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SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549


Form 10-K

|           |  |                                                                                                 
|---------- |  | ------------------------------------------------------------------------------------------------
|(Mark one) |  |                                                                                                 
|þ          |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR
    15(d)
    OF THE SECURITIES EXCHANGE ACT OF 1934    
|          
|           |  | For the fiscal year ended June 30,
    2003                                                     
|          
|or        
|          
|o          |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR
    15(d)
    OF THE SECURITIES EXCHANGE ACT OF 1934
|          
|           |  | For the transition period
    from           to           .                                     

Commission File Number: 1-9641

Identix Incorporated

(Exact name of registrant as specified in its
charter)


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

Registrants telephone number, including
area code:

(952) 932-0888


Securities registered pursuant to
Section 12(b) of the Act:

Common Stock, $0.01 par value


Securities registered pursuant to
Section 12(g) of the Act:

None


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 requirements for the
past 90 days.
Yes þ          No o

Indicate by check mark if disclosure of
delinquent filers pursuant to Item 405 of Regulation S-K is
not contained herein, and will not be contained, to the best of
registrants knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this
Form 10-K or any amendment to this
Form 10-K.     o

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

The aggregate market value of the voting and
non-voting common equity held by non-affiliates of the
registrant at December 31, 2002 was approximately
$439,132,000 based upon the closing market price of $5.15 per
share.

The number of outstanding shares of the
registrants common stock on September 4, 2003 was
86,058,713.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Definitive Proxy Statement filed
with the Securities and Exchange Commission in connection with
the Annual Meeting of Stockholders expected to be held
October 30, 2003 are incorporated by reference in
Part III of this Form 10-K.



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TABLE OF CONTENTS



|                                                                       |                                                                                                         |  |  |  |  |  |  | 
|---------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|PART I                                                                
|                                                                       | Item 1. Business                                                                                       
|                                                                       | Item 2. Description of Properties                                                                      
|                                                                       | Item 3. Legal Proceedings                                                                              
|                                                                       | Item 4. Submission of Matters to a Vote of Security-Holders                                            
|PART II                                                               
|                                                                       | Item 5. Market for the Companys Common Stock and Related Stockholder Matters                          
|                                                                       | Item 6. Selected Financial Data                                                                        
|                                                                       | Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations          
|                                                                       | Item 7A. Quantitative and Qualitative Disclosures about Market Risk                                    
|                                                                       | Item 8. Financial Statements and Supplementary Data                                                    
|REPORT OF INDEPENDENT AUDITORS                                        
|CONSOLIDATED BALANCE SHEETS                                           
|CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY AND COMPREHENSIVE LOSS
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Year Ended June 30, 2003   
|PART III                                                              
|                                                                       | Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
|                                                                       | Item 13. Certain Relationships and Related Transactions                                                
|PART IV                                                               
|SIGNATURES                                                            
|POWER OF ATTORNEY                                                     
|Financial Statement Schedule                                          
|SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS AND RESERVES            
|EX-10.53 Line of Credit Agreement                                     
|EX-10.54 Employment Agreement                                         
|EX-21.1 Subsidiaries of Identix                                       
|EX-23.1 Consent of Independent Accountants                            
|EX-31.1 302 Certification-Chief Executive Officer                     
|EX-31.2 302 Certification-Chief Financial Officer                     
|EX-32 906 Certifications                                              



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IDENTIX INCORPORATED

Year Ended June 30, 2003


TABLE OF CONTENTS

|         |  |                                                                                                    |  |      |    | 
|-------- |  | -------------------------------------------------------------------------------------------------- |  | ---- | -- | 
|         |  |                                                                                                    |  | Page
|         |  |                                                                                                    |  |     
|PART I  
|Item 1.  |  | BUSINESS                                                                                           |  |      | 2  | 
|Item 2.  |  | PROPERTIES                                                                                         |  |      | 32 | 
|Item 3.  |  | LEGAL PROCEEDINGS                                                                                  |  |      | 33 | 
|Item 4.  |  | SUBMISSION OF MATTERS TO A VOTE OF SECURITY
    HOLDERS                                            |  |      | 33 | 
|PART II 
|Item 5.  |  | MARKET FOR THE COMPANYS COMMON STOCK AND
    RELATED STOCKHOLDER MATTERS                          |  |      | 34 | 
|Item 6.  |  | SELECTED FINANCIAL DATA                                                                            |  |      | 34 | 
|Item 7.  |  | MANAGEMENTS DISCUSSION AND ANALYSIS OF
    FINANCIAL CONDITION AND RESULTS OF OPERATIONS          |  |      | 36 | 
|Item 7A. |  | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
    MARKET RISK                                     |  |      | 48 | 
|Item 8.  |  | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA                                                        |  |      | 49 | 
|Item 9.  |  | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
    ACCOUNTING AND FINANCIAL DISCLOSURE           |  |      | 81 | 
|Item 9A. |  | CONTROLS AND PROCEDURES                                                                            |  |      | 81 | 
|PART III
|Item 10. |  | DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT                                                 |  |      | 81 | 
|Item 11. |  | EXECUTIVE COMPENSATION                                                                             |  |      | 81 | 
|Item 12. |  | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
    AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS |  |      | 82 | 
|Item 13. |  | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS                                                     |  |      | 82 | 
|PART IV 
|Item 14. |  | EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND
    REPORTS ON FORM 8-K                               |  |      | 82 | 

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PART I







Item 1.     Business


The statements in this Annual Report on
Form 10-K that relate to future plans, events or
performance are forward-looking statements. Actual results could
differ materially due to a variety of factors, including the
factors described under Risk Factors and the other
risks described in this Annual Report on Form 10-K. The
Company undertakes no obligation to publicly update these
forward-looking statements to reflect events or circumstances
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, obtain
identifications or who need to be identified or have their
identity verified for other purposes. Additionally, the
Companys product and solution offerings can help identify
those who perpetrate fraud or otherwise pose a threat to public
safety. Identix products serve a broad range of industries
and market segments  most notably, government and law
enforcement, transportation, 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.



| |                                   
| | ----------------------------------
| | Business Case  Why
    Biometrics

Security today is built around trust and identity
verification. The roots of todays security framework are
grounded in the ability to provide authorized individuals with
the appropriate access rights based on those individuals
authenticating or verifying their trusted identity. Biometrics
are a way to establish a unique and trusted identity for each
individual that cannot be lost, stolen or misused, which can be
an issue with traditional methods of authentication such as
passwords, tokens, keys and proximity cards. Biometrics is the
measurement of an individuals unique physical or
behavioral characteristic(s) to recognize his identity and/or
verify his claimed identity. A number of traits and behaviors
can underlie biometrics including fingerprints, face, iris,
retina, and voice.

The tragic events of September 11, 2001 and
the subsequent worldwide response in calling for better security
measures created a heightened awareness around security and
around the need to incorporate accurate and unique identity into
security via biometric applications. This heightened awareness
has driven the understanding, as well as the adoption, of a need
for new security requirements in numerous areas. The following
areas are some in which new security requirements are being
adopted or considered: federal, state and local government;
international governments; some aspects of the transportation
industry, including airlines and airports, trains and seaports;
and in major industries in corporate America including banking,
healthcare, and educational enterprises.

Legislation has been passed and additional
legislation is being promulgated requiring heightened security
in numerous areas including general homeland security. Much of
this legislation is recommending the use of biometrics as a
method to help ensure that only authorized and verified
individuals are gaining access to protected information,
facilities, and international borders.

As one of the only biometric companies that
provides proprietary technology for both fingerprint and facial
recognition, Identix mission is to provide an accurate
means of identifying an individual. Identix is also focused on
empowering individual identification by clearly and
unequivocally linking action with identity. By offering
solutions that enhance privacy, provide credentialed
authorization, increase security and convenience, and reduce the
likelihood of a possible breach or fraud, Identix is employing
its biometric technology to address the new identity
requirements of security.

2



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| |                                                             
| | ------------------------------------------------------------
| | Current Market Outlook  Target
    Industries/ Applications

Identix delivers solutions in at least three key
areas related to identification. (1) Fraud detection
applications, where a biometric is used to enroll an individual
into a program to receive a benefit or privilege or to establish
that an individual has not enrolled multiple times under false
identities or aliases; (2) Identification and detection
applications, where a biometric is used to identify or be on the
look-out for individuals on a watch-list who may pose a threat
to public safety or national security; and
(3) Authentication applications, such as those encountered
in physical and logical access where a biometric is used to
confirm that an individual is who he or she claims to be before
granting access. Within these three key areas there are many
applications. For example, the Companys biometric
identification technology, systems and information technology
services enable customers to identify and authenticate
individuals to check the identity of suspected criminals.
Identix offerings can also be used to enroll citizens in
national identification programs and to verify these
citizens identity to receive privileges or benefits or to
provide monitored entry and exit in and out of the country.
Additionally, Identix biometric identification technology
systems and information technology services help enable
customers in identifying and authenticating individuals for
physical access to doors and facilities or for logical access
for computers and networks. Other applications include helping
commercial employers and government agencies conduct background
checks on applicants for employment or permits and helping to
verify or establish identity for the purposes of issuing
identification documents, conducting transactions, or conducting
criminal investigations. Identix product and service
offerings include Live Scan terminals and systems that provide
forensic-quality electronic fingerprint capture and transmission
for searches against existing databases for the identification
of individuals. Identix products and services also include
computer-based optical fingerprint capture devices, face and
fingerprint recognition technology, and the software and
hardware platforms for deploying these technologies. Identix
also offers photographic systems, software tools and finished
products, multi-media data storage and communications servers,
and the systems integration and software development services
required to deploy and use these systems.

Government:Government agencies  federal, state, and
local  have long been adopting biometric
technologies. Identix has frequently been their biometric
company of choice. In some instances, the call by these
government entities for the use of biometrics has been driven by
legislation. Currently, there are several legislative acts and
bills pending or passed that call for the use of technology,
including biometrics, to provide enhanced security. Much of this
legislation falls under the broad category of Homeland Security
and includes, but is not limited to, the Aviation and
Transportation Security Act of 2001, the Enhanced Border
Security and Visa Entry Reform Act of 2001, the Public Health
Security and Bioterrorism Preparedness and Response Act of 2002,
the USA PATRIOT Act of 2001 and the Port and Maritime Security
Act of 2002.

Law Enforcement:For
more than 100 years, fingerprints have been the standard by
which law enforcement agencies identify criminals and suspects.
Live Scan fingerprinting is the computerized version of ink and
paper fingerprint capture. Frequently, Identix Live Scan systems
are the choice of law enforcement and corrections agencies.
Requirements for new technologies and applications among law
enforcement agencies emerge daily. Some law enforcement
requirements may call for facial recognition for mug shot
systems and real time criminal identification, facial
surveillance for criminal detection, and/or wireless systems
that allow fingerprints and photographs to be captured remotely.
Identix is one of the few companies that can provide this broad
range of comprehensive offerings.

National Identification and Passport
Programs:Many foreign countries are
establishing or discussing the establishment of national
identification programs to help ensure that only qualified
citizens are able to avail themselves of the benefits to which a
countrys citizens are entitled. Some of these programs and
potential programs are also aimed at helping to secure a
countrys borders by tracking entry and exit of both
citizens and visitors. Identix offers a range of products that
can be utilized in national identification programs to enroll
citizens for receipt of benefit purposes and/or to add biometric
identifiers to national identification programs. Identix
product and service offerings in this area include Live Scan
terminals and systems that provide forensic-quality electronic
fingerprint capture and transmission into databases for
identification of individuals, computer-based optical
fingerprint capture, face and fingerprint recognition technology
and software and hardware platforms for deploying these
technologies. Additional Identix offerings that may be utilized
by these programs include photographic systems, software tools
and finished products, multi-media

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data storage and communications servers, and the
systems integration and software development services required
to deploy and use these systems.


Healthcare:Government legislation surrounding the integrity,
confidentiality, and privacy of patient data was enacted under
the Health Insurance Portability & Accountability Act
(HIPAA). HIPAA requires the healthcare industry to
restructure current information technology (IT)
infrastructures and methods. Identix offers products and
solutions to assist healthcare organizations work towards
reducing errors, while increasing efficiencies, lowering costs
and meeting these legislative demands. Identix can provide
assistance in becoming HIPAA compliant, while enhancing the
security and reducing the inconvenience and risks associated
with passwords, Personal Identification Numbers
(PIN) and keys.

Financial:Many
financial institutions, including securities firms, are legally
mandated to conduct background checks on current employees and
applicants. In addition, banks and brokerage houses find
themselves vulnerable to theft from internal and external
sources. An alarmingly fast-growing number of identity fraud
cases and a whole host of other security risks, as well as
privacy issues posed by providing services over the Internet,
are issues financial institutions face on a daily basis. Identix
offers products and solutions to address these concerns. From
assisting in employee background checks to helping to secure
physical and logical access through biometrics, Identix provides
a number of products and solutions for financial institutions.

Consumer:The
indirect costs to the consumer of general fraud and
impersonation are estimated to be in the billions of dollars
each year in the United States. In addition, damages resulting
from security breaches, such as unauthorized persons gaining
improper access to confidential information, may not be
quantifiable, but can be equally problematic. Accordingly, the
ability to verify the identity of a specific individual is of
critical importance in reducing acts of fraud and increasing
security. Each day individuals are required to identify
themselves numerous times with something they have in their
possession or with the knowledge of certain information. Methods
of identity include magnetic strip cards and PINs to transact
business at Automatic Teller Machines (ATM) or
point-of-sale (POS) terminals; passwords or tokens
to log-on to a computer or a computer network; keys, cards or
passwords to enter the workplace; PINs, passwords and account
numbers to complete a commercial transaction on-line; credit
cards to make a credit purchase; time cards to begin work; and a
drivers license to write a check or transact business at a
bank.

Identix offers biometric products and solutions
that can help prevent fraud and identity theft, as well as help
protect proprietary information in consumer-related areas. Some
of these areas include computer database and network access and
security, computer software, intranet and Internet security,
data sharing and management, electronic commerce, communications
devices, POS terminals, bank transaction authorization, facility
access and security, ATMs, time-and-attendance, and residential
security.

Product Offerings



| |         
| | --------
| | Overview

Through its merger with Visionics Corporation
(Visionics) in June of 2002, the Companys
combined product portfolio has expanded significantly. Identix
has developed leading-edge security and Live Scan solutions that
can help to: protect proprietary information; prevent fraud and
identity theft; identify criminals; enroll individuals in
identification programs; control physical access; protect
confidential records; protect information contained on corporate
networks; and assist in job applicant screening. Many of the
Companys solutions employ leading optical fingerprint
capture technologies and facial recognition technologies,
proprietary algorithms and/or customizable application software
suites. The product segment of the Company contributed 56%, 39%
and 43% of total revenues for fiscal years 2003, 2002, and 2001
respectively with the service segment of the Company
contributing 44%, 61%, and 57% of total revenues for fiscal
years 2003, 2002, and 2001 respectively.

Identix offerings can be classified into
five categories: (i) technology; (ii) products;
(iii) platforms; (iv) project management services; and
(v) fingerprinting services.

4



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| |                   
| | ------------------
| | i.     Technology:



| |                        
| | -----------------------
| | Fingerprint technology.

Identix is a leader in the development of
commercial grade fingerprint identification technology. The
Companys proprietary software engine, BioEngine®,
enables a broad range of products and applications to be built
or assembled by partners, original equipment manufacturers
(OEM), value added resellers (VAR) and
system integrators. These products and applications include
authentication systems for information security, access control,
financial transactions and time and attendance.

In addition to BioEngine, Identix has packaged
its fingerprint technology offerings into application-specific
Software Development Kits (SDK).

BioEngine SDK.The
BioEngine SDK allows system engineers to rapidly develop
biometrically secure applications for fingerprint verification
and/or identification. Implementation options include
verification (one-to-one) and identification (one-to-many or
search) matching capabilities and support.

BioLogon® SDK.The BioLogon SDK allows system engineers to rapidly integrate
biometrically secure applications by interfacing with
Identix BioLogon software. The BioLogon SDK leverages
Identix existing BioLogon software technology for rapid
application deployment.

FingerLanTMIV
SDK.The Identix FingerLan IV SDK
contains the tools needed to create a custom physical access
control application, or to integrate fingerprint biometrics into
virtually any access control system using Microsoft Visual C++
to control Identix FingerscanTM V20 fingerprint
access control units. The SDK also provides sample and source
code to write an application that exercises many of the
FingerLan Access Control Application functions, which can
greatly assist developers in rapidly integrating the Fingerscan
V20 physical access device into any application.

BioCard® SDK.Identix BioCard SDK enables smart card manufacturers,
integrators, and end users to easily implement smart card-based
biometric authentication. The framework of the BioCard SDK
enables Windows-based applications and JavaTM Card
applets to leverage Identix biometric authentication
capabilities. The BioCard SDK extends the current security of
any applet/application to support multiple factors of
authentication. Using minimal function calls at the UserLogon
and UserEnroll level, engineering organizations can integrate
most applications and java applets in a matter of hours.

A significant number of companies have purchased
Identix Fingerprint SDKs and a growing number are deploying
finished products and solutions. Through Identix partner
network, Identix BioEngine technology is deployed throughout
government agencies, hospitals, banks and corporate facilities
worldwide.

Federal Government:The U.S. Department of Defense (DOD) has deployed
Identix DFR® 2080 single fingerprint readers in
conjunction with Identix BioEngine fingerprint recognition
technology for use by the DODs personnel processing
center, the Defense Manpower Data Center (DMDC). The
DOD is using Identix technology to upgrade its existing
fingerprint record files of all DOD military and civilian
personnel to Identix most recent fingerprint biometric
technology offering. The upgrade will include all personnel
under DMDC in both the Defense Enrollment Eligibility Reporting
System (DEERS) and Real-time Automated Personnel
Identification System (RAPIDS) programs.



| |                    
| | -------------------
| | Facial Recognition.

Identix is a recognized leader in the development
of facial recognition technology. Its proprietary software
engine, FaceIt®, enables a broad range of products and
applications built by partners (OEMs, VARs and system
integrators). These include identity fraud applications and
authentication systems for information security, access control,
travel, banking and e-commerce, as well as enhanced Closed
Circuit Television systems (CCTV). FaceIt technology
is also the underlying biometric technology for Identix
Biometric Network Platform and Identix Automated Biometric
Identification SystemTM (ABISTM). ABIS is
a web-based enterprise-level facial recognition-matching
platform that eases the delivery of large-scale identification
solutions for government, law enforcement and commercial users
by providing numerous capabilities required by these types of
entities with millions of records to manage.

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FaceIt technology is also provided through
software development toolkits, run-time licenses and application
software.

The primary SDKs and toolkits are:

FaceIt Verification
SDK.The FaceIt Verification SDK
contains face finding and face recognition technologies designed
for use in one-to-one verification scenarios, such as access
control or time and attendance.

FaceIt Identification
SDK.The FaceIt Identification SDK
contains face finding and face recognition technology designed
for use in searching large photo databases and other data mining
applications.

FaceIt Surveillance
SDK.The FaceIt Surveillance SDK is an
add-on for the FaceIt Identification SDK that allows fast face
segmentation (and multiple face finding) for near real-time
performance. In order to perform face recognition after finding
faces using this SDK, the Identification SDK is required. The
face finding functionality is similar to that found in the
Identification SDK, but the algorithms used in this SDK have
been optimized for speed and are designed for use with images
captured from live video or video playback.

Over 500 companies have purchased FaceIt SDKs and
a growing number are deploying finished products and solutions.
Through Identix partner network, FaceIt technology is
deployed in casinos, law enforcement mug shot booking systems,
town center surveillance systems, voter registration and civil
identification programs, laptop screensaver applications, and
video data mining products.

ID fraud prevention:A state department of motor vehicles (DMV) has
enhanced its drivers license issuance program with
Identix facial recognition technology. Under the enhanced
license issuance program, implemented by a third party, selected
drivers license applicants will be compared with the
10 million records the state has on file to identify
possible duplicates and aid in the DMVs investigation of
identity fraud.

Internet
authentication:A leading online
traffic school provider, has deployed Identix FaceIt
technology to verify individuals that have opted for a web-based
alternative to traditional on-site traffic schools. Using FaceIt
technology, the traffic school successfully created a tool that
makes it possible to verify the identity of the test taker from
start to finish, even from remote locations.



| |                  
| | -----------------
| | ii.     Products:



| |          
| | ---------
| | Live Scan

In the Live Scan market, the Company has
established a leadership position by providing systems for the
efficient capture and management of digital fingerprint and full
handprint images and demographic data for various applications
including law enforcement, national identification enrollment
programs, immigration and civilian employment, screening and
background checks. The Companys Live Scan offerings range
from ruggedized stand-alone units to small, portable and
wireless devices. These offerings allow Identix to serve the
broad needs of the government, law enforcement and civilian Live
Scan markets.

TouchPrintTM, TENPRINTER®,
FingerPrinterTM CMS, and TouchPrint PRO Full Hand
Scanner systems were designed for use by law enforcement
agencies as a more accurate and efficient method of recording
fingerprint and full handprint and demographic information than
the conventional ink-and-roll method. These Live
Scan products are computer-based, inkless Live Scan systems that
electronically scan and capture forensic quality fingerprint and
full handprint images directly from an individuals finger.
The fingerprint and/or full handprint images can then be printed
using a laser printer or transmitted over telephone lines or a
wide area network to Automatic Fingerprint Identification
Systems (AFIS) for identification matching at local,
state or federal agencies, or other established databases. In
addition to law enforcement applications, other applications for
Live Scan include background checks of prospective employees by
public and private sector employers and enrollment into national
identification or other large-scale identification programs.

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In order to meet the forensic quality standards
required for identifying individuals from within large AFIS
systems, the Company has applied its optics and image processing
expertise to develop systems that it believes capture higher
resolution and more accurate images than other available
products. Identix Live Scan systems produce rolled finger,
slap (four fingers at once), and full handprint
images at a minimum of 500 dots per inch.

TouchPrint 3000; TouchPrint 2000; TENPRINTER
1133; FingerPrinter CMS.The
TouchPrint 3000 is the latest stand-alone Live Scan system
launched by the Company. The TouchPrint 3000 family of products
incorporates the best of breed in technology and product design
from Identix and Visionics. The TouchPrint 3000 Series, like all
Identix Live Scan systems has obtained FBI Appendix F
Certification, the FBIs highest level of Image Quality
Specification (IQS). Identix believes that the
TouchPrint 3000 is the only ten-print scanner with no moving
parts and a single large, non-coated platen, which helps to
reduce downtime and maintenance costs, while enhancing system
performance. State-of-the-art optical and lighting
schemes  Moisture Discriminating OpticsTM
(patented), Dual Beam IlluminationTM (patent pending)
and Clear Trace ImagingTM (patent
pending)  enable the TouchPrint 3000 Series Live
Scan systems to ignore moisture, dirt, residue and latent prints
left behind on the platen, helping to lower AFIS rejection
rates, maximize throughput and dramatically enhance AFIS
performance.

The moisture-discrimination patented imaging
design technology eliminates a long-standing limitation in live
digital imaging of fingerprints that is caused by the presence
of moisture on the surface of the platen or adhering to the
convoluted surfaces of the subjects fingerprints.
Conventional Live Scan optics cannot discriminate between
moisture and skin surface. This optical limitation results in
the inability to consistently and accurately image ridge and
pore structure detail, reducing the utility of digital
fingerprints for forensic comparison with crime scene latent
lifts. Identix Moisture Discriminating Optics
effectively ignore residual moisture consistently
recording the structure of ridge edges and skin pore detail even
when the ridges are surrounded by moisture. All three Live Scan
systems utilize high-resolution scanners with digital signal and
video processing boards, multi-processing application software,
multi-tasking computers, computer monitors as well as laser
printers. The TouchPrint 3000, TouchPrint 2000, and TENPRINTER
1133 systems are enclosed in a ruggedized cabinet.

TouchPrint 3100; TouchPrint 2600 Applicant
Fingerprint System (TP-2600
AFS).The TouchPrint 3100 and
TP-2600 AFS are designed to provide high-quality fingerprint
scanning for civil applications. The TouchPrint 3100 and TP-2600
AFS are based, respectively; on the Companys, FBI
Appendix F-Certified, TouchPrint 3000 and TouchPrint 2000
fingerprint scanner technology. The TouchPrint 3100 and TP-2600
AFS support direct connections to state and local AFIS systems
and to the FBI IAFIS to permit rapid screening of job applicants
to help prevent the hiring of personnel with past criminal
records for industries such as airports, school systems,
banking/financial and securities firms and segments of the
healthcare field. These models are also well suited for
enrollment of individuals for national or other large-scale
identification programs where forensic quality images are
required or preferred.

TENPRINTER FC-Desktop Modular and TENPRINTER
FC-Transportable.The TENPRINTER
FC-Desktop Modular and TENPRINTER FC-Transportable are FBI
Appendix F-Certified, low cost, modular fingerprint Live
Scan systems. The Transportable is designed to fit in a
hard-sided carrying case, and allows forensic quality Live Scan
fingerprint capture at remote locations. Fingerprint images can
be transmitted to AFIS systems from remote locations or stored
for processing at a central location.

TouchPrint PRO Full Hand
Scanner.Identix TouchPrint PRO
is the first full hand Live Scan imager to receive
Appendix F-Certification from the FBI. Employing
Identix patented Moisture Discriminating Optics, the
TouchPrint PRO captures a continuous scan from the carpal crease
to the fingertips, in compliance with International Association
for Identification (IAI) standards. The TouchPrint
PRO Scanner eliminates the tedious process of stitching together
pieces of prints and provides the ability to absolutely connect
palm images to a particular human subject through the
simultaneous capture of fingertip and palm ridge information.

TouchPrint 3800.Identix TouchPrint 3800 incorporates the TouchPrint 3000 with
the TouchPrint PRO Full Hand Scanner to provide fingerprinting
booking stations with an integrated full hand scanner configured

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in a ruggedized housing, with adjustable height
controls designed to withstand heavy traffic and harsh booking
environments.


DFR®2080;
DFR 2090; DFR 90 The DFR 2080, 2090, and 90 are forensic
quality single fingerprint readers specifically designed to
capture and display a high-resolution video fingerprint image on
a customer-supplied workstation. The DFR 2080/2090 products are
compact, low cost, high-quality fingerprint readers that deliver
National Institute of Standards and Technology
(NIST) compliant 500 dpi resolution and provide a
digital USB output. The DFR 2080/2090, are best suited for
high-traffic identity verification points such as border
crossings, ID and payment processing centers, DMVs, social
benefit distribution centers, employee registration, and
financial institutions.

These products are designed to be used primarily
by system integrators as an optical fingerprint capture device
that supplies fingerprint images to a frame grabber that
digitizes the image for computerized fingerprint database
systems for identification matching. More than 5,000 units of
Identix DFR 90 scanner, the predecessor to the DFR 2090,
have been incorporated by OEMs into turnkey systems and are used
for civilian applications in welfare fraud prevention,
immigration and border control, employee enrollment for benefit
entitlement verification, and motor vehicle licensing.

TouchPrint Card Scan
System.Identix TouchPrint Card
Scan Systems provide digitization of inked fingerprint images
that were originally recorded on 10-print card stock. The Card
Scan Systems are designed to be used primarily by lower volume
booking sites that want to participate in an electronic
fingerprint identification network. These systems employ flatbed
scanners on which the user places the inked fingerprint card.
The system checks for lateral and angular misalignment of the
card, digitizes the complete card, applies automatic contrast
equalization and extracts the digital image of each individual
fingerprint on the card. The digitized fingerprint record can be
forwarded by mail or electronically for identification
processing by the FBI, or a local or state AFIS or for archive
at a records repository.

Store & Forward
Systems.Identix Store &
Forward Systems are used at central processing sites to manage
the flow of electronic fingerprint records from a network of
TouchPrint, TouchPrint PRO, TENPRINTER, or FingerPrinter CMS
Live Scan systems. The high-performance, multi-function Store
& Forward platform simultaneously supports record receiving,
interactive record editing, selective record transmitting and
record printing on locally attached printers.

Image Printers.Identix printers provide automated receipt and printing of Live
Scan fingerprint records at remote or central facilities.
High-capacity record storage options ensure uninterrupted record
flow during peak load periods.



| |                         
| | ------------------------
| | Live Scan Installed Base

Law enforcement:Law
enforcement agencies in all 50 States, including police and
sheriffs departments, courts, prisons, jails, customs and
the Immigration and Naturalization Service (INS),
the District of Columbia and more than four foreign countries
have installed in excess of 6,000 of the Companys Live
Scan products. Identix currently has statewide law enforcement
network installations of its Live Scan systems in more than 15
states. Many large cities and counties have also installed
networks of Identix TouchPrint and TENPRINTER Live Scan systems
for law enforcement agencies.

Immigration:The INS
uses Identix Live Scan products to perform background
checks on persons who enter the United States and persons
seeking naturalization. Approximately 850 systems have been
delivered to INS installations at airports and other ports of
entry, as well as immigrant processing centers across the
country.

Social services:Social service agencies in five states to-date use Identix
Live Scan products to provide forensic quality images to
identify welfare recipients and prevent collection of benefits
by the same person under different names.

Airports:In an
effort to increase aviation security, the U.S. Congress passed
legislation in October 2001 that would require criminal
background checks for all people who apply for a job that will
give them access to

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the airfield. To date, close to 150 U.S.
airports have installed Identix Live Scan systems for
applicant fingerprinting to assist the airports in meeting the
compliance terms of this mandate.




| |                 
| | ----------------
| | Network Security

Many government and commercial
organizations most valuable resources reside on computer
systems: business plans, customer lists, account records,
product information, medical records, personal data, and
financial records for example. To protect information, it is
critical to control access whether from a local area network or
through wireless communication devices. This is especially
critical in those areas such as healthcare and finance, where
legislation has mandated confidentiality of patient records and
financial transactions and information. Frequently, convenience
dictates that the keys to those systems are often found on
scraps of paper floating around the office or taped under
keyboards. Identix information security products and
solutions are designed to protect computers, networks, and
portable devices from unauthorized users, both external and
internal.

The Companys product offerings are
convenient, easy to use, and suitable for the majority of
information security applications. Identix offers a variety of
products, all with the ability for customization to fit the
various needs and environments of governmental and commercial
entities. For example, fingerprint identification at log-on can
be layered with facial recognitions continuous monitoring
capabilities to secure the most sensitive applications. In
addition, the Companys information security solutions can
be combined with smart cards, PINs, passwords and other less
secure authentication methods for added security.

BioTouch® USB
200.The BioTouch USB 200
fingerprint reader utilizes the Companys DFR 200
scanner, a small optical fingerprint reader about the size of
two matchbooks. The DFR 200 fingerprint reader is ideal for
desktop peripheral devices and is primarily used for password
replacement in PC products. BioTouch USB 200 works with
Identix BioLogon software to scan a persons finger
image and match it against a previously enrolled image for
positive user authentication.

BioTouch PC Card.The BioTouch PC Card provides a fully functional optical
fingerprint reader inside a single type II PC card and is
specially designed to enable biometric security in laptop and
pocket PCs. The BioTouch PC Card works with BioLogon software to
scan a persons finger image and match it against a
previously enrolled image for positive user authentication. It
utilizes Identix DFR 300 scanner, a small optical
fingerprint reader approximately 4.5 mm thick with a
surface area about the size of a standard U.S. postage stamp.

BioLogon.BioLogon
is a family of software products designed by Identix for
stand-alone and networked PC security. BioLogon replaces
hard-to-remember passwords with a touch of a finger to gain
access to PCs and networks. BioLogon has been developed to work
with Microsofts Network Security Architecture,
Novells NMAS network products and the Wyse Thin Client
Architecture.



| |                                
| | -------------------------------
| | Network Security Installed Base

Healthcare:Identix network security solutions are being employed to
secure access to confidential patient records by companies in
the healthcare industry.

A southern California regional health center has
integrated Identix BioLogon into its network applications
for authentication of individual patient data transactions.
Identix biometric security solutions will help ensure the
health center complies with the rigorous confidentiality
requirements of HIPAA. The Health center is replacing password
authentication across its Wide Area Network (WAN)
with Identix BioTouch USB biometric fingerprint readers
and Identix BioLogon software for Windows 2000.

A large hospital has deployed Identix fingerprint
technology to its workforce as a customized biometrically
authenticated healthcare application. Hospital employees can
biometrically access numerous network applications with the
simple touch of a finger via Identix technology to assist the
hospital in complying with HIPAA regulations. Identix technology
provides not only a more secure system than when the hospital
used passwords, it also assists the hospital in complying with
the strict confidentiality requirements for accessing

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patient records because biometric authentication
provides information on which individual is accessing what
patient record.


A major San Diego, California based healthcare
provider has deployed Sentillion Inc.s Vergence®
product suite, which integrates Identix fingerprint
biometric BioLogon® authentication software and provides
solutions for strong authentication, single sign-on, context
management, and privacy management for the healthcare industry.
The healthcare provider placed the order through Sentillion, an
Identix value added reseller. The order also includes 7,000
Identix® BioTouchTM USB fingerprint readers and
an 11,000-user BioLogon server license. Additional hospitals,
have selected Sentillions biometric single sign-on
product, Vergence. Vergence integrates Identix fingerprint
biometric BioLogon, which provides a strong authentication of an
employees identity which grants access into each
respective hospitals IT network. This includes a total of
more than 1,200 Identix BioTouch USB fingerprint readers
and Identix BioLogon server licenses for in excess of
1,400 users.

Financial Services:Major banking institutions are employing Identix
fingerprint biometric security and authentication solutions to
secure access by employees to bank IT networks. One of the
largest installations by a major Bank, consists of
5,000 Identix fingerprint readers  a combination
of BioTouch PC Cards for mobile computers and parallel port
devices  and a 5,000-seat license for Identix
BioLogon software. The Bank is a leading financial services,
investment banking and investment management firm with more than
60,000 employees throughout the world.

Additionally, other large international banks use
the Companys network security solutions for transaction
authorization. A large Central American bank has deployed
Identix fingerprint biometric security solutions to secure
access to its databases by member banks. In order to help ensure
that only authorized individuals from authorized member banks
can access the bank databases, the bank is requiring
verification via fingerprint biometric prior to allowing
database access. The bank has deployed Identix BioTouch USB
fingerprint readers to its network of member banks along with
BioLogon to enable users to enroll in the new security system.

A South American bank has adopted Identix
security solutions to positively authenticate its customers
prior to conducting transactions at its branch offices
throughout the country. These solutions provide heightened
security for its customers, while eliminating the need to
remember cumbersome passwords. The bank has installed BioLogon
software and fingerprint readers at teller windows in many of
its banks. Customers are required to verify their identity via
the fingerprint readers prior to performing a transaction.
Additionally, the bank has integrated Identix fingerprint
technology into five Diebold ATM machines at select locations to
replace PINs for ATM transactions.

Identix fingerprint technology is also being
deployed by a large Pacific Rim bank to provide heightened
security for electronic fund transfers. The bank has more than
790 branches and approximately 8 million customers
throughout the country. Identix Fingerscan V20 units have been
deployed in select branches to assist the bank in the secure
processing of high-value electronic fund transactions.
Identix fingerprint biometric technology has been directly
integrated into the banks electronic fund transfer
delivery system. This means that no electronic transfer in
excess of a certain value may be processed without proper
biometric verification. Bank tellers and managers are enrolled
in the system and assigned specific levels of security for
approval for electronic fund transfers. Teller stations
throughout the banks branch location network are equipped
with Identix systems and tellers must authenticate themselves
via fingerprint prior to processing an electronic fund transfer.
At very high values, a supervisor is also required to approve
the transfer and verify his identity prior to processing of the
electronic transfer.

A large international mercantile & futures
exchange based in South America has implemented Identix
fingerprint biometric security for authentication and access to
its electronic Global Trading System. The exchange moves
approximately $17.5 billion daily and believes that it is
the eighth largest futures and options exchange in the world.
Following a six-month evaluation program, the exchange has begun
to deploy Identix industry-leading fingerprint biometric
hardware and software to its traders. The solution requires
traders to access the electronic Global Trading System via
fingerprint biometric authentication. Each authorized trader has
enrolled with four fingers and may use any of the four to log-on
to the electronic trading system. Traders

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are required to verify their identity via the
fingerprint readers periodically at defined time intervals
throughout the period of time they are logged-on to the system.




| |                  
| | -----------------
| | Local Government:

A state public safety department currently
deploys more than 1200 Identix BioLogon software seats to
control access to sensitive information on its IT network. The
deployment includes the installation of Identix BioTouch
USB 200 readers at the corresponding computer terminals.
Two additional agencies within the state are also deploying
Identix BioLogon software and BioTouch USB 200 fingerprint
readers for heightened network security via fingerprint
biometric authentication.

A California city has incorporated Identix
network security solutions in 1,500 seats across its desktop
Information Technology (IT) network that
accommodates a complexity of city bureaus and offices.
Identix security solutions provide the city the ability to
access multiple applications with a single function, a
fingerprint, instead of several passwords. Using Identix
BioLogon software, the city can also share workstations and
permit log-ons from anywhere on the network. Since the city
implemented Identix network security solution, it has
eliminated 85 percent of its help-desk calls. Estimated
savings produced from the reduction in help desk calls has more
than offset the investment.

Court Systems:A
state supreme court has incorporated Identix fingerprint
security solutions to secure its 650 seat WAN
enterprise-wide, which encompasses five district courts of
appeal and the state supreme court. This states supreme
court has deployed 650 Compaq Fingerprint Information
Technology (FIT) readers, which incorporate the
Identix DFR 200 optical fingerprint reader, along with
BioLogon, to secure the state courts IT applications with
fingerprint authentication data. The solution also integrates
Novell Modular Authentication Services (NMAS),
Network services software from Novell Inc. (Novell),
to deliver a single point of administration for managing,
accessing and grading password and fingerprint biometric
authentication methods.

Education:A
southern California school has selected Identix
fingerprint security solutions as a convenient, cost-saving
alternative to passwords to secure its 430 seat network.
The security solution chosen by the school to protect its
network includes Identix BioLogon software for
Windows 2000 and the Compaq FIT reader, which incorporates
the Identix DFR 200 optical fingerprint reader.



| |                  
| | -----------------
| | Physical Security

Identix Physical Access solutions provide a
secure means for any organization looking to control and audit
an individuals physical access privileges. Government and
commercial entities are increasingly in need of better solutions
to secure their facilities and frequently, securing physical
access to their buildings is not enough. Today there is a demand
to control, audit, and positively identify employees, residents
and even visitors as they enter facilities. Currently, entities
may be losing time and money to fraud as employees trade
smart/swipe cards and/or PINs to bypass current security and
time and attendance terminals. Identix physical access
solutions help control and monitor user entry.

Identix product offerings are convenient
and suitable for the majority of physical security applications.
Identix offers a variety of products, with the ability for
customization to fit a companys needs and environment. For
example, the Identix Fingerscan V20 fingerprint access
control device integrates easily into existing access systems
and provides a biometrically secure combination of verifying the
users identity while maintaining a positive transaction
log for automatic reporting. The system can be easily combined
with smart cards, PINs, etc. for added security.

FingerScanTMV20.
The FingerScan V20 is the Companys latest Physical
Access Control (PAC) product. FingerScan V20
combines Identix minutiae-based algorithm with embedded PC
technology to create a highly functional access control device.
By utilizing the same technology used in BioLogon products,
Identix plans to offer universal access solutions for
enterprises. Users can access a building, an office door and a
PC with the placement of one of their fingers.
FingerScan V20 provides additional functionality by

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incorporating capability for ethernet and
proximity cards and allows for expanded capabilities through a
software application called Fingerlan Access Control Software.




| |                                                        
| | -------------------------------------------------------
| | Physical Security/ Time & Attendance
    Installed Base

Building access:Numerous organizations have installed the Companys
biometric PAC solutions to secure building access, including the
Pentagon and various other United States government agencies,
banks and industrial plants. A major Las Vegas-based casino has
installed Identix FingerScan V20 units to secure the
entrances to vital areas within its casinos. The casino is
securing access to many of its offices with FingerScan V20s,
including IT offices, the cold room where computers are located,
the PBX room and the cage and security offices. Access to these
areas is accomplished via the touch of a finger. In addition to
providing access, Identix software applications have
allowed the casino to set up timers to let security know if
count teams emptying slot machines have not logged back within
the scheduled time and detect if a door has been propped open.

Corrections:A state
department of corrections and juvenile facilities has installed
the Companys fingerprint readers and networking software
for physical access control in prisons and juvenile facilities
statewide. The systems enable authorized staff members to enter
and exit secure areas, provide an exact record of each entry and
exit and alert security staff if authorized persons do not
biometrically check out of the secured areas when expected.

Time-and-attendance:A major Australian supermarket chain uses the Companys
biometric solutions to maintain accurate time-and-attendance
records for in excess of 80,000 employees in over 500 stores.



| |                    
| | -------------------
| | Facial Surveillance

Today, facial recognition technology is the only
biometric capable of identifying known people at a distance. As
the only commercial entity to be chosen and continually funded
for four consecutive years by Defense Advanced Research Project
Agency (DARPA) to participate in the Human ID at a
Distance program, Identix is at the cutting edge, making the
Companys FaceIt technology the industry-leading offering.

Facial surveillance can yield instant results,
verifying the identity of a suspect and checking through
millions of records for possible matches quickly, automatically
and reliably. Identix automated systems are used in
airports, casinos, public buildings, town centers and shopping
malls around the world to enhance the effectiveness of security
provided by new and previously installed CCTV systems.

These investigative tools help to single out
known terrorists or criminals, but they can also be applied to
quickly identify VIP guests, frequent customers or expected
visitors who have opted into a customer service-marketing
program.

FaceIt® ARGUS.FaceIt ARGUS is a state-of-the-art automated full-time facial
surveillance and identification engine that allows each camera
of a surveillance system, whether new or old, to serve as a
diligent observation point, even when the video is not being
actively observed. Based on Identix Biometric Network
Platform and incorporating all the capabilities of the
Companys leading FaceIt facial recognition engine, FaceIt
ARGUS makes it possible to turn any passive CCTV system into an
active, real-time identification and observation point. The
system can handle an unlimited number of camera inputs. Through
the Internet, the system can be linked to databases of any size
and/or location.



| |                      
| | ---------------------
| | Mobile Identification

Identix believes that security and identity
should never be limited to the requirements of a particular
established location, situation or environment. Police officers
in the field, agents securing borders and ports, and roaming
security officers all have a critical need to be able to
identify people in real-time at any location. Identix offers a
patented mobile identification system, called Identification
Based Information System (IBIS), that can capture
fingerprints and photographs on location and transmit them
wirelessly back to a central databank.

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IBIS is a patented wireless, real-time mobile
identification system that combines expertise in biometric
capture and connectivity. The system is capable of capturing
photographs and forensic quality fingerprints for transmission
to law enforcement and other legacy databases. IBIS is comprised
of software tools, multi-media data storage and communications
servers. A complete management reporting database and audit
trail is included. The Company provides the systems integration
and software development services that are required to implement
identification management systems.

Identix IBIS system uses a hand-held
portable device, called a Remote Data Terminal
(RDT), to capture photographs and forensic-quality
fingerprint images in a mobile environment. The fingerprint data
is then transmitted wirelessly to the central IBIS server via
the police radio communication system or cellular
communications. At the IBIS server, the data is processed and
transferred to one or more AFIS databases. If a fingerprint
match exists, identification information is transferred back to
the RDT. Fingerprint and photo non-matches are discarded from
the system after the transaction.

IBIS has been undergoing testing in various
counties and cities in key regional areas of the United States,
including the Southwest, Midwest and Northwest. In fiscal year
2003, some of these tests have been expanded to actual rollouts
of Identix IBIS systems through contract awards for
non-pilot deployments of IBIS.



| |                    
| | -------------------
| | iii.     Platforms:



| |                           
| | --------------------------
| | Biometric Network Platform

Biometric Network Platform (BNP) is a
technology framework for building scalable biometric solutions.
It consists of network ready elements  hardware
components, called biometric network appliances
(BNA), programming logic for connecting the BNAs to
each other or to a standard security and information system, and
an enabling biometric technology whose functionalities are
encapsulated in the BNA components. By combining the different
BNAs with application-specific programming logic, a wide range
of scalable solutions  such as large database
searching and enterprise security  can easily be
built. The individual BNAs are dedicated to performing one
specific task surrounding identification and the programming
logic tells what action should be taken based on whether or not
a match is made. For example, in some applications a positive
match may allow someone to gain access to an area, while in
another application access of the identified person may be
restricted.

The BNP software architecture also incorporates
certain of Identix itrustTM
multi-authentication know-how, enabling the BNA to combine
access rights and administration functions for secure and
trusted data sharing and transaction management services for
enterprise security and Internet applications. The Company
believes the integration of itrust technology with Identix
existing BNP technology, both organically developed and acquired
through third party acquisition, brings to the BNP three of the
most important aspects of security  authentication,
access and administration  as a managed network
security service offering. This integration enables the
development of solutions to safeguard the integrity of data by
providing an organization the tools to control and confirm who
is on the other end of a transaction, grant that user access to
particular resources on the network, and keep a record of
transactions as they occur.

The BNP is specifically aimed at data mining,
surveillance and enterprise security applications. Currently,
the core biometric technology for the BNP is Identix
proprietary FaceIt engine, however, the platform is designed to
support other biometric technologies, including fingerprint.

Identix provides the BNP components to large
systems integrators who in turn create customer-specific
offerings.

In addition, in order to meet market demands and
promote the BNP overall, the Company provides several
off-the-shelf products based on the BNP to end user markets.
Among these is ABIS, a unique server software architecture that
runs on modular commercial off-the-shelf hardware components,
making it easy for integrators and end-users alike to expand the
capabilities of the system as the scope of the identification
program grows. ABIS is accessed through a standard web browser
or a thin client interface and provides various functionalities
such as enroll, search and delete, in an easy to use application
programming interface (API).

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| |                                                                                   
| | ----------------------------------------------------------------------------------
| | iv.     Project
    Management Services  Identix Public Sector, Inc.
    (IPS):

Identix Public Sector, Inc., formerly ANADAC,
Inc., is a wholly owned subsidiary of Identix headquartered in
Fairfax, Virginia. IPS provides information technology,
engineering services and facilities engineering consulting
services to private and public sector clients. IPS
services also support the development, installation, integration
and operation of hardware and software technology solutions,
including Identix products, for a variety of client operating
environments. IPS provides these services through business units
organized around the following areas:



| |                                             
| | --------------------------------------------
| | Information Technology Security
    Services

IPS Information Technology Group (IT
Security) provides an assortment of services to help
companies protect information by controlling external and
internal access. Services include: risk assessment, intrusion
detection, and security policy development and management.

IT Security provides design, development and
integration services for biometric security and imaging systems
for a variety of applications ranging from law enforcement to
office and business applications. For example, IT Security has
served as the systems integrator for police and sheriffs
departments that have integrated Identix TouchPrint Live
Scan system and the customers criminal justice information
systems.

IT Security was awarded a Federal Supply Schedule
(FSS) through the General Services Administration
(GSA), which provides computerized catalogs for
federal and state agencies to easily procure equipment and
services. Through the GSA FSS program, IPS streamlines the
acquisition process and allows federal and state agencies to
procure Identix equipment in an expedient manner. Originally the
IT Security organization implemented the GSA FSS program for
internal use. Now, however, the IT Security organization allows
third parties to sell through the Companys GSA contract
for a fee. The current contract has a five-year base period of
performance and a five-year follow-on option.



| |                                                        
| | -------------------------------------------------------
| | Complex Program Management and Engineering
    Services

This group supplies government and major
commercial organizations with a staff of experts in management
and technical disciplines to address a variety of needs
including: program management, acquisition and financial
management, logistics and engineering/technical services. For
more than 20 years, IPS has served the Department of
Defense (DoD), primarily the U.S. Navy, managing
programs that play a critical role in the nations defense.
These programs include the Program Executive Office for
Expeditionary Warfare, Naval Special Warfare Program and the
Office of Naval Research.



| |                       
| | ----------------------
| | Facilities Engineering

IPS Facilities Engineering Division assists
large property owners with many complex technical issues in the
areas of facilities design, engineering, cost estimating,
project management, tenant coordination and move services. Its
staff of facilities professionals includes engineers, as well as
technicians, skilled and experienced as owner representatives in
all aspects of facility management design, construction,
renovation, and maintenance. These professionals work on behalf
of clients to ensure that projects are completed successfully,
on time, and within budget. For example, IPS functions as the
construction manager for GSAs 10-year renovation of the
White House and Executive Office buildings, which began in 1998.



| |                                                   
| | --------------------------------------------------
| | Legislative Demographic Services, Inc.
    (LDS)

IPS wholly owned subsidiary, LDS, provides
demographic data information and services principally to Fortune
500 companies, major associations, and industries for use in
lobbying federal and state legislatures. LDS product line
matches customer data files and produces demographic data
information by politician to include committees positions
on issues and individual voting records. This process allows
LDS customers to analyze politicians views and then
mobilize employees, suppliers and/or members in an attempt to
influence political positions. Most recently, LDS has been
contracted to analyze potential political impacts on mergers,
acquisitions and industrial plant closings.

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A portion of IPS business comes from
government agencies, subjecting the business to certain
additional risks.

IPS markets its services directly to United
States government agencies, including the DOD, and to commercial
entities.



| |                                    
| | -----------------------------------
| | v.     Fingerprinting
    Services:

Certain employers, including federal or state
government agencies, child care, banks, securities companies,
transportation agencies, and gaming licensing agencies require a
background check, including a fingerprint check, as a condition
of employment. Usually, an applicant is required to go to a
police station for ink fingerprinting and then forward the
fingerprint card to the employer who then submits the card to
state or federal authorities to perform a background
investigation. Ink fingerprint cards have rejection rates as
high as 40%, requiring an applicant to repeat the fingerprinting
and submission process. Repeat processing, frequently delays the
employers hiring process.

The need for reliable and convenient fingerprint
capture for diverse applications has given rise to the
fingerprinting services business. In September 1997, the Company
entered into a joint venture agreement with Sylvan Learning
Centers, Inc. (Sylvan) for the purpose of providing
fingerprinting services for a variety of civilian applications.
The joint venture, Sylvan Identix Fingerprinting Centers
(SIFC), currently has over 100 fingerprinting
locations around the country and processes more than
400,000 applicants each year. Its customers include state
agencies and school districts, major airlines, and financial
industry associations. Fingerprinting services are provided on a
contract basis using Identix Live Scan systems and the joint
venture earns fees for each user of the services.

The fingerprint services business provides the
applicant and employer with the following advantages:
fingerprinting takes place in a non-police environment;
background checks can be completed more quickly so the applicant
can begin work more quickly; re-submissions can be done
automatically; rejection of cards because of poor print quality
is virtually eliminated; and the risk is reduced to employers by
discovering that an employee, who has begun work, may have a
criminal record.

Strategy



| |         
| | --------
| | Overview

The Companys goal is to continue to provide
an accurate and reliable means to enhance identification,
authentication, verification, and security via BNPs, technology,
applications, and solutions. Identix believes it will continue
to achieve these goals by further developing high-level
platforms, technology, products, applications and solutions that
encompass Live Scan, network and physical security, and
fingerprint and facial recognition. Identix plans to capitalize
on the need for uniqueness of identity in security applications
to increase its market penetration of federal, state and local
governments, healthcare, finance and other enterprise markets in
the U.S. and internationally. The Company believes the
government markets  federal, state and local, and
international  provide the best near-term opportunity
for significant adoption of biometrics. The Company also
believes governmental legislation and regulation of industries
such as transportation; healthcare and financial services will
provide the catalyst for increased adoption of biometric
products and solutions in these and other industries. It is the
Companys goal to establish a leadership position in these
markets and leverage its position of leadership into each
subsequent adopting market with the eventual goal of becoming a
leading security provider worldwide.

The key elements of the Companys strategy
include:

Deliver comprehensive
solutions.In all target markets, the
Company strives to provide comprehensive product and service
solutions for its customers. Identix is able to deliver
comprehensive biometric security solutions for a range of
different uses by integrating fingerprint image capture devices,
fingerprint analysis algorithms, facial recognition
capabilities, and authentication network management platforms.
The Company considers its multi-biometric security software and
algorithms to be critical in providing comprehensive customer
solutions and strives to maintain its leading edge in these
areas. This strategy is different from

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certain other companies, which focus solely on
either the development of fingerprint image capture devices or
on a single biometric technology. In addition, the
Companys field service organization continues to expand
the scope of its services to law enforcement and government
agencies, assisting in systems analysis and providing interfaces
between Identix and existing computer systems to improve the
quality and efficiency of records collection. The Company seeks
to continue to provide superior technical services and
responsiveness by providing complete customer solutions to its
target markets.


Deliver scalable multi-biometric technology
and authentication platforms.With its
BNP, the Company seeks to overcome some of the hurdles faced in
the adoption of biometrics by providing scalability for large
enterprises. The Company will continue to develop the
capabilities of the BNP and provide targeted product offerings
based on this framework. Through the BNP, the Company also
strives to enable secure and trusted data sharing and
transaction management services for open networks by integrating
the three most important aspects of security, authentication,
access rights and administration, as a managed network security
service.

Penetrate and develop new markets through
strategic partnerships and
relationships.The Company has
established strategic relationships with a select group of
market leaders to provide biometric products and solutions,
including FaceIt, BioEngine, ABIS, and its BNP, for a variety of
applications. An extensive infrastructure already exists for
many of the markets in which the Company currently participates
or intends to participate. In such cases, the Company has and
will continue to pursue relationships with companies that have
strong positions in these markets as well as with OEMs, system
integrators, defense contractors, and resellers who serve as
prime contractors for large integrated systems in the domestic
and international markets. For example, the Company has
developed relationships with leading prime contractors and works
with these companies to provide finger and facial recognition
biometric technology and products for large-scale programs. The
Company has also developed relationships with the leading
Automated Fingerprint Identification System
(AFIS) suppliers, to provide forensic quality Live Scan
capabilities to government agencies. Additionally, the Company
intends to continue to pursue VAR and OEM relationships for its
FaceIt technology offerings. Moreover, the Company may continue
to develop new strategic partnerships and relationships in other
areas that pertain to the Companys business.

Maintain and enhance leadership in biometric
technology.The Companys success
depends on providing technologically advanced, cost-effective
solutions. Accordingly, the Company intends to continue to
invest in research and development and, where necessary, or
appropriate, consider acquiring companies or technologies that
are complementary to its business in order to maintain and
enhance its leadership position in biometric technology. These
efforts include development of enhanced algorithms, applications
software, integration tools and software, integrated hardware
designs, and mechanical and electronic components designed for
high volume production.

Maintain a global
perspective.The Company believes
there are many opportunities to apply biometric technologies
throughout the world and solutions provided in one area of the
world can be used in other regions for customers with similar
requirements. Where fraud is prevalent and the confidentiality
of information is of concern, biometric solutions have the
potential of providing significant savings. The Company has
established regional master distributor and reseller
relationships throughout North America, South America, Europe,
Middle East and the Far East to address opportunities and
provide a local sales, distribution and support presence in
these regions.

Product Development

The Company continues to invest in research,
development and engineering to enhance the performance and
functionality, and in certain cases to reduce the costs, of its
existing technology, products and solutions, as well as to
increase the breadth of its product and services offerings. The
Companys expenditures for research, development and
engineering totaled $11,044,000, $10,620,000, and $9,649,000 in
the fiscal years ended June 30, 2003, 2002 and 2001,
respectively.

The Companys development programs have
recently focused on combining the best of breed in technology
and innovation from Identix and Visionics into new product and
solutions lines. Recent developments include the next generation
imaging products consisting of a full hand scanner and
enhancements of the Companys

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Live Scan offerings and IBIS products.
Additionally, the Companys development programs have
focused on the next generation fingerprint and facial
recognition technology, which the Company believes will further
enhance the speed and accuracy of searching and matching
algorithms within very large databases. The Company believes its
next generation fingerprint and facial recognition technology
developments will be more reliable and cost effective than
current commercialized technology, as well as provide additional
functionality, including the storage of fingerprint and/or
facial templates on smart cards and similar storage devices.


Sales, Marketing and Support

Identix sales strategy is organized around
four specific markets, namely 1) federal, 2) state and
local, 3) physical access and information technology (which
includes selling to OEMs), and 4) international. Each sales
organization is supported by a full range of functional groups,
which design, engineer, manufacture, market, fulfill and support
the Companys market-specific products and offerings. Each
sales organization is further supported by both a professional
service group within the Company to customize solutions for each
market and a field service group to ensure ongoing performance
of the Companys systems at customer sites throughout the
world. Identix believes this organizational structure is market
and customer driven.

Direct Sales.Within
the U.S., the Companys network and physical security, Live
Scan, FaceIt ARGUS and IBIS product offerings are sold directly
to end users through the four sales organizations. Direct sales
activity is concentrated in the public sector market, law
enforcement, transportation, state and local governments,
financial services, and other commercial enterprises.

Channel Sales and Business
Development.The Companys
network and physical security fingerprint products and facial
recognition offerings, such as ABIS, are sold through a
worldwide network of channel sales personnel aligned with the
sales organization. Each respective sales organization within
the Company establishes and maintains relationships with
corresponding distributors, systems integrators, VARs, and OEMs.
The Company also works closely with skilled system integrators
for government, civil and commercial applications of its Live
Scan systems.

Channel sales activity is concentrated in the
markets of secure ID systems, law enforcement, transportation,
network security, healthcare, financial services, commercial
enterprise, and domestic and international government.

Marketing Strategy

Network Security
Solutions:The Companys Network
Security products and solutions are marketed and sold through a
worldwide network of direct sales personnel, distributors,
systems integrators, VARs, and OEMs. The Companys Network
Security products and solutions sales activity is concentrated
in the markets of federal, state and local government,
enterprise network security, healthcare (protecting and
recording access to patient records), education, and banking
(financial transactions). The Company has sales, service and
product marketing in most regional sales offices to provide
customers with complete sales and support services. The Company
also works closely with its distributors, systems integrators,
VARs, and OEMs to ensure that end users are fully supported
post-sale.

Sales activity varies widely from single
authentication devices sold by Internet fulfillment houses to
complex, networked recognition solutions sold by system
integrators, which include facial surveillance and recognition
at a distance, PC network security, financial transaction
authorization, time-and-attendance, and building access. The
success of these sales depends upon the Companys ability
to provide comprehensive integrated solutions.

Facial Recognition.FaceIt is sold primarily to government agencies and law
enforcement customers in conjunction with ID systems, mug-shot
database systems and CCTV systems through the Companys
strategic partners and VARs. Partners pay a license fee for use
of the technology based on, for example, the number of software
seats sold or the size of the database being used. License fees
can range from a low of a few dollars per unit for a screen
saver application on laptops to nearly $1 million, as in
the case where the

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Company granted an unlimited use license for a
voter registration system in a large Central American country.
The FaceIt ARGUS facial surveillance system is also sold
primarily to federal, state and local government customers.
Since the proliferation of this product rests primarily on its
acceptance by several key customers, it is difficult to
determine its overall potential. The Company is currently
participating in DARPAs Human I.D. at a
Distance program, which is advancing the state of the art
in facial recognition systems. ABIS is sold primarily through
systems integrators and VARs. ABIS is primarily targeted at
entities such as passport agencies, interior ministries, large
corporate enterprises and motor vehicle agencies throughout the
world that face the potentially daunting task of sifting through
millions of images to identify any duplicates prior to issuing
an ID. Additional target customers include law enforcement
agencies that rely on facial searches for investigations and mug
shot booking. The cost of the system depends on many factors
including database size, required response time and throughput.
The Company develops proposals, either directly or in
cooperation with its partners, and is often directly involved in
negotiating the contract terms.


Live Scan products and
solutions.The Companys Live
Scan solutions are marketed domestically and internationally
primarily through a direct sales force and sales
representatives. Identix also teams with NEC to provide Live
Scan capability to law enforcement agencies that purchase NEC
Live Scan systems. In addition, the Company works closely with
skilled system integrators and defense contractors to develop
identification solutions for civil and commercial applications
of its Live Scan technology both domestically and
internationally. The Company develops proposals, either directly
or in cooperation with its partners, and is often directly
involved in negotiating the contract terms.

The Companys TouchPrint and TENPRINTER Live
Scan systems are generally sold through a competitive bid
process based on a competitive tender. Funding for these
projects often comes from federal, state and local agencies. The
funding, proposal, contract negotiation, and implementation
process can extend over several months or years. For existing
customers that are adding to or upgrading their systems, the
sales cycle generally is considerably shorter and these sales
often are not required to go through the bid process.

IBIS:The Company
expects the majority of IBIS sales to be derived from federal,
state and local agency customers. Identix expects IBIS adoption
to follow a similar pattern to current Live Scan products, where
larger agencies will more than likely deploy it first before
smaller agencies consider adoption. The Company expects the
majority of early adopters of IBIS will require federal or state
funding. An initial installation of IBIS may cost between
$200,000 and $800,000 for the back end server infrastructure and
a limited number of handheld units. Total cost depends on
existing wireless communication infrastructure and the type of
AFIS an agency may have. The Company anticipates that once an
IBIS system is established within an area, additional handheld
units may be added without significant infrastructure
investment. The initial handheld units are expensive to produce
and may require additional engineering to reduce production
costs and to enhance the features and functionality. After
assessing results and feedback from early adopters, the Company
has undertaken an effort to align its IBIS solution offering to
conform to its target customer needs and requirements. The
Company anticipates on-going product development in this area.

Identix Public Sector
services.IPS markets its services
directly to United States government agencies, including the DOD
and Navy, as well as commercial entities.

Product and Customer Support

Service and support for all Company products,
including web-based, telephone and onsite support plus training,
is based out of the Companys headquarters in Minnetonka,
MN. Installation and maintenance support comes from the
Companys 24 hour/7 days per week TouchCare support
center, regional technical staffs, and the Companys
engineering staff. This support may include traveling to the
customer site to explain the technical operation of the system,
clarifying the configurations, detailing any necessary software
customization, and defining any integration issues. Once
installed, the systems are supported by the TouchCare support
center, regional staffs, and the Identix trained system
integrators, VARs, or partners.

The Companys Live Scan products carry a
90-day to one-year warranty and extended service is offered
through a choice of maintenance contracts. Certain of the
Companys physical access and network security products
generally carry a 90-day warranty, with additional support
available for a fee after the expiration of

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the warranty period. For equipment produced by
other companies, the Company generally passes on to its
customers the standard warranties provided by those
manufacturers. The Company has field engineering and service
personnel supporting its products throughout the United States.


Backlog

Product sales are generally made pursuant to
purchase orders, which are subject to cancellation. The Company
typically ships its products within sixty days of receipt of an
order. For its services business, amounts in backlog are often
not funded and, even if they are funded, are subject to
cancellation by the contracting agency. Accordingly, the Company
believes that backlog at any given time cannot be considered a
meaningful indicator of future financial performance.

Identix had product backlog of $5,718,000 on
June 30, 2003, all of which is scheduled to be shipped and
recognized as revenue in fiscal 2004. Identix had product
backlog of $6,172,000 on June 30, 2002 and $1,336,000 on
June 30, 2001.

IPS had services backlog of $63,189,000 on
June 30, 2003. IPS had services backlog of $101,354,000 on
June 30, 2002 and $131,510,000 on June 30, 2001. The
decrease in the IPS backlog from fiscal 2002 to fiscal 2003, is
primarily the result of a decrease in the number of government
contracts that has been awarded to IPS in fiscal 2003.

Patents and Trade Secrets

The Companys ability to compete effectively
will depend in part on its ability to maintain the proprietary
nature of its technology, products and manufacturing processes.
The Company principally relies upon patent, trademark,
copyright, trade secret and contract law to establish and
protect its proprietary rights. The success of the
Companys business will depend in part on its proprietary
technology and the Companys protection of that technology.

The Company holds the following patents:



| |   |                                                                                                                                                   
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------
| |  | one U.S. patent expiring in 2004 and two foreign
    patents on one version of the Companys optical fingerprint
    reading device;              
|
| |  | one U.S. patent expiring in 2005 on a system for
    capturing both slap and individual rolled fingerprint images;                                
|
| |  | one U.S. patent expiring in 2007 for a method for
    generating data characteristics of a rolled fingerprint image;                              
|
| |  | one U.S. patent expiring in 2008 and seven
    foreign patents on a fingerprint analysis algorithm;                                               
|
| |  | one U.S. patent expiring in 2010 and four foreign
    patents on a portable apparatus for identification verification;                            
|
| |  | one U.S. patent expiring in 2010 on a system for
    removing moisture from a finger or a finger-imaging surface;                                 
|
| |  | one U.S. patent expiring in 2013 covering an
    enhanced method of recording a fingerprint in the presence of
    moisture on a persons fingers;
|
| |  | one U.S. patent expiring in 2014 and six foreign
    patents on the Companys curved platen design palm scanner;                                  
|
| |  | one U.S. patent expiring in 2014 covering a
    system for electronically acquiring fingerprint images;                                           
|
| |  | one U.S. patent expiring in 2015 covering a
    version of the Companys optical fingerprint reading device
    including a heated optical platen;
|
| |  | one U.S. patent expiring in 2015 covering a
    system for electronically acquiring fingerprint images;                                           

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| |   |                                                                                                                                                                
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | one U.S. patent expiring in 2015 for obtaining a
    plain image of multiple fingerprints;                                                                     
|
| |  | one U.S. patent expiring in 2016 covering a
    system for reducing smear in rolled fingerprint capture;                                                       
|
| |  | one U.S. patent expiring in 2016 covering a
    memory card having a biometric template;                                                                       
|
| |  | one U.S. patent expiring in 2016 for a face
    recognition technique;                                                                                         
|
| |  | one U.S. patent expiring in 2017 and one foreign
    patent on a palm scanner;                                                                                 
|
| |  | one U.S. patent expiring in 2018 covering an
    optical fingerprint reading device including a rotatable drum;
    and                                        
|
| |  | one U.S. patent expiring in 2018 covering a
    portable hand-held personal identification system and method of
    providing secure access to a host facility.

Identix has an ongoing policy of filing patent
and trademark applications to seek protection for novel features
of its products and currently has 13 patent applications pending
in the United States and 17 in foreign countries. Identix
currently has four U.S. trademark applications pending and 27
U.S. trademark registrations. Identix currently has five foreign
trademark applications pending and ten foreign trademark
registrations.

There is a risk that claims allowed on any
patents held by the Company, or that trademarks held by the
Company, may not be broad enough to protect the Companys
technology or proprietary interests. In addition, the
Companys patents or trademarks may be challenged,
invalidated or circumvented and Identix cannot be certain that
the rights granted thereunder will provide competitive
advantages to the Company. The loss of patent or trademark
protection on the Companys technology or the circumvention
of its patent or trademark protection by competitors could have
a material adverse effect on the Companys business,
operating results, financial condition and stock price and on
the Companys ability to compete successfully. See
Risk Factors.

The Company cannot be certain that any existing
or future patent or trademark applications by the Company will
result in issued patents or trademarks with the scope of the
claims sought by the Company, or at all. Moreover, any current
or future issued or licensed patents may not afford sufficient
protection against competitors with similar technologies or
processes, and the possibility exists that already issued
patents may infringe upon or be designed around by others. In
addition, there is a risk that others will independently develop
proprietary technologies and processes which are the same as or
substantially equivalent or superior to those of the Company.
There is a risk that the Company has infringed, or will in the
future infringe, patents or trademarks owned by others, that the
Company will need to develop non-infringing technology or
acquire licenses under patents or trademarks belonging to others
for technology potentially useful or necessary to the Company,
and that such licenses will not be available to the Company on
acceptable terms, if at all. See Risk Factors.

The Company may have to litigate to enforce its
patents or trademarks or to determine the scope and validity of
other parties proprietary rights. Litigation could be
costly and divert managements attention. An adverse
outcome in any litigation may have a severe negative impact on
the Companys business, operating results, financial
condition and stock price and on the Companys ability to
compete successfully. To determine the priority of inventions,
Identix may have to participate in interference proceedings
declared by the United States Patent and Trademark Office or
oppositions in foreign patent and trademark offices, which could
result in substantial cost to the Company and could result in
limitations on the scope or validity of the Companys
patents or trademarks. See Risk Factors.

The Company also relies on trade secrets and
proprietary know-how, which it seeks to protect by
confidentiality agreements with its employees, consultants and
with third parties. There is a risk that these agreements may be
breached, and that remedies available to the Company will not be
adequate. In addition, the Companys trade secrets and
proprietary know-how may otherwise become known or be
independently discovered by others. A failure by the Company to
protect its trade secrets, proprietary know-how and other
intellectual property in a meaningful manner could have a
material adverse effect on the Companys business,
operating results, financial condition and stock price and on
the Companys ability to compete successfully. See
Risk Factors.

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Competition

The markets for the Companys products and
solutions are extremely competitive and are characterized by
rapid technological change as a result of technical developments
exploited by competitors, the changing technical needs of the
customers, and frequent introductions of new features. The
Company expects competition to increase as other companies
introduce products that are competitively priced, that may have
increased performance or functionality, or that incorporate
technological advances not yet developed or implemented by the
Company. Some of the Companys present and potential
competitors may have financial, marketing, and research
resources substantially greater than those of the Company. In
order to compete effectively in this environment, the Company
must continually develop and market new and enhanced products at
competitive prices, and have the resources to invest in
significant research and development activities. There is a risk
that the Company may not be able to make the technological
advances necessary to compete successfully. Existing and new
competitors may enter or expand their efforts in the
Companys markets, or develop new products to compete
against the Companys. The Companys competitors may
develop new technologies or enhancements to existing products or
introduce new products that will offer superior price or
performance features. New products or technologies may render
the Companys products obsolete.

A significant number of established and startup
companies are developing and marketing software and hardware for
fingerprint or other biometric security applications that could
compete directly with the Companys products. Some of these
companies are developing semiconductor or optically based direct
contact fingerprint image capture devices. Other companies are
developing and marketing other methods of biometric
identification such as retinal blood vessel or iris pattern,
signature recognition, hand geometry, voice, and facial
structure. If one or more of these approaches were widely
adopted, it would significantly reduce the potential market for
the Companys products. Some of the Companys products
also compete with non-biometric technologies such as traditional
key, card and surveillance systems, tokens, PINs, and passwords.

The Company believes that the most important
competitive factors for these products are the degree of
security provided, ease of use, functionality, price, size, and
reliability. In applications such as controlled access to
computers, ATMs, and Electronic Funds Transfer
(EFT), the Company faces competition from
technologies relying on PINs, smart cards, tokens, or passwords.
In competing with these non-biometric products, the Company
believes that the most important competitive issue is the
trade-off between the additional security provided by positive
personal identification and the higher price. However, the
replacement of computer passwords by the Companys products
can be a very cost effective solution. In some instances,
however, products using non-biometric technologies may be
complementary to, rather than competitive with, the
Companys products. For example, card key or token systems
can be integrated with the Companys biometric security
systems to supply different levels of security within a
facility. 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 the Companys BNP solutions.
Some of these companies may have significantly more cash and
resources than the Company, and may currently offer a broader or
more robust range of solutions than those currently available
through the Companys offerings. Identix physical
access, network security, facial surveillance and recognition
products and solutions face competition from a number of
competitors who are actively engaged in developing and marketing
biometrics of other security products, including RSA Security,
Incorporated, Precise Biometrics AB, Secugen Corporation,
SafLink Corporation, Authentic, Cognitec Systems GmbH, Eyematic,
Imagis, Sagem Morpho Inc., Netegrity, Inc., Secure Computing
Corporation, and Viisage Technology, Incorporated.

The Company believes that the most important
competitive factors for the Live Scan products are the quality
of fingerprint images, the capability to work within large
criminal history networks, ease of use, price, and reliability.
Identix Live Scan products face competition from a number
of competitors who are actively engaged in developing and
marketing Live Scan products, including Heiman Biometric Systems
GmbH, CrossMatch Technologies, Inc. and Printrak International,
Inc., a company owned by Motorola.

The market for the Companys IBIS device is
in its infancy and, therefore, the competitive environment is
not well defined. The Company believes that some of the Live
Scan competitors have smaller devices

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capturing fingerprints, but not the combination
of face and finger. Additionally, the Company believes that some
of the AFIS vendors may develop product offerings to compete in
this market.


Facial recognition is an emerging market. As
such, there are currently no companies with significant sales in
this market. The Companys primary competitor today is
Viisage Technology, Incorporated with a primary customer base of
government agencies with particular penetration in Departments
of Motor Vehicles. Additional competitors in the facial
recognition market include Cognitec Systems GmbH and Eyematic.
The Company believes its competitive advantage is the BNP and
ABIS that enable turnkey delivery of large-scale facial
identification solutions. While the Company does not believe any
other significant competitors exist today, many companies appear
to be working on similar technology. The Company believes the
advanced stage of its development along with its relative size
gives Identix a competitive advantage over any additional
company that may emerge.

In its services business, the Company faces
substantial competition from professional service providers and
systems integrators of all sizes in the government marketplace.
IPS is increasingly being required to bid on firm fixed price
and similar contracts that result in greater performance risks
to IPS. If IPS is not able to maintain a competitive cost
structure, support specialized market niches, retain its highly
qualified personnel or align with technology leaders, it may
lose its ability to compete successfully in the services
business.

Manufacturing

The Company limits its manufacturing activities
to the assembly, repair, and testing of proprietary
sub-assemblies. Printed circuit board and other mechanical and
optical assemblies are fabricated by highly automated, contract
manufacturing partners. The Company believes this will permit
rapid expansion of production capacity to meet any significant
increase in product demand and minimize the cost associated with
the expansion of internal manufacturing. The Company believes
that the cost of material and fabricated subassemblies will
decline if manufacturing volumes increase. Quality control
audits are performed as part of the manufacturing process. The
Companys physical access and network security products are
fully outsourced to contract partners.

The Company currently uses certain components and
sub-assemblies which come from sole source suppliers, the most
important of which are the charge coupled and CMOS imaging
devices, ASICs for its network and physical access security
products and proprietary optical assemblies and coatings for its
products. The partial or complete loss of supplies available
from sole or limited sources of supply or the delay in receiving
supplies from these sources could result in delays in
manufacturing and shipping of products to customers and require
the incurrence of development and other costs to establish
alternative sources of supply. While the Company attempts to
maintain inventory on sole sourced components, it may take the
Company several months to locate alternative supplies if
required, or redesign its products to accommodate components
from different suppliers. If the Company is required to seek
alternative suppliers, the Company may not be able to obtain
such components within the time frames required by the Company
at an affordable cost, or at all. Any delays resulting from
suppliers failing to deliver on a timely basis in sufficient
quantities or of sufficient quality or any significant increase
in the price from existing or alternative suppliers could have a
material adverse effect on the Companys business,
financial condition, and results of operations.

Employees

As of August 1, 2003, Identix had 359
employees working in its products business, of whom 74 were
engaged in research, development and engineering, 58 in
production and production support, 180 in sales, marketing and
field service and 47 in general administration, finance and
legal. As of August 1, 2003, IPS had 157 employees working
in its services business, of whom 110 were service providers, 22
were engaged in sales and marketing and 25 were engaged in
general administration and finance. None of Identix
employees is represented by a union and Identix has never
experienced a work stoppage. Management considers its employee
relations to be good.

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Financial Information about Segments

For the financial information about the
Companys reportable segments, see Note 12 to the
Consolidated Financial Statements.

RISK FACTORS

This annual report on Form 10-K 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 annual report on Form 10-K 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 elsewhere in this 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
    information collected;
|
| |  | public perceptions regarding the confidentiality
    of private information;                                                         
|
| |  | proposed or enacted legislation related to
    privacy of information;                                                               
|
| |  | customers satisfaction with our products
    and services; and                                                                      
|
| |  | marketing efforts and publicity regarding these
    products and services.                                                           

Certain groups have publicly objected to the use
of biometric products for some applications on civil liberties
grounds and legislation has been proposed to regulate the use of
biometric security products. From time to time, biometrics
technologies have been the focus of organizations and
individuals seeking to curtail or eliminate such technologies on
the grounds that they may be used to diminish personal privacy
rights. If such initiatives result in restrictive legislation,
the market for biometric solutions may be adversely affected.
Even if biometric solutions gain wide market acceptance, our
products and services may not adequately address the
requirements of the market and may not gain wide market
acceptance.

We face intense competition from other
biometric solution providers as well as identification and
security systems providers.

A significant number of established and startup
companies have developed or are developing and marketing
software and hardware for facial or fingerprint biometric
security applications that currently compete or will compete
directly with our current facial and fingerprint security and
identity related line of products and applications. Some of
these companies have developed or are developing and marketing
semiconductor or optically based direct contact fingerprint
image capture devices, or retinal blood vessel, iris pattern,
hand geometry, voice or facial structure solutions. If one or
more of these technologies or approaches were widely adopted, it
would significantly reduce the potential market for our
products. Our security and

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identity related line of products and
applications 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 and identity
related line of products and applications 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.


Our facial biometric products face intense
competition from a number of competitors who are actively
engaged in developing and marketing facial-based recognition or
security products, including Viisage Technology, Inc. and Imagis
Technologies Inc. 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, Inc.), 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.

Our financial and operating results often vary
significantly from quarter to quarter and may be negatively
affected by a number of factors.

Our financial and operating results may fluctuate
from quarter to quarter because of the following reasons:



| |   |                                                                                                                                                                       
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the lack of availability of government funds;                                                                                                                         
|
| |  | reduced demand for products and services caused,
    for example, by competitors;                                                                                     
|
| |  | price reductions, new competitors, or the
    introduction of enhanced products or services from new or
    existing competitors;                                     
|
| |  | changes in the mix of products and services we or
    our distributors sell;                                                                                          
|
| |  | cancellations, delays or contract amendments by
    government agency customers;                                                                                      
|
| |  | unforeseen legal expenses, including litigation
    costs;                                                                                                            
|
| |  | expenses related to acquisitions or mergers;                                                                                                                          
|
| |  | impairment charges arising out of our assessments
    of goodwill and intangibles;                                                                                    
|
| |  | other one-time financial charges;                                                                                                                                     
|
| |  | the lack of availability or increase in cost of
    key components and subassemblies; and                                                                             
|
| |  | the inability to timely and successfully complete
    development of complex designs and components, or manufacture in
    volume and install certain of our products.

Particularly important is the need to invest in
planned technical development programs to maintain and enhance
our competitiveness, and to successfully develop and launch new
products and services on a timely basis. Improving the
manageability and likelihood of success of such programs
requires the development of budgets, plans and schedules for the
execution of these programs and the adherence to such budgets,
plans and schedules. The majority of such program costs are
payroll and related staff expenses, and secondarily

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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, if we are successful in
winning such procurements, there may be unevenness in shipping
schedules, as well as potential delays and schedule changes in
the timing of deliveries and recognition of revenue, or
cancellation of such procurements.

For the years ended June 2003 and 2002, we
derived approximately 77% and 83% 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, we were notified that our 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 expired on June 30, 2003. During the twelve
months ended June 30, 2003, $7,300,000 was recognized under
the contract.

For the years ended June 2003 and 2002, we
derived approximately 88% 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. We
were audited by the Defense Contract Audit Agency for the period
from July 1, 1997 to June 30, 2000 and the results of
the audit did not have a material effect on the Companys
financial position or results of operations.

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

In many instances, the procurements of our
federal, state and local customers are dependent on the
availability or continued availability of federal, state or
local government funds or grants and general tax funding. Such
funding may not be approved or, if approved, it may not be
available for the purchase of our products or solutions, and
even if such funding is approved and available, such funds may
be subject to termination at any time at the sole discretion of
the government body providing or receiving such funds.

We also extend substantial credit to federal,
state and local governments in connection with sales of our
products and services. Sales to sizeable customers requiring
large and sophisticated networks of fingerprint recognition and
Live Scan systems and peripheral equipment often include
technical requirements which may not be fully known at the time
requirements are specified by the customer. In addition,
contracts may specify performance criteria that must be
satisfied before the customer accepts the products and services.
Collection of accounts receivable may be dependent on completion
of customer requirements, which may be unpredictable, subject to
change by the customer, and not fully understood by us at the
time of acceptance of the order, and may involve investment of
additional resources. These investments of additional resources
are accrued when amounts can be estimated but may be
uncompensated and negatively affect profit margins and our
liquidity.

Additionally, without regard to termination of
funding, government agencies both domestically and
internationally may successfully assert the right to terminate
business or funding relationships with us at their sole
discretion without adequate or any compensation or recourse for
us.

The substantial costs of our merger with
Visionics Corporation, which was completed in June 2002, and the
manner of accounting for the merger may affect Identix
reported results of operations.

Approximately $30 million of costs have been
incurred in connection with our merger with Visionics. These
include costs associated with combining the businesses of the
two companies, including integration and restructuring costs,
costs associated with the consolidation of operations and the
fees of financial advisors, attorneys and accountants. A
significant portion of these costs has been charged to expense
in the period incurred, which increased our loss under generally
accepted accounting principals (GAAP) for such
period. The remaining costs, consisting primarily of fees and
expenses paid to financial advisors, attorneys and accountants,
were a component of the purchase price and capitalized as an
element of goodwill. There is a risk 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.

While the vast majority of costs associated with
the merger are behind us, we may incur additional integration
costs, for example, costs associated with the sublease of our
former office and manufacturing space in California, and these
costs may be higher than anticipated.

Goodwill is required to be tested for impairment
at least annually and we will be required to record a non-cash
charge to earnings in the period any impairment of goodwill is
determined. During the fourth quarter of fiscal year 2003, we
recorded an impairment charge to goodwill in the amount of
$154,799,000.

The market price of our common stock could
decline.

The market price of our common stock could
decline if:



| |   |                                                                                                                                                                                                                                                         
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | our merger with Visionics proves to be ultimately
    unsuccessful;                                                                                                                                                                                     
|
| |  | the combined company is unable to successfully
    market its products and services to both companies
    customers;                                                                                                                                   
|
| |  | the combined company does not achieve the
    perceived benefits of the merger as rapidly as, or to the
    extent, anticipated by financial or industry analysts, or such
    analysts do not perceive the same benefits to the merger as do
    we; or

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| |   |                                                                                                                                     
| | - | ------------------------------------------------------------------------------------------------------------------------------------
| |  | 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 the 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 existing working capital may be
adequate to fund our operating cash requirements for at least
the next twelve months, we may need to raise additional debt or
equity financing in the future. We may not be able to obtain
additional debt or equity financing. If successful in raising
additional financing, we may not be able to do so on terms that
are not excessively dilative to existing stockholders or less
costly than existing sources of financing. Failure to secure
additional financing in a timely manner and on favorable terms
in the future could have a material adverse impact on our
financial performance and stock price and require us to
implement certain cost reduction initiatives and curtail certain
of our operations.

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

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

The biometrics industry is characterized by
rapid technological change and evolving industry standards,
which could render existing products obsolete.

Our future success will depend upon our ability
to develop and introduce a variety of new products and services
and enhancements to these new product and services in order to
address the changing and sophisticated needs of the marketplace.
Frequently, technical development programs in the biometric
industry require assessments to be made of the future directions
of technology and technology markets generally, which are
inherently risky and difficult to predict. Delays in introducing
new products, services and enhancements, the failure to choose
correctly among technical alternatives or the failure to offer
innovative products and services at competitive prices may cause
customers to forego purchases of our products and services and
purchase those of our competitors.

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.

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Our lengthy and variable sales cycle will make
it difficult to predict operating results.

Certain of our products often have a lengthy
sales cycle while the customer evaluates and receives approvals
for purchase. If, after expending significant funds and effort,
we fail to receive an order, a negative impact on our financial
results and stock price could result.

It is difficult to predict accurately the sales
cycle of any large order for any of our products. If we do not
ship and or install one or more large orders as forecast for a
fiscal quarter, our total revenues and operating results for
that quarter could be materially and adversely affected.

The substantial lead-time required for
ordering parts and materials may lead to excess or insufficient
inventory.

The lead-time for ordering parts and materials
and building many of our products can be many months. As a
result, we must order parts and materials and build our products
based on forecasted demand. If demand for our products lags
significantly behind our forecasts, we may produce more products
than we can sell, which can result in cash flow problems and
write-offs or write-downs of obsolete inventory.

We rely in part upon original equipment
manufacturers (OEM) and distribution partners to
distribute our products, and we may be adversely affected if
those parties do not actively promote our products or pursue
installations that use our equipment.

A significant portion of our product revenue
comes from sales to partners including OEM, systems integrators,
distributors and resellers. Some, but not all, of these
relationships are formalized in written agreements. Even where
these relationships are formalized in written agreements, the
agreements are often terminable with little or no notice and
subject to periodic amendment. We cannot control the amount and
timing of resources that our partners devote to activities on
our behalf.

We intend to continue to seek strategic
relationships to distribute, license and sell certain of our
products. We, however, may not be able to negotiate acceptable
relationships in the future and cannot predict whether current
or future relationships will be successful.

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

We obtain certain 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 years ended June 2003 and 2002, we
derived approximately 9%, and 13% 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.

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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                                                                                                                                              
|
| |  | 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 June 30, 2003, the State of Wisconsin
Investment Board and Mazama Capital Management, L.L.C owned
approximately 9% and 5% respectively of the Companys
outstanding common stock. The concentration of large percentages
of ownership in any single stockholder may delay or prevent
change in control of the Company. Additionally, the sale of a
significant number of our shares in the open market by a single
stockholder or otherwise could adversely affect our stock price.

We may be subject to loss in market share and
market acceptance as a result of manufacturing errors, delays or
shortages.

Performance failure in our products or certain of
our services may cause loss of market share, delay in or loss of
market acceptance, additional warranty expense or product
recall, or other contractual liabilities. The complexity of
certain of our fingerprint readers makes the manufacturing and
assembly process of such products, especially in volume,
complex. This may in turn lead to delays or shortages in the
availability of certain products, or, in some cases, the
unavailability of certain products. The negative effects of any
delay or failure could be exacerbated if the delay or failure
occurs in products or services that provide personal security,
secure sensitive computer data, authorize significant financial
transactions or perform other functions where a security breach
could have significant consequences.

If a product or service launch is delayed or is
the subject of an availability shortage because of problems with
our ability to manufacture or assemble the product or service
successfully on a timely basis, or if a product or service
otherwise fails to meet performance criteria, we may lose
revenue opportunities entirely and/or experience delays in
revenue recognition associated with a product or service in
addition to incurring higher operating expenses during the
period required to correct the defects. There is a risk that for
unforeseen reasons we may be required to repair or replace a
substantial number of products in use or to reimburse

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customers for products that fail to work or meet
strict performance criteria. We carry product liability
insurance, but existing coverage may not be adequate to cover
potential claims.


We may be subject to repair, replacement,
reimbursement and liability claims as a result of products that
fail to work or to meet applicable performance
criteria.

There is a risk that for unforeseen reasons we
may be required to repair or replace a substantial number of
products in use or to reimburse customers for products that fail
to work or meet strict performance criteria. We attempt to limit
remedies for product or service failure to the repair or
replacement of malfunctioning or noncompliant products or
services, and also attempt to exclude or minimize exposure to
product and related liabilities by including in our standard
agreements warranty disclaimers and disclaimers for
consequential and related damages as well as limitations on our
aggregate liability. From time to time, in certain complex sale
or licensing transactions, we may negotiate liability provisions
that vary from such standard forms. There is a risk that our
contractual provisions may not adequately minimize our product
and related liabilities or that such provisions may be
unenforceable. We carry product liability insurance, but
existing coverage may not be adequate to cover potential claims.
We maintain warranty reserves as deemed adequate by management.

Failure by us to maintain the proprietary
nature of our technology, intellectual property and
manufacturing processes could have a material adverse effect on
our business, operating results, financial condition and stock
price and on our ability to compete effectively.

We principally rely upon patent, trademark,
copyright, trade secret and contract law to establish and
protect our proprietary rights. There is a risk that claims
allowed on any patents or trademarks we hold may not be broad
enough to protect our technology. In addition, our patents or
trademarks may be challenged, invalidated or circumvented and we
cannot be certain that the rights granted thereunder will
provide competitive advantages to us. Moreover, any current or
future issued or licensed patents, or trademarks, or currently
existing or future developed trade secrets or know-how may not
afford sufficient protection against competitors with similar
technologies or processes, and the possibility exists that
certain of our already issued patents or trademarks may infringe
upon third party patents or trademarks or be designed around by
others. In addition, there is a risk that others may
independently develop proprietary technologies and processes,
which are the same as, substantially equivalent or superior to
ours, or become available in the market at a lower price.

There is a risk that we have infringed or in the
future will infringe patents or trademarks owned by others, that
we will need to acquire licenses under patents or trademarks
belonging to others for technology potentially useful or
necessary to us, and that licenses will not be available to us
on acceptable terms, if at all.

We may have to litigate to enforce our patents or
trademarks or to determine the scope and validity of other
parties proprietary rights. Litigation could be very
costly and divert managements attention. An adverse
outcome in any litigation may have a severe negative impact on
our financial results and stock price. To determine the priority
of inventions, we may have to participate in interference
proceedings declared by the United States Patent and Trademark
Office or oppositions in foreign patent and trademark offices,
which could result in substantial cost us and limitations on the
scope or validity of our patents or trademarks.

We also rely on trade secrets and proprietary
know-how, which we seek to protect by confidentiality agreements
with our employees, consultants, service providers and third
parties. There is a risk that these agreements may be breached,
and that the remedies available to us may not be adequate. In
addition, our trade secrets and proprietary know-how may
otherwise become known to or be independently discovered by
others.

If we fail to adequately manage the size of
our business, it could have a severe negative impact on our
financial results or stock price.

Our management believes that in order to be
successful we must appropriately manage the size of our
business. This may mean reducing costs and overhead in certain
economic periods, and selectively growing in periods of economic
expansion. In addition, we will be required to implement
operational, financial and

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management information procedures and controls
that are efficient and appropriate for the size and scope of our
operations. The management skills and systems currently in place
may not be adequate and we may not be able to manage any
significant reductions or growth effectively.


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

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



| |   |                                                                                                                                    
| | - | -----------------------------------------------------------------------------------------------------------------------------------
| |  | exposure to unknown liabilities of acquired
    companies;                                                                         
|
| |  | higher than anticipated acquisition costs and
    expenses;                                                                        
|
| |  | effects of costs and expenses of acquiring and
    integrating new businesses on our operating results and
    financial condition;
|
| |  | the difficulty and expense of assimilating the
    operations and personnel of the companies;                                      
|
| |  | disruption of our ongoing business;                                                                                                
|
| |  | diversion of management time and attention;                                                                                        
|
| |  | failure to maximize our financial and strategic
    position by the successful incorporation of acquired technology;               
|
| |  | the maintenance of uniform standards, controls,
    procedures and policies;                                                       
|
| |  | loss of key employees and customers as a result
    of changes in management;                                                      
|
| |  | the incurrence of amortization expenses;                                                                                           
|
| |  | incurring impairment charges arising out of our
    assessments of goodwill and intangibles and;                                   
|
| |  | possible dilution to our stockholders.                                                                                             

In addition, geographic distances may make
integration of businesses or the acquisition of assets more
difficult. We may not be successful in overcoming these risks or
any other problems encountered in connection with any mergers or
acquisitions.

If we fail to attract and retain qualified
senior executive and key technical personnel, our business will
not be able to expand.

We are dependent on the continued availability of
the services of our employees, many of whom are individually key
to our future success, and the availability of new employees to
implement our business plans. The market for skilled employees
is highly competitive, especially for employees in technical
fields. Although our compensation programs are intended to
attract and retain the employees required for us to be
successful, there can be no assurance that we will be able to
retain the services of all of the key employees or a sufficient
number to execute our plans, nor can there be any assurances
that we will be able to continue to attract new employees as
required.

Our personnel may voluntarily terminate their
relationship with us at any time, and competition for qualified
personnel, especially engineers, is intense. The process of
locating additional personnel with the combination of skills and
attributes required to carry out our strategy could be lengthy,
costly and disruptive.

If we lose the services of key personnel, or fail
to replace the services of key personnel who depart, we could
experience a severe negative impact on our financial results and
stock price. In addition, there is intense competition for
highly qualified engineering and marketing personnel in the
locations where we principally

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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.


Available Information

The Company makes available free of charge on or
through the Companys Internet website Identix annual
reports on Form 10-K, quarterly reports on Form 10-Q,
current reports on Form 8-K and all amendments to those
reports as soon as reasonably practicable after they are
electronically filed with, or furnished to, the Securities and
Exchange Commission. The Companys Internet website address
is www.identix.com.The information contained on our
website is not part of this report.






|        |                          
|------- | -------------------------
|Item 2. | Description of Properties

The Company does not own any real estate. The
Company is headquartered in Minnesota with office and
manufacturing facilities of approximately 71,600 square feet in
an industrial park at 5600 Rowland Road in Minnetonka. The
average monthly lease payment for the Minnetonka facility is
$61,000 a month plus taxes, insurance and maintenance costs. The
space is occupied under a lease expiring on March 31, 2008
and is believed to be adequate for the Companys current
business needs.

The Company leases approximately 10,000 square
feet of space at One Exchange Place, Jersey City, New Jersey.
The average monthly lease payment for the Jersey City facility
is $20,000 per month plus taxes, insurance and maintenance
costs. The space is occupied under a lease expiring in May 2006.

The Company has a customer service and sales
office in Ontario, California, in approximately 9,600 square
feet. The average monthly lease payment for the Ontario facility
is $13,000 a month plus taxes, insurance and maintenance costs.
The space is occupied under a lease expiring in November 2007.

The Company leases approximately 5600 square feet
of space in a facility in Eden Prairie, Minnesota. The average
monthly lease payment for the Eden Prairie facility is $2,000 a
month plus taxes, insurance and maintenance costs. The space is
occupied under a lease expiring in November 2003.

The Company leases approximately 2,000 square
feet of space in a facility in Washington D.C. The average
monthly lease payment for this Washington D.C. facility is
$7,000 a month. The space is occupied under a lease expiring in
January 2008. The Company subleases this facility to a third
party.

The Company leases space in two facilities in the
United Kingdom. The first facility has average monthly lease
payments of $1,700 and is located at Cirencester Business Park,
Love Lane, Cirencester, Gloucestershire in the United Kingdom.
The Company has a sixty-month lease agreement for this facility
that expires in December 2006. The Company subleases this
facility to a third party. The second United Kingdom facility
which has average monthly lease payments of $1,900 and is
located at Calleva Park, Aldermaston, Berkshire. The Company has
a thirty-six month lease that expires in June 2005.

IPS leases approximately 93,000 square feet in
Virginia and Washington D.C. with an average aggregate monthly
lease payments of $262,000, which expire at various dates
through 2011. The leases contain escalation provisions requiring
rental increases for increases in operating expense and real
estate taxes. IPS also services customers from an office leased
in Mississippi. The Company subleases a portion of these
facilities to third parties.

The Company also leases approximately 26,000
square feet of space in Los Gatos, California for its former
administrative headquarters and manufacturing facility and
approximately 31,000 square feet of space in Dublin, California
for its former engineering, research and customer support
facilities. The monthly lease payment for the Los Gatos facility
is $160,000 a month plus taxes, insurance and maintenance costs
and the lease expires December 31, 2007. The monthly lease
payment for the Dublin facility is $47,000 a month plus taxes,
insurance, and maintenance and the lease expires March 15,
2006. The facilities in Los Gatos and Dublin are currently
vacant and the Company is actively pursuing its option to
sublease these facilities.

32



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##### Table of Contents



In addition the Company leases certain equipment
and furniture under operating leases that expire at various
dates through July 2006.






|        |                  
|------- | -----------------
|Item 3. | Legal Proceedings

The Company is not party to any material legal
proceedings.






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

No matters were submitted to a vote of
security-holders during the fourth quarter of the fiscal year
ended June 30, 2003

Supplemental
Item.     Executive Officers of the
Company

The executive officers of the Company, and their
ages as of August 1, 2003, are as follows:

|                |  |     |    |          |  |                                                                                                                            
|--------------- |  | --- | -- | -------- |  | ---------------------------------------------------------------------------------------------------------------------------
|Name            |  | Age |    | Position
|                |  |     |    |         
|Joseph J. Atick |  |     | 39 |          |  | President, Chief Executive Officer and Director                                                                            
|Paul Griffin    |  |     | 42 |          |  | Chief Technology Officer                                                                                                   
|Linda Howard    |  |     | 43 |          |  | Senior Vice President and General Manager,
    Federal Strategic Business Group; President, Identix Public
    Sector, Inc.
|Erik E. Prusch  |  |     | 36 |          |  | Chief Financial Officer                                                                                                    
|Mark S. Molina  |  |     | 44 |          |  | General Counsel and Secretary                                                                                              
|James H. Moar   |  |     | 54 |          |  | Chief Operating Officer                                                                                                    

Joseph J. Atickwas
named President and Chief Executive Officer of the Company and
was appointed a Director effective with the Companys
merger with Visionics Corporation in June 2002. From February
2001 to June 2002, Dr. Atick held the position of Chief
Executive Officer and Director of Visionics, and from April 2001
to June 2002, Dr. Atick also held the position of President
of Visionics. Dr. Atick served as Chief Executive Officer
of Visionics Technology Corporation from 1994 until its merger
with Digital Biometrics, Inc. in February 2001, resulting in the
formation of the publicly traded Visionics Corporation.

Paul Griffinwas
named Chief Technology Officer of the Company in July 2002. From
February 2001 until the merger of the Company with Visionics in
June 2002, Mr. Griffin served as Chief Technology Officer
of Visionics. Mr. Griffin was Vice President of Technology
of Visionics Technology Corporation from 1994 until its merger
with Digital Biometrics in February 2001. Prior to such time,
Mr. Griffin held various research, fellowship and
post-doctorate positions at the Rockefeller University,
Superconducting Supercollider Laboratory, the University of
Florida and the Fermi National Accelerator Laboratory.

Linda Howardwas
named Senior Vice President and General Manager, Federal
Strategic Business Group and President, IPS in July 2002. From
May 2001 to June 2002, she served as Executive Vice President,
Chief Operating Officer of IPS. From August 1999 to April 2001,
Ms. Howard served as Chief Operating Officer of DynCorp
Management Resource, a $50 million division of DynCorp.
Previously, from 1986 to 1998, Ms. Howard performed
multiple assignments with Electronic Data Systems Corporation
(EDS). Most recently, she was Vice President of
Operations for EDS Military Systems.

Erik E. Pruschhas
served as Chief Financial Officer of the Company since April
2001. Prior to joining the Company, he was Chief Financial
Officer for the $3.5 billion Gateway Business, a division
of Gateway Computers, Inc. In 1998, Mr. Prusch was Vice
President of Mergers and Acquisitions for Koch Industries. From
1993 to 1997, Mr. Prusch held various positions for
PepsiCo, Inc. Prior to such time, Mr. Prusch served as a
Senior Consultant for Deloitte & Touche.

Mark S. Molinahas
served as General Counsel of the Company since October 1999. He
was appointed Secretary in December 1999. From February 1996 to
October 1999, Mr. Molina was with Harris Corporation, most
recently as Senior Counsel, Microwave Communications Division.
Prior to joining Harris, he practiced

33



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##### Table of Contents



corporate, business and securities law with firms
in San Francisco, Sydney, Australia and New York City, where he
began his career with Shearman & Sterling in 1985.


James H. Moarjoined
Identix as Chief Operating Officer effective April 2003. From
1998 to 2002, Mr. Moar was COO of publicly-traded,
Minneapolis, MN-based Tennant Company (NYSE:TNC). From 1995 to
1997, he was Chief Operating Officer for DataCard Group. He
served in various other positions at DataCard between 1990 and
1995, including President and General Manager, Card
Personalization Group. Between 1974 and 1990, Mr. Moar held
various management and executive positions with Liquipak
International, Inc. of St. Paul, MN, New York-based
International Paper Company and Citicorp in New York.






PART II







|        |                                                                          
|------- | -------------------------------------------------------------------------
|Item 5. | Market for the Companys Common Stock
    and Related Stockholder Matters

The Companys common stock is listed on the
Nasdaq National Market, Inc. under the symbol IDNX.

The following table sets forth the range of high
and low closing prices as reported by Nasdaq for the fiscal
periods indicated.

|                                |  |      |       |     |  |   |      | 
|------------------------------- |  | ---- | ----- | --- |  | - | ---- | 
|                                |  | High |       | Low
|                                |  |      |       |    
|Fiscal year ended June 30, 2003 |  |      |       |     |  |   |      | 
|Fourth Quarter                  |  | $    | 6.99  |     |  | $ | 4.14 | 
|id Third Quarter                |  |      | 5.24  |     |  |   | 3.27 | 
|Second Quarter                  |  |      | 6.98  |     |  |   | 4.04 | 
|First Quarter                   |  |      | 7.54  |     |  |   | 4.40 | 
|Fiscal year ended June 30, 2002 |  |      |       |     |  |   |      | 
|Fourth Quarter                  |  | $    | 9.37  |     |  | $ | 5.57 | 
|Third Quarter                   |  |      | 15.50 |     |  |   | 6.51 | 
|Second Quarter                  |  |      | 15.74 |     |  |   | 5.25 | 
|First Quarter                   |  |      | 10.96 |     |  |   | 3.75 | 

The last reported sale price of the common stock,
as reported by Nasdaq on August 29, 2003 was $6.41. As
of September 5, 2003, there were 1,720 stockholders of
record.

The Company has not paid any cash dividends on
its capital stock during the last five fiscal years. The Company
currently intends to retain any earnings for use in its business
and does not anticipate paying any cash dividends in the
foreseeable future.






|        |                        
|------- | -----------------------
|Item 6. | Selected Financial Data

The selected consolidated financial data set
forth below with respect to the Companys statements of
operations data for the years ended June 30, 2003, 2002,
and 2001 and with respect to the balance sheets at June 30,
2003 and 2002 are derived from the Companys audited
consolidated financial statements included elsewhere in this
Annual Report on Form 10-K. Consolidated statement of
operations data for the years ended June 30, 2000 and 1999
and consolidated balance sheet data at June 30, 2001, 2000,
and 1999 have been derived from audited consolidated financial
statements of the Company not included in this Annual Report on
Form 10-K. The following selected consolidated financial
data should be read in conjunction with the consolidated
financial statements for Identix and the notes thereto appearing
in Item 8 of this Annual Report on Form 10-K and
Managements Discussion and Analysis of Financial
Condition and Results of

34



---



##### Table of Contents



Operations appearing in Item 7 of this
Annual Report on Form 10-K. Historical operating results
are not necessarily indicative of the results that may be
expected in any future period.


Selected Financial Data

|                                                                      |                                                                       |                                       |          |         |   |      |         |       |   |      |         |        |   |   |         |       |      |   |         |       |     
|--------------------------------------------------------------------- | --------------------------------------------------------------------- | ------------------------------------- | -------- | ------- | - | ---- | ------- | ----- | - | ---- | ------- | ------ | - | - | ------- | ----- | ---- | - | ------- | ----- | ----
|                                                                      |                                                                       |                                      
|                                                                      |                                                                       | Fiscal Year Ended June 30,           
|                                                                      |                                                                       |                                      
|                                                                      |                                                                       | 2003                                  |          | 2002(2) |   | 2001 |         | 2000  |   | 1999
|                                                                      |                                                                       |                                       |          |         |   |      |         |       |   |     
|                                                                      |                                                                       |                                      
|                                                                      |                                                                       | (In thousands, except per share data)
|Statement of Operations Data:                                         |                                                                       |                                       |          |         |   |      |         |       |   |      |         |        |   |   |         |       |      |   |         |      
|Revenues                                                              |                                                                       | $                                     | 92,514   |         |   | $    | 73,190  |       |   | $    | 81,828  | (4)    |   | $ | 72,695  |       |      | $ | 81,762  |      
|Loss before cumulative effect of a change in
    accounting principle |                                                                       |                                       | (187,374 | )(1)    |   |      | (55,438 | )(3)  |   |      | (27,600 | )(6,7) |   |   | (13,386 | )     |      |   | (13,419 | )(8) 
|Cumulative effect of a change in accounting
    principle             |                                                                       |                                       |         |         |   |      |        |       |   |      | (1,998  | )(4)   |   |   |        |       |      |   |        |      
|                                                                      |                                                                       |                                       |          |         |   |      |         |       |   |      |         |        |   |   |         |       |      |   |         |      
|Net loss                                                              |                                                                       | $                                     | (187,374 | )       |   | $    | (55,438 | )     |   | $    | (29,598 | )      |   | $ | (13,386 | )     |      | $ | (13,419 | )    
|                                                                      |                                                                       |                                       |          |         |   |      |         |       |   |      |         |        |   |   |         |       |      |   |         |      
|Basic and diluted net loss per share:                                 |                                                                       |                                       |          |         |   |      |         |       |   |      |         |        |   |   |         |       |      |   |         |      
|                                                                      | Loss before cumulative effect of a change in
    accounting principle |                                       | $        | (2.20   | ) |      | $       | (1.33 | ) |      | $       | (0.82  | ) |   | $       | (0.43 | )    |   | $       | (0.52 | )   
|                                                                      | Cumulative effect of a change in accounting
    principle             |                                       |          |        |   |      |         |      |   |      |         | (0.06  | ) |   |         |      |      |   |         |      |     
|                                                                      | Basic and diluted net income Loss per share                           |                                       | $        | (2.20   | ) |      | $       | (1.33 | ) |      | $       | (0.88  | ) |   | $       | (0.43 | )(5) |   | $       | (0.52 | )(5)
|Balance Sheet Data:                                                   |                                                                       |                                       |          |         |   |      |         |       |   |      |         |        |   |   |         |       |      |   |         |      
|Cash and cash equivalents                                             |                                                                       | $                                     | 34,712   |         |   | $    | 53,346  |       |   | $    | 20,777  |        |   | $ | 15,620  |       |      | $ | 3,013   |      
|Working capital                                                       |                                                                       |                                       | 53,397   |         |   |      | 63,239  |       |   |      | 32,440  |        |   |   | 34,546  |       |      |   | 15,671  |      
|Total assets                                                          |                                                                       |                                       | 245,270  |         |   |      | 431,255 |       |   |      | 83,486  |        |   |   | 83,518  |       |      |   | 71,466  |      
|Stockholders equity                                                  |                                                                       |                                       | 211,264  |         |   |      | 393,323 |       |   |      | 64,082  |        |   |   | 67,634  |       |      |   | 51,729  |      



---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                    
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Includes a write-off of $154,799,000 that is
    related to the impairment of goodwill as well as $10,206,000 of
    restructuring, write-offs and other merger related charges.                                                                                                                                                                                                                                   
|   
|(2) | Identix merger with Visionics Corporation
    was completed on June 25, 2002. Thus, Identix
    consolidated results of operation for the year ended
    June 30, 2002 reflects Visionics Corporations results
    of operations for only the three final business days of June
    2002.                                                                                                                       
|   
|(3) | Includes $18,798,000 of restructuring, write-offs
    and other merger related charges and a charge of $6,400,000 for
    the write-off of acquired in-process research and development.                                                                                                                                                                                                                           
|   
|(4) | Identix changed its method of accounting for
    revenue recognition effective July 1, 2000 to comply with
    the Securities and Exchange Commission Staff Accounting Bulletin
    No. 101, Revenue Recognition in Financial
    Statements (SAB 101).                                                                                                                                                        
|   
|(5) | Assuming Identix accounting change to
    comply with SAB 101 was made retroactive to periods prior to
    July 1, 1999, the pro forma basic and diluted net loss per
    share for fiscal 2000 is $0.41. Pro forma net income
    (loss) per share amounts for the periods prior to fiscal
    2000 are not presented as the effect of the change in accounting
    principle could not be reasonable determined.
|   
|(6) | Includes preferred stock and warrant expense of
    $1,259,000.                                                                                                                                                                                                                                                                                                                                                    
|   
|(7) | Includes charges for inventory write-offs and
    reserves of $1,843,000 and write-off of intangibles and other
    special charges of $2,674,000.                                                                                                                                                                                                                                                                 
|   
|(8) | Includes a $10,044,000 charge for the write-off
    of acquired in-process research and development and a
    reorganization charge of $1,648,000 related to the acquisition
    of Identicator Technology.                                                                                                                                                                                                        

35



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##### Table of Contents








|        |                                                                                          
|------- | -----------------------------------------------------------------------------------------
|Item 7. | Managements Discussion and Analysis
    of Financial Condition and Results of Operations

Forward-looking Statements

The statements in this Annual Report on
Form 10-K 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 in Item 1 and the other risks identified in
this Annual Report on Form 10-K. The Company undertakes no
obligation to publicly update these forward-looking statements
to reflect events or circumstances 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 and 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
provides public sector services through IPS, a wholly owned
subsidiary of the Company. Identix also formed a joint venture,
Sylvan Identix Fingerprinting Centers (SIFC), in
September 1997 with Sylvan for the purpose of providing
fingerprinting services for a variety of civilian applications.

On June 25, 2002, Identix completed its
merger with Visionics Corporation (Visionics), a
leading provider of biometric technologies and identification
information systems. As Identix merger with Visionics was
consummated on June 25, 2002, Identix consolidated
statements of operations for the fourth quarter and year ended
June 30, 2002, reflect Visionics results of
operations for the final three business days of June 2002. In
connection with this stock-for-stock merger transaction, each
outstanding share of Visionics common stock was exchanged for
1.3436 shares of Identix, resulting in the issuance of an
aggregate of 39,422,000 shares of Identix 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 Identix common stock. The total purchase
price was $334,818,000. (See Note 2 of Notes to Consolidated
Financial Statements).

In December 1999, the Securities and Exchange
Commission Staff issued Staff Accounting Bulletin No. 101,
Revenue Recognition in Financial Statements
(SAB 101). The Company implemented the
provisions of SAB 101 in the fourth quarter of fiscal 2001,
retroactive to July 1, 2000. As a result of this change in
accounting principle, the Company recorded a charge of
$1,998,000 to reflect the cumulative effect of the change on
prior years as of July 1, 2000. The Companys results
for the first three quarters of fiscal 2001 were previously
restated to reflect the adoption of SAB 101 as of July 1,
2000. For fiscal 2001, the Company recognized $3,563,000 in
product revenues that are included in the cumulative effect
adjustment.

The portions of the Companys revenues
impacted by the adoption of SAB 101 are product revenues
derived from the sale of equipment that requires installation.
Certain of the Companys equipment sales require
installation subsequent to shipment and transfer of title.
Previously, the Company had generally recognized revenue upon
shipment of equipment to customers, regardless of installation
requirements, provided final customer acceptance and collection
of the related receivable were probable. The Companys
interpretation of the requirements of SAB 101 results in changes
to the Companys accounting method for revenue recognition
related to equipment sales that require installation, since the
installation is not considered perfunctory. Under the
Companys new accounting policy, 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 continue to be recognized in accordance with the
terms of the sale, generally upon shipment by the Company,
provided no significant vendor obligations remain and collection
of the receivable is deemed probable.

36



---



##### Table of Contents



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 Annual Report on Form 10-K for the fiscal
year ended June 30, 2003 describes the significant
accounting policies and methods used in the preparation of the
Consolidated Financial Statements. Estimates are used for, but
not limited to, the accounting for the allowance for doubtful
accounts and sales returns, goodwill impairments, inventory
allowances, warranty costs, revenue recognition as well as loss
contingencies and restructurings. Actual results could differ
from these estimates. The following critical accounting policies
are impacted significantly by judgments, assumptions and
estimates used in the preparation of the Consolidated Financial
Statements.



| |                                                       
| | ------------------------------------------------------
| | Allowance for doubtful accounts and sales
    returns:

The allowance for doubtful accounts is based on
the Companys assessment of the collectibility of specific
customer accounts and the aging of the accounts receivable. If
there is a deterioration of a customers credit worthiness
or actual defaults are higher than the historical experience,
estimates of the recoverability of amounts due could be
adversely affected. A reserve for sales returns is established
based on historical trends in returns and information obtained
directly from the customers regarding possible returns. If the
actual future returns do not reflect historical data, the
Companys revenue could be affected. The allowance for
doubtful accounts was $3,026,000 and $2,694,000 at June 30,
2003 and 2002, respectively.



| |                      
| | ---------------------
| | Goodwill impairments:

Goodwill represents the excess of the aggregate
purchase price over the fair value of the net assets of an
acquired business. The Company performs a goodwill impairment
assessment on an annual basis or more frequently if changes in
circumstances or the occurrence of events suggest an impairment
exists. The impairment test entails comparing the carrying value
of goodwill to the estimated fair value of a reporting unit that
the goodwill is assigned. There are a number of significant
management assumptions and estimates inherent in estimating the
fair value of the reporting unit including those used to
estimate future cash flows and the appropriate rate that
incorporates the Companys cost of capital and the risk
profile of the cash flows. Actual cash flows may be less than
those estimated by management. A change in industry or market
conditions or a downturn in the Companys operations could
result in a further impairment of goodwill. At the end of fiscal
year 2003, the Company completed its annual goodwill impairment
analysis that resulted in the Company recording an impairment
charge in fiscal year 2003 for $154,799,000. Net goodwill was
$140,945,000 and $295,744,000 at June 30, 2003 and 2002,
respectively.



| |                      
| | ---------------------
| | Inventory allowances:

Inventories are recorded at the lower of standard
cost, which approximates actual cost on a first-in-first-out
basis, or market value. The Company writes down inventories to
net realizable value based on forecasted demand and market
conditions as well as the anticipated timing and impact of new
product introductions. Actual demand, market conditions and
timing of new product introductions may be different from those
projected by management. This could have a material effect on
gross margins and operating results. The inventory obsolescence
reserve was $1,375,000 and $1,955,000 at June 30, 2003 and
2002, respectively.



| |                
| | ---------------
| | Warranty costs:

The Company accrues for warranty costs based on
the expected material and labor usage costs to provide warranty
services. If an increase in warranty claims are experienced,
which is higher than the historical rate, gross margin could be
adversely affected. The warranty reserve was $374,000 and
$306,000 at June 30, 2003 and 2002, respectively.

37



---



##### Table of Contents





| |                     
| | --------------------
| | Revenue recognition:

Significant management judgments and estimates
are made in connection with the revenues recognized in any
accounting period. The Company must assess whether the fee
associated with a revenue transaction is fixed or determinable
and whether or not collection is probable. Material differences
could result in the amount and timing of revenues for any period
if management were to make different judgments or utilize
different estimates.

Certain of the Companys Product segment
equipment sales such as its TouchPrint Live Scan Systems
generally require installation subsequent to shipment and
transfer of title. The Company recognizes revenue on such sales
in accordance with Staff Accounting Bulletin (SAB)
101, Revenue Recognition, 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
including 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 TouchPrint Live Scan Systems that generally
require installation, upon the final installation and acceptance
from the end user.

The Company adopted Emerging Issues Task Force
Issue No. 00-21 Accounting for Revenue Arrangements
with Multiple Deliverables, (EITF 00-21)
effective April 1, 2003. Under EITF 00-21, a company must
determine whether any or all of the deliverables of a multiple
deliverable agreement can be separated from one another. If
separation is possible, revenue is recognized for each
deliverable (based on objective and reliable evidence of the
fair value) as the applicable revenue recognition criteria are
achieved for that specific deliverable. Alternatively, if
separation is not possible, revenue recognition may need to be
spread evenly over the performance of all deliverables, or
deferred until all elements of the arrangement have been
delivered to the customer.

The Company also sells several stand-alone
software products including BioLogon and software developer
kits. Revenue is recognized on software products in accordance
with Statement of Position (SOP) 97-2,
Software Revenue Recognition, as amended. The
Company recognizes revenue on software products when persuasive
evidence of an arrangement exists, delivery has occurred, the
vendors fee is fixed or determinable and vendor-specific
objective evidence (VSOE) exists to allocate the
total fee to all undelivered elements of the arrangement and
collection is 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 services are
performed for 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.

Service revenues directly from contracts with the
U.S. Government, principally with the Department of Defense
(DOD), and from subcontracts with other U.S.
Government contractors, were approximately 77% and 83% of total
services revenue for fiscal 2003 and 2002, respectively.
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. The Company was
audited by the Defense Contract Audit

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Agency for the period from July 1, 1997 to
June 30, 2000 and the results of the audit did not have a
material effect on the Companys financial position or
results of operations.




| |                                           
| | ------------------------------------------
| | Loss contingencies and
    restructurings:

The Company is subject to the possibility of
various loss contingencies arising in the ordinary course of
business. The Company considers the likelihood of the loss or
impairment of an asset or the incurrence of a liability as well
as the Companys ability to reasonably estimate the amount
of loss in determining loss contingencies. An estimated loss
contingency is accrued when it is probable that a liability has
been incurred or an asset has been impaired and the amount of
loss can be reasonably estimated. Identix regularly evaluates
available current information to determine whether such reserves
should be adjusted.

The Company recorded reserves for the estimated
cost to terminate or sublease excess facilities. The Company
will continue to evaluate the commercial real estate market
conditions quarterly to determine if the Companys
estimates of the amount and timing of future sublease income are
reasonable, based on current and expected commercial real estate
market conditions. If the Company determines that the estimates
for sublease activities has significantly changed, an adjustment
to the restructuring liability would be charged to income in the
period in which such determination was made. Accrued lease exit
costs were $12,151,000 and $10,340,000 at June 30, 2003 and
2002, respectively.

Results of Operations

Fiscal Years Ended June 30, 2003 and
2002

Revenues.Total
revenues for fiscal 2003 were $92,514,000 compared to
$73,190,000 for fiscal 2002. For fiscal 2003 the increase in
total revenues of 26% is due to the merger between Visionics and
Identix that took place on June 25, 2002. As a result, 2003
reflects twelve months operations as a combined company, whereas
2002 only reflects three business days of activity for Visionics.

The Companys product revenues were
$52,009,000 for fiscal 2003, compared to $28,399,000 in fiscal
2002. The 83% increase is the result of the merger between
Visionics and Identix that took place on June 25, 2002,
partially offset by lower than anticipated demand for the
Companys products due to delayed customer spending
decisions.

International sales accounted for $4,925,000 or
9% of the Companys product revenues for fiscal 2003,
compared to $3,603,000 or 13% for fiscal 2002. The decrease as a
percentage of revenue is the result of domestic product revenue
increasing significantly as the result of the Visionics merger.
The former Visionics company had significantly less
international revenue. The Companys international sales
are generally denominated in U.S. dollars. The Company 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. The
Companys product business did not have any one-customer
account for 10% or more of total revenues in either fiscal 2003
or fiscal 2002.

The Companys services revenues were
$40,505,000 for fiscal 2003 compared to $44,791,000 for fiscal
2002, net of intersegment revenues. The decrease in services
revenues of 10% for fiscal 2003 resulted from lost contracts and
delayed or reduced spending on several of the Companys
long-term contracts. The delays were caused by the lack of a
federal budget earlier in the fiscal year and a reorganization
in the Naval Sea Systems Command 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 fiscal 2003 and for fiscal 2002, revenues directly from the
DOD and from other U.S. government agencies accounted for 77%
and 83% of the Companys total services revenues,
respectively.

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 expired on
June 30, 2003. During the twelve months ended June 30,
2003, $7,300,000 of revenue was recognized under the contract.

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During fiscal 2003, the Company derived
approximately 88% of its services revenues from T&M
contracts and from FFP contracts compared to 91% in fiscal 2002.
The decrease in the percentage of services revenues generated by
T&M and FFP contracts is primarily due to a decrease in
sales through the Companys GSA contract. 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
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. Revenues generated from contracts with government
agencies are subject to audit and subsequent adjustment by
negotiation between the Company and representatives of such
government agencies.

The Companys services business also
generates a portion of its revenues from cost plus fixed fee
(CPFF) contracts, which accounted for approximately
12% of its services revenues for fiscal 2003, compared to 9% for
fiscal 2002. The total dollars contributed by CPFF contracts to
service revenue has remained relatively stable at $4,031,000 and
$4,699,000 for fiscal year 2002 and 2003 respectively. However,
due to a decrease in the amount of revenue the T&M and FFP
contracts are contributing to service revenue the CPFFs
percentage of service revenue has increased from fiscal year
2002 to 2003.

Gross Margin.Gross
margin on product revenues was 33% for fiscal 2003, as compared
to 31% in fiscal 2002. The increase in product gross margin was
due to a change in the mix of products sold and reduced overhead
expenses as a result of the Visionics merger. A primary
contributor to the higher margin sales was an order from the DOD
in the third quarter of fiscal year 2003, for 5.4 million
user licenses for the Companys BioEngine® fingerprint
recognition technology. 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% for
fiscal 2003 and 6% for fiscal 2002. The increase in gross margin
was primarily due to restructuring events that took place in the
prior fiscal year that did not occur in fiscal year 2003. These
events in fiscal 2002 included lower utilization of the direct
labor workforce, increased utilization of subcontractors and
contract overruns.

Research, Development and
Engineering.Research, development and
engineering expenses were $11,044,000 or 21% of product revenues
for fiscal 2003, compared to $10,620,000 or 37% of product
revenues for fiscal 2002. The increase of dollars in research,
development and engineering expenses was the result of the
Companys continued emphasis on the investment in research
and development, which is critical to developing new and
innovative products intended to allow the Company to maintain a
strong technological position in the industry. The decrease in
research, development and engineering expense as a percentage of
product revenues reflects efficiencies that resulted from the
Visionics merger.

Marketing and
Selling.Marketing and selling
expenses were $12,304,000 for fiscal 2003, compared to
$14,604,000 for fiscal 2002. The percentage of marketing and
selling expenses of total revenue was 13% and 20% for the twelve
months ending June 30, 2003 and 2002, respectively. The
decrease was due to improved cost controls in the areas of
travel, consultants, and employee terminations that were not
replaced including a small number of highly paid employees.

General and
Administrative.General and
administrative expenses were $16,531,000 or 18% of total
revenues for fiscal 2003, compared to $17,030,000 or 23% of
total revenues for fiscal 2002. The decrease in general and
administrative expense from fiscal year 2002 to 2003 is
$499,000, and is primarily the result of efficiencies realized
from the Visionics merger.

Amortization of Acquired Intangible
Assets.Amortization of acquired
intangible assets was $5,683,000 and $1,005,000 for fiscal year
2003 and 2002 respectively. The amortization of acquired
intangibles relates primarily to intangible assets such as
patents, licenses and trademarks. The increase in amortization
expense is related to the amortization of intangible assets that
were acquired in connection with the Visionics merger in June
2002.

Impairment of
Goodwill.In accordance with Statement
of Financial Accounting Standards No. 142, the Company
performed its annual assessment for goodwill impairment as of
June 30, 2003 for all of the

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Companys goodwill, which is contained in
its product reporting unit. The fair value of the product
reporting unit was determined using a weighted-average of both
the market and income approaches. The market approach utilized
public company comparables while the income approach was based
on the present value of estimated future cash flows that the
reporting unit is expected to generate over its estimated
remaining life. In the application of the income approach, the
Company was required to make estimates of future operating
trends and judgments on discount rates and other variables.
Actual future results and other assumed variables could differ
from these estimates. The Company engaged an independent
valuation consultant to assist the Company in determining the
fair values used in the impairment assessment. In the
Companys application of the income approach, it assumed a
cash flow period of 10 years, a discount rate of 15%, and a
terminal value based on the tenth years estimated future
cash flows. The assumptions supporting the cash flows, including
the discount rate and estimated terminal value were determined
using managements best estimates available at the time the
impairment assessment was made. The results of this impairment
assessment indicated that the implied fair value of the goodwill
was less than its carrying value, resulting in a non-cash
impairment charge of $154,799,000 at June 30, 2003.


Restructuring, Write-offs and Other Merger
Related Charges.

Fiscal 2003

During the twelve months ended June 30,
2003, the Company recorded restructuring and merger related
expenses totaling $10,206,000. For the twelve months ended
June 30, 2003, these costs consisted of $2,283,000 related
to employees with extended terminations to assist in the
integration, $370,000 associated with the disposal of fixed
assets, $4,940,000 related to lease exit costs and $2,613,000 in
relocation costs. Merger related costs are expensed as incurred.

Of the lease exit costs of $4,940,000 recorded
during the twelve months ended June 30, 2003, $4,061,000
was due to the sublease of a portion of its Fairfax, Virginia
facility. The charge 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
$1,981,000. 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, future changes in real estate markets
could impact the ultimate amount of cash paid to resolve these
obligations. During the twelve months ended June 30, 2003,
the Company reduced its liability by $182,000 which related to
the shut down of the Companys Virginia Beach-based Law
Enforcement Solutions Division (LESD) group as the
actual costs to dispose of these operations were less than
originally estimated in fiscal 2001. In addition, in Fiscal year
2003 the Company recorded an additional charge of approximately
$825,000 related to lease exit costs at the Companys
Dublin and Los Gatos, California facilities. This charge is
associated with revised estimated lease exit costs due to
additional time required to sublease the facilities which is
attributable to the high vacancy rates in the corporate real
estate market in northern California.

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

|                              |       |                                           |            |            |  |          |           |            |  |                 |         |         |  |   |           |            |  |   |            |            | 
|----------------------------- | ----- | ----------------------------------------- | ---------- | ---------- |  | -------- | --------- | ---------- |  | --------------- | ------- | ------- |  | - | --------- | ---------- |  | - | ---------- | ---------- | 
|                              |       |                                          
|                              |       | For the twelve months ended June 30, 2003
|                              |       |                                          
|                              |       | Liability as of                           |            |            |  | Non-Cash |           | Cash       |  | Liability as of
|                              |       | June 30, 2002                             |            | Additions  |  | Charges  |           | Payments   |  | June 30, 2003  
|                              |       |                                           |            |            |  |          |           |            |  |                
|Severance and benefits        |       | $                                         | 2,493,000  |            |  | $        | 2,283,000 |            |  | $               |        |         |  | $ | 4,162,000 |            |  | $ | 614,000    |           
|Disposal of fixed assets      |       |                                           |           |            |  |          | 370,000   |            |  |                 | 370,000 |         |  |   |          |            |  |   |           |           
|Lease exit costs              |       |                                           | 10,340,000 |            |  |          | 4,940,000 |            |  |                 | 388,000 |         |  |   | 2,741,000 |            |  |   | 12,151,000 |           
|Internal merger costs & other |       |                                           | 814,000    |            |  |          | 2,613,000 |            |  |                 |        |         |  |   | 3,396,000 |            |  |   | 31,000     |           
|                              |       |                                           |            |            |  |          |           |            |  |                 |         |         |  |   |           |            |  |   |            |           
|                              | Total |                                           | $          | 13,647,000 |  |          | $         | 10,206,000 |  |                 | $       | 758,000 |  |   | $         | 10,299,000 |  |   | $          | 12,796,000 | 
|                              |       |                                           |            |            |  |          |           |            |  |                 |         |         |  |   |           |            |  |   |            |           

The restructuring liability is classified in the
consolidated balance sheet based on the anticipated timing of
the respective payment. As of June 30, 2003 and 2002,
$9,443,000 and $8,634,000 respectively of the restructuring
liability is classified as long-term.

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Fiscal 2002

The Company recorded the following restructuring
and other related charges during the fiscal year ended
June 30, 2002:

|                                |       |         |            |            |  |                       |           |                               |  |   |           |           |  |   |            |            | 
|------------------------------- | ----- | ------- | ---------- | ---------- |  | --------------------- | --------- | ----------------------------- |  | - | --------- | --------- |  | - | ---------- | ---------- | 
|                                |       | Total   |            | Non-cash   |  | Cash Payments through |           | Restructuring Liability as of
|                                |       | Charges |            | Charges    |  | June 30, 2002         |           | June 30, 2002                
|                                |       |         |            |            |  |                       |           |                              
|Severance and benefits          |       | $       | 6,093,000  |            |  | $                     | 900,000   |                               |  | $ | 2,700,000 |           |  | $ | 2,493,000  |           
|Disposal of fixed assets        |       |         | 1,294,000  |            |  |                       | 1,294,000 |                               |  |   |          |           |  |   |           |           
|Lease exit costs                |       |         | 10,340,000 |            |  |                       |          |                               |  |   |          |           |  |   | 10,340,000 |           
|Internal merger costs and other |       |         | 1,071,000  |            |  |                       |          |                               |  |   | 257,000   |           |  |   | 814,000    |           
|                                |       |         |            |            |  |                       |           |                               |  |   |           |           |  |   |            |           
|                                | Total |         | $          | 18,798,000 |  |                       | $         | 2,194,000                     |  |   | $         | 2,957,000 |  |   | $          | 13,647,000 | 
|                                |       |         |            |            |  |                       |           |                               |  |   |           |           |  |   |            |           

Severance and Benefits

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
$1,597,000 were made during the fiscal year ended June 30,
2002. The remaining liability at June 30, 2002 of $115,000
is included in accrued compensation in the consolidated balance
sheet.

In June 2002, in connection with the
Companys merger with Visionics, approximately 110
employees were terminated from the Companys Los Gatos,
California; Dublin, California; and IPS locations. The
terminated employees were from all functional areas of the
Company. The workforce reduction resulted in a charge of
$3,481,000 relating primarily to severance and fringe benefits.
Related cash payments of $1,103,000 were made during the fiscal
year ended June 30, 2002. The remaining liability at
June 30, 2002 of $2,378,000 is included in accrued
compensation in the consolidated balance sheet. In connection
with the June 2002 terminations, certain stock options were
subject to remeasurement and acceleration resulting in a
non-cash charge of $900,000.

Disposal of fixed assets

A non-cash charge of $1,294,000 was recorded for
the write-off of property and equipment due to the
discontinuance of certain product lines as well as the closure
of the Companys Los Gatos, California and Dublin,
California facilities.

Lease exit costs

A charge of $10,340,000 was recorded for the
estimated cost to terminate or sublease two excess leased
facilities in Northern California. Of this amount, $1,706,000 is
included in other accrued liabilities and $8,634,000 is included
in other liabilities in the consolidated balance sheet at
June 30, 2002. The estimate is based on current comparable
rates for leases in respective markets. Should facilities rental
rates continue to decrease in these markets or should it take
longer than expected to sublease these facilities, the actual
loss could exceed this estimate. The costs are expected to be
paid through fiscal 2008, based on the underlying lease
agreements.

Internal merger costs and other

The Company incurred internal merger related
costs of $587,000 during the period from the announcement of the
merger through its completion. Of this amount, $257,000 was paid
in the year ended June 30, 2002. The remaining balance is
included in accounts payable in the consolidated balance sheet.
The Company expects that this amount will be fully paid during
fiscal year 2003.

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A charge of $484,000, mostly related to
additional costs required to shutdown the Companys
Virginia Beach-based Law Enforcement Solutions Division
(LESD) was also recorded. In June 2001, management
made the decision to exit LESD. The reserve for the disposal is
included in other accrued liabilities in the consolidated
balance sheet.

Acquired In-Process Research and
Development.In connection with the
Companys merger with Visionics in fiscal year 2002, the
Company recorded a charge of $6,400,000 for the write-off of
acquired in-process research and development (see Note 2 of
the Consolidated Financial Statements).

Interest and Other Income (Expense),
net.For fiscal 2003, interest and
other income was $1,884,000 compared to $949,000 for fiscal
2002. The increase for the twelve months ended June 30,
2003 is primarily the result of a net gain realized on the sale
of investments of $458,000 during fiscal year 2003 and interest
from investments totaling $872,000 for the twelve months ending
June 30, 2003. Investment and interest income in fiscal
2002 was $212,000. The increase in interest and realized gains
in fiscal 2003 is primarily the result of returns from higher
average cash balances in fiscal 2003 compared to fiscal 2002.
These items were partially offset by a loss on the disposal of
fixed assets totaling $192,000 in fiscal year 2003.

Interest Expense.Interest expense was $15,000 for fiscal year 2003, compared to
$0 for fiscal year 2002. Interest expense in fiscal year 2003
resulted from leases for office equipment.

Provision for Income
Taxes.The Company had income tax
expense, consisting of certain State franchise taxes, in fiscal
2003 of $181,000 and $46,000 in fiscal 2002. In fiscal years
2003 and 2002, the Companys effective tax rate was below
the statutory rate due to the net losses incurred. As of
June 30, 2003, the Company had federal net operating loss
carryforwards of approximately $187,700,000 and $156,674,000,
respectively, which may be available to offset future taxable
income. The carryforwards expire on various dates through fiscal
2024 and may be subject to certain limitations on annual
utilizations due to changes in ownership, as defined by federal
and state law.

Equity Interest in Income (Loss) of Joint
Venture.The equity interest in joint
venture was a loss of $285,000 for fiscal year 2003 compared to
income of $329,000 in fiscal year 2002 and represents the
Companys 50% share of the results of SIFC. The decrease is
the result of one-time occurrences in fiscal year 2002.

Fiscal Years Ended June 30, 2002 and
2001

Revenues.Total
revenues for fiscal 2002 were $73,190,000 compared to
$81,828,000 for fiscal 2001. For fiscal 2002 the decrease in
total revenues of 11% is due to decreases in both the
Companys product and service revenue.

The Companys product revenues were
$28,399,000 for fiscal 2002, compared to $35,061,000 in fiscal
2001. For fiscal 2002, the decrease in product revenues of 19%
was due to a decrease in sales of Imaging solutions products and
services, primarily due to the saturation and decline of the
state and local law enforcement marketplace. Security revenue
for fiscal 2002 was $8,171,000 compared to $8,051,000 for fiscal
2001. The increase of 2% was due to an increase in our Physical
Access product line.

International sales accounted for $3,603,000 or
13% of the Companys product revenues for fiscal 2002,
compared to $3,705,000 or 11% for fiscal 2001. The
Companys international sales are generally denominated in
U.S. dollars. The Company 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. The Companys product business did
not have any one customer account for 10% or more of total
revenues in either fiscal 2002 or fiscal 2001.

The Companys services revenues were
$44,791,000 for fiscal 2002 compared to $46,767,000 for fiscal
2001, net of intersegment revenues. The decrease in services
revenues of 4% for fiscal 2002 was primarily related to a
reduction in new contract starts as well as reductions in
government funding on certain contracts due to reprioritization
of defense spending. The majority of the Companys services
revenues are generated directly from contracts with the U.S.
government, principally the DOD. For fiscal 2002 and for fiscal
2001,

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revenues directly from the DOD and from other
U.S. government agencies accounted for 83% and 89% of the
Companys total services revenues, respectively.


During fiscal 2002, the Company derived
approximately 91% of its services revenues from T&M
contracts and from FFP contracts compared to 94% in fiscal 2001.
The decrease in the percentage of services revenues generated by
T&M and FFP contracts is primarily due to a decrease in
sales through the Companys GSA contract. 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
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. Revenues generated from contracts with government
agencies are subject to audit and subsequent adjustment by
negotiation between the Company and representatives of such
government agencies.

The Companys services business also
generates a portion of its revenues from cost plus fixed fee
(CPFF) contracts, which accounted for approximately
9% of its services revenues for fiscal 2002, compared to 6% for
fiscal 2001. The increase in the percentage of services revenues
generated by CPFF contracts is primarily due to the award of a
significant new CPFF contract during fiscal 2002. CPFF contracts
provide for the reimbursement of allowable costs, including
indirect costs plus a fee or profit.

Gross Margin.Gross
margin on product revenues was 31% for fiscal 2002, as compared
to 35% in fiscal 2001. The decrease in product gross margin
reflects continued market price pressures in the Companys
Imaging segment and lower unit volumes that has resulted in
under absorbed overhead costs. 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 6% for
fiscal 2002 and 11% for fiscal 2001. The decrease in gross
margin was primarily due to lower utilization of the direct
labor workforce, increased utilization of subcontractors and
contract overruns during the current fiscal year.

Research, Development and
Engineering.Research, development and
engineering expenses were $10,620,000 or 37% of product revenues
for fiscal 2002, compared to $9,649,000 or 28% for fiscal 2001.
The increase in research, development and engineering expenses
is primarily due to increased consultant costs incurred to
further develop and enhance the Companys Security and
Imaging products. The Company believes that investment in
research and development is critical to maintaining a strong
technological position in the industry.

Marketing and
Selling.Marketing and selling
expenses were $14,604,000 for fiscal 2002, compared to
$16,389,000 for fiscal 2001. The percentage of marketing and
selling expenses of total revenue was 20% for both fiscal
periods. Due to cost cutting measures implemented during the
year, the Company had decreases in marketing and selling
expenses for travel, consulting, outside services and sales
commissions of approximately $1,600,000.

General and
Administrative.General and
administrative expenses were $17,030,000 or 23% of total
revenues for fiscal 2002, compared to $13,946,000 or 17% of
total revenues for fiscal 2000. The increase in general and
administrative expenses was primarily due to increased staffing
and related administrative expenses to support future growth and
development of supporting infrastructure. The increase in
general and administrative expenses is also due to charges for
accounts receivable write-offs and provisions totaling
$1,439,000 during fiscal 2002 compared to $1,168,000 during
fiscal 2001.

Amortization of Acquired Intangible
Assets.The Amortization of acquired
intangible assets was $1,005,000 and 3,329,000 for fiscal year
2002 and 2001, respectively. The amortization of acquired
intangibles relates primarily to intangible assets such as
patents, licenses and trademarks. The decrease from fiscal year
2001 to 2002 is primarily the result of capitalized software
development costs that became fully amortized in the first part
of fiscal year 2002.

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Restructuring, Write-offs and Other Merger
Related Charges.

Fiscal 2002

The Company recorded restructuring, write-offs
and other merger related charges of $18,798,000 and $1,890,000
for fiscal years 2002 and 2001 respectively. The increase from
fiscal year 2001 to 2002 is primarily the result of the
Visionics merger that necessitated moving the corporate
headquarters from California to Minnesota, which resulted in a
charge of $16,433,000 in fiscal year 2002 for lease exit costs
and employee terminations.

Fiscal 2001

In light of continued deteriorating general
economic conditions, during the third quarter of fiscal 2001,
the Company initiated a review of its asset carrying values,
forecasted sales and the timing of introductions and end of
lives of products.

As a continuation of this review, in June 2001,
the Company initiated a restructuring of its worldwide
operations to reduce costs and increase operational
efficiencies. The Company consolidated and centralized all
functional areas, including sales, customer service, finance and
marketing. Beginning in fiscal 2002, the Companys services
group based in Northern Virginia is now managing all service and
consulting operations, including worldwide customer support and
public sector customers. Also, in June 2001, the Company closed
the operations of its Virginia Beach-based LESD group, a
business that was not profitable or central to the
Companys revised business strategy. These actions resulted
in a charge of $1,890,000 taken in fiscal year 2001 for
restructuring, write-offs and other merger related charges.

Acquired In-Process Research and
Development.In connection with the
Companys merger with Visionics, the Company recorded a
charge of $6,400,000 for the write-off of acquired in-process
research and development (see Note 2 of the Consolidated
Financial Statements).

Preferred Stock and Warrant
Expense.In connection with the
private sale of shares of Series A Preferred Stock and
warrants in July 2000 to Motorola, (see Overview section above
and Note 9 of Notes to Consolidated Financial Statements),
the Company recognized a one-time preferred stock and warrant
expense of $1,259,000 relating to the embedded beneficial
conversion feature within the Series A Preferred Stock.

Interest and Other Income (Expense),
net.For fiscal 2002, interest and
other income was $949,000 compared to $1,436,000 for fiscal
2001. The decrease in interest and other income was primarily
due to a lower level of cash and cash equivalents and lower
interest rates. Interest and other income for fiscal 2002 were
primarily composed of interest income of $654,000 and license
fees from SIFC of $388,000.

Interest Expense.Interest expense was nil for fiscal 2002, compared to $113,000
for fiscal 2001. The decrease in interest expense was due to
lack of borrowings under the Companys lines of credit.

Provision for Income
Taxes.The Company had income tax
expense, consisting of certain State franchise taxes, in fiscal
2002 of $46,000 and had no expense in fiscal 2001. In fiscal
2002, the Companys effective tax rate was below the
statutory rate due to the net loss incurred. As of June 30,
2002, the Company had federal net operating loss carry forwards
of approximately $156,674,000 and $71,412,000, respectively,
which are available to offset future taxable income. The carry
forwards expire on various dates through fiscal 2022.

Equity Interest in Income (Loss) of Joint
Venture.The equity interest in joint
venture was income of $329,000 for fiscal 2002 compared to
income of $281,000 in fiscal 2001 and represents the
Companys 50% share of the results of SIFC.

Cumulative Effect of a Change in Accounting
Principle.As discussed in the
Overview section above, the Company implemented the provisions
of SAB 101 in the fourth quarter of fiscal 2001,
retroactive to July 1, 2000. As a result of this change in
accounting principle, the Company recorded a charge of
$1,998,000 in fiscal 2001 to reflect the cumulative effect of
the change on prior years as of the beginning of the fiscal year.

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Liquidity and Capital Resources

The Company financed its operations during the
twelve months ended June 30, 2003, primarily from its
working capital at June 30, 2002. As of June 30, 2003,
the Companys principal sources of liquidity consisted of
$53,397,000 of working capital including $43,703,000 in cash and
cash equivalents and short-term marketable securities.

The Companys existing line of credit (the
Identix Line of Credit) was entered into on
May 30, 2003. This line of credit provides for up to the
lesser of $15,000,000 or the cash collateral base or the
borrowing base. Borrowings under the Identix Line of Credit are
collateralized by substantially all of the assets of the Company
and bear interest at the banks prime rate that was 4.00%
at June 30, 2003. The Identix Line of Credit expires on
October 30, 2004. Until the Company establishes a net
income before taxes for two consecutive fiscal quarters, the
Company will be required to deposit with the lender an amount
equal to the sum of the aggregate outstanding principal amount
of all prior advances plus any portion of the line of credit
reserved to support unexpired letters of credit plus the amount
of the requested advance before an advance will be given. In
addition, all advances must be used for working capital. At
June 30, 2003, there were no amounts outstanding under this
line of credit.

The Identix Line of Credit agreement contains
financial, operating and reporting covenants. At June 30,
2003, the Company was in compliance with all covenants.

Cash used in operating activities was $26,721,000
during fiscal year 2003. The cash used in operations consisted
primarily of the net loss of $187,374,000; decreased accounts
receivable of $2,335,000, decreased accounts payable of
$2,702,000 and decreased compensation of $2,489,000. These items
were partially offset by noncash charges for the impairment of
goodwill of $154,799,000; depreciation and amortization of
$8,280,000; stock based compensation expense of $1,673,000 as
well as increased inventories of $1,175,000. Cash provided by
investing activities for the twelve months ended June 30,
2003 was primarily the result of net sales of marketable
securities partially offset by additions to property, plant and
equipment and intangible assets. Cash provided by financing
activities for the twelve months ended June 30, 2003 was due
solely to proceeds from the sale of the Companys equity
securities and the exercise of employee stock options.

Cash used for operating activities was
$25,343,000 during fiscal 2002. Cash used for operating
activities primarily reflects a net loss of $55,438,000,
decreased accounts payable of $2,924,000 and decreased deferred
revenue of $906,000. This was partially reduced by increased
other accrued liabilities of $9,511,000, decreased accounts
receivable of $6,643,000 and increased accrued compensation of
$2,862,000. In addition, cash used for operating activities in
fiscal 2002 was reduced by non-cash charges for acquired
in-process research and development of $6,400,000, amortization
of intangibles and depreciation of $3,487,000, stock-based
compensation expenses of $1,447,000, allowance for doubtful
accounts of $1,439,000 and restructuring, write-offs and other
merger related charges of $1,294,000. Cash provided by investing
activities for the twelve months ended June 30, 2002 was
primarily the result of net cash acquired in the Visionics
merger partially offset by purchases of marketable securities
and additions to property, plant and equipment. Cash provided by
financing activities for the twelve months ended June 30,
2002 was due solely to proceeds from the sale of the
Companys equity securities and the exercise of employee
stock options.

Cash used for operating activities was
$12,501,000 during fiscal 2001. Cash used for operating
activities primarily reflects a net loss of $29,598,000,
increased inventory of $2,749,000 and increased prepaid expenses
and other assets of $580,000. This was partially reduced by
increased deferred revenues of $4,111,000, increased accounts
payable of $2,025,000 and decreased accounts receivable of
$1,576,000. In addition, cash used for operating activities in
fiscal 2001 was reduced by non-cash charges for amortization of
intangibles of $3,728,000, depreciation of $1,923,000, write-off
of intangibles and other special charges of $1,890,000,
inventory reserve of $1,770,000, preferred stock and warrant
expense of $1,259,000, allowance for doubtful accounts of
$1,168,000 and stock compensation expense of $1,069,000. Cash
used by investing activities for the twelve months ended
June 30, 2001 was primarily the result of additions to
property, plant and equipment and intangible assets. Cash
provided by financing activities for the twelve months ended
June 30, 2002 was due primarily to proceeds from the sale
of the Companys equity securities and the exercise of
employee stock options partially offset by net payments under
the Companys bank lines of credit.

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The Company did not have any material capital
expenditure commitments as of June 30, 2003.

The Company currently occupies its 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.

Future minimum lease payments for operating
leases are as follows:

|                            |       |   |           |            | 
|--------------------------- | ----- | - | --------- | ---------- | 
|Fiscal year ending June 30: |       |   |           |           
|2004                        |       | $ | 7,332,000 |           
|2005                        |       |   | 7,656,000 |           
|2006                        |       |   | 6,994,000 |           
|2007                        |       |   | 6,481,000 |           
|2008                        |       |   | 3,981,000 |           
|Thereafter                  |       |   | 6,617,000 |           
|                            |       |   |           |           
|                            | Total |   | $         | 39,061,000 | 
|                            |       |   |           |           

Included in the above future minimum payments is
$10,857,000 related to two leased facilities in northern
California that were vacated in connection with the
Companys merger with Visionics. In fiscal year 2003 the
Company has recorded a charge of $4,940,000 representing the
future lease costs, net of estimated sublease income, related
primarily to excess leased facilities at its Fairfax, Virginia
facility. (See Note 3 of the Consolidated Financial
Statements).

In January 2003, the Company was notified that
its service business was not 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 expired on June 30,
2003.

While the Company believes that existing working
capital may be adequate to fund the Companys current cash
requirements, the Company may need to raise additional debt or
equity financing in the future. The Company may not be able to
obtain additional debt or equity financing. 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 May 2003, the Financial Accounting Standards
Board (FASB) issued Statement of Financial
Accounting Standards (SFAS) No. 150,
Accounting For Certain Financial Instruments with
Characteristics of both Liabilities and Equity. This
Statement establishes standards for how an issuer classifies and
measures certain financial instruments with characteristics of
both liabilities and equity. It requires that an issuer classify
a financial instrument that is within its scope as a liability
(or an asset in some circumstances). Many of those instruments
were previously classified as equity. SFAS No. 150 will be
effective for the Company for financial instruments entered into
or modified after May 31, 2003 and otherwise will be
effective for all existing financial instruments at the
beginning of the first interim period beginning after
June 15, 2003. Management believes the adoption of SFAS
No. 150 will not have a material impact on either the
Companys financial position or results of operations.

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Item 7A.     Quantitative
and Qualitative Disclosures about Market Risk


Interest Rate Risk.Certain of the Companys short-term and long-term
marketable securities are classified as available-for-sale
securities and the cost of securities sold is based on the
specific identification method. At June 30, 2003,
short-term marketable securities consisted of $2,026,000 of
government securities and $6,965,00 of high-grade corporate
bonds and long-term marketable securities consisted of
government securities of $505,000. The market value of these
investments on any given day during the investment term may vary
as a result of market interest rate fluctuations. A hypothetical
10% movement in interest rates during the investment term would
not likely have a material impact on investment income. The
actual impact on investment income in the future may differ
materially from this analysis, depending on actual balances and
changes in the timing and the amount of the interest rate
movements.

Foreign Currency Exchange Rate
Risk.Certain of the Companys
foreign revenues, cost of revenues and marketing expenses are
transacted in local currencies. 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 are not material to the
Companys consolidated results of operations or balance
sheet.

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##### Table of Contents








Item 8.     Financial
Statements and Supplementary Data


INDEX TO CONSOLIDATED FINANCIAL
STATEMENTS

AND FINANCIAL STATEMENT SCHEDULE


|                              |                                                                                                                                 |      |  |    | 
|----------------------------- | ------------------------------------------------------------------------------------------------------------------------------- | ---- |  | -- | 
|                              |                                                                                                                                 | Page
|                              |                                                                                                                                 |     
|Financial Statements:         |                                                                                                                                 |      |  |   
|                              | Report of Independent Auditors                                                                                                  |      |  | 50 | 
|                              | Consolidated Balance Sheets as of June 30,
    2003 and 2002                                                                    |      |  | 51 | 
|                              | Consolidated Statements of Operations for the
    years ended June 30, 2003, 2002 and 2001                                      |      |  | 52 | 
|                              | Consolidated Statements of Stockholders
    Equity and Comprehensive Loss for the years ended June 30,
    2003, 2002 and 2001 |      |  | 53 | 
|                              | Consolidated Statements of Cash Flows for the
    years ended June 30, 2003, 2002 and 2001                                      |      |  | 54 | 
|                              | Notes to Consolidated Financial Statements                                                                                      |      |  | 55 | 
|Financial Statement Schedule: |                                                                                                                                 |      |  |   
|                              | Schedule II  Valuation and
    Qualifying Accounts and Reserves for the years ended
    June 30, 2003, 2002 and 2001           |      |  | 88 | 

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REPORT OF INDEPENDENT AUDITORS


To the Board of Directors and Stockholders of
Identix Incorporated:

In our opinion, the consolidated financial
statements listed in the accompanying index present fairly, in
all material respects, the financial position of Identix
Incorporated and its subsidiaries at June 30, 2003 and
2002, and the results of their operations and their cash flows
for each of the three years in the period ended June 30,
2003 in conformity with accounting principles generally accepted
in the United States of America. In addition, in our opinion,
the financial statement schedule listed in the accompanying
index presents fairly, in all material respects, the information
set forth therein when read in conjunction with the related
consolidated financial statements. These financial statements
and financial statement schedule are the responsibility of the
Companys management; our responsibility is to express an
opinion on these financial statements and financial statement
schedule based on our audits. We conducted our audits of these
statements in accordance with auditing standards generally
accepted in the United States of America, which require that we
plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the
overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.

As discussed in Note 7 to the consolidated
financial statements, the Company adopted Statement of Financial
Accounting Standards No. 142, Goodwill and other
Intangible Assets, on July 1, 2001.



| |                           
| | --------------------------
| | PRICEWATERHOUSECOOPERS LLP

Minneapolis, Minnesota

July 29, 2003


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IDENTIX INCORPORATED






CONSOLIDATED BALANCE SHEETS


|                                                |                                                                                                                                            |                                            |             |              |             |  |             |              |             | 
|----------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------ | ------------------------------------------ | ----------- | ------------ | ----------- |  | ----------- | ------------ | ----------- | 
|                                                |                                                                                                                                            | June 30,                                   |             | June 30,    
|                                                |                                                                                                                                            | 2003                                       |             | 2002        
|                                                |                                                                                                                                            |                                            |             |             
|ASSETS                                         
|Current assets:                                 |                                                                                                                                            |                                            |             |              |             |  |             |             
|                                                | Cash and cash equivalents                                                                                                                  |                                            | $           | 34,712,000   |             |  | $           | 53,346,000   |            
|                                                | Marketable securities  short-term                                                                                                         |                                            |             | 8,991,000    |             |  |             | 5,143,000    |            
|                                                | Accounts receivable, net                                                                                                                   |                                            |             | 21,434,000   |             |  |             | 19,880,000   |            
|                                                | Inventories                                                                                                                                |                                            |             | 9,920,000    |             |  |             | 11,095,000   |            
|                                                | Prepaid expenses and other assets                                                                                                          |                                            |             | 1,677,000    |             |  |             | 1,412,000    |            
|                                                |                                                                                                                                            |                                            |             |              |             |  |             |             
|                                                |                                                                                                                                            | Total current assets                       |             |              | 76,734,000  |  |             |              | 90,876,000  | 
|Marketable securities  long-term               |                                                                                                                                            |                                            | 505,000     |              |             |  | 10,269,000  |             
|Property and equipment, net                     |                                                                                                                                            |                                            | 4,157,000   |              |             |  | 6,243,000   |             
|Goodwill                                        |                                                                                                                                            |                                            | 140,945,000 |              |             |  | 295,744,000 |             
|Acquired intangible assets, net                 |                                                                                                                                            |                                            | 19,854,000  |              |             |  | 25,037,000  |             
|Other assets                                    |                                                                                                                                            |                                            | 3,075,000   |              |             |  | 3,086,000   |             
|                                                |                                                                                                                                            |                                            |             |              |             |  |             |             
|                                                |                                                                                                                                            | Total assets                               |             | $            | 245,270,000 |  |             | $            | 431,255,000 | 
|                                                |                                                                                                                                            |                                            |             |              |             |  |             |             
|LIABILITIES AND STOCKHOLDERS
    EQUITY       
|Current liabilities:                            |                                                                                                                                            |                                            |             |              |             |  |             |             
|                                                | Accounts payable                                                                                                                           |                                            | $           | 8,025,000    |             |  | $           | 10,727,000   |            
|                                                | Accrued compensation                                                                                                                       |                                            |             | 3,593,000    |             |  |             | 6,082,000    |            
|                                                | Other accrued liabilities                                                                                                                  |                                            |             | 4,522,000    |             |  |             | 4,032,000    |            
|                                                | Deferred revenue                                                                                                                           |                                            |             | 7,197,000    |             |  |             | 6,796,000    |            
|                                                |                                                                                                                                            |                                            |             |              |             |  |             |             
|                                                |                                                                                                                                            | Total current liabilities                  |             |              | 23,337,000  |  |             |              | 27,637,000  | 
|Deferred revenue                                |                                                                                                                                            |                                            | 419,000     |              |             |  | 741,000     |             
|Other liabilities                               |                                                                                                                                            |                                            | 10,250,000  |              |             |  | 9,554,000   |             
|                                                |                                                                                                                                            |                                            |             |              |             |  |             |             
|                                                |                                                                                                                                            | Total liabilities                          |             |              | 34,006,000  |  |             |              | 37,932,000  | 
|                                                |                                                                                                                                            |                                            |             |              |             |  |             |             
|Commitments and contingencies (Notes 14 and 15) |                                                                                                                                            |                                            |             |              |             |  |             |             
|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 85,944,951 and 84,651,058 shares issued and
    outstanding, respectively |                                            |             | 859,000      |             |  |             | 846,000      |            
|                                                | Additional paid-in capital                                                                                                                 |                                            |             | 536,173,000  |             |  |             | 532,738,000  |            
|                                                | Accumulated deficit                                                                                                                        |                                            |             | (328,651,000 | )           |  |             | (141,277,000 | )          
|                                                | Deferred stock-based compensation                                                                                                          |                                            |             | (663,000     | )           |  |             | (2,540,000   | )          
|                                                | Accumulated other comprehensive loss                                                                                                       |                                            |             | (156,000     | )           |  |             | (146,000     | )          
|                                                |                                                                                                                                            |                                            |             |              |             |  |             |             
|                                                |                                                                                                                                            | Total stockholders equity                 |             |              | 211,264,000 |  |             |              | 393,323,000 | 
|                                                |                                                                                                                                            |                                            |             |              |             |  |             |             
|                                                |                                                                                                                                            | Total liabilities and stockholders equity |             | $            | 245,270,000 |  |             | $            | 431,255,000 | 
|                                                |                                                                                                                                            |                                            |             |              |             |  |             |             

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

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IDENTIX INCORPORATED

CONSOLIDATED STATEMENTS OF
OPERATIONS

|                                                                                        |                                                                       |                                                                |                          |       |             |             |             |       |            |             |             |       |            |             | 
|--------------------------------------------------------------------------------------- | --------------------------------------------------------------------- | -------------------------------------------------------------- | ------------------------ | ----- | ----------- | ----------- | ----------- | ----- | ---------- | ----------- | ----------- | ----- | ---------- | ----------- | 
|                                                                                        |                                                                       |                                                               
|                                                                                        |                                                                       | Fiscal Year Ended June 30,                                    
|                                                                                        |                                                                       |                                                               
|                                                                                        |                                                                       | 2003                                                           |                          | 2002  |             | 2001       
|                                                                                        |                                                                       |                                                                |                          |       |             |            
|Revenues:                                                                               |                                                                       |                                                                |                          |       |             |             |             |       |            |             |             |      
|                                                                                        |                                                                       | Product revenues                                               |                          | $     | 52,009,000  |             |             | $     | 28,399,000 |             |             | $     | 35,061,000 |            
|                                                                                        |                                                                       | Services revenues                                              |                          |       | 40,505,000  |             |             |       | 44,791,000 |             |             |       | 46,767,000 |            
|                                                                                        |                                                                       |                                                                |                          |       |             |             |             |       |            |             |             |      
|                                                                                        |                                                                       |                                                                | Total revenues           |       |             | 92,514,000  |             |       |            | 73,190,000  |             |       |            | 81,828,000  | 
|                                                                                        |                                                                       |                                                                |                          |       |             |             |             |       |            |             |             |      
|Cost and expenses:                                                                      |                                                                       |                                                                |                          |       |             |             |             |       |            |             |             |      
|                                                                                        |                                                                       | Cost of product revenues                                       |                          |       | 34,923,000  |             |             |       | 19,475,000 |             |             |       | 22,787,000 |            
|                                                                                        |                                                                       | Cost of services revenues                                      |                          |       | 35,801,000  |             |             |       | 41,928,000 |             |             |       | 41,783,000 |            
|                                                                                        |                                                                       | Research, development and engineering                          |                          |       | 11,044,000  |             |             |       | 10,620,000 |             |             |       | 9,649,000  |            
|                                                                                        |                                                                       | Marketing and selling                                          |                          |       | 12,304,000  |             |             |       | 14,604,000 |             |             |       | 16,389,000 |            
|                                                                                        |                                                                       | General and administrative                                     |                          |       | 16,531,000  |             |             |       | 17,030,000 |             |             |       | 13,946,000 |            
|                                                                                        |                                                                       | Amortization of acquired intangible assets                     |                          |       | 5,683,000   |             |             |       | 1,005,000  |             |             |       | 3,329,000  |            
|                                                                                        |                                                                       | Impairment of goodwill                                         |                          |       | 154,799,000 |             |             |       |           |             |             |       |           |            
|                                                                                        |                                                                       | Restructuring, write-offs and other merger
    related charges |                          |       | 10,206,000  |             |             |       | 18,798,000 |             |             |       | 1,890,000  |            
|                                                                                        |                                                                       | Acquired in-process research and development                   |                          |       |            |             |             |       | 6,400,000  |             |             |       |           |            
|                                                                                        |                                                                       | Preferred stock warrant expense                                |                          |       |            |             |             |       |           |             |             |       | 1,259,000  |            
|                                                                                        |                                                                       |                                                                |                          |       |             |             |             |       |            |             |             |      
|                                                                                        |                                                                       |                                                                | Total costs and expenses |       |             | 281,291,000 |             |       |            | 129,860,000 |             |       |            | 111,032,000 | 
|                                                                                        |                                                                       |                                                                |                          |       |             |             |             |       |            |             |             |      
|Loss from operations                                                                    |                                                                       |                                                                | (188,777,000             | )     |             |             | (56,670,000 | )     |            |             | (29,204,000 | )    
|Interest and other income, net                                                          |                                                                       |                                                                | 1,884,000                |       |             |             | 949,000     |       |            |             | 1,436,000   |      
|Interest expense                                                                        |                                                                       |                                                                | (15,000                  | )     |             |             |            |       |            |             | (113,000    | )    
|                                                                                        |                                                                       |                                                                |                          |       |             |             |             |       |            |             |             |      
|Loss before income taxes and equity interest in
    income (loss) of joint venture      |                                                                       |                                                                | (186,908,000             | )     |             |             | (55,721,000 | )     |            |             | (27,881,000 | )    
|Provision for income taxes                                                              |                                                                       |                                                                | (181,000                 | )     |             |             | (46,000     | )     |            |             |            |      
|                                                                                        |                                                                       |                                                                |                          |       |             |             |             |       |            |             |             |      
|Loss before equity interest in income
    (loss) of joint venture                       |                                                                       |                                                                | (187,089,000             | )     |             |             | (55,767,000 | )     |            |             | (27,881,000 | )    
|Equity interest in (loss) income of joint
    venture                                   |                                                                       |                                                                | (285,000                 | )     |             |             | 329,000     |       |            |             | 281,000     |      
|                                                                                        |                                                                       |                                                                |                          |       |             |             |             |       |            |             |             |      
|Loss before cumulative effect of a change in
    accounting principle                   |                                                                       |                                                                | (187,374,000             | )     |             |             | (55,438,000 | )     |            |             | (27,600,000 | )    
|Cumulative effect of a change in accounting
    principle                               |                                                                       |                                                                |                         |       |             |             |            |       |            |             | (1,998,000  | )    
|                                                                                        |                                                                       |                                                                |                          |       |             |             |             |       |            |             |             |      
|Net loss                                                                                |                                                                       | $                                                              | (187,374,000             | )     |             | $           | (55,438,000 | )     |            | $           | (29,598,000 | )    
|                                                                                        |                                                                       |                                                                |                          |       |             |             |             |       |            |             |             |      
|Basic and Diluted net loss per
    share:                                               |                                                                       |                                                                |                          |       |             |             |             |       |            |             |             |      
|                                                                                        | Loss before cumulative effect of a change in
    accounting principle |                                                                | $                        | (2.20 | )           |             | $           | (1.33 | )          |             | $           | (0.82 | )         
|                                                                                        | Cumulative effect of a change in accounting
    principle             |                                                                | $                        |      |             |             | $           |      |            |             | $           | (0.06 | )         
|                                                                                        |                                                                       |                                                                |                          |       |             |             |             |       |            |             |             |      
|                                                                                        | Net loss per share                                                    |                                                                | $                        | (2.20 | )           |             | $           | (1.33 | )          |             | $           | (0.88 | )         
|                                                                                        |                                                                       |                                                                |                          |       |             |             |             |       |            |             |             |      
|Weighted average common shares used in basic
    and diluted loss per share computation |                                                                       |                                                                | 85,242,000               |       |             |             | 41,609,000  |       |            |             | 33,807,000  |      

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

52



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##### Table of Contents



IDENTIX INCORPORATED






CONSOLIDATED STATEMENTS OF STOCKHOLDERS
EQUITY AND COMPREHENSIVE LOSS


|                                                                                      |                          |                                                                 |         |              |   |            |           |             |   |                 |            |               |   |              |         |      |   |       |             |   |   |   |              |   |              |   |            |   |   |   |          |   |        |   |             |              |              |  
|------------------------------------------------------------------------------------- | ------------------------ | --------------------------------------------------------------- | ------- | ------------ | - | ---------- | --------- | ----------- | - | --------------- | ---------- | ------------- | - | ------------ | ------- | ---- | - | ----- | ----------- | - | - | - | ------------ | - | ------------ | - | ---------- | - | - | - | -------- | - | ------ | - | ----------- | ------------ | ------------ | -
|                                                                                      |                          |                                                                 |         |              |   |            |           |             |   |                 |            |               |   |              |         |     
|                                                                                      |                          | Convertible                                                     |         |              |   |            |           |             |   |                 |            | Accumulated   |   |             
|                                                                                      |                          | Preferred Stock                                                 |         | Common Stock |   |            |           |             |   | Deferred        |            | Other         |   |             
|                                                                                      |                          |                                                                 |         |              |   | Additional |           | Accumulated |   | Stock-based     |            | Comprehensive |   |             
|                                                                                      |                          | Shares                                                          |         | Amount       |   | Shares     |           | Amount      |   | Paid in Capital |            | Deficit       |   | Compensation |         | Loss |   | Total
|                                                                                      |                          |                                                                 |         |              |   |            |           |             |   |                 |            |               |   |              |         |      |   |      
|Balance June 30, 2000                                                                 |                          |                                                                 |        |              |   |            |          |             |   |                 | 33,026,964 |               |   |              | 330,000 |      |   |       | 124,511,000 |   |   |   | (56,241,000  | ) |              |   | (785,000   | ) |   |   | (181,000 | ) |        |   | 67,634,000  |             
|Net loss                                                                              |                          |                                                                 |        |              |   |            |          |             |   |                 |           |               |   |              |        |      |   |       |            |   |   |   | (29,598,000  | ) |              |   |           |   |   |   |         |   |        |   | (29,598,000 | )           
|Sale of common stock under stock option plans                                         |                          |                                                                 |        |              |   |            |          |             |   |                 | 919,367    |               |   |              | 9,000   |      |   |       | 2,036,000   |   |   |   |             |   |              |   |           |   |   |   |         |   |        |   | 2,045,000   |             
|Sale of common stock under employee stock
    purchase plan                           |                          |                                                                 |        |              |   |            |          |             |   |                 | 165,010    |               |   |              | 2,000   |      |   |       | 1,007,000   |   |   |   |             |   |              |   |           |   |   |   |         |   |        |   | 1,009,000   |             
|Sale of common stock by private placement in
    January 2001, net of issuance costs  |                          |                                                                 |        |              |   |            |          |             |   |                 | 264,901    |               |   |              | 3,000   |      |   |       | 1,980,000   |   |   |   |             |   |              |   |           |   |   |   |         |   |        |   | 1,983,000   |             
|Sale of common stock by private placement in June
    2001, net of issuance costs     |                          |                                                                 |        |              |   |            |          |             |   |                 | 2,225,000  |               |   |              | 22,000  |      |   |       | 14,957,000  |   |   |   |             |   |              |   |           |   |   |   |         |   |        |   | 14,979,000  |             
|Sale of convertible preferred stock to Motorola,
    Inc., net of issuance costs      |                          |                                                                 | 234,558 |              |   |            | 3,702,000 |             |   |                 |           |               |   |              |        |      |   |       |            |   |   |   |             |   |              |   |           |   |   |   |         |   |        |   | 3,702,000   |             
|Issuance of warrants in connection with sale of
    convertible preferred stock       |                          |                                                                 |        |              |   |            |          |             |   |                 |           |               |   |              |        |      |   |       | 1,259,000   |   |   |   |             |   |              |   |           |   |   |   |         |   |        |   | 1,259,000   |             
|Deferred stock- based compensation                                                    |                          |                                                                 |        |              |   |            |          |             |   |                 |           |               |   |              |        |      |   |       | 1,170,000   |   |   |   |             |   |              |   | (1,170,000 | ) |   |   |         |   |        |   |            |             
|Amortization of deferred stock-based compensation                                     |                          |                                                                 |        |              |   |            |          |             |   |                 |           |               |   |              |        |      |   |       |            |   |   |   |             |   |              |   | 889,000    |   |   |   |         |   |        |   | 889,000     |             
|Stock-based compensation                                                              |                          |                                                                 |        |              |   |            |          |             |   |                 |           |               |   |              |        |      |   |       | 180,000     |   |   |   |             |   |              |   |           |   |   |   |         |   |        |   | 180,000     |             
|                                                                                      |                          |                                                                 |         |              |   |            |           |             |   |                 |            |               |   |              |         |      |   |       |             |   |   |   |              |   |              |   |            |   |   |   |          |   |        |   |             |             
|Balance June 30, 2001                                                                 |                          |                                                                 | 234,558 |              |   |            | 3,702,000 |             |   |                 | 36,601,242 |               |   |              | 366,000 |      |   |       | 147,100,000 |   |   |   | (85,839,000  | ) |              |   | (1,066,000 | ) |   |   | (181,000 | ) |        |   | 64,082,000  |             
|Components of comprehensive loss:                                                     |                          |                                                                 |         |              |   |            |           |             |   |                 |            |               |   |              |         |      |   |       |             |   |   |   |              |   |              |   |            |   |   |   |          |   |        |   |             |             
|Net loss                                                                              |                          |                                                                 |        |              |   |            |          |             |   |                 |           |               |   |              |        |      |   |       |            |   |   |   | (55,438,000  | ) |              |   |           |   |   |   |         |   |        |   | (55,438,000 | )           
|                                                                                      |                          | Unrealized gain on available-for-sale marketable
    securities |         |              |  |            |           |             |  |                 |            |               |  |              |         |      |  |       |             |   |  |   |              |   |             |   |            |   |  |   |          |   | 35,000 |   |             |              | 35,000       |  
|                                                                                      |                          |                                                                 |         |              |   |            |           |             |   |                 |            |               |   |              |         |      |   |       |             |   |   |   |              |   |              |   |            |   |   |   |          |   |        |   |             |             
|                                                                                      | Total comprehensive loss |                                                                 |         |             |   |            |           |            |   |                 |            |              |   |              |         |     |   |       |             |  |   |   |              |  |              |   |            |  |   |   |          |  |        |   |             | (55,403,000  | )           
|Sale of common stock under stock option plans                                         |                          |                                                                 |        |              |   |            |          |             |   |                 | 976,884    |               |   |              | 10,000  |      |   |       | 4,306,000   |   |   |   |             |   |              |   |           |   |   |   |         |   |        |   | 4,316,000   |             
|Sale of common stock under employee stock
    purchase plan                           |                          |                                                                 |        |              |   |            |          |             |   |                 | 139,417    |               |   |              | 1,000   |      |   |       | 694,000     |   |   |   |             |   |              |   |           |   |   |   |         |   |        |   | 695,000     |             
|Sale of common stock by private placement in
    December 2001, net of issuance costs |                          |                                                                 |        |              |   |            |          |             |   |                 | 7,390,000  |               |   |              | 74,000  |      |   |       | 48,273,000  |   |   |   |             |   |              |   |           |   |   |   |         |   |        |   | 48,347,000  |             
|Issuance of common stock in connection with
    Visionics acquisition                 |                          |                                                                 |        |              |   |            |          |             |   |                 | 39,421,959 |               |   |              | 394,000 |      |   |       | 305,128,000 |   |   |   |             |   |              |   |           |   |   |   |         |   |        |   | 305,522,000 |             
|Issuance of options and warrants in connection
    with Visionics acquisition         |                          |                                                                 |        |              |   |            |          |             |   |                 |           |               |   |              |        |      |   |       | 25,745,000  |   |   |   |             |   |              |   | (2,178,000 | ) |   |   |         |   |        |   | 23,567,000  |             
|Issuance of common stock for services received
    relating to Visionics acquisition  |                          |                                                                 |        |              |   |            |          |             |   |                 | 121,556    |               |   |              | 1,000   |      |   |       | 749,000     |   |   |   |             |   |              |   |           |   |   |   |         |   |        |   | 750,000     |             
|Amortization of deferred stock-based compensation                                     |                          |                                                                 |        |              |   |            |          |             |   |                 |           |               |   |              |        |      |   |       |            |   |   |   |             |   |              |   | 704,000    |   |   |   |         |   |        |   | 704,000     |             
|Stock-based compensation                                                              |                          |                                                                 |        |              |   |            |          |             |   |                 |           |               |   |              |        |      |   |       | 743,000     |   |   |   |             |   |              |   |            |   |   |   |         |   |        |   | 743,000     |             
|                                                                                      |                          |                                                                 |         |              |   |            |           |             |   |                 |            |               |   |              |         |      |   |       |             |   |   |   |              |   |              |   |            |   |   |   |          |   |        |   |             |             
|Balance June 30, 2002                                                                 |                          |                                                                 | 234,558 |              |   |            | 3,702,000 |             |   |                 | 84,651,058 |               |   |              | 846,000 |      |   |       | 532,738,000 |   |   |   | (141,277,000 | ) |              |   | (2,540,000 | ) |   |   | (146,000 | ) |        |   | 393,323,000 |             
|Components of comprehensive loss:                                                     |                          |                                                                 |         |              |   |            |           |             |   |                 |            |               |   |              |         |      |   |       |             |   |   |   |              |   |              |   |            |   |   |   |          |   |        |   |             |             
|                                                                                      |                          | Net loss                                                        |         |              |  |            |           |             |  |                 |            |               |  |              |         |      |  |       |             |   |  |   |              |   | (187,374,000 | ) |            |   |  |   |          |   |       |   |             |              | (187,374,000 | )
|                                                                                      |                          | Cumulative Translation Adjustment                               |         |              |  |            |           |             |  |                 |            |               |  |              |         |      |  |       |             |   |  |   |              |   |             |   |            |   |  |   |          |   | 20,000 |   |             |              | 20,000       |  
|Change in Unrealized gain on available for-sale
    marketable securities             |                          |                                                                 |        |              |   |            |          |             |   |                 |           |               |   |              |        |      |   |       |            |   |   |   |             |   |              |   |           |   |   |   | (30,000  | ) |        |   | (30,000     | )           
|                                                                                      |                          |                                                                 |         |              |   |            |           |             |   |                 |            |               |   |              |         |      |   |       |             |   |   |   |              |   |              |   |            |   |   |   |          |   |        |   |             |             
|                                                                                      | Total comprehensive loss |                                                                 |         |             |   |            |           |            |   |                 |            |              |   |              |         |     |   |       |             |  |   |   |              |  |              |   |            |  |   |   |          |  |        |   |             | (187,384,000 | )           
|Sale of common stock under stock option plans                                         |                          |                                                                 |        |              |   |            |          |             |   |                 | 779,221    |               |   |              | 8,000   |      |   |       | 2,357,000   |   |   |   |             |   |              |   |           |   |   |   |         |   |        |   | 2,365,000   |             
|Sale of common stock under stock Identix
    401(k)Plan                               |                          |                                                                 |        |              |   |            |          |             |   |                 | 104,921    |               |   |              | 1,000   |      |   |       | 345,000     |   |   |   |             |   |              |   |           |   |   |   |         |   |        |   | 346,000     |             
|Sale of common stock under employee stock
    purchase plan                           |                          |                                                                 |        |              |   |            |          |             |   |                 | 127,170    |               |   |              | 1,000   |      |   |       | 557,000     |   |   |   |             |   |              |   |           |   |   |   |         |   |        |   | 558,000     |             
|Exercise of stock warrants                                                            |                          |                                                                 |        |              |   |            |          |             |   |                 | 282,581    |               |   |              | 3,000   |      |   |       | 380,000     |   |   |   |             |   |              |   |           |   |   |   |         |   |        |   | 383,000     |             
|Amortization of deferred stock-based compensation                                     |                          |                                                                 |        |              |   |            |          |             |   |                 |           |               |   |              |        |      |   |       |            |   |   |   |             |   |              |   | 1,673,000  |   |   |   |         |   |        |   | 1,673,000   |             
|Elimination of deferred compensation related to
    terminated employees              |                          |                                                                 |        |              |   |            |          |             |   |                 |           |               |   |              |        |      |   |       | (204,000    | ) |   |   |             |   |              |   | 204,000    |   |   |   |         |   |        |   |            |             
|                                                                                      |                          |                                                                 |         |              |   |            |           |             |   |                 |            |               |   |              |         |      |   |       |             |   |   |   |              |   |              |   |            |   |   |   |          |   |        |   |             |             
|Balance June 30, 2003                                                                 |                          |                                                                 | 234,558 |              |   | $          | 3,702,000 |             |   |                 | 85,944,951 |               |   | $            | 859,000 |      |   | $     | 536,173,000 |   |   | $ | (328,651,000 | ) |              | $ | (663,000   | ) |   | $ | (156,000 | ) |        | $ | 211,264,000 |             
|                                                                                      |                          |                                                                 |         |              |   |            |           |             |   |                 |            |               |   |              |         |      |   |       |             |   |   |   |              |   |              |   |            |   |   |   |          |   |        |   |             |             

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

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##### Table of Contents



IDENTIX INCORPORATED

CONSOLIDATED STATEMENTS OF CASH
FLOWS

|                                                             |                                                                                        |                                                              |             |              |             |      |            |             |            |   |            |             |           |  
|------------------------------------------------------------ | -------------------------------------------------------------------------------------- | ------------------------------------------------------------ | ----------- | ------------ | ----------- | ---- | ---------- | ----------- | ---------- | - | ---------- | ----------- | --------- | -
|                                                             |                                                                                        |                                                             
|                                                             |                                                                                        | Fiscal Year Ended June 30,                                  
|                                                             |                                                                                        |                                                             
|                                                             |                                                                                        | 2003                                                         |             | 2002         |             | 2001
|                                                             |                                                                                        |                                                              |             |              |             |     
|Cash flows from operating
    activities:                    |                                                                                        |                                                              |             |              |             |      |            |             |            |   |            |            
|                                                             | Net loss                                                                               |                                                              | $           | (187,374,000 | )           |      | $          | (55,438,000 | )          |   | $          | (29,598,000 | )        
|                                                             | Adjustments to reconcile net loss to net cash
    used in operating activities:        |                                                              |             |              |             |      |            |             |            |   |            |             |          
|                                                             |                                                                                        | Depreciation and amortization                                |             |              | 8,280,000   |      |            |             | 3,487,000  |   |            |             | 5,651,000 |  
|                                                             |                                                                                        | Loss on disposals of property and equipment                  |             |              | 265,000     |      |            |             | 72,000     |   |            |             | 11,000    |  
|                                                             |                                                                                        | Equity interest in loss (income) on joint venture            |             |              | 285,000     |      |            |             | (329,000   | ) |            |             | (281,000  | )
|                                                             |                                                                                        | Realized gain on sales of marketable securities              |             |              | (458,000    | )    |            |             |           |   |            |             |          |  
|                                                             |                                                                                        | Impairment of Goodwill                                       |             |              | 154,799,000 |      |            |             |           |   |            |             |          |  
|                                                             |                                                                                        | Stock-based compensation expense                             |             |              | 1,673,000   |      |            |             | 1,447,000  |   |            |             | 1,069,000 |  
|                                                             |                                                                                        | Amortization of premiums on marketable securities            |             |              | 16,000      |      |            |             |           |   |            |             |          |  
|                                                             |                                                                                        | Bad debt expense                                             |             |              | 801,000     |      |            |             | 1,439,000  |   |            |             | 1,168,000 |  
|                                                             |                                                                                        | Non-cash restructuring write-offs and other
    charges      |             |              | 758,000     |      |            |             | 1,294,000  |   |            |             |          |  
|                                                             |                                                                                        | Write-off of intangible assets and other special
    charges |             |              |            |      |            |             | 57,000     |   |            |             | 1,890,000 |  
|                                                             |                                                                                        | Preferred stock warrant expense                              |             |              |            |      |            |             |           |   |            |             | 1,259,000 |  
|                                                             |                                                                                        | Acquired in-process research and development                 |             |              |            |      |            |             | 6,400,000  |   |            |             |          |  
|                                                             | Changes in assets and liabilities, net of effects
    of acquisition:                  |                                                              |             |              |             |      |            |             |            |   |            |             |          
|                                                             |                                                                                        | Accounts receivable                                          |             |              | (2,335,000  | )    |            |             | 6,643,000  |   |            |             | 1,576,000 |  
|                                                             |                                                                                        | Inventories                                                  |             |              | 1,175,000   |      |            |             | 122,000    |   |            |             | (979,000  | )
|                                                             |                                                                                        | Prepaid expenses and other assets                            |             |              | (539,000    | )    |            |             | 920,000    |   |            |             | (580,000  | )
|                                                             |                                                                                        | Accounts payable                                             |             |              | (2,702,000  | )    |            |             | (2,924,000 | ) |            |             | 2,025,000 |  
|                                                             |                                                                                        | Accrued compensation                                         |             |              | (2,489,000  | )    |            |             | 2,862,000  |   |            |             | 333,000   |  
|                                                             |                                                                                        | Other accrued liabilities                                    |             |              | 1,045,000   |      |            |             | 9,511,000  |   |            |             | (156,000  | )
|                                                             |                                                                                        | Deferred revenue                                             |             |              | 79,000      |      |            |             | (906,000   | ) |            |             | 4,111,000 |  
|                                                             |                                                                                        |                                                              |             |              |             |      |            |             |            |   |            |            
|                                                             | Net cash used in operating activities                                                  |                                                              |             | (26,721,000  | )           |      |            | (25,343,000 | )          |   |            | (12,501,000 | )        
|                                                             |                                                                                        |                                                              |             |              |             |      |            |             |            |   |            |            
|Cash flows from investing
    activities:                    |                                                                                        |                                                              |             |              |             |      |            |             |            |   |            |            
|                                                             | Cash acquired from acquisition, net of direct
    transaction costs                    |                                                              |             |             |             |      |            | 24,330,000  |            |   |            |            |          
|                                                             | Proceeds from the sales of marketable securities                                       |                                                              |             | 42,472,000   |             |      |            |            |            |   |            |            |          
|                                                             | Purchases of marketable securities                                                     |                                                              |             | (36,144,000  | )           |      |            | (15,607,000 | )          |   |            |            |          
|                                                             | Capital expenditures                                                                   |                                                              |             | (1,393,000   | )           |      |            | (3,292,000  | )          |   |            | (3,954,000  | )        
|                                                             | Proceeds from the sale of property and equipment                                       |                                                              |             |             |             |      |            | 20,000      |            |   |            | 19,000      |          
|                                                             | Additions of intangibles and other assets                                              |                                                              |             | (500,000     | )           |      |            | (933,000    | )          |   |            | (1,696,000  | )        
|                                                             |                                                                                        |                                                              |             |              |             |      |            |             |            |   |            |            
|                                                             | Net cash from (used by) investing activities                                           |                                                              |             | 4,435,000    |             |      |            | 4,518,000   |            |   |            | (5,631,000  | )        
|                                                             |                                                                                        |                                                              |             |              |             |      |            |             |            |   |            |            
|Cash flows from financing
    activities:                    |                                                                                        |                                                              |             |              |             |      |            |             |            |   |            |            
|                                                             | Borrowings under bank lines of credit                                                  |                                                              |             |             |             |      |            |            |            |   |            | 4,914,000   |          
|                                                             | Payments under bank lines of credit                                                    |                                                              |             |             |             |      |            |            |            |   |            | (5,344,000  | )        
|                                                             | Proceeds from sales of common stock                                                    |                                                              |             | 3,652,000    |             |      |            | 53,394,000  |            |   |            | 23,719,000  |          
|                                                             |                                                                                        |                                                              |             |              |             |      |            |             |            |   |            |            
|                                                             | Net cash provided by financing activities                                              |                                                              |             | 3,652,000    |             |      |            | 53,394,000  |            |   |            | 23,289,000  |          
|                                                             |                                                                                        |                                                              |             |              |             |      |            |             |            |   |            |            
|Net (decrease) increase in cash and cash
    equivalents     |                                                                                        |                                                              | (18,634,000 | )            |             |      | 32,569,000 |             |            |   | 5,157,000  |            
|Cash and cash equivalents at period beginning                |                                                                                        |                                                              | 53,346,000  |              |             |      | 20,777,000 |             |            |   | 15,620,000 |            
|                                                             |                                                                                        |                                                              |             |              |             |      |            |             |            |   |            |            
|Cash and cash equivalents at period end                      |                                                                                        | $                                                            | 34,712,000  |              |             | $    | 53,346,000 |             |            | $ | 20,777,000 |            
|                                                             |                                                                                        |                                                              |             |              |             |      |            |             |            |   |            |            
|Supplemental disclosures of cash flow
    information:       |                                                                                        |                                                              |             |              |             |      |            |             |            |   |            |            
|                                                             | Cash paid during the year for:                                                         |                                                              |             |              |             |      |            |             |            |   |            |             |          
|                                                             | Interest                                                                               |                                                              | $           | 8,000        |             |      | $          |            |            |   | $          | 113,000     |          
|                                                             | Taxes                                                                                  |                                                              | $           | 128,000      |             |      | $          |            |            |   | $          |            |          
|Schedule of non-cash investing and financing
    activities: |                                                                                        |                                                              |             |              |             |      |            |             |            |   |            |            
|                                                             | Common stock, options and warrants issued in
    connection with Visionics acquisition |                                                              | $           |             |             |      | $          | 331,267,000 |            |   | $          |            |          
|                                                             | Common stock issued for services received
    relating to the Visionics acquisition    |                                                              | $           |             |             |      | $          | 750,000     |            |   | $          |            |          

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

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##### Table of Contents



IDENTIX INCORPORATED






NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS


Year Ended June 30, 2003




|         |                                                        
|-------- | -------------------------------------------------------
|Note 1  | The Company and Its Significant Accounting
    Policies

Identix Incorporated (Identix or the
Company) designs, manufactures, develops and markets
products for security, anti-fraud, law enforcement and other
applications. In addition, the Company provides information
technology, engineering and management consulting services to
private and public sector clients through Identix Public Sector,
Inc. (IPS), a wholly owned subsidiary of the
Company. The principal markets for the Companys products
are the Americas, Asia, Australia, Europe and the Middle East.
The Company operates two business segments: (i) Products
and (ii) Services.



| |                       
| | ----------------------
| | Basis of Consolidation

The consolidated financial statements include the
accounts of the Company and its wholly owned subsidiaries. All
significant inter-company balances and transactions have been
eliminated in consolidation.



| |                                         
| | ----------------------------------------
| | Management Estimates and
    Assumptions

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 of assets and
liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and reported amounts of
revenues and expenses during the reporting period. Actual
results could differ from those estimates.



| |          
| | ---------
| | Liquidity

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



| |              
| | -------------
| | Joint Venture

In September 1997, the Company entered into a
joint venture agreement with Sylvan Learning Centers, Inc.
(Sylvan) to form Sylvan/ Identix Fingerprinting
Centers, LLC (SIFC) for the purpose of providing
fingerprinting services. The Company owns a 50% interest in the
joint venture. In addition to the Companys equity interest
in the income (loss) from the joint venture, the Company
also derives license fees from SIFC, which are included within
the interest and other income (expense), net, line item of the
consolidated statement of operations. License fees recognized
from SFIC were $332,000, $388,000 and $308,000 for the years
ended June 30, 2003, 2002 and 2001, respectively.



| |                    
| | -------------------
| | Revenue Recognition

In December 1999, the Securities and Exchange
Commission Staff issued Staff Accounting Bulletin No. 101,
Revenue Recognition in Financial Statements
(SAB 101). The Company implemented the
provisions of SAB 101 in the fourth quarter of fiscal 2001,
retroactive to July 1, 2000. As a result of this change in
accounting principle, the Company recorded a charge of
$1,998,000 to reflect the cumulative effect of the change on
prior years as of July 1, 2000. The results for the first
three quarters of fiscal 2001 were previously restated to
reflect the adoption of SAB 101 as of July 1, 2000.

55



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IDENTIX INCORPORATED


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The portion of the Companys revenue
impacted by the adoption of SAB 101 is product revenue
derived from the sale of equipment that requires installation.
Certain of the Companys equipment sales such as its
TouchPrint Live Scan Systems generally require installation
subsequent to shipment and transfer of title. Previously, the
Company had generally recognized revenue upon shipment of
equipment to customers, regardless of installation requirements,
provided final customer acceptance and collection of the related
receivable were probable. The Companys interpretation of
the requirements of SAB 101 resulted in changes to the
Companys accounting method for revenue recognition related
to equipment sales that require installation, since the
installation is not considered perfunctory. Under the
Companys new accounting policy, 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 the Companys Security segment products including
DFR-300, DFR-200 and FingerScan V20 continue to be
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 TouchPrint Live Scan
Systems that generally require installation, upon the final
installation and acceptance from the end user.

The Company adopted Emerging Issues Task Force
Issue No. 00-21 Accounting for Revenue Arrangements
with Multiple Deliverables,(EITF 00-21)
effective April 1, 2003. There was no cumulative effect of
a change in accounting policy upon the adoption of
EITF 00-21. Under EITF 00-21, a company must determine
whether any or all of the deliverables of a multiple deliverable
agreement can be separated from one another. If separation is
possible, revenue is recognized for each deliverable (based on
objective and reliable evidence of the fair value) as the
applicable revenue recognition criteria are achieved for that
specific deliverable. Alternatively, if separation is not
possible, revenue recognition may need to be spread evenly over
the performance of all deliverables, or deferred until all
elements of the arrangement have been delivered to the customer.

The Company also sells several stand-alone
software products including BioLogon and software developer
kits. Revenue is recognized on software products in accordance
with Statement of Position (SOP) 97-2,
Software Revenue Recognition, as amended. The
Company recognizes revenue on software products when persuasive
evidence of an arrangement exists, delivery has occurred, the
vendors fee is fixed or determinable and vendor-specific
objective evidence (VSOE) exists to allocate the
total fee to all undelivered elements of the arrangement and
collection is 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 services are
performed for 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.

Services revenues directly from contracts with
the U.S. Government, principally with the Department of Defense
(DOD), and from subcontracts with other U.S.
Government contractors, were approximately 77%

56



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##### Table of Contents



IDENTIX INCORPORATED


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

of total services revenue for fiscal 2003, 83%
for fiscal 2002 and 89% for fiscal 2001. 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. The Company was audited by the
Defense Contract Audit Agency for the period from July 1,
1997 to June 30, 2000 and the results of the audit did not
have a material effect on the Companys financial position
or results of operations.

In January 2003, the Company was notified that
its service business would not be awarded a contract to continue
providing professional support services and material acquisition
support to the Naval Sea Systems Command. The original contract
is a cost plus fixed fee award that expired on June 30,
2003. During the twelve months ended June 30, 2003,
$7,300,000 of revenue was recognized under the contract.



| |                
| | ---------------
| | Major Customers

In fiscal 2003, 2002 and 2001, the Company had
one customer, DOD, which accounted for 27%, 45% and 40%
respectively, of total revenue. No other customer accounted for
more than 10% of total revenue.



| |                                               
| | ----------------------------------------------
| | Cash Equivalents and Marketable
    Securities

Cash equivalents consist of highly liquid
investments with remaining maturities of three months or less
when purchased by the Company. Marketable securities are held as
securities available for sale and are carried at their market
value based on quoted market prices as of the balance sheet
date. The amortized cost of securities is adjusted for
amortization of premiums and accretion of discounts to maturity.
Such amortization is included in interest income. Realized gains
or losses are determined based on the specific identification
method and are reflected in income. Net unrealized gains or
losses are recorded directly in stockholders equity except
those unrealized losses that are deemed to be other than
temporary are reflected in income. The Company determines the
appropriate classification of marketable securities at the time
of purchase and reevaluates such designation as of each balance
sheet date.



| |                
| | ---------------
| | Restricted Cash

Restricted cash consists of cash balances held by
a bank in the form of certificates of deposit. At June 30,
2003 and 2002, included in other assets are $2,192,000 and
$1,482,000, respectively, of restricted cash held as collateral
under the operating leases for the Companys Los Gatos,
California, Dublin, California and Virginia facilities.



| |                             
| | ----------------------------
| | Concentration of Credit Risk

Financial instruments that potentially subject
the Company to concentrations of credit risk consist principally
of cash, cash equivalents, marketable securities, and accounts
receivable. The Company places cash, cash equivalents, and
marketable securities in a variety of financial instruments and,
by policy, limit the amount of credit exposure by investing its
excess cash and cash equivalents with major banks in money
market accounts and by restricting investments in marketable
securities to highly rated securities.

The Company performs ongoing credit evaluations
of its customers and provides for expected losses. Management
believes that any risk of material loss is reduced due to the
Companys substantial number of government customers,
primarily DOD. Accounts receivables from DOD represented 30% of
total consolidated accounts receivables at June 30, 2003
and 17% at June 30, 2002.



| |          
| | ---------
| | Suppliers

Certain components and parts used in the
Companys products are procured from a single source or
limited group of suppliers. The Company does not have long-term
agreements with any of its suppliers. The

57



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##### Table of Contents



IDENTIX INCORPORATED


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

failure of a supplier, including a
sub-contractor, to deliver on schedule could delay or interrupt
the Companys delivery of products and thereby adversely
affect the Companys revenues and results of operations.



| |                                        
| | ---------------------------------------
| | Fair Value of Financial
    Instruments

The carrying value of the Companys
financial instruments, including cash and cash equivalents,
marketable securities, accounts receivable, accounts payable and
accrued liabilities approximate their fair values due to their
relatively short maturities. The Company does not hold or issue
financial instruments for trading purposes.



| |            
| | -----------
| | Inventories

Inventories are stated at the lower of standard
cost (which approximates actual cost on a first-in, first-out
cost method).

The Company provides for obsolete, slow moving or
excess inventories in the period when obsolescence or inventory
in excess of expected demand is first identified. During the
year ended June 30, 2003, the Company physically disposed
of $1,536,000 of inventory due to obsolescence. The inventory
obsolescence reserve was $1,375,000 and $1,955,000 at
June 30, 2003 and 2002, respectively.



| |                       
| | ----------------------
| | Property and Equipment

Property and equipment are stated at cost less
accumulated depreciation and amortization. Depreciation is
computed using the straight-line method with the estimated
useful lives of the assets ranging from two to five years.
Amortization of equipment held under capital leases and
leasehold improvements are computed using the straight-line
method and the shorter of the remaining lease term or the
estimated useful life of the related equipment or improvements.
Repair and maintenance costs are expensed as incurred.
Depreciation expense was $2,597,000, $2,482,000 and $1,554,000
for the years ended June 30, 2003, 2002 and 2001,
respectively.

The Company evaluates the recoverability of
property and equipment and other long-lived assets, excluding
goodwill, annually or more frequently if changes in
circumstances or the occurrence of events suggest the remaining
value is not recoverable. An impairment of long-lived assets is
recognized in the event the carrying value of such assets
exceeds the future undiscounted cash flows attributable to such
assets.



| |                                   
| | ----------------------------------
| | Intangible Assets and
    Goodwill

Acquired intangible assets include developed
technology, service/maintenance agreements, patents/core
technology, trade name/trademark, order backlog and employee
agreements. The acquired intangible assets are amortized over
their estimated useful lives ranging from three months to four
years, (see Note 2 and Note 6). Goodwill represents
the excess of the purchase price over the fair value of net
assets of acquired businesses.

The Company reviews intangible assets and
goodwill for impairment annually or more frequently if changes
in circumstances or the occurrence of events suggest the
remaining value is not recoverable. The assessment for
impairment of goodwill and other intangible assets requires the
Company to make several estimates about fair value, many of
which are based upon projected future cash flows.



| |                           
| | --------------------------
| | Software Development Costs

Certain software development costs incurred are
capitalized after technological feasibility has been
demonstrated. Technological feasibility is determined when
planning, designing, coding and testing have been completed
according to design specifications. The period of time between
technological feasibility and general

58



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##### Table of Contents



IDENTIX INCORPORATED


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

release of products to customers is generally
extremely short. Commencing with product introduction, such
capitalized amounts are amortized on a product-by-product basis
at the greater of the amount computed using (a) the ratio
of current revenues for a product to the total of current and
anticipated future revenues or (b) the straight-line method
over the remaining estimated economic life of the product.
Generally, the Company assigns an estimated economic life of one
to five years to capitalized software costs. Research and
development expenditures are charged to research and development
in the period incurred. At June 30, 2003 and 2002, the net
book value of the capitalized software costs was zero.



| |                             
| | ----------------------------
| | Foreign Currency Translation

Assets and liabilities of the foreign
subsidiaries are translated into U.S. Dollars at the exchange
rate in effect at the balance sheet date. Revenues, costs, and
expenses are translated using the average exchange rate for the
year. Gains and losses resulting from translation are
accumulated as a separate component of accumulated other
comprehensive income loss in stockholders equity. Gains
and losses resulting from foreign currency transactions are
included in the consolidated statement of operations, as
incurred, and have not been significant for the periods
presented.



| |                 
| | ----------------
| | Product Warranty

The Company provides a warranty for manufacturing
and material defects on all units sold. A reserve for warranty
costs, based on estimates made by management utilizing projected
costs to repair units, is recorded and periodically adjusted to
reflect actual experience.



| |             
| | ------------
| | Income Taxes

Income taxes are accounted for under the asset
and liability method. Deferred tax assets and liabilities are
recognized for the future tax consequences attributable to
differences between financial statement carrying amounts of
existing assets and liabilities and their respective tax bases
and operating loss and tax credit carryforwards. Deferred tax
assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled.
The effect on deferred tax assets and liabilities of a change in
tax rates is recognized in income in the period that includes
the enactment date. Valuation allowances are established when
necessary to reduce tax assets to the amounts expected to be
realized.



| |                         
| | ------------------------
| | Stock-Based Compensation

The Company accounts for its employee and
director stock option plans and employee stock purchase plans in
accordance with provisions of the Accounting Principles Board
Opinion (APB) No. 25, Accounting for
Stock Issued to Employees. Additional pro forma
disclosures on the Companys stock plans are presented in
Note 9. The Company accounts for stock options issued to
non-employees in accordance with the provisions of
SFAS 123, SFAS 148 and Emerging Issues Task Force
(EITF) 96-18 Accounting for Equity Instruments
that are Issued to Other Than Employees for Acquiring or in
Conjunction with Selling Goods or Services. As permitted
by SFAS No. 123, Accounting for Stock Based
Compensation, the Company continues to measure
compensation cost for the stock option plan using the intrinsic
value method of accounting.

59



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##### Table of Contents



IDENTIX INCORPORATED


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Had Identix used the fair value method of
accounting for its stock plans and charged compensation costs
against operations over the vesting period, net loss and net
loss per share for 2003, 2002 and 2001 would have been adjusted
to the following pro forma amounts:

|                     |                                                                                                                                            |                            |              |            |   |      |             |             |   |   |             |             |  
|-------------------- | ------------------------------------------------------------------------------------------------------------------------------------------ | -------------------------- | ------------ | ---------- | - | ---- | ----------- | ----------- | - | - | ----------- | ----------- | -
|                     |                                                                                                                                            |                           
|                     |                                                                                                                                            | Fiscal year ended June 30,
|                     |                                                                                                                                            |                           
|                     |                                                                                                                                            | 2003                       |              | 2002       |   | 2001
|                     |                                                                                                                                            |                            |              |            |   |     
|Net Loss as reported |                                                                                                                                            | $                          | (187,374,000 | )          |   | $    | (55,438,000 | )           |   | $ | (29,598,000 | )          
|                     | Add: Stock Based compensation expense included in
    reported net loss, net of related tax effects                                        |                            |              | 1,673,000  |   |      |             | 1,206,000   |   |   |             | 1,069,000   |  
|                     | Deduct: Total stock based compensation expense
    determined under fair value based method for all awards, net of
    related tax effects |                            |              | (8,257,000 | ) |      |             | (10,736,000 | ) |   |             | (12,787,000 | )
|                     |                                                                                                                                            |                            |              |            |   |      |             |             |   |   |             |            
|Proforma net loss    |                                                                                                                                            | $                          | (193,958,000 | )          |   | $    | (64,968,000 | )           |   | $ | (41,316,000 | )          
|                     |                                                                                                                                            |                            |              |            |   |      |             |             |   |   |             |            
|Net Loss per share:  |                                                                                                                                            |                            |              |            |   |      |             |             |   |   |             |            
|                     | As Reported                                                                                                                                |                            | $            | (2.20      | ) |      | $           | (1.33       | ) |   | $           | (0.88       | )
|                     | Proforma                                                                                                                                   |                            | $            | (2.28      | ) |      | $           | (1.56       | ) |   | $           | (1.22       | )

The weighted average fair value at date of grant
for options granted during fiscal 2003, 2002 and 2001 was $3.61,
$4.72 and $8.78 per option, respectively. The fair value of
options at date of grant was estimated using the Black-Scholes
option-pricing model with the following assumptions:

|                        |  |                   |      |      |  |      |      |   |  |  |      |  
|----------------------- |  | ----------------- | ---- | ---- |  | ---- | ---- | - |  |  | ---- | -
|                        |  |                  
|                        |  | Fiscal year ended
|                        |  | June 30,         
|                        |  |                  
|                        |  | 2003              |      | 2002 |  | 2001
|                        |  |                   |      |      |  |     
|Expected life (years)   |  |                   | 4.59 |      |  |      | 3.76 |   |  |  | 4    |  
|Risk free interest rate |  |                   | 3.42 | %    |  |      | 3.93 | % |  |  | 5.31 | %
|Volatility              |  |                   | 91   | %    |  |      | 93   | % |  |  | 81   | %
|Dividend yield          |  |                   |     | %    |  |      |     | % |  |  |     | %

The Companys fair value calculations for
employees stock purchase rights under the Employee Stock
Purchase Plan (ESPP) were made using the
Black-Scholes option-pricing model with weighted average
assumptions based on the one year purchase period of the ESPP.



| |                                                                
| | ---------------------------------------------------------------
| | Comprehensive Loss and Accumulated Other
    Comprehensive Loss

Comprehensive loss includes net loss and other
comprehensive loss. Other comprehensive loss includes cumulative
translation adjustments and unrealized gains and losses on
available-for-sale securities. Identix comprehensive loss has
been presented in the Consolidated Statement of
Stockholders Equity and Comprehensive Loss. The components
of accumulated other comprehensive loss are as follows:

|                                           |  |          |          |          |  |   |          |  
|------------------------------------------ |  | -------- | -------- | -------- |  | - | -------- | -
|                                           |  | June 30, |          | June 30,
|                                           |  | 2003     |          | 2002    
|                                           |  |          |          |         
|Cumulative translation adjustment          |  | $        | (161,000 | )        |  | $ | (181,000 | )
|Unrealized gain on marketable securities   |  |          | 5,000    |          |  |   | 35,000   |  
|                                           |  |          |          |          |  |   |          |  
|Total accumulated other comprehensive loss |  | $        | (156,000 | )        |  | $ | (146,000 | )
|                                           |  |          |          |          |  |   |          |  

60



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##### Table of Contents



IDENTIX INCORPORATED


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



| |                   
| | ------------------
| | Earnings Per Share

Basic earnings per share are computed by dividing
the net loss available to common shareholders 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 9,082,522,
10,985,438 and 7,075,585 shares of common stock were outstanding
at June 30, 2003, 2002 and 2001, respectively, but were not
included in the computation of diluted net loss per share as
their effect was anti-dilutive. Also 234,558 shares of
convertible preferred stock were outstanding at June 30,
2003 and 2002 and are convertible into 235,553 shares of common
stock, but were not included in the computation of diluted net
loss per share as their effect was anti-dilutive.



| |                  
| | -----------------
| | Reclassifications

Certain prior year amounts have been reclassified
to conform to the current year presentation.

Note 2  Merger with Visionics
Corporation

On June 25, 2002, Identix completed its
merger with Visionics Corporation (Visionics), a
leading provider of biometric technologies and identification
information systems. As Identix merger with Visionics was
completed on June 25, 2002, Identix consolidated
statements of operations for the year ended June 30, 2002,
reflect Visionics results of operations for only the final
three business days of June 2002.

In connection with this stock-for-stock merger
transaction, each outstanding share of Visionics common stock
was exchanged for 1.3436 shares of Identix, resulting in the
issuance of an aggregate of 39,422,000 shares of Identix 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 Identix common stock.
The fair value of Identix common stock issued was
determined to be $7.75 using the five trading day average price
surrounding February 22, 2002, the date the merger was
announced. The fair value of Identix stock options and
warrants issued was determined using the Black-Scholes option
pricing model. The following assumptions were used to determine
the fair value of the options: expected life of 0.50 years
to 2.79 years, risk-free interest rate of 1.38% to 4.03%,
expected volatility of 85% and no expected dividend yield. The
following assumptions were used to determine the fair value of
the warrants: expected life ranging from 0.50 years to
4.67 years, risk-free interest rate ranging from 4.32% to
5.17%, expected volatility of 85% and no expected dividend yield.

The total purchase price consisted of the
following:

|                                                     |                      |   |             |             | 
|---------------------------------------------------- | -------------------- | - | ----------- | ----------- | 
|Value of Identix common stock issued                |                      | $ | 305,522,000 |            
|Value of Visionics options and warrants
    assumed |                      |   | 25,745,000  |            
|Direct transaction costs                             |                      |   | 3,551,000   |            
|                                                     |                      |   |             |            
|                                                     | Total purchase price |   | $           | 334,818,000 | 
|                                                     |                      |   |             |            

61



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##### Table of Contents



IDENTIX INCORPORATED


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The allocation of the purchase price to the
assets acquired and liabilities assumed based on the fair value
of Visionics was as follows:

|                                        |                                                  |                                     |                     |            |  |  |             |   |            |             | 
|--------------------------------------- | ------------------------------------------------ | ----------------------------------- | ------------------- | ---------- |  |  | ----------- | - | ---------- | ----------- | 
|Tangibles assets acquired:              |                                                  |                                     |                     |            |  |  |             |  
|                                        | Cash and cash equivalents                        |                                     | $                   | 27,130,000 |  |  |             |   |           
|                                        | Accounts receivable                              |                                     |                     | 4,810,000  |  |  |             |   |           
|                                        | Inventories                                      |                                     |                     | 5,130,000  |  |  |             |   |           
|                                        | Prepaid expenses and other current assets        |                                     |                     | 500,000    |  |  |             |   |           
|                                        | Property and equipment                           |                                     |                     | 2,153,000  |  |  |             |   |           
|                                        |                                                  |                                     |                     |            |  |  |             |  
|                                        |                                                  | Total tangible assets               |                     |            |  |  |             | $ | 39,723,000 |            
|Amortizable intangible assets acquired: |                                                  |                                     |                     |            |  |  |             |  
|                                        | Developed technology                             |                                     |                     | 16,100,000 |  |  |             |   |           
|                                        | Service/ Maintenance agreements                  |                                     |                     | 3,600,000  |  |  |             |   |           
|                                        | Patents/ Core technology                         |                                     |                     | 2,900,000  |  |  |             |   |           
|                                        | Tradename/ Trademark                             |                                     |                     | 500,000    |  |  |             |   |           
|                                        | Order backlog and employee agreements            |                                     |                     | 300,000    |  |  |             |   |           
|                                        |                                                  |                                     |                     |            |  |  |             |  
|                                        |                                                  | Total amortizable intangible assets |                     |            |  |  |             |   | 23,400,000 |            
|Goodwill                                |                                                  |                                     |                     |            |  |  | 273,099,000 |  
|In-process research and development     |                                                  |                                     |                     |            |  |  | 6,400,000   |  
|Fair value of liabilities assumed:      |                                                  |                                     |                     |            |  |  |             |  
|                                        | Accounts payable                                 |                                     |                     | 3,052,000  |  |  |             |   |           
|                                        | Other accrued liabilities                        |                                     |                     | 2,690,000  |  |  |             |   |           
|                                        | Deferred revenue  current                       |                                     |                     | 3,484,000  |  |  |             |   |           
|                                        | Deferred revenue and other long-term liabilities |                                     |                     | 756,000    |  |  |             |   |           
|                                        |                                                  |                                     |                     |            |  |  |             |  
|                                        |                                                  | Total liabilities assumed           |                     |            |  |  |             |   | (9,982,000 | )          
|Deferred compensation                   |                                                  |                                     |                     |            |  |  | 2,178,000   |  
|                                        |                                                  |                                     |                     |            |  |  |             |  
|                                        |                                                  |                                     | Net assets acquired |            |  |  |             |   | $          | 334,818,000 | 
|                                        |                                                  |                                     |                     |            |  |  |             |  

In accordance with SFAS 141, Business
Combinations and SFAS 142, Goodwill and Other
Intangible Assets, all identifiable assets acquired were
analyzed to determine their fair values and remaining useful
lives. The amortizable intangible assets acquired have useful
lives, as follows: Developed technology 
5 years; Service/ Maintenance agreements 
6 years; Patents/ Core technology  6 years;
Tradename/ Trademark  3 years; Order backlog and
employee agreements  3 months to 4 years.
Goodwill represents the excess of the purchase price over the
fair value of the net tangible and identifiable intangible
assets acquired. In accordance with SFAS No. 142, goodwill
will not be amortized, but will be tested for impairment at
least annually. The goodwill has been assigned to the
Companys product reporting unit, which is also a
reportable segment. The goodwill is not deductible for tax
purposes. See discussion of fiscal year 2003 goodwill impairment
in Note 7.



| |                                                                 
| | ----------------------------------------------------------------
| | Developed technology and in-process
    research and development

A portion of the purchase price has been
allocated to developed technology and in-process research and
development. The fair value was estimated through a discounted
cash flow method using the income approach, which determines the
fair value of an asset based on the value of the cash flows that
the asset can be expected to generate in the future. In-process
research and development guidelines discussed in the American

62



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##### Table of Contents



IDENTIX INCORPORATED


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Institute of Certified Public Accountants
IPR&D Practice Aid were utilized in the traditional income
approach. The rates used to discount the net cash flows to their
present value are based on Visionics weighted average cost
of capital and adjusted upwards or downwards, as appropriate,
for the asset being valued. Discount rates ranging from 25% to
35% were used for the individual in-process technology products
due to the additional risks related to the development and
success, and based on the stage of completion of the in-process
products. A discount rate of 13% was applied to developed
technology to reflect the lack of technological and/or market
risk associated with achieving the forecasted sales attributable
to those technologies.

As the basis for identifying the in-process
research and development, the development projects were
evaluated in the context of Interpretation 4 of FASB
Statement No. 2. In accordance with these provisions, the
research and development projects were examined to determine if
there were any alternative future uses. Such evaluation
consisted of a specific review of efforts, including the overall
objectives of the project, progress toward the objectives, and
the uniqueness of the developments of these objectives. In
addition, each in-process research and development project was
reviewed to determine if technological feasibility had been
achieved. In assessing Visionics research and development
projects, many key characteristics of Visionics, the rate of
technology changes in the industry, product life cycles, and the
various projects stage of development were considered.
Where development projects had reached technological
feasibility, they were classified as developed technology, and
the value assigned to developed technology was capitalized.
Where the development projects had not reached technological
feasibility and had no future alternative uses, they were
classified as in-process research and development and were
charged to expense upon closing of the merger.

Visionics current product portfolio
consists of four main product families: FaceIt, LiveScan,
Identification Based Information System (IBIS), and
Biometric Network Platform (BNP). FaceIt products
are currently in the market and are sold through resellers. As
of June 25, 2002 (the Valuation Date), there
were no significant in-process developments related to FaceIt
products. Visionics has begun significant development efforts to
enhance components of the LiveScan, IBIS, and BNP product
offerings as of the Valuation Date. The in-process developments
by family are: (1) LiveScan  1000 dots per
inch (dpi), (2) IBIS  2nd Generation
Remote Data Terminal (RDT), and
(3) BNP  Automatic Biometric Identification
System (ABIS).

LiveScan:The
current release of LiveScan is a third generation product, which
displays objects at a screen resolution of 500 dpi. As of the
Valuation Date, the Company was developing a LiveScan product
with 1000 dpi. LiveScan  1000 dpi will
increase the products screen resolution and image quality beyond
the current products capabilities.

IBIS:The current
release of IBIS products contains a first generation wireless
networked RDT. As of the Valuation Date, the Company was
developing a second generation RDT for the IBIS family of
products.

BNP:The current
release of the BNP is called the Argus System. As of the
Valuation Date, the Company was developing ABIS, a back-end
scalable database integrated into the BNP.

The following are the estimated fair value and
stage of completion percentages for each of the in-process
products as of the Valuation Date:

|                          |       |            |           |            |  |  |     |  | 
|------------------------- | ----- | ---------- | --------- | ---------- |  |  | --- |  | 
|                          |       |            |           | Stage of  
|In-process Product        |       | Fair Value |           | Completion
|                          |       |            |           |           
|LiveScan  1000 dpi       |       | $          | 1,800,000 |            |  |  | 21% | 
|IBIS  2nd Generation RDT |       |            | 1,300,000 |            |  |  | 59% | 
|BNP  ABIS                |       |            | 3,300,000 |            |  |  | 84% | 
|                          |       |            |           |            |  |  |     | 
|                          | Total |            | $         | 6,400,000  |  |  |     |  | 
|                          |       |            |           |            |  |  |     | 

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IDENTIX INCORPORATED


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The biometric industry is a rapidly developing
market that requires innovative technology to address the
evolving needs of the consumer. Future success in the biometric
industry will depend on the Companys ability to achieve
scientific and technological advances and to translate such
advances into commercially competitive products on a timely
basis that keep pace with competing technological developments
and address the increasingly sophisticated needs of its
customers. Visionics in-process products are at various
stages of development that require further research and
development to determine technical feasibility and commercial
viability. Current engineering efforts are focused on adding the
planned functionalities to the LiveScan, IBIS, and BNP line of
products. Developing the new product releases is time-consuming,
costly, and complex. There is risk that the developments will
not be competitive with other products using alternative
technologies that offer comparable functionalities. The IBIS
second generation RDT and the BNP ABIS products were completed
in fiscal 2003 while the LiveScan 1000dpi product was 80%
complete at June 30, 2003.



| |                                    
| | -----------------------------------
| | Service/ Maintenance
    agreements

The existing service/maintenance agreements
relate to the revenue generated by Visionics from fees that
users pay when they subscribe to a Visionics service/
maintenance contract. The income approach was used in estimating
the fair value of the service/ maintenance agreements. The net
cash flows were estimated using the on-going income expected to
be generated from the existing service/ maintenance agreements
in place as of the Valuation Date. A discount rate of 15% was
used to discount the net cash flows to their present value.



| |                         
| | ------------------------
| | Patents/ Core technology

The acquired patents/core technology represents a
series of filed patent applications and a patents/ core modular
architecture that is used in each of Visionics products.
Together, they form a major part of the platform of both the
current and planned future releases. In estimating the fair
value of patents/ core technology, a variation of the income
approach, the royalty savings approach, was used. In the
application of the royalty savings approach, the value of the
patents/ core technology was estimated by capitalizing the
royalties saved because Visionics owned the technology. An
estimated 3.0% royalty rate was used as the approximate royalty
rate that could be attributable to the patents/ core technology.
A discount rate of 21% was used to discount the estimated future
royalties saved to their present value.



| |                                    
| | -----------------------------------
| | Unaudited pro forma
    information

The following unaudited pro forma information
presents a summary of the consolidated results of operations of
the Company, excluding the charge for acquired in-process
research and development, assuming the acquisition of Visionics
occurred on July 1, 2000:

|                                                                        |  |                            |             |      |  |   |             |  
|----------------------------------------------------------------------- |  | -------------------------- | ----------- | ---- |  | - | ----------- | -
|                                                                        |  |                           
|                                                                        |  | Fiscal Year Ended June 30,
|                                                                        |  |                           
|                                                                        |  | 2002                       |             | 2001
|                                                                        |  |                            |             |     
|Revenues                                                                |  | $                          | 105,079,000 |      |  | $ | 112,301,000 |  
|Net loss before cumulative effect of change in
    accounting principle |  | $                          | (42,088,000 | )    |  | $ | (37,745,000 | )
|Loss per share  basic and diluted                                      |  | $                          | (.52        | )    |  | $ | (.52        | )
|Common shares used in basic and diluted loss per
    share computation  |  |                            | 80,491,000  |      |  |   | 73,229,000  |  

Note 3  Restructuring,
Write-Offs and Other Merger Related Charges



| |            
| | -----------
| | Fiscal 2003

During the twelve months ended June 30,
2003, the Company recorded restructuring and merger related
expenses totaling $10,206,000. For the twelve months ended
June 30, 2003, these costs consisted of $2,283,000

64



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IDENTIX INCORPORATED


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

related to employees with extended terminations
to assist in the integration, $370,000 associated with the
disposal of fixed assets, $4,940,000 related to lease exit costs
and $2,613,000 in relocation costs. Merger related costs are
expensed as incurred.

Of the lease exit costs of $4,940,000 recorded
during the twelve months ended June 30, 2003,
$4,061,000 was due to the sublease of a portion of its Fairfax,
Virginia facility. The charge 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
$1,981,000. 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, future changes in real estate markets
could impact the ultimate amount of cash paid to resolve these
obligations. During the twelve months ended June 30,
2003, the Company reduced its liability by $182,000 which
related to the shut down of the Companys Virginia
Beach-based Law Enforcement Solutions Division
(LESD) group as the actual costs to dispose of the
these operations were less than originally estimated in fiscal
2001. In addition, in Fiscal year 2003 the Company recorded an
additional charge of approximately $825,000 related to lease
exit costs at the Companys Dublin and Los Gatos,
California facilities. This charge is associated with revised
estimated lease exit costs due to additional time required to
sublease the facilities which is attributable to the high
vacancy rates in the corporate real estate market in Northern
California.

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

|                              |       |                                           |            |            |  |          |           |            |  |                 |         |         |  |   |           |            |  |   |            |            | 
|----------------------------- | ----- | ----------------------------------------- | ---------- | ---------- |  | -------- | --------- | ---------- |  | --------------- | ------- | ------- |  | - | --------- | ---------- |  | - | ---------- | ---------- | 
|                              |       |                                          
|                              |       | For the twelve months ended June 30, 2003
|                              |       |                                          
|                              |       | Liability as of                           |            |            |  | Non-Cash |           | Cash       |  | Liability as of
|                              |       | June 30, 2002                             |            | Additions  |  | Charges  |           | Payments   |  | June 30, 2003  
|                              |       |                                           |            |            |  |          |           |            |  |                
|Severance and benefits        |       | $                                         | 2,493,000  |            |  | $        | 2,283,000 |            |  | $               |        |         |  | $ | 4,162,000 |            |  | $ | 614,000    |           
|Disposal of fixed assets      |       |                                           |           |            |  |          | 370,000   |            |  |                 | 370,000 |         |  |   |          |            |  |   |           |           
|Lease exit costs              |       |                                           | 10,340,000 |            |  |          | 4,940,000 |            |  |                 | 388,000 |         |  |   | 2,741,000 |            |  |   | 12,151,000 |           
|Internal merger costs & other |       |                                           | 814,000    |            |  |          | 2,613,000 |            |  |                 |        |         |  |   | 3,396,000 |            |  |   | 31,000     |           
|                              |       |                                           |            |            |  |          |           |            |  |                 |         |         |  |   |           |            |  |   |            |           
|                              | Total |                                           | $          | 13,647,000 |  |          | $         | 10,206,000 |  |                 | $       | 758,000 |  |   | $         | 10,299,000 |  |   | $          | 12,796,000 | 
|                              |       |                                           |            |            |  |          |           |            |  |                 |         |         |  |   |           |            |  |   |            |           

The restructuring liability is classified in the
consolidated balance sheet based on the anticipated timing of
the respective payment. As of June 30, 2003 and 2002,
$9,443,000 and $8,634,000 respectively of the restructuring
liability is classified as long-term.



| |            
| | -----------
| | Fiscal 2002

The Company recorded the following restructuring
and other related charges during the fiscal year ended
June 30, 2002:

|                                |       |               |            |            |  |                       |           |                         |  |   |           |           |  |   |            |            | 
|------------------------------- | ----- | ------------- | ---------- | ---------- |  | --------------------- | --------- | ----------------------- |  | - | --------- | --------- |  | - | ---------- | ---------- | 
|                                |       |               |            | Non-cash   |  | Cash Payments through |           | Restructuring Liability
|                                |       | Total Charges |            | Charges    |  | June 30, 2002         |           | as of June 30, 2002    
|                                |       |               |            |            |  |                       |           |                        
|Severance and benefits          |       | $             | 6,093,000  |            |  | $                     | 900,000   |                         |  | $ | 2,700,000 |           |  | $ | 2,493,000  |           
|Disposal of fixed assets        |       |               | 1,294,000  |            |  |                       | 1,294,000 |                         |  |   |          |           |  |   |           |           
|Lease exit costs                |       |               | 10,340,000 |            |  |                       |          |                         |  |   |          |           |  |   | 10,340,000 |           
|Internal merger costs and other |       |               | 1,071,000  |            |  |                       |          |                         |  |   | 257,000   |           |  |   | 814,000    |           
|                                |       |               |            |            |  |                       |           |                         |  |   |           |           |  |   |            |           
|                                | Total |               | $          | 18,798,000 |  |                       | $         | 2,194,000               |  |   | $         | 2,957,000 |  |   | $          | 13,647,000 | 
|                                |       |               |            |            |  |                       |           |                         |  |   |           |           |  |   |            |           

65



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##### Table of Contents



IDENTIX INCORPORATED


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



| |                       
| | ----------------------
| | Severance and Benefits

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
$1,597,000 were made during the fiscal year ended June 30,
2002. The remaining liability at June 30, 2002 of $115,000
is included in accrued compensation in the consolidated balance
sheet.

In June 2002, in connection with the
Companys merger with Visionics, approximately 110
employees were terminated from the Companys
Los Gatos, California; Dublin, California; and IPS
locations. The terminated employees were from all functional
areas of the Company. The workforce reduction resulted in a
charge of $3,481,000 relating primarily to severance and fringe
benefits. Related cash payments of $1,103,000 were made during
the fiscal year ended June 30, 2002. The remaining
liability at June 30, 2002 of $2,378,000 is included in
accrued compensation in the consolidated balance sheet. In
connection with the June 2002 terminations, certain stock
options were subject to remeasurement and acceleration resulting
in a non-cash charge of $900,000.



| |                         
| | ------------------------
| | Disposal of fixed assets

A non-cash charge of $1,294,000 was recorded for
the write-off of property and equipment due to the
discontinuance of certain product lines as well as the closure
of the Companys Los Gatos, California and Dublin,
California facilities.



| |                 
| | ----------------
| | Lease exit costs

A charge of $10,340,000 was recorded for the
estimated cost to terminate or sublease two excess leased
facilities in Northern California. Of this amount, $1,706,000 is
included in other accrued liabilities and $8,634,000 is included
in other liabilities in the consolidated balance sheet at
June 30, 2002. The estimate is based on current comparable
rates for leases in respective markets. Should facilities rental
rates continue to decrease in these markets or should it take
longer than expected to sublease these facilities, the actual
loss could exceed this estimate. The costs are expected to be
paid through fiscal 2008, based on the underlying lease
agreements.



| |                                    
| | -----------------------------------
| | Internal merger costs and
    other

The Company incurred internal merger related
costs of $587,000 during the period from the announcement of the
merger through its completion. Of this amount, $257,000 was paid
in the year ended June 30, 2002. The remaining balance is
included in accounts payable in the consolidated balance sheet.
The Company expects that this amount will be fully paid during
fiscal year 2003.

A charge of $484,000, mostly related to
additional costs required to shutdown the Companys
Virginia Beach-based Law Enforcement Solutions Division
(LESD) was also recorded. In June 2001, management
made the decision to exit LESD. The reserve for the disposal is
included in other accrual liabilities in the consolidated
balance sheet.



| |            
| | -----------
| | Fiscal 2001

In light of continued deteriorating general
economic conditions, during the third quarter of fiscal 2001,
the Company initiated a review of its asset carrying values,
forecasted sales and the timing of introductions and end of
lives of products.

66



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IDENTIX INCORPORATED


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

As a continuation of this review, in June 2001,
the Company initiated a restructuring of its worldwide
operations to reduce costs and increase operational
efficiencies. The Company consolidated and centralized all
functional areas, including sales, customer service, finance and
marketing. Beginning in fiscal 2002, the Companys services
group based in Northern Virginia is now managing all service and
consulting operations, including worldwide customer support and
public sector customers. Also, in June 2001, the Company closed
the operations of its Virginia Beach-based LESD group, a
business that was not profitable or central to the
Companys revised business strategy. These actions resulted
in a charge of $1,890,000 taken in fiscal year 2001 for
restructuring, write-offs and other merger related charges.

Note 4  Balance Sheet
Detail

|                                                |                                                             |          |            |             |           |   |            |            |           | 
|----------------------------------------------- | ----------------------------------------------------------- | -------- | ---------- | ----------- | --------- | - | ---------- | ---------- | --------- | 
|                                                |                                                             |         
|                                                |                                                             | June 30,
|                                                |                                                             |         
|                                                |                                                             | 2003     |            | 2002       
|                                                |                                                             |          |            |            
|Accounts receivable:                            |                                                             |          |            |             |           |   |            |           
|                                                | Commercial and other                                        |          | $          | 14,552,000  |           |   | $          | 13,861,000 |          
|                                                | United States Government:                                   |          |            |             |           |   |            |            |          
|                                                |                                                             | Billed   |            |             | 4,089,000 |   |            |            | 4,408,000 | 
|                                                |                                                             | Unbilled |            |             | 5,769,000 |   |            |            | 4,212,000 | 
|                                                | Other receivables                                           |          |            | 50,000      |           |   |            | 93,000     |          
|Less: allowance for doubtful accounts           |                                                             |          | (3,026,000 | )           |           |   | (2,694,000 | )         
|                                                |                                                             |          |            |             |           |   |            |           
|                                                |                                                             | $        | 21,434,000 |             |           | $ | 19,880,000 |           
|                                                |                                                             |          |            |             |           |   |            |           
|Inventories:                                    |                                                             |          |            |             |           |   |            |           
|                                                | Purchased parts and materials                               |          | $          | 3,351,000   |           |   | $          | 4,190,000  |          
|                                                | Work-in-process                                             |          |            | 4,893,000   |           |   |            | 4,956,000  |          
|                                                | Finished goods, including spares                            |          |            | 1,676,000   |           |   |            | 1,949,000  |          
|                                                |                                                             |          |            |             |           |   |            |           
|                                                |                                                             | $        | 9,920,000  |             |           | $ | 11,095,000 |           
|                                                |                                                             |          |            |             |           |   |            |           
|Property and equipment:                         |                                                             |          |            |             |           |   |            |           
|                                                | Manufacturing, test and office equipment                    |          | $          | 4,449,000   | (a)       |   | $          | 6,346,000  |          
|                                                | Furniture and fixtures                                      |          |            | 3,296,000   |           |   |            | 2,127,000  |          
|                                                | Leasehold improvements                                      |          |            | 1,889,000   |           |   |            | 2,594,000  |          
|                                                |                                                             |          |            |             |           |   |            |           
|                                                |                                                             |          | 9,634,000  |             |           |   | 11,067,000 |           
|Less: accumulated depreciation and amortization |                                                             |          | (5,477,000 | )           |           |   | (4,824,000 | )         
|                                                |                                                             |          |            |             |           |   |            |           
|                                                |                                                             | $        | 4,157,000  |             |           | $ | 6,243,000  |           
|                                                |                                                             |          |            |             |           |   |            |           
|Acquired intangible assets:                     |                                                             |          |            |             |           |   |            |           
|                                                | Purchased technology                                        |          | $          | 28,563,000  |           |   | $          | 28,063,000 |          
|                                                | Patents and licenses                                        |          |            | 204,000     |           |   |            | 204,000    |          
|                                                | Capitalized software development costs                      |          |            | 1,465,000   |           |   |            | 1,465,000  |          
|                                                | Less: accumulated amortization                              |          |            | (10,378,000 | )         |   |            | (4,695,000 | )        
|                                                |                                                             |          |            |             |           |   |            |           
|                                                |                                                             | $        | 19,854,000 |             |           | $ | 25,037,000 |           
|                                                |                                                             |          |            |             |           |   |            |           
|Other assets:                                   |                                                             |          |            |             |           |   |            |           
|                                                | Deposits                                                    |          | $          | 2,573,000   |           |   | $          | 1,806,000  |          
|                                                | Receivables from Companys 50% owned SIFC
    joint venture |          |            | 79,000      |           |   |            | 459,000    |          
|                                                | Other assets                                                |          |            | 423,000     |           |   |            | 821,000    |          
|                                                |                                                             |          |            |             |           |   |            |           
|                                                |                                                             | $        | 3,075,000  |             |           | $ | 3,086,000  |           
|                                                |                                                             |          |            |             |           |   |            |           

67



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##### Table of Contents



IDENTIX INCORPORATED


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

|                                     |                           |          |            |           |  |   |           |           | 
|------------------------------------ | ------------------------- | -------- | ---------- | --------- |  | - | --------- | --------- | 
|                                     |                           |         
|                                     |                           | June 30,
|                                     |                           |         
|                                     |                           | 2003     |            | 2002     
|                                     |                           |          |            |          
|Accrued compensation:                |                           |          |            |           |  |   |           |          
|                                     | Salary and wages          |          | $          | 925,000   |  |   | $         | 1,939,000 | 
|                                     | Severance                 |          |            | 492,000   |  |   |           | 1,941,000 | 
|                                     | Benefits                  |          |            | 1,962,000 |  |   |           | 1,963,000 | 
|                                     | Payroll taxes             |          |            | 214,000   |  |   |           | 239,000   | 
|                                     |                           |          |            |           |  |   |           |          
|                                     |                           | $        | 3,593,000  |           |  | $ | 6,082,000 |          
|                                     |                           |          |            |           |  |   |           |          
|Other accrued liabilities            |                           |          |            |           |  |   |           |          
|                                     | Lease exit costs          |          | $          | 2,708,000 |  |   | $         | 1,706,000 | 
|                                     | Other accrued liabilities |          |            | 1,814,000 |  |   |           | 2,326,000 | 
|                                     |                           |          |            |           |  |   |           |          
|                                     |                           | $        | 4,522,000  |           |  | $ | 4,032,000 |          
|                                     |                           |          |            |           |  |   |           |          
|Other accrued liabilities-noncurrent |                           |          |            |           |  |   |           |          
|                                     | Lease exit costs          |          | $          | 9,443,000 |  |   | $         | 8,634,000 | 
|                                     | Severance                 |          |            | 96,000    |  |   |           | 552,000   | 
|                                     | Other accrued liabilities |          |            | 711,000   |  |   |           | 368,000   | 
|                                     |                           |          |            |           |  |   |           |          
|                                     |                           | $        | 10,250,000 |           |  | $ | 9,554,000 |          
|                                     |                           |          |            |           |  |   |           |          



---



|    |                                                                                                             
|--- | ------------------------------------------------------------------------------------------------------------
|(a) | The decrease in property and equipment is due
    primarily to the disposal of equipment during fiscal 2003.



|         |               
|-------- | --------------
|Note 5  | Line of Credit

The Companys existing line of credit (the
Identix Line of Credit) was entered into on
May 30, 2003. This line of credit provides for up to the
lesser of $15,000,000 or the cash collateral base or the
borrowing base. Borrowings under the Identix Line of Credit are
collateralized by substantially all of the assets of the Company
and bear interest at the banks prime rate of interest plus
4.00% at June 30, 2003. The Identix Line of Credit expires
on October 30, 2004. Until the Company establishes a net
income before taxes for two consecutive fiscal quarters, the
Company will be required to deposit with the lender an amount
equal to the sum of the aggregate outstanding principal amount
of all prior advances plus any portion of the line of credit
reserved to support unexpired letters of credit plus the amount
of the requested advance before an advance will be given. In
addition, all advances must be used for working capital. At
June 30, 2003, there were no amounts outstanding under this
line of credit.

The Identix Line of Credit agreement contains
financial, operating and reporting covenants. At June 30,
2003, the Company was in compliance with all covenants.

At June 30, 2002, the Company had a second
line of credit that 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 accounts receivable including IPS accounts
receivable. Borrowings under the Identix Line of Credit are
secured by substantially all of the assets of the Company and
bear interest at the banks prime rate of interest plus 50
basis points (5.25% at June, 2002). The Identix Line of Credit
expired on March 28, 2003. At June 30, 2002, there
were no amounts outstanding under this line of credit.

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IDENTIX INCORPORATED


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



|         |                  
|-------- | -----------------
|Note 6  | Intangible Assets

The Companys intangible assets at
June 30 were comprised of the following:

|                                       |  |               |            |               |  |       |             |          |  |              |            |     |  |   |            |  |  |   |            |   |  |   |            | 
|-------------------------------------- |  | ------------- | ---------- | ------------- |  | ----- | ----------- | -------- |  | ------------ | ---------- | --- |  | - | ---------- |  |  | - | ---------- | - |  | - | ---------- | 
|                                       |  |               |            |              
|                                       |  | June 30, 2003 |            | June 30, 2002
|                                       |  |               |            |              
|                                       |  | Gross         |            |               |  | Gross |             |         
|                                       |  | Carrying      |            | Accumulated   |  |       |             | Carrying |  | Accumulated  |            |    
|                                       |  | Amount        |            | Amortization  |  | Net   |             | Amount   |  | Amortization |            | Net
|                                       |  |               |            |               |  |       |             |          |  |              |            |    
|Acquired intangible assets:            |  |               |            |               |  |       |             |          |  |              |            |     |  |   |            |  |  |   |            |   |  |   |            | 
|Developed technology                   |  | $             | 16,100,000 |               |  | $     | (3,264,000  | )        |  | $            | 12,836,000 |     |  | $ | 16,100,000 |  |  | $ | (44,000    | ) |  | $ | 16,056,000 | 
|Service/maintenance agreements         |  |               | 3,600,000  |               |  |       | (608,000    | )        |  |              | 2,992,000  |     |  |   | 3,600,000  |  |  |   | (8,000     | ) |  |   | 3,592,000  | 
|Patents/core technology                |  |               | 8,063,000  |               |  |       | (4,443,000  | )        |  |              | 3,620,000  |     |  |   | 7,563,000  |  |  |   | (2,961,000 | ) |  |   | 4,602,000  | 
|Tradename/ Trademark                   |  |               | 500,000    |               |  |       | (169,000    | )        |  |              | 331,000    |     |  |   | 500,000    |  |  |   | (2,000     | ) |  |   | 498,000    | 
|Order backlog and employee contracts   |  |               | 300,000    |               |  |       | (225,000    | )        |  |              | 75,000     |     |  |   | 300,000    |  |  |   | (11,000    | ) |  |   | 289,000    | 
|Patents and licenses                   |  |               | 204,000    |               |  |       | (204,000    | )        |  |              |           |     |  |   | 204,000    |  |  |   | (204,000   | ) |  |   |           | 
|Capitalized software development costs |  |               | 1,465,000  |               |  |       | (1,465,000  | )        |  |              |           |     |  |   | 1,465,000  |  |  |   | (1,465,000 | ) |  |   |           | 
|                                       |  |               |            |               |  |       |             |          |  |              |            |     |  |   |            |  |  |   |            |   |  |   |            | 
|                                       |  | $             | 30,232,000 |               |  | $     | (10,378,000 | )        |  | $            | 19,854,000 |     |  | $ | 29,732,000 |  |  | $ | (4,695,000 | ) |  | $ | 25,037,000 | 
|                                       |  |               |            |               |  |       |             |          |  |              |            |     |  |   |            |  |  |   |            |   |  |   |            | 

Aggregate amortization expense amounted to
$5,863,000 and $1,005,000 for the years ended June 30, 2003
and 2002, respectively. The increase of the amortization expense
is due to the intangibles acquired in the Visionics acquisition.

Estimated amortization expense of intangible
assets for each of next five fiscal years is as follows:

|                             |  |   |            | 
|---------------------------- |  | - | ---------- | 
|For year ended June 30, 2004 |  | $ | 5,373,000  | 
|For year ended June 30, 2005 |  | $ | 4,593,000  | 
|For year ended June 30, 2006 |  | $ | 4,428,000  | 
|For year ended June 30, 2007 |  | $ | 4,359,000  | 
|For year ended June 30, 2008 |  | $ | 1,101,000  | 
|                             |  |   |            | 
|                             |  | $ | 19,854,000 | 
|                             |  |   |            | 

Note 7  Goodwill

Effective July 1, 2001 the Company adopted
SFAS No. 142, Goodwill and Other Intangible Assets. The
adoption of SFAS No. 142 resulted in a reduction of
goodwill amortization expense during fiscal 2002 of
approximately $599,000 per quarter. This reduction represents
the amount of amortization of goodwill that, in accordance with
SFAS No. 142, is no longer subject to amortization.
Goodwill is no longer subject to amortization, but is instead
subject to periodic (at minimum, on an annual basis) impairment
testing. Intangible assets that have finite useful lives will
continue to be amortized over their respective useful lives. The
goodwill test for impairment consists of a two-step process that
begins with an estimation of the fair value of a reporting unit.
The first step is a screen for potential impairment and the
second step measures the amount of impairment, if any.

In accordance with SFAS 142, the Company
performed its annual assessment for goodwill impairment as of
June 30, 2003 for all of the Companys goodwill, which
is contained in its product reporting unit. The fair value of
the product reporting unit was determined using a
weighted-average of both the market and income approaches. The
market approach utilized public company comparables while the
income approach was based on the present value of estimated
future cash flows that the reporting unit is expected to
generate over its

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IDENTIX INCORPORATED


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

estimated remaining life. In the application of
the income approach, the Company was required to make estimates
of future operating trends and judgments on discount rates and
other variables. Actual future results and other assumed
variables could differ materially from these estimates. The
Company engaged an independent valuation consultant to assist
the Company in determining the fair values used in the
impairment assessment. In the Companys application of the
income approach, it assumed a cash flow period of 10 years,
a discount rate of 15%, and a terminal value based on the tenth
years estimated future cash flows. The assumptions
supporting the cash flows, including the discount rate and
estimated terminal value, were determined using
managements best estimates available at the time the
impairment assessment was made. The results of this impairment
assessment indicated that the implied fair value of the goodwill
was less than its carrying value, resulting in a non-cash
impairment charge of $154,799,000 at June 30, 2003.

The Companys goodwill balance of
$22,645,000 at July 1, 2001 arose from its April 1999
acquisition of Identicator Technologies, Inc. The goodwill was
assigned to the Companys then Security reporting unit,
which was a reportable segment. The Security reporting unit is
now included in the Companys product reporting unit.

A reconciliation of previously reported net loss
and net loss per share, for each of the three years in the
periods ended June 30, 2003, 2002 and 2001, to the amounts
adjusted for the exclusion of goodwill amortization is as
follows:

|                                                                                        |                            |                            |              |              |   |      |             |             |   |   |             |             |  
|--------------------------------------------------------------------------------------- | -------------------------- | -------------------------- | ------------ | ------------ | - | ---- | ----------- | ----------- | - | - | ----------- | ----------- | -
|                                                                                        |                            |                           
|                                                                                        |                            | Fiscal Year Ended June 30,
|                                                                                        |                            |                           
|                                                                                        |                            | 2003                       |              | 2002         |   | 2001
|                                                                                        |                            |                            |              |              |   |     
|Reported net loss                                                                       |                            | $                          | (187,374,000 | )            |   | $    | (55,438,000 | )           |   | $ | (29,598,000 | )          
|                                                                                        | Add: Goodwill amortization |                            |              |             |   |      |             |            |   |   |             | 2,396,000   |  
|                                                                                        |                            |                            |              |              |   |      |             |             |   |   |             |            
|                                                                                        | Adjusted net loss          |                            | $            | (187,374,000 | ) |      | $           | (55,438,000 | ) |   | $           | (27,202,000 | )
|                                                                                        |                            |                            |              |              |   |      |             |             |   |   |             |            
|Basic and diluted net loss per share:                                                   |                            |                            |              |              |   |      |             |             |   |   |             |            
|                                                                                        | Reported net loss          |                            | $            | (2.20        | ) |      | $           | (1.33       | ) |   | $           | (0.88       | )
|                                                                                        | Goodwill amortization      |                            |              |             |   |      |             |            |   |   |             | 0.07        |  
|                                                                                        |                            |                            |              |              |   |      |             |             |   |   |             |            
|                                                                                        | Adjusted net loss          |                            | $            | (2.20        | ) |      | $           | (1.33       | ) |   | $           | (0.81       | )
|                                                                                        |                            |                            |              |              |   |      |             |             |   |   |             |            
|Weighted average common shares used in basic
    and diluted loss per share computation |                            |                            | 85,242,000   |              |   |      | 41,609,000  |             |   |   | 33,807,000  |            

The change in the carrying amount of goodwill for
the year ended June 30, 2003 resulted solely from the
impairment of the Companys product reporting unit goodwill
and is as follows:

|                            |  |   |              |  
|--------------------------- |  | - | ------------ | -
|Balance as of July 1, 2002  |  | $ | 295,744,000  |  
|Impairment of goodwill      |  |   | (154,799,000 | )
|                            |  |   |              |  
|Balance as of June 30, 2003 |  | $ | 140,945,000  |  
|                            |  |   |              |  

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IDENTIX INCORPORATED


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Note 8  Marketable
Securities

The Companys portfolio of marketable
securities at June 30, 2003 and 2002 consists of the
following:

|                                       |  |                                 |           |            |  |            |       |            |  |   |   |  |  |   |           | 
|-------------------------------------- |  | ------------------------------- | --------- | ---------- |  | ---------- | ----- | ---------- |  | - | - |  |  | - | --------- | 
|                                       |  |                                
|                                       |  | Fiscal Year Ended June 30, 2003
|                                       |  |                                
|                                       |  |                                 |           | Gross      |  | Gross      |       |           
|                                       |  |                                 |           | Unrealized |  | Unrealized |       |           
|                                       |  | Cost                            |           | Gains      |  | Losses     |       | Fair Value
|                                       |  |                                 |           |            |  |            |       |           
|Corporate Bonds                        |  | $                               | 6,965,000 |            |  | $          |      |            |  | $ |  |  |  | $ | 6,965,000 | 
|U.S. government and agency obligations |  |                                 | 2,526,000 |            |  |            | 5,000 |            |  |   |  |  |  |   | 2,531,000 | 
|                                       |  |                                 |           |            |  |            |       |            |  |   |   |  |  |   |           | 
|                                       |  | $                               | 9,491,000 |            |  | $          | 5,000 |            |  | $ |  |  |  | $ | 9,496,000 | 
|                                       |  |                                 |           |            |  |            |       |            |  |   |   |  |  |   |           | 

|                                       |  |                                 |            |            |  |            |        |            |  |   |        |   |  |   |            | 
|-------------------------------------- |  | ------------------------------- | ---------- | ---------- |  | ---------- | ------ | ---------- |  | - | ------ | - |  | - | ---------- | 
|                                       |  |                                
|                                       |  | Fiscal Year Ended June 30, 2002
|                                       |  |                                
|                                       |  |                                 |            | Gross      |  | Gross      |        |           
|                                       |  |                                 |            | Unrealized |  | Unrealized |        |           
|                                       |  | Cost                            |            | Gains      |  | Losses     |        | Fair Value
|                                       |  |                                 |            |            |  |            |        |           
|U.S. government and agency obligations |  | $                               | 15,377,000 |            |  | $          | 40,000 |            |  | $ | (5,000 | ) |  | $ | 15,412,000 | 
|                                       |  |                                 |            |            |  |            |        |            |  |   |        |   |  |   |            | 

|             |                                    |          |           |           |  |   |            |            | 
|------------ | ---------------------------------- | -------- | --------- | --------- |  | - | ---------- | ---------- | 
|             |                                    |         
|             |                                    | June 30,
|             |                                    |         
|             |                                    | 2003     |           | 2002     
|             |                                    |          |           |          
|Included in: |                                    |          |           |           |  |   |            |           
|             | Marketable securities  short-term |          | $         | 8,991,000 |  |   | $          | 5,143,000  | 
|             | Marketable securities  long-term  |          |           | 505,000   |  |   |            | 10,269,000 | 
|             |                                    |          |           |           |  |   |            |           
|Total        |                                    | $        | 9,496,000 |           |  | $ | 15,412,000 |           
|             |                                    |          |           |           |  |   |            |           

The Companys portfolio of marketable
securities by contractual maturity at June 30, 2003 and
2002 is as follows:

|                        |  |          |           |      |  |   |            | 
|----------------------- |  | -------- | --------- | ---- |  | - | ---------- | 
|                        |  |         
|                        |  | June 30,
|                        |  |         
|                        |  | 2003     |           | 2002
|                        |  |          |           |     
|Due in one year or less |  | $        | 8,991,000 |      |  | $ | 5,143,000  | 
|Due after one year      |  |          | 505,000   |      |  |   | 10,269,000 | 
|                        |  |          |           |      |  |   |            | 
|Total                   |  | $        | 9,496,000 |      |  | $ | 15,412,000 | 
|                        |  |          |           |      |  |   |            | 

Note 9  Capital
Stock



| |                            
| | ---------------------------
| | Convertible Preferred Stock

In July 2000, the Company entered into a
Securities Purchase Agreement with Motorola, Inc.
(Motorola), whereby the Company sold 234,558 shares
of Series A Convertible Preferred Stock (the
Series A Preferred Stock) at $15.99 per
share, resulting in cash proceeds to the Company of $3,702,000,
net of issuance costs. The sale of the Series A Preferred
Stock was exempt from registration under applicable securities
laws. However, Motorola has demand registration rights, which
were effective beginning on January 7, 2001.

In connection with the issuance of the
Series A Preferred Stock, the Company also issued Motorola
a warrant to purchase 187,647 shares of the Companys
common stock at $17.11 per share. The warrant was
immediately exercisable and expires on July 7, 2005. The
Company determined the fair value of the warrant using the
Black-Scholes option pricing model. Based on the net cash
proceeds received from the sale of Series A Preferred Stock
of $3,702,000, the relative fair values of the Series A
Preferred Stock and the

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IDENTIX INCORPORATED


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

warrant totaled $2,443,000 and $1,259,000,
respectively. The relative fair market value of the warrant was
credited to additional paid-in capital within stockholders
equity. The Company recognized a one-time preferred stock and
warrant expense of $1,259,000 relating to the embedded
beneficial conversion feature within the Series A Preferred
Stock.



| |             
| | ------------
| | Common Stock

In connection with the Companys merger with
Visionics (see Note 2), the Company issued an aggregate of
39,422,000 shares of Identix common stock for all outstanding
shares of Visionics common stock.

In December 2001, the Company sold 7,390,000
shares of its Common Stock in a private placement to new and
existing institutional investors, pursuant to a stock agreement.
The shares were sold at $7.00 per share and resulted in net
cash proceeds to the Company of $48,347,000. The purchase price
was based on the closing price of the Companys common
stock in the period prior to the execution of the agreement, and
represent a discount of 11.8% to the prior day closing price,
8.7% to the 20-day straight average or 10.8% to the 20-day
volume weighted average price, each of which were considered by
the Company to be competitively priced for the size of the
transaction.

In June 2001, the Company sold 2,225,000 shares
of its common stock at $6.75 per share in a private
placement to the State of Wisconsin Investment Board. The sale
resulted in net cash proceeds of $14,979,000. The Company has
registered the shares for resale.

In December 2000, the Company entered into a
Common Stock Purchase Agreement with VeriSign Capital
Management, Inc. (VeriSign) pursuant to which, the
Company sold, in January 2001, 264,901 shares of its common
stock at $7.55 per share. The sale resulted in net cash
proceeds to the Company of $1,983,000.



| |                       
| | ----------------------
| | Employee Stock Options

In February 2002, the Company adopted the Identix
Incorporated 2002 Equity Incentive Plan (2002 Plan).
Stockholders approved the 2002 Plan in June 2002. The 2002 Plan
will expire in 2012. A total of 5,800,000 Shares of the
Companys common stock have been reserved for the issuance
under the 2002 Plan. The 2002 Plan provides for the
discretionary award of options, restricted stock, stock purchase
rights, performance shares or any combination of these awards to
eligible employees and Non-employee directors of and consultants
to the Company. Options generally vest on an annual basis over a
period of four years.

In April 2000, the Company adopted the Identix
Incorporated New Employee Stock Incentive Plan (New
Employee Plan). The New Employee Plan will expire in 2010.
In February 2001, the Company amended the New Employee Plan so
that a total of 2,500,000 shares of the Companys common
stock are currently reserved for issuance under the New Employee
Plan. Under the New Employee Plan, awards may be granted as a
material inducement to any person accepting employment or
consultancy with the Company, provided such person is not
employed by the Company at the time of the award. The New
Employee Plan provides for the discretionary award of options,
restricted stock, stock purchase rights, performance shares or
any combination of these awards to eligible persons; provided,
however, that only nonqualified stock options may be granted
under the plan. Under the New Employee Plan, the term of any
nonqualified stock option granted may not exceed 15 years.
Options generally vest on an annual basis over a period of four
years.

In August 1995, the Companys shareholders
approved the Non-Employee Directors Stock Option Plan
(Directors Plan), under which nonqualified stock
options are granted to non-employee directors on a formula
basis. In October 1998, 2000 and 2002, the stockholders amended
the Directors Plan so that a total of 1,310,000 shares of
the Companys common stock are currently reserved for
issuance under the Directors Plan.

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IDENTIX INCORPORATED


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The Directors Plan provides that when a person
who is not, and has not been in the preceding twelve months, an
officer or an employee of the Company is elected or appointed a
member of the Board, the Company will grant that person on the
effective date of such election or appointment (i) a
nonqualified stock option to purchase 30,000 shares of Company
common stock if less than six months have elapsed since the last
annual meeting of stockholders or (ii) a nonqualified stock
option to purchase 15,000 shares of common stock if at least six
months have elapsed since the last annual meeting of
stockholders. The Directors Plan, as currently in effect,
further provides that on the first meeting of the Board
immediately following the annual meeting of stockholders of the
Company (even if held on the same day as the meeting of
stockholders), the Company will grant to each non-employee
director then in office a nonqualified stock option to purchase
an additional 30,000 shares of Company common stock.

Under the Directors Plan, options are granted for
a period of 10 years at an exercise price equal to the fair
market value of the Companys common stock on the date of
the grant. Options vest quarterly over a one-year period from
the date of grant.

In July 1995, the stockholders approved the
Identix Incorporated Equity Incentive Plan (1995
Plan). The 1995 Plan will expire in 2005. In October 1997,
1998 and 2000, the stockholders amended the 1995 Plan so that a
total of 4,700,000 shares of the Companys common stock are
currently reserved for issuance under the 1995 Plan. The 1995
Plan provides for the discretionary award of options, restricted
stock, stock purchase rights, performance shares or any
combination of these awards to eligible employees and
non-employee directors of and consultants to the Company.

Under the 1995 and 2002 Plans, the term of any
incentive stock option granted may not exceed 10 years and
the term of any nonqualified stock option may not exceed
15 years. The exercise price of incentive stock options
must not be less than the fair market value of the
Companys common stock at the date of grant. The exercise
price of nonqualified stock options must be at least 85% of the
fair market value of the Companys common stock at the date
of grant.

In connection with the acquisition of Visionics,
the Company has assumed Visionics stock option plans.
Approximately 3,225,128 shares of the Companys common
stock have been reserved for issuance under the assumed plans
and the related options are included in the following table:

|                            |                                                                     |               |           |             |   |               |           |           |   |   |      |       | 
|--------------------------- | ------------------------------------------------------------------- | ------------- | --------- | ----------- | - | ------------- | --------- | --------- | - | - | ---- | ----- | 
|                            |                                                                     | Shares        |           |             |   |              
|                            |                                                                     | Available for |           | Options     |   | Weighted     
|                            |                                                                     | Grant         |           | Outstanding |   | Average Price
|                            |                                                                     |               |           |             |   |              
|Balance as of June 30, 2000 |                                                                     |               | 2,056,027 |             |   |               | 5,147,964 |           |   | $ | 7.26 |      
|                            | Shares reserved upon adoption of amendment to
    Directors Plan   |               |           | 450,000     |   |               |           |          |   |   |      |       | 
|                            | Shares reserved upon adoption of amendment to New
    Employee Plan |               |           | 1,000,000   |   |               |           |          |   |   |      |       | 
|                            | Options granted                                                     |               |           | (2,508,750  | ) |               |           | 2,508,750 |   |   | $    | 11.26 | 
|                            | Options exercised                                                   |               |           |            |   |               |           | (919,367  | ) |   | $    | 2.13  | 
|                            | Options canceled                                                    |               |           | 437,813     |   |               |           | (437,813  | ) |   | $    | 9.40  | 
|                            | Options canceled and expired                                        |               |           |            |   |               |           | (11,152   | ) |   | $    | 0.26  | 
|                            |                                                                     |               |           |             |   |               |           |           |   |   |      |      
|Balance as of June 30, 2001 |                                                                     |               | 1,435,090 |             |   |               | 6,288,382 |           |   | $ | 9.77 |      
|                            | Shares reserved upon adoption of amendment to
    2002 Plan         |               |           | 5,800,000   |   |               |           |          |   |   |      |       | 
|                            | Shares reserved for Visionics assumed options                       |               |           | 3,225,128   |   |               |           |          |   |   |      |       | 
|                            | Shares assumed for Visionics acquisition                            |               |           | (3,225,128  | ) |               |           | 3,225,128 |   |   | $    | 4.93  | 
|                            | Options granted                                                     |               |           | (2,124,794  | ) |               |           | 2,124,794 |   |   | $    | 7.86  | 

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IDENTIX INCORPORATED


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

|                            |                                                                   |               |           |             |   |               |           |            |   |   |      |       | 
|--------------------------- | ----------------------------------------------------------------- | ------------- | --------- | ----------- | - | ------------- | --------- | ---------- | - | - | ---- | ----- | 
|                            |                                                                   | Shares        |           |             |   |              
|                            |                                                                   | Available for |           | Options     |   | Weighted     
|                            |                                                                   | Grant         |           | Outstanding |   | Average Price
|                            |                                                                   |               |           |             |   |              
|                            | Options exercised                                                 |               |           |            |   |               |           | (976,884   | ) |   | $    | 4.25  | 
|                            | Options canceled                                                  |               |           | 1,292,943   |   |               |           | (1,292,943 | ) |   | $    | 11.46 | 
|                            | Options canceled and expired                                      |               |           |            |   |               |           | (14,037    | ) |   | $    | 11.46 | 
|                            |                                                                   |               |           |             |   |               |           |            |   |   |      |      
|Balance as of June 30, 2002 |                                                                   |               | 6,403,239 |             |   |               | 9,354,440 |            |   | $ | 7.61 |      
|                            | Shares reserved upon adoption of amendment to
    Directors Plan |               |           | 450,000     |   |               |           |           |   |   |      |       | 
|                            | Options granted                                                   |               |           | (2,008,118  | ) |               |           | 2,008,118  |   |   | $    | 4.66  | 
|                            | Options exercised                                                 |               |           |            |   |               |           | (779,221   | ) |   | $    | 2.77  | 
|                            | Options canceled                                                  |               |           | 2,323,673   |   |               |           | (2,323,673 | ) |   | $    | 10.10 | 
|                            | Options canceled and expired                                      |               |           |            |   |               |           |           |   |   | $    | 2.36  | 
|                            |                                                                   |               |           |             |   |               |           |            |   |   |      |      
|Balance as of June 30, 2003 |                                                                   |               | 7,168,794 |             |   |               | 8,259,664 |            |   | $ | 6.64 |      
|                            |                                                                   |               |           |             |   |               |           |            |   |   |      |      

During fiscal 2003, the Company recognized
expense of $1,673,000 primarily as a result of amortization of
the intrinsic value of the employee stock options assumed in the
Visionics merger. During fiscal 2002, the Company recognized
expense of $1,447,000 for stock options granted to employees at
exercise prices below fair market value at the time of grant,
for a remeasurement charge related to the modification of stock
option terms upon termination of the Companys former CEO
and for stock options granted to non-employees.

The following table summarizes options
outstanding at June 30, 2003:

|                |  |                     |           |                     |  |                  |      |        |  |                  |       |  |  |  |           |  |  |   |       | 
|--------------- |  | ------------------- | --------- | ------------------- |  | ---------------- | ---- | ------ |  | ---------------- | ----- |  |  |  | --------- |  |  | - | ----- | 
|                |  |                     |           |                    
|                |  | Options Outstanding |           | Options Exercisable
|                |  |                     |           |                    
|Range of        |  |                     |           | Weighted Average    |  | Weighted Average |      |        |  | Weighted Average
|Exercise Prices |  | Number              |           | Remaining Life      |  | Exercise Price   |      | Number |  | Exercise Price  
|                |  |                     |           |                     |  |                  |      |        |  |                 
|                |  |                     |           | (in years)          |  |                  |      |        |  |                 
|$0.26-$4.42     |  |                     | 2,115,138 |                     |  |                  | 6.47 |        |  | $                | 2.91  |  |  |  | 1,198,783 |  |  | $ | 2.11  | 
|$4.45-$5.34     |  |                     | 2,109,334 |                     |  |                  | 8.78 |        |  |                  | 4.88  |  |  |  | 801,356   |  |  |   | 4.90  | 
|$5.87-$9.83     |  |                     | 2,116,336 |                     |  |                  | 7.23 |        |  |                  | 7.44  |  |  |  | 1,682,040 |  |  |   | 7.11  | 
|$9.88-$16.38    |  |                     | 1,918,856 |                     |  |                  | 6.89 |        |  |                  | 11.78 |  |  |  | 1,134,174 |  |  |   | 12.33 | 
|                |  |                     |           |                     |  |                  |      |        |  |                  |       |  |  |  |           |  |  |   |       | 
|                |  |                     | 8,259,664 |                     |  |                  | 7.35 |        |  | $                | 6.64  |  |  |  | 4,816,353 |  |  | $ | 6.73  | 
|                |  |                     |           |                     |  |                  |      |        |  |                  |       |  |  |  |           |  |  |   |       | 



| |                             
| | ----------------------------
| | Employee Stock Purchase Plan

On October 30, 1998, the Company adopted an
employee stock purchase plan (ESPP), through which
qualified employees of the Company may participate in stock
ownership of the Company. The cost of each share purchased was
85% of the lower of the closing prices for common stock on:
(i) the first trading day in the enrollment period in which
the purchase is made, and (ii) June 30 and
December 31 purchase date. Pursuant to the ESPP, 127,170,
139,417, and 165,011 shares were issued at a weighted average
price of $4.39, $4.99 and $6.12 per share during fiscal 2003,
2002 and 2001, respectively. At June 30, 2003 the ESPP was
depleted of shares of common stock for issuance thereunder, and
the Company has no plans to authorize or seek shareholder
authorization for additional shares of common stock for issuance
under the ESPP.



| |                          
| | -------------------------
| | Defined Contribution Plan

The Company has a retirement savings plan
pursuant to Section 401(k) of the Internal Revenue Code
(the Code), whereby an eligible employee may contribute a
portion of their earnings, not to exceed annual amounts
allowable under the Code. Employees may elect to have their
contributions and plan account

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IDENTIX INCORPORATED


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

balances invested in shares of the Companys
common stock. In addition, the Company may also make
contributions at the discretion of the Board of Directors. For
the years ended June 30, 2003, 2002 and 2001, the Company
provided for matching contributions totaling $303,000, $240,000
and $284,000, respectively.



| |                              
| | -----------------------------
| | Employee Stock Ownership Plan

The IPS Employee Stock Ownership Plan
(ESOP) enables eligible employees of IPS to share in
the growth of the Company through the acquisition of the
Companys common stock. The ESOP provides for the Company,
at its discretion, to make contributions of up to 10% of each
participants base salary. The amount of compensation
expense related to the ESOP is based upon the cash contributions
to the ESOP made by the Company. The Companys expense for
the ESOP was $36,000 in fiscal 2003, $73,000 in fiscal 2002 and
$94,000 in fiscal 2001. A total of 163,864, 197,297 and 194,610
allocated shares of the Companys common stock were held by
the ESOP at June 30, 2003, 2002 and 2001, respectively.



| |         
| | --------
| | Warrants

In connection with the Companys merger with
Visionics (see Note 2), all warrants to purchase shares of
Visionics common stock outstanding immediately prior to the
consummation of the merger were converted into warrants to
purchase 635,211 shares of the Companys common stock at
exercise prices ranging from $1.24 per share to $12.55 per
share. All the warrants issued are immediately exercisable and
expire at various dates through October 23, 2006. As of
June 30, 2003 and 2002 the above warrants to purchase
410,860, 142,344 and 82,007 shares of common stock had per share
exercise prices ranging from $1.24 to $1.40, from $4.22 to $5.82
and from $9.83 to $12.55, respectively.

In connection with the private placement of the
Companys common stock in July 1999, the Company issued to
the investors warrants to purchase 905,798 shares of common
stock for $11.33 per share until January 1, 2001 and an
additional 362,319 shares at $11.18 per share until July 1,
2004. The Company also issued a fully exercisable warrant on
July 1, 1999 to purchase 33,186 shares of common stock for
$10.85 per share to the broker who arranged the private
placement. In April 2000, warrants to purchase 905,798 of the
Companys common shares at $11.33 per share were exercised.
The Company received net cash proceeds of $10,263,000. At
June 30, 2003 and 2002 these warrants were still
outstanding.

In connection with the private placement of the
Companys Series A Convertible Preferred Stock, the
Company issued to the investor a warrant to purchase 187,647
shares of the Companys common stock at $17.11 per share.
The warrant is immediately exercisable and expires on
July 7, 2005. The Company determined the fair value of the
warrant using the Black-Scholes option pricing model and, based
on the net cash proceeds received from the sales of
Series A Preferred Stock the relative fair value of the
warrant totaled $1,259,000. At June 30, 2003 and 2002 this
warrant was still outstanding.

Note 10  Related Party
Transactions

A member of the Board of Directors presently
serves as chairman of the board of, and owns 38% of Integrated
Manufacturing Solutions, Inc., (IMS), a manufacturer
of integrated circuit boards that provides manufacturing
services to the Company. IMS billed the Company approximately
$82,000, $1,076,000 and $1,620,000 in fiscal 2003, 2002 and
2001, respectively. Amounts outstanding to IMS at June 30,
2003 and 2002 were approximately $0 and $48,000, respectively.

The Company purchases certain complete biometric
security products, research and development, engineering and
administrative services from International Technology Concepts,
Inc. (IT Concepts). Two former officers and
shareholders of the Company are directors, officers and
principal shareholders of IT Concepts. IT Concepts billed the
Company approximately $1,173,000 in fiscal 2003, $5,263,000 in
fiscal 2002

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IDENTIX INCORPORATED


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

and $3,672,000 in fiscal 2001. Amounts
outstanding to IT Concepts at June 30, 2003 and 2002 were
approximately $61,000 and $43,000, respectively.

Note 11  Income
Taxes

The following is a reconciliation between the
statutory federal income tax rate and the provision for income
taxes:

|                                                   |  |                            |             |      |  |      |             |   |  |   |             |  
|-------------------------------------------------- |  | -------------------------- | ----------- | ---- |  | ---- | ----------- | - |  | - | ----------- | -
|                                                   |  |                           
|                                                   |  | Fiscal year ended June 30,
|                                                   |  |                           
|                                                   |  | 2003                       |             | 2002 |  | 2001
|                                                   |  |                            |             |      |  |     
|Federal tax at statutory rate                      |  | $                          | (65,418,000 | )    |  | $    | (18,833,000 | ) |  | $ | (10,037,000 | )
|State tax, net of federal benefit                  |  |                            | 632,000     |      |  |      | (1,924,000  | ) |  |   | (1,181,000  | )
|Non-deductible preferred stock and warrant expense |  |                            |            |      |  |      |            |   |  |   | 428,000     |  
|Stock-based compensation                           |  |                            | 647,000     |      |  |      | 239,000     |   |  |   |            |  
|Goodwill amortization                              |  |                            |            |      |  |      |            |   |  |   | 1,257,000   |  
|Goodwill impairment                                |  |                            | 54,180,000  |      |  |      |            |   |  |   |            |  
|Change in valuation allowance                      |  |                            | 10,348,000  |      |  |      | 18,634,000  |   |  |   | 9,513,000   |  
|In-process research and development write-off      |  |                            |            |      |  |      | 2,176,000   |   |  |   |            |  
|Other                                              |  |                            | (208,000    | )    |  |      | (246,000    | ) |  |   | 20,000      |  
|                                                   |  |                            |             |      |  |      |             |   |  |   |             |  
|                                                   |  | $                          | 181,000     |      |  | $    | 46,000      |   |  | $ |            |  
|                                                   |  |                            |             |      |  |      |             |   |  |   |             |  

Deferred tax assets (liabilities) comprise
the following:

|                                                |                                |          |             |            |   |   |             |             |  
|----------------------------------------------- | ------------------------------ | -------- | ----------- | ---------- | - | - | ----------- | ----------- | -
|                                                |                                |         
|                                                |                                | June 30,
|                                                |                                |         
|                                                |                                | 2003     |             | 2002      
|                                                |                                |          |             |           
|Net operating loss and tax credit carryforwards |                                | $        | 67,447,000  |            |   | $ | 55,996,000  |            
|Inventory reserve and basis differences         |                                |          | 7,041,000   |            |   |   | 9,108,000   |            
|Depreciation and amortization                   |                                |          |            |            |   |   | 661,000     |            
|Accounts receivable and related allowances      |                                |          | 1,082,000   |            |   |   | 1,108,000   |            
|Deferred revenue                                |                                |          | 2,644,000   |            |   |   | 2,148,000   |            
|Tax credits                                     |                                |          | 3,021,000   |            |   |   | 3,088,000   |            
|Other                                           |                                |          | 406,000     |            |   |   | 227,000     |            
|                                                |                                |          |             |            |   |   |             |            
|                                                | Gross deferred tax assets      |          |             | 81,641,000 |   |   |             | 72,336,000  |  
|Valuation allowance                             |                                |          | (72,212,000 | )          |   |   | (61,864,000 | )          
|                                                |                                |          |             |            |   |   |             |            
|                                                | Net deferred assets            |          |             | 9,429,000  |   |   |             | 10,472,000  |  
|                                                |                                |          |             |            |   |   |             |            
|Unbilled accounts receivable                    |                                |          | (2,130,000  | )          |   |   | (1,602,000  | )          
|Acquired intangibles                            |                                |          | (7,299,000  | )          |   |   | (8,870,000  | )          
|                                                |                                |          |             |            |   |   |             |            
|                                                | Gross deferred tax liabilities |          |             | (9,429,000 | ) |   |             | (10,472,000 | )
|                                                |                                |          |             |            |   |   |             |            
|                                                | Total net deferred tax asset   |          | $           |           |   |   | $           |            |  
|                                                |                                |          |             |            |   |   |             |            

The Company has a valuation allowance of
$72,212,000 as of June 30, 2003. Based upon the results of
the current year operations, the Companys projected
operating results, and all other available objective
information, the Companys management does not believe that
sufficient future taxable income will be generated to realize
all of the net deferred tax assets. Included in the valuation
allowance as of June 30, 2003

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IDENTIX INCORPORATED


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

and 2002 are tax benefits attributable to
non-compensatory stock options of $3,715,000 and $2,381,000,
respectively, which when realized, will be a credit to
additional paid-in-capital.

The Company has federal net operating loss
carryforwards of approximately $184,900,000 and $156,674,000 as
of June 30, 2003 and June 30, 2002, respectively,
which may be available to reduce future taxable income. As of
June 30, 2003 and 2002, the Company has state net operating
loss carryforwards of approximately $37,300,000 and $67,740,000,
respectively. These carryforwards begin to expire from 2004
through 2024. For federal and state tax purposes, the
Companys net operating loss carryforwards may be subject
to certain limitations on annual utilization in the event of
changes in ownership, as defined by federal and state law.

As of June 30, 2003 and 2002, the Company
has federal research and experimentation credit carryforwards of
approximately $2,680,000 and $2,684,000, respectively, which
begin to expire from 2004 to 2022. The Company also has state
research and experimentation tax credit carryforwards of
approximately $450,000 as of June 30, 2003, which will be
carried forward indefinitely.

Note 12  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. Reportable
segment information for periods prior to July 1, 2002 has
been restated to conform to the current organization. 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.

|                                          |                                       |                            |            |            |   |      |            |            |   |   |            |            |  
|----------------------------------------- | ------------------------------------- | -------------------------- | ---------- | ---------- | - | ---- | ---------- | ---------- | - | - | ---------- | ---------- | -
|                                          |                                       |                           
|                                          |                                       | Fiscal Year Ended June 30,
|                                          |                                       |                           
|                                          |                                       | 2003                       |            | 2002       |   | 2001
|                                          |                                       |                            |            |            |   |     
|Total revenues:                           |                                       |                            |            |            |   |      |            |            |   |   |            |           
|                                          | Product  from external customers     |                            | $          | 51,662,000 |   |      | $          | 28,399,000 |   |   | $          | 35,061,000 |  
|                                          | Services  from external customers    |                            |            | 43,857,000 |   |      |            | 46,974,000 |   |   |            | 50,561,000 |  
|                                          | Elimination of inter-segment revenues |                            |            | (3,005,000 | ) |      |            | (2,183,000 | ) |   |            | (3,794,000 | )
|                                          |                                       |                            |            |            |   |      |            |            |   |   |            |           
|                                          |                                       | $                          | 92,514,000 |            |   | $    | 73,190,000 |            |   | $ | 81,828,000 |           
|                                          |                                       |                            |            |            |   |      |            |            |   |   |            |           
|Depreciation and amortization:            |                                       |                            |            |            |   |      |            |            |   |   |            |           
|                                          | Products                              |                            | $          | 7,803,000  |   |      | $          | 2,853,000  |   |   | $          | 4,913,000  |  
|                                          | Services                              |                            |            | 477,000    |   |      |            | 634,000    |   |   |            | 738,000    |  
|                                          |                                       |                            |            |            |   |      |            |            |   |   |            |           
|                                          |                                       | $                          | 8,280,000  |            |   | $    | 3,487,000  |            |   | $ | 5,651,000  |           
|                                          |                                       |                            |            |            |   |      |            |            |   |   |            |           
|Interest and other income (expense), net: |                                       |                            |            |            |   |      |            |            |   |   |            |           
|                                          | Products                              |                            | $          | 1,849,000  |   |      | $          | 914,000    |   |   | $          | 1,045,000  |  
|                                          | Services                              |                            |            | 35,000     |   |      |            | 35,000     |   |   |            | 391,000    |  
|                                          |                                       |                            |            |            |   |      |            |            |   |   |            |           
|                                          |                                       | $                          | 1,884,000  |            |   | $    | 949,000    |            |   | $ | 1,436,000  |           
|                                          |                                       |                            |            |            |   |      |            |            |   |   |            |           
|Capital expenditures:                     |                                       |                            |            |            |   |      |            |            |   |   |            |           
|                                          | Products                              |                            | $          | 1,313,000  |   |      | $          | 1,041,000  |   |   | $          | 3,193,000  |  
|                                          | Services                              |                            |            | 80,000     |   |      |            | 2,251,000  |   |   |            | 761,000    |  
|                                          |                                       |                            |            |            |   |      |            |            |   |   |            |           
|                                          |                                       | $                          | 1,393,000  |            |   | $    | 3,292,000  |            |   | $ | 3,954,000  |           
|                                          |                                       |                            |            |            |   |      |            |            |   |   |            |           

77



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IDENTIX INCORPORATED


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

|                      |          |                            |              |              |   |      |             |             |   |   |             |             |  
|--------------------- | -------- | -------------------------- | ------------ | ------------ | - | ---- | ----------- | ----------- | - | - | ----------- | ----------- | -
|                      |          |                           
|                      |          | Fiscal Year Ended June 30,
|                      |          |                           
|                      |          | 2003                       |              | 2002         |   | 2001
|                      |          |                            |              |              |   |     
|Loss from operations: |          |                            |              |              |   |      |             |             |   |   |             |            
|                      | Product  |                            | $            | (184,654,000 | ) |      | $           | (50,029,000 | ) |   | $           | (26,650,000 | )
|                      | Services |                            |              | (4,123,000   | ) |      |             | (6,641,000  | ) |   |             | (2,554,000  | )
|                      |          |                            |              |              |   |      |             |             |   |   |             |            
|                      |          | $                          | (188,777,000 | )            |   | $    | (56,670,000 | )           |   | $ | (29,204,000 | )          
|                      |          |                            |              |              |   |      |             |             |   |   |             |            

|                     |          |          |             |             |  |   |             |             | 
|-------------------- | -------- | -------- | ----------- | ----------- |  | - | ----------- | ----------- | 
|                     |          |         
|                     |          | June 30,
|                     |          |         
|                     |          | 2003     |             | 2002       
|                     |          |          |             |            
|Identifiable assets: |          |          |             |             |  |   |             |            
|                     | Product  |          | $           | 235,719,000 |  |   | $           | 419,689,000 | 
|                     | Services |          |             | 9,551,000   |  |   |             | 11,566,000  | 
|                     |          |          |             |             |  |   |             |            
|                     |          | $        | 245,270,000 |             |  | $ | 431,255,000 |            
|                     |          |          |             |             |  |   |             |            

Note 13  Foreign Operations
Data

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

|                |               |                            |            |            |  |      |            |            |  |   |            |            | 
|--------------- | ------------- | -------------------------- | ---------- | ---------- |  | ---- | ---------- | ---------- |  | - | ---------- | ---------- | 
|                |               |                           
|                |               | Fiscal Year Ended June 30,
|                |               |                           
|                |               | 2003                       |            | 2002       |  | 2001
|                |               |                            |            |            |  |     
|Total revenues: |               |                            |            |            |  |      |            |            |  |   |            |           
|                | North America |                            | $          | 87,589,000 |  |      | $          | 69,587,000 |  |   | $          | 78,123,000 | 
|                | International |                            |            | 4,925,000  |  |      |            | 3,603,000  |  |   |            | 3,705,000  | 
|                |               |                            |            |            |  |      |            |            |  |   |            |           
|                |               | $                          | 92,514,000 |            |  | $    | 73,190,000 |            |  | $ | 81,828,000 |           
|                |               |                            |            |            |  |      |            |            |  |   |            |           

|                     |               |          |             |             |  |   |             |             | 
|-------------------- | ------------- | -------- | ----------- | ----------- |  | - | ----------- | ----------- | 
|                     |               |         
|                     |               | June 30,
|                     |               |         
|                     |               | 2003     |             | 2002       
|                     |               |          |             |            
|Identifiable assets: |               |          |             |             |  |   |             |            
|                     | North America |          | $           | 244,115,000 |  |   | $           | 430,431,000 | 
|                     | International |          |             | 1,155,000   |  |   |             | 824,000     | 
|                     |               |          |             |             |  |   |             |            
|                     |               | $        | 245,270,000 |             |  | $ | 431,255,000 |            
|                     |               |          |             |             |  |   |             |            

Note 14  Commitments

The Company currently occupies its 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.

78



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IDENTIX INCORPORATED


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Future minimum lease payments for operating
leases are as follows:

|                            |       |   |           |            | 
|--------------------------- | ----- | - | --------- | ---------- | 
|Fiscal year ending June 30: |       |   |           |           
|2004                        |       | $ | 7,332,000 |           
|2005                        |       |   | 7,656,000 |           
|2006                        |       |   | 6,994,000 |           
|2007                        |       |   | 6,481,000 |           
|2008                        |       |   | 3,981,000 |           
|Thereafter                  |       |   | 6,617,000 |           
|                            |       |   |           |           
|                            | Total |   | $         | 39,061,000 | 
|                            |       |   |           |           

Included in the above future minimum payments is
$10,857,000 related to two leased facilities in Northern
California that were vacated in connection the Companys
merger with Visionics. In fiscal year 2003 the Company has
recorded a charge of $4,940,000 representing the future lease
costs, net of estimated sublease income, primarily related to
excess leased facilities at its Fairfax, Virginia facility. (See
Note 3 of the Consolidated Financial Statements).

Rent expense is recorded on a straight-line basis
over the term of the individual lease. Total rental expense
under operating leases was $5,428,000, $4,786,000 and $2,550,000
for the years ended June 30, 2003, 2002 and 2001,
respectively.



|          |                                                        
|--------- | -------------------------------------------------------
|Note 15  | Indemnification Arrangements and Product
    Warranties

As part of the Visionics acquisition in June
2002, the Company undertook, and assumed from Visionics,
obligations to indemnify the officers and directors of the
acquired company for certain events or occurrences while the
officer or director served in such capacity. The maximum
potential amount of future payments the Company could be
required to make under this indemnification obligation is
unlimited; however, the Company has purchased a directors
and officers insurance policy to cover former directors
and officers of Visionics that provides coverage until
June 25, 2007 and may enable us to recover a portion of any
future amounts paid. Assuming the applicability of the coverage
and the willingness of the insurer to assume coverage and
subject to certain retention, loss limits and other policy
provisions and except as provided below, the Company believe the
estimated fair value of the indemnification obligations to
Visionics directors and officers is not material. However,
no assurances can be given that the covering insurers will not
attempt to dispute the validity, applicability or amount of
coverage without expensive and time-consuming litigation against
the insurers.

From time to time, the Company agrees to
indemnify its customers against liability if the Companys
products infringe a third partys intellectual property
rights.

The Company offers a warranty on various products
and services. The Company estimates the costs that may be
incurred under its warranties and records a liability in the
amount of such costs at the time the product is sold. Factors
that affect the Companys warranty liability include the
number of units sold, historical and anticipated rates of
warranty claims and cost per claim. The Company periodically
assesses the adequacy of its recorded warranty liabilities and
adjusts the amounts as necessary. The amount of the reserve
recorded is

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IDENTIX INCORPORATED


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

equal to the costs to repair or otherwise satisfy
the claim. The following table presents changes in the
Companys warranty liability during fiscal year 2003:

|                         |  |   |          |  
|------------------------ |  | - | -------- | -
|Balance at July 1, 2002  |  | $ | 306,000  |  
|Warranty Expense         |  |   | 353,000  |  
|Closed Warranty Claims   |  |   | (285,000 | )
|                         |  |   |          |  
|Balance at June 30, 2003 |  | $ | 374,000  |  
|                         |  |   |          |  

Note 16  Recent Accounting
Pronouncements

In May 2003, the Financial Accounting Standards
Board (FASB) issued Statement of Financial
Accounting Standards (SFAS) No. 150,
Accounting For Certain Financial Instruments with
Characteristics of both Liabilities and Equity. This
Statement establishes standards for how an issuer classifies and
measures certain financial instruments with characteristics of
both liabilities and equity. It requires that an issuer classify
a financial instrument that is within its scope as a liability
(or an asset in some circumstances). Many of those instruments
were previously classified as equity. SFAS No. 150 will be
effective for the Company for financial instruments entered into
or modified after May 31, 2003 and otherwise will be
effective for all existing financial instruments at the
beginning of the first interim period beginning after
June 15, 2003. Management believes the adoption of SFAS
No. 150 will not have a material impact on either the
Companys financial position or results of operations.

Note 17  Quarterly
Consolidated Financial Data (Unaudited)

The following tables present certain unaudited
consolidated quarterly financial information for each of the
eight quarters ended June 30, 2003. In the opinion of the
Companys management, this quarterly information has been
prepared on the same basis as the consolidated financial
statements and includes all adjustments (consisting only of
normal recurring adjustments) necessary to present fairly the
unaudited quarterly results.

In thousands, except share and per share amounts:

|                                                                                        |  |                |            |              |  |           |            |          |  |          |            |   |  |   |            |   |  |   |            |  
|--------------------------------------------------------------------------------------- |  | -------------- | ---------- | ------------ |  | --------- | ---------- | -------- |  | -------- | ---------- | - |  | - | ---------- | - |  | - | ---------- | -
|                                                                                        |  |               
|                                                                                        |  | Quarters Ended
|                                                                                        |  |               
|                                                                                        |  | September 30,  |            | December 31, |  | March 31, |            | June 30, |  |         
|                                                                                        |  | 2002           |            | 2002         |  | 2003      |            | 2003(a)  |  | Total(a)
|                                                                                        |  |                |            |              |  |           |            |          |  |         
|Revenues                                                                                |  | $              | 25,062     |              |  | $         | 22,516     |          |  | $        | 21,805     |   |  | $ | 23,131     |   |  | $ | 92,514     |  
|Gross profit                                                                            |  |                | 4,913      |              |  |           | 4,948      |          |  |          | 5,816      |   |  |   | 6,113      |   |  |   | 21,790     |  
|Net loss                                                                                |  | $              | (14,199    | )            |  | $         | (7,552     | )        |  | $        | (6,510     | ) |  | $ | (159,113   | ) |  | $ | (187,374   | )
|Basic and diluted net loss per share                                                    |  | $              | (0.17      | )            |  | $         | (0.09      | )        |  | $        | (0.08      | ) |  | $ | (1.86      | ) |  | $ | (2.20      | )
|Weighted average common shares used in basic and
    diluted loss per share computation |  |                | 84,801,000 |              |  |           | 85,124,000 |          |  |          | 85,393,000 |   |  |   | 85,663,000 |   |  |   | 85,242,000 |  



---



|    |                                                                                                       
|--- | ------------------------------------------------------------------------------------------------------
|(a) | Includes a write-off of $154,799,000 that is
    related to the impairment of goodwill in fiscal 2003.

80



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IDENTIX INCORPORATED


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

|                                                                                        |  |                |            |              |  |           |            |          |  |          |            |   |  |   |            |   |  |   |            |  
|--------------------------------------------------------------------------------------- |  | -------------- | ---------- | ------------ |  | --------- | ---------- | -------- |  | -------- | ---------- | - |  | - | ---------- | - |  | - | ---------- | -
|                                                                                        |  |               
|                                                                                        |  | Quarters Ended
|                                                                                        |  |               
|                                                                                        |  | September 30,  |            | December 31, |  | March 31, |            | June 30, |  |         
|                                                                                        |  | 2001           |            | 2001         |  | 2002      |            | 2002(b)  |  | Total(b)
|                                                                                        |  |                |            |              |  |           |            |          |  |         
|Revenues                                                                                |  | $              | 16,764     |              |  | $         | 19,512     |          |  | $        | 19,232     |   |  | $ | 17,682     |   |  | $ | 73,190     |  
|Gross profit                                                                            |  |                | 2,746      |              |  |           | 3,703      |          |  |          | 2,989      |   |  |   | 2,349      |   |  |   | 11,787     |  
|Net loss                                                                                |  | $              | (8,477     | )            |  | $         | (6,203     | )        |  | $        | (7,464     | ) |  | $ | (33,294    | ) |  | $ | (55,438    | )
|Basic and diluted net loss per share                                                    |  | $              | (0.23      | )            |  | $         | (0.16      | )        |  | $        | (0.17      | ) |  | $ | (0.72      | ) |  | $ | (1.33      | )
|Weighted average common shares used in basic and
    diluted loss per share computation |  |                | 36,629,000 |              |  |           | 37,824,000 |          |  |          | 44,814,000 |   |  |   | 46,129,000 |   |  |   | 41,609,000 |  



---



|    |                                                                                                                                                                                                                                                                                   
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(b) | Identix merger with Visionics was completed
    on June 25, 2002. Thus, Identix consolidated results
    of operations for the fourth quarter and year ended
    June 30, 2002 reflect Visionics results of operations
    for only the final three business days of June 2002.

Item 9. Changes in and
Disagreements with Accountants on Accounting and Financial
Disclosure

None.

Item 9A. Controls and
Procedures

Evaluation of Disclosure Controls and
Procedures.Based on their evaluation
as of the end of the period covered by this Annual Report on
Form 10-K, our chief executive officer and chief financial
officer have concluded that our disclosure controls and
procedures (as defined in Rules 13a-15(e) and 15d-15(e) of
the Securities Exchange Act of 1934) are effective to ensure
that information required to be disclosed by us in reports that
we file or submit under the Securities Exchange Act of 1934 is
recorded, processed, summarized and reported within the time
periods specified in Securities and Exchange Commission rules
and forms.

Changes in Internal Control Over Financial
Reporting.There were no changes in
our internal control over financial reporting identified in
connection with our evaluation that occurred during our fourth
fiscal quarter that have materially affected, or are reasonably
likely to materially affect, our internal control over financial
reporting.






PART III


Item 10.     Directors
and Executive Officers of the Registrant

The information required by this Item with
respect to executive officers is set forth in Part I of
this Annual Report on Form 10-K and the information with
respect to the directors is incorporated by reference to the
information set forth under the caption Election of
Directors in the proxy statement to be used in connection
with the 2003 Annual Meeting of the Stockholders (the
Proxy Statement).

Item 11.     Executive
Compensation

The information required by this Item is
incorporated by reference to the information set forth under the
caption Executive Compensation in the Proxy
Statement.

81



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|         |                                                                                                       
|-------- | ------------------------------------------------------------------------------------------------------
|Item 12. | Security Ownership of Certain Beneficial
    Owners and Management and Related Stockholder
    Matters

The information required by this Item is
incorporated by reference to the information set forth under the
caption Security Ownership of Certain Beneficial Owners
and Management and Related Stockholder Matters in the
Proxy Statement.






Item 13.     Certain
Relationships and Related Transactions


The information required by this Item is
incorporated by reference to the information set forth under the
caption Certain Transactions and Employment
Agreements in the Proxy Statement.






PART IV


Item 14. Exhibits, Financial
Statement Schedules, and Reports on Form 8-K

(a) 1     Financial
Statements.

The information required by this Item appears in
Item 8 of this Annual Report on Form 10-K.

(a) 2     Financial
Statement Schedules

Schedule II  Valuation and
Qualifying Accounts and Reserves

(a) 3     Exhibits.

|        |      |             |  |                                                                                                                                                                                                                                                                   
|------- | ---- | ----------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |      |            
|Number  |      | Description
|        |      |            
|        | 2.0  |             |  | Agreement and Plan of Merger dated as of
    February 22, 2002 by and among Identix, Visionics
    Corporation and Viper Acquisition Corporation (incorporated by
    reference to the February 22, 2002 Form 8-K)                                                
|        | 3.1  |             |  | Certificate of Incorporation (incorporated by
    reference to the December 16, 1998 Form 8-K)                                                                                                                                                                    
|        | 3.2  |             |  | Amended and Restated Bylaws (incorporated by
    reference to the May 15, 2002 Form 10-Q)                                                                                                                                                                         
|        | 4.1  |             |  | Registration Rights Agreement dated June 30,
    1999 (incorporated by reference to the registration statement on
    Form S-3, no. 333-82239, filed July 2, 1999)                                                                                                
|        | 4.2  |             |  | Form of Series I Warrant (incorporated by
    reference to the registration statement on Form S-3,
    no. 333-82239, filed July 2, 1999)                                                                                                                         
|        | 4.3  |             |  | Warrant dated June 29, 2001 between
    Visionics Corporation and Morgan Keegan, Inc. (incorporated by
    reference to the post-effective amendment no. 1 to the
    registration statement on Form S-4, no. 333-84428,
    filed September 5, 2002)             
|        | 4.4  |             |  | Warrant dated October 11, 2001 between
    Visionics Corporation and Morgan Keegan & Company, Inc.
    (incorporated by reference to the post effective amendment
    no. 1 to the registration statement on Form S-4,
    no. 333-84428, filed September 5, 2002)
|        | 4.5  |             |  | Warrant dated October 24, 2001 between
    Visionics Corporation and Thomas Pierce (incorporated by
    reference to the post-effective amendment no. 1 to the
    registration statement on Form S-4, no. 333-84428,
    filed September 5, 2002)                
|        | 4.6  |             |  | Form of Warrant dated January 8, 1999
    (incorporated by reference to the post-effective amendment
    no. 1 to the registration statement on Form S-4,
    no. 333-84428, filed September 5, 2002)                                                             
|        | 4.7  |             |  | Form of Warrant dated June 28, 2001
    (incorporated by reference to the post effective amendment
    no. 1 to the registration statement on Form S-4,
    no. 333-84428, filed September 5, 2002)                                                               
|        | 4.8  |             |  | Securities Purchase Agreement between Identix and
    Motorola, Inc., dated July 2000 (incorporated by reference
    to the September 26, 2000 Form 10-K)                                                                                                         
|        | 4.9  |             |  | Certificate of Designation of Series A
    Preferred Stock of Identix (incorporated by reference to the
    September 26, 2000 Form 10-K)                                                                                                                         
|        | 4.10 |             |  | Information and Registration Rights Agreement
    between Identix and Motorola, Inc., dated July 7, 2000
    (incorporated by reference to the September 26, 2000
    Form 10-K)                                                                                  

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|        |       |             |  |                                                                                                                                                                                                                                                        
|------- | ----- | ----------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |       |            
|Number  |       | Description
|        |       |            
|        | 4.11  |             |  | Warrant to Purchase 187,647 Shares of Identix
    Common Stock, dated July 6, 2000 (incorporated by reference
    to the September 26, 2000 Form 10-K)                                                                                                 
|        | 4.12  |             |  | Common Stock Purchase Agreement between Identix
    and VeriSign Capital Management, Inc., dated December 22,
    2000 (incorporated by reference to the February 14, 2001
    Form 10-Q)                                                              
|        | 4.13  |             |  | Share Purchase Agreement between Identix and
    State of Wisconsin Investment Board, dated, June 11, 2001
    (incorporated by reference to the registration statement on
    Form S-3, no. 333-63306, filed June 19, 2001)                           
|        | 4.14  |             |  | Form of Common Stock Purchase Agreement dated
    November 30, 2001 (incorporated by reference to the
    September 28, 2001 Form 10-K)                                                                                                                
|        | 10.1  |             |  | Identix 1983 Incentive Stock Option Plan and form
    of Incentive Stock Option Agreement and Non-Statutory Stock
    Option Agreement (incorporated by reference to Identix
    registration statement no. 29-95551)                                 
|        | 10.2  |             |  | ANADAC 1984 Incentive Stock Option Plan and forms
    of Incentive Stock Option Agreement and Non-Statutory Stock
    Option Agreement (incorporated by reference to Identix
    registration statement 33-55074)                                     
|        | 10.3  |             |  | Identix 1992 Employee Stock Option Plan, and
    forms of Incentive Stock Option Agreement and Non-Qualified
    Stock Option Agreement (incorporated by reference to the
    registration statement on Form S-8, no. 333-77803,
    filed May 5, 1999)
|        | 10.4  |             |  | Amendment to Identix 1992 Employee Stock Option
    Plan, dated June 18, 2001 (incorporated by reference to the
    September 28, 2001 Form 10-K)                                                                                                      
|        | 10.5  |             |  | Second Amendment to Identix 1992 Employee Stock
    Option Plan, dated January 29, 2002 (incorporated by
    reference to the May 15, 2002 Form 10-Q)                                                                                                  
|        | 10.6  |             |  | Identix 1995 Equity Incentive Plan, as amended
    June 18, 2001 and January 29, 2002 (incorporated by
    reference to the May 15, 2002 Form 10-Q)                                                                                                    
|        | 10.7  |             |  | Identix 1995 Non-employee Directors Stock Option
    Plan, as amended June 18, 2001 and January 29, 2002
    (incorporated by reference to the May 15, 2002
    Form 10-Q)                                                                             
|        | 10.8  |             |  | Identix New Employee Stock Incentive Plan, as
    amended June 18, 2001 and January 29, 2002
    (incorporated by reference to the May 15, 2002
    Form 10-Q)                                                                                         
|        | 10.9  |             |  | Identix 2002 Equity Incentive Plan (incorporated
    by reference to the registration statement on Form S-8,
    no. 333-91858, filed July 7, 2002)                                                                                                    
|        | 10.10 |             |  | Visionics Corporation 1990 Stock Option Plan
    (incorporated by reference to the registration statement on
    Form S-8, no. 333-91858, filed July 7, 2002)                                                                                          
|        | 10.11 |             |  | Visionics Corporation 1998 Stock Option Plan
    (incorporated by reference to the registration statement on
    Form S-8, no. 333-91858, filed July 7, 2002)                                                                                          
|        | 10.12 |             |  | Visionics Corporation Stock Incentive Plan
    (incorporated by reference to the registration statement on
    Form S-8, no. 333-91858, filed July 7, 2002)                                                                                            
|        | 10.13 |             |  | Employee Stock Purchase Plan (incorporated by
    reference to the registration statement on Form S-8,
    no. 333-69141, filed December 17, 1998)                                                                                                     
|        | 10.14 |             |  | Foreign Subsidiary Employee Stock Purchase Plan
    (incorporated by reference to the registration statement on
    Form S-8, no. 333-69141, filed December 17, 1998)                                                                                  
|        | 10.15 |             |  | Subcontract between ANADAC and Advanced
    Engineering and Research Associates, Inc., dated August 25,
    2000 (incorporated by reference to the September 28, 2001
    Form 10-K)                                                                   
|        | 10.16 |             |  | Deed of Lease between Brit Limited Partnership
    and Anadac, Inc. dated September 28, 2000 (incorporated by
    reference to the May 15, 2002 Form 10-Q)                                                                                             
|        | 10.17 |             |  | Standard Industrial Commercial Multi-Tenant Lease
    between Identix and Vasona Business Park, dated December 8,
    2000 (incorporated by reference to the February 14, 2001
    Form 10-Q)                                                          
|        | 10.18 |             |  | Office Building Lease between Identix and Pacific
    Gulf Properties Inc., dated July 19, 2000, as amended
    December 12, 2000 (incorporated by reference to the
    September 28, 2001 Form 10-K)                                                  

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|        |       |             |  |                                                                                                                                                                                                                                                 
|------- | ----- | ----------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |       |            
|Number  |       | Description
|        |       |            
|        | 10.19 |             |  | Office Lease between ANADAC and Federal Center
    Limited Partnership dated April 2, 1999, as amended
    December 1, 1999 and April 11, 2001 (incorporated by
    reference to the September 28, 2001 Form 10-K)                              
|        | 10.20 |             |  | Lease for the Minnetonka, Minnesota premises
    dated November 7, 1989 (incorporated by reference to
    Visionics Corporations registration statement on
    Form S-18, no. 33-36939C, dated December 6, 1990)                               
|        | 10.21 |             |  | Amendment to Lease for the Minnetonka, Minnesota
    premises dated March 11, 1996 (incorporated by reference to
    Visionics Corporations December 23, 1997
    Form 10-K)                                                                   
|        | 10.22 |             |  | Compensation Continuation Agreement between
    Identix and James P. Scullion, dated January 5, 2000
    (incorporated by reference to the March 31, 2000
    Form 10-Q)                                                                        
|        | 10.23 |             |  | Amendment No. 1 to Compensation Continuation
    Agreement between Identix and James P. Scullion, dated
    August 22, 2001 (incorporated by reference to the
    September 28, 2001 Form 10-K)                                                 
|        | 10.24 |             |  | Amendment No. 2 to Compensation Continuation
    Agreement between Identix and James P. Scullion, dated
    January 29, 2002 (incorporated by reference to the
    May 15, 2002 Form 10-Q)                                                      
|        | 10.25 |             |  | Form of Separation Agreement and Release between
    Identix and James P. Scullion (incorporated by reference to
    registration statement of Form S-4, no. 333-84428,
    filed May 15, 2002)                                                 
|        | 10.26 |             |  | Employment Agreement between Identix and Oscar
    Pieper, dated April 26, 1999 (incorporated by reference to
    the November 26, 2000 Form 10-Q)                                                                                              
|        | 10.27 |             |  | Employment Agreement between Identix and Grant
    Evans, dated April 26, 1999 (incorporated by reference to
    the November 26, 2000 Form 10-Q)                                                                                               
|        | 10.28 |             |  | Amendment No. 1 to Employment Agreement
    between Identix and Grant Evans, dated August 22, 2001
    (incorporated by reference to the September 28, 2001
    Form 10-K)                                                                      
|        | 10.29 |             |  | Amendment No. 2 to Employment Agreement between
    Identix and Grant Evans, dated October 25, 2001
    (incorporated by reference to the February 14, 2002
    Form 10-Q)                                                                      
|        | 10.30 |             |  | Compensation Agreement between ANADAC and
    Paul J. Bulger, dated May 11, 1999 (incorporated by
    reference to the September 28, 2001 Form 10-K)                                                                                            
|        | 10.31 |             |  | Employment Agreement between Identix and
    Daniel H. Dellegrotti, dated June 21, 2001
    (incorporated by reference to the September 28, 2001
    Form 10-K)                                                                                 
|        | 10.32 |             |  | Employment Agreement between Identix and Robert
    McCashin, dated October 19, 2000 and Option Agreement
    between Identix and Robert McCashin, dated October 19, 2000
    (incorporated by reference to the February 14, 2001
    Form 10-Q)
|        | 10.33 |             |  | Amendment No. 1 to Employment Agreement
    between Identix and Robert McCashin, dated August 22, 2001
    (incorporated by reference to the November 14, 2001
    Form 10-Q)                                                                   
|        | 10.34 |             |  | Form of Amendment No. 2 to Employment
    Agreement between Identix and Robert McCashin (incorporated by
    reference to the registration statement on Form S-4,
    no. 333-84428, filed April 25, 2002)                                      
|        | 10.35 |             |  | Employment Agreement between Identix and
    Erik E. Prusch, dated April 2, 2001 (incorporated by
    reference to the March 5, 2001 Form 10-Q)                                                                                                 
|        | 10.36 |             |  | Amendment No. 1 to Employment Agreement
    between Identix and Erik E. Prusch, dated August 22,
    2001 (incorporated by reference to the November 14, 2001
    Form 10-Q)                                                                    
|        | 10.37 |             |  | Secured Promissory Note dated October 5,
    2001 by Erik E. Prusch in favor of Identix (incorporated by
    reference to the February 14, 2002 Form 10-Q)                                                                                      
|        | 10.38 |             |  | Second Deed of Trust and Assignment of Rents
    dated October 5, 2001 between Erik E. Prusch, as
    Trustor, and Identix, as Beneficiary (incorporated by reference
    to the February 14, 2002 Form 10-Q)                                   
|        | 10.39 |             |  | Form of Indemnification Agreement between Identix
    and certain of its officers (incorporated by reference to the
    November 26, 2000 Form 10-Q)                                                                                            
|        | 10.40 |             |  | Employment Agreement between Identix and
    Mark S. Molina, dated August 22, 2001 (incorporated by
    reference to the November 14, 2001 Form 10-Q)                                                                                           

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|        |       |             |  |                                                                                                                                                                                                             
|------- | ----- | ----------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |       |            
|Number  |       | Description
|        |       |            
|        | 10.41 |             |  | Employment Agreement between Identix and
    Linda J. Howard, dated August 22, 2001 (incorporated
    by reference to the November 14, 2001 Form 10-Q)                                                      
|        | 10.42 |             |  | Employment Agreement between Identix and Sunday
    Lewis, dated August 22, 2001 (incorporated by reference to
    the November 14, 2001 Form 10-Q)                                                         
|        | 10.43 |             |  | Employment Agreement between Identix and
    Valerie J. Lyons, dated August 22, 2001 (incorporated
    by reference to the November 14, 2001 Form 10-Q)                                                     
|        | 10.44 |             |  | Form of Separation Agreement and Release between
    Identix and Valerie J. Lyons (incorporated by reference to
    the September 27, 2002 Form 10-K)                                                       
|        | 10.45 |             |  | Form of Employment Agreement between Identix and
    Joseph J. Atick (incorporated by reference to the
    registration statement on Form S-4, no. 333-84428,
    filed April 25, 2002)                     
|        | 10.46 |             |  | Loan and Security Agreement between Identix and
    Silicon Valley Bank, dated September 26, 2001 (incorporated
    by reference to the November 14, 2001 Form 10-Q)                                        
|        | 10.47 |             |  | Streamline Facility Agreement between Identix and
    Silicon Valley Bank, dated September 26, 2001 (incorporated
    by reference to the November 14, 2001 Form 10-Q)                                      
|        | 10.48 |             |  | Collateral Assignment, Patent Mortgage and
    Security Agreement between Identix and Silicon Valley Bank,
    dated September 26, 2001 (incorporated by reference to the
    November 14, 2001 Form 10-Q)  
|        | 10.49 |             |  | Amendment to Loan Documents dated March 28,
    2002 (incorporated by reference to the May 15, 2002
    Form 10-Q)                                                                                          
|        | 10.50 |             |  | Loan Agreement dated November 19, 2000
    between Visionics Corporation and Associated Bank Minnesota
    (incorporated by reference to Visionics Corporations
    December 8, 2000 Form 10-K)            
|        | 10.51 |             |  | Change in Terms Agreement dated December 19,
    2001 between Visionics Corporation and Associated Bank Minnesota
    (incorporated by reference to Visionics Corporations
    February 14, 2002 Form 10-Q)
|        | 10.52 |             |  | Business Loan Agreement dated December 19,
    2001 between Visionics Corporation and Associated Bank Minnesota
    (incorporated by reference to Visionics Corporations
    February 14, 2002 Form 10-Q)  
|        | 10.53 |             |  | Line of Credit Agreement dated May 30, 2003
    between Identix Corporation and Associated Bank Minnesota                                                                                                   
|        | 10.54 |             |  | Employment Agreement between Identix and
    James H. Moar, dated as of April 14, 2003                                                                                                                      
|        | 21.1  |             |  | Subsidiaries of Identix                                                                                                                                                                                     
|        | 23.1  |             |  | Consent of Independent Accountants                                                                                                                                                                          
|        | 31.1  |             |  | 302 Certification by the Chief Executive Officer                                                                                                                                                            
|        | 31.2  |             |  | 302 Certification by the Chief Financial Officer                                                                                                                                                            
|        | 32    |             |  | 906 Certifications                                                                                                                                                                                          

(b) Reports on Form 8-K:

During the fiscal year ended June 30, 2003,
the following report on Form 8-K was furnished:

Report on Form 8-K dated April 24,
2003, disclosing material non-public information regarding its
results of operations for the quarter ended March 31, 2003.

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SIGNATURES


Pursuant to the requirements of Section 13
or 15(d) of the Securities Exchange Act of 1934, the Registrant,
Identix Incorporated, a corporation organized and existing under
the laws of the State of Delaware, has duly caused this report
to be signed on its behalf by the undersigned thereunto duly
authorized, in the City of Minnetonka, State of Minnesota, on
the 12th day of September 2003.



| |                     
| | --------------------
| | IDENTIX INCORPORATED



| |     |                    
| | --- | -------------------
| | By: | /s/ JOSEPH J. ATICK

| |                                     
| | ------------------------------------
| |                                     
| | Joseph J. Atick                     
| | Chief Executive Officer and Director






POWER OF ATTORNEY


KNOW ALL PERSONS BY THESE PRESENTS, that each
person whose signature appears below constitutes and appoints
Joseph J. Atick and Mark S. Molina, jointly and
severally, his attorneys-in-fact, each with the power of
substitution, for him in any and all capacities, to sign any
amendments to the Annual Report for the fiscal year ended
June 30, 2003 on Form 10-K and to file the same, with
exhibits thereto and other documents in connection therewith,
with the Securities and Exchange Commission, hereby ratifying
and confirming all that each of said attorneys-in-fact, or his
substitute or substitutes, may do or cause to be done by virtue
hereof.

Pursuant to the requirements of the Securities
Exchange Act of 1934, this Annual Report on Form 10-K has
been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.

|                                     |  |                                                                      |  |                   
|------------------------------------ |  | -------------------------------------------------------------------- |  | ------------------
|Signature                            |  | Title                                                                |  | Date              
|                                     |  |                                                                      |  |                   
|                                    
|/s/ JOSEPH J. ATICKJoseph J. Atick   |  | President and Chief Executive Officer (Chief
    Executive Officer)  |  | September 12, 2003
|                                    
|/s/ ERIK E. PRUSCHErik E. Prusch     |  | Chief Financial Officer (Chief Financial and
    Accounting Officer) |  | September 12, 2003
|                                    
|/s/ ROBERT MCCASHINRobert McCashin   |  | Chairman                                                             |  | September 12, 2003
|                                    
|/s/ MILTON E. COOPERMilton E. Cooper |  | Director                                                             |  | September 12, 2003
|                                    
|/s/ MALCOM J. GUDISMalcolm J. Gudis  |  | Director                                                             |  | September 12, 2003
|                                    
|/s/ JOHN E. HAUGOJohn E. Haugo       |  | Director                                                             |  | September 12, 2003
|                                    
|/s/ JOHN E. LAWLERJohn E. Lawler     |  | Director                                                             |  | September 12, 2003

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|                                       |  |          |  |                   
|-------------------------------------- |  | -------- |  | ------------------
|Signature                              |  | Title    |  | Date              
|                                       |  |          |  |                   
|                                      
|/s/ GEORGE LATIMERGeorge Latimer       |  | Director |  | September 12, 2003
|                                      
|/s/ PATRICK H. MORTONPatrick H. Morton |  | Director |  | September 12, 2003

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SCHEDULE II


VALUATION AND QUALIFYING ACCOUNTS AND
RESERVES

|                                 |                          |            |   |            |  |            |   |            |     |  |   |           |  |  |   |           | 
|-------------------------------- | ------------------------ | ---------- | - | ---------- |  | ---------- | - | ---------- | --- |  | - | --------- |  |  | - | --------- | 
|                                 |                          | Balance at |   | Charges to |  |            |   | Balance at
|                                 |                          | Beginning  |   | Costs and  |  |            |   | End       
|Description                      |                          | of Period  |   | Expenses   |  | Deductions |   | of Period 
|                                 |                          |            |   |            |  |            |   |           
|Allowance for Doubtful Accounts: |                          |            |   |            |  |            |   |            |     |  |   |           |  |  |   |          
|                                 | Year ended June 30, 2001 |            | $ | 1,066,000  |  |            | $ | 1,168,000  |     |  | $ | 832,000   |  |  | $ | 1,402,000 | 
|                                 | Year ended June 30, 2002 |            | $ | 1,402,000  |  |            | $ | 1,867,000  | (a) |  | $ | 575,000   |  |  | $ | 2,694,000 | 
|                                 | Year ended June 30, 2003 |            | $ | 2,694,000  |  |            | $ | 801,000    |     |  | $ | 469,000   |  |  | $ | 3,026,000 | 
|Inventory Reserve:               |                          |            |   |            |  |            |   |            |     |  |   |           |  |  |   |          
|                                 | Year ended June 30, 2001 |            | $ | 1,774,000  |  |            | $ | 1,770,000  |     |  | $ | 1,096,000 |  |  | $ | 2,448,000 | 
|                                 | Year ended June 30, 2002 |            | $ | 2,448,000  |  |            | $ | 730,000    | (a) |  | $ | 1,223,000 |  |  | $ | 1,955,000 | 
|                                 | Year ended June 30, 2003 |            | $ | 1,955,000  |  |            | $ | 956,000    |     |  | $ | 1,536,000 |  |  | $ | 1,375,000 | 



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|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) | Included in charges to costs and expenses for the
    year ended June 30, 2002, are additions for allowance for
    doubtful accounts and provision for inventory reserves of
    $428,000 and $543,000, respectively, resulting from
    Identix merger with Visionics Corporation.

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