June 2002 and acquired Identicator Technology, Inc.
(Identicator Technology) in fiscal 1999, one company in fiscal 1998 and two
companies in fiscal 1996. We also acquired certain software and source code
assets in October 2002. These and any other acquisitions and/or mergers by
Identix are and will be accompanied by the risks commonly encountered in
acquisitions of companies. These risks include, among other things:



| |  |  | exposure to unknown liabilities of acquired companies;                                                                     
| | - |  | ---------------------------------------------------------------------------------------------------------------------------
|
| |  |  | 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;
|
| |  |  | 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;           
|
| |  |  | 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.

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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 of the key employees or a
sufficient number to execute our plans, nor can there be any assurances that 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 impact 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 are invested in money market
accounts with major financial institutions. Due to the short duration and
conservative nature of the Companys cash equivalents, 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.

The Company primarily enters into debt obligations 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.

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 second fiscal quarter
that have materially affected, or are reasonably likely to materially affect,
our internal control over financial reporting.

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PART II OTHER INFORMATION




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



| | (a) |  | The Annual Meeting of Shareholders was held on
October 30, 2003.                                                                      
| | --- |  | --------------------------------------------------------------------------------------------------------------------------------------
|
| | (b) |  | All Board of Directors nominees referenced in Item
4 (c) below were elected at the Annual Meeting of Shareholders
on October 30, 2003.
|
| | (c) |  | The matters voted upon and the results of the
voting were as follows:                                                                 
|

| | (1) |  | The following eight persons were elected
to the Board of Directors:
| | --- |  | -------------------------------------------------------------------

|                  |  |           |            |                |  |  |           | 
|----------------- |  | --------- | ---------- | -------------- |  |  | --------- | 
|Name              |  | Votes For |            | Votes Withheld
|                  |  |           |            |               
|Robert McCashin   |  |           | 81,526,299 |                |  |  | 1,401,517 | 
|Joseph J. Atick   |  |           | 81,723,513 |                |  |  | 1,204,303 | 
|Milton E. Cooper  |  |           | 81,318,987 |                |  |  | 1,608,829 | 
|Malcolm J. Gudis  |  |           | 81,279,803 |                |  |  | 1,648,013 | 
|John E. Haugo     |  |           | 81,265,535 |                |  |  | 1,662,281 | 
|George Latimer    |  |           | 81,240,615 |                |  |  | 1,687,201 | 
|John E. Lawler    |  |           | 81,208,053 |                |  |  | 1,639,763 | 
|Patrick H. Morton |  |           | 80,208,042 |                |  |  | 2,719,774 | 



| | (2) |  | The appointment of PricewaterhouseCoopers
LLP as independent accountants of the Company for the
fiscal year ending June 30, 2004 was ratified. The number
of shares voted in favor of the appointment was 81,583,256
the number of shares voted against were 1057,425, and the
number of shares that abstained was 287,135.
| | --- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




Item 6. Exhibits and Reports on
Form 8-K.



| | (a) |  | Exhibits
| | --- |  | --------

|        |  |                          
|------- |  | -------------------------
|Exhibit |  |                          
|Number  |  | Description              
|        |  |                          
|10.56   |  | Indemnification Agreement
|31.1    |  | CEO Certification        
|31.2    |  | CFO Certification        
|32      |  | 906 Certifications       



| | (b) |  | A Form 8-K was filed on October 30, 2003, which contained
the Companys press release announcing its the financial results
for the quarter ending September 30, 2003.                         
| | --- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | (c) |  | A Form 8-K was filed on December 23, 2003, which
disclosed material non-public information regarding the Companys
anticipated results of operations for the quarter ending December
31, 2003.

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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 12,
2004.

| |  |                        
| |  | -----------------------
| |  | IDENTIX INCORPORATED   
| |  |                        
| |  | BY:  /s/ James H. Moar 
| |  |                        
| |  | James H. Moar          
| |  | Chief Financial Officer

27