##### Table of Contents



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, 2002 or

o         Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period fromto

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   NOo

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). YES  x   NOo

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:

85,403,374 shares of Common Stock
as of January 31, 2003

1



---

TABLE OF CONTENTS



|                              |                                                                                               |                                                                                                         |  |  |  |  |  | 
|----------------------------- | --------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------- |  |  |  |  |  | 
|PART I. FINANCIAL INFORMATION
|                              | Item 1. Unaudited Financial Statements                                                       
|                              |                                                                                               | CONDENSED CONSOLIDATED BALANCE SHEETS  December 31, 2002 and June 30, 2002                            
|                              |                                                                                               | CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS  Three and six months ended December 31, 2002 and 2001
|                              |                                                                                               | CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS Six months ended December 31, 2002 and 2001            
|                              |                                                                                               | 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                   
|EX-99.1 906 Certifications   



---



##### Table of Contents






IDENTIX INCORPORATED

INDEX

|        |  |           |  |                                                                                                          |  |   
|------- |  | --------- |  | -------------------------------------------------------------------------------------------------------- |  | --
|PART I  |  |           |  | FINANCIAL INFORMATION                                                                                    |  |   
|        |  |           |  |                                                                                                          |  |   
|        |  | Item 1    |  | Unaudited Financial Statements                                                                           |  |   
|        |  |           |  |                                                                                                          |  |   
|        |  |           |  | Condensed
Consolidated Balance Sheets - December 31, 2002 and June 30, 2002                              |  | 3 
|        |  |           |  |                                                                                                          |  |   
|        |  |           |  | Condensed
Consolidated Statements of Operations - Three and six months ended December 31, 2002 and 2001. |  | 4 
|        |  |           |  |                                                                                                          |  |   
|        |  |           |  | Condensed
Consolidated Statements of Cash Flows - Six months ended December 31, 2002 and 2001            |  | 5 
|        |  |           |  |                                                                                                          |  |   
|        |  |           |  | Notes to Condensed Consolidated Financial Statements                                                     |  | 6 
|        |  |           |  |                                                                                                          |  |   
|        |  | Item 2    |  | Managements Discussion and Analysis of Financial
Condition and Results of Operations                    |  | 11
|        |  |           |  |                                                                                                          |  |   
|        |  | 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

2



---



##### Table of Contents









IDENTIX
INCORPORATEDCONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)

|                                  |                                                                                                                                    |                            |                                            |                                      |             |              |             |              |             |             |  | 
|--------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------- | -------------------------- | ------------------------------------------ | ------------------------------------ | ----------- | ------------ | ----------- | ------------ | ----------- | ----------- |  | 
|                                  |                                                                                                                                    |                            |                                            |                                      |             | December 31, |             |              | June 30,    |            
|                                  |                                                                                                                                    |                            |                                            |                                      |             |              |             |              |             |            
|                                  |                                                                                                                                    |                            |                                            |                                      |             | 2002         |             |              | 2002        |            
|                                  |                                                                                                                                    |                            |                                            |                                      |             |              |             |              |             |            
|                                  |                                                                                                                                    |                            |                                            | ASSETS                               |             |              |             |              |             |             |  | 
|Current assets:                   |                                                                                                                                    |                            |                                            |                                      |             |              |             |             
|                                  | Cash and cash equivalents                                                                                                          |                            | $                                          | 41,067,000                           |             |              | $           | 53,346,000   |            
|                                  | Marketable securities  short-term                                                                                                 |                            |                                            | 8,468,000                            |             |              |             | 5,143,000    |            
|                                  | Accounts receivable, net                                                                                                           |                            |                                            | 22,318,000                           |             |              |             | 19,880,000   |            
|                                  | Inventories                                                                                                                        |                            |                                            | 8,737,000                            |             |              |             | 11,095,000   |            
|                                  | Prepaid expenses and other assets                                                                                                  |                            |                                            | 1,524,000                            |             |              |             | 1,412,000    |            
|                                  |                                                                                                                                    |                            |                                            |                                      |             |              |             |              |             |            
|                                  |                                                                                                                                    | Total current assets       |                                            |                                      | 82,114,000  |              |             |              | 90,876,000  |            
|Marketable securities  long-term |                                                                                                                                    |                            | 1,031,000                                  |                                      |             |              | 10,269,000  |             
|Property and equipment, net       |                                                                                                                                    |                            | 5,374,000                                  |                                      |             |              | 6,243,000   |             
|Goodwill                          |                                                                                                                                    |                            | 295,744,000                                |                                      |             |              | 295,744,000 |             
|Acquired intangible assets, net   |                                                                                                                                    |                            | 22,618,000                                 |                                      |             |              | 25,037,000  |             
|Other assets                      |                                                                                                                                    |                            | 2,581,000                                  |                                      |             |              | 3,086,000   |             
|                                  |                                                                                                                                    |                            |                                            |                                      |             |              |             |              |             |            
|                                  |                                                                                                                                    |                            | Total assets                               |                                      | $           | 409,462,000  |             |              | $           | 431,255,000 | 
|                                  |                                                                                                                                    |                            |                                            |                                      |             |              |             |              |             |            
|                                  |                                                                                                                                    |                            |                                            | LIABILITIES AND STOCKHOLDERS EQUITY |             |              |             |              |             |             |  | 
|Current liabilities:              |                                                                                                                                    |                            |                                            |                                      |             |              |             |             
|                                  | Accounts payable                                                                                                                   |                            | $                                          | 8,457,000                            |             |              | $           | 10,727,000   |            
|                                  | Accrued compensation                                                                                                               |                            |                                            | 3,882,000                            |             |              |             | 6,082,000    |            
|                                  | Other accrued liabilities                                                                                                          |                            |                                            | 5,501,000                            |             |              |             | 4,032,000    |            
|                                  | Deferred revenue                                                                                                                   |                            |                                            | 6,818,000                            |             |              |             | 6,796,000    |            
|                                  |                                                                                                                                    |                            |                                            |                                      |             |              |             |              |             |            
|                                  |                                                                                                                                    | Total current liabilities  |                                            |                                      | 24,658,000  |              |             |              | 27,637,000  |            
|Deferred revenue                  |                                                                                                                                    |                            | 498,000                                    |                                      |             |              | 741,000     |             
|Other liabilities                 |                                                                                                                                    |                            | 10,468,000                                 |                                      |             |              | 9,554,000   |             
|                                  |                                                                                                                                    |                            |                                            |                                      |             |              |             |              |             |            
|                                  |                                                                                                                                    | Total liabilities          |                                            |                                      | 35,624,000  |              |             |              | 37,932,000  |            
|                                  |                                                                                                                                    |                            |                                            |                                      |             |              |             |              |             |            
|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
85,268,269 and 84,651,058 shares issued and outstanding, respectively |                            |                                            | 853,000                              |             |              |             | 846,000      |            
|                                  | Additional paid-in capital                                                                                                         |                            |                                            | 534,016,000                          |             |              |             | 532,738,000  |            
|                                  | Accumulated deficit                                                                                                                |                            |                                            | (163,028,000                         | )           |              |             | (141,277,000 | )          
|                                  | Deferred stock-based compensation                                                                                                  |                            |                                            | (1,547,000                           | )           |              |             | (2,540,000   | )          
|                                  | Accumulated other comprehensive loss                                                                                               |                            |                                            | (158,000                             | )           |              |             | (146,000     | )          
|                                  |                                                                                                                                    |                            |                                            |                                      |             |              |             |              |             |            
|                                  |                                                                                                                                    | Total stockholders equity |                                            |                                      | 373,838,000 |              |             |              | 393,323,000 |            
|                                  |                                                                                                                                    |                            |                                            |                                      |             |              |             |              |             |            
|                                  |                                                                                                                                    |                            | Total liabilities and stockholders equity |                                      | $           | 409,462,000  |             |              | $           | 431,255,000 | 
|                                  |                                                                                                                                    |                            |                                            |                                      |             |              |             |              |             |            

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

3



---



##### Table of Contents






IDENTIX INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)

|                                                                                    |                                                                                |                          |            |                                 |            |   |                               |            |            |      |             |             |            |   |             |             |            | 
|----------------------------------------------------------------------------------- | ------------------------------------------------------------------------------ | ------------------------ | ---------- | ------------------------------- | ---------- | - | ----------------------------- | ---------- | ---------- | ---- | ----------- | ----------- | ---------- | - | ----------- | ----------- | ---------- | 
|                                                                                    |                                                                                |                          |            | Three Months Ended December 31, |            |   | Six Months Ended December 31, |           
|                                                                                    |                                                                                |                          |            |                                 |            |  
|                                                                                    |                                                                                |                          |            | 2002                            |            |   | 2001                          |            |            | 2002 |             |             | 2001       |  
|                                                                                    |                                                                                |                          |            |                                 |            |   |                               |            |            |      |             |             |            |  
|Revenues:                                                                           |                                                                                |                          |            |                                 |            |   |                               |            |            |      |             |             |            |   |             |            
|                                                                                    | Product revenues                                                               |                          | $          | 12,512,000                      |            |   | $                             | 6,527,000  |            |      | $           | 26,664,000  |            |   | $           | 12,583,000  |           
|                                                                                    | Services revenues                                                              |                          |            | 10,004,000                      |            |   |                               | 12,985,000 |            |      |             | 20,914,000  |            |   |             | 23,693,000  |           
|                                                                                    |                                                                                |                          |            |                                 |            |   |                               |            |            |      |             |             |           
|                                                                                    |                                                                                | Total revenues           |            |                                 | 22,516,000 |   |                               |            | 19,512,000 |      |             |             | 47,578,000 |   |             |             | 36,276,000 | 
|                                                                                    |                                                                                |                          |            |                                 |            |   |                               |            |            |      |             |             |           
|Cost and expenses:                                                                  |                                                                                |                          |            |                                 |            |   |                               |            |            |      |             |             |            |   |             |            
|                                                                                    | Cost of product revenues                                                       |                          |            | 8,781,000                       |            |   |                               | 4,008,000  |            |      |             | 19,086,000  |            |   |             | 8,096,000   |           
|                                                                                    | Cost of services revenues                                                      |                          |            | 8,787,000                       |            |   |                               | 11,801,000 |            |      |             | 18,631,000  |            |   |             | 21,731,000  |           
|                                                                                    | Research, development and engineering                                          |                          |            | 2,690,000                       |            |   |                               | 2,254,000  |            |      |             | 5,778,000   |            |   |             | 4,868,000   |           
|                                                                                    | Marketing and selling                                                          |                          |            | 3,401,000                       |            |   |                               | 3,497,000  |            |      |             | 6,652,000   |            |   |             | 6,948,000   |           
|                                                                                    | General and administrative                                                     |                          |            | 4,056,000                       |            |   |                               | 4,121,000  |            |      |             | 8,939,000   |            |   |             | 7,649,000   |           
|                                                                                    | Amortization of acquired intangible assets                                     |                          |            | 1,373,000                       |            |   |                               | 233,000    |            |      |             | 2,919,000   |            |   |             | 466,000     |           
|                                                                                    | Restructuring, write-offs and other merger related charges                     |                          |            | 1,550,000                       |            |   |                               |           |            |      |             | 8,305,000   |            |   |             | 1,712,000   |           
|                                                                                    |                                                                                |                          |            |                                 |            |   |                               |            |            |      |             |             |           
|                                                                                    |                                                                                | Total costs and expenses |            |                                 | 30,638,000 |   |                               |            | 25,914,000 |      |             |             | 70,310,000 |   |             |             | 51,470,000 | 
|                                                                                    |                                                                                |                          |            |                                 |            |   |                               |            |            |      |             |             |           
|                                                                                    | Loss from operations                                                           |                          |            | (8,122,000                      | )          |   |                               | (6,402,000 | )          |      |             | (22,732,000 | )          |   |             | (15,194,000 | )         
|                                                                                    | Interest and other income, net                                                 |                          |            | 673,000                         |            |   |                               | 178,000    |            |      |             | 1,047,000   |            |   |             | 400,000     |           
|                                                                                    | Interest expense                                                               |                          |            | (5,000                          | )          |   |                               |           |            |      |             | (4,000      | )          |   |             |            |           
|                                                                                    |                                                                                |                          |            |                                 |            |   |                               |            |            |      |             |             |           
|                                                                                    | Loss before income taxes and equity interest in income (loss) of joint venture |                          |            | (7,454,000                      | )          |   |                               | (6,224,000 | )          |      |             | (21,689,000 | )          |   |             | (14,794,000 | )         
|                                                                                    | (Provision) benefit for income taxes                                           |                          |            | 8,000                           |            |   |                               |           |            |      |             | (14,000     | )          |   |             | 1,000       |           
|                                                                                    |                                                                                |                          |            |                                 |            |   |                               |            |            |      |             |             |           
|                                                                                    | Loss before equity interest in income of joint venture                         |                          |            | (7,446,000                      | )          |   |                               | (6,224,000 | )          |      |             | (21,703,000 | )          |   |             | (14,793,000 | )         
|                                                                                    | Equity interest in (loss)/ income of joint venture                             |                          |            | (106,000                        | )          |   |                               | 21,000     |            |      |             | (48,000     | )          |   |             | 113,000     |           
|                                                                                    |                                                                                |                          |            |                                 |            |   |                               |            |            |      |             |             |           
|Net loss                                                                            |                                                                                | $                        | (7,552,000 | )                               |            | $ | (6,203,000                    | )          |            | $    | (21,751,000 | )           |            | $ | (14,680,000 | )          
|                                                                                    |                                                                                |                          |            |                                 |            |   |                               |            |            |      |             |             |           
|                                                                                    | Basic and diluted net loss per share                                           |                          | $          | (0.09                           | )          |   | $                             | (0.16      | )          |      | $           | (0.26       | )          |   | $           | (0.39       | )         
|                                                                                    |                                                                                |                          |            |                                 |            |   |                               |            |            |      |             |             |           
|Weighted average common shares used in basic
and diluted loss per share computation |                                                                                |                          | 85,124,000 |                                 |            |   | 37,824,000                    |            |            |      | 84,962,000  |             |            |   | 37,226,000  |            

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

4



---



##### Table of Contents






IDENTIX INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

|                                                     |                                                                             |                                                     |             |                               |            |      |            |             |            |  
|---------------------------------------------------- | --------------------------------------------------------------------------- | --------------------------------------------------- | ----------- | ----------------------------- | ---------- | ---- | ---------- | ----------- | ---------- | -
|                                                     |                                                                             |                                                     |             | Six Months Ended December 31,
|                                                     |                                                                             |                                                     |             |                              
|                                                     |                                                                             |                                                     |             | 2002                          |            | 2001
|                                                     |                                                                             |                                                     |             |                               |            |     
|Cash flows from operating activities:                |                                                                             |                                                     |             |                               |            |      |            |            
|                                                     | Net loss                                                                    |                                                     | $           | (21,751,000                   | )          |      | $          | (14,680,000 | )         
|                                                     | Adjustments to reconcile net loss to net cash used in operating
activities: |                                                     |             |                               |            |      |            |             |           
|                                                     |                                                                             | Depreciation and amortization                       |             |                               | 4,167,000  |      |            |             | 1,713,000  |  
|                                                     |                                                                             | Loss on disposals of property and equipment         |             |                               |           |      |            |             | 44,000     |  
|                                                     |                                                                             | Equity interest in loss (income) on joint venture   |             |                               | 48,000     |      |            |             | (113,000   | )
|                                                     |                                                                             | Realized gain on sales of securities                |             |                               | (236,000   | )    |            |             |           |  
|                                                     |                                                                             | Stock-based compensation expense                    |             |                               | 932,000    |      |            |             | 307,000    |  
|                                                     |                                                                             | Amortization of premiums on marketable securities   |             |                               | 88,000     |      |            |             |           |  
|                                                     |                                                                             | Bad debt expense                                    |             |                               | 589,000    |      |            |             | 136,000    |  
|                                                     |                                                                             | Non-cash restructuring write-offs and other charges |             |                               | 441,000    |      |            |             |           |  
|                                                     | Changes in assets and liabilities, net of effects of acquisition:           |                                                     |             |                               |            |      |            |             |           
|                                                     |                                                                             | Accounts receivable                                 |             |                               | (3,013,000 | )    |            |             | 5,742,000  |  
|                                                     |                                                                             | Inventories                                         |             |                               | 2,358,000  |      |            |             | (705,000   | )
|                                                     |                                                                             | Prepaid expenses and other assets                   |             |                               | 273,000    |      |            |             | 297,000    |  
|                                                     |                                                                             | Accounts payable                                    |             |                               | (2,270,000 | )    |            |             | (3,091,000 | )
|                                                     |                                                                             | Accrued compensation                                |             |                               | (2,200,000 | )    |            |             | (46,000    | )
|                                                     |                                                                             | Other accrued liabilities                           |             |                               | 2,383,000  |      |            |             | (227,000   | )
|                                                     |                                                                             | Deferred revenue                                    |             |                               | (221,000   | )    |            |             | (845,000   | )
|                                                     |                                                                             |                                                     |             |                               |            |     
|                                                     | Net cash used in operating activities                                       |                                                     |             | (18,412,000                   | )          |      |            | (11,468,000 | )         
|                                                     |                                                                             |                                                     |             |                               |            |     
|Cash flows from investing activities:                |                                                                             |                                                     |             |                               |            |      |            |            
|                                                     | Proceeds from the sales of marketable securities                            |                                                     |             | 15,599,000                    |            |      |            |            |           
|                                                     | Purchases of marketable securities                                          |                                                     |             | (9,492,000                    | )          |      |            |            |           
|                                                     | Capital expenditures                                                        |                                                     |             | (820,000                      | )          |      |            | (2,526,000  | )         
|                                                     | Proceeds from the sale of property and equipment                            |                                                     |             |                              |            |      |            | 7,000       |           
|                                                     | Additions of intangibles and other assets                                   |                                                     |             | (500,000                      | )          |      |            | (421,000    | )         
|                                                     |                                                                             |                                                     |             |                               |            |     
|                                                     | Net cash provided (used) by investing activities                            |                                                     |             | 4,787,000                     |            |      |            | (2,940,000  | )         
|                                                     |                                                                             |                                                     |             |                               |            |     
|Cash flows from financing activities:                |                                                                             |                                                     |             |                               |            |      |            |            
|                                                     | Proceeds from sales of common and preferred stock                           |                                                     |             | 1,346,000                     |            |      |            | 52,515,000  |           
|                                                     |                                                                             |                                                     |             |                               |            |     
|                                                     | Net cash provided by financing activities                                   |                                                     |             | 1,346,000                     |            |      |            | 52,515,000  |           
|                                                     |                                                                             |                                                     |             |                               |            |     
|Net
(decrease) increase in cash and cash equivalents |                                                                             |                                                     | (12,279,000 | )                             |            |      | 38,107,000 |            
|Cash and cash equivalents at period beginning        |                                                                             |                                                     | 53,346,000  |                               |            |      | 20,777,000 |            
|                                                     |                                                                             |                                                     |             |                               |            |     
|Cash and cash equivalents at period end              |                                                                             | $                                                   | 41,067,000  |                               |            | $    | 58,884,000 |            
|                                                     |                                                                             |                                                     |             |                               |            |     

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

5



---



##### 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), 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, 2002 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 or six months ended December 31, 2002 are
not necessarily indicative of results to be expected for the entire fiscal
year, which ends on June 30, 2003.                                                                                                                                                                                                                                                                                                                                                            
|  
|   |  | 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. 101,
Revenue Recognition in Financial Statements 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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 also sells several stand-alone software products including
BioLogon and 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 revenue accrued which becomes
billable per the terms of contract. Provisions for estimated contract losses
are recorded in the period such losses are determined.                                                                                                                                                                                                                                                                                                                                                                                                           

6



---



##### Table of Contents





|   |  | 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 80% and 82% of
total services revenue for the three and six months ending December 31, 2002
compared to 78% and 84% 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. Identix Public Sector (IPS) is currently being audited by the
Defense Contract Audit Agency for the period from July 1, 1997 to June 30,
2000. While the Company believes that the results of such audit will have no
material effect on the Companys financial position, or results of
operations, there can be no assurance that no adjustment will be made and
that, if made, such adjustments will not have a material effect on the
Companys financial position, results of operations, or cash flows.
|-- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|3. |  | Cash and Credit Facilities                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|  
|   |  | The Company financed its operations during the six months ended December 31,
2002, primarily from its working capital at June 30, 2002. As of December
31, 2002, the Companys principal sources of liquidity consisted of
$57,456,000 of working capital including $49,535,000 in cash and cash
equivalents and short-term marketable securities. The Company also has
$10,699,000 available for future borrowings under the Companys bank lines of
credit.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|  
|   |  | At December 31, 2002, the Company has two lines of credit. The Companys
first line of credit (the Identix Line of Credit) was entered into in
September 2001 and was amended on March 28, 2002. This line of credit
provides for up to the lesser of $15,000,000 or 80% of the Companys eligible
product accounts receivable and 85% of the Companys eligible service
business accounts receivable. 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 plus 50 basis points (4.75% at
December 31, 2002). The Identix Line of Credit expires on March 28, 2003.
At December 31, 2002, there were no amounts outstanding under this line of
credit and approximately $8,699,000 was available to borrow.                                                                                                                                                                                                                                                                                                                                                           
|  
|   |  | The Companys second line of credit (the Visionics Line of Credit), which
was established by Visionics Corporation (Visionics), a wholly owned
subsidiary of the Company, is an inventory and receivables based line of
credit for the lesser of eligible inventory and accounts receivables or
$2,000,000. Borrowings under the Visionics Line of Credit are collateralized
by Visionics inventory and accounts receivable. The Visionics Line of
Credit bears interest at the banks prime rate of interest plus 50 basis
points (4.75% at December 31, 2002). The line of credit will expire on March
30, 2003. At December 31, 2002 there were no amounts outstanding under this
line of credit and $2,000,000 was available to borrow.                                                                                                                                                                                                                                                                                                                                                                                                                                            
|  
|   |  | The Identix Line of Credit and the Visionics Line of Credit agreements
contain financial and operating covenants, including restrictions on the
Companys ability to pay dividends on its common stock. At December 31,
2002, the Company was in compliance with such covenants.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|  
|4. |  | 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, |  
|                                 |  |              |           |  |          |  
|                                 |  | 2002         |           |  | 2002     |  
|                                 |  |              |           |  |          |  
|Purchased parts and materials    |  | $            | 3,140,000 |  |          | $ | 4,190,000  | 
|Work-in-process                  |  |              | 3,458,000 |  |          |   | 4,956,000  | 
|Finished goods, including spares |  |              | 2,139,000 |  |          |   | 1,949,000  | 
|                                 |  |              |           |  |          |  
|                                 |  | $            | 8,737,000 |  |          | $ | 11,095,000 | 
|                                 |  |              |           |  |          |  



|5. |  | Restructuring, Write-offs and Other Merger Related Charges                                                    
|-- |  | --------------------------------------------------------------------------------------------------------------
|  
|   |  | Fiscal 2003                                                                                                   
|  
|   |  | During the three and six months ended December 31, 2002, the Company recorded
restructuring and merger related

7



---



##### Table of Contents





| |  | 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 are 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 are expensed as
incurred.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | Lease exit costs of $299,000 were recorded for the three months ended
December 31, 2002, and are related to revised estimated lease exit costs that
were non-recoverable at the Companys Dublin, California facility.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|
| |  | 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 division 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.
|
| |  | The following table represents a summary of restructuring, write-offs and
other merger related charges:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           

|                                |       |   |                                            |            |               |           |           |           |                  |   |         |               |  |   |                   |           |  |                 |            |            | 
|------------------------------- | ----- | - | ------------------------------------------ | ---------- | ------------- | --------- | --------- | --------- | ---------------- | - | ------- | ------------- |  | - | ----------------- | --------- |  | --------------- | ---------- | ---------- | 
|                                |       |   | For the six
months ended December 31, 2002 |           
|                                |       |   |                                            |           
|                                |       |   | Restructuring                              |            | Restructuring
|                                |       |   | Liability as
of                            |            |               |           |           |           |                  |   |         |               |  |   |                   |           |  | Liability as of
|                                |       |   | June 30, 2002                              |            |               | Additions |           |           | Non-Cash Charges |   |         | Cash Payments |  |   | December 31, 2002
|                                |       |   |                                            |            |               |           |           |           |                  |   |         |               |  |   |                  
|Severance and benefits          |       | $ | 2,493,000                                  |            |               | $         | 2,005,000 |           |                  | $ |        |               |  | $ | 3,642,000         |           |  | $               | 856,000   
|Disposal of fixed assets        |       |   |                                           |            |               |           | 194,000   |           |                  |   | 194,000 |               |  |   |                  |           |  |                 |           |           
|Lease exit costs                |       |   | 10,340,000                                 |            |               |           | 4,065,000 |           |                  |   | 247,000 |               |  |   | 1,103,000         |           |  |                 | 13,055,000
|Internal merger costs and other |       |   | 814,000                                    |            |               |           | 2,041,000 |           |                  |   |        |               |  |   | 2,756,000         |           |  |                 | 99,000    
|                                |       |   |                                            |            |               |           |           |           |                  |   |         |               |  |  
|                                | Total |   | $                                          | 13,647,000 |               |           | $         | 8,305,000 |                  |   | $       | 441,000       |  |   | $                 | 7,501,000 |  |                 | $          | 14,010,000
|                                |       |   |                                            |            |               |           |           |           |                  |   |         |               |  |  



|   |  | Fiscal 2002                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|-- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | In June 2001, the Company initiated a restructuring of its worldwide
operations to reduce costs and increase operational efficiencies. In
connection with the restructuring, in July 2001, the Company initiated a
workforce reduction of approximately 42 employees, or 10% of its workforce to
streamline its worldwide functions, operations and resources primarily in
marketing, selling and administration. The workforce reduction resulted in a
$1,712,000 charge during the quarter ended September 30, 2001 relating
primarily to severance and fringe benefits. Related cash payments of
$1,306,000 were made during the six months ended December 31, 2001. The
remaining liability was paid during the year ended June 30, 2002.
|  
|6. |  | Earnings Per Share                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|  
|   |  | Basic earnings per share are computed by dividing net income (loss) available
to common stockholders by the weighted average number of common shares
outstanding during the period. Diluted earnings per share gives effect to all
dilutive potential common shares outstanding during the period, including
convertible preferred stock as well as stock options and warrants, using the
treasury stock method.                                                                                                                                                                                                                                                                                                                             
|  
|   |  | Options and warrants to purchase 9,690,000 and 6,722,000 shares of common
stock were outstanding at December 31, 2002 and 2001, respectively, but were
not included in the computation of diluted net loss per share as their effect
was anti-                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               

8



---



##### Table of Contents





|   |  | dilutive. Also 235,000 shares of convertible preferred stock were
outstanding at December 31, 2002 and are convertible into 236,000 shares of
common stock, but were not included in the computation of diluted net loss
per share as their effect was anti-dilutive.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|7. |  | Comprehensive Loss                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|  
|   |  | Comprehensive loss for the three and six months ended December 31, 2002 was
$7,821,000 and $21,763,000 compared to $6,203,000 and $14,680,000 for the
same period 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.                                                                                                                                                                                                                                                                                                                                                                                                                                              
|  
|8. |  | Unaudited Pro Forma Information                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|  
|   |  | On June 25, 2002, the Company completed its merger with Visionics Corporation
(Visionics), a leading provider of biometric technologies and
identification information systems. 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.
|  
|   |  | The following table presents the consolidated results of operations on an
unaudited pro forma basis, excluding the charge for acquired in-process
research and development, as if the June 2002 merger with Visionics
Corporation had taken place at the beginning of the periods presented:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          

|                                                                   |  |                    |            |   |                  |   |             |  
|------------------------------------------------------------------ |  | ------------------ | ---------- | - | ---------------- | - | ----------- | -
|                                                                   |  | Three Months ended |            |   | Six Months ended |  
|                                                                   |  | December 31,       |            |   | December 31,     |  
|                                                                   |  |                    |            |   |                  |  
|                                                                   |  | 2001               |            |   | 2001             |  
|                                                                   |  |                    |            |   |                  |  
|Revenues                                                           |  | $                  | 26,991,000 |   |                  | $ | 51,914,000  |  
|Net Loss                                                           |  |                    | (9,586,000 | ) |                  |   | (20,380,000 | )
|Loss per share  basic and diluted                                 |  | $                  | (0.12      | ) |                  | $ | (0.27       | )
|Common shares used in basic and diluted loss
per share computation |  |                    | 77,246,000 |   |                  |   | 76,648,000  |  



|   |  | The unaudited pro forma results of operations are for comparative purposes
only and do not necessarily reflect the results that would have occurred had
the merger occurred at the beginning of the periods presented or the results
which may occur in the future. These pro forma amounts are not necessarily
indicative of the results that would have been obtained if the merger had
occurred as of the beginning of the period presented or that may occur in the
future.                                                                                                                                                                           
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|9. |  | Reportable Segment Data                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|  
|   |  | The Company has determined that its reportable segments are those based on
its method of internal reporting. Effective July 1, 2002, the Company
reorganized in conjunction with the merger with Visionics and the new
reportable segments are Products and Services. 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, |           
|                      |          |   |                                 |            |   |                               |           
|                      |          |   | 2002                            |            |   | 2001                          |            |            | 2002 |   |             | 2001        |  
|                      |          |   |                                 |            |   |                               |            |            |      |   |             |             |  
|Total revenues:       |          |   |                                 |            |   |                               |            |            |      |   |             |             |   |   |             |            
|                      | Product  |   | $                               | 12,512,000 |   |                               | $          | 6,527,000  |      |   | $           | 26,664,000  |   |   | $           | 12,583,000  |  
|                      | Services |   |                                 | 10,004,000 |   |                               |            | 12,985,000 |      |   |             | 20,914,000  |   |   |             | 23,693,000  |  
|                      |          |   |                                 |            |   |                               |            |            |      |   |             |             |   |  
|                      |          | $ | 22,516,000                      |            |   | $                             | 19,512,000 |            |      | $ | 47,578,000  |             |   | $ | 36,276,000  |            
|                      |          |   |                                 |            |   |                               |            |            |      |   |             |             |   |  
|Loss from operations: |          |   |                                 |            |   |                               |            |            |      |   |             |             |   |   |             |            
|                      | Product  |   | $                               | (7,991,000 | ) |                               | $          | (5,775,000 | )    |   | $           | (18,668,000 | ) |   | $           | (13,435,000 | )
|                      | Services |   |                                 | (131,000   | ) |                               |            | (627,000   | )    |   |             | (4,064,000  | ) |   |             | (1,759,000  | )
|                      |          |   |                                 |            |   |                               |            |            |      |   |             |             |   |  
|                      |          | $ | (8,122,000                      | )          |   | $                             | (6,402,000 | )          |      | $ | (22,732,000 | )           |   | $ | (15,194,000 | )          
|                      |          |   |                                 |            |   |                               |            |            |      |   |             |             |   |  

9



---



##### Table of Contents



|                     |  |              |             |  |          |   |             | 
|-------------------- |  | ------------ | ----------- |  | -------- | - | ----------- | 
|                     |  | December 31, |             |  | June 30, |  
|                     |  |              |             |  |          |  
|                     |  | 2002         |             |  | 2002     |  
|                     |  |              |             |  |          |  
|Identifiable assets: |  |              |             |  |          |   |             | 
|Product              |  | $            | 398,496,000 |  |          | $ | 419,689,000 | 
|Services             |  |              | 10,966,000  |  |          |   | 11,566,000  | 
|                     |  |              |             |  |          |  
|                     |  | $            | 409,462,000 |  |          | $ | 431,255,000 | 
|                     |  |              |             |  |          |  



|10. |  | Foreign Operations Data                                                                                                
|--- |  | -----------------------------------------------------------------------------------------------------------------------
|   
|    |  | In geographical reporting, revenues are attributed to the geographical
location of the sales and service organizations:

|                |               |   |                                 |            |  |                               |            |            |      |   |            |            |  |   |            |            | 
|--------------- | ------------- | - | ------------------------------- | ---------- |  | ----------------------------- | ---------- | ---------- | ---- | - | ---------- | ---------- |  | - | ---------- | ---------- | 
|                |               |   | Three Months Ended December 31, |            |  | Six Months Ended December 31, |           
|                |               |   |                                 |            |  |                               |           
|                |               |   | 2002                            |            |  | 2001                          |            |            | 2002 |   |            | 2001       | 
|                |               |   |                                 |            |  |                               |            |            |      |   |            |            | 
|Total revenues: |               |   |                                 |            |  |                               |            |            |      |   |            |            |  |   |            |           
|                | North America |   | $                               | 21,432,000 |  |                               | $          | 18,473,000 |      |   | $          | 45,549,000 |  |   | $          | 34,897,000 | 
|                | International |   |                                 | 1,084,000  |  |                               |            | 1,039,000  |      |   |            | 2,029,000  |  |   |            | 1,379,000  | 
|                |               |   |                                 |            |  |                               |            |            |      |   |            |            | 
|                |               | $ | 22,516,000                      |            |  | $                             | 19,512,000 |            |      | $ | 47,578,000 |            |  | $ | 36,276,000 |           
|                |               |   |                                 |            |  |                               |            |            |      |   |            |            | 

|                     |               |   |              |             |  |          |             |             | 
|-------------------- | ------------- | - | ------------ | ----------- |  | -------- | ----------- | ----------- | 
|                     |               |   | December 31, |             |  | June 30, |            
|                     |               |   |              |             |  |          |            
|                     |               |   | 2002         |             |  | 2002     |            
|                     |               |   |              |             |  |          |            
|Identifiable assets: |               |   |              |             |  |          |             |            
|                     | North America |   | $            | 408,656,000 |  |          | $           | 430,431,000 | 
|                     | International |   |              | 806,000     |  |          |             | 824,000     | 
|                     |               |   |              |             |  |          |            
|                     |               | $ | 409,462,000  |             |  | $        | 431,255,000 |            
|                     |               |   |              |             |  |          |            



|11. |  | Recent Accounting Pronouncements                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|    |  | In June 2002, the Financial Accounting Standards Board (FASB) issued SFAS No.
146, Accounting for Exit or Disposal Activities. SFAS 146 addresses
significant issues regarding the recognition, measurement, and reporting of
costs that are associated with exit and disposal activities, including
restructuring activities that are currently accounted for under EITF No.
94-3, Liability Recognition for Certain Employee Termination Benefits and
Other Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring). The scope of SFAS 146 also includes costs related to
terminating a contract that is not a capital lease and termination benefits
that employees who are involuntarily terminated receive under the terms of a
one-time benefit arrangement that is not an ongoing benefit arrangement or an
individual deferred-compensation contract. SFAS 146 will be effective for the
Company for exit or disposal activities that are initiated after December 31,
2002. The provisions of EITF No. 94-3 shall continue to apply for an exit
activity initiated under an exit plan that met the criteria of EITF No. 94-3
prior to the adoption of SFAS 146. Adopting the provisions of SFAS 146 will
change, on a prospective basis, the timing of when restructuring charges are
recorded from a commitment date approach to when the liability is incurred.
|   
|    |  | In December 2002 the Company adopted the provisions of FASB Interpretation
No. 45, Guarantors Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others. The implementation
of this accounting pronouncement did not have a material effect on the
Companys results of operations, financial position or cash flows.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   
|    |  | In December 2002 the FASB issued SFAS No. 148, Accounting for Stock-Based
Compensation  Transition and Disclosure  an amendment of FAS 123. SFAS No.
148 provides alternative methods of transition for a voluntary change to the
fair value based method of accounting for stock-based employee compensation
and amends certain disclosure                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       

10



---



##### Table of Contents





|    |  | requirements of SFAS No. 123. The transition provisions of this Statement are
effective for fiscal years ending after December 15, 2002, and the disclosure
requirements of the Statement are effective for interim periods beginning
after December 15, 2002. The Company currently plans to continue to apply the
intrinsic-value based method to account for stock options and will comply
with the new disclosure requirements beginning with the third quarter of
fiscal 2003.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|12. |  | Subsequent Event                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|   
|    |  | In January 2003, the Company was notified that its service business will not
be awarded a contract to continue providing professional support services and
material acquisition support to the Naval Sea Systems Command. The original
contract is a cost plus fixed fee award that expires on June 30, 2003.
During the three and six months ended December 31, 2002, $3,100,000 and
$5,500,000 of revenue was recognized under the contract.                                    




Item 2. 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. 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.

CRITICAL ACCOUNTING POLICIES

The preparation of financial statements and related disclosures in conformity
with accounting principles generally accepted in the United States 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, 2002 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 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, 2002 describes
the critical accounting policies that are impacted significantly by judgments,
assumptions and estimates used in the preparation of the Consolidated Financial
Statements.

11



---



##### Table of Contents



RESULTS OF OPERATIONS

Revenues, Cost of Revenues and Gross Margins

Revenues for the three and six months ended December 31, 2002 were $22,516,000
and $47,578,000 compared to $19,512,000 and $36,276,000 for the same period in
the prior fiscal year. The increase in revenues of 15% and 31% for the three
and six months ended December 31, 2002 was primarily the result of an increase
in product sales resulting from the Visionics merger, partially offset by lower
services revenue. For comparable periods for the prior fiscal year, Visionics
revenue was $7,479,000 and $15,638,000 respectively. The Company had one
customer, the Department of Defense DOD which accounted for 30% of the total
revenue for the three and six months ended 2002, and 45% and 46% for the same
periods respectively in the prior fiscal year.

Product revenues were $12,512,000 and $26,664,000 for the three and six months
ended December 31, 2002, compared to $6,527,000 and $12,583,000 for the same
periods in the prior fiscal year. The increase in product revenue of 92% and
112% for the three and six months ended December 31, 2002 was primarily due to
the Visionics merger. For comparable periods last year Visionics revenue was
$7,479,000 and $15,638,000.

International sales accounted for $1,084,000 and $2,029,000 or 9% and 8% of the
Companys product revenues for the three and six months ended respectively
December 31, 2002 compared to $1,039,000 and $1,379,000 or 16% and 11%
respectively for the same period in the prior fiscal year. 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 were $10,004,000 and $20,914,000 for the three and six months
ended December 31, 2002 down 23% and 12% when compared to services revenues of
$12,985,000 and $23,693,000 for the same periods in the prior fiscal year. The
decrease for the three and six months ended is the result of delayed or reduced
spending on several of the Companys long-term contracts. The delays have been
caused by the lack of a federal budget and some of the reduction has been due
to the Naval Sea Systems Command reorganization as well as a reduced level of
spending on government contractors such as Identix. 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, 2002, revenues directly from the DOD and from other U. S. Government
agencies accounted for 80% and 82% of the Companys total services revenues
compared to 78% and 84% respectively, for the same periods in the prior fiscal
year. Services revenues were not affected by the merger with Visionics.

In January 2003, the Company was notified that its service business will not
be awarded a contract to continue providing professional support services and
material acquisition support to the Naval Sea Systems Command. The original
contract is a cost plus fixed fee award that expires on June 30, 2003. During
the three and six months ended December 31, 2002, $3,100,000 and $5,500,000 of
revenue was recognized under the contract. This contract would have generated
an estimated $3,250,000 per quarter of additional revenue over the life of the
contract.

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, 2002, the
Company derived 90% and 91%, respectively, of services revenues from FFP and
T&M contracts. During the three and six months ended December 31, 2001, the
Company derived 88% and 89%, respectively, of services revenues from FFP and
T&M contracts. FFP contracts provide for a fixed price for stipulated services
or products, regardless of the 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 10% and 9%, respectively,
of its services revenues for the three and six months ended December 31, 2002
and approximately 12% and 11% respectively, of its services revenues for the
same period 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. IPS is currently being audited by
the Defense Contract Audit Agency for the period from July 1, 1997 to June 30,
2000. While the Company believes that the results of such audits will have no
material effect on the Companys financial position or results of operations,
there can be no assurance that no adjustments will be made and that, if made,
such adjustments will not have a material effect on the Companys financial
position, results of operations, or cash flows.

12



---



##### Table of Contents



Gross margin on product revenues was 30% and 28% for the three and six months
ended December 31, 2002 and 39% and
36% for the same periods of the prior fiscal year. The decrease in product
gross margin for the three and six months ended December 31, 2002, was due to a
combination of continued market price pressures on the Companys product lines,
costs associated with integrating facilities and lower unit volumes that
resulted in underabsorbed overhead costs and a change in the product mix. 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 12% and 11% for the three and six months
ended December 31, 2002 as compared to 9% and 8% for the same periods in the
prior fiscal year. The increase in gross margins for the three and six months
ended December 31, 2002 compared to the prior year was due to a combination of
decreased indirect overhead expenses and a change in the mix of services
provided.

Research, Development and Engineering

Research, development and engineering expenses were $2,690,000 and $5,778,000
or 21% and 22% of product revenues for the three and six months ended December
31, 2002 compared to $2,254,000 and $4,868,000 or 35% and 39% of product
revenues for the same periods in the prior fiscal year. The increase in
research, development and engineering expenses was the result of continued
emphasis on the investment in research and development that is critical in
maintaining a strong technological position in the industry.

Marketing and Selling

Marketing and selling expenses were $3,401,000 and $6,652,000 or 15% and 14% of
total revenues for the three and six months ended December 31, 2002 compared to
$3,497,000 and $6,948,000 or 18% and 19% of total revenues for the same periods
in the prior fiscal year. The decrease in marketing and selling expenses was
primarily due to reduced staffing in the marketing area and the Companys
continued efforts to control its marketing expenditures.

General and Administrative

General and administrative expenses were $4,056,000 and $8,939,000 or 18% and
19% of total revenues for the three months and six months ended December 31,
2002, compared to $4,121,000 and $7,649,000 or 21% of total revenues for the
same periods in the prior fiscal year. The decrease in general and
administrative expenses for the three months ended December 31, 2002, compared
to the same period in the prior fiscal year was due to efforts by the Company
to reduce costs as well as efficiencies resulting from the Visionics merger.
The increase in general and administrative expenses when comparing the six
months ended December 31, 2002 to December 31, 2001 was the result of increased
costs in the first quarter of fiscal year 2002 in the areas of recruitment,
subcontractors, the Companys information technology department as well as an
increase in stock option amortization expense from $307,000 in the six months
ended December 31, 2001 to $932,000 in the six months ended December 31, 2002,
associated with the Visionics merger.

Amortization of Acquired Intangible Assets

The
amortization expense consists primarily of acquired intangible
assets such as developed technology, patents and capitalized software
development cost. The amortization expense related to acquired intangible
assets was $1,373,000 and $2,919,000 for the three and six months ended
December 31, 2002 compared to $233,000 and $466,000 for the same periods in the
prior fiscal year. The increase in amortization expense is primarily the
result of intangible assets which were acquired during the Visionics
acquisition which are now being amortized over their estimated useful lives.

Restructuring Write-offs and Other Merger Related Charges

Fiscal 2003

During the three and six months ended December 31, 2002, the Company recorded
restructuring and 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 are 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 are expensed as
incurred.

13



---



##### Table of Contents





| |                                                                                                                                                                                                                       
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Lease exit costs of $299,000 were recorded for the three months ended December
31, 2002, and are related to revised estimated lease exit costs that were
non-recoverable at the Companys Dublin, California facility.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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 division 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.

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

|                              |  |                                            |            |           |  |         |           |               |  |                   |         |  |  |                 |           |  |  |   |            | 
|----------------------------- |  | ------------------------------------------ | ---------- | --------- |  | ------- | --------- | ------------- |  | ----------------- | ------- |  |  | --------------- | --------- |  |  | - | ---------- | 
|                              |  | For the six months ended December 31, 2002
|                              |  |                                           
|                              |  | Restructuring                              |            |           |  |         |           |               |  |                   |         |  |  | Restructuring  
|                              |  | Liability as of                            |            |           |  |         |           | Non-Cash      |  |                   |         |  |  | Liability as of
|                              |  | June 30, 2002                              |            | Additions |  | Charges |           | Cash Payments |  | December 31, 2002
|                              |  |                                            |            |           |  |         |           |               |  |                  
|Severance and benefits        |  | $                                          | 2,493,000  |           |  | $       | 2,005,000 |               |  | $                 |        |  |  | $               | 3,642,000 |  |  | $ | 856,000    | 
|Disposal of fixed assets      |  |                                            |           |           |  |         | 194,000   |               |  |                   | 194,000 |  |  |                 |          |  |  |   |           | 
|Lease exit costs              |  |                                            | 10,340,000 |           |  |         | 4,065,000 |               |  |                   | 247,000 |  |  |                 | 1,103,000 |  |  |   | 13,055,000 | 
|Internal merger costs & other |  |                                            | 814,000    |           |  |         | 2,041,000 |               |  |                   |        |  |  |                 | 2,756,000 |  |  |   | 99,000     | 
|                              |  |                                            |            |           |  |         |           |               |  |                   |         |  |  |                 |           |  |  |   |            | 
|Total                         |  | $                                          | 13,647,000 |           |  | $       | 8,305,000 |               |  | $                 | 441,000 |  |  | $               | 7,501,000 |  |  | $ | 14,010,000 | 
|                              |  |                                            |            |           |  |         |           |               |  |                   |         |  |  |                 |           |  |  |   |            | 

Fiscal 2002

In June 2001, the Company initiated a restructuring of its worldwide operations
to reduce costs and increase operational efficiencies. In connection with the
restructuring, in July 2001, the Company initiated a workforce reduction of
approximately 42 employees, or 10% of its workforce to streamline its worldwide
functions, operations and resources primarily in marketing, selling and
administration. The workforce reduction resulted in a $1,712,000 charge during
the quarter ended September 30, 2001 relating primarily to severance and fringe
benefits. Related cash payments of $1,306,000 were made during the six months
ended December 31, 2001. The remaining liability was paid during the year
ended June 30, 2002.

Interest and Other Income (Expense), net

For the three and six months ended December 31, 2002 and 2001, interest and
other income (expense), net was $673,000 and $1,047,000 compared to $178,000
and $400,000 for the same periods in the prior fiscal year. The increase for
the three and six months ended December 31, 2002 is primarily the result of a
net gain realized on the sale of investments of $235,000 in the second quarter
of fiscal year 2002 and interest from investments totaling $334,000 and
$502,000 for the three and six months ending December 31, 2002. Interest
income is up for the fiscal 2003 periods due to much higher average cash
balances in fiscal 2003 because of cash acquired in the Visionics acquisition
in late June 2002 and from the remaining proceeds from a Company private
placement in December 2001.

Interest Expense

Interest expense was $5,000 and $4,000 for the three and six months ended
December 31, 2002, compared to zero for the same periods in the prior fiscal
year. There have been no borrowings under the Companys lines of credit for
the three and six months ended December 31, 2002 and 2001. 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.

14



---



##### Table of Contents



Benefit (Provision) for Income Taxes

The Company recorded an income tax benefit of $8,000 for the three months ended
December 31, 2002 and a provision of $14,000 for the six months ended December
31, 2002. For the three months ended December 31, 2001, the tax provision was
zero and for the six months ended December 31, 2002 the company experienced a tax
benefit for $1,000. The tax provision recorded for the six months ended
December 31, 2002 is related to state minimum taxes.

Equity Interest in Income of Joint Venture

The equity interest in income of joint venture represents the Companys 50%
share of the results of Sylvan Identix Fingerprinting Centers (SIFC). For
the three and six months ended December 31, 2002, the Companys equity interest
in the joint venture loss was $106,000 and $48,000 respectively. For the same
periods in the prior fiscal year the company experienced income of $21,000 and
$113,000. The decrease in the equity interest is due to decreased net income
of SIFC.

Liquidity and Capital Resources

The Company financed its operations during the six months ended December 31,
2002, primarily from its working capital at June 30, 2002. As of December 31,
2002, the Companys principal sources of liquidity consisted of $57,456,000 of
working capital including $49,535,000 in cash and cash equivalents and
short-term marketable securities. The Company also has $10,699,000 available
for future borrowings under the Companys bank lines of credit.

At December 31, 2002, the Company has two lines of credit. The Companys first
line of credit (the Identix Line of Credit) was entered into in September
2001 and was amended on March 28, 2002. This line of credit provides for up to
the lesser of $15,000,000 or 80% of the Companys eligible product accounts
receivable and 85% of the Companys eligible service business accounts
receivable. 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 plus 50 basis points (4.75% at December 31, 2002). The
Identix Line of Credit expires on March 28, 2003. At December 31, 2002, there
were no amounts outstanding under this line of credit and approximately
$8,699,000 was available to borrow.

The Companys second line of credit (the Visionics Line of Credit), which was
established by Visionics Corporation (Visionics), a wholly owned subsidiary
of the Company, is an inventory and receivables based line of credit for the
lesser of eligible inventory and accounts receivables or $2,000,000.
Borrowings under the Visionics Line of Credit are collateralized by Visionics
inventory and accounts receivable. The Visionics Line of Credit bears interest
at the banks prime rate of interest plus 50 basis points (4.75% at December
31, 2002). The line of credit will expire on March 30, 2003. At December 31,
2002 there were no amounts outstanding under this line of credit and $2,000,000
was available to borrow.

The Identix Line of Credit and the Visionics Line of Credit agreements contain
financial and operating covenants, including restrictions on the Companys
ability to pay dividends on its common stock. At December 31, 2002, the
Company was in compliance with such covenants.

The Company used $12,279,000 of cash and cash equivalents during the six months
ended December 31, 2002 of which $7,501,000 was related to restructuring and
merger costs. Cash used in operating activities for the periods presented was
primarily due to net losses offset by certain non-cash items. Cash provided by
investing activities for the six months ended December 31, 2002 was primarily
the result of net sales of marketable securities partially offset by additions
to property, plant and equipment and intangible assets. Cash used in investing
activities for the six months ended December 31, 2001 was primarily due to
capital expenditures and additions to intangible assets. 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, 2002.

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. The
Company leases office space for its IPS 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.

15



---



##### Table of Contents



Future minimum lease payments for operating leases are as follows:

|                                        |  |   |            | 
|--------------------------------------- |  | - | ---------- | 
|Periods or fiscal years ending June 30: |  |   |            | 
|2003                                    |  | $ | 3,508,000  | 
|2004                                    |  |   | 7,302,000  | 
|2005                                    |  |   | 7,541,000  | 
|2006                                    |  |   | 6,869,000  | 
|2007                                    |  |   | 6,412,000  | 
|Thereafter                              |  |   | 10,557,000 | 
|                                        |  |   |            | 
|Total                                   |  | $ | 42,189,000 | 
|                                        |  |   |            | 

Included in the above future minimum payments is $11,820,000 related to two
leased facilities that were vacated in connection with the Companys merger
with Visionics. At June 30, 2002 the Company recorded a charge of $10,340,000
representing a portion of the future lease costs related to these excess leased
facilities.

In January 2003, the Company was notified that its service business will not
be awarded a contract to continue providing professional support services and
material acquisition support to the Naval Sea Systems Command. The original
contract is a cost plus fixed fee award that expires on June 30, 2003. During
the three and six months ended December 31, 2002, $3,100,000 and $5,500,000 of
revenue was recognized under the contract. The loss of this contract will not
materially affect the Companys cash flows.

While the Company believes that future cash flows from operations, together
with existing working capital and available lines of credit, may be adequate to
fund the Companys operating cash requirements for at least the next twelve
months, the Company may need to raise additional debt or equity financing in
the future. The Company may not be able to obtain additional debt or equity
financing. 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 June 2002, the Financial Accounting Standards Board (FASB) issued SFAS No.
146, Accounting for Exit or Disposal Activities. SFAS 146 addresses
significant issues regarding the recognition, measurement, and reporting of
costs that are associated with exit and disposal activities, including
restructuring activities that are currently accounted for under EITF No. 94-3,
Liability Recognition for Certain Employee Termination Benefits and Other
Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring). The scope of SFAS 146 also includes costs related to
terminating a contract that is not a capital lease and termination benefits
that employees who are involuntarily terminated receive under the terms of a
one-time benefit arrangement that is not an ongoing benefit arrangement or an
individual deferred-compensation contract. SFAS 146 will be effective for the
Company exit or disposal activities that are initiated after December 31, 2002.
The provisions of EITF No. 94-3 shall continue to apply for an exit activity
initiated under an exit plan that met the criteria of EITF No. 94-3 prior to
the adoption of SFAS 146. Adopting the provisions of SFAS 146 will change, on a
prospective basis, the timing of when restructuring charges are recorded from a
commitment date approach to when the liability is incurred.

In December 2002 the Company adopted the provisions of FASB Interpretation No.
45, Guarantors Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others. The implementation of
this accounting pronouncement did not have a material effect on the Companys
results of operations, financial position or cash flows.

In December 2002 the FASB issued SFAS No. 148, Accounting for Stock-Based
Compensation  Transition and Disclosure. SFAS No. 148 provides alternative
methods of transition for a voluntary change to the fair value based method of
accounting for stock-based employee compensation and amends the disclosure
requirements of SFAS No. 123. The transition provisions of this Statement are
effective for fiscal years ending after December 15, 2002, and the disclosure
requirements of the Statement are effective for interim periods beginning after
December 15, 2002. The Company currently plans to continue to apply the
intrinsic-value based method to account for stock options and will comply with
the new disclosure requirements beginning with the third quarter of fiscal
2003.

16



---



##### Table of Contents



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 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 fingerprint information
collected;
|
| |  |  | public perceptions regarding the confidentiality of private 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. In the event that 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 fingerprint biometric
security applications that currently compete or will compete directly with
those products designed, developed and sold under our line of Security
products. Some of these companies have developed or are developing and
marketing semiconductor or optically based direct contact fingerprint image
capture devices. Other companies have developed or are developing and marketing
other methods of biometric identification such as retinal blood vessel or iris
pattern, hand geometry, voice and facial structure. If one or more of these
technologies or approaches were widely adopted, it would significantly reduce
the potential market for our products. Our Security products also compete with
non-biometric technologies such as certificate authorities, and traditional
key, card, surveillance systems and passwords. Many competitors offering
products that are competitive with our Security products and services have
significantly more financial and other resources than we have. The biometric
security market is a rapidly evolving and intensely competitive market, and we
believe that additional competitors may yet enter the market and become
significant long-term competitors.

The products designed, developed and sold under our line of products known
as our Imaging 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 company owned by Motorola), 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
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.

17



---



##### Table of Contents



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 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;                                                
|
| |  |  | unforeseen legal expenses, including litigation costs;                                                                      
|
| |  |  | expenses related to acquisitions or mergers;                                                                                
|
| |  |  | other one-time financial charges;                                                                                           
|
| |  |  | the lack of availability or increase in cost of key components and subassemblies; and                                       
|
| |  |  | the inability to successfully manufacture in volume certain of
our products that may contain complex designs and components.

Particularly important is the need to invest in planned technical
development programs to maintain and enhance our competitiveness, and to
develop and launch new products and services. 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.

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 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 typically impose provisions that permit
cancellation in the event that funds are unavailable to the public agency. In
some cases, unsuccessful bidders for public agency contracts are provided the
opportunity to formally protest certain contract awards through various agency,
administrative and judicial channels. The protest process may delay a
successful bidders contract performance for a number of weeks, months or more,
or 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. 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, in the event 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, 2002, we derived
approximately 80% and 82% 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. In
January 2003, the Company was notified that its service business will not be
awarded a contract to continue providing professional support services and
material acquisition support to the Naval Sea Systems Command. The original
contract is a cost plus fixed fee award that expires on June 30, 2003. During
the three and six months ended December 31, 2002, $3,100,000 and $5,500,000 of
revenue 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.

18



---



##### Table of Contents



For the three and six months ended December 31, 2002, we derived approximately
90% and 91% 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. The Defense Contract Audit Agency
is currently auditing IPS for the periods from July 1, 1997 to June 30, 2000.
While we believe that the results of such audit will have no material effect on
our profits, if made, such adjustments may have a material adverse effect on
our business, financial condition and results of operations.

Integration of our business and Visionics business following our merger may be
difficult to achieve, which may adversely affect operations.

Our merger with Visionics, which was completed in June 2002, continues to
present risks related to the integration and management of technology,
operations and personnel of two companies. The integration of the businesses of
the two companies is a complex, time-consuming and expensive process and may
disrupt our business if not completed in a timely and efficient manner. We
operate with Visionics as a combined organization utilizing common information
and communications systems, operating procedures, financial controls and human
resources practices.

We may encounter substantial difficulties, costs and delays involved in
integrating the companies operations, including:



| |  |  | potential conflicts between business cultures;                                                                           
| | - |  | -------------------------------------------------------------------------------------------------------------------------
|
| |  |  | adverse changes in business focus perceived by third-party constituencies;                                               
|
| |  |  | potential conflicts in distribution, marketing or other important relationships;                                         
|
| |  |  | inability to implement uniform standards, controls, procedures and policies;                                             
|
| |  |  | integration of the research and development and product development efforts;                                             
|
| |  |  | loss of key employees and/or the diversion of managements attention from other ongoing business concerns; and           
|
| |  |  | costs associated with the integration of the two companies may be difficult to control or may be higher than anticipated.

In addition, prior to the merger, Visionics was co-headquartered in New
Jersey and Minnesota, with offices in five locations, and Identix was
headquartered in Northern California, with offices in nine locations. After
the merger, we moved our headquarters to Minnesota. The geographic distances
and the consolidation of operations increase the risk that the integration will
not be completed successfully or in a timely and cost-effective manner. We may
not be successful in overcoming these risks or any other problems encountered
in connection with the integration of the companies.

The substantial costs of the merger and the manner of accounting for the merger
may affect Identix reported results of operations.

Approximately $28 million of costs are expected to be incurred in
connection with the merger. Such amount includes 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. A significant
portion of these costs will be charged to expense in the period incurred,
reducing our earnings or increasing our loss for such period. The remaining
costs, consisting primarily of fees and expenses paid to financial advisors,
attorneys and accountants, will be a component of the purchase price and
capitalized as an element of goodwill. Goodwill is required to be tested for
impairment at least annually and we will be required to record a charge to
earnings in the period any impairment of goodwill is determined. There is a
risk that the management of the combined company will not be able to
effectively control the costs associated with the integration of the two
companies or that such costs may be higher than anticipated. The failure to
manage such integration costs effectively could have a material adverse effect
on the business operations, financial results and stock price of the combined
company.

The market price of our common stock could decline.

The market price of our common stock could decline if:



| |  |  | our integration with Visionics is unsuccessful;                                                              
| | - |  | -------------------------------------------------------------------------------------------------------------
|
| |  |  | the combined company is unable to successfully market its products and services to both companies customers;

19



---



##### Table of Contents





| |  |  | 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 or engaging in a war with 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 that future cash flows from operations, together with
existing working capital and available lines of credit, 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.

Future growth depends in part on the success of itrust, a relatively new
business activity with little operating history.

Our future growth may depend on the success of itrust, which was formed in
July 2000 and has a limited operating history. itrusts success will depend on
many factors, including, but not limited to:



| |  |  | our ability to form additional collaborative partnerships that will contribute technical and commercial value to itrust;                                               
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | the demand for our security products and itrust products and services;                                                                                                 
|
| |  |  | our ability to successfully and rapidly manufacture, disseminate and deploy biometric enabled products and services;                                                   
|
| |  |  | the ability and willingness of our collaborative partners to
successfully and rapidly promote, manufacture, disseminate and deploy
biometric enabled products services;
|
| |  |  | the levels of competition in the space for Internet and wireless web security services;                                                                                
|
| |  |  | the perceived need for secure communications and commerce in such markets;                                                                                             
|
| |  |  | our ability to successfully introduce new products and services; and                                                                                                   
|
| |  |  | our ability to expand its operations and attract, integrate,
retain and motivate qualified sales, marketing, and research and
development personnel.                   

A significant number of established and startup companies have developed
or are developing and marketing security and/or authentication solutions that
currently compete or will compete directly with itrusts solutions. Some of
these companies have significantly more cash and resources than we do, and may
currently offer a broader or more robust range of solutions than those
currently available through the itrust offering. The wired and wireless
security and authentication marketplace is rapidly evolving and intensely
competitive and we believe that additional competitors may yet enter the market
and become significant long-term competitors.

We have experienced net losses in the last two fiscal years and expect
additional losses in the future. itrust is not expected to contribute
significant revenues or positive cash flows in the foreseeable future. At the
same time, however, we will incur significant costs in the design, development,
manufacture, sale and deployment of itrust products and services and in the
execution of itrusts business plan. In part because of the significant
investment we will make in itrust, we expect to incur substantial additional
losses and negative cash flows from it in the foreseeable future.

20



---



##### Table of Contents



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

Our wholly-owned subsidiary, 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.

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 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.

Our results of operations may be harmed by governmental credit, funding and
other policies.

We 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 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.

Furthermore, in many instances, customer procurements 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.

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.

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 revenues 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.

21



---



##### Table of Contents



We rely on products and services provided by International Technology Concepts,
Inc. (IT Concepts).

Certain of our product lines require the purchase of products, components
of products and research, development and engineering services related to the
development of products from IT Concepts. In turn, IT Concepts subcontracts
portions of its work to an affiliate in Russia and brings in a portion of its
engineering and personnel resources from Russia.

If we were to lose IT Concepts as a supplier of certain products and
engineering services, or if IT Concepts were prohibited or restricted from
importing a portion of its engineering requirements or resources, because of
lack of availability of applicable immigration visas or otherwise, we would be
required to find alternative suppliers of products and services or hire
additional engineering personnel to provide the services. This could require us
to incur significant additional research and development costs and delay
shipment of certain products to customers. There is a risk that we would not
be able to find such personnel or suppliers at a reasonable cost, or at all.
Any delay in product development or shipment could have a material adverse
effect on our business, operations, financial results and stock price. Identix
is a party to a series of agreements with IT Concepts governing IT Concepts
supply of research, development and engineering services to Identix. Identix
relies in part on these agreements to protect its ownership, and the
confidentiality of Identix proprietary technology, trade secrets and other
intellectual property rights developed under the agreements. There is a risk
that these agreements may be inadequate to protect Identix, or that such
agreements may be breached, and that the remedies available to Identix may not
be adequate.

Loss of sole or limited source suppliers may result in delays or additional
expenses.

We obtain certain components and complete products 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 year ended June 2002, and the three and six months ended December
31, 2002, we derived approximately 13%, 9% and 8%, respectively, 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 conditions;                                                                                                                                                                   
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | delays in or absolute prohibitions on exporting products
resulting from export restrictions for certain products and
technologies, including crime control products and encryption
technology;
|
| |  |  | loss of, or delays in importing products, services and
intellectual property developed abroad, resulting from unstable or
fluctuating social, political or governmental conditions;             
|
| |  |  | fluctuations in foreign currencies and the U.S. dollar;                                                                                                                                         
|
| |  |  | loss of revenue, property (including intellectual property) and
equipment from expropriation, nationalization, war, insurrection,
terrorism, criminal acts and other political and social risks;
|
| |  |  | the overlap of different tax structures;                                                                                                                                                        
|
| |  |  | seasonal reductions in business activity;                                                                                                                                                       
|
| |  |  | risks of increases in taxes and other government fees; and                                                                                                                                      

22



---



##### Table of Contents





| |  |  | 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.

Two 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, 2002, the State of Wisconsin Investment Board and
Mazama Capital Management, L.L.C owned approximately 10% 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 (such as itrust 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. The Company maintains 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.

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

23



---



##### Table of Contents



declared by the United States Patent and Trademark Office or oppositions
in foreign patent and trademark offices, which could result in substantial cost
to the Company 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 fiscal 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; 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.

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 Dr.
Joseph J. Atick, the Companys President and CEO, as well as certain of our
other 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.

24



---



##### Table of Contents



If we lose the services of Dr. Atick or other 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 and lines 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

Under
the supervision of and with the participation of our management,
including our President and Chief Executive Officer and our Chief Financial
Officer, we conducted an evaluation of our disclosure controls and procedures,
as such term is defined under Rule 13a-14(c) promulgated under the Securities
Exchange Act of 1934, as amended within 90 days of the filing date of this
report. Based on their evaluation, our President and Chief Executive Officer
and our Chief Financial Officer concluded that Identix disclosure controls and
procedures are adequate and effective in timely alerting them to material
information required to be included in our periodic SEC reports.

It should be noted that the design of any system of controls is based in
part upon certain assumptions about the likelihood of future events, and there
can be no assurance that any design will succeed in achieving its stated goals
under all potential future conditions, regardless of how remote. We intend to
review and evaluate the design and effectiveness of our disclosure controls and
procedures on an ongoing basis and, if necessary or appropriate, to improve our
controls and procedures over time and to correct any deficiencies that we may
discover in the future. Our goal in this process is to ensure that our senior
management and board of directors have timely access to all material financial
and non-financial information concerning our consolidated business and
operations. While we believe the present design of our disclosure controls and
procedures is adequate and effective to achieve our goal, future events
affecting our consolidated business and operations may cause us to
significantly modify our disclosure controls and procedures.

There have been no significant changes (including corrective actions with
regard to significant deficiencies or material weaknesses) in our internal
controls or other factors that could significantly affect these controls
subsequent to the date of the evaluation referenced above.

25



---



##### Table of Contents









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 24, 2002.                                                                     
| | --- |  | -------------------------------------------------------------------------------------------------------------------------------------
|
| | (b) |  | All Board of Directors nominees referenced in Item 4(c) below were elected at the Annual Meeting of Shareholders
on October 24, 2002.
|
| | (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   |  |           | 74,866,206 |                |  |  | 1,844,293 | 
|Joseph J. Atick   |  |           | 75,158,737 |                |  |  | 1,551,762 | 
|Milton E. Cooper  |  |           | 74,355,844 |                |  |  | 2,354,655 | 
|Malcolm J. Gudis  |  |           | 74,342,676 |                |  |  | 2,367,823 | 
|John E. Haugo     |  |           | 74,352,435 |                |  |  | 2,358,064 | 
|George Latimer    |  |           | 74,343,945 |                |  |  | 2,366,554 | 
|John E. Lawler    |  |           | 74,343,248 |                |  |  | 2,367,251 | 
|Patrick H. Morton |  |           | 74,273,911 |                |  |  | 2,436,588 | 



| | (2) |  | An amendment to increase from 860,000 to
1,310,000 the number of shares reserved for issuance under
the non-employee directors stock option plan was approved.
The number of shares voted in favor of the amendment was
64,978,545 the number of shares voted against were
11,489,146 and the number of share abstaining was 242,806.
| | --- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | (3) |  | The appointment of PricewaterhouseCoopers
LLP as independent accountants of the Company for the
fiscal year ending June 30, 2003 was ratified. The number
of shares voted in favor of the appointment was 74,669,894
the number of shares voted against were 1,906,178, and the
number of shares that abstained was 134,427.         




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



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

|        |  |                   
|------- |  | ------------------
|Exhibit |  |                   
|Number  |  | Description       
|        |  |                   
|99.1    |  | 906 Certifications



| | (b) |  | No reports on Form 8-K have been filed during the quarter for which
this Report is filed
| | --- |  | ----------------------------------------------------------------------------------------

26



---



##### Table of Contents






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 14,
2003.

| |  |                                       
| |  | --------------------------------------
| |  | IDENTIX INCORPORATED                  
| |  |                                       
| |  | BY: /s/ Erik E. Prusch                
| |  |                                       
| |  | Erik E. Prusch
Chief Financial Officer

27



---



##### Table of Contents



CERTIFICATIONS

I, Joseph J. Atick, President and Chief Executive Officer, certify that:



|1. |  | I have reviewed this quarterly report on Form 10-Q of Identix
Incorporated (the registrant);                                                                                                                                                                                                                                
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|2. |  | Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
|  
|3. |  | Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;                   
|  
|4. |  | The registrants other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:                                                                                                         



| |                                                                                                                                                                                                                                                                                             
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
|
| | b) evaluated the effectiveness of the registrants disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
quarterly report (the Evaluation Date); and                                                                                            
|
| | c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;                                                                                                                  



|5. |  | The registrants other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrants auditors and the audit
committee of the registrants board of directors (or persons performing
the equivalent functions):
|-- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |                                                                                                                                                                                                                                                                                                
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrants ability to record,
process, summarize and report financial data and have identified for the
registrants auditors any material weakness in internal controls; and
|
| | b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrants internal controls;
and                                                                                                                                      



|6. |  | The registrants other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weakness.
|-- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |       |  |                                                      
| |  | ----- |  | -----------------------------------------------------
| |  | By:   |  | /s/ Joseph J. Atick                                  
| |  |       |  |                                                      
| |  |       |  | Joseph J. Atick
President and Chief Executive Officer
| |  |       |  |                                                      
| |  | Date: |  | February 14, 2003                                    

28



---



##### Table of Contents



I, Erik E. Prusch, Chief Financial Officer, certify that:



|1. |  | I have reviewed this quarterly report on Form 10-Q of Identix
Incorporated (the registrant);                                                                                                                                                                                                                                
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|2. |  | Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
|  
|3. |  | Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;                   
|  
|4. |  | The registrants other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:                                                                                                         



| |                                                                                                                                                                                                                                                                                             
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
|
| | b) evaluated the effectiveness of the registrants disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
quarterly report (the Evaluation Date); and                                                                                            
|
| | c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;                                                                                                                  



|5. |  | The registrants other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrants auditors and the audit
committee of the registrants board of directors (or persons performing
the equivalent functions):
|-- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |                                                                                                                                                                                                                                                                                                
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrants ability to record,
process, summarize and report financial data and have identified for the
registrants auditors any material weakness in internal controls; and
|
| | b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrants internal controls;
and                                                                                                                                      



|6. |  | The registrants other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weakness.
|-- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |       |  |                                       
| |  | ----- |  | --------------------------------------
| |  | By:   |  | /s/ Erik E. Prusch                    
| |  |       |  |                                       
| |  |       |  | Erik E. Prusch
Chief Financial Officer
| |  |       |  |                                       
| |  | Date: |  | February 14, 2003                     

29