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                      SECURITIES AND EXCHANGE COMMISSION
                             Washington, DC 20549
 
                               ----------------
 
                                  FORM 10-K/A
                                Amendment No. 2
 
                               ----------------
(Mark one)
 
  [X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
     ACT OF 1934
 
                    For the fiscal year ended June 30, 1998
 
                                      OR
 
  [_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
     EXCHANGE ACT OF 1934
 
                     For the transition period from  to  .
 
                        Commission File Number: 1-9641
 
                             IDENTIX INCORPORATED
            (Exact name of registrant as specified in its charter)
 
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<CAPTION>
                 California                                  94-2842496
       (State or other jurisdiction of            (IRS Employer Identification No.)
        incorporation or organization)
    510 North Pastoria Avenue, Sunnyvale,
                 California                                    94086
<S>                                            <C>
  (Address of principal executive offices)                   (Zip Code)
</TABLE>
 
      Registrant's telephone number, including area code: (408) 731-2000
 
          Securities registered pursuant to Section 12(b) of the Act:
                          Common Stock, no par value
 
          Securities registered pursuant to Section 12(g) of the Act:
                                     None
 
                  Name of each exchange on which registered:
                            American Stock Exchange
 
  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 [X] No [_]
 
  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 [X] .
 
  The aggregate market value of the voting stock held by non-affiliates of the
registrant on September 1, 1998, based upon the closing price of the common
stock on the American Stock Exchange for such date, was approximately
$93,117,000. Shares of common stock held by each officer and director and by
each person who owns 5% or more of the outstanding common stock have been
excluded in that such persons may be deemed to be affiliates. This
determination of affiliate status is not necessarily a conclusive
determination for other purposes.
 
  The number of outstanding shares of the registrant's common stock on
September 1, 1998 was 25,298,444.
 
                      DOCUMENTS INCORPORATED BY REFERENCE
 
  Portions of the Definitive Proxy Statement expected to be filed with the
Securities and Exchange Commission on or about September 16, 1998 and to be
used in connection with the Annual Meeting of Shareholders expected to be held
October 29, 1998 are incorporated by reference in Part III of this Form 10-K.
 
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                               TABLE OF CONTENTS
 
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 Item 1.  BUSINESS......................................................    1
 
 Item 2.  PROPERTIES....................................................   22
 
 Item 3.  LEGAL PROCEEDINGS.............................................   23
 
 Item 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS...........   23
 
 Item 5.  MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
          MATTERS.......................................................   25
 
 Item 6.  SELECTED FINANCIAL DATA.......................................   26
 
 Item 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
          AND RESULTS OF OPERATIONS.....................................   27
 
 Item 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA...................   34
 
 Item 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
          AND FINANCIAL DISCLOSURE......................................   55
 
 Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT............   55
 
 Item 11. EXECUTIVE COMPENSATION........................................   55
 
 Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
          MANAGEMENT....................................................   55
 
 Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................   55
 
 Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
          FORM 8-K......................................................   56
</TABLE>
 
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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") is a leader in designing,
developing, manufacturing and marketing comprehensive solutions for the
capture or comparison of fingerprints for security, fraud prevention, law
enforcement and other applications. Identix's products are classified into two
groups: (i) Biometric Security products that verify the identity of an
individual through the unique biological characteristics of a fingerprint and
(ii) Biometric Imaging products that electronically capture forensic quality
fingerprint images directly from an individual's fingers for law enforcement
and other applications. At the core of Identix's Biometric Security and
Biometric Imaging products are its proprietary fingerprint capture
technologies. The Company's products employ patented algorithms and
proprietary customizable application software suites, as well as industry
leading expertise in optics and high resolution printing technology. Identix's
technologies and know-how enable it to produce biometric solutions for
federal, state and local governmental entities and commercial customers
worldwide. As of June 30, 1998, Identix had shipped over 15,000 Biometric
Security products to customers in over 40 countries through its worldwide
network of sales offices and distributorships. In addition, law enforcement
and other government agencies in 38 states and four foreign countries have
installed Identix Biometric Imaging products. Through ANADAC, Inc. ("ANADAC"),
the Company provides information technology, engineering and management
consulting services, including the installation and integration of Identix
products, to private and public sector clients. Identix also formed a joint
venture in September 1997 with Sylvan Learning Systems, Inc. ("Sylvan") for
the purpose of providing fingerprinting services through Sylvan's testing
centers nationwide.
 
Biometric Industry Overview
 
  The analysis of unique biological characteristics of an individual, also
known as biometrics, is being used increasingly for identification and
verification purposes. Examples of unique biological characteristics that can
be used to identify an individual include fingerprints, retinal blood vessel
or iris patterns of the eye, hand geometry, voice and facial structure. Among
these, fingerprint analysis has gained the most widespread use for biometric
identification and verification purposes. Fingerprint analysis is an accurate
and reliable method to distinguish one individual from another, employs well-
developed and proven technology and processes and is viewed as less intrusive
relative to certain other biometric identification methods. The process of
capturing, storing, retrieving and comparing fingerprints has become
increasingly automated as a result of advances in optics, electronics and
computing. These advances have enabled fingerprint identification technology
to be used to confirm an individual's identity for a variety of commercial and
governmental applications.
 
 Biometric Security
 
  The costs of fraud are estimated to be in the billions of dollars each year
in the United States alone. 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 as 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 an individual is required to identify himself numerous times with
something the individual has in his possession or with the knowledge of
certain information, such as: magnetic stripe cards and PINs to transact
business at ATMs or point-of-sale terminals; passwords 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
 
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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.
 
  However, these common verification methods generally cannot provide positive
identification. Keys, credit cards, ATM cards and card keys can be lost or
stolen. Passwords, account numbers or other information used for identity
verification can be divulged to or intercepted by unauthorized users through
electronic means and otherwise. In the workplace, time-and-attendance
information can be improperly altered by an employee punching a time card for
a tardy or absent co-worker.
 
  The analysis of unique biological characteristics offers a more accurate
method of verifying an individual's identity. Over the last decade,
technological advances, including significant advances in two-dimensional
imagers, high performance microprocessors and computer memory, have enabled
the commercial development of equipment to read, record and analyze unique
biological data. Potential applications of biometric identification systems
span a broad range and include computer database and network access and
security, computer software, intranet and Internet security, electronic
commerce, communications devices, point-of-sale terminals, bank transaction
authorization, facility access and security, ATMs, time-and-attendance, home
security and automobiles. However, implementation of biometric equipment for
these diverse applications may require network management software, customer-
specific applications software and interfaces that allow integration with the
customer's existing computer systems to provide complete biometric solutions.
 
 Biometric Imaging
 
  Fingerprint images have emerged as an important means of identification and
verification in both government and civilian markets. In law enforcement in
particular, fingerprint identification is widely utilized and has been
accepted by courts around the world. Historically, fingerprints have been
collected using the traditional "ink-and-roll" process. Typically, this
process starts at the local law enforcement agency where usually three or more
complete sets of ink-and-roll prints are taken, one for the local agency, one
for the state and one for the Federal Bureau of Investigation ("FBI"). The FBI
reports that it currently receives over 34,000 fingerprint cards each work
day. The fingerprint is then compared at the local agency, state and/or FBI
with a database of fingerprints by means of an Automated Fingerprint
Identification Systems ("AFIS"), a computer system developed in the 1970s
which uses minutiae-based recognition algorithms which detect fingerprint
characteristics to accomplish fingerprint matching. Before the AFIS can make
the comparison, an ink-and-roll card is run through a scanner which creates a
digital image of the fingerprint. The AFIS then compares the digital image
with an existing database of fingerprints to identify an individual if that
individual's fingerprint is in the database and, at the same time, updates the
database with that fingerprint image.
 
  While the advent of computerized AFIS systems significantly improved the
ability to compare fingerprints against large databases of fingerprints, the
manual process of collecting and mailing ink-and-roll cards to the agency that
maintains the AFIS and scanning the fingerprint image into the AFIS has led to
significant bottlenecks. In addition, the fingerprinting process can be
complicated by a lack of cooperation of the person being fingerprinted, the
need to take multiple sets of prints and operator error. Various agencies have
reported that in excess of 30% of such cards are rejected because prints are
smudged or applied incorrectly. If the FBI or state agency rejects the card,
the local agency is often required to locate the individual, if possible, and
have another set of fingerprints taken. As a result, the time between taking a
set of fingerprints and receiving the results of the search may take several
days, several weeks or longer.
 
  Live-scan biometric imaging systems, which electronically capture and
digitize an image of the fingerprint directly from a person's finger, were
developed to replace the manual ink-and-roll process. The digitized
fingerprint image captured by the live-scan system can then be compared with a
database of stored fingerprint images by an AFIS. If a state or federal agency
can receive electronic fingerprint cards, then the image can be electronically
relayed to that agency for comparison and the results can be returned to the
local agency within minutes or hours. In addition, because the fingerprint
images are captured electronically, multiple cards can be printed from one set
of images, eliminating the need to roll the fingerprint numerous times. Live-
scan systems
 
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<PAGE>
 
also generally have quality assurance features that help reduce the chance of
operator error during the fingerprinting process.
 
  A number of domestic and certain international law enforcement communities
are in the process of converting from manual ink-and-roll fingerprint capture
to live-scan fingerprint capture. In the United States, the FBI has undertaken
a major program to upgrade its Identification Division and has announced that
its goal is to bring its new identification facility on-line and to receive a
majority of fingerprint submissions electronically. This announcement by the
FBI, coupled with increased automation at the federal and state levels, has
prompted other federal, state and local agencies to adopt live-scan systems as
their primary method for conducting background and identification checks.
Other federal agencies, including Immigration and Naturalization Service
("INS"), Internal Revenue Service, U.S. Drug Enforcement Agency, U.S. Marshals
Service and the U.S. Secret Service use live-scan systems to perform
identification and background checks.
 
  The ability to capture a forensic quality fingerprint image electronically
and compare that fingerprint with a database of fingerprint images also has
important civilian (non-law enforcement) applications, such as conducting
employee background checks (including jobs in federal or state government,
banking, airport, child care, stock brokers and other securities professionals
or gaming) or screening potential foster parents. Millions of fingerprint
cards are taken each year in the United States for civilian purposes.
Traditionally, local police stations have performed this service, with
completed fingerprint cards submitted to state authorities or the FBI to
perform a background investigation. This process usually takes several weeks
to complete. In addition, if an ink-and-roll fingerprint card is rejected, an
applicant must go through the process again, which can delay further an
applicant's start date. In some cases, employers or agencies find themselves
with such a backlog of applicants awaiting fingerprinting or results of the
background check that they allow applicants to start the job without the
background check being complete, placing the employer at risk if an applicant
has a criminal record. The need for reliable and convenient fingerprint
capture in a non-law enforcement environment and the need to streamline the
background checking process have created a demand for live-scan products and
fingerprinting services.
 
The Identix Solution
 
  The Company has developed an industry-leading set of biometric security and
imaging solutions for security, fraud prevention, law enforcement and other
applications. The core of the Company's products are proprietary fingerprint
capture technologies developed through the application of Identix's
understanding of the science of fingerprint biometrics, optics, algorithms,
computing and networking.
 
  Biometric Security Solutions. In the Biometric Security market, the Company
provides a comprehensive line of integrated biometric hardware and software
solutions for a variety of applications, providing the Company's customers
with significant improvements over traditional security and identification
measures. The Company believes its Biometric Security technology is the most
widely used in the world. Identix has sold over 15,000 Biometric Security
products to customers in over 40 countries through its worldwide network of
sales offices and distributorships to provide complete biometric solutions for
a wide variety of applications, including the following:
 
  Building access: Numerous organizations have installed the Company's
Biometric Security products to secure building access, including the Pentagon
and various other United States government agencies, banks and industrial
plants.
 
  Bank transaction authorization: Three large international banks use the
Company's Biometric Security products for transaction authorization.
 
  Network and computer database security: Identix has and continues to develop
a wide range of enterprise level security solutions for databases, network
security, e-commerce and other emerging computer user needs. For example,
Identix through a joint development and marketing agreement with Oracle,
provides a Biometric Security solution for use in authorizing access to
Oracle's database software. In addition, Identix has developed a Biometric
Security solution for advanced user biometric authentication for Computer
Associate's Unicenter TNG system management software.
 
                                       3
<PAGE>
 
  Airport security: The Company's Biometric Security products have been chosen
for use in pilot programs at Chicago International O'Hare Airport to develop a
universal air cargo security access system that is based on a combination of
biometric identification and smart cards and general door access throughput
the airport.
 
  Time-and-attendance: Woolworth's Limited, a major Australian supermarket
chain, uses the Company's Biometric Security products to maintain accurate
time-and-attendance records for in excess of 80,000 employees in over 500
stores.
 
  ATM service: Armaguard, an Australian armored car and cash carrying company,
uses the Company's Biometric Security products to secure access for service
personnel to approximately 1,200 ATMs across Australia.
 
  Corrections: The California Department of Corrections and the California
Youth Authority ("CYA") are installing the Company's Biometric Security
fingerprint readers and networking software for physical access control in
prisons and CYA 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.
 
  The Company believes that success in the Biometric Security industry
requires addressing the customer's needs by providing the necessary software
applications and necessary interfaces with the customer's legacy computer
systems. The Company has developed system management software to facilitate
the deployment of Biometric Security devices and to control and manage a
distributed network of Biometric Security devices. This management software
enables an authorized system manager to limit, as desired, the scope of access
of individuals and can create an audit trail of entries, alarms, enrollments,
system changes and impostor attempts. The Company has also developed a number
of customizable software applications to address specific customer's
identification and verification requirements. These applications include a
secure sign-on for Windows NT, a specialized tracking system for correctional
institution operations (Bio-Sentinel), and identity verification for digital
certificate authorization in electronic commerce. The Company has developed
solutions to interface Identix's Biometric Security products with customer
legacy computer systems, including Oracle databases, Computer Associates
Unicenter TNG system management software, smart card readers and legacy
systems. In addition, the Company has also developed the necessary software
that encodes a smart card with fingerprint information used to verify an
individual's identity before authorizing a transaction.
 
  Biometric Imaging Solutions. In the Biometric Imaging market, the Company
has established a leadership position by providing systems for the efficient
capture and management of digital fingerprint images and demographic data for
various law enforcement, immigration and civilian employment, screening and
background checks. Law enforcement and other government agencies in 38 states
and four foreign counties have installed the Company's Biometric Imaging
products for the following applications:
 
  Law Enforcement: Identix provides live-scan systems for state-wide law
enforcement networks in California, Arizona, Texas, Illinois, Ohio, New
Jersey, Maryland and Georgia. Many large cities and counties also use a
network of Identix TouchPrint 600 live-scan systems for law enforcement,
including New York City Police Department, Cook County (Chicago) Sheriff's
Department, Boston Police Department and Detroit Police Department.
 
  Fingerprinting Services for Civilian Application: The Company recently
entered into a joint venture with Sylvan for the purpose of providing
fingerprinting services for a variety of civilian applications through
Sylvan's testing centers nationwide. The joint venture currently has
operations in ten United States cities and has programs with the American
Banking Association and the National Association of Securities Dealers for
performing background checks on banking and securities personnel.
 
  Immigration: The INS uses the Company's Biometric Imaging products to
perform background checks on persons who enter the United States and persons
seeking naturalization.
 
  Social services: Social service agencies in five states use the Company's
Biometric Imaging products to provide forensic quality images to identify
welfare recipients and prevent collection of benefits by the same person under
different names.
 
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  Motor vehicle licensing: Two states use the Company's Biometric Imaging
products to check whether driver's license applicants have received and/or had
revoked a license under different names in that state.
 
  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 a system that it believes captures
higher resolution and more accurate images than other available systems. The
Identix fingerprint capture unit produces rolled finger and "slap" (four
fingers at once) images at 600 dots per inch and 500 dots per inch,
respectively.
 
  The Company's live-scan products contain proprietary high-resolution
printing technology and a number of proprietary software features, including
data management software and software for digitizing and processing
fingerprint data in accordance with FBI standards. The Company's expertise in
networking and systems integration has allowed it to implement large scale
systems in some of the largest law enforcement agencies in the United States
to automate and improve the efficiency of the identification process. In
addition, the Company has developed proprietary quality assurance software
that can tell the operator if a smudged or otherwise unreadable fingerprint
image was captured, allowing the operator to recapture the image and has
developed capture sequence control software that detects sequence errors
resulting from the accidental rolling of the wrong finger for placement on the
fingerprint card.
 
Strategy
 
  The Company's goal is to continue to develop and expand high level security
applications for information technology, banking, government and other
Biometric Security applications worldwide, to augment its presence in the
domestic Biometric Imaging markets and penetrate international Biometric
Imaging markets. The key elements of the Company's strategy include:
 
  Deliver Comprehensive Biometric Solutions. In both the Biometric Imaging and
Biometric Security fields, the Company strives to provide comprehensive
solutions for its customers. Identix is able to deliver complete Biometric
Security systems for a range of different uses by integrating fingerprint
image capture devices, fingerprint analysis algorithms, operating systems to
manage networks of biometric devices and end-user software solutions that the
Company believes best meet the end-user's needs. The Company considers
Biometric Security software and algorithms to be critical in providing
comprehensive customer solutions and strives to maintain its leading edge in
these areas, unlike certain other companies which are focusing solely on the
development of image capture devices. In the Biometric Imaging industry, the
Company intends to offer expanded capabilities to encompass all phases of the
booking operation in a single, integrated system, through modular expansion.
In addition, the Company's field service organization continues to expand the
scope of its services to law enforcement agencies, assisting in systems
analysis and providing interfaces between Identix and existing computer
systems to improve the quality and efficiency of records collection. In both
Biometric Security and Biometric Imaging, the Company seeks to continue to
provide superior technical services and responsiveness and complete customer
solutions that meet or exceed specifications.
 
  Penetrate New Markets Through Strategic Relationships. The Company is
establishing strategic relationships with a select group of market leaders to
provide Biometric Security solutions for a variety of applications. An
extensive infrastructure already exists for many of the markets in which the
Company wishes to participate. In such cases, the Company has and will pursue
relationships with companies with strong positions in these markets. For
example, the Company has developed Biometric Security products in cooperation
with both Oracle and Computer Associates to enhance the security of their
software. In addition, the Company has developed relationships with two of the
leading AFIS suppliers in the world, Sagem Morpho, Inc. ("Sagem Morpho") and
NEC Technologies, Inc. ("NEC"), to provide forensic quality Biometric Imaging
to government agencies. In September 1997, the Company entered into a joint
venture with Sylvan to provide fingerprinting services. The Company intends to
continue to focus on developing strategic relationships with OEMs, system
integrators and resellers who serve as prime contractors for large, integrated
systems in the domestic and international markets.
 
  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
 
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invest in research and development and, where necessary, acquire 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 low cost fingerprint capture devices, enhanced algorithms,
applications software, integration tools and software, highly integrated
hardware designs, and mechanical and electronic components designed for high
volume production.
 
  Maintain a Global Presence and Perspective. The Company believes that there
are many opportunities to apply biometric technologies throughout the world
and that solutions provided in one area of the world can be used in other
regions for customers with similar requirements. Where fraud is prevalent,
biometric solutions have the potential of providing immediate substantial
savings. The Company has established a regional sales and support presence in
North and South America, Australia, Europe and Asia to address opportunities
throughout the world.
 
Biometric Security Products
 
  The Company's Biometric Security products operate by comparing an
individual's fingerprint with a previously recorded mathematical
characterization, or template, of that fingerprint. The template can be stored
in a computer's memory, in a stand-alone Biometric Security product or a smart
card (a card similar to a credit card with an embedded computer chip). When
requesting access or authorization the user identifies himself with a PIN or
coded identification card and then places his finger on the platen of the
Biometric Security system. The system compares the finger placed on the platen
with the stored template to confirm the user's identity. If the fingerprint
and the stored template match, the user is positively identified and access or
transaction processing is authorized. If the fingerprint and the stored
template do not match, access or transaction processing is denied.
 
  TouchSafe II and TouchNet II. TouchSafe II and TouchNet II for Oracle are
used for controlling access to computers, computer databases and networks in a
wide range of solutions including government, airports, banking and
healthcare. TouchSafe II and TouchNet II are designed to be connected to both
personal computers and sophisticated client/server networks to provide
advanced user authentication through Identix developed solutions, such as the
Oracle and Computer Associates specific solutions, or third party custom
developed solutions. TouchNet II features data hashing security which encodes
and decodes network-based communications and fingerprint data for heightened
security.
 
  TouchSAFE Personal and TouchNet III. TouchSAFE Personal and TouchNet III are
the next generation products which serve the same market applications as
TouchSafe II and TouchNet II. Both products connect to the host computer via a
serial interface and perform enrollment and verification functions within the
device using Identix proprietary pattern-matching algorithms and either a
custom ASIC microprocessor or an off-the-shelf microcontroller. Both products
will operate with all Identix Biometric Security systems and application
software. TouchSAFE Personal also incorporates an optional internal smart card
read/write device, all within its streamlined desktop configuration. The
Company believes that these products can provide identity authentication on
computer networks for electronic commerce, database access and other computer-
related information and data security applications.
 
  TouchLock II. TouchLock II is an access control system which may be used in
many different applications, including securing access to physical space such
as buildings, vaults and ATMs or authorizing financial transactions. TouchLock
products, which are very rugged and recognized for their mission-critical
reliability, have been installed in the Pentagon and various other United
States government agencies and in banks and industrial plants around the
world. These products may be connected in a network configuration through a
personal computer and have the flexibility to permit access to designated
entry points, thereby allowing a customer to install different levels of
security at different locations within the same system. In addition, TouchLock
II can be used as a stand-alone system eliminating the need for a personal
computer or network connection. TouchLock II is also marketed under the name
Fingerscan internationally.
 
  TouchClock II. TouchClock II is specifically designed for employee time-and-
attendance applications, to be used as an alternative to, or in conjunction
with, traditional punchcard time-and-attendance systems.
 
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TouchClock II can track an individual's time of arrival and departure as well
as breaks. TouchClock II is based on the same core proprietary technology as
TouchLock II.
 
  TouchBlock II, TouchBlock 2.5 and F3. The Company sells fingerprint
identification kits to OEMs consisting of a tooled optics subsystem, custom
integrated circuit or off-the-shelf microcontrollers, and supporting software
modules which allows biometric identification to be integrated into third
party OEM systems.
 
  Fingerlan III. Fingerlan III is system management software for use with
TouchLock designed to allow the authorized system manager the ability to limit
access of specific individuals to certain times or to certain locations, as
well as to create an audit trail of all entries, alarms, enrollments, system
changes and impostor attempts. Fingerlan III is compatible with Microsoft
Windows.
 
  Application Software. The Company's Biometric Security software products
comprise two major categories: applications developed internally and software
interfaces to third party products. Applications developed internally include
a secure sign-on for Windows NT, a specialized tracking system for
correctional institution operations (Bio-Sentinel), and identity verification
for digital certificate authorization in electronic commerce. The Company has
developed solutions to interface Identix's Biometric Security products with
customer legacy computer systems, including Oracle databases, Computer
Associates Unicenter TNG system management software, smart card readers and
legacy applications. In addition, the Company has also developed the necessary
software that encodes a smart card with fingerprint information used to verify
an individual's identity before authorizing a transaction. The Company works
with its customers to develop software applications and provides software
developer kits for customized applications.
 
  Algorithms. The Company has developed proprietary pattern recognition
algorithms. Most competitors use minutiae-based algorithms, the same
fingerprint matching algorithm used by law enforcement. The use of this
publicly available minutiae algorithm creates the risk that the minutiae
fingerprint template captured for personal access or authorization may be used
for background checks against law enforcement databases without the knowledge
or consent of the individual. The Company's pattern recognition algorithms
operate on an entirely different basis than the minutiae-based algorithm,
thereby reducing the civil liberties concerns associated with fingerprinting
generally.
 
Biometric Imaging Products
 
  The Company's Biometric Imaging products are used for the capture, storage
and management of high resolution forensic quality fingerprint images and
other identifying information.
 
  TouchPrint 600 Live-Scan System. The Company's TouchPrint products are
computer-based, inkless live-scan systems that electronically scan and capture
forensic quality fingerprint images directly from an individual's finger. The
fingerprint images then can be printed using a laser printer or transmitted
over telephone lines or a wide area network (WAN) to AFIS systems for
identification matching at local, state or federal agencies. TouchPrint was
designed for use by law enforcement agencies as a more accurate and efficient
method of recording fingerprint and demographic information than the
conventional "ink-and-roll" method. The TouchPrint 600 workstation and printer
system was the first system accredited under the FBI's Image Quality
Specifications standard. Accreditation to this specification is required for
direct electronic submission of fingerprint images to the FBI's integrated
AFIS. In addition to law enforcement applications, other applications for the
TouchPrint systems include background checks of prospective employees by
public and private sector employers. TouchPrint 600 systems typically
integrate a high resolution scanner with digital signal and video processing
boards, multi-processing application software, a multi-tasking computer,
monitors as well as a laser printer enclosed in a cabinet.
 
  TouchPrint 600 Card Scan System. The TouchPrint 600 Card Scan System
provides digitization of inked fingerprint images that were originally
recorded on 10-print card stock. The TouchPrint 600 Card Scan System is
designed to be used primarily by lower volume booking sites that want to
participate in an electronic fingerprint identification network. The
TouchPrint Card Scan System has a flat-bed scanner on which the user places
the inked fingerprint card. The system checks for lateral and angular
misalignment of the card, digitizes
 
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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 central records repository.
 
  TouchPrint 600 Palm Scanner. The TouchPrint 600 Palm Scanner is an inkless
live-scan system that electronically captures high quality palm images for
forensic matching. The TouchPrint 600 Palm Scanner can be integrated with
existing TouchPrint 600 live-scan networks. The palm images can be transmitted
to identification bureaus for examination using existing TouchPrint 600
communication software and printed using existing TouchPrint 600 printing
systems with upgrade.
 
  TouchView II. TouchView II is specifically designed to capture and display a
high resolution video fingerprint image on a customer-supplied workstation.
TouchView is designed to be used primarily by system integrators as an optical
fingerprint capture device which supplies fingerprint images to a frame
grabber which digitizes the image for computerized fingerprint database
systems for identification matching. The Company's TouchView single-finger
imagers are incorporated by OEMs into turnkey systems and are used for
civilian applications in welfare fraud prevention, immigration and border
control, and motor vehicle licensing.
 
  DocuColor. The DocuColor mugshot and image file management system is an
image management system that provides the capability to create an "electronic
file folder" containing color video images, document images, fingerprints,
forms and digitized data. The system provides compact storage and easy
retrieval of a large volume of criminal justice information such that a user
can, by querying the system and utilizing certain physical characteristics of
a suspect, produce from a search of thousands of suspect records a photo line-
up for comparison. The system operates on a personal computer workstation. A
digital video camera is used for capturing color photographs and a high
resolution scanner is used to digitize documents to store in an electronic
file folder. A high-capacity relational database is used to index and store
information and images. Images and data from the electronic file folders can
be displayed on high resolution monitors or printed on black and white or
color printers. The DocuColor system provides networking capabilities to allow
multiple users access to a central database and image storage system.
 
  TouchPrint 600 Store & Forward System. The TouchPrint 600 Store & Forward
System located at central processing sites manage the flow of electronic
fingerprint records from a network of TouchPrint 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.
 
  TouchPrint 600 Print Server. TouchPrint 600 Print Servers 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.
 
  Software. The TouchPrint 600 live-scan comes with Identix's proprietary user
interface software, which can be custom configured to meet the demanding
demographic data entry and specialized workflow requirements of law
enforcement agencies. TouchPrint's Image Quality Assurance (QA) software
automatically checks each fingerprint image and alerts the operator if the
fingerprint should be re-scanned. In addition, Identix offers software options
such as AccuCapture Sequence Control that provides true "slap-to-roll"
comparison eliminating fingerprint sequence errors by the live-scan operators.
The TouchPrint 600 also supports selective management reporting functions to
evaluate system and operator performance.
 
Fingerprint Services
 
  Certain employers (including federal or state government agencies, child
care, securities 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 submit the fingerprint card to the employer for submission to the state
authorities or the FBI to perform a background investigation. If the
fingerprint card is rejected, an applicant then must go through the process
again.
 
  The need for reliable and convenient fingerprint capture for diverse
applications has given rise to the fingerprinting business. In September 1997,
the Company and Sylvan entered into a joint venture to pursue
 
                                       8
<PAGE>
 
opportunities created by this demand for fingerprint services. The joint
venture provides fingerprinting services on a contract basis using Identix
live-scan systems at locations provided by Sylvan or government agencies and
through mobile units which are dispatched from a central location and make
periodic visits to different locales. The business maintains an "800" number
which people can call to find out the most convenient location for them to
have fingerprints taken (including the times at which mobile units are
servicing various locations) and to schedule an appointment. The joint venture
earns a fee for each user of the services. The joint venture currently
provides fingerprinting services in ten United States cities. In the last
year, the joint venture has established programs with the American Banking
Association and the National Association of Securities Dealers for performing
background checks on banking and securities personnel.
 
  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 allowing the
applicant to begin work sooner; re-submissions can be done automatically; the
rejection of cards because of poor print quality is virtually eliminated; and
employers may not be subject to the unnecessary risk of discovering that an
employee who has begun work may have a criminal record.
 
ANADAC Services
 
  The Company provides information technology, engineering and management
consulting services to private and public sector clients through ANADAC, which
is headquartered in Arlington, Virginia. ANADAC's services support the
development, installation, integration and operation of hardware and software
technology solutions, including Identix products, for a variety of client
operating environments. ANADAC provides such services through the following
groups and subsidiary:
 
  Information Technology Group. ANADAC's Information Technology Group ("IT
Group") provides business process analysis and business process engineering as
well as system design, development, integration and implementation services to
automate a client's workflow thereby improving operational efficiency and
solving business problems. The IT Group's solutions incorporate a variety of
technologies such as digital imaging, Biometric Imaging, networking,
relational database development and management, telecommunications and
integration of nonhomogeneous software and hardware into a single homogeneous
environment.
 
  The IT Group focuses on providing acquisition, design, development and
integration support for imaging systems in a variety of different applications
ranging from law enforcement to office and business applications to automated
storage and retrieval. The IT Group utilizes the Company's DocuColor image
file management system to provide customers a file management system that
allows users to capture, catalog, index, store and retrieve data, digital
video images and document images using a file folder paradigm. The IT Group
also develops and implements biometric solutions using the Company's products.
For example, the IT Group has been a systems integrator for the Maryland
Department of Public Safety and Cook County Sheriff's Department whereby they
integrated the Company's TouchPrint 600 live-scan system, the Company's
DocuColor mugshot and file management system and the customers' criminal
justice information systems. The IT Group also functioned as the software
development facility to integrate the Company's TouchLock and TouchSafe
product lines into Computer Associates Unicenter TNG system management
software and Identix's Bio-Sentinel software. The IT Group also designs and
implements other imaging systems using "off-the-shelf" or commercially
available products that satisfy its clients' requirements.
 
  The IT Group has used internally developed technology to develop the Identix
General Services Administration ("GSA") computerized catalog that enables
federal and state agencies to call up specifications and pricing, then order
equipment and services from its GSA Federal Supply Schedule Contract ("FSS").
Through the GSA FSS program, Identix streamlines the acquisition process and
allows federal and state agencies to procure Identix equipment in an expedient
matter. Originally the IT Group implemented the GSA FSS program for internal
use; now however, the IT Group allows third parties for a fee to sell through
the Company's GSA computerized catalog.
 
  Systems Engineering Group. ANADAC's System Engineering Group is a leader in
providing consulting, scheduling, project monitoring, financial and contract
management planning and implementing system acquisition programs in both the
public and private sectors. The Systems Engineering Group has extensive
 
                                       9
<PAGE>
 
expertise in planning and executing weapon system acquisitions. In September
1995, ANADAC's System Engineering Group was awarded a contract for program
management engineering services by the Naval Sea Systems Command in support of
the AEGIS Combat Shipbuilding Program. The contract generated approximately $7
million per year in revenue in the past three years, and is estimated to have
a total contract value of approximately $38 million over a five-year period if
all contract options are exercised. There can be no assurance that any
contract extensions will be exercised or that funding will be provided beyond
the base year.
 
  Facilities Group. ANADAC's Facilities Group provides strategic program
management, including monitoring and cost control, facility engineering
audits, assessments, inspections and maintenance management and construction
management programs. An example contract includes functioning as the
construction manager for GSA's 10-year renovation of the White House and
Executive Office buildings.
 
  Legislative Demographic Services, Inc. ANADAC's wholly owned subsidiary
Legislative Demographic Services, Inc. provides demographic data information
and services principally to Fortune 500 companies for use in lobbying Federal
and state legislatures.
 
  A substantial portion of ANADAC's business comes from government agencies,
which subjects the business to certain additional risks.
 
Product Development
 
  The Company continues to invest in research, development and engineering to
enhance the performance and functionality, and in certain cases reduce the
costs, of its existing products as well as to increase the breadth of the
Company's product offerings. The Company's expenditures for research,
development and engineering totaled $4,572,000, $2,754,000, and $1,486,000, in
the fiscal years ended June 30, 1998, 1997 and 1996, respectively. In
addition, research, development and engineering expenditures funded by
customers were $16,000, $269,000, and $255,000 in the fiscal years ended June
30, 1998, 1997 and 1996, respectively.
 
  The Company's development programs have recently focused on: the next
generation Biometric Security devices which are being developed to be faster,
more reliable and cost effective than currently available devices; Biometric
Security end user software applications; development of the recently
introduced palm scanner; and enhancement of the Company's other live-scan
products.
 
Sales, Marketing and Support
 
  The Company markets its Biometric Security and Biometric Imaging product
lines directly to end users through its internal sales force, and indirectly
through authorized agents, distributors, VARs, system integrators and OEMs.
The Company's sales organization is divided into four regions: North America;
Asia/ Pacific; Latin America; Europe, Middle East and Africa.
 
  Biometric Security Products. The Company's Biometric Security products are
sold through a worldwide network of direct sales personnel, distributors,
systems integrators, VARs and OEMs. Sales activity is concentrated in the
markets of database and network access security, banking (financial
transactions), time-and-attendance, access control and government (personal
verification). The Company has sales, service, product marketing and
application engineering expertise in each regional sales offices to provide
the customers with complete sales and maintenance support.
 
  Sales activity varies widely from single access control devices sold by a
dealer or system integrator to complicated, networked solutions sold by
several companies working cooperatively, such as, financial transaction
authorization, time-and-attendance and building access. The success of these
sales depends on the Company's ability to provide integrated solutions that
are usually software based. The majority of the service and support activities
relate to these software and integration issues.
 
  Biometric Imaging Products. The Company's Biometric Imaging products are
marketed domestically primarily through a direct sales force and
internationally through sales representatives. Identix also teams with two
major AFIS vendors, NEC and Sagem Morpho, to provide TouchPrint 600 systems or
OEM versions thereof
 
                                      10
<PAGE>
 
for law enforcement applications. In addition, the Company works closely with
skilled system integrators for civil and commercial applications of its
Biometric Imaging technology. 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 600 live-scan system is generally sold through a
competitive bid process based on a RFP. Funding for such projects often comes
from federal, state and local agencies. The funding, proposal, contract
negotiation and implementation process can extend over several months or
years, although for existing customers that are adding to or upgrading their
systems, the sales cycle is considerably shorter and these sales often are not
required to go through the bid process.
 
  Product Support. Installation and maintenance support comes from the
Company's 24 hour/7 days per week TouchCare support center, regional technical
staffs as well as the Company's engineering staff. This support generally
includes travel to the customer site to explain the technical operation of the
system, clarify the configurations, detail any necessary software
customization and define the integration issues. The systems are then
installed and supported by the TouchCare support center, regional staffs and
the Identix trained system integrators, VARs or partners. The Company provides
ongoing training at its Sunnyvale, California facility for customers and
distributors, as well as providing on-site training for customers.
 
  The Company's Biometric Imaging products carry a 90-day warranty and
extended service and warranty are offered through a choice of maintenance
contracts. The Company's Biometric Security products carry a one year warranty
and additional support is available for a fee after the expiration of the
warranty period. For equipment produced by other companies, the Company passes
on to its customers the standard warranties provided by those manufacturers.
Service centers are located in California, Australia, Indonesia and
Switzerland.
 
  ANADAC Services. ANADAC markets its services directly to United States
government agencies, including the DOD, and to commercial entities.
 
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 ANADAC 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 $4,865,000 on June 30, 1998, all of which is
scheduled to be shipped and recognized as revenue in the current fiscal year.
Identix had product backlog of $2,558,000 on June 30, 1997 and $1,677,000 on
June 30, 1996.
 
  ANADAC had services backlog of $139,316,000 on June 30, 1998, of which
$19,280,000 is scheduled to be provided and recognized as revenue in the
current fiscal year. ANADAC had services backlog of $44,450,000 on June 30,
1997 and $54,372,000 on June 30, 1996.
 
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,
copyright, trade secret and contract law to establish and protect its
proprietary rights. The success of the Company's products business will depend
in part on its proprietary technology and the Company's protection of such
technology. The Company holds the following patents: one U.S. patent expiring
in 2004 and ten foreign patents on one version of the Company's optical
fingerprint reading device; one U.S. patent expiring in 2008 and six foreign
patents on a fingerprint analysis algorithm; one U.S. patent expiring in 2013
covering an enhanced method of recording a fingerprint; one U.S. patent
expiring in 2014 on the Company's curved platen
 
                                      11
<PAGE>
 
design palm scanner; one U.S. patent expiring in 2015 covering a different
version of the Company's optical fingerprint reading device; and one U.S.
patent expiring in 2016 covering a system for reducing smear in rolled
fingerprint capture. Identix has an ongoing policy of filing patent
applications to seek protection for novel features of its products and
currently has four patent applications pending in the United States and five
in foreign countries. No assurance can be given that the claims allowed on any
patents held by the Company will be sufficiently broad to protect the
Company's technology. In addition, no assurance can be given that any patents
issued to the Company will not be challenged, invalidated or circumvented or
that the rights granted thereunder will provide competitive advantages to the
Company. The loss of patent protection on the Company's technology or the
circumvention of its patent protection by competitors could have a material
adverse effect on the Company's ability to compete successfully in its
products business. There can be no assurance that any existing or future
patent applications by the Company will result in issued patents with the
scope of the claims sought by the Company, or at all, that any current or
future issued or licensed patents, trade secrets or know-how will afford
sufficient protection against competitors with similar technologies or
processes, or that any patents issued will not be infringed upon or designed
around by others. In addition, there can be no assurance that others will not
independently develop proprietary technologies and processes which are the
same as or substantially equivalent or superior to those of the Company.
Further, there can be no assurance that the Company has not or will not
infringe prior or future patents owned by others, that the Company will not
need to acquire licenses under patents belonging to others for technology
potentially useful or necessary to the Company, or that such licenses will be
available to the Company, if at all, on terms acceptable to the Company.
 
  Litigation, which could result in substantial cost to the Company and
diversion of management attention, may also be necessary to enforce any
patents issued to the Company or to determine the scope and validity of other
parties' proprietary rights. If the outcome of any such litigation is adverse
to the Company, its business could be adversely affected. To determine the
priority of inventions, the Company may have to participate in interference
proceedings declared by the United States Patent and Trademark Office or
oppositions in foreign patent offices, which could result in substantial cost
to the Company and limitations on scope or validity of the Company's patents.
 
  The Company also relies on trade secrets and proprietary know-how which it
seeks to protect by confidentiality agreements with its employees and
consultants and with third parties. There can be no assurance that these
agreements will not be breached, that the Company will have adequate remedies
for any breach, or that its trade secrets and proprietary know-how will not
otherwise become known or be independently discovered by others.
 
Competition
 
  The markets for Biometric Security and Biometric Imaging products are
extremely competitive and are characterized by rapid technological change,
both 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 additional and more competitive products. In order to compete
effectively in this environment, the Company must continually be able to
develop and market new and enhanced products and market those products at
competitive prices. There can be no assurance that the Company will be able to
make the technological advances necessary to compete successfully in its
products business. Some of the Company's present and potential competitors
have financial, marketing and research resources substantially greater than
those of the Company. Existing and new competitors may enter or expand their
efforts in the Company's product markets, or develop new products to compete
against the Company's products. No assurance can be given that the Company's
competitors will not develop new technologies or enhancements to existing
products or introduce new products that will offer superior price or
performance features or that new products or technologies will not render
obsolete the products of the Company. Recently, a significant number of
established and startup companies have become engaged in developing software
and hardware for fingerprint Biometric Security applications that could
compete directly with the Company's Biometric Security products, including a
number of companies that are developing semiconductor or optically-based
direct contact fingerprint
 
                                      12
<PAGE>
 
image capture devices. In addition, other companies are developing currently
or have developed other methods of biometric identification such as retinal
blood vessel or iris pattern, hand geometry, voice and facial structure, which
could significantly reduce the potential market for the Company's products if
widely adopted. The Company's Biometric Security products also face
competition from non-biometric technologies such as traditional key, card and
surveillance systems, PINs and similar traditional verification methods. The
Company believes that in an effort to remain competitive in the future it will
need to invest increasing financial resources in research and development.
 
  The Company believes that the most important competitive factors for
Biometric Security products are the degree of security provided, ease of use,
functionality, price and reliability. In applications such as controlled
access to computers, ATMs and electronic funds transfer, the Company faces
competition from technologies relying on PIN numbers 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. In
some instances, however, products using non-biometric technologies may be
complementary to, rather than competitive with, the Company's Biometric
Security products. For example, card key systems can be integrated with
Biometric Security systems to supply different levels of security within a
facility.
 
  The Company believes that the most important competitive factors for the
Biometric Imaging products are the quality of fingerprint images, the
capability to work within large criminal history networks, ease of use, price
and reliability. The Company is aware of other companies that are currently
marketing live-scan products competing with Identix's TouchPrint products.
 
  In its services business, the Company faces substantial competition from
professional services providers and systems integrators of all sizes in the
government marketplace. ANADAC is increasingly being required to bid on firm
fixed price and similar contracts that result in greater performance risk to
ANADAC. If ANADAC is not able to maintain a competitive cost structure,
support specialized market niches, retain its highly qualified personnel or
align with technology leaders, its ability to compete successfully will be
materially and adversely affected.
 
Manufacturing
 
  The Company limits its manufacturing activities to the assembly and testing
of proprietary subassemblies, final system assembly and functional testing.
Printed circuit board assemblies are fabricated by highly automated outside
suppliers. The Company believes this would permit rapid expansion of
production capacity to meet any significant increase in product demand. The
Company believes that the cost of material and fabricated subassemblies will
decline if manufacturing volume increases. Quality control tests are performed
at all stages of the manufacturing process.
 
  The Company currently uses certain components which are sole sourced, the
most important of which are the charge coupled and CMOS imaging devices and
ASICs for the Biometric Security products and the charge coupled devices for
the Biometric Imaging 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 a few months worth of 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,
there can be no assurance that the Company will 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
components on a timely basis in sufficient quantities or of sufficient quality
or any significant increase in the price of components from existing or
alternative suppliers could have a material adverse effect on the Company's
business, financial condition and results of operations.
 
                                      13
<PAGE>
 
Employees
 
  As of September 1, 1998, Identix had 167 employees working in its products
business, of whom 36 were engaged in research, development and engineering, 22
in production and production support, 80 in sales, marketing and field service
and 29 in general administration and finance. As of September 1, 1998, Identix
had 252 employees working in its services business, of whom 213 were service
providers, 17 were engaged in sales and marketing and 22 were engaged in
general administration and finance. None of Identix's employees is represented
by a union and Identix has never experienced a work stoppage. Management
considers its employee relations to be good.
 
                                      14
<PAGE>
 
                                 RISK FACTORS
 
  The Company's future operations, financial performance, business and share
price may be affected by a number of factors, including the following, any 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.
 
Fluctuations in Quarterly Results
 
  The Company's quarterly operating results have in the past been, and will
continue to be, subject to significant variations resulting from a number of
factors, many of which are outside of the Company's control and any one of
which could substantially affect the Company's results of operations for any
particular fiscal period. The Company's revenues in any period have been, and
in the near term are expected to be, derived from large orders from a limited
number of customers. Accordingly, revenues in a particular quarter will be
dependent upon the timing and size of major orders and the timing of
recognition of revenues from those orders. A majority of the Company's
revenues are derived from the sale of products and services directly to
governmental agencies or OEMs, systems integrators or resellers who sell
products and services to government agencies. Government agencies are subject
to political and budgetary constraints and orders from them may be canceled or
substantially delayed or the receipt of revenues or payments substantially
delayed due to political and budgetary processes or other scheduling delays
relating to the contract or bidding process. In addition, the Company's
contracts with local government agencies may be contingent upon availability
of matching funds from state or federal entities. Other factors which can
result in fluctuations in quarterly results of operations include budgetary
and purchasing cycles of government agencies; changes in the mix of products
and services sold and the mix of product sales by distribution channels; the
pricing of existing and future products by the Company's competitors; the
introduction of new or enhanced products by the Company or its competitors and
the market acceptance thereof; expenses related to, and results of,
litigation; percentage of and costs associated with firm fixed price ("FFP")
contracts and time and materials ("T&M") contracts; the availability and cost
of key components; and fluctuations in general economic conditions. The
Company also may choose to reduce prices or to increase spending in response
to competition or to pursue new market opportunities, all of which may
adversely affect the Company's business, financial condition and results of
operations. Further, the lead-time for ordering parts and materials and
building the Company's products can be many months and the Company orders
parts and materials and builds products based on its forecasted demand for the
products. If demand for the Company's products lags significantly behind the
Company's forecasts, the Company runs the risk of building too large an
inventory, which may adversely affect cash flow and may result in write-offs
or writedowns of inventory because of product obsolescence. Due to the
foregoing factors, the Company's operating results may differ from the
expectations of securities analysts and investors, which could adversely
affect the trading price of the Company's common stock. The Company believes
that period-to-period comparisons of its results of operations should not be
relied upon as indications of future performance.
 
Dependence Upon New and Uncertain Markets; Uncertainty of Market Acceptance
 
  Substantially all of the Company's product revenues to date have been, and
for the foreseeable future are anticipated to be, derived from Biometric
Security products and Biometric Imaging products. Biometric Security products
represent a new approach to identity verification, which has only been used in
limited applications to date, and these products have not gained widespread
commercial acceptance. The expansion of the market for the Company's products
depends on a number of factors, including the cost and reliability of the
Company's products and products of competitors, customers' perception of the
perceived benefits of these products, public perceptions of the intrusiveness
of these products and the manner in which agencies are using the fingerprint
information collected, public confidence as to confidentiality of private
information, customers' satisfaction with the Company's products and publicity
regarding these products. Public objections have been raised as to the use of
biometric products for some applications on civil liberties grounds and
certain legislation has been proposed to regulate the use of Biometric
Security products. The Company's future success is dependent upon the
development and expansion of markets for Biometric Security products and
Biometric Imaging products both
 
                                      15
<PAGE>
 
domestically and internationally. In addition, even if markets develop for
Biometric Security products and additional markets develop for Biometric
Imaging products, there can be no assurance that the Company's products will
gain wide market acceptance in these markets. A number of factors may limit
the market acceptance of the Company's products, including the performance and
price of the Company's products compared to competitive products or
technologies, the practicalities of developing the infrastructure necessary to
support certain Biometric Security applications such as ATMs and point-of-sale
applications, the nature of technological innovations and new product
development activities by the Company and its competitors, and the extent of
marketing efforts by the Company's collaborators or partners. If the markets
for the Company's products fail to develop or develop more slowly than
anticipated or if the Company's Biometric Security products fail to gain wide
market acceptance, or Biometric Imaging products lose market share, the
Company's business, financial condition and results of operations would be
materially and adversely affected.
 
Competition and Technological Change
 
  The markets for Biometric Security and Biometric Imaging products are
extremely competitive and are characterized by rapid technological change,
both as a result of technical developments exploited by competitors, the
changing technical needs of customers and frequent introductions of new
features. The Company expects competition to increase as other companies
introduce additional and more competitive products. In order to compete
effectively in this environment, the Company must continually be able to
develop and market new and enhanced products and market those products at
competitive prices. There can be no assurance that the Company will be able to
make the technological advances necessary to compete successfully in its
products business. Some of the Company's present and potential competitors
have financial, marketing and research resources substantially greater than
those of the Company. Existing and new competitors may enter or expand their
efforts in the Company's product markets, or develop new products to compete
against the Company's products. No assurance can be given that the Company's
competitors will not develop new technologies or enhancements to existing
products or introduce new products that will offer superior price or
performance features or that new products or technologies will not render
obsolete the products of the Company. Recently, a significant number of
established and startup companies have become engaged in developing software
and hardware for fingerprint Biometric Security applications that could
compete directly with the Company's Biometric Security products, including a
number of companies that are developing semiconductor or optically-based
direct contact fingerprint image capture devices. In addition, other companies
are developing currently or have developed other methods of biometric
identification such as retinal blood vessel or iris pattern, hand geometry,
voice and facial structure, which could significantly reduce the potential
market for the Company's products if widely adopted. The Company's Biometric
Security products also face competition from non-biometric technologies such
as traditional key, card and surveillance systems, PINs and similar
traditional verification methods. The Company believes that in an effort to
remain competitive in the future it will need to invest increasing financial
resources in research and development.
 
  In its services business, the Company faces substantial competition from
professional services providers of all sizes in the government marketplace.
ANADAC is increasingly being required to bid on FFP and similar contracts that
result in greater performance risk to ANADAC. If ANADAC is not able to
maintain a competitive cost structure, support specialized market niches,
retain its highly qualified personnel or align with technology leaders, its
ability to compete successfully will be materially and adversely affected.
 
Dependence on New Product Introductions
 
  The Company's future success will depend upon its ability to address the
needs of the market by enhancing its current products and by developing and
introducing new products on a timely basis that keep pace with technological
developments and emerging industry standards (including FBI accreditation
standards and evolving standards for the interface of Biometric Security
products), respond to evolving customer requirements and achieve market
acceptance. The development of new, technologically-advanced products and
product enhancements is a complex and uncertain process requiring high levels
of innovation, as well as the accurate anticipation of technological and
market trends. Any failure by the Company to anticipate or adequately respond
 
                                      16
<PAGE>
 
to technological developments or end user requirements, or any significant
delays in product development or introduction, could result in a loss of
competitiveness or revenue. There can be no assurance that the Company will be
successful in developing and marketing product enhancements or new products on
a timely basis if at all, that the Company will not experience difficulties
that could delay or prevent the successful development, introduction and sale
of these products, or that any of its new products and product enhancements
will adequately meet the requirements of the marketplace and achieve market
acceptance. If the Company is unable, for technological or any other reason,
to develop, introduce and sell its products in a timely manner, the Company's
business, financial condition and results of operations would be materially
and adversely affected. In addition, because a number of the Company's
Biometric Imaging products and Biometric Security products are incorporated
into systems marketed by other companies, or are co-marketed together with
other products or services sold by other companies, the failure to introduce
products in a timely manner may cause such companies to seek alternative
suppliers or marketing partners. From time to time, the Company or its present
or future competitors may announce new products, capabilities or technologies
that have the potential to replace the Company's existing products. There can
be no assurance that announcements of currently planned or other new products
will not cause customers to delay or alter their purchasing decisions in
anticipation of such products, which could have a material adverse effect on
the Company's business, financial condition and results of operations. In
addition, new product introductions may contribute to fluctuations in
quarterly operating results or result in the early obsolescence of the
Company's products, because customers may forego ordering the Company's
existing products. If the Company's new products have reliability or quality
problems, the Company may experience reduced orders, higher manufacturing
costs, delays in collecting accounts receivable and additional service and
warranty expense.
 
Dependence on Strategic Relationships for Product Distribution
 
  The Company's strategy for the distribution of certain of its products
requires entering into various strategic relationships with OEMs, systems
integrators and resellers. Some of these relationships are formalized in
agreements; however, such agreements are often terminable with little or no
notice, and subject to periodic amendment. Although the Company believes that
the OEMs, systems integrators and resellers with which it works have an
economic motivation to promote or use the Company's products, the amount and
timing of resources to be devoted to these activities are not within the
control of the Company. There can be no assurance that such parties will
actively promote the Company's products or pursue installations which use the
Company's equipment, that any distribution or other arrangements with the
Company will not be terminated or renegotiated or that the Company will derive
any revenues from such arrangements. The Company intends to continue to seek
strategic relationships to distribute and sell certain of its products. There
can be no assurance that the Company will be able to negotiate acceptable
strategic relationships in the future or that current or future strategic
relationships will be successful.
 
Public Agency Contract Considerations
 
  A majority of the Company's revenues are derived from the sale of products
and services either directly to governmental agencies or to OEMs, systems
integrators or resellers who sell products to government agencies. Government
agencies frequently require provisions in contracts that are not standard in
private commercial transactions, such as bonding requirements and provisions
permitting the purchasing agency to cancel the contract without penalty if
funding for the contract is no longer available or is not obtained. As public
agencies, the Company's prospective customers are also subject to public
agency contract requirements, which vary from jurisdiction to jurisdiction.
Future sales to public agencies will depend on the Company's ability to meet
public agency contract requirements, certain of which may be onerous or even
impossible for the Company 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 contain provisions
that permit cancellation in the event that funds are unavailable to the public
agency. There can be no assurance that the Company will be awarded any of the
contracts for which its products are bid or, if awarded, that substantial
delays or cancellations of purchases will not result from protests initiated
by losing bidders.
 
                                      17
<PAGE>
 
Uncertainty Related to Contracts for Services with Government Agencies
 
  During fiscal 1998, the Company derived approximately 89% of its services
revenue directly from contracts relating to the DOD and other U.S. Government
agencies. Loss of any material government contract due to budget cuts or
otherwise could have a material adverse effect on the Company's business,
financial condition and results of operations.
 
  During fiscal 1998, the Company derived approximately 68% of services
revenues from T&M contracts and FFP contracts. T&M contracts typically provide
for payment of negotiated hourly rates for labor incurred plus reimbursement
of other allowable direct and indirect costs. FFP contracts provide for a
fixed price for stipulated services or products, regardless of the costs
incurred, which may result in losses from cost overruns. The Company assumes
certain performance risk on FFP and T&M contracts and the failure to estimate
accurately 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 such overruns for any FFP and
T&M contracts it is awarded. In addition, 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. ANADAC is currently undergoing such an audit by the Defense Contract
Audit Agency for the period from July 1, 1992 to June 30, 1995. While the
Company believes that the results of such audit will have no material effect
on the Company's revenues, there can be no assurance that no adjustments will
be made and that, if made, such adjustments will not have a material adverse
effect on the Company's business, financial condition and results of
operations.
 
Risks Associated with International Business
 
  During fiscal 1998, the Company's net product revenues from international
sales were 18%. A key component of the Company's strategy is to pursue product
sales in international markets. There can be no assurance that the Company
will be able to market, sell and deliver its products in these foreign
countries. In addition to the uncertainty as to the Company's ability to
expand its international presence, there are certain risks inherent in foreign
operations, including general economic conditions in each country, seasonal
reductions in business activity during the summer months in Europe and certain
other parts of the world, delays in or prohibitions on exporting products
resulting from export restrictions for certain products and technologies
(including "crime control" products and encryption technology), fluctuations
in foreign currencies and the U.S. dollar which can increase the sales price
of the Company's products in local currencies, loss of revenue, property and
equipment from expropriation, nationalization, war, insurrection, terrorism
and other political risks, the overlap of different tax structures, risks of
increases in taxes and other government fees and involuntary renegotiation of
contracts with foreign governments. The Company is also at risk from changes
in foreign and domestic laws, regulations and policies governing foreign
operations. There can be no assurance that laws or administrative practices
relating to taxation, foreign exchange or other matters of countries within
which the Company operates or will operate will not change. Any such change
could have a material adverse effect on the Company's business, financial
condition and results of operations. In addition, the laws of foreign
countries treat the protection of proprietary rights differently from, and may
not protect the Company's proprietary rights to the same extent as, laws in
the United States.
 
  The Company's international sales generally are 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.
 
Dependence on Large Orders by Customers
 
  The Company's revenues principally consist of large orders from a limited
number of customers. While the individual customers may vary from period to
period, the Company is nevertheless dependent upon these large orders for a
substantial portion of its total revenues. There can be no assurance that the
Company will be able to obtain large orders on a consistent basis. The
Company's inability to obtain sufficient large orders would have a material
adverse effect on the Company's business, financial condition and results of
operations. Moreover, the
 
                                      18
<PAGE>
 
timing and shipment of such orders may cause the operating results of the
Company in any given quarter to differ from the expectations of securities
analysts, which could adversely affect the trading price of the Company's
common stock. Losses arising from customer disputes regarding shipping
schedules, product condition or performance, or the Company's inability to
collect accounts receivable from any major customer could also have a material
adverse effect on the Company's business, financial condition and results of
operations.
 
  Orders for the Company's Biometric Imaging products are often subject to
delays associated with the lengthy approval processes that typically accompany
large capital expenditures by government agencies. The Company's total
revenues depend in significant part upon the decision of a government agency
to adopt and integrate the Company's systems, which often involves a
significant capital commitment as well as significant future support costs.
Similar delays may also be experienced from government agencies procuring the
Company's services. The Company often has a lengthy sales cycle while the
customer evaluates and receives approvals for the purchase of the Company's
products or services. Any significant failure by the Company to receive an
order after expending significant funds and effort could have a material
adverse effect on its business, financial condition and results of operations.
It may be difficult to predict accurately the sales cycle of any large order.
In the event one or more large orders fail to be shipped as forecasted for a
fiscal quarter, the Company's total revenues and operating results for such
quarter could be materially and adversely affected. In addition, even if the
Company receives such an order, the order may be contingent upon availability
of matching funds from state or federal entities or may be canceled or receipt
of revenues may be substantially delayed due to political and budgetary
processes.
 
Risks Associated with Acquisitions
 
  As part of its business strategy, the Company intends to acquire assets and
businesses principally relating to or complementary to its current operations.
The Company acquired two companies in fiscal 1996 and one in fiscal 1998.
These and any other acquisitions by the Company will be accompanied by the
risks commonly encountered in acquisitions of companies. Such risks include,
among other things, potential exposure to unknown liabilities of acquired
companies or to acquisition costs and expenses exceeding amounts anticipated
for such purposes; fluctuations in the Company's quarterly and annual
operating results due to the costs and expenses of acquiring and integrating
new businesses; the difficulty and expense of assimilating the operations and
personnel of the companies; the potential disruption of the Company's ongoing
business and diversion of management time and attention; the inability of
management to maximize the Company's financial and strategic position by the
successful incorporation of acquired technology; the maintenance of uniform
standards, controls, procedures and policies; the impairment of relationships
with and possible loss of key employees and customers as a result of changes
in management; the incurrence of amortization expenses if an acquisition is
accounted for as a purchase; and dilution to the shareholders of the Company
if the consideration for the acquisition consists of the Company's equity. In
addition, the difficulty of integrating certain companies may be increased by
geographic distances. There can be no assurance that the Company will be
successful in overcoming these risks or any other problems encountered in
connection with such acquisitions.
 
Risk of Product Defects and Failure to Meet Performance Criteria
 
  Complex products such as those offered by the Company may contain undetected
or unresolved defects or may fail initially to meet customers' performance
criteria when first introduced or as new versions are released. There can be
no assurance that, despite testing by the Company, defects or performance
flaws will not be found in new products or new versions of products following
commercial release or that performance failures will not result, causing loss
of market share, delay in or loss of market acceptance, additional warranty
expense or product recall. In addition, the failure of products to meet
performance criteria could result in delays in recognition of revenue and
higher operating expenses during the period required to correct such defects.
There is a risk that for unforeseen reasons the Company may be required to
repair or replace a substantial number of products in use or to reimburse
persons for products that fail to work or meet strict performance criteria.
Any such occurrence could have a material adverse effect on the Company's
business, financial condition and results of operations. The
 
                                      19
<PAGE>
 
Company does carry product liability insurance, but there can be no assurance
that existing coverage is adequate for current operations or will be adequate
for future operations. The Company's business could be materially and
adversely affected by the assertion of product liability claims.
 
Protection of Proprietary Technology
 
  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,
copyright, trade secret and contract law to establish and protect its
proprietary rights. The success of the Company's products business will depend
in part on its proprietary technology and the Company's protection of such
technology. The Company holds United States and foreign patents covering
certain of its products and technologies and has other patent applications
pending. Identix has an ongoing policy of filing patent applications to seek
protection for novel features of its products.
 
  No assurance can be given that the claims allowed on any patents held by the
Company will be sufficiently broad to protect the Company's technology. In
addition, no assurance can be given that any patents issued to the Company
will not be challenged, invalidated or circumvented or that the rights granted
thereunder will provide competitive advantages to the Company. The loss of
patent protection on the Company's technology or the circumvention of its
patent protection by competitors could have a material adverse effect on the
Company's ability to compete successfully in its products business. There can
be no assurance that any existing or future patent applications by the Company
will result in issued patents with the scope of the claims sought by the
Company, or at all, that any current or future issued or licensed patents,
trade secrets or know-how will afford sufficient protection against
competitors with similar technologies or processes, or that any patents issued
will not be infringed upon or designed around by others. In addition, there
can be no assurance that others will not independently develop proprietary
technologies and processes, which are the same as, substantially equivalent or
superior to those of the Company. Further, there can be no assurance that the
Company has not or will not infringe prior or future patents owned by others,
that the Company will not need to acquire licenses under patents belonging to
others for technology potentially useful or necessary to the Company, or that
such licenses will be available to the Company, if at all, on terms acceptable
to the Company.
 
  Litigation, which could result in substantial cost to the Company and
diversion of management attention, may also be necessary to enforce any
patents issued to the Company or to determine the scope and validity, of other
parties' proprietary rights. If the outcome of any such litigation is adverse
to the Company, its business, financial condition and results of operations
could be materially and adversely affected. To determine the priority of
inventions, the Company may have to participate in interference proceedings
declared by the United States Patent and Trademark Office or oppositions in
foreign patent offices, which could result in substantial cost to the Company
and limitations on the scope or validity of the Company's patents. The Company
also relies on trade secrets and proprietary know-how which it seeks to
protect by confidentiality agreements with its employees and consultants and
with third parties. There can be no assurance that these agreements will not
be breached, that the Company will have adequate remedies for any breach, or
that its trade secrets and proprietary know-how will not otherwise become
known or be independently discovered by others.
 
Risks Associated with Managing Expansion of Operations
 
  The Company has experienced substantial growth in recent years and believes
that in order to be successful it must continue to grow rapidly. If the
Company is to grow rapidly, the Company will be required to expand, train and
manage its employee base, particularly skilled technical, marketing and
management personnel. Rapid growth will also require an increase in the level
of responsibility for both existing and new management and will require the
Company to implement and improve operational, financial and management
information procedures and controls. The Company competes with some of the
major technology, consulting and software companies in seeking to attract
qualified personnel. There can be no assurance that the management skills and
systems currently in place will be adequate or that the Company will be able
to manage effectively any significant growth it experiences and to hire or
assimilate new personnel necessary to pursue its growth strategy. Any failure
to
 
                                      20
<PAGE>
 
adequately manage growth could materially and adversely affect the Company's
business, financial condition and results of operations.
 
Dependence Upon Sole and Limited Sources of Supply; Risks Associated with
Implementation of Larger Scale Manufacturing Capabilities
 
  Certain of the components included in the Company's products are obtained
from a single source or a limited group of suppliers, the most important of
which are the charge coupled and CMOS imaging devices and ASICs for the
Biometric Security products and the charge coupled devices for the Biometric
Imaging products. The Company has no long term agreements with any of its
suppliers. Although the Company seeks to reduce dependence on these sole and
limited sources of suppliers, the partial or complete loss of certain of these
sources or the delay in receiving supplies from these sources could result in
delays in manufacturing and shipping of products to customers. This may
require the incurrence of development and other costs to establish alternative
sources of supply. While the Company attempts to maintain a few months of
inventory on sole source components, it may take the Company several months to
locate alternative suppliers if required, and/or to re-tool its products to
accommodate components from different suppliers. If the Company is required to
seek alternative suppliers, there can be no assurance that the Company will 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 components 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 material adverse effect on the
Company's business, financial condition and results of operations.
 
  Historically, the volume of the Company's production requirements for the
law enforcement and public sectors has not placed significant capacity
constraints on the Company's manufacturing and assembling capabilities.
However, if the Company begins to market its products for potentially larger
volume applications, the Company may be required to fulfill larger orders in a
short period of time and to implement measures to decrease product costs.
There can be no assurance that the Company will be able to scale-up its
manufacturing and assembling capacities to fulfill such orders and to decrease
manufacturing costs. Any failure by the Company to implement higher volume
manufacturing or reduce product costs for commercial applications could have a
material adverse effect on the Company's business, financial condition and
results of operations.
 
Dependence upon Key Personnel; Need to Hire Additional Qualified Personnel
 
  The Company's success will depend upon its ability to retain its current
senior management team and key technical, marketing and sales personnel and
its ability to identify, attract and retain additional highly qualified
personnel. The Company's employees may voluntarily terminate their employment
with the Company at any time, and competition for qualified employees,
especially engineers, is intense. The process of locating additional personnel
with the combination of skills and attributes required to carry out the
Company's strategy is often lengthy. The loss of the services of key
personnel, or the inability to attract additional qualified personnel, could
have a material adverse effect on the Company's business, financial condition
and results of operations.
 
Volatility of Stock Price
 
  The stock market has from time to time experienced significant price and
volume fluctuations that may be unrelated to the operating performance of
particular companies. In addition, the market price of the common stock, like
the stock prices of many technology companies, has been, and may continue to
be, highly volatile. Variations in quarterly operating results, the timing and
volume of procurements for the Company's products and services, announcements
of technological innovations or new products or services by the Company or by
the Company's competitors, announcements regarding product pricing by the
Company or its competitors, failure of the Company to meet earnings or revenue
expectations of securities analysts, the commencement of litigation, the
developments in or outcome of any litigation, developments in patent or other
proprietary rights, and economic and other external factors, among other
factors, may have a material adverse effect on the market price of the common
stock.
 
 
                                      21
<PAGE>
 
Share Holdings of Ascom USA
 
  As of September 1, 1998, Ascom USA Inc. ("Ascom"), beneficially owned
approximately 20% of the outstanding common stock. This concentration of
ownership may have the effect of delaying or preventing a change in control of
the Company. The Company is a party to a Voting Trust Agreement ("Voting Trust
Agreement") with Ascom whereby Ascom deposited all of its 5,048,924 shares of
the Company's common stock ("Voting Stock") into a voting trust ("Voting
Trust"). The Trustee has voting control of the Voting Stock. The Voting Trust
Agreement expires in 2004. Ascom has preemptive rights with respect to
issuances of the Company's securities and registration rights with respect to
the securities it holds. Ascom has recently requested registration of
approximately 1,700,000 shares. The sale of a significant number of shares by
Ascom in the open market could have an adverse effect on the trading price of
the Company's common stock. The Company's ability to obtain additional
financing on favorable terms in the future may be adversely affected by the
existence of these preemptive rights and registration rights.
 
Impact of Year 2000
 
  The Company has evaluated the products and services it offers, as well as
its information technology infrastructure, in an effort to determine whether
the Company or its customers may have exposure to Year 2000 problems caused by
computer systems that only use a two-digit year value and, accordingly, will
be subject to error or failure when the year 2000 arrives. The Company has
also made inquiries of its key suppliers to determine their readiness with
respect to Year 2000 problems.
 
  The Company has identified certain internal software that requires updating
in order to be Year 2000 compliant. As part of the Company's maintenance
contract for that software, the vendor of that software has provided the
Company with an upgrade that addresses the Year 2000 problem. The Company has
not installed the software upgrade yet, but expects to have the installation
completed by early 1999. The Company is also aware that it has sold certain
Biometric Imaging products that, at the request of the customers, use a two-
digit value for the year. The Company is informing its customers of the
potential issues that may be raised by this feature and how they can be
remediated. The Company believes that the costs to the Company not borne by
customers for such remediation will be insignificant. The Company is also
aware that its TouchLock I product (which is only used by one customer and is
no longer in production) is not Year 2000 compliant. The Company, at its cost,
upgraded the software on the installed TouchLock I products to make them Year
2000 compliant. The expenditure required to complete this upgrading was
insignificant.
 
  The Company is at risk of disruption to its business if Year 2000 problems
are experienced by its key suppliers. The Company has sent inquiries to its
suppliers to determine their readiness with respect to Year 2000 problems. The
Company is still in the process of collecting responses. The Company will be
able to better determine what actions may be necessary to address potential
problems with key suppliers after it receives responses back from these
suppliers. A failure of a key supplier to provide the Company with necessary
components or services could result in a delay by the Company in providing
products or services to the Company's customers and have a material adverse
effect on the Company's business, financial condition and results of
operations.
 
  The Year 2000 problem is pervasive and complex and there can be no assurance
that the Company has been or will be able to identify all of the Year 2000
issues that may affect the Company or that any remedial efforts it takes will
adequately address any potential Year 2000 problems.
 
Item 2. Properties
 
  Identix leases approximately 40,000 square feet of space in Sunnyvale,
California for manufacturing, research and administration. The monthly lease
payments are $33,000 a month plus taxes, insurance and maintenance costs and
the lease expires in 2001. Sales and service offices are leased in Australia,
Zurich, Rio de Janiero, Beirut and Singapore with an aggregate net monthly
lease payment of approximately $14,000. Identix also services customers from
sales offices in California, Georgia, Virginia and Michigan. Identix also has
small offices in Illinois and Missouri primarily providing engineering
services. ANADAC leases approximately
 
                                      22
<PAGE>
 
42,000 square feet in four locations in Virginia with aggregate monthly lease
payments of $83,000, which leases expire in 2000 and 2001. ANADAC also
services customers from offices leased in Mississippi, Maryland, and Virginia.
The Company believes that its facilities are adequate for its operations for
the foreseeable future.
 
Item 3. Legal Proceedings
 
  The Company was named as a defendant in a class action lawsuit, which was
filed in October 1996 in the United States District Court for the Northern
District of California. Certain executive officers of the Company were also
named as defendants. Plaintiffs sought to represent a class of all persons who
purchased the Company's common stock between January 31, 1996 and August 26,
1996 (the "Class Period"). The complaint alleged claims under the federal
securities laws and California law. Plaintiffs alleged that the Company and
certain of its executive officers made false and misleading statements
regarding the Company that caused the market price of its common stock to be
"artificially inflated" during the Class Period. The Company and its officers
denied plaintiffs' allegations. In December 1997, the Company and its officers
reached an agreement with plaintiffs and their counsel to settle the lawsuit.
The settlement was funded largely with directors and officers liability
insurance proceeds. The settlement was approved by the Court, following notice
to the class members, and the lawsuit was dismissed with prejudice on March 6,
1998.
 
  On May 31, 1995, Digital Biometrics, Inc. ("DBI"), a competitor, filed a
lawsuit in the United States District Court for the Northern District of
California against the Company alleging that certain of the Company's
TouchPrint products violate a DBI patent and seeking injunctive relief and
unspecified damages. The lawsuit has no implication for other Identix
products. On August 22, 1996, the District Court granted the Company's motion
determining that the TouchPrint 600 does not infringe the patent. On December
7, 1996, the District Court issued another ruling determining that the
predecessor product of the TouchPrint 600, the TouchPrint 900 product, did not
infringe the patent. As a result, the District Court entered judgment in favor
of Identix and awarded Identix its costs of suit. On January 7, 1997, DBI
filed a Notice of Appeal. On July 2, 1998, the United States Court of Appeals
for the Federal Circuit affirmed the District Court's judgment. DBI has
publicly announced that it has no plans to appeal the ruling and, accordingly,
the Company believes that the judgment in favor of the Company will be the
final disposition of the case.
 
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, 1998.
 
Supplemental Item. Executive Officers of the Registrant
 
  The executive officers of Identix, and their ages as of September 1, 1998,
are as follows:
 
<TABLE>
<CAPTION>
   Name                     Age                            Position
   ----                     ---                            --------
   <S>                      <C> <C>
   Randall C. Fowler.......  59 President, Chief Executive Officer and Director
 
   Harrison N. Walther.....  61 President and Chief Executive Officer of ANADAC and Director
 
   James P. Scullion.......  42 Executive Vice President, Chief Financial Officer and Secretary
 
   Daniel F. Maase.........  54 Vice President, Biometric Imaging Division
 
   John Kirsten............  54 Vice President, Biometric Security Division
 
   Alan Schallop...........  57 Vice President, Worldwide Sales, Marketing and Customer Support
 
   Gary L. Cauble..........  47 Vice President, Manufacturing
 
   John Bruce-Smith........  41 Vice President, Finance
</TABLE>
 
  Randall C. Fowler is Chairman of the Board of Directors, President and Chief
Executive Officer of the Company, positions he has held since founding the
Company in 1982.
 
  Harrison N. Walther has been a director of the Company since February 1995.
Mr. Walther is the President and Chief Executive Officer of ANADAC. Mr.
Walther joined ANADAC in 1982. He served as
 
                                      23
<PAGE>
 
Vice President of ANADAC from 1982 through 1984 and Executive Vice President
from 1984 through 1985 before assuming the duties of President in 1986.
 
  James P. Scullion has been Executive Vice President and Chief Financial
Officer of the Company since July 1996 and, from 1990 to 1996, he was Vice
President, Finance and Chief Financial Officer of the Company. From 1986 to
1990, he was Vice President, Finance and Chief Financial Officer at DataTrak,
Inc., a manufacturer of security access systems.
 
  Daniel F. Maase, Vice President, Biometric Imaging Division, joined the
Company in November 1988 and served as Vice President, Engineering from
December 1988 until he was appointed to his present position in February 1998.
Prior to joining Identix he was an Operations Manager at Varian Associates, a
manufacturer of instruments and microwave power devices, medical equipment and
semiconductors, from 1987 to 1988.
 
  John Kirsten, Vice President, Biometric Security Division, joined the
Company in May 1998. Prior to joining the Company, he spent several years in
the software industry, serving as Vice President of International Operations
for Objectivity, Inc. from 1997 to 1998, Vice President of International
Operations for IDE/Aonix from 1995 to 1997, and Vice President of European
Operations for IMSL/Visual Numerics, Inc. from 1992 to 1995.
 
  Alan Schallop, Vice President, Worldwide Sales, Marketing & Customer
Support, joined the company in October 1997 as the Vice President, North
American Sales, Marketing & Customer Support. He was appointed to his present
position in February 1998. Prior to joining Identix, Mr. Schallop was the Vice
President of Worldwide Sales and Customer Support of Zapex Technologies from
December 1996 to October 1997, the Chief Operating Officer of Pharm/Net from
June 1996 to December 1996, the Vice President of Worldwide Customer Support
of Wyse Technology from May 1995 to May 1996, the Vice President of North
American Sales and Channels of OpenVision Technologies Inc. from March 1994 to
February 1995 and served in various positions with Sequent Computer Systems,
Inc. from December 1990 to February 1994, including Vice President and General
Manager of North American Sales. Mr. Schallop worked at Hewlett-Packard Co.
from 1969 to 1990 in various positions, including U.S. Sales Manager for
Networked Systems and OEM products.
 
  Gary L. Cauble, Vice President, Manufacturing, joined the Company in August
1995. Prior to joining the Company, from 1990 to 1995, he was assistant
Division Manager/Operations Manager at Bell Industries.
 
  John Bruce-Smith, Vice President, Finance, joined Identix Australia Pty
Limited as Controller in November 1997 and served as Controller of Identix
from April 1998 through August 1998, before being appointed to his present
position in September 1998. Prior to joining Identix, he worked as a financial
project manager at Racal Telecommunications Ltd in England from February 1997
through September 1997. Prior to that, Mr. Bruce-Smith served in various
financial capacities with AWA Limited in Sydney from 1990 through 1996, most
recently serving as Assistant Chief Financial Officer.
 
                                      24
<PAGE>
 
                                    PART II
 
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
 
  The Company's common stock is listed on the American Stock Exchange ("AMEX")
under the symbol IDX.
 
  The following table sets forth the range of high and low closing prices as
reported on the AMEX for the fiscal periods indicated.
 
<TABLE>
<CAPTION>
                                                             High       Low
                                                             ----       ---
     <S>                                                     <C>        <C>
     Year ended June 30, 1998
     Fourth Quarter.........................................   8 9/16   5 5/8
     Third Quarter..........................................  10 1/2    8 1/2
     Second Quarter.........................................  11 5/8    9 5/16
     First Quarter..........................................  11 13/16  8 3/4
     Year ended June 30, 1997
     Fourth Quarter.........................................  11 1/4    7 7/16
     Third Quarter..........................................  12 3/4    8 3/8
     Second Quarter.........................................  10 3/4    7 1/4
     First Quarter..........................................  13 7/8    8 3/16
</TABLE>
 
  The last reported sale price of the common stock on the AMEX on September 1,
1998 was $4 15/16. As of September 1, 1998, there were 1,192 shareholders of
record.
 
  The Company has not paid any cash dividends on its common 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. In addition, the Company's bank lines of credit
restrict the Company's ability to pay dividends.
 
                                      25
<PAGE>
 
Item 6. Selected Financial Data
 
  The selected consolidated financial data set forth below with respect to the
Company's statements of operations for each of the three fiscal years in the
period ended June 30, 1998 and with respect to the balance sheets at June 30,
1998 and 1997 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, 1995 and 1994, and
consolidated balance sheet data at June 30, 1996, 1995 and 1994 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 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.
 
<TABLE>
<CAPTION>
                                        Fiscal Year Ended June 30,
                                  --------------------------------------------
                                   1998   1997(1)  1996        1995     1994
                                  ------- ------- -------     -------  -------
                                   (in thousands, except per share data)
<S>                               <C>     <C>     <C>         <C>      <C>
Statement of Operations Data:
Revenues........................  $79,374 $52,543 $38,541     $27,014  $20,135
Net income (loss)...............      768     518  (3,441)(2)    (715)  (2,596)
Basic net income (loss) per
 share..........................     0.03    0.02   (0.15)      (0.04)   (0.14)
Diluted net income (loss) per
 share..........................     0.03    0.02   (0.15)      (0.04)   (0.14)
Weighted average common shares..   25,104  24,817  23,485      19,371   18,304
Weighted average common shares
 assuming dilution..............   25,669  25,586  23,485      19,371   18,304
Balance Sheet Data:
Cash and cash equivalents.......  $   753 $ 2,510 $   981     $ 3,842  $   799
Working capital.................   18,153  15,477  14,914       9,571    3,588
Total assets....................   42,012  32,440  27,107      18,104   10,593
Long-term debt and convertible
 debt...........................       --      --     127          --      500
Shareholders' equity............   22,910  20,898  19,472      12,274    5,751
</TABLE>
----------
(1) Fiscal year 1997 has been adjusted for the acquisition of Biometric
    Applications and Technology, Inc., which was accounted for as a pooling of
    interests.
 
(2) Includes a $4.7 million write-off of acquired in-process research and
    development related to the acquisition of Fingerscan Pty Ltd.
 
                                      26
<PAGE>
 
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 "Right 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 designs, develops, manufactures and markets two categories of
products for security, anti-fraud, law enforcement and other applications: (i)
Biometric Security products that verify the identity of an individual through
the unique biological characteristics of a fingerprint and (ii) Biometric
Imaging products that electronically capture forensic quality fingerprint
images directly from an individual's fingers for law enforcement and other
applications. The Company provides information technology, engineering and
management consulting services to private and public sector clients through
its wholly owned subsidiary ANADAC. ANADAC's services support the development,
installation, integration and operation of hardware and software technology
solutions, including Identix products, for a variety of client operating
environments.
 
  On March 26, 1996, the Company acquired Fingerscan Pty Limited
("Fingerscan"), a privately-held Australian-based company that designs and
markets Biometric Security products. Fingerscan had been a long-standing
Identix OEM partner integrating Identix fingerprint identification technology
into Fingerscan's fingerprint identity and verification products and systems.
The acquisition was accounted for as a purchase. Accordingly, the Company's
fiscal 1996 consolidated financial statements include the results of
Fingerscan from the date of acquisition. Fingerscan's name was changed to
Identix Australia Pty Limited during fiscal 1998. See Item 8, Note 2 of Notes
to Consolidated Financial Statements.
 
  On June 30, 1996, the Company acquired Innovative Archival Solutions, Inc.
("IAS"), a privately-held company which provides fingerprinting services using
the Company's Biometric Imaging systems. The acquisition was accounted for as
a pooling of interests. The Company's fiscal 1996 consolidated financial
statements include the accounts and operations of IAS. For fiscal 1995, the
effects of the combination with IAS were not significant and the Company has
not restated fiscal year 1995 to include the accounts and operations of IAS.
See Item 8, Note 2 of Notes to Consolidated Financial Statements.
 
  On July 23, 1997, the Company acquired Biometric Applications and
Technology, Inc. ("BA&T"), a privately held developer of biometric and "smart"
card applications and solutions. BA&T had been a software development partner
that integrated its software into Identix's Biometric Security products. The
acquisition was accounted for as a pooling of interests. The Company's fiscal
1997 consolidated financial statements include the accounts and operations of
BA&T. For fiscal 1996, the effects of the combination with BA&T were not
significant and the Company has not restated fiscal year 1996 to include the
accounts and operations of BA&T. See Item 8, Note 2 of Notes to Consolidated
Financial Statements.
 
  On September 30, 1997, the Company entered into a joint venture agreement
with Sylvan Learning Systems, Inc. for the purpose of providing fingerprinting
services through Sylvan's testing centers nationwide. As of October 1, 1997,
the business of IAS has been conducted through the joint venture,
Sylvan/Identix Fingerprint Centers, LLC ("SIFC").
 
  The Company implemented a restructuring of the Biometric Security Division
in February 1998. Management of the Biometric Security Division was
transferred from Fingerscan in Australia to Identix. The following functions
were transferred to personnel employed in the U.S. by the parent
company: management control and responsibility for profitability; global sales
and service; engineering; product development and manufacturing. The remaining
operations of Fingerscan consist of a sales and service office for the
Australian market. Management determined that the functional currency of
Fingerscan had changed from the Australian to the U.S. dollar and that the
above actions constituted a substantial liquidation of Fingerscan.
 
                                      27
<PAGE>
 
Results of Operations
 
  Years Ended June 30, 1998 and 1997
 
  Revenues. Revenues for fiscal 1998 were $79,374,000, compared to $52,543,000
for fiscal 1997. For fiscal 1998 the increase in revenues of 51% is due to
increases in both the Company's net product revenues and services revenues.
 
  The Company's net product revenues were $34,720,000 for fiscal 1998,
compared to $26,652,000 in fiscal 1997. For fiscal 1998, the increases in net
product revenues of 30% were due to increased shipments of the Company's
Biometric Imaging product group, mainly the TouchPrint 600 product line. In
addition, increased sales of the TouchPrint 600 product line have generated
additional revenues from maintenance support agreements and related customer
support. The increase in Biometric Imaging sales was partially offset by a
decline in the Company's Biometric Security product group sales, which
resulted primarily from a decline in sales in Asia related to the adverse
economic events in the region. International sales accounted for $6,350,000 or
18% of the Company's net product revenues for fiscal 1998, compared to
$8,178,000 or 31% for fiscal 1997. The decrease in international sales for the
year was primarily due to a decline in sales in Asia. The Company expects
international sales to continue to represent a significant portion of net
product revenues although the percentage may fluctuate from period to period.
The Company's international sales generally are 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 did not
have any customer account for 10% or more of total product revenues in either
fiscal 1998 or fiscal 1997.
 
  The Company's fingerprinting services revenues were $1,078,000 for fiscal
1998. For certain contracts that Identix held prior to the commencement of
SIFC, Identix subcontracted the fingerprinting services to the joint venture
at amounts equal to the amounts billed to the customers; therefore, no gross
margin was recognized by the Company except for a 5% license fee charged to
SIFC for use of certain of the Company's trademarks. As of July 1, 1998, all
contracts for fingerprinting services held by Identix have been assigned to
SIFC and the Company does not expect to report revenues for fingerprinting
services in the future.
 
  The Company's services revenues were $43,576,000 for fiscal 1998 compared to
$25,891,000 for fiscal 1997. The increases in services revenues of 68% for
fiscal 1998 was due primarily to increases in U.S. government purchases
through the Company's General Services Administration ("GSA") contract which
is operated and maintained by ANADAC. The GSA contract allows Government
agencies to purchase the Company's products and services as well as third
party products and services at agreed upon prices and rates. The Company and
the General Services Administration negotiate the prices and rates
periodically or as new products or services are added. The majority of the
Company's services revenues are generated directly from contracts with the
U.S. government, principally the Department of Defense ("DOD"). For fiscal
1998, revenues directly from the DOD and from other U.S. government agencies
accounted for 89% of the Company's total services revenues compared to 77% in
fiscal 1997.
 
  The Company's services business generates a significant amount of its
revenues from cost plus fixed fee ("CPFF") contracts, which accounted for
approximately 21% of its services revenues for fiscal 1998, compared to 39%
for fiscal 1997. The decrease in the percentage of services revenues generated
by CPFF contracts is primarily due to the increase in third party services
purchased through the Company's GSA contract. CPFF contracts provide for the
reimbursement of allowable costs, including indirect costs plus a fee or
profit. The Company's services business also generates revenue from time-and-
materials ("T&M") contracts and from firm fixed-price ("FFP") contracts.
During fiscal 1998, the Company derived approximately 68% of its services
revenues from T&M and FFP contracts compared to 46% in fiscal 1997. The
increase in the percentage of services revenues generated by T&M and FFP
contracts is primarily due to the increase in third party services purchased
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. FFP contracts provide for a fixed
price for stipulated services or products, regardless of the costs incurred,
which may result in
 
                                      28
<PAGE>
 
losses from cost overruns. The Company assumes greater performance risk on T&M
and FFP contracts and the failure to accurately estimate ultimate costs or to
control costs during performance of the work can result in reduced profit
margins or losses. There can be no assurance that the Company's services
business will not incur cost overruns for any FFP and T&M contracts it is
awarded. In addition, 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. ANADAC is
currently undergoing an audit by the Defense Contract Audit Agency for the
period from July 1, 1992 to June 30, 1995.
 
  Gross Margin. Gross margin on net product revenues was 51% for fiscal 1998,
as compared to 50% in fiscal 1997. 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 14% for fiscal 1998 as compared to 20%
for fiscal 1997. The decrease in gross margin for the year was primarily due
to an increase in third party services purchased through the GSA contact
maintained by ANADAC. When the Company sells third party services through the
GSA contract, the Company earns a fee based on a percentage of the third party
purchased services. The fee earned on third party services is typically less
than the fee earned on services directly provided by the Company.
 
  Research, Development and Engineering. Research, development and engineering
expenses were $4,572,000 or 13% of net product revenues for fiscal 1998,
compared to $2,754,000 or 10% for fiscal 1997. The increase in research,
development and engineering expenses is primarily due to the addition of
engineering staff and related expenses to further develop and enhance the
Company's products. The Company believes that investment in research and
development is critical to maintaining a strong technological position in the
industry and therefore expects research, development and engineering expenses
to continue to increase in absolute dollars in fiscal 1999.
 
  The actual revenues from products acquired from Fingerscan based on the F3
and F4 technologies have been significantly less than the revenues estimated
in determining the fair value of the in-process research and development
acquired. In valuing the acquired in-process research and development,
management of Fingerscan in 1996 estimated that F3 revenue for fiscal years
1997 through 2001 would be $160,000,000 and that F4 revenue for fiscal years
1998 through 2003 would be $45,000,000. The F3 technology was completed and
incorporated into two products which were introduced toward the end of fiscal
1998. Currently forecasted revenue from F3 products is approximately
$5,000,000. The F4 research and development project did not result in any
discrete, identifiable product from which revenues are expected to be derived.
 
  In both projects, there were significant technical problems that took longer
to overcome than originally expected. Further, the market demand for biometric
security products based on these technologies has been smaller than originally
expected due to the price of these products and a lack of market awareness.
 
  Marketing and Selling. Marketing and selling expenses were $9,107,000 or 11%
of total revenues for fiscal 1998 compared to $8,076,000 or 15% of total
revenues for fiscal 1997. The increase in marketing and selling expenses in
absolute dollars is due to the increased staffing and expenses to promote the
Company's products and services and to expand its customer support
organization. The Company expects marketing and selling expenses to continue
to increase in absolute dollars in fiscal 1999.
 
  General and Administrative. General and administrative expenses were
$8,474,000 or 11% of total revenues for fiscal 1998, compared to $7,171,000 or
14% of total revenues for fiscal 1997. The increase in general and
administrative expenses was primarily due to an increase in staffing and other
related administrative expenses to support the growth in operations and the
development of supporting infrastructure. The increase was partially offset by
a decrease in litigation charges which were $491,000 for fiscal 1998 compared
to $736,000 for fiscal 1997 (See Item 8, Note 10 of Notes to Consolidated
Financial Statements).
 
  Reorganization and Other Non-Recurring Costs. Reorganization and other non-
recurring costs were $717,000 for fiscal 1998. These costs consisted primarily
of a $460,000 write-off of cumulative translation
 
                                      29
<PAGE>
 
adjustment and, to a lesser extent, the write-off of deferred offering costs
and severance costs relating to the streamlining of the Company's
international operations.
 
  Interest and Other Income. For fiscal 1998, interest other income was
$66,000 compared to interest other income of $232,000 for fiscal 1997. The
decrease in interest and other income is primarily due to a foreign currency
transaction loss of $202,000.
 
  Interest Expense. Interest expense was $239,000 for fiscal 1998, compared to
$264,000 for fiscal 1997. The difference was due to lower levels of borrowings
under the lines of credit.
 
  The weighted average interest rate paid by the Company on borrowings under
its line of credit (the "Identix Line of Credit") for fiscal 1998 and 1997 was
approximately 8.5% each year. The weighted average interest rate paid by
ANADAC on borrowings under its bank line of credit (the "ANADAC Line of
Credit") during fiscal 1998 and 1997 was 8.5% and 8.3%, respectively.
 
  Income Taxes. No federal income taxes were paid or accrued in fiscal 1998
and 1997 due to the use of net operating loss ("NOL") carryforwards. The
Company had federal and state NOL carryforwards of approximately $19.6 million
and $3.6 million, respectively, as of June 30, 1998 that may be applied to
reduce future taxable income. However, under the Tax Reform Act of 1986, a
corporation's ability to use its NOLs may be impaired or limited in certain
circumstances, including a cumulative stock ownership change of more than 50%
over a three year period (an "ownership change"). Management believes that the
Company's public offering of units in January 1993 caused the Company to
experience an ownership change under these provisions. As a result, there is
an annual limitation on the utilization of the Company's NOL carryforwards
incurred prior to the ownership change of approximately $2.5 million. The NOL
carryforwards expire on various dates through fiscal 2011.
 
  Equity Interest in Joint Venture. The equity interest in joint venture loss
of $171,000 for fiscal 1998 represents the Company's share of the results of
SIFC.
 
  Years Ended June 30, 1997 and 1996
 
  Revenues. Revenues for fiscal 1997 were $52,543,000 compared to $38,541,000
for fiscal 1996. The increase in revenues of 36% for fiscal 1997 was due to
increases in both net product revenues and services revenues.
 
  The Company's net product revenues were $26,652,000 for fiscal 1997 compared
to $16,565,000 for fiscal 1996. The increase of 61% in net product revenues
for fiscal 1997 was due primarily to increased shipments of the Company's
Biometric Security products, primarily in international markets, and
TouchPrint 600 product line and increased fingerprint services. International
sales represented $8,178,000 or 31% of the Company's net product revenues for
fiscal 1997 compared to $2,198,000 or 13% for fiscal 1996. The overall impact
of currency fluctuations on operating results was not significant in fiscal
1997 or fiscal 1996. In fiscal 1997, the Company did not have any customer
account for 10% or more of total product revenues. In fiscal 1996, the
Company's products business had one customer which represented 14% of total
revenues.
 
  The Company's services revenues were $25,891,000 for fiscal 1997 compared to
$21,976,000 for fiscal 1996. The increase of 18% in services revenues for
fiscal 1997 was due to increased contract revenues from both U.S. Government
and commercial clients. The majority of the Company's services revenues are
generated from contracts with the U.S. Government, principally the DOD. For
fiscal 1997, revenues directly from the DOD and from other U.S. Government
agencies accounted for 77% of the Company's total services revenues compared
to 78% for fiscal 1996.
 
  CPFF contracts accounted for 39% of the Company's services revenues for
fiscal 1997 compared to 43% for fiscal 1996. During fiscal 1997, the Company
derived approximately 46% of services revenues from T&M contracts and FFP
contracts compared to 41% for fiscal 1996.
 
                                      30
<PAGE>
 
  Gross Margin. Gross margin on net product revenues was 50% for fiscal 1997
compared to 47% for fiscal 1996. The increase in gross margin for fiscal 1997
compared to fiscal 1996 was primarily due to (i) the favorable mix of
Biometric Security and Biometric Imaging product sales, (ii) cost reductions
in certain components and (iii) increased manufacturing efficiencies because
of the increase in unit volume and the absorption of manufacturing overhead
resulting from higher production levels.
 
  Gross margin on services revenues was 20% for fiscal 1997 compared to 18%
for fiscal 1996. The increase in the gross margin on services revenues was
primarily due to increased gross margins on revenues generated by ANADAC's
information technology group.
 
  Research, Development and Engineering. Research, development and engineering
expenses were $2,754,000 or 10% of net product revenues for fiscal 1997
compared to $1,486,000 or 9% of net product revenues for fiscal 1996. In
addition, for fiscal 1997 and 1996, research, development and engineering
expenditures funded by customers were $269,000 and $255,000, respectively. The
increase in research, development and engineering expenses, in absolute
dollars, is primarily due to the inclusion of research, development and
engineering expenses incurred by Fingerscan to develop and maintain certain
Biometric Security products, and in general, the addition of engineering staff
and related expenses to further develop and enhance the Company's products,
including the Company's introduction of the TouchPrint 600 Card Scan System
and new TouchPrint printer line.
 
  Marketing and Selling. Marketing and selling expenses were $8,076,000 or 15%
of total revenues for fiscal 1997 compared to $4,958,000 or 13% of total
revenues for fiscal 1996. The increase in marketing and selling expenses was
due to the inclusion of Fingerscan's marketing and selling expenses for the
entire year in fiscal 1997 and increased staffing and expenses to (i) promote
the Company's products and services, (ii) expand international sales and
distribution and (iii) expand its customer service organization.
 
  General and Administrative. General and administrative expenses were
$7,171,000 or 14% of total revenues for fiscal 1997 compared to $4,431,000 or
11% of total revenues for fiscal 1996. The increase in general and
administrative expenses was primarily due to (i) the additional administrative
expenses related to the operations of Fingerscan, (ii) litigation charges of
$736,000 related to a patent infringement lawsuit filed by a competitor and a
class action suit filed against the Company compared to litigation reserves
and expenses of $390,000 for fiscal 1996 and (iii) an increase in staffing and
related administrative expenses.
 
  Write-off of Acquired In-Process Research and Development. On March 26,
1996, the Company acquired Fingerscan. The excess of the purchase price over
the fair market value of the assets purchased and liabilities assumed was
$5,280,000, of which $4,723,000 was allocated to in-process research and
development, based on an independent appraisal, and was written-off in the
quarter ended March 31, 1996. See Item 8, Note 2 of Notes to Consolidated
Financial Statements.
 
  At the time of acquisition, the remaining research and development efforts
required to complete the in-process research and development and to introduce
products based upon resulting technologies included additional development of
hardware and software by Fingerscan and outside contractors, predominantly
integrated circuit manufacturers. The future research and development expense
associated with the in-process products was estimated to be approximately
$4,550,000 between 1996 and 2003.
 
  There were two significant technologies in-process at the time of
acquisition. "F3" was expected to result in new products that were 1/20th the
size and 1/10th the price of existing products. The second in-process
technology, "F4," was expected to greatly enhance user access by eliminating
the need for a smart card or access code and have far greater database
scanning capabilities.
 
  Each project had a different likelihood of success. Identified risks for the
F3 were significant remaining development issues, lack of working model or
prototype and the high risk nature of the technology. Risks for the F4
included those for the F3 plus the risk that competitors would drive prices
down quicker than anticipated, gaining market share before the F4 technology
was viable in it targeted market. The discount factor applied to the future
cash flows for these in-process technologies was 45% based on the independent
assessment of the calculated weighted cost of capital and the risks associated
with the in-process products.
 
                                      31
<PAGE>
 
  The valuation methodology used included an analysis and estimation of the
fair market value and remaining economic life of both the core and in-process
technologies on a going concern basis. The valuation of the business
enterprise and the acquired in-process research and development were developed
by discounting future net cash flows at a rate that reflected both the return
requirements of the market and risks inherent in the investment.
 
  Interest and Other Income. Net interest and other income was $232,000 during
fiscal 1997 compared to $460,000 during fiscal 1996. In fiscal 1997, interest
and other income was primarily related to an export market development grant
related to a subsidiary's export sales of $123,000 as compared to $27,000 in
fiscal 1996. In fiscal 1996, interest and other income also included the
proceeds from a licensing agreement related to one of the Company's trademarks
of $249,000.
 
  Interest Expense. Interest expense of $264,000 was incurred by the Company
during fiscal 1997 compared to interest expense of $164,000 for fiscal 1996.
The difference was due to increased borrowings against the Identix Line of
Credit.
 
  The weighted average interest rate paid by the Company on the Identix Line
of Credit for fiscal 1997 was approximately 8.5%. During fiscal 1996, Identix
did not borrow against the Identix Line of Credit. The weighted average
interest rate paid on the ANADAC Line of Credit for fiscal 1997 and fiscal
1996 was approximately 8.3% and 8.5%, respectively.
 
  Income Taxes. No federal income taxes were paid or accrued in fiscal 1997
and fiscal 1996 due to the use of NOL carryforwards in fiscal 1997 and
operating losses incurred in fiscal 1996.
 
Liquidity and Capital Resources
 
  The Company financed its operations during the year ended June 30, 1998
primarily from its existing working capital at June 30, 1997 and borrowings
under the Identix Line of Credit and the ANADAC Line of Credit. As of June 30,
1998, the Company's principal sources of liquidity consisted of $18,153,000 of
working capital including $753,000 in cash and cash equivalents, the Identix
Line of Credit and the ANADAC Line of Credit.
 
  The Identix Line of Credit is a $6,000,000 bank line of credit secured by
the personal property of Identix. Under the bank line of credit, the Company
may borrow up to 80% of eligible accounts receivable and may borrow up to 50%
of eligible inventory. Amounts drawn bear interest at the bank's prime rate of
interest (8.5% at June 30, 1998). The line of credit expires on October 27,
1998. At June 30, 1998, $4,925,000 was outstanding and $1,075,000 was
available under the Identix Line of Credit. On July 6, 1998, the Identix Line
of Credit was amended to increase the bank line to $7,000,000. The Company now
may borrow up to 80% of eligible accounts receivable and may borrow up to 35%
of eligible inventory. The Identix Line of Credit agreement contains financial
and operating covenants, including restrictions on the Company's ability to
pay dividends on the Company's common stock.
 
  The ANADAC Line of Credit is a $6,000,000 bank line of credit secured by
ANADAC's accounts receivable and certain other assets. Under the ANADAC Line
of Credit, ANADAC may borrow against qualified accounts receivable. Amounts
drawn bear interest at the bank's prime rate of interest (8.5% at June 30,
1998). The line of credit expires on November 30, 1998. At June 30, 1998,
$1,924,000 was outstanding and $4,076,000 was available under the ANADAC Line
of Credit. The ANADAC Line of Credit agreement contains financial and
operating covenants.
 
  The Company used cash of $6,356,000 in its operating activities during the
year ended June 30, 1998 primarily due to increases in accounts receivable of
$9,839,000 and inventories of $1,868,000. These uses of cash were partially
offset by increases in deferred revenue, net of amortization, of $699,000 and
accounts payable of $2,114,000. The increase in accounts receivable was due
primarily to an increase in total revenues, and the increase in inventories
was due primarily to the stocking of certain inventory for the Company's
Biometric Security and Biometric Imaging product groups. The increase in
deferred revenue was primarily due to an
 
                                      32
<PAGE>
 
increase in the number of TouchPrint 600 systems under maintenance contracts.
The increase in accounts payable was due to financing the increase in
inventories and timing of vendor payments.
 
  The Company used cash of $1,575,000 in investing activities during the year
ended June 30, 1998 consisting of purchases of property and equipment of
$883,000 and additions to intangibles and other assets of $631,000.
 
  The Company's financing activities provided cash of $6,174,000 during the
year ended June 30, 1998. Financing activities consisted of increased net
borrowings of $4,930,000 against the Company's lines of credit and proceeds
from exercises of stock options and warrants to purchase common stock of
$1,244,000.
 
  Identix did not have any material capital expenditure commitments as of June
30, 1998.
 
  The Company believes that cash flow from operations together with existing
working capital and two existing bank lines of credit will be adequate to fund
the Company's cash requirements through fiscal 1999. However, the Company may
require additional equity or debt financing beyond the amounts currently
forecasted to meet its working capital or capital equipment needs. There can
be no assurance that the Company would be able to obtain such financing or
that the terms of financing would be favorable to the Company.
 
Impact of Year 2000
 
  The Company has evaluated the products and services it offers, as well as
its information technology infrastructure, in an effort to determine whether
the Company or its customers may have exposure to Year 2000 problems caused by
computer systems that only use a two-digit year value and, accordingly, will
be subject to error or failure when the year 2000 arrives. The Company has
also made inquiries of its key suppliers to determine their readiness with
respect to Year 2000 problems.
 
  The Company has identified certain internal software that requires updating
in order to be Year 2000 compliant. As part of the Company's maintenance
contract for that software, the vendor of that software has provided the
Company with an upgrade that addresses the Year 2000 problem. The Company has
not installed the software upgrade yet, but expects to have the installation
completed by early 1999. The Company is also aware that it has sold certain
Biometric Imaging products that, at the request of the customers, use a two-
digit value for the year. The Company is informing its customers of the
potential issues that may be raised by this feature and how they can be
remediated. The Company believes that the costs to the Company not borne by
the customers for such remediation will be insignificant. The Company is also
aware that its TouchLock I product (which is only used by one customer and is
no longer in production) is not Year 2000 compliant. The Company, at its cost,
upgraded the software on the installed TouchLock I products to make them Year
2000 compliant. The expenditure required to complete this upgrading was
insignificant.
 
  The Company is at risk of disruption to its business if Year 2000 problems
are experienced by its key suppliers. The Company has sent inquiries to its
suppliers to determine their readiness with respect to Year 2000 problems. The
Company is still in the process of collecting responses. The Company will be
able to better determine what actions may be necessary to address potential
problems with key suppliers after it receives responses back from these
suppliers. A failure of a key supplier to provide the Company with necessary
components or services could result in a delay by the Company in providing
products or services to the Company's customers and have a material adverse
effect on the Company's business, financial condition and results of
operations.
 
  The Year 2000 problem is pervasive and complex and there can be no assurance
that the Company has been or will be able to identify all of the Year 2000
issues that may affect the Company or that any remedial efforts it takes will
adequately address any potential Year 2000 problems.
 
                                      33
<PAGE>
 
Item 8. Financial Statements and Supplementary Data
 
                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
 
<TABLE>
<CAPTION>
                                                                          Page
                                                                          ----
<S>                                                                       <C>
Financial Statements:
 Report of Independent Accountants.......................................  35
 Consolidated Balance Sheets as of June 30, 1998 and 1997................  36
 Consolidated Statements of Operations for the years ended June 30, 1998,
  1997 and 1996..........................................................  37
 Consolidated Statements of Shareholders' Equity for the years ended June
  30, 1998, 1997 and 1996................................................  38
 Consolidated Statements of Cash Flows for the years ended June 30, 1998,
  1997 and 1996..........................................................  39
 Notes to Consolidated Financial Statements..............................  40
Financial Statement Schedules:
 Schedule II Valuation and Qualifying Accounts and Reserves for the years
  ended June 30, 1998, 1997 and 1996.....................................  58
</TABLE>
 
                                       34
<PAGE>
 
                       REPORT OF INDEPENDENT ACCOUNTANTS
 
To the Board of Directors and Shareholders 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, 1998 and
1997, and the results of their operations and their cash flows for each of the
three years in the period ended June 30, 1998, in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express
an opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audits 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 the opinion expressed above.
 
PricewaterhouseCoopers LLP
 
San Jose, California
July 28, 1998
 
                                      35
<PAGE>
 
                              IDENTIX INCORPORATED
 
                          CONSOLIDATED BALANCE SHEETS
 
                                     ASSETS
 
<TABLE>
<CAPTION>
                                                            June 30,
                                                    --------------------------
                                                        1998          1997
                                                    ------------  ------------
<S>                                                 <C>           <C>
Current assets:
  Cash and cash equivalents........................ $    753,000  $  2,510,000
  Accounts receivable, less allowance for doubtful
   accounts of $866,000 and $625,000...............   28,576,000    18,737,000
  Inventories......................................    7,163,000     5,295,000
  Prepaid expenses and other assets................      586,000       323,000
                                                    ------------  ------------
    Total current assets...........................   37,078,000    26,865,000
Property and equipment, net........................    2,105,000     2,567,000
Intangibles and other assets.......................    2,768,000     3,008,000
Investment in joint venture........................       61,000            --
                                                    ------------  ------------
    Total assets................................... $ 42,012,000  $ 32,440,000
                                                    ============  ============
 
                      LIABILITIES AND SHAREHOLDERS' EQUITY
 
Current liabilities:
  Notes payable to banks........................... $  6,849,000  $  1,919,000
  Accounts payable.................................    8,428,000     6,314,000
  Accrued compensation.............................    1,837,000     1,515,000
  Other accrued liabilities........................      574,000     1,079,000
  Deferred revenue.................................    1,237,000       561,000
                                                    ------------  ------------
    Total current liabilities......................   18,925,000    11,388,000
Deferred revenue...................................       88,000        65,000
Other liabilities..................................       89,000        89,000
                                                    ------------  ------------
    Total liabilities..............................   19,102,000    11,542,000
                                                    ------------  ------------
 
Commitments and contingencies (Notes 9 and 10)
 
Shareholders' equity:
  Common stock, no par value; 50,000,000 shares
   authorized; 25,255,577 and 24,942,778 shares
   issued and outstanding..........................   52,527,000    51,283,000
  Accumulated deficit..............................  (29,436,000)  (30,204,000)
  Cumulative translation adjustment................     (181,000)     (181,000)
                                                    ------------  ------------
    Total shareholders' equity.....................   22,910,000    20,898,000
                                                    ------------  ------------
    Total liabilities and shareholders' equity..... $ 42,012,000  $ 32,440,000
                                                    ============  ============
</TABLE>
 
  The accompanying notes are an integral part of these consolidated financial
                                  statements.
 
                                       36
<PAGE>
 
                              IDENTIX INCORPORATED
 
                     CONSOLIDATED STATEMENTS OF OPERATIONS
 
<TABLE>
<CAPTION>
                                                Fiscal year ended June 30,
                                            -------------------------------------
                                               1998         1997         1996
                                            -----------  -----------  -----------
<S>                                         <C>          <C>          <C>
Revenues:
 Net product revenues.....................  $34,720,000  $26,652,000  $16,565,000
 Fingerprinting services revenues.........    1,078,000           --           --
 Services revenues........................   43,576,000   25,891,000   21,976,000
                                            -----------  -----------  -----------
    Total revenues........................   79,374,000   52,543,000   38,541,000
                                            -----------  -----------  -----------
Costs and expenses:
 Cost of product revenues.................   16,887,000   13,359,000    8,722,000
 Cost of fingerprinting services
  revenues................................    1,028,000           --           --
 Cost of services revenues................   37,477,000   20,633,000   17,958,000
 Research, development and engineering....    4,572,000    2,754,000    1,486,000
 Marketing and selling....................    9,107,000    8,076,000    4,958,000
 General and administrative...............    8,474,000    7,171,000    4,431,000
 Reorganization and other non-recurring
  costs...................................      717,000           --           --
 Write-off of acquired in-process
  research and development................           --           --    4,723,000
                                            -----------  -----------  -----------
    Total costs and expenses..............   78,262,000   51,993,000   42,278,000
                                            -----------  -----------  -----------
Income (loss) from operations.............    1,112,000      550,000   (3,737,000)
Interest and other income (expense), net..       66,000      232,000      460,000
Interest expense..........................     (239,000)    (264,000)    (164,000)
                                            -----------  -----------  -----------
Income (loss) before equity interest in
 joint venture............................      939,000      518,000   (3,441,000)
Equity interest in joint venture..........     (171,000)          --           --
                                            -----------  -----------  -----------
Net income (loss).........................  $   768,000  $   518,000  $(3,441,000)
                                            ===========  ===========  ===========
Basic net income (loss) per share.........  $      0.03  $      0.02  $     (0.15)
                                            ===========  ===========  ===========
Diluted net income (loss) per share.......  $      0.03  $      0.02  $     (0.15)
                                            ===========  ===========  ===========
Weighted average common shares............   25,104,000   24,817,000   23,485,000
Weighted average common shares assuming
 dilution.................................   25,669,000   25,586,000   23,485,000
</TABLE>
 
 
  The accompanying notes are an integral part of these consolidated financial
                                  statements.
 
                                       37
<PAGE>
 
                              IDENTIX INCORPORATED
 
                CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
 
<TABLE>
<CAPTION>
                               Common Stock
                          ---------------------- Accumulated      Cumulative
                            Shares     Amount      Deficit     Translation Adj.    Total
                          ---------- ----------- ------------  ---------------- -----------
<S>                       <C>        <C>         <C>           <C>              <C>
Balance June 30, 1995...  21,520,879 $39,437,000 $(27,163,000)    $      --     $12,274,000
Sale of common stock
 under stock option
 plans..................     679,724   1,569,000                                  1,569,000
Sale of common stock
 under warrant
 exercise...............   1,295,885   3,559,000                                  3,559,000
Issuance of common stock
 related to acquisition
 of Fingerscan Pty
 Limited................     668,976   5,459,000                                  5,459,000
Issuance of common stock
 related to acquisition
 of Innovative Archival
 Solutions, Inc. .......     155,000                   70,000                        70,000
Cumulative translation
 adjustment.............                                            (18,000)        (18,000)
Net loss................                           (3,441,000)                   (3,441,000)
                          ---------- ----------- ------------     ---------     -----------
Balance June 30, 1996...  24,320,464  50,024,000  (30,534,000)      (18,000)     19,472,000
Sale of common stock
 under stock option
 plans..................      66,739     190,000                                    190,000
Sale of common stock
 under warrant
 exercise...............     105,575     332,000                                    332,000
Cumulative translation
 adjustment.............                                           (163,000)       (163,000)
Issuance of common stock
 related to acquisition
 of
 Biometric Applications
 and Technology, Inc. ..     450,000     737,000     (188,000)                      549,000
Net income..............                              518,000                       518,000
                          ---------- ----------- ------------     ---------     -----------
Balance June 30, 1997...  24,942,778  51,283,000  (30,204,000)     (181,000)     20,898,000
Sale of common stock
 under stock option
 plans..................     287,799   1,191,000                                  1,191,000
Sale of common stock
 under warrant
 exercise...............      25,000      53,000                                     53,000
Net income..............                              768,000                       768,000
                          ---------- ----------- ------------     ---------     -----------
Balance June 30, 1998...  25,255,577 $52,527,000 $(29,436,000)    $(181,000)    $22,910,000
                          ========== =========== ============     =========     ===========
</TABLE>
 
  The accompanying notes are an integral part of these consolidated financial
                                  statements.
 
                                       38
<PAGE>
 
                              IDENTIX INCORPORATED
 
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
 
<TABLE>
<CAPTION>
                                             Fiscal year ended June 30,
                                       ----------------------------------------
                                           1998          1997          1996
                                       ------------  ------------  ------------
<S>                                    <C>           <C>           <C>
Increase (decrease) in cash and cash
 equivalents:
 Net income (loss)...................  $    768,000  $    518,000  $ (3,441,000)
 Adjustments to reconcile net income
  (loss) to net cash provided by or
  used for operating activities:
  Depreciation.......................     1,345,000     1,116,000     1,045,000
  Amortization of intangibles........       871,000       814,000       492,000
  Amortization of deferred revenue...    (2,127,000)     (937,000)     (408,000)
  Write-off of acquired in-process
   research
   and development...................            --            --     4,723,000
  Increase in inventory reserve......       338,000       284,000       177,000
 Changes in assets and liabilities,
  net of effects of acquisitions:
  Accounts receivable................    (9,839,000)   (2,406,000)   (7,966,000)
  Inventories........................    (2,206,000)   (1,115,000)   (1,896,000)
  Prepaid expenses and other assets..      (263,000)      (57,000)      253,000
  Accounts payable...................     2,114,000     3,005,000     1,484,000
  Accrued compensation...............       322,000       279,000       169,000
  Other accrued liabilities..........      (505,000)      424,000      (299,000)
  Deferred revenue...................     2,826,000     1,014,000       437,000
                                       ------------  ------------  ------------
 Net cash provided by (used for)
  operating activities...............    (6,356,000)    2,939,000    (5,230,000)
                                       ------------  ------------  ------------
Cash flows used in investing
 activities:
 Capital expenditures................      (883,000)   (1,379,000)   (1,951,000)
 Investment in joint venture.........       (61,000)           --            --
 Additions to intangibles and other
  assets.............................      (631,000)     (975,000)     (898,000)
 Cash received in acquisitions.......            --         6,000       180,000
                                       ------------  ------------  ------------
 Net cash used in investing
  activities.........................    (1,575,000)   (2,348,000)   (2,669,000)
                                       ------------  ------------  ------------
Cash flows provided by financing
 activities:
 Borrowings under bank lines of
  credit.............................    20,150,000    16,530,000    14,361,000
 Payments under bank lines of
  credit.............................   (15,220,000)  (16,457,000)  (14,666,000)
 Borrowings under long-term note.....            --            --       318,000
 Principal payments on long-term
  note...............................            --      (233,000)      (85,000)
 Proceeds from sale of common stock
  and warrants, net..................     1,244,000       522,000     5,128,000
 Capital contribution................            --       737,000            --
 Other, net..........................            --         2,000            --
                                       ------------  ------------  ------------
 Net cash provided by financing
  activities.........................     6,174,000     1,101,000     5,056,000
                                       ------------  ------------  ------------
Effect of exchange rate changes on
 cash and cash equivalents...........            --      (163,000)      (18,000)
                                       ------------  ------------  ------------
Net increase (decrease) in cash and
 cash equivalents....................    (1,757,000)    1,529,000    (2,861,000)
Cash and cash equivalents at
 beginning of year...................     2,510,000       981,000     3,842,000
                                       ------------  ------------  ------------
Cash and cash equivalents at end of
 year................................  $    753,000  $  2,510,000  $    981,000
                                       ============  ============  ============
Supplemental disclosures of cash flow
 information:
Cash paid during the year for
 interest............................  $    291,000  $    206,000  $    172,000
</TABLE>
 
  The accompanying notes are an integral part of these consolidated financial
                                  statements.
 
                                       39
<PAGE>
 
                             IDENTIX INCORPORATED
 
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
NOTE 1 -- THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES
 
  Identix Incorporated (the "Company") designs, manufactures, develops and
markets two categories of products for security, anti-fraud, law enforcement
and other applications: (i) Biometric Security products that verify the
identity of an individual through the unique biological characteristics of a
fingerprint and (ii) Biometric Imaging products that electronically capture
forensic quality fingerprint images from an individual's fingers for law
enforcement and other applications. The Company provides information
technology, engineering and management consulting services to private and
public sector clients through its wholly owned subsidiary ANADAC, Inc.
("ANADAC"). The principal markets for the Company's products are the Americas,
Asia, Australia, Europe and the Middle East.
 
  On March 26, 1996, the Company acquired Fingerscan Pty Limited
("Fingerscan") pursuant to a share purchase agreement whereby Fingerscan
became a wholly owned subsidiary of the Company. The acquisition was accounted
for as a purchase (Note 2). In fiscal 1998, Fingerscan changed its name to
Identix Australia Pty Limited ("Identix Australia").
 
  On June 30, 1996, the Company acquired Innovative Archival Solutions, Inc.
("IAS") pursuant to a share purchase agreement. The acquisition was accounted
for as a pooling of interests (Note 2). Since September 30, 1997, the business
of IAS has been conducted through Sylvan/Identix Fingerprinting Center, L.L.C.
("SIFC").
 
  On July 23, 1997, the Company acquired Biometric Applications and
Technology, Inc. ("BA&T") pursuant to a share purchase agreement. The
acquisition was accounted for as a pooling of interests (Note 2).
 
  Ascom USA Inc., a subsidiary of Ascom Hasler AG, a Swiss Company, owned
approximately 20% of the Company's common stock at June 30, 1998 (Note 6).
 
Basis of Consolidation
 
  The consolidated financial statements include the accounts of Identix
Incorporated and its wholly owned subsidiaries: ANADAC, Identix Australia and
BA&T; all significant intercompany balances and transactions have been
eliminated in consolidation.
 
Management Estimates and Assumptions
 
  The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of 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.
 
Joint Venture
 
  On September 30, 1997, the Company entered into a joint venture agreement
with Sylvan Learning Centers, Inc. to form SIFC for the purpose of providing
fingerprinting services through Sylvan's testing systems nationwide. The
Company owns a 50% interest in the joint venture. For certain contracts held
by Identix prior to the joint venture, Identix subcontracts the fingerprinting
services to the joint venture. Revenues received by Identix under these
contracts are presented separately as fingerprinting services revenue in the
consolidated statement of operations. As of July 1, 1998, the contracts have
been assigned to SIFC.
 
Revenue Recognition
 
  Revenue from product sales is recognized in accordance with the terms of
sale, generally upon shipment by the Company, provided no significant vendor
obligations remain and collection of the receivable is deemed
 
                                      40
<PAGE>
 
                             IDENTIX INCORPORATED
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 
probable. Extended service and maintenance contract revenue is deferred and
recognized ratably 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 cost-reimbursable, time and material and fixed-price contracts.
Revenues for cost-plus fixed fee contracts are recognized as costs are
incurred, including a proportionate amount of the fee earned. Revenues on
time-and-materials contracts are recognized to the extent of billable rates
times hours worked plus materials expense incurred. Revenues on fixed-price
contracts are generally recognized on the percentage-of-completion method
based on costs incurred in relation to total estimated costs. Unbilled
accounts receivable at June 30, 1998 represent revenue accrued which becomes
billable upon attainment of contract milestones. 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, and from subcontracts with other
U.S. Government contractors were approximately 89% of total services revenues
for fiscal 1998, 77% for fiscal 1997 and 78% for fiscal 1996. 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. Audits of ANADAC's costs have been
completed by the Defense Contract Audit Agency through June 30, 1992. ANADAC
is currently undergoing an audit by the Defense Contract Audit Agency for the
period from July 1, 1992 to June 30, 1995. No material adjustments have been
made, and ANADAC does not anticipate adjustments for any open years that would
have a material effect on the consolidated financial statements.
 
Major Customer and International Revenues
 
  In fiscal 1998 and 1997, the Company had no non-U.S. Government customers
that accounted for 10% or more of total revenues. In fiscal 1996 one non-U.S.
Government customer in the Company's products business accounted for 14% of
total revenues.
 
  Net product revenues included international revenues of $6,350,000 in fiscal
1998, $8,178,000 in fiscal 1997, and $2,198,000 in fiscal 1996.
 
Cash and Cash Equivalents
 
  Cash equivalents consist of highly liquid investments with a maturity of
three months or less when purchased. These investments consist of income
producing securities, which are readily convertible to cash and are stated at
cost, which approximates market.
 
Concentration of Credit Risk
 
  The Company performs on-going credit evaluations of its customers' financial
conditions and limits the amount of credit extended when deemed necessary. The
Company maintains an allowance for potential credit losses which are based
upon the expected collectibility of all accounts receivable. Management
believes that any risk of loss is significantly reduced due to the Company's
substantial number of government customers. The write-off of uncollectible
amounts in current and prior years has not been significant.
 
  Currently, the Company's policy is to limit its exposure in financial
instruments by investing its excess cash with major banks in money market
securities. The Company, by policy, limits the amount of exposure to any one
financial institution.
 
                                      41
<PAGE>
 
                             IDENTIX INCORPORATED
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 
 
Inventories
 
  Inventories are stated at the lower of cost (determined on the first-in,
first-out cost method) or market. 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.
 
Property and Equipment
 
  Property and equipment are stated at cost. 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 is 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.
 
Intangibles and Other Assets
 
  Intangible assets include goodwill, purchased technology, capitalized
contract rights and capitalized software developments costs. Goodwill and
purchased technology are amortized over five to seven years. Capitalized
contract rights are amortized over the terms of the related contracts, usually
one to five years.
 
  The Company accounts for software development costs in accordance with
Statement of Financial Accounting Standards No. 86 "Accounting for the Costs
of Computer Software to be Sold, Leased or Otherwise Marketed." Accordingly,
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. 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. Amortization of capitalized software costs is
charged to cost of product revenues. Research and development expenditures are
charged to research and development in the period incurred.
 
  In fiscal 1996, the Company adopted Statement of Financial Accounting
Standards No. 121 "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of." Accordingly, the Company evaluates asset
recoverability at each balance sheet date or when an event occurs that may
impair recoverability of the asset. The Company determines the recoverability
of the carrying amount of each intangible asset by reviewing the following
factors: the undiscounted value of expected operating cash flows in relation
to its net capital investments, the estimated useful or contractual life of
the intangible asset, the contract or product supporting the intangible asset,
and in the case of purchased technology and capitalized software development
costs, the Company periodically reviews the recoverability of the asset value
by evaluating its products with respect to technological advances, competitive
products and the needs of its customers.
 
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 at the time
of sale and periodically adjusted to reflect actual experience.
 
                                      42
<PAGE>
 
                             IDENTIX INCORPORATED
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 
 
Income Taxes
 
  Deferred tax assets and liabilities are recognized for the expected tax
consequences of temporary differences between the income tax bases of assets
and liabilities and the amounts reported for financial reporting purposes for
all periods presented (Note 7).
 
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 No. 25, "Accounting for Stock Issued to Employees"
("APB 25"). Additional pro forma disclosures as required under Statement of
Financial Accounting Standards No. 123 "Accounting for Stock-Based
Compensation" ("SFAS 123") are presented in Note 5.
 
Comprehensive Income
 
  In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130 "Reporting Comprehensive Income" ("SFAS
130"). This statement is effective for the Company's fiscal year ending June
30, 1999. The statement establishes presentation and disclosure requirements
for reporting comprehensive income. Comprehensive income includes charges or
credits to equity that are not the result of transactions with owners. The
Company plans to report comprehensive income as part of the Consolidated
Statements of Shareholders' Equity as required under SFAS 130 and expects
there to be no material impact on its financial position and results of
operations as a result of the adoption of this new accounting standard.
 
Segments of an Enterprise and Related Information
 
  In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 131 "Disclosures about
Segments of an Enterprise and Related Information" ("SFAS 131"). This
statement is effective for the Company's fiscal year ending June 30, 1999. The
statement requires the Company to report certain financial information about
operating segments in a complete set of financial statements as well as in
condensed financial statements of interim periods. It also requires that the
Company report certain information about its products and services, the
geographic areas in which it operates and its major customers. The method the
FASB chose for determining what information to report is referred to as the
"management approach". The management approach is based on the way that
management organizes the segments within the enterprise for making operating
decisions and assessing performance. Company management has not yet completed
its assessment of how the "management approach" will impact existing segment
disclosures, but does not expect that this new standard will have a material
adverse effect on the consolidated financial statement disclosures.
 
Foreign Currency Translation
 
  The Company's foreign subsidiary used the local currency as the functional
currency until March 31, 1998. Since then, the functional currency has been
the US dollar. Accordingly, assets and liabilities were translated at the
exchange rate in effect at that date and revenue and expenses since then are
recorded in US dollars at current exchange rates. Foreign currency transaction
losses included in interest and other income were $202,000 in fiscal 1998.
Such amounts were not material in fiscal 1997 and fiscal 1996.
 
Earnings Per Share
 
  The Company adopted Statement of Financial Accounting Standards No. 128,
"Earnings Per Share" ("SFAS 128") during the second quarter of fiscal 1998.
This statement simplifies the standards for computing
 
                                      43
<PAGE>
 
                             IDENTIX INCORPORATED
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 
earnings per share (EPS) previously defined in Accounting Principles Board
Opinion No. 15 "Earnings Per Share." All prior-period earnings per share data
has been restated in accordance with SFAS 128. SFAS 128 requires presentation
of both Basic EPS and Diluted EPS on the face of the income statement. Basic
EPS is computed by dividing net income available to common stockholders
(numerator) by the weighted average number of common shares outstanding
(denominator) during the period. Diluted EPS gives effect to all dilutive
potential common shares outstanding during the period including stock options
and warrants, using the treasury stock method, and convertible preferred
stock, using the if-converted method. In computing Diluted EPS, the average
stock price for the period is used in determining the number of shares assumed
to be purchased from the exercise of stock options.
 
  Following is a reconciliation of the numerators and denominators of the
basic and diluted earnings per share for the periods presented below:
 
<TABLE>
<CAPTION>
                                                 Years Ended June 30,
                                          -----------------------------------
                                             1998        1997        1996
                                          ----------- ----------- -----------
   <S>                                    <C>         <C>         <C>
   Net income (loss) (Numerator)......... $   768,000 $   518,000 $(3,441,000)
                                          =========== =========== ===========
   Weighted average common stock
    outstanding (Denominator)............  25,104,000  24,817,000  23,485,000
   Dilutive effect of stock options and
    warrants.............................     565,000     769,000          --
                                          ----------- ----------- -----------
   Weighted average common stock
    outstanding assuming dilution
    (Denominator)........................  25,669,000  25,586,000  23,485,000
                                          =========== =========== ===========
   Basic net income (loss) per share..... $      0.03 $      0.02 $     (0.15)
                                          =========== =========== ===========
   Diluted net income (loss) per share... $      0.03 $      0.02 $     (0.15)
                                          =========== =========== ===========
</TABLE>
 
  Options to purchase 934,287 and 560,322 shares of common stock at weighted
average exercise prices of $10.21 and $11.09 per share were outstanding at
June 30, 1998 and June 30, 1997, respectively, but were not included in the
computation of diluted EPS because they were anti-dilutive.
 
  Shares held by the Company's employee stock ownership plan are treated as
outstanding for purposes of computing earnings per share.
 
NOTE 2 -- ACQUISITIONS
 
Biometric Applications and Technology, Inc
 
  On July 23, 1997, pursuant to a share purchase agreement, the Company issued
450,000 shares of the Company's common stock to acquire BA&T, a privately held
company located in Kansas City, Missouri. In connection with the acquisition
of BA&T, the Company incurred costs of approximately $45,000, primarily for
transaction and professional fees. BA&T develops and markets biometric and
"smart" card software applications and solutions and has been an Identix
software development partner. The acquisition has been accounted for as a
pooling of interests.
 
  The Company's fiscal 1998 consolidated financial statements include the
accounts and operations of BA&T. The Company has restated the consolidated
financial statements for fiscal 1997 to include the results and operations of
BA&T. For fiscal 1996, the effects of the combination with BA&T were not
significant and the Company has not restated the fiscal 1996 consolidated
financial statements to include the accounts and operations of BA&T.
 
                                      44
<PAGE>
 
                             IDENTIX INCORPORATED
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 
 
  Separate net revenues, net income (loss) and related per share amounts of
the combined entities for the year ended June 30, 1997 are presented in the
following table:
 
<TABLE>
<CAPTION>
                                                Identix     BA&T      Combined
                                              ----------- ---------  -----------
     <S>                                      <C>         <C>        <C>
     Net revenues............................ $52,390,000 $ 153,000  $52,543,000
     Net income (loss)....................... $ 1,250,000 $(732,000) $   518,000
     Net income per share
      Basic..................................                        $      0.02
      Diluted................................                        $      0.02
</TABLE>
 
Fingerscan
 
  On March 26, 1996, the Company acquired Fingerscan, a privately-held
Australian-based company that designs and markets Biometric Security products,
pursuant to a Share Purchase Agreement whereby Fingerscan became a wholly
owned subsidiary of the Company. In accordance with the Share Purchase
Agreement, the shareholders of Fingerscan were issued 668,976 shares of the
Company's no par value common stock.
 
  The acquisition was accounted for using the purchase method of accounting.
Accordingly, the Company's results for fiscal 1996 include the operations of
Fingerscan from the date of acquisition and the purchase price has been
allocated to the assets purchased and the liabilities assumed based upon the
fair values at the date of acquisition. Based upon an appraisal by an
investment banking firm, the value of the 668,976 shares of the Company's
common stock issued in the acquisition was determined to be $5,459,000
reflecting a 32% discount for certain restrictions related to the resale of
the common stock issued to purchase Fingerscan. The excess of the purchase
price over the fair market value of the net tangible assets acquired
aggregated approximately $5,280,000, of which $4,723,000 was allocated to in-
process research and development and $557,000 was allocated to other
intangibles including acquired technology. An independent appraisal was
performed which used the income approach to determine the fair value of
Fingerscan and its identifiable assets, including the portion of the purchase
price attributed to the in-process research and development. The income
approach includes an analysis of the markets, completion costs, cash flows,
other required assets, contributions made by core technology and risks
associated with achieving such cash flows. The developmental products acquired
were evaluated in context of Interpretation 4 of SFAS No. 2 and SFAS No. 86
and the identified in-process research and development was expensed in
accordance with these provisions as technological feasibility had not yet been
reached. At the time of acquisition, the in-process research and development
charge represented a multiple of approximately 19 times Fingerscan's trailing
twelve month research and development expenditures. The Company amortizes the
amount allocated to other intangibles including acquired technology over a
five-year period.
 
  The following unaudited pro forma information presents a summary of
consolidated results of operations of the Company and Fingerscan as if the
acquisition had occurred at the beginning of the respective periods. The pro
forma combined statements of operations do not include the adjustment for the
non-recurring write-off of acquired in-process research and development. The
net income per share is based on the average number of shares of common stock
of Identix outstanding during the period plus the common shares issued by
Identix to acquire Fingerscan. These pro forma results have been prepared for
comparative purposes only and do not purport to be indicative of what
operating results would have been had the acquisition actually taken place on
the assumed dates or of operating results which may occur in the future.
 
                                      45
<PAGE>
 
                             IDENTIX INCORPORATED
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 
 
<TABLE>
<CAPTION>
                                                               Fiscal year ended
                                                                 June 30, 1996
                                                               -----------------
     <S>                                                       <C>
     Net revenues.............................................    $39,883,000
     Net income...............................................    $   966,000
     Net income per share
      Basic...................................................    $      0.04
      Diluted.................................................    $      0.04
</TABLE>
 
  The Company implemented a restructuring of the Biometric Security Division
in February 1998. Management of the Biometric Security Division was
transferred from Fingerscan in Australia to Identix. The following functions
were transferred from Fingerscan in Australia to personnel employed in the
U.S. by the parent company:
 
  . Management control and responsibility for profitability
 
  . Global sales and service
 
  . Engineering and product development
 
  . Manufacturing
 
  The remaining operations of Fingerscan consist of a sales and service office
for the Australian Biometric Security market. Management determined that the
functional currency of Fingerscan had changed from the Australian to the
U.S. dollar and that the above actions constituted a substantial liquidation
of Fingerscan. Accordingly, $460,000 of cumulative translation adjustment was
charged to income during fiscal 1998.
 
IAS
 
  On June 30, 1996, pursuant to a share purchase agreement, the Company issued
155,000 shares of the Company's common stock to acquire IAS, a privately held
company. In connection with the acquisition of IAS, the Company incurred costs
of approximately $40,000 primarily for transaction and professional fees,
before tax. The acquisition has been accounted for as a pooling of interests.
The Company's fiscal 1996 consolidated financial statements include the
accounts and operations of IAS. For fiscal 1995, the effects of the
combination with IAS were not significant and the Company has not restated the
fiscal 1995 consolidated financial statements to include the accounts and
operations of IAS.
 
  Separate net revenues, net income (loss) and related per share amounts of
the combined entities, after adjustments for transactions between the two
entities, for the year ended June 30, 1996 are presented in the following
table:
 
<TABLE>
<CAPTION>
                                  Identix       IAS     Adjustments  Combined
                                -----------  ---------- ----------- -----------
<S>                             <C>          <C>        <C>         <C>
Net revenues................... $37,208,000  $2,194,000  $(861,000) $38,541,000
Net income (loss).............. $(3,557,000) $  256,000  $(140,000) $(3,441,000)
Net loss per share
 Basic.........................                                     $     (0.15)
 Diluted.......................                                     $     (0.15)
</TABLE>
 
                                      46
<PAGE>
 
                             IDENTIX INCORPORATED
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 
NOTE 3 -- BALANCE SHEET DETAIL
 
<TABLE>
<CAPTION>
                                                              June 30,
                                                       ------------------------
                                                          1998         1997
                                                       -----------  -----------
<S>                                                    <C>          <C>
Accounts receivable:
Commercial and other.................................. $16,655,000  $11,914,000
United States Government:
Billed................................................  10,350,000    5,277,000
Unbilled..............................................   2,062,000    1,730,000
Employee receivables..................................     375,000      441,000
Less: allowance for doubtful accounts.................    (866,000)    (625,000)
                                                       -----------  -----------
                                                       $28,576,000  $18,737,000
                                                       ===========  ===========
Inventories:
Purchased parts and materials......................... $ 3,518,000  $ 3,027,000
Work-in-process.......................................     906,000    1,076,000
Finished goods, including spares......................   2,739,000    1,192,000
                                                       -----------  -----------
                                                       $ 7,163,000  $ 5,295,000
                                                       ===========  ===========
Property and equipment:
Manufacturing, test and office equipment.............. $ 5,356,000  $ 5,326,000
Furniture and fixtures................................   1,205,000    1,194,000
Leasehold improvements................................     149,000      127,000
                                                       -----------  -----------
                                                         6,710,000    6,647,000
Less: accumulated depreciation and amortization.......  (4,605,000)  (4,080,000)
                                                       -----------  -----------
                                                       $ 2,105,000  $ 2,567,000
                                                       ===========  ===========
Intangibles and other assets:
Goodwill and deferred acquisition costs............... $ 1,298,000  $ 1,370,000
Purchased technology..................................   1,334,000    1,334,000
Capitalized software costs............................   3,099,000    2,367,000
Less: accumulated amortization........................  (3,302,000)  (2,516,000)
                                                       -----------  -----------
                                                         2,429,000    2,555,000
Other assets..........................................     339,000      453,000
                                                       -----------  -----------
                                                       $ 2,768,000  $ 3,008,000
                                                       ===========  ===========
</TABLE>
 
NOTE 4 -- LINES OF CREDIT
 
  The Company has a $6,000,000 bank line of credit (the "Identix Line of
Credit") secured by substantially all of the personal property of the Company.
Under the Identix Line of Credit, the Company may borrow up to 80% of eligible
accounts receivable and up to 50% of eligible inventory. Amounts drawn bear
interest at the bank's prime rate of interest (8.50% at June 30, 1998). The
line of credit expires on October 27, 1998. At June 30, 1998, $4,925,000 was
outstanding and $1,075,000 was available under this bank line of credit. The
line of credit agreement contains financial and operating covenants including
restrictions on the Company's ability to pay dividends on the Company's common
stock. During fiscal 1998, the Company was in default on one of its bank line
of credit covenants. The Company has obtained a waiver of default from the
bank for breaches of the covenant. At June 30, 1998, the Company was in
compliance with such bank covenants.
 
 
                                      47
<PAGE>
 
                             IDENTIX INCORPORATED
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 
  On July 6, 1998, the Identix Line of Credit was amended to increase the
maximum amount available to $7,000,000. The Company may now borrow up to 80%
of eligible accounts receivable and may borrow up to 35% of eligible
inventory.
 
  ANADAC has a $6,000,000 bank line of credit and outstanding balances bear
interest at the bank's prime lending rate (8.50% at June 30, 1998) and are
payable upon demand. Available borrowings under the line are based upon
qualifying accounts receivable balances. The line of credit expires November
30, 1998. At June 30, 1998, $1,924,000 was outstanding and $4,076,000 was
available under the ANADAC Line of Credit. The line of credit agreement
includes, among other things, certain financial covenants and maintenance of
certain financial ratios. At June 30, 1998, ANADAC was in compliance with such
bank covenants.
 
NOTE 5 -- CAPITAL STOCK
 
Employee Stock Options
 
  In May 1983, the Company adopted an incentive stock option plan which
expired in 1993 ("1983 Plan"). Under the 1983 Plan, the Company reserved a
total of 2,000,000 shares of the Company's common stock. In October 1992, the
Company adopted the 1992 Incentive Stock Option Plan ("1992 Plan"). The 1992
Plan will expire in 2002. A total of 1,000,000 shares of the Company's common
stock has been reserved for issuance under the 1992 Plan. In July 1995, the
Company adopted the Identix Incorporated Equity Incentive Plan ("1995 Plan").
The 1995 Plan will expire in 2005. In October 1997, the Company amended the
1995 Plan so that a total of 1,750,000 shares of the Company's common stock
are 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,
including executive officers and consultants. In August 1995, the Company
adopted the Non-employee Directors Stock Option Plan ("Directors Plan"), under
which nonqualified stock options are granted to non-employee directors on a
formula basis. A total of 250,000 shares of the Company's common stock is
reserved for issuance under the Directors Plan.
 
  Under the 1983, 1992, and 1995 Plans, options are granted for a period of 10
years. All grants of incentive stock options must be made at a price at least
equal to the then fair market value of the Company's common stock at the date
of grant. All grants of nonqualified stock options must be made at a price of
at least 85% of the then fair market value of the Company's common stock at
the date of grant. Options generally vest on a monthly basis over a period of
two to five years.
 
  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. Upon election or appointment, each director of the
Company who is not, and has not been an officer or employee of the Company,
receives an option to purchase 10,000 shares of the Company's common stock;
provided, however, that if a director was appointed to the Board of Directors
after six months of the date of the annual meeting of shareholders at which
directors are elected, that director receives an option to purchase 5,000
shares of the Company's common stock. Thereafter, each director receives an
option to purchase 10,000 shares of the Company's common stock on the date of
the first meeting of the Board of Directors of the Company following the
annual meeting of the shareholders at which directors are elected. Options
vest quarterly over a one year period from the date of grant.
 
                                      48
<PAGE>
 
                             IDENTIX INCORPORATED
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 
 
  The following table summarizes the Company's stock option activity and
related information for the past three years:
 
<TABLE>
<CAPTION>
                                Shares Available Optioned Shares   Weighted
                                   for Grant       Outstanding   Average Price
                                ---------------- --------------- -------------
<S>                             <C>              <C>             <C>
Balance June 30, 1995..........        47,006       1,454,904       $ 2.48
Shares reserved upon adoption
 of the 1995 Plan..............     1,000,000              --
Shares reserved upon adoption
 of the Directors Plan.........       250,000              --
Options Granted................      (730,000)        730,000       $ 9.28
Options Exercised..............            --        (679,724)      $ 2.28
Options Canceled...............        29,291         (29,291)      $ 5.93
Options Canceled and Expired...                        (8,000)      $ 2.75
                                   ----------      ----------
Balance June 30, 1996..........       596,297       1,467,889       $ 5.85
 
Shares reserved upon adoption
 of amendment to 1995 Plan.....       250,000              --
Options Granted................      (933,350)        933,350       $ 9.31
Options Exercised..............            --         (66,739)      $ 2.73
Options Canceled...............       260,534        (260,534)      $10.55
Options Canceled and Expired...                          (150)      $ 4.00
                                   ----------      ----------
Balance as of June 30, 1997....       173,481       2,073,816       $ 6.90
Shares reserved upon adoption
 of amendment to 1995 Plan.....       500,000              --
Options Granted................    (1,672,633)      1,672,633       $ 8.26
Options Exercised..............            --        (287,799)      $ 4.14
Options Canceled...............     1,167,256      (1,167,256)      $ 9.74
Options Canceled and Expired...                          (133)      $ 2.50
                                   ----------      ----------
Balance as of June 30, 1998....       168,104       2,291,261       $ 6.59
                                   ----------      ----------
</TABLE>
 
  As of June 30, 1998 options for approximately 1,440,410 common shares were
exercisable under the 1983, 1992, 1995 and Directors Plans.
 
  In April 1998, 903,833 outstanding options with exercise prices in excess of
the then fair market value of the common stock, $7.625, were repriced to
$7.625 per share. Such options have been included in the above table as both
canceled and granted in fiscal 1998. No other terms of the options were
amended.
 
  The following table summarizes significant option groups outstanding at June
30, 1998 and related weighted average prices and lives as follows:
 
<TABLE>
<CAPTION>
                             Options Outstanding                Options Exercisable
                --------------------------------------------- ------------------------
                                                              Number
   Range of       Number    Weighted Average Weighted Average   of    Weighted Average
Exercise Price  Outstanding  Remaining Life   Exercise Price  Shares   Exercise Price
--------------  ----------- ---------------- ---------------- ------- ----------------
<S>             <C>         <C>              <C>              <C>     <C>
$1.33 - $ 3.00     305,138        4.66            $2.42       287,570      $2.40
$3.19 - $ 5.31     171,958        5.61             3.26       167,026       3.24
$6.00 - $ 7.81   1,732,449        8.61             7.48       929,098       7.44
$9.88 - $12.25      81,716        8.81            10.46        56,716      10.72
</TABLE>
 
 
                                      49
<PAGE>
 
                             IDENTIX INCORPORATED
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 
Pro Forma Disclosures
 
  All options were granted at an exercise price equal to the fair market value
of the Company's common stock at the date of grant. The weighted average fair
value at date of grant for options granted during fiscal 1998, 1997 and 1996
were $3.67, $4.85 and $4.83 per option, respectively. The fair value of
options at date of grant was estimated using the Black-Scholes model with the
following assumptions:
 
<TABLE>
<CAPTION>
                                                                Fiscal Year
                                                               Ended June 30,
                                                               ----------------
                                                               1998  1997  1996
                                                               ----  ----  ----
     <S>                                                       <C>   <C>   <C>
     Stock Options:
      Expected life (years)...................................    4     4     4
      Risk free interest rate................................. 5.53% 6.32% 5.85%
      Volatility..............................................   53%   60%   60%
      Dividend yield..........................................   --    --    --
</TABLE>
 
  Had compensation expense for the Company's stock-based compensation plans
been determined based on the methods prescribed by SFAS No. 123, the Company's
net income (loss) and net income (loss) per share for the years ended June 30,
1998, 1997 and 1996 would have been as follows:
 
<TABLE>
<CAPTION>
                                              Fiscal Year Ended June 30,
                                           -----------------------------------
                                              1998        1997        1996
                                           -----------  ---------  -----------
     <S>                                   <C>          <C>        <C>
     Net income (loss):
      As reported......................... $   768,000  $ 518,000  $(3,441,000)
      Pro forma........................... $(1,701,000) $(893,000) $(3,813,000)
     Net income (loss) per share:
      As reported
       Basic.............................. $      0.03  $    0.02  $     (0.15)
       Diluted............................ $      0.03  $    0.02  $     (0.15)
      Pro forma
       Basic.............................. $     (0.07) $   (0.04) $     (0.16)
       Diluted............................ $     (0.07) $   (0.04) $     (0.16)
</TABLE>
 
Employee Stock Ownership Plan
 
  The ANADAC, Inc. Employee Stock Ownership Plan ("ESOP") enables eligible
employees of ANADAC to share in the growth of the Company through the
acquisition of 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 ESOP was $188,000 in fiscal 1998, $158,000 in fiscal 1997 and $183,000 in
fiscal 1996. A total of 303,909 and 360,427 allocated shares of common stock
were held by the ESOP at June 30, 1998 and 1997, respectively.
 
Warrants
 
  Under certain private transactions authorized by the Board of Directors of
the Company from 1992 through 1994, warrants to purchase 395,160 shares of the
Company's common stock were issued at exercise prices ranging from $2.125 to
$3.75 per share. At June 30, 1998, warrants from these transactions to
purchase 40,000 shares of the Company's common stock were outstanding, which
expire in January 1999.
 
  Warrants to purchase 2,250,000 shares of the Company's common stock at $3.00
per share were issued as part of a public offering in 1993. Also, as part of
the public offering, the Company issued the underwriter a warrant to purchase
45,000 units at an exercise price of $12.00 per unit, each unit consisting of
five warrants to purchase common stock and one share of series A Preferred
Stock convertible into five shares of common stock.
 
                                      50
<PAGE>
 
                             IDENTIX INCORPORATED
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 
On June 6, 1995, the Company announced that on July 6, 1995 it would redeem,
for $0.05 per warrant, all warrants issued in the public offering not
exercised by July 5, 1995. At June 30, 1996, all warrants were exercised or
redeemed. As part of the warrant redemption, the Company entered into a
standby underwriting agreement whereby the underwriter would purchase for
$3.00 per share all unexercised warrants related to the warrant redemption.
Pursuant to the agreement, the underwriter purchased 3,210 of the unexercised
warrants.
 
  On December 15, 1994, the Company issued warrants to purchase 250,000 shares
of its common stock for $3.00 per share to an investment banking firm and
certain of its officers and employees for providing services to the Company.
The warrant holders exercised the warrants in August 1995.
 
NOTE 6 -- RELATED PARTY TRANSACTIONS
 
  As of June 30, 1998, Ascom USA Inc. ("Ascom") beneficially owned 5,075,924
or approximately 20% of the Company's outstanding common stock ("the Voting
Stock"). The Company is a party to a Voting Trust Agreement with Ascom (the
"Agreement") whereby Ascom deposited all of its shares of the Company's common
stock held by Ascom, into a voting trust. The trustee of the voting trust is
on the Company's Board of Directors and has voting control of the Voting
Stock. The term of the Voting Trust Agreement expires in 2004. In
consideration for Ascom entering into the Agreement, the Company granted Ascom
certain additional registration rights with respect to the Voting Stock,
modified certain contractual transfer restrictions with respect to the Voting
Stock, and granted Ascom price protections regarding certain sales of Voting
Stock.
 
  Patrick H. Morton is a member of the Company's Board of Directors and
presently owns 38% of Integrated Manufacturing Solutions, Inc, ("IMS") a
manufacturer of integrated circuit boards, that provides manufacturer services
to the Company. IMS billed the Company approximately $2,437,000 and $427,000
in fiscal 1998 and 1997, respectively. Amounts outstanding to IMS at June 30,
1998 were approximately $311,000. The Company did not do business with IMS
prior to fiscal 1997.
 
NOTE 7 -- INCOME TAXES
 
  The following is a reconciliation between statutory federal income taxes and
the provision for income taxes:
 
<TABLE>
<CAPTION>
                                              Fiscal Year Ended June 30,
                                            ---------------------------------
                                              1998       1997        1996
                                            ---------  ---------  -----------
     <S>                                    <C>        <C>        <C>
     Tax expense (benefit) at statutory
      rate................................. $ 261,000  $ 438,000  $(1,204,000)
     State taxes net of federal benefit....    33,000     80,000           --
     Release of valuation allowance........  (360,000)  (578,000)          --
     Benefit of operating losses not
      recognized...........................        --         --    1,174,000
     Other.................................    66,000     60,000       30,000
                                            ---------  ---------  -----------
                                            $      --  $      --  $        --
                                            =========  =========  ===========
</TABLE>
 
 
                                      51
<PAGE>
 
                             IDENTIX INCORPORATED
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 
  Deferred tax assets (liabilities) comprise the following:
 
<TABLE>
<CAPTION>
                                                            June 30,
                                                     ------------------------
                                                        1998         1997
                                                     -----------  -----------
   <S>                                               <C>          <C>
   Loss and credit carryforwards.................... $ 8,440,000  $ 9,200,000
   Depreciation and amortization....................      80,000       80,000
   Inventory reserves and basis differences.........     360,000      222,000
   Compensation accruals............................     340,000      244,000
   Accounts receivable and sales reserves...........     336,000      237,000
   Other............................................     384,000      280,000
                                                     -----------  -----------
   Gross deferred tax assets........................   9,940,000   10,263,000
                                                     -----------  -----------
   Unbilled accounts receivable.....................    (908,000)  (1,014,000)
   Capitalized software.............................    (492,000)    (535,000)
   Other............................................    (284,000)    (283,000)
                                                     -----------  -----------
   Gross deferred tax liabilities...................  (1,684,000)  (1,832,000)
                                                     -----------  -----------
   Net deferred tax asset before valuation
    allowance.......................................   8,256,000    8,431,000
   Deferred tax asset valuation allowance...........  (8,256,000)  (8,431,000)
                                                     -----------  -----------
       Total net deferred tax asset................. $        --  $        --
                                                     ===========  ===========
</TABLE>
 
  The deferred tax asset valuation allowance is attributed to U.S. Federal,
State and foreign deferred tax assets. Management believes sufficient
uncertainty exists regarding the realizability of these assets, such that a
full valuation allowance is required.
 
  As of June 30, 1998, the Company has federal and state net operating loss
carryforwards of approximately $19.6 million and $3.6 million, respectively,
for financial reporting and income tax purposes, which are available to offset
future taxable income. The carryforwards expire on various dates through
fiscal 2011. Under the Tax Reform Act of 1986, the amounts of and the benefit
from net operating losses that can be carried forward may be impaired or
limited in certain circumstances, including a cumulative stock ownership
change of more than 50% over a three-year period. As a result of the public
offering in January 1993, a change of ownership occurred, causing an annual
limitation on the utilization of the net operating loss carryforwards,
incurred prior to the ownership change, of approximately $2.5 million.
 
NOTE 8 -- FOREIGN OPERATIONS DATA
 
  In geographical reporting, revenues are attributed to the geographical
location of the sales and service organizations, and costs directly and
indirectly incurred in generating revenues are similarly assigned. For fiscal
1996, the Company's revenues from unaffiliated customers and identifiable
assets were less than 10% of consolidated total revenues and total assets,
respectively.
 
                                      52
<PAGE>
 
                             IDENTIX INCORPORATED
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 
 
<TABLE>
<CAPTION>
                                                       Fiscal year ended June
                                                                 30,
                                                       ------------------------
                                                          1998         1997
                                                       -----------  -----------
<S>                                                    <C>          <C>
Net revenues from unaffiliated customers:
 North America........................................ $73,024,000  $43,305,000
 Asia-Pacific.........................................   3,344,000    9,238,000
 Europe, Middle East, Africa..........................   3,006,000           --
                                                       -----------  -----------
                                                       $79,374,000  $52,543,000
                                                       -----------  -----------
Operating results:
 North America........................................ $ 4,482,000  $ 2,262,000
 Asia-Pacific.........................................  (1,763,000)      30,000
 Europe, Middle East, Africa..........................     229,000           --
 General Corporate Expenses...........................  (2,180,000)  (1,774,000)
                                                       -----------  -----------
                                                         $ 768,000  $   518,000
                                                       -----------  -----------
Identifiable assets:
 North America........................................ $40,025,000  $27,079,000
 Asia-Pacific.........................................   1,312,000    5,361,000
 Europe, Middle East, Africa..........................     675,000           --
                                                       -----------  -----------
                                                       $42,012,000  $32,440,000
                                                       -----------  -----------
</TABLE>
 
  Intercompany transfers are at prices sufficient to recover a reasonable
profit. These transfers are eliminated in the consolidated financial
statements. Intercompany transfers of products from North America to other
regions were $1,991,000 and $3,814,000 for fiscal 1998 and 1997, respectively.
 
  As a result of the substantial liquidation of the Company's Australian
subsidiary in the quarter ended March 31, 1998, assets of the foreign
operations were transferred to the United States in satisfaction of a portion
of intercompany borrowings.
 
NOTE 9 -- COMMITMENTS
 
Leases
 
  The Company currently occupies its headquarters and products business
facility under a lease, which expires in April 2001 and is required to pay
taxes, insurance, and maintenance as well as monthly rental payments. Further,
the Company leases office space for its products sales force under operating
leases which expire at various dates through 2003. The Company leases office
space for its services business under operating leases expiring at various
dates through 2001. 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:
 
<TABLE>
       <S>                                                            <C>
       Year ending June 30,
       1999.......................................................... $1,669,000
       2000..........................................................  1,508,000
       2001..........................................................  1,034,000
       2002..........................................................     32,000
       Thereafter....................................................     25,000
                                                                      ----------
           Total..................................................... $4,268,000
                                                                      ==========
</TABLE>
 
                                      53
<PAGE>
 
                             IDENTIX INCORPORATED
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 
 
  Total rental expense under operating leases was $1,882,000, $1,788,000 and
$1,308,000 for the years ended June 30, 1998, 1997 and 1996, respectively.
 
NOTE 10 -- CONTINGENT LIABILITIES
 
  The Company was named as a defendant in a class action lawsuit, which was
filed in October 1996 in the United States District Court for the Northern
District of California. Certain executive officers of the Company were also
named as defendants. Plaintiffs sought to represent a class of all persons who
purchased the Company's common stock between January 31, 1996 and August 26,
1996 (the "Class Period"). The complaint alleged claims under the federal
securities laws and California law. Plaintiffs alleged that the Company and
certain of its executive officers made false and misleading statements
regarding the Company that caused the market price of its common stock to be
"artificially inflated" during the Class Period. The Company and its officers
denied plaintiffs' allegations. In December 1997, the Company and its officers
reached an agreement with plaintiffs and their counsel to settle the lawsuit.
The settlement was funded largely with directors and officers liability
insurance proceeds. The settlement was approved by the Court, following notice
to the class members, and the lawsuit was dismissed with prejudice on March 6,
1998.
 
  On May 31, 1995, Digital Biometrics, Inc. ("DBI"), a competitor, filed a
lawsuit in the United States District Court for the Northern District of
California against the Company alleging that certain of the Company's
TouchPrint products violate a DBI patent and seeking injunctive relief and
unspecified damages. The lawsuit has no implication for other Identix
products. On August 22, 1996, the District Court granted the Company's motion
determining that the TouchPrint 600 does not infringe the patent. On December
7, 1996, the District Court issued another ruling determining that the
predecessor product of the TouchPrint 600, the TouchPrint 900 product, did not
infringe the patent. As a result, the District Court entered judgment in favor
of Identix and awarded Identix its costs of suit. On January 7, 1997, DBI
filed a Notice of Appeal. On July 2, 1998, the United States Court of Appeals
for the Federal Circuit affirmed the District Court's judgment. DBI has
publicly announced that it has no plans to appeal the ruling and, accordingly,
the Company believes that the judgment in favor of the Company will be the
final disposition of the case.
 
                                      54
<PAGE>
 
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
 
  Not applicable.
 
                                   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 1998 Annual Meeting of the Shareholders (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.
 
Item 12. Security Ownership of Certain Beneficial Owners and Management
 
  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" 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" in the Proxy
Statement.
 
                                      55
<PAGE>
 
                                    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.
 
<TABLE>
<CAPTION>
 Exhibit
 Number                                Description
 -------                               -----------
 <C>      <S>
  3.1(2)  Registrant's Amended and Restated Articles of Incorporation, as
          amended
  3.2(2)  Registrant's Bylaws, as amended
 10.1(3)  Lease Agreement dated June 15, 1988, between Identix and Santa Clara
          Property Associates
 10.2(1)  Identix's 1983 Incentive Stock Option Plan and forms of Incentive
          Stock Option Agreement and Non-Statutory Stock Option Agreement
 10.3(2)  Stock Option Agreement dated March 13, 1989 between Identix and Ascom
          Hasler AG, as amended by Amendment Number 1 thereto dated April 20,
          1989 and Amendment Number 2 thereto dated August 8, 1989
 10.4(4)  Stock Purchase Agreement dated July 24, 1990 between Identix and
          Ascom Hasler AG
 10.5(5)  Stock Purchase Agreement and Amendment Number 3 to Stock Option
          Agreement dated December 14, 1990 between Identix and Ascom Hasler AG
 10.6(6)  Loan Agreement and Amendment Number 4 to Stock Option Agreement dated
          December 12, 1991 between Identix and Ascom Hasler AG
 10.7(2)  Registrant's 1992 Employee Stock Option Plan and forms of Incentive
          Stock Option Agreement and Nonqualified Stock Option Agreement
 10.8(2)  Loan Agreement dated October 30, 1992 between Identix and Ascom
          Hasler AG
 10.9(2)  Loan and Security Agreement dated January 9, 1991 among Crestar Bank,
          Defense Systems Concepts, Inc. and ANADAC, as amended August 5, 1992
          and October 23, 1992
 10.10(2) ANADAC 1984 Incentive Stock Option Plan and forms of Incentive Stock
          Option Agreement and Nonstatutory Stock Option Agreement
 10.11(7) Voting Trust Agreement with Respect to Capital Stock of Identix
          Incorporated among Identix Incorporated, the Voting Trustee, and
          Ascom Holding Inc. dated as of September 2, 1994
 10.12(7) Amendment No. 5 to Stock Option Agreement among Identix Incorporated,
          Ascom Hasler, Ltd., and Ascom Holding Inc. dated as of September 2,
          1994
 10.13(7) Amendment to Registration Rights Agreement among Identix
          Incorporated, Ascom Hasler, Ltd., and Ascom Holding Inc. dated as of
          September 2, 1994
 10.14(8) Office Building Lease dated May 18, 1995, between ANADAC, Inc. and
          Charles Smith Management, Inc.
 10.15(9) Office Building Lease dated April 1, 1995 between ANADAC, Inc., and
          U.S. AIR, Inc.
 10.16(9) Office Building Lease dated July 27, 1995 between ANADAC, Inc., and
          Third Gould Limited Liability Company
 10.17(9) Identix's 1995 Equity Incentive Plan
</TABLE>
 
                                       56
<PAGE>
 
<TABLE>
<CAPTION>
 Exhibit
 Number                                 Description
 -------                                -----------
 <C>       <S>
 10.18(9)  Identix's 1995 Nonemployee Directors Stock Option Plan
 10.19(9)  Letter Agreement dated July 28, 1995 between Identix and Ascom
           Holding Inc.
 10.20(10) AEGIS Combat Ship Building Contract Program
 10.21(11) The Fourth Amendment dated February 9, 1996 to Lease Agreement dated
           June 15, 1988 for the Company's corporate offices and manufacturing
           facility
 10.22(12) December 1996 Amendment to Loan and Security Agreement between
           ANADAC, a wholly owned subsidiary of the Company, and Crester Bank
           dated December 2, 1996
 10.23(12) Amended and Restated Revolving Note Agreement between ANADAC, a
           wholly owned subsidiary of the Company, and Crestar Bank dated
           December 2, 1996
 10.24(13) Security and Loan Agreement dated August 29, 1997 between the
           Company and Imperial Bank
 23.1      Consent of PricewaterhouseCoopers LLP, Independent Accountants
 24.1*     Power of Attorney
 27.1*     Financial Data Schedule
</TABLE>
----------
   * Previously filed as an Exhibit to the Annual Report on Form 10-K filed on
     September 16, 1998.
 
 (1) Incorporated by reference to registrant's registration statement no. 29-
     95551.
 
 (2) Incorporated by reference to registrant's registration statement no. 33-
     55074.
 
 (3) Incorporated by reference to the June 30, 1989 Form 10-K.
 
 (4) Incorporated by reference to the July 24, 1990 Form 8-K.
 
 (5) Incorporated by reference to the December 14, 1990 Form 8-K.
 
 (6) Incorporated by reference to the June 30, 1992 Form 10-K.
 
 (7) Incorporated by reference to the September 30, 1994 Form 10-Q.
 
 (8) Incorporated by reference to the March 31, 1995 Form 10-Q.
 
 (9) Incorporated by reference to the June 30, 1995 Form 10-K.
 
(10) Incorporated by reference to the September 30, 1995 Form 10-Q.
 
(11) Incorporated by reference to the September 30, 1996 Form 10-Q.
 
(12) Incorporated by reference to the December 31, 1996 Form 10-Q.
 
(13) Incorporated by reference to the September 30, 1997 Form 10-Q.
 
  (b) Reports on Form 8-K:
 
     No reports on Form 8-K were filed by the Company during the three months
  ended June 30, 1998.
 
                                       57
<PAGE>
 
                              IDENTIX INCORPORATED
 
                                  SCHEDULE II
                 VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
 
<TABLE>
<CAPTION>
                                   Balance
                                     at     Additions
                                  Beginning Charged to             Balance at
Description                       of Period  Expense   Deductions End of Period
-----------                       --------- ---------- ---------- -------------
<S>                               <C>       <C>        <C>        <C>
Inventory Reserve:
Year ended June 30, 1996......... $242,000   $177,000   $ 75,000    $344,000
Year ended June 30, 1997......... $344,000   $284,000   $ 65,000    $563,000
Year ended June 30, 1998......... $563,000   $338,000   $ 35,000    $866,000
 
Allowance for Doubtful Accounts:
Year ended June 30, 1996......... $347,000   $238,000   $ 97,000    $488,000
Year ended June 30, 1997......... $488,000   $500,000   $363,000    $625,000
Year ended June 30, 1998......... $625,000   $862,000   $621,000    $866,000
</TABLE>
 
                                       58
<PAGE>
 
                                  SIGNATURES
 
  Pursuant to the requirements of Section 13 or 15(d) of the Securities and
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 Sunnyvale, State of California, on the 16th
day of April, 1999.
 
                                          IDENTIX INCORPORATED
 
                                                   /s/ Randall C. Fowler,
                                          By: _________________________________
                                                     Randall C. Fowler,
                                               Chairman, President and Chief
                                                     Executive Officer
 
                                      59