##### Table of Contents











SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549


Form 10-K

|           |  |                                                                                                 
|---------- |  | ------------------------------------------------------------------------------------------------
|(Mark one) |  |                                                                                                 
|þ          |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR
    15(d)
    OF THE SECURITIES EXCHANGE ACT OF 1934    
|          
|           |  | For the fiscal year ended June 30,
    2004                                                     
|          
|or        
|          
|o          |  | TRANSITION REPORT PURSUANT TO SECTION 13
    OR 15(d)
    OF THE SECURITIES EXCHANGE ACT OF 1934
|          
|           |  | For the transition period
    from           to                                                 

Commission File Number: 1-9641

Identix Incorporated

(Exact name of registrant as specified in its
charter)


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

Registrants telephone number, including
area code:

(952) 932-0888


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

Common Stock, $0.01 par value


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

None


Indicate by check mark whether the registrant
(1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the
past 90 days.
Yes þ          No o

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

Indicate by check mark whether the registrant is
an accelerated filer (as defined in Rule 12b-2 of the
Exchange Act).
Yes þ          No o

The aggregate market value of the voting and
non-voting common equity held by non-affiliates of the
registrant at December 31, 2003 was approximately
$383,877,839 based upon the closing market price of
$4.45 per share.

The number of outstanding shares of the
registrants common stock on August 31, 2004 was
88,445,094.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Definitive Proxy Statement filed
with the Securities and Exchange Commission in connection with
the Annual Meeting of Stockholders expected to be held
October 28, 2004 are incorporated by reference in
Part III of this Form 10-K.



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IDENTIX INCORPORATED

Year Ended June 30, 2004


TABLE OF CONTENTS

|                                                         |  |                                                                                                        |  |      |    | 
|-------------------------------------------------------- |  | ------------------------------------------------------------------------------------------------------ |  | ---- | -- | 
|                                                         |  |                                                                                                        |  | Page
|                                                         |  |                                                                                                        |  |     
|PART I                                                  
|Item 1.                                                  |  | BUSINESS                                                                                               |  |      | 2  | 
|Item 2.                                                  |  | PROPERTIES                                                                                             |  |      | 26 | 
|Item 3.                                                  |  | LEGAL PROCEEDINGS                                                                                      |  |      | 27 | 
|Item 4.                                                  |  | SUBMISSION OF MATTERS TO A
    VOTE OF SECURITY HOLDERS                                                |  |      | 28 | 
|PART II                                                 
|Item 5.                                                  |  | MARKET FOR THE
    COMPANYS COMMON STOCK AND RELATED STOCKHOLDER MATTERS                              |  |      | 29 | 
|Item 6.                                                  |  | SELECTED FINANCIAL DATA                                                                                |  |      | 30 | 
|Item 7.                                                  |  | MANAGEMENTS DISCUSSION
    AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS              |  |      | 31 | 
|Item 7A.                                                 |  | QUANTITATIVE AND QUALITATIVE
    DISCLOSURES ABOUT
    MARKET RISK                                     |  |      | 44 | 
|Item 8.                                                  |  | FINANCIAL STATEMENTS AND
    SUPPLEMENTARY DATA                                                        |  |      | 45 | 
|Item 9.                                                  |  | CHANGES IN AND DISAGREEMENTS
    WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE               |  |      | 77 | 
|Item 9A.                                                 |  | CONTROLS AND PROCEDURES                                                                                |  |      | 77 | 
|PART III                                                
|Item 10.                                                 |  | DIRECTORS AND EXECUTIVE
    OFFICERS OF THE REGISTRANT                                                 |  |      | 78 | 
|Item 11.                                                 |  | EXECUTIVE COMPENSATION                                                                                 |  |      | 78 | 
|Item 12.                                                 |  | SECURITY OWNERSHIP OF
    CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
    MATTERS |  |      | 78 | 
|Item 13.                                                 |  | CERTAIN RELATIONSHIPS AND
    RELATED TRANSACTIONS                                                     |  |      | 79 | 
|Item 14.                                                 |  | PRINCIPAL ACCOUNTANT FEES
    AND SERVICES                                                             |  |      | 79 | 
|PART IV                                                 
|Item 15.                                                 |  | EXHIBITS, FINANCIAL
    STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K                                   |  |      | 79 | 
|Employment Agreement - Elissa J. Lindsoe                
|Amendment to Employment Agreement - Mark S. Molina      
|Subsidiaries                                            
|Consent of Independent Registered Public Accounting Firm
|302 Certification by the Chief Executive Officer        
|302 Certification by the Chief Financial Officer        
|302 Certification by the Chief Operating Officer        
|906 Certifications                                      



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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,
we, us, our or the
Company) provides fingerprint, facial and skin
biometric technologies, as well as systems, and critical system
components that empower the identification of individuals in
large-scale ID and ID management programs. The Companys
offerings include live scan systems and services for biometric
data capture, mobile systems for on-the-spot ID, and backend
standards-based modules and software components for biometric
matching and data mining. Identix offerings are used for a
number of security-related markets, including to conduct
background checks, speed travel and commerce via secure
identification documents, prevent identity fraud in large-scale
government and civil ID programs, and control access to secure
areas and networks. With a global network of partners, such as
leading system integrators, defense prime contractors and OEMs,
Identix serves a broad range of domestic and international
markets including government, law enforcement, gaming, finance,
travel, transportation, corporate enterprise and healthcare. A
leader worldwide in multi-biometric technology, Identix believes
it has more fingerprint and facial biometric installations
worldwide than any other company.



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

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

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

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

As one of the only biometric companies providing
proprietary technology for fingerprint, facial, and skin
recognition, Identix mission is to provide an accurate
means of identifying an individual and to empower human
identification by allowing the secure and convenient association
of identity with authorized actions and credentials. By offering
products and solutions that help enhance privacy, provide
credentialed authorization, identify individuals against
databases, increase security and convenience, and reduce the
likelihood of a possible breach or fraud, Identix is employing
its biometric technology to address the identification
requirements of security.

2



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

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

U.S. Government:Government agencies 
federal, state, and local  have long been adopting
biometric technologies, and Identix has frequently been the
biometric company of choice. In some instances, the need by
these government entities for the use of biometrics has been
driven by legislation. Currently, there are several legislative
acts and bills pending or passed that require the use of
technology, including biometrics, to provide enhanced security.
Much of this legislation falls under the broad category of
Homeland Security and includes, but is not limited to, the
Aviation and Transportation Security Act of 2001, the Enhanced
Border Security and Visa Entry Reform Act of 2001, the Public
Health Security and Bioterrorism Preparedness and Response Act
of 2002, the USA PATRIOT Act of 2001 and the Port and Maritime
Security Act of 2002. These mandates call for stronger biometric
security at ports of entry, use of biometrics to help determine
identity of visa applicants, biometrics to verify identity at
border crossings and maximize convenience in the travel process.
Identix product offerings in these areas include live scan
terminals and systems that provide forensic-quality electronic
fingerprint capture and transmission into databases for
identification of individuals at border checkpoints, enabling
technology for computer-based optical fingerprint capture, face,
skin and fingerprint recognition technology and software and
hardware platforms for checking identity at ports of entry and
searching against watch lists, and enabling secure
identification documents, granting benefits and accessing
sensitive areas and computer networks.

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

National Identification and Passport
Programs:Many foreign countries are
establishing or discussing the establishment of national
identification and/or passport programs to help ensure that only
qualified citizens are able to avail themselves of the benefits
to which a countrys citizens are entitled. Some of these
programs and potential programs are also aimed at helping to
secure a countrys borders by tracking entry and

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exit of both citizens and visitors. Recently, the
United States established legislation requiring that by October
2005, biometric identifiers are to be included in the passports
of current Visa Waiver countries (countries where citizens are
not required to obtain a Visa prior to entering the U.S.). The
International Civil Aviation Organization (ICAO) ruled that
facial recognition would be the primary biometric of choice for
incorporation into Visa Waiver countries passports.
Identix offers a range of products and technologies that can be
utilized in national identification and/or passport programs to
enroll and verify citizens for receipt of benefit purposes
and/or to add biometric identifiers to national identification
and/or passport programs. Identix product and service
offerings in this area include Live Scan terminals and systems
that provide forensic-quality electronic fingerprint capture and
transmission into databases for identification of individuals,
enabling biometric technology for computer-based optical
fingerprint capture, face, skin and fingerprint recognition
technology and software and hardware platforms, as well as
biometric datamining capabilities, for deploying these
technologies. Additional Identix offerings that may be utilized
by these programs include photographic systems, software tools
and finished products, multi-media data storage and
communications servers, and the systems integration and software
development services required to deploy and use these systems.


Healthcare:Government legislation surrounding the integrity,
confidentiality, and privacy of patient data was enacted under
the Health Insurance Portability & Accountability Act
(HIPAA). HIPAA requires the healthcare industry to
restructure current information technology (IT)
infrastructures and methods. Identix offers products and
solutions for end users, as well as enabling biometric
technology for original equipment manufacturers
(OEMs) and application developers to incorporate
into their offerings, to assist healthcare organizations work
towards meeting these legislative demands, while increasing
efficiencies and user convenience and lowering overall
administrative costs and risks associated with passwords,
Personal Identification Numbers (PIN) and keys.

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

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

Identix offers enabling biometric technology that
can be integrated into existing or new offerings by OEMs and
application developers to help prevent fraud and identity theft,
as well as help protect proprietary information in
consumer-related areas. Some of these areas include computer
database and network access and security, computer software,
intranet and Internet security, data sharing and management,
biometric datamining capabilities, electronic commerce,
communications devices, POS terminals, bank transaction
authorization, facility access and security, ATMs,
time-and-attendance systems, and residential security.

4



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Product Offerings



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

Through its merger with Visionics Corporation
(Visionics) in June of 2002, the Companys
combined product portfolio has expanded significantly. Identix
has developed leading-edge identity, security and Live Scan
technology, products and solutions that can help to: protect
proprietary information; prevent fraud and identity theft;
identify criminals; enroll individuals in identification
programs; control physical access; protect confidential records;
protect information contained on corporate networks; and assist
in job applicant screening. Many of the Companys solutions
employ leading optical fingerprint capture technologies and
facial recognition technologies, proprietary algorithms and/or
customizable application software suites. The Company had sales
from these biometric products of $50,054,000, $48,658,000 and
$28,399,000 for fiscal years 2004, 2003, and 2002 respectively.
The remaining balance of revenue earned during these periods
came from nonbiometric system related sources.

Identix offerings can be classified into
five categories: (i) Live Scan; (ii) IBIS
(Identification Based Information System); (iii) ABIS
(Automated Biometric Identification System); (iv) Enabling
Biometric Technologies, and (v) Biometric and other Professional
Services.



| |                            
| | ---------------------------
| | i.            Live
    Scan

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

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

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



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

TouchPrint 3000; TouchPrint 3500; TouchPrint
2000; TENPRINTER 1133; FingerPrinter
CMS.The TouchPrint 3000 Series is the
latest Live Scan product family launched by the Company. The
TouchPrint 3000 family of products incorporates the best of
breed in technology and product design from Identix and
Visionics. The TouchPrint 3000 Series, like all Identix Live
Scan systems has obtained FBI Appendix F Certification, the
FBIs highest level of Image Quality Specification
(IQS). Identix believes that the TouchPrint 3000
Series live scan systems are the only ten-print scanners with no
moving parts and a single large, non-coated platen, which helps
to reduce downtime and maintenance costs, while enhancing system
performance. State-of-the-art optical and lighting
schemes  Moisture Discriminating
OpticsTM(patented),

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Dual Beam IlluminationTM (patent
pending) and Clear Trace ImagingTM (patent
pending)  enable the TouchPrint 3000 Series Live
Scan systems to ignore moisture, dirt, residue and latent prints
left behind on the platen, helping to lower AFIS rejection
rates, maximize throughput and dramatically enhance AFIS
performance.


The moisture-discrimination patented imaging
design technology eliminates a long-standing limitation in live
digital imaging of fingerprints that is caused by the presence
of moisture on the surface of the platen or adhering to the
convoluted surfaces of the subjects fingerprints.
Conventional Live Scan optics cannot discriminate between
moisture and skin surface. This optical limitation results in
the inability to consistently and accurately image ridge and
pore structure detail, reducing the utility of digital
fingerprints for forensic comparison with crime scene latent
lifts. Identix Moisture Discriminating Optics
effectively ignore residual moisture consistently
recording the structure of ridge edges and skin pore detail even
when the ridges are surrounded by moisture. All TouchPrint 3000
Series Live Scan systems utilize high-resolution scanners
with digital signal and video processing boards,
multi-processing application software, multi-tasking computers,
computer monitors as well as laser printers. The TouchPrint 3000
and TouchPrint 3500, TouchPrint 3800 (see below), TouchPrint
2000, and TENPRINTER 1133 systems are enclosed in a ruggedized
cabinet.

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

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

TouchPrint PRO Full Hand
Scanner.Identix TouchPrint PRO
is the first full hand Live Scan imager to receive
Appendix F-Certification from the FBI. Employing
Identix patented Moisture Discriminating Optics, the
TouchPrint PRO captures a continuous scan from the carpal crease
to the fingertips, in compliance with International Association
for Identification (IAI) standards. It also employs
a patented cylindrical imager that enables the entire hand to be
scanned, including the curved surface of the palm, the fingers
and the writers edge. The TouchPrint PRO Scanner
eliminates the tedious process of stitching together pieces of
prints and provides the ability to absolutely connect palm
images to a particular human subject through the simultaneous
capture of fingertip and palm ridge information. The TouchPrint
PRO is sold as an add-on to TouchPrint 2000 systems.

TouchPrint 3800.Identix TouchPrint 3800 incorporates the TouchPrint 3000 with
the TouchPrint PRO Full Hand Scanner to provide fingerprinting
booking stations with an integrated full hand scanner configured
in a ruggedized housing, with adjustable height controls
designed to withstand heavy traffic and harsh booking
environments.

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

6



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

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

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



| |                                
| | -------------------------------
| | Examples of Live Scan Customers

Law enforcement:Law
enforcement agencies in all 50 States, including police and
sheriffs departments, courts, prisons, jails, customs and
the Bureau of Citizenship and Immigration Services
(BCIS), the District of Columbia and more than four
foreign countries have installed in excess of 7,000 of the
Companys Live Scan products. Identix currently has
statewide law enforcement network installations of its Live Scan
systems in more than 15 states. Many large cities and
counties have also installed networks of Identix TouchPrint and
TENPRINTER Live Scan systems for law enforcement agencies.

Immigration:The
BCIS uses Identix Live Scan products to perform background
checks on persons who enter the United States and persons
seeking naturalization. Approximately 1200 systems have been
delivered to BCIS installations at airports and other ports of
entry, as well as immigrant processing centers across the
country.

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

Airports:In an
effort to increase aviation security, the U.S. Congress
passed legislation in October 2001 that would require criminal
background checks for all people who apply for a job that will
give them access to the airfield. To date, close to 150
U.S. airports have installed Identix Live Scan
systems for applicant fingerprinting to assist the airports in
meeting the compliance terms of this mandate.



| |                                                                   
| | ------------------------------------------------------------------
| | ii.             IBIS
    (Identification Based Information System)

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

IBIS is a patented wireless, real-time mobile
identification system that combines expertise in biometric
capture and connectivity. The system is capable of capturing
photographs and forensic quality fingerprints for transmission
to law enforcement and other legacy databases. IBIS is comprised
of software tools, multi-media

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data storage and communications servers. A
complete management reporting database and audit trail is
included. The Company provides the systems integration and
software development services that are required to implement
identification management systems.


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

IBIS has been undergoing testing in various
counties and cities in key regional areas of the United States,
including the Southwest, Midwest, Northwest, and East Coast. In
fiscal years 2003 and 2004, some of these tests have been
expanded to actual rollouts of Identix IBIS systems
through contract awards for non-pilot deployments of IBIS.



| |                                                                                              
| | ---------------------------------------------------------------------------------------------
| | iii.              ABIS
    (Automated Biometric Identification System)/Facial
    Recognition

The
ABISTMSystemis an enterprise level
multi-biometric search engine, designed to solve the problem of
large-scale facial matching. Similar in architecture to many
fingerprint AFIS systems, but using commercial off-the-shelf
hardware, the ABIS System packages Identix
FaceIt®face recognition technology in a unique software
architecture that provides open-ended scalability, risk
management through configuration redundancy and flexibility with
regards to the number of concurrent searches and required
response time. The ABIS System is available as a turnkey package
or as a software only implementation for smaller databases for
low-throughput environments. At the core of the ABIS System is a
unique software architecture that makes it easy for integrators
and end users alike to expand the capabilities of the system as
the scope of the identification program grows. Adding more
hardware enables users to expand the database size, increase
search speed or the number of simultaneous searches without
reinstalling a new architecture. The ABIS System provides the
necessary platform components of a 1:N facial matching solution
such as a database for storing templates (Oracle 9i Database); a
search architecture that handles a single search on multiple
parallel matching engines; multiple parallel search sets for
partitioning searchable data and managing response time
requirements; as well as out-of-the-box redundancy for
continuous operations. Integrators create a user interface using
an easy to use application-programming interface
(API)  based on open standard protocols like XML, SQL
and HTTP  that provides basic enroll, search and
delete functions. The ABIS System also works with legacy facial
image databases, making it easy and seamless to add facial
recognition to any ID system.



| |                                                    
| | ---------------------------------------------------
| | iv.             Enabling
    Biometric Technologies

Identix offers its industry-leading core
biometric technologies  fingerprint, facial and skin
(Surface Texture Analysis) recognition  to entities
such as OEMs, systems integrators, application developers and
others for integration into existing or planned products,
solutions and/or applications.



| |                        
| | -----------------------
| | Fingerprint Recognition

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



| |                    
| | -------------------
| | Facial Recognition:

Identix is a recognized leader in the development
of facial recognition technology. Its proprietary software
engine, FaceIt®, enables a broad range of products and
applications built by partners (OEMs, VARs and

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system integrators). These include identity fraud
applications and authentication systems for information
security, physical access control, travel, banking and
e-commerce, as well as enhanced Closed Circuit Television
systems (CCTV). FaceIt technology is also the
underlying biometric technology for Identix Automated
Biometric Identification System (ABIS). FaceIt technology is
also provided through software development toolkits, run-time
licenses and application software.




| |                          
| | -------------------------
| | Surface Texture Analysis:

In March 2004, Identix acquired certain
technology of privately held Delean Vision Worldwide, Inc. This
technology acquisition brought to Identix a new class of pattern
recognition algorithms, known as Surface Texture Analysis (STA).
Identix-run tests demonstrated that when applied to human skin,
the patent pending STA algorithms extract a unique
characteristic of the skin structure known as the
Skinprint. The Skinprint can be used on its own as a
biometric identifier, or it can be fused together or
incorporated with traditional facial or fingerprint biometric
templates to deliver what the Company believes are high levels
of accuracy and robustness for existing face and finger
recognition applications. Identix is currently in the process of
working to incorporate the STA algorithms into the
Companys FaceIt SDKs and its ABIS system.



| |                  
| | -----------------
| | Fingerprint SDKs:

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

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

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

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



| |                                                          
| | ---------------------------------------------------------
| | Examples of Fingerprint Enabling Technology
    Customers

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

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

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


Several large healthcare providers have deployed
Sentillion Inc.s Vergence® product suite, which
integrates Identix fingerprint biometric technology and
provides solutions for strong authentication, single sign-on,
context management, and privacy management for the healthcare
industry. The healthcare providers have placed their order
through Sentillion, an Identix value added reseller.

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

Additionally, other large international banks use
the Companys fingerprint technology for transaction
authorization. A large Central American bank has deployed
Identix fingerprint biometric technology to secure access
to its databases by member banks. In order to help ensure that
only authorized individuals from authorized member banks can
access the bank databases, the bank is requiring verification
via fingerprint biometric prior to allowing database access.

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

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

A large international mercantile &
futures exchange based in South America has implemented
Identix fingerprint biometric technology and access to its
electronic Global Trading System. The exchange moves
approximately $17.5 billion daily and believes that it is
the eighth largest futures and options exchange in the world.
Following a six-month evaluation program, the exchange has begun
deploying a solution enabled by Identix fingerprint technology
to its traders. The solution requires traders to access the
electronic Global Trading System via fingerprint biometric
authentication. Each authorized trader has enrolled with four
fingers and may use any of the four to log-on to the electronic
trading system. Traders are required to verify their identity
via the fingerprint readers periodically at defined time
intervals throughout the period of time they are logged-on to
the system.



| |                        
| | -----------------------
| | Facial Recognition SDKs

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

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

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

FaceIt Quality Assessment
SDK.The FaceIt® Quality
Assessment Software Developers Kit (SDK) contains
technology designed for use in evaluating the quality of images
that are to be enrolled into automated facial recognition
systems. The use of this SDK helps to ensure optimum performance
of a facial recognition system down the line.



| |                                             
| | --------------------------------------------
| | Examples of Facial Recognition
    Customers

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

State departments of motor vehicles
(DMV) have enhanced their drivers license
issuance programs with Identix facial recognition
technology. Under the enhanced license issuance program of one
state, implemented by a third party, selected drivers
license applicants are compared with the 10+ million records the
state has on file to identify possible duplicates and aid in the
DMVs investigation of identity fraud.

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



| |                                                            
| | -----------------------------------------------------------
| | v.            Biometric
    and other Professional Services



| |                                            
| | -------------------------------------------
| | Identix Identification Services
    (IIS)

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

In February 2004, Identix acquired
100 percent ownership of Sylvan Identix Fingerprint
Centers, LLC. Sylvan Identix, now renamed IIS, is a leader
in electronic fingerprinting services. The Companys
services allow corporations and government agencies to outsource
to IIS the tenprint biometric data capture and transmission
to the FBI for applicant background checks. Fingerprint
background checks have, in recent times, become a frequent
requirement by employers and licensing agencies in the United
States, and are in fact mandated by state and federal laws for
more than a dozen job categories. IIS maintains a network
of Identix live scan systems at processing centers across the
Nation, where certified technicians process applicants quickly
and easily.

The fingerprint services business provides the
applicant and employer with the following advantages:
fingerprinting takes place in a non-police environment;
background checks can be completed more quickly so the applicant
can begin work more quickly; re-submissions can be done
automatically; rejection of cards

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because of poor print quality is virtually
eliminated; and the risk is reduced to employers by discovering
that an employee, who has begun work, may have a criminal record.


IIS currently has over 100 fingerprinting
locations around the country and processes more than 400,000
applicants each year. Its customers include state agencies and
school districts, major airlines, and financial industry
associations. Fingerprinting services are provided on a contract
basis using Identix Live Scan systems and IIS earns fees for
each user of the services.



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

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

Strategy



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

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

The key elements of the Companys strategy
include:

Deliver comprehensive
solutions.In all target markets, the
Company strives to provide comprehensive product and service
solutions for its customers. Identix strategy includes direct
sales into markets such as Federal and State, local governments
and law enforcement, as well as channel sales in the
international marketspace, and partnering with OEMs, channel
owners and/or application developers to sell Identix products
and incorporate Identix core biometric technology into
offerings by these types of companies. Identix is able to
deliver comprehensive biometric security solutions for a range
of different uses by integrating fingerprint image capture
devices, fingerprint analysis algorithms, facial and skin
recognition capabilities, and biometric data mining platforms.
The Company considers its multi-biometric security software and
algorithms to be critical in providing comprehensive customer
solutions and strives to maintain its leading edge in these
areas. This strategy is different from certain other companies,
which focus solely on either the development of fingerprint
image capture devices or on a single biometric technology. In
addition, the Companys field service organization
continues to expand the scope of its services to law enforcement
and government agencies, assisting in systems analysis and
providing interfaces between Identix and existing computer
systems to improve the quality and efficiency of records
collection. The Company seeks to continue to provide superior
technical services and responsiveness by providing complete
customer solutions to its target markets.

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Deliver scalable multi-biometric technology
and authentication platforms.With the
ABIS system, the Company seeks to overcome some of the hurdles
faced in the adoption of biometrics by providing scalability for
large enterprises. The Company will continue to develop the
capabilities of the ABIS system and provide targeted product
offerings based on this framework. Through the ABIS system, the
Company also strives to enable secure and trusted datamining and
data sharing for small and large scale programs where
identification and identity management are critical aspects of
security and/or benefits distribution and management.

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

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

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

Product Development

The Company continues to invest in research and
development to enhance the performance and functionality, and in
certain cases to reduce the costs, of its existing technology,
products and solutions, as well as to increase the breadth of
its technology, product and services offerings. The
Companys expenditures for research and development totaled
$9,675,000, $11,060,000 and $10,620,000, in the fiscal years
ended June 30, 2004, 2003 and 2002, respectively.

The Companys development programs have
recently focused on expanding on the best of breed in technology
and innovation from Identix and Visionics into new product and
solutions lines. Additionally, Identix is pursuing new
technology application for its recently acquired STA algorithms.
Recent developments include the next generation imaging products
consisting of a full hand scanner and enhancements of the
Companys Live Scan offerings, IBIS products and the ABIS
system. Additionally, the Companys development programs
have focused on the next generation fingerprint, facial, and
skin recognition technology, which the Company believes will
further enhance the speed and accuracy of searching and matching
algorithms within very large databases. The Company believes its
next generation fingerprint, facial, and skin recognition
technology developments will be more reliable and cost effective
than current commercialized technology, as

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well as provide additional functionality,
including the storage of fingerprint and/or facial and skin
templates on smart cards and similar storage devices.


Sales, Marketing and Support

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

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

Channel Sales and Business
Development.The Companys Live
Scan, network and physical security, fingerprint products and
facial recognition offerings, such as the ABIS system, are sold
through a worldwide network of channel sales personnel.
Additionally, the U.S. channel, federal and international
sales organizations establish and maintain relationships with
corresponding distributors, systems integrators, VARs, and OEMs.
The Company also works closely with skilled system integrators
for government, civil and commercial applications of its Live
Scan systems.

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

Marketing Strategy

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

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

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

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ABIS.The ABIS
system is sold primarily through systems integrators and VARs.
The ABIS system is primarily targeted at entities such as
passport agencies, interior ministries, large corporate
enterprises and motor vehicle agencies throughout the world that
face the potentially daunting task of sifting through millions
of images to identify any duplicates prior to issuing an ID.
Additional target customers include law enforcement agencies
that rely on facial searches for investigations and mug shot
booking. The cost of the system depends on many factors
including database size, required response time and throughput.
The Company develops proposals, either directly or in
cooperation with its partners, and is often directly involved in
negotiating the contract terms.

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

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

Identix Identification Services
(IIS).IIS markets its services
directly to state agencies and school districts, major airlines,
financial industry associations and other targeted areas where
background checks and/or applicant screening are required.
Fingerprinting services are provided on a contract basis using
Identix Live Scan systems and IIS earns fees for each user of
the services. IIS also seeks out potential partnerships or
alliances with other companies that may provide different
aspects of the applicant screening process.

Product and Customer Support

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

The Companys Live Scan products carry a
one-year warranty and extended service is offered through a
choice of maintenance contracts. Certain products that
incorporate the Companys enabling biometric technologies
generally carry a 90-day warranty, with additional support
available for a fee after the expiration of the warranty period.
For equipment produced by other companies, the Company generally
passes on to its customers the standard warranties provided by
those manufacturers. The Company has field engineering and
service personnel supporting its products throughout the United
States.

Backlog

Product sales are generally made pursuant to
purchase orders, which can be subject to cancellation. The
Company typically ships its products within sixty days of
receipt of an order. The Company believes that backlog at any
given time cannot be considered a meaningful indicator of future
financial performance.

Identix had product backlog of $8,100,000,
$5,178,000 and $6,172,000 on June 30, 2004, 2003 and 2002
respectively.

15



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Patents and Trademarks

The Companys ability to compete effectively
will depend in part on its ability to maintain the proprietary
nature of its technology, products and manufacturing processes.
The Company principally relies upon patent, trademark,
copyright, trade secret and contract law to establish and
protect its proprietary rights. The success of the
Companys business will depend in part on its proprietary
technology and the Companys protection of that technology.
The Company holds 20 U.S. patents and 22 foreign patents
related to biometric technology. See Risk Factors.

Competition

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

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

Identix faces competition from a number of
competitors who are actively engaged in developing and marketing
biometrics or other security products, including Precise
Biometrics AB, Secugen Corporation, SafLink Corporation,
Authentec, Cognitec Systems GmbH, Neven Vision, Imagis, Sagem
Morpho Inc., Cogent Systems, Inc., and Viisage Technology,
Incorporated.

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

The market for the Companys IBIS device is
in its infancy and, therefore, the competitive environment is
not well defined. The Company believes that some of the Live
Scan competitors have smaller devices capturing fingerprints,
but not the combination of face and finger. Additionally, the
Company believes that some of the AFIS vendors may develop
product offerings to compete in this market.

Manufacturing

The Company limits its manufacturing activities
to the assembly, repair, and testing of proprietary
sub-assemblies. Printed circuit boards and other mechanical and
optical assemblies are fabricated by highly

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automated, contract manufacturing partners. The
Company believes this will permit rapid expansion of production
capacity to meet any significant increase in product demand and
minimize the cost associated with the expansion of internal
manufacturing. The Company believes that the cost of material
and fabricated subassemblies will decline if manufacturing
volumes increase. Quality control audits are performed as part
of the manufacturing process. The Companys physical access
and network security products are fully outsourced to contract
partners.


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

Employees

As of August 1, 2004, Identix had 480
employees working in its products business, of whom 72 were
engaged in research, development and engineering, 122 in
production and customer support, 231 in sales, marketing and
field service and 55 in general administration, finance and
legal. None of Identix employees is represented by a union
and Identix has never experienced a work stoppage. Management
considers its employee relations to be healthy.

Financial Information about Segments

For the financial information about the
Companys reportable segments, see Note 14 to the
Consolidated Financial Statements.

RISK FACTORS

This annual report on Form 10-K contains
forward-looking statements that involve risks and uncertainties.
The Companys business, operating results, financial
performance, and share price may be materially adversely
affected by a number of factors, including but not limited to
the following risk factors, any one of which could cause actual
results to vary materially from anticipated results or from
those expressed in any forward-looking statements made by the
Company in this annual report on Form 10-K or in other
reports, press releases or other statements issued from time to
time. Additional factors that may cause such a difference are
set forth elsewhere in this annual report on
Form 10-K.

Our business will not grow unless the market
for biometric solutions expands both domestically and
internationally.

Our revenues are derived from the sale of
biometric products. Biometric solutions have not gained
widespread commercial acceptance. We cannot accurately predict
the future growth rate, if any, or the ultimate size of the
biometric technology market. The expansion of the market for our
products depends on a number of factors including without
limitation:



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

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| |   |                                                                                                                                      
| | - | -------------------------------------------------------------------------------------------------------------------------------------
| |  | public perceptions of the intrusiveness of these
    solutions and the manner in which firms are using the
    information collected;
|
| |  | public perceptions regarding the confidentiality
    of private information;                                                         
|
| |  | proposed or enacted legislation related to
    privacy of information;                                                               
|
| |  | customers satisfaction with our products
    and services; and                                                                      
|
| |  | marketing efforts and publicity regarding these
    products and services.                                                           

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

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

A significant number of established and startup
companies have developed or are developing and marketing
software and hardware for facial and/or fingerprint biometric
products and applications that currently compete or will compete
directly with our current facial and fingerprint offerings. Some
of these companies have developed or are developing and
marketing semiconductor or optically based direct contact
fingerprint image capture devices, or retinal blood vessel, iris
pattern, hand geometry, voice or facial structure solutions. If
one or more of these technologies or approaches were widely
adopted, it would significantly reduce the potential market for
our products. Our security and identity related line of products
and applications also compete with non-biometric technologies
such as certificate authorities, smart card security solutions,
and traditional key, card, surveillance systems and passwords.
Many competitors offering products that are competitive with our
security and identity related line of products and applications
have significantly more financial and other resources than the
Company. The biometric security market is a rapidly evolving and
intensely competitive market, and we believe that additional
competitors will continue to enter the market and become
significant long-term competitors.

Our facial biometric products face intense
competition from a number of competitors who are actively
engaged in developing and marketing facial-based recognition or
security products, including Viisage Technology, Inc., Cognitech
and Imagis Technologies, Inc. The products designed, developed
and sold under our line of products known as our Live
Scan products also face intense competition from a number
of competitors who are actively engaged in developing and
marketing similar products, including Heimann Biometric Systems
GmbH, Sagem Morpho, Inc., Printrak International, Inc., (a
Motorola company), and CrossMatch Technologies, Inc.

We expect competition to increase and intensify
in the near term in the biometrics markets. Companies competing
with us may introduce products that are competitively priced,
have increased performance or functionality or incorporate
technological advances not yet developed or implemented by us.
Some present and potential competitors have financial,
marketing, research, and manufacturing resources substantially
greater than ours.

In order to compete effectively in this
environment, we must continually design, develop and market new
and enhanced products at competitive prices and must have the
resources available to invest in significant research and
development activities. The failure to do so could have a
material adverse effect on our business operations, financial
results and stock price.

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We derive a significant amount of our revenue
from government contracts, which are often non-standard, involve
competitive bidding, may be subject to cancellation without
penalty and may produce volatility in earnings and
revenue.

Our performance in any one reporting period is
not necessarily indicative of sale trends or future operating or
earnings performance because of our reliance on a small number
of large customers, the majority of which are government
agencies. Government contracts frequently include provisions
that are not standard in private commercial transactions. For
example, government contracts may include bonding requirements
and provisions permitting the purchasing agency to cancel the
contract for convenience at any time without penalty in certain
circumstances. As public agencies, our prospective customers are
also subject to public agency contract requirements that vary
from jurisdiction to jurisdiction. Some of these requirements
may be onerous or impossible to satisfy.

Additionally, public agency contracts are
frequently awarded only after formal competitive bidding
processes, which are often protracted, and typically impose
provisions that permit cancellation in the event that funds are
unavailable to the public agency. In some cases, unsuccessful
bidders for public agency contracts are provided the opportunity
to formally protest certain contract awards through various
agency, administrative and judicial channels. The protest
process may delay a successful bidders contract
performance for a number of weeks, months or more, or result in
the cancellation of the contract award entirely. There is a risk
that we may not be awarded contracts for which we bid or, if
awarded, that substantial delays or cancellation of purchases
may follow as a result of third party protests. For example, in
October 2003, the Company announced that is had been awarded a
Blanket Purchase Order (BPO) from the Department of
Homeland Security (DHS) with an estimated value of
approximately $27 million. The award was subsequently
protested by one of our competitors who had been an unsuccessful
participant in the bidding process for the BPO. Though the
protest was ultimately resolved in favor of Identix, the protest
resulted in substantial delays in DHS procurement of our
technology under the BPO. Similar protests, and similar delays,
regarding any future government contracts of a material nature
that may be awarded to Identix could result in materially
adverse revenue volatility, making management of inventory
levels, cash flow and profitability or loss inherently
difficult. Outright loss of any material government contract,
such as the BPO award to Identix, through the protest process or
otherwise, could have a material adverse effect on our financial
results and stock price.

The ownership of our GSA Multiple Award IT-70
Schedule contract related to our product business was
transferred to the buyer of our former wholly owned subsidiary,
Identix Public Sector, Inc. (IPS), in February 2004.
We entered into a reseller agreement with such third party
concurrently with the closing of the sale of IPS, and we
continue to sell our products through such resellers IT 70
Schedule. Such contract, now held by our reseller, is subject to
future audit, and any material adverse findings or adjustments
arising out of such audits may have a material adverse effect on
ability to sell our products through the resellers
contract, which could in turn materially adversely affect our
business, financial condition and results of operations.
Furthermore, the current IT-70 contract, which has the been the
subject of two monthly extensions since its original expiration
date of June 30, 2004, is currently set to expire
September 16, 2004. While efforts are underway by the
reseller to obtain a multi-year extension to the original
contract term, the failure to obtain such extension may have a
material adverse effect on ability to sell our products through
the resellers contract, which could in turn materially
adversely affect our business, financial condition and results
of operations. The Company is in the process of applying for a
new IT-70 Schedule contract, but there can be no assurance that
we will successfully obtain such contract on a timely basis. Any
failure to obtain such contract, or any significant delays we
experience in obtaining such contract, could have a material
adverse effect on our business operations, financial results and
stock price.

Similar to federal government contracts, state
and local government agency contracts may be contingent upon
availability of matching funds from federal, state or local
entities. State and local law enforcement and other government
agencies are subject to political, budgetary, purchasing and
delivery constraints which may continue to result in quarterly
and annual revenues and operating results that may be irregular
and difficult to predict. Such revenue volatility makes
management of inventory levels, cash flow and profitability
inherently difficult. In addition, if we are successful in
winning such procurements, there may be unevenness in shipping

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schedules, as well as potential delays and
schedule changes in the timing of deliveries and recognition of
revenue, or cancellation of such procurements.


For the years ended June 2004 and 2003, we
derived approximately 14% and 12% of our revenue directly from
contracts relating to the U.S. Federal Government with no
one governmental agency comprising more than 10% of the total
revenues. The loss of a material government contract due to
budget cuts or otherwise could have a severe negative impact on
our financial results and stock price.

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

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



| |   |                                                                                                                                                                                                                                                                                    
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the lack of availability of government funds;                                                                                                                                                                                                                                      
|
| |  | reduced demand for products and services caused,
    for example, by product offerings from new competitors;                                                                                                                                                                       
|
| |  | the inability to timely and successfully complete
    (i) development of complex designs and components,
    (ii) new product introductions that may result in improved
    gross margins or the inability to manufacture in volume or
    install certain of our complex products.
|
| |  | changes in the mix of products and services we or
    our distributors sell;                                                                                                                                                                                                       
|
| |  | cancellations, delays or contract amendments by
    government agency customers;                                                                                                                                                                                                   
|
| |  | protests of federal, state or local government
    contract awards by competitors;                                                                                                                                                                                                 
|
| |  | unforeseen legal expenses, including litigation
    and/or administrative protest costs;                                                                                                                                                                                           
|
| |  | expenses related to acquisitions or mergers;                                                                                                                                                                                                                                       
|
| |  | impairment charges arising out of our assessments
    of goodwill and intangibles;                                                                                                                                                                                                 
|
| |  | other one-time financial charges; and                                                                                                                                                                                                                                              
|
| |  | the lack of availability or increase in cost of
    key components and subassemblies.                                                                                                                                                                                              
|
| |  | competitive pricing pressures                                                                                                                                                                                                                                                      
|
| |  | unpredictable product installation schedules                                                                                                                                                                                                                                       

Particularly important is the need to invest in
planned technical development programs to maintain and enhance
our competitiveness, and to successfully develop and launch new
products and services on a timely basis. Improving the
manageability and likelihood of success of such programs
requires the development of budgets, plans and schedules for the
execution of these programs and the adherence to such budgets,
plans and schedules. The majority of such program costs are
payroll and related staff expenses, and secondarily materials,
subcontractors and promotional expenses. These costs are very
difficult to adjust in response to short-term fluctuations in
our revenues, compounding the difficulty of achieving
profitability in the event of a revenue downturn.

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

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

We also extend substantial credit to federal,
state and local governments in connection with sales of our
products and services. Sales to sizeable customers requiring
large and sophisticated networks of fingerprint

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recognition and Live Scan systems and peripheral
equipment often include technical requirements which may not be
fully known at the time requirements are specified by the
customer. In addition, contracts may specify performance
criteria that must be satisfied before the customer accepts the
products and services. Collection of accounts receivable may be
dependent on completion of customer requirements, which may be
unpredictable, subject to change by the customer, and not fully
understood by us at the time of acceptance of the order, and may
involve investment of additional resources. These investments of
additional resources are accrued when amounts can be estimated
but may be uncompensated and negatively affect profit margins
and our liquidity.


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

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

Approximately $30 million of costs have been
incurred in connection with our merger with Visionics. These
include costs associated with combining the businesses of the
two companies, including integration and restructuring costs,
costs associated with the consolidation of operations and the
fees of financial advisors, attorneys and accountants. While the
vast majority of costs associated with the merger are behind us,
we may incur additional integration costs, for example, costs
associated with the sublease of our former office and
manufacturing space in California, and these costs may be higher
than anticipated.

In connection with the Visionics merger, we
recorded a substantial amount of goodwill. Generally accepted
accounting principles requires that goodwill be tested for
impairment at least annually and a non-cash charge to earnings
must be recognized in the period any impairment of goodwill is
determined. While we did not record an impairment of goodwill in
fiscal year 2004, during the fourth quarter of fiscal year 2003,
we recorded an impairment charge to goodwill in the amount of
$154,799,000.

The market price of our common stock could
decline if:



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

The terrorist attacks of September 11,
2001, and the continuing threat of global terrorism, have
increased financial expectations that may not
materialize.

The September 11, 2001 terrorist attacks,
and continuing concerns about global terrorism, may have created
an increase in awareness for biometric security solutions
generally. However, it is uncertain whether the actual level of
demand for our biometric products and services will grow as a
result of such increased awareness. Increased demand may not
result in an actual increase in our revenues. In addition, it is
uncertain which security solutions, if any, will be adopted as a
result of the terrorism and whether our products will be a part
of those solutions. Efforts in the war against terrorism, the
war in Iraq, and the post-war reconstruction efforts in Iraq,
may actually delay funding for the implementation of biometric
solutions generally. Even if our products are considered or
adopted as solutions to the terrorism, the level and timeliness
of available funding are unclear. These factors may adversely
impact us and create unpredictability in revenues and operating
results.

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We may need to raise additional equity or debt
financing in the future.

While we believe existing working capital will be
adequate to fund our operating cash requirements for at least
the next 12 months, we may need to raise additional debt or
equity financing in the future, which may not be available to
us. Even if we are successful in raising additional financing,
we may not be able to do so on terms that are not excessively
dilutive to existing stockholders or less costly than existing
sources of financing. Failure to secure additional financing in
a timely manner and on favorable terms could have a material
adverse effect on our financial performance and stock price and
require us to implement certain cost reduction initiatives
resulting in the curtailment of our operations.

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

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

Continued participation by us in the market for
Live Scan systems that are linked to forensic quality databases
under the jurisdiction of governmental agencies may require the
investment of our resources in upgrading our products and
technology for us to compete and to meet regulatory and
statutory standards. We may not have adequate resources
available to us or may not adequately keep pace with appropriate
requirements in order to effectively compete in the marketplace.

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

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

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

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

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

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

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

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

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

We obtain certain hardware components and
complete products, as well as software applications, from a
single source or a limited group of suppliers. We do not have
long-term agreements with any of our suppliers. We will
experience significant delays in manufacturing and shipping of
products to customers if we lose these sources or if supplies
from these sources are delayed.

As a result, we may be required to incur
additional development, manufacturing and other costs to
establish alternative sources of supply. It may take several
months to locate alternative suppliers, if required, or to
re-tool our products to accommodate components from different
suppliers. We cannot predict if we will be able to obtain
replacement components within the time frames we require at an
affordable cost, or at all. Any delays resulting from suppliers
failing to deliver components or products on a timely basis in
sufficient quantities and of sufficient quality or any
significant increase in the price of components from existing or
alternative suppliers could have a severe negative impact on our
financial results and stock price.

The success of our strategic plan to pursue
sales in international markets may be limited by risks related
to conditions in such markets.

For the fiscal years ending June 30, 2004
and June 30, 2003 we derived approximately 12% and 9% of
our product revenues from international sales. We currently have
a local presence in the United Kingdom.

There is a risk that we may not be able to
successfully market, sell and deliver our products in foreign
countries, or successfully rely on supplemental offshore
research and development resources.

Risks inherent in marketing, selling and
delivering products in foreign and international markets, each
of which could have a severe negative impact on our financial
results and stock price, include those associated with:



| |   |                                                                                                                                                                                                             
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | regional economic or political conditions;                                                                                                                                                                  
|
| |  | delays in or absolute prohibitions on exporting
    products resulting from export restrictions for certain products
    and technologies, including crime control products
    and encryption technology;
|
| |  | loss of, or delays in importing products,
    services and intellectual property developed abroad, resulting
    from unstable or fluctuating social, political or governmental
    conditions;             
|
| |  | fluctuations in foreign currencies and the
    U.S. dollar;                                                                                                                                                 
|
| |  | loss of revenue, property (including intellectual
    property) and equipment from expropriation, nationalization,
    war, insurrection, terrorism, criminal acts and other political
    and social risks;
|
| |  | the overlap of different tax structures;                                                                                                                                                                    
|
| |  | seasonal reductions in business activity;                                                                                                                                                                   
|
| |  | risks of increases in taxes and other government
    fees; and                                                                                                                                              
|
| |  | involuntary renegotiations of contracts with
    foreign governments.                                                                                                                                       

In addition, foreign laws treat the protection of
proprietary rights differently from laws in the United States
and may not protect our proprietary rights to the same extent as
U.S. laws. The failure of foreign laws or judicial systems
to adequately protect our proprietary rights or intellectual
property, including intellectual property developed on our
behalf by foreign contractors or subcontractors may have a
material adverse effect on our business, operations, financial
results and stock price.

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

As of June 30, 2004, the State of Wisconsin
Investment Board, owned approximately 8%, of the Companys
outstanding common stock. The concentration of large percentages
of ownership in any single stockholder may delay or prevent
change in control of the Company. Additionally, the sale of a
significant number of our shares in the open market by a single
stockholder or otherwise could adversely affect our stock price.

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

Performance failure in our products may cause
loss of market share, delay in or loss of market acceptance,
additional warranty expense or product recall, or other
contractual liabilities. The complexity of certain of our
fingerprint readers makes the manufacturing and assembly process
of such products, especially in volume, complex. This may in
turn lead to delays or shortages in the availability of certain
products, or, in some cases, the unavailability of certain
products. The negative effects of any delay or failure could be
exacerbated if the delay or failure occurs in products that
provide personal security, secure sensitive computer data,
authorize significant financial transactions or perform other
functions where a security breach could have significant
consequences. If a product launch is delayed or is the subject
of an availability shortage because of problems with our ability
to manufacture or assemble the product successfully on a timely
basis, or if a product or service otherwise fails to meet
performance criteria, we may lose revenue opportunities entirely
and/or experience delays in revenue recognition associated with
a product or service in addition to incurring higher operating
expenses during the period required to correct the defects.
There is a risk that for unforeseen reasons we may be required
to repair or replace a substantial number of products in use or
to reimburse customers for products that fail to work or meet
strict performance criteria. We carry product liability
insurance, but existing coverage may not be adequate to cover
potential claims.

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

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

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

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

24



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##### Table of Contents



are the same as, substantially equivalent or
superior to ours, or become available in the market at a lower
price.


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

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

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

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

Our management believes that in order to be
successful we must appropriately manage the size of our
business. This may mean reducing costs and overhead in certain
economic periods, and selectively growing in periods of economic
expansion. In addition, we will be required to implement
operational, financial and management information procedures and
controls that are efficient and appropriate for the size and
scope of our operations. The management skills and systems
currently in place may not be adequate and we may not be able to
manage any significant cost reductions or effectively provide
for our growth.

Acquisitions and dispositions of companies,
assets or technologies may result in disruptions to our
business.

As part of our business roadmap, we may from time
to time acquire businesses, assets or technologies relating to,
or complementary to, our current strategies or operations, and
we may also divest certain businesses or assets that we consider
non-complementary to our current strategies or operations.

In March 2004, we acquired certain technology and
intellectual property rights of Delean Vision Worldwide, Inc. In
February 2004, we acquired the remaining 50% percent interest in
Sylvan Identix Fingerprint Centers, LLC (SIFC) that
we didnt already own. We subsequently re-named SIFC to
Identix Identification Services, LLC. In February 2004, we sold
our wholly owned subsidiary, Identix Public Sector, Inc., whose
business principally consisted of providing project management
and facilities engineering services to government agencies. We
acquired certain proprietary software and source code assets
from a third party in October 2002. We merged with Visionics in
June 2002 and acquired Identicator Technology, Inc. in fiscal
1999. We also acquired one company in fiscal 1998 and two
companies in fiscal 1996. These and any other acquisitions,
mergers and divestitures by Identix are and will be accompanied
by the risks commonly encountered in such transactions. These
risks include, among other things:



| |   |                                                                                                                                    
| | - | -----------------------------------------------------------------------------------------------------------------------------------
| |  | exposure to unknown liabilities of acquired
    companies or assets;                                                               
|
| |  | higher than anticipated acquisition costs and
    expenses;                                                                        
|
| |  | effects of costs and expenses of acquiring and
    integrating new businesses on our operating results and
    financial condition;
|
| |  | effects of consolidated revenue loss associated
    with dispositions of material subsidiaries or assets;                          
|
| |  | effects of costs and expenses of integrating and
    introducing new technologies;                                                 

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| |   |                                                                                                                                                                                      
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the difficulty and expense of assimilating the
    operations and personnel of the companies;                                                                                        
|
| |  | disruption of our ongoing business;                                                                                                                                                  
|
| |  | diversion of management time and attention;                                                                                                                                          
|
| |  | failure to maximize our financial and strategic
    position by the successful incorporation of acquired technology;                                                                 
|
| |  | failure to realize the potential of acquired
    technologies, complete product development, or properly obtain
    or secure appropriate protection of intellectual property rights;
|
| |  | the maintenance of uniform standards, controls,
    procedures and policies;                                                                                                         
|
| |  | loss of key employees and customers as a result
    of changes in management;                                                                                                        
|
| |  | the incurrence of amortization expenses;                                                                                                                                             
|
| |  | incurring impairment charges arising out of our
    assessments of goodwill and intangibles; and                                                                                     
|
| |  | possible dilution to our stockholders.                                                                                                                                               

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

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

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

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

If we lose the services of key personnel, or fail
to replace the services of key personnel who depart, we could
experience a severe negative effect on our financial results and
stock price. In addition, there is intense competition for
highly qualified engineering and marketing personnel in the
locations where we principally operate. The loss of the services
of any key engineering, marketing or other personnel or our
failure to attract, integrate, motivate and retain additional
key employees could have a material adverse effect on our
business, operating and financial results and stock price.

Available Information

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






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

The Company does not own any real estate. The
Company is headquartered in Minnesota with office and
manufacturing facilities of approximately 71,600 square
feet in an industrial park at 5600 Rowland Road in

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##### Table of Contents



Minnetonka. The average monthly lease payment for
the Minnetonka facility is $61,000 a month plus taxes, insurance
and maintenance costs. The space is occupied under a lease
expiring on March 31, 2008 and is believed to be adequate
for the Companys current business needs.


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

The Company has a customer service and sales
office in Ontario, California, in approximately
9,600 square feet. The average monthly lease payment for
the Ontario facility is $12,000 a month plus taxes, insurance
and maintenance costs. The space is occupied under a lease
expiring in November 2007.

The Company leases approximately 5600 square
feet of space in a facility in Eden Prairie, Minnesota. The
average monthly lease payment for the Eden Prairie facility is
$2,000 a month plus taxes, insurance and maintenance costs. The
space is occupied under a lease expiring in November 2004.

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

The Company leases space in two facilities in the
United Kingdom. The first facility has average monthly lease
payments of $1,500 and is located at Cirencester Business Park,
Love Lane, Cirencester, Gloucestershire in the United Kingdom.
The lease agreement for this facility expires in December 2006.
The Company subleases this facility to a third party. The second
United Kingdom facility which has average monthly lease payments
of $1,900 and is located at Calleva Park, Aldermaston,
Berkshire. The lease expires in June 2005.

The Company also leases approximately
26,000 square feet of space in Los Gatos, California for
its former administrative headquarters and manufacturing
facility and approximately 31,000 square feet of space in
Dublin, California for its former engineering, research and
customer support facilities. The average monthly lease payment
for the Los Gatos facility is $154,000 a month plus taxes,
insurance and maintenance costs and the lease expires
December 31, 2007. The average monthly lease payment for
the Dublin facility is $45,000 a month plus taxes, insurance,
and maintenance and the lease expires March 15, 2006. The
facilities in Los Gatos and Dublin are currently vacant. The
Company is currently subleasing approximately 19,000 square
feet of the Dublin facility with subleases expiring in March
2006. The Company receives average monthly sublease proceeds
from this facility of $10,000 per month. The Company is
actively pursuing its option to sublease the remainder of the
Dublin and the Los Gatos facilities.

The Company leases approximately
15,800 square feet in a facility in Fairfax Virginia. The
average monthly lease payment for the Fairfax facility is
$36,000 per month plus taxes and insurance costs. The space
is occupied under two leases, one for 3,600 square feet
expiring February 2006 and a second lease for 12,200 square
feet expiring in February 2009.

The Company leases approximately
12,000 square feet in a facility in Springfield Illinois
for the headquarters for its IIS subsidiary. The average
monthly lease payment for the Springfield facility is
$8,400 per month plus taxes and insurance costs. The space
is occupied under a lease expiring in September 2008.

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






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

On February 5, 2003, Roger Benson, an
individual, filed a lawsuit seeking unspecified damages against
the Company, Digital Biometrics, Inc. (DBI), and
Visionics Corporation in California Superior Court, alleging
that in 1998 he was issued a duplicate electronic fingerprint
number that was also held by a convicted felon. He alleges that
the fingerprint number was generated by a live scan system
manufactured by DBI and operated by a Sheriffs office in
the State of Oregon. The lawsuit also alleges injuries from a
43-day

27



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##### Table of Contents



incarceration after the plaintiffs identity
was allegedly mistaken for that of the felon because of the
duplicate fingerprint number. The complaint alleges liability
under strict product liability, failure to warn, breach of
implied warranty, negligence, and unfair business practices,
among other theories of liability. On December 2, 2003, the
court granted the Companys motion for judgment on the
pleadings, dismissing all of the plaintiffs causes of
action and granting leave to amend. The plaintiff filed amended
complaints on January 14, 2004, and January 30, 2004.
Additional individual plaintiffs were added to the amended
complaint and the State of Oregon and the State of California,
among others, were added as defendants. On May 11, 2004,
the Court denied the Companys motion to dismiss. While
discovery in the case is continuing, based on currently
available information, the Company believes that the issuance of
any duplicate fingerprint numbers was not the result of any
design, manufacturing or product defect or malfunction, or any
other error, omission or fault on the part the Company or
affiliated defendants. The Company intends to vigorously defend
this lawsuit.


On July 22, 2004, the Company was served
with a class action complaint naming Miguel Espinoza as a
purported class action plaintiff. Mr. Espinoza is also one
of the individual plaintiffs added to the Benson litigation via
the January 2004 amended complaints in that litigation.
Mr. Espinoza claims that he was denied a liquor license for
his business in Oregon on August 1, 2002 because he was
misidentified as a convicted felon. He alleges the
misidentification was a result of duplicate fingerprint
identification number also held by a convicted felon, and that
the duplicate number was generated by a live scan system
manufactured by DBI and operated by a Sheriffs office in
the State of Oregon. The complaint alleges liability under
strict product liability, failure to warn, breach of implied
warranty, negligence, product misrepresentation and 42 U.S.C
§1983 among other theories of liability. While the case is
in its earliest stages, based on currently available
information, the Company believes that the issuance of any
duplicate fingerprint numbers was not the result of any design,
manufacturing or product defect or malfunction, or any other
error, omission or fault on the part the Company or affiliated
defendants. The Company intends to vigorously defend this
lawsuit.

While it is not possible at this early stage of
the proceedings to predict with precision and certainty the
outcome of the actions discussed above, based on the facts and
information currently available to the Company (which are
subject to change based on discovery of further facts and
information) the Company believes that liabilities and costs
arising out of such actions will not have a material adverse
impact on the Companys consolidated financial position,
results of operations or cash flows.






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

No matters were submitted to a vote of
security-holders during the fourth quarter of the fiscal year
ended June 30, 2004.



|                   |                                      
|------------------ | -------------------------------------
|Supplemental Item. | Executive Officers of the
    Company

The executive officers of the Company, and their
ages as of August 1, 2004, are as follows:

|                  |  |     |    |          |  |                                                
|----------------- |  | --- | -- | -------- |  | -----------------------------------------------
|Name              |  | Age |    | Position
|                  |  |     |    |         
|Joseph J. Atick   |  |     | 40 |          |  | President, Chief Executive Officer and Director
|Paul Griffin      |  |     | 42 |          |  | Chief Technology Officer                       
|Elissa J. Lindsoe |  |     | 37 |          |  | Chief Financial Officer                        
|Mark S. Molina    |  |     | 45 |          |  | General Counsel and Secretary                  
|James H. Moar     |  |     | 55 |          |  | Chief Operating Officer                        

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

28



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##### Table of Contents



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

Elissa J. Lindsoewas named Chief Financial Officer of
the Company in June 2004. Prior to joining Identix, she was Vice
President & Treasurer of Secure Computing Corporation,
a global provider of network security products. From 1997 to
2001, Ms. Lindsoe served as Director of Finance and
Controller for Secure. Between 1990 and 1997, Ms. Lindsoe
held various financial positions with increasing responsibility
for MVE, Incorporated and Honeywell, Incorporated.

Mark S. Molinahas
served as General Counsel of the Company since October 1999. He
was appointed Secretary in December 1999. From February 1996 to
October 1999, Mr. Molina was with Harris Corporation, most
recently as Senior Counsel, Microwave Communications Division.
Prior to joining Harris, he practiced corporate, business and
securities law with firms in San Francisco, Sydney,
Australia and New York City, where he began his career with
Shearman & Sterling in 1985.

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




PART II






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

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

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

|                                |  |      |      |     |  |   |      | 
|------------------------------- |  | ---- | ---- | --- |  | - | ---- | 
|                                |  | High |      | Low
|                                |  |      |      |    
|Fiscal year ended June 30, 2004 |  |      |      |     |  |   |      | 
|Fourth Quarter                  |  | $    | 8.36 |     |  | $ | 5.67 | 
|Third Quarter                   |  |      | 5.77 |     |  |   | 4.35 | 
|Second Quarter                  |  |      | 6.13 |     |  |   | 4.26 | 
|First Quarter                   |  |      | 7.18 |     |  |   | 5.27 | 
|Fiscal year ended June 30, 2003 |  |      |      |     |  |   |      | 
|Fourth Quarter                  |  | $    | 6.99 |     |  | $ | 4.14 | 
|Third Quarter                   |  |      | 5.24 |     |  |   | 3.27 | 
|Second Quarter                  |  |      | 6.98 |     |  |   | 4.04 | 
|First Quarter                   |  |      | 7.54 |     |  |   | 4.40 | 

The last reported sale price of the common stock,
as reported by Nasdaq on August 31, 2004 was $4.60. As of
August 31, 2004, there were 1727 stockholders of record.

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

29



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##### Table of Contents








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

The selected consolidated financial data set
forth below with respect to the Companys statements of
operations data for the years ended June 30, 2004, 2003,
and 2002 and with respect to the balance sheets at June 30,
2004 and 2003 are derived from the Companys audited
consolidated financial statements included elsewhere in this
Annual Report on Form 10-K. The Companys statements
of operations data for all periods presented reflects the
classification of Identix Public Sector as discontinued
operations (see Note 3 to the Consolidated Financial
Statements). Consolidated statements of operations data for the
years ended June 30, 2001 and 2000 and consolidated balance
sheet data at June 30, 2002, 2001, and 2000 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.

|                                                                      |                                                                       |                                       |         |       |   |         |          |       |   |      |         |       |   |   |         |        |   |   |         |       |     
|--------------------------------------------------------------------- | --------------------------------------------------------------------- | ------------------------------------- | ------- | ----- | - | ------- | -------- | ----- | - | ---- | ------- | ----- | - | - | ------- | ------ | - | - | ------- | ----- | ----
|                                                                      |                                                                       |                                      
|                                                                      |                                                                       | Fiscal Year Ended June 30,           
|                                                                      |                                                                       |                                      
|                                                                      |                                                                       | 2004                                  |         | 2003  |   | 2002(4) |          | 2001  |   | 2000
|                                                                      |                                                                       |                                       |         |       |   |         |          |       |   |     
|                                                                      |                                                                       |                                      
|                                                                      |                                                                       | (In thousands, except per share data)
|Statement of Operations Data:                                         |                                                                       |                                       |         |       |   |         |          |       |   |      |         |       |   |   |         |        |   |   |         |      
|Revenues                                                              |                                                                       | $                                     | 55,199  |       |   | $       | 52,684   |       |   | $    | 33,465  |       |   | $ | 38,156  | (6)    |   | $ | 33,390  |      
|Loss from continuing operations                                       |                                                                       |                                       | (23,667 | )     |   |         | (183,940 | )     |   |      | (49,380 | )     |   |   | (26,046 | )      |   |   | (14,614 | )    
|Income (loss) from discontinued operations                            |                                                                       |                                       | 5,125   | (1)   |   |         | (3,434   | )     |   |      | (6,058  | )     |   |   | (1,554  | )      |   |   | 1,228   |      
|Loss before cumulative effect of a change in
    accounting principle |                                                                       |                                       | (18,542 | )(2)  |   |         | (187,374 | )(3)  |   |      | (55,438 | )(5)  |   |   | (27,600 | )(8,9) |   |   | (13,386 | )    
|Cumulative effect of a change in accounting
    principle             |                                                                       |                                       |        |       |   |         |         |       |   |      |        |       |   |   | (1,998  | )(6)   |   |   |        |      
|                                                                      |                                                                       |                                       |         |       |   |         |          |       |   |      |         |       |   |   |         |        |   |   |         |      
|Net loss                                                              |                                                                       | $                                     | (18,542 | )     |   | $       | (187,374 | )     |   | $    | (55,438 | )     |   | $ | (29,598 | )      |   | $ | (13,386 | )    
|                                                                      |                                                                       |                                       |         |       |   |         |          |       |   |      |         |       |   |   |         |        |   |   |         |      
|Basic and diluted net loss per share:                                 |                                                                       |                                       |         |       |   |         |          |       |   |      |         |       |   |   |         |        |   |   |         |      
|                                                                      | Loss from continuing operations                                       |                                       | $       | (0.27 | ) |         | $        | (2.16 | ) |      | $       | (1.19 | ) |   | $       | (0.77  | ) |   | $       | (0.47 | )   
|                                                                      | Income (loss) from discontinued operations                            |                                       | $       | 0.06  |   |         | $        | (0.04 | ) |      | $       | (0.14 | ) |   | $       | (0.05  | ) |   | $       | 0.04  |     
|                                                                      | Loss before cumulative effect of a change in
    accounting principle |                                       | $       | (0.21 | ) |         | $        | (2.20 | ) |      | $       | (1.33 | ) |   | $       | (0.82  | ) |   | $       | (0.43 | )   
|                                                                      | Cumulative effect of a change in accounting
    principle             |                                       | $       |      |   |         | $        |      |   |      | $       |      |   |   | $       | (0.06  | ) |   | $       |      |     
|                                                                      | Basic and diluted net income Loss per share                           |                                       | $       | (0.21 | ) |         | $        | (2.20 | ) |      | $       | (1.33 | ) |   | $       | (0.88  | ) |   | $       | (0.43 | )(7)
|Balance Sheet Data:                                                   |                                                                       |                                       |         |       |   |         |          |       |   |      |         |       |   |   |         |        |   |   |         |      
|Cash and cash equivalents                                             |                                                                       | $                                     | 35,944  |       |   | $       | 34,712   |       |   | $    | 53,346  |       |   | $ | 20,777  |        |   | $ | 15,620  |      
|Working capital                                                       |                                                                       |                                       | 45,822  |       |   |         | 53,397   |       |   |      | 63,239  |       |   |   | 32,440  |        |   |   | 34,546  |      
|Total assets                                                          |                                                                       |                                       | 228,827 |       |   |         | 245,270  |       |   |      | 431,255 |       |   |   | 83,486  |        |   |   | 83,518  |      
|Stockholders equity                                                  |                                                                       |                                       | 203,489 |       |   |         | 211,264  |       |   |      | 393,323 |       |   |   | 64,082  |        |   |   | 67,634  |      



---



|    |                                                                                                                                                 
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Includes a gain on the sale of IPS of $5,934,000
    that was partially offset by the loss from discontinued
    operations of $809,000.        
|   
|(2) | Includes special charges of $2,115,000 as
    discussed in the management discussion and analysis in the
    section entitled special charges.

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|    |                                                                                                                                                                                                                                                                                             
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(3) | Includes a write-off of $154,799,000 that is
    related to the impairment of goodwill as well as $6,327,000 of
    special charges.                                                                                                                                                        
|   
|(4) | Identix merger with Visionics Corporation
    was completed on June 25, 2002. Thus, Identix
    consolidated results of operation for the year ended
    June 30, 2002 reflects Visionics Corporations results
    of operations for only the three final business days of June
    2002.
|   
|(5) | Includes $17,965,000 of special charges and a
    charge of $6,400,000 for the write-off of acquired in-process
    research and development.                                                                                                                                               
|   
|(6) | Identix changed its method of accounting for
    revenue recognition effective July 1, 2000 to comply with
    the Securities and Exchange Commission Staff Accounting Bulletin
    No. 101, Revenue Recognition in Financial
    Statements (SAB 101).                                 
|   
|(7) | Assuming Identix accounting change to
    comply with SAB 101 was made retroactive to periods prior
    to July 1, 1999, the pro forma basic and diluted net loss
    per share for fiscal 2000 is $0.41.                                                                                  
|   
|(8) | Includes preferred stock and warrant expense of
    $1,259,000.                                                                                                                                                                                                                             
|   
|(9) | Includes charges for inventory write-offs and
    reserves of $1,843,000 and write-off of intangibles and other
    special charges of $2,674,000.                                                                                                                                          






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

Forward-Looking Statements

The statements in this Annual Report on
Form 10-K that relate to future plans, events or
performance are forward-looking statements. Actual results,
events and performance may differ materially due to a variety of
factors, including the factors described under Risk
Factors in Item 1 and the other risks identified in
this Annual Report on Form 10-K. The Company undertakes no
obligation to publicly update these forward-looking statements
to reflect events or circumstances after the date hereof or to
reflect the occurrence of unanticipated events.

Overview

Identix Incorporated (Identix or the
Company) provides a broad range of fingerprint and
facial recognition technology offerings that empower the
identification of individuals who wish to gain access to
information or facilities, conduct transactions and obtain
identifications. Additionally, the companys products and
solution offerings can help identify those who perpetrate fraud
and otherwise pose a threat to public safety. Identix
products serve a broad range of industries and market
segments  most notably, government and law
enforcement, aviation, financial, healthcare and corporate
enterprise. A world leader in multi-biometric technology,
Identix believes it has more fingerprint and facial biometric
installations worldwide than any other company.

Fiscal 2004

Fiscal year 2004 was a year marked by significant
positive and strategic change at Identix. The significant events
that occurred were the disposition of Identix wholly owned
subsidiary Identix Public Sector (IPS), the acquisition of
technology from Delean Vision Worldwide, Inc., the acquisition
of 100% ownership of Sylvan Identix Fingerprint Centers, LLC now
renamed Identix Identification Services (IIS), and the
streamlining of Identix operations with a reduction in
force plan that reduced its total workforce by six percent. The
Company believes these actions allow Identix to fully focus on
it core biometric business while enhancing its biometric
technology, expanding access to the commercial and civil markets
while at the same time, streamlining its operations. In
addition, on June 28, 2004, Identix was reconfirmed as the
sole recipient of a Department of Homeland Security blanket
purchase agreement valued at an estimated $27,000,000 over a
60-month period.

On February 13, 2004, the Company
consummated the sale of Identix Public Sector (IPS) to
Alion Science and Technology Corporation (Alion). In fiscal year
2004, the Company recognized income from discontinued operations
of $5,125,000 of which $5,934,000 is attributable to the gain on
the sale of IPS and $809,000 is attributable to the loss on the
discontinued IPS operations from July 1, 2003 to the date
of the

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sale. The IPS operations are presented in the
Companys Consolidated Statements of Operations for all
periods presented as discontinued operations. Under the terms of
the agreement, upon closing Alion paid the Company $8,850,000 in
cash. This amount is shown as proceeds from sale of businesses,
net of transaction costs of $1,042,000, in the Consolidated
Statement of Cash Flows for the year ended June 30, 2004.
The terms of the sale include the potential for additional
future payments to the Company of up to $500,000 pending
satisfaction of certain conditions. The terms of the sale also
include an obligation on the part of the Company to indemnify
Alion against certain potential liabilities, including for
breaches of representations and warranties made by the Company
in the sales agreement, for an amount not to exceed $2,125,000.


On February 23, 2004, the Company acquired
the remaining 50% ownership of Sylvan Identix fingerprint
Centers, LLC now known as Identix Identification services
(IIS). IIS provides services to corporations and government
agencies whereby IIS captures fingerprints and transmits
the data for applicant background checks. IIS maintains a
network of Identix live scan systems at processing centers
across the country where certified technicians process
applicants. In consideration for the remaining 50% interest in
the joint venture, Identix paid Sylvan Learning Centers, Inc.
$875,000 in cash. In addition, to satisfy employment agreement
obligations the Company gave certain IIS employees Company stock
valued at $749,000.

On February 26, 2004, the Company announced
that it had strategically refocused its operations towards its
core competencies which resulted in a reduction in force of
approximately 30 full time equivalent job positions, or
approximately six percent of its workforce; the severance costs
associated with this reduction in force was approximately
$250,000. Following this reduction in force, the Company began
to re-supplement its workforce and resources, and expects to
continue to do so, in a manner that more sharply focuses its
workforce and resources towards it core competencies and
maximizes the benefits of its strategic re-alignment.

On March 10, 2004, Identix acquired certain
technology from Delean Vision Worldwide Inc. (Delean). The
technology acquired was biometric recognition algorithms known
as skin texture analysis (STA) that allows a unique
characteristic of the skin structure known as a
skinprint to be used to identify individuals. In
exchange for the technology and intellectual property rights of
Delean, the Company issued 675,000 shares of Identix common
stock and a warrant with contingent future vesting rights in
favor of Delean to purchase up to 800,000 shares of Identix
common stock at $4.70 per share. The warrant vests upon the
successful issuance of certain U.S. patents related to the
technology acquired from Delean. The fair value of any warrants
which vest will be recorded as additional cost of the intangible
assets at the time of vesting.

On June 28, 2004, Identix was reconfirmed as
the sole receipt of a Department of Homeland Security
(DHS) blanket purchase agreement (BPA) with an
estimated value of $27,000,000 over a 60 month period,
although the exact amount and the number of live scan systems
purchased, may vary depending on DHS actual future needs.
DHS previously had awarded the BPA to Identix after the agency
had conducted exhaustive evaluations, and subsequent
revaluations, of all offerors proposals. After it was
ruled that Identix was the sole recipient of the BPA, the DHS
lifted the stop work order that had been in place as a result of
the protest by an unsuccessful bidder, and instructed Identix to
resume delivery of live scan systems under a previously issued
initial purchase order.

Fiscal 2002

On June 25, 2002, Identix completed its
merger with Visionics Corporation (Visionics), a
leading provider of biometric technologies and identification
information systems. As Identix merger with Visionics was
consummated on June 25, 2002, Identix consolidated
statements of operations for the fourth quarter and year ended
June 30, 2002, reflect Visionics results of
operations for the final three business days of June 2002. In
connection with this stock-for-stock merger transaction, each
outstanding share of Visionics common stock was exchanged for
1.3436 shares of Identix, resulting in the issuance of an
aggregate of 39,422,000 shares of Identix common stock for
all outstanding shares of Visionics common stock. In addition,
all options and warrants to purchase shares of Visionics common
stock outstanding immediately prior to the consummation of the
merger were converted into options and warrants to
purchase 3,860,000 shares of Identix common stock. The
total purchase price was $334,818,000. (See Note 4 of Notes
to Consolidated Financial Statements).

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Critical Accounting Policies

The preparation of financial statements and
related disclosures in conformity with accounting principles
generally accepted in the United States of America requires
management to make judgments, assumptions and estimates that
affect the amounts reported in the Consolidated Financial
Statements and accompanying notes. Note 1 to the
Consolidated Financial Statements in the Annual Report on
Form 10-K for the fiscal year ended June 30, 2004
describes the significant accounting policies and methods used
in the preparation of the Consolidated Financial Statements.
Estimates are used for, but not limited to, the accounting for
the allowance for doubtful accounts and sales returns, goodwill
impairments, inventory allowances, warranty obligations, revenue
recognition as well as loss contingencies and restructurings. We
base our estimates on historical experience and various
assumptions that are believed to be reasonable under the
circumstances, and the results form the basis for making
judgments about the reported values of assets, liabilities,
revenues and expenses. Actual results could materially differ
from these estimates. The following critical accounting policies
are impacted significantly by judgments, assumptions and
estimates used in the preparation of the Consolidated Financial
Statements.



| |                                     
| | ------------------------------------
| | Allowance for doubtful
    accounts:

The allowance for doubtful accounts is based on
the Companys assessment of the collectibility of specific
customer accounts and the aging of the accounts receivable. If
there is a deterioration of a customers credit worthiness
or actual defaults are higher than the historical experience,
estimates of the recoverability of amounts due could be
adversely affected. The allowance for doubtful accounts was
$1,124,000 and $3,026,000 at June 30, 2004 and 2003,
respectively.



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

Goodwill represents the excess of the aggregate
purchase price over the fair value of the net assets of an
acquired business. The Company performs a goodwill impairment
assessment on an annual basis or more frequently if changes in
circumstances or the occurrence of events suggest an impairment
exists. The impairment test entails comparing the carrying value
of goodwill to the estimated fair value of the reporting unit
that the goodwill is assigned. There are a number of significant
management assumptions and estimates inherent in estimating the
fair value of the reporting unit including those used to
estimate future cash flows and the appropriate discount rate
that incorporates the Companys cost of capital and the
risk profile of the cash flows. Actual cash flows may be less
than those estimated by management. A change in industry or
market conditions or a downturn in the Companys operations
could result in a further impairment of goodwill. As of
June 30, 2004, the Company completed its annual goodwill
impairment analysis and had determined that goodwill was fairly
stated. In fiscal year 2003, the Company completed its annual
goodwill impairment analysis that resulted in the recording of
an impairment charge of $154,799,000. Net goodwill was
$141,213,000 and $140,945,000 at June 30, 2004 and 2003,
respectively.



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

Inventories are recorded at the lower of standard
cost or market, which approximates actual cost on a
first-in-first-out basis, or market value. The Company writes
down inventories to net realizable value based on forecasted
demand and market conditions as well as the anticipated timing
and impact of new product introductions. Actual demand, market
conditions and timing of new product introductions may be
different from those projected by management. These differences
could have a material effect on gross margins and operating
results. The inventory obsolescence reserve was $4,170,000 and
$1,375,000 at June 30, 2004 and 2003, respectively. In
addition, the inventory obsolescence provision was $3,563,000,
$2,344,000 and $1,905,000 for the years ending June 30,
2004, 2003, and 2002 respectively.



| |                      
| | ---------------------
| | Warranty obligations:

The Company accrues for warranty obligations
based on the expected material and labor usage costs to provide
warranty services. If an increase in warranty claims are
experienced, which is higher than the historical

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rate, gross margins and operating results could
be adversely affected. The warranty reserve was $921,000 and
$374,000 at June 30, 2004 and 2003, respectively.




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

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

Certain of the Companys equipment sales
such as its TouchPrint Live Scan Systems generally require
installation subsequent to shipment and transfer of title. The
Company recognizes revenue on such sales in accordance with
Staff Accounting Bulletin (SAB) 104, Revenue
Recognition, which superceded SAB No. 101. Revenue
related to equipment sales that require installation is deferred
until installation is complete and customer acceptance has been
obtained. Revenue related to product sales that require no
installation such as the Companys TP3000A and TP3100A
products as well as printers and other peripheral devices
including DFR-300, DFR-200 and FingerScan V20 are recognized in
accordance with the terms of the sale, generally upon shipment
by the Company, provided no significant obligations remain and
collection of the receivable is deemed reasonably assured.
Revenues from sales of products via authorized representatives,
dealers, distributors or other third party sales channels are
recognized at the time the risks and rewards have transferred.

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

The Company also sells several stand-alone
software products including ABIS systems, BioLogon and software
developer kits. Revenue is recognized on software products in
accordance with Statement of Position (SOP) 97-2,
Software Revenue Recognition, as amended. The
Company recognizes revenue on software products when persuasive
evidence of an arrangement exists, delivery has occurred, the
vendors fee is fixed or determinable and vendor-specific
objective evidence (VSOE) exists to allocate the
total fee to all undelivered elements of the arrangement and
collection is deemed reasonably assured. VSOE is established
based upon either sales of the element (e.g. maintenance,
training or consulting) in individual transactions, or, in
certain cases for maintenance, based upon substantive renewal
rates. In cases where the Company does not have VSOE for all
delivered elements in the transaction (e.g., for licenses), the
fees from these multiple-element agreements are allocated using
the residual value method. Maintenance revenue is deferred and
recognized rateably over the life of the service period of the
related agreement.

Revenues related to IIS which was acquired
in February 2004 are recognized as services are performed.



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

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

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The Company recorded reserves for the estimated
cost to terminate or sublease excess facilities. The Company
will continue to evaluate the commercial real estate market
conditions quarterly to determine if the Companys
estimates of the amount and timing of future sublease income are
reasonable, based on current and expected commercial real estate
market conditions. If the Company determines that the estimates
for sublease activities has significantly changed, an adjustment
to the restructuring liability would be charged to income in the
period in which such determination was made. Accrued lease exit
costs were $7,600,000 and $12,151,000 at June 30, 2004 and
2003, respectively.

Results of Operations

Fiscal Years Ended June 30, 2004 and
2003

Revenues.Revenues
for fiscal 2004 were $55,199,000 compared to $52,684,000 for
fiscal 2003. The revenues for fiscal 2004 increased by 5% from
fiscal year 2003. This increase is primarily due to the addition
of Identix Identification Services revenue in the second half of
fiscal 2004. The Company expects fiscal year 2005 revenues to
increase by 30-45% over fiscal year 2004 as large deployments
are beginning to occur within governments worldwide.

International sales accounted for $6,865,000 or
12% of the Companys revenues for fiscal 2004, compared to
$4,925,000 or 9% for fiscal 2003. The increase in international
sales is primarily the result of two large international orders
occurring during fiscal 2004, one for the Companys live
scan systems and the other for contracted custom development
work. In addition, during the fiscal year 2004 there was
increased revenue from smaller but more numerous international
orders that contributed to the increase seen above. Identix is
actively pursuing business in the international biometric
market. The Companys international sales are generally
denominated in U.S. dollars. The Company monitors its
foreign currency exchange exposure and, if significant, will
take action to reduce foreign exchange risk. To date, the
Company has not entered into any hedging transactions.

Gross Margin.Gross
margin on revenues was 32% for fiscal 2004, compared to 33% in
fiscal 2003. The decrease in gross margin was due to competitive
pricing pressures related to the Companys live scan
systems, which were partially offset by increased sales of other
higher margin products. 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. The
Company expects gross margins to be lower in the first half of
fiscal 2005 than in recent past quarters due to the
Companys upfront investment in specific customer programs
that the Company believes will result in significant higher
gross margins in the second half of fiscal year 2005 resulting
in expected full year gross margins in the 35%-39% range.

Research and
Development.Research and development
expenses were $9,675,000 or 18% of revenues for fiscal 2004,
compared to $11,060,000 or 21% of revenues for fiscal 2003. The
decrease in research and development expenses was the result of
work that was being performed in relation to the Companys
TP-3000 livescan machines that took place in fiscal 2003 that
didnt take place in fiscal 2004. Now and in the future,
Identix is committed to continue its focus on the investment in
research and development, which is critical to developing new
and innovative products intended to allow the Company to
maintain a strong technological position in the industry.

Marketing and
Selling.Marketing and selling
expenses were $10,867,000 for fiscal 2004, compared to
$12,137,000 for fiscal 2003. The percentage of marketing and
selling expenses of total revenue was 20% and 23% for the twelve
months ending June 30, 2004 and 2003, respectively. The
decrease was due primarily to the recovery of several very old
and previously fully reserved accounts receivable balances,
which totaled approximately $737,000 in fiscal 2004 partially
offset by bad debt expense of $198,000 in fiscal 2004. In
addition, there was a net reduction in the marketing and selling
head count that resulted in a savings of $403,000 in fiscal 2004.

General and
Administrative.General and
administrative expenses were $13,814,000 or 25% of total
revenues for fiscal 2004, compared to $12,930,000 or 24% of
total revenues for fiscal 2003. The increase in general and
administrative expense is related to four months of IIS
general and administrative expense of

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$618,00 in fiscal year 2004, which was not
present in fiscal 2003, increased legal fees of $642,000 as well
as fees of $70,000 associated with the search for a Chief
Financial Officer. These increases were partially offset by
lower information technology costs of $447,000.


The Company expects operating expenses including
Research, Development, Engineering, Marketing, Sales, General,
Administrative, and Amortization of intangible assets to
approximate $10,500,000 to $11,000,000 in each of the first
through the fourth quarters of fiscal year 2005 respectively.

Amortization of Acquired Intangible
Assets.Amortization of acquired
intangible assets was $5,543,000 and $5,683,000 for fiscal year
2004 and 2003 respectively. The amortization of acquired
intangibles relates primarily to intangible assets such as
patents, licenses and trademarks.

Impairment of
Goodwill.In accordance with Statement
of Financial Accounting Standards No. 142, the Company
performed its annual assessment for goodwill impairment as of
June 30, 2004 for all of the Companys goodwill and it
was determined that the fair value of the goodwill exceeded its
carrying value and an impairment charge was not needed for
fiscal year 2004.

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

Special Charges.Special charges (such as restructuring and acquisition related
charges) result from unique facts and circumstances that likely
will not recur with similar materiality or impact on continuing
operations. Special charges consisted of the following for the
periods presented:

|                                 |  |                              |       |      |  |      |       |  |  |   |        | 
|-------------------------------- |  | ---------------------------- | ----- | ---- |  | ---- | ----- |  |  | - | ------ | 
|                                 |  |                             
|                                 |  | Twelve Months Ended June 30,
|                                 |  |                             
|                                 |  | 2004                         |       | 2003 |  | 2002
|                                 |  |                              |       |      |  |     
|                                 |  |                             
|                                 |  | (In thousands)              
|Restructuring related            |  | $                            | 860   |      |  | $    | 6,327 |  |  | $ | 17,965 | 
|Employment agreement obligations |  |                              | 506   |      |  |      |      |  |  |   |       | 
|SIFC acquisition related         |  |                              | 749   |      |  |      |      |  |  |   |       | 
|                                 |  |                              |       |      |  |      |       |  |  |   |        | 
|                                 |  | $                            | 2,115 |      |  | $    | 6,327 |  |  | $ | 17,965 | 
|                                 |  |                              |       |      |  |      |       |  |  |   |        | 

Fiscal 2004

During the twelve months ended June 30,
2004, the Company incurred approximately $2,115,000 in special
charges. These charges consisted of $860,000 related to
restructuring, $506,000 related to payments made under the
former Chairman of the Boards employment agreement
associated with his retirement in February 2004 and $749,000 for
the value of shares of Company common stock issued to certain
former Sylvan Identix Fingerprint Center (SIFC) employees in
connection with the acquisition of 100% of SIFC (See
Note 2). The restructuring charges included $610,000
related to an increase in the reserve on the sublease of the
Companys Northern California facilities and $250,000
related to a reduction in force of 6% of the Companys
workforce in February 2004. The increase of lease exit costs by
$610,000 reflects an updated assessment by management of what
the Company will recover under the current conditions of the
Northern

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California real estate market. The additional
sublease reserve and the reduction in force expenses are
reflected in the restructuring schedule below:


|                                |       |                                           |        |             |  |                 |     |          |  |                 |       |       |  |   |       |       |  |   |       |       | 
|------------------------------- | ----- | ----------------------------------------- | ------ | ----------- |  | --------------- | --- | -------- |  | --------------- | ----- | ----- |  | - | ----- | ----- |  | - | ----- | ----- | 
|                                |       |                                          
|                                |       | For the Twelve Months Ended June 30, 2004
|                                |       |                                          
|                                |       |                                           |        | Liabilities |  |                
|                                |       | Restructuring                             |        |             |  | Satisfied in    |     |          |  | Restructuring  
|                                |       | Liability as of                           |        |             |  | Connection with |     | Cash     |  | Liability as of
|                                |       | June 30, 2003                             |        | Additions   |  | IPS Disposition |     | Payments |  | June 30, 2004  
|                                |       |                                           |        |             |  |                 |     |          |  |                
|                                |       |                                          
|                                |       | (In thousands)                           
|Severance and benefits          |       | $                                         | 614    |             |  | $               | 250 |          |  | $               |      |       |  | $ | 744   |       |  | $ | 120   |      
|Lease exit costs                |       |                                           | 12,151 |             |  |                 | 610 |          |  |                 | 2,267 |       |  |   | 2,894 |       |  |   | 7,600 |      
|Internal merger costs and other |       |                                           | 31     |             |  |                 |    |          |  |                 |      |       |  |   | 31    |       |  |   |      |      
|                                |       |                                           |        |             |  |                 |     |          |  |                 |       |       |  |   |       |       |  |   |       |      
|                                | Total |                                           | $      | 12,796      |  |                 | $   | 860      |  |                 | $     | 2,267 |  |   | $     | 3,669 |  |   | $     | 7,720 | 
|                                |       |                                           |        |             |  |                 |     |          |  |                 |       |       |  |   |       |       |  |   |       |      

The restructuring liability is classified in the
consolidated balance sheet based on the anticipated timing of
the respective payment. As of June 30, 2004, $5,152,000 of
the above restructuring liability is classified as long-term.
Management currently believes that of the $120,000 accrued for
severance and benefits, $11,000 will be paid over the next
twelve months with the remaining balance being paid through 2013
with the lease exit costs being paid over the remaining term of
the leases. The leases expire at various dates through fiscal
year 2008.

In conjunction with the restructuring and other
related charges recorded, the Company made certain estimates
regarding future sublease income that have a significant impact
on its anticipated cash obligations and restructuring reserves.
Although the Company believes that the lease commitment
estimates are appropriate in the circumstances, future changes
in real estate markets could impact the ultimate amount of cash
paid to resolve these obligations

Fiscal 2003

During the twelve months ended June 30,
2003, the Company recorded restructuring and other related
charges totaling $10,206,000. Of this amount $6,327,000 is
classified as special charges on the Consolidated Statements of
Operations with the remaining amount classified in discontinued
operations. For the twelve months ended June 30, 2003,
these costs consisted of $2,283,000 related to employees with
extended terminations to assist in the integration, $370,000
associated with the disposal of fixed assets, $4,940,000 related
to lease exit costs and $2,613,000 in relocation costs.

Of the lease exit costs of $4,940,000 recorded
during the twelve months ended June 30, 2003, $3,879,000
was due to the sublease of a portion of its Fairfax, Virginia
facility. The charge represented the difference between the
remaining lease obligation of $5,222,000, abandoned property and
equipment of $445,000 and costs to sublet the facility of
$375,000, partially offset by estimated sublease income of
$1,981,000 and a recovery on the closure of the Law Enforcement
Solutions Division of $182,000.

The following table represents a summary of
restructuring and other related charges:

|                              |       |                                           |        |                |  |                  |       |          |  |          |       |                 |  |   |     |     |  |   |       |        |  |   |        |        | 
|----------------------------- | ----- | ----------------------------------------- | ------ | -------------- |  | ---------------- | ----- | -------- |  | -------- | ----- | --------------- |  | - | --- | --- |  | - | ----- | ------ |  | - | ------ | ------ | 
|                              |       |                                          
|                              |       | For the Twelve Months Ended June 30, 2003
|                              |       |                                          
|                              |       |                                           |        | Additions from |  | Additions from   |       |         
|                              |       | Liability as of                           |        | Continuing     |  | IPS Discontinued |       | Non-Cash |  | Cash     |       | Liability as of
|                              |       | June 30, 2002                             |        | Operations     |  | Operations       |       | Charges  |  | Payments |       | June 30, 2003  
|                              |       |                                           |        |                |  |                  |       |          |  |          |       |                
|                              |       |                                          
|                              |       | (In thousands)                           
|Severance and benefits        |       | $                                         | 2,493  |                |  | $                | 2,283 |          |  | $        |      |                 |  | $ |    |     |  | $ | 4,162 |        |  | $ | 614    |       
|Disposal of fixed assets      |       |                                           |       |                |  |                  | 370   |          |  |          |      |                 |  |   | 370 |     |  |   |      |        |  |   |       |       
|Lease exit costs              |       |                                           | 10,340 |                |  |                  | 1,061 |          |  |          | 3,879 |                 |  |   | 388 |     |  |   | 2,741 |        |  |   | 12,151 |       
|Internal merger costs & other |       |                                           | 814    |                |  |                  | 2,613 |          |  |          |      |                 |  |   |    |     |  |   | 3,396 |        |  |   | 31     |       
|                              |       |                                           |        |                |  |                  |       |          |  |          |       |                 |  |   |     |     |  |   |       |        |  |   |        |       
|                              | Total |                                           | $      | 13,647         |  |                  | $     | 6,327    |  |          | $     | 3,879           |  |   | $   | 758 |  |   | $     | 10,299 |  |   | $      | 12,796 | 
|                              |       |                                           |        |                |  |                  |       |          |  |          |       |                 |  |   |     |     |  |   |       |        |  |   |        |       

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Interest and Other Income (Expense),
net.For fiscal 2004, interest and
other income was $1,164,000 compared to $1,848,000 for fiscal
2003. The decrease for the twelve months ended June 30,
2004 is primarily the result of lower interest income of
$708,000 in fiscal 2004 compared to interest income of $872,000
in fiscal 2003. In addition, there was a $458,000 net gain
realized on the sale of investments in fiscal year 2003 that
didnt occur in fiscal year 2004.

Interest Expense.Interest expense was $11,000 for fiscal year 2004, compared to
$14,000 for fiscal year 2003. Interest expense in fiscal year
2004 and 2003 resulted from leases for office equipment.

Provision for Income
Taxes.The Company had income tax
expense, consisting of certain State franchise taxes, in fiscal
2004 of $43,000 and $180,000 in fiscal 2003. In fiscal years
2004 and 2003, the Companys effective tax rate was below
the statutory rate due to a full valuation allowance being
required on the net losses incurred. As of June 30, 2004
and 2003, the Company had federal net operating loss
carryforwards of approximately $203,000,000 and $184,900,000
respectively, which may be available to offset future taxable
income. The carryforwards expire on various dates from 2004
through fiscal 2024 and may be subject to certain limitations on
annual utilizations due to changes in ownership, as defined by
federal and state law.

Equity Interest in Loss of Joint
Venture.The equity interest in joint
venture was a loss of $302,000 for fiscal year 2004 compared to
a loss of $285,000 in fiscal year 2003 and represents the
Companys 50% share of the results of SIFC. In the third
quarter of fiscal year 2004, the Company acquired 100% ownership
of the joint venture for $875,000 in cash.

Discontinued
Operations.On February 13, 2004,
the Company consummated the sale of IPS to Alion. In fiscal year
2004, the Company recognized income from discontinued operations
of $5,125,000 of which $5,934,000 is attributable to the gain on
the sale of IPS and $809,000 is attributable to the loss on the
IPS discontinued operations from July 1, 2003 to the date
of the sale. The IPS operations are presented in the
Companys Consolidated Statements of Operations as
discontinued operations. During the twelve months ended
June 30, 2004 and 2003, the Company recorded a loss from
discontinued operations of $809,000 and $3,434,000,
respectively. The decrease in the net loss on discontinued
operations was primarily the result of $3,879,000 of
restructuring related expenses occurring in fiscal 2003 that did
not occur in fiscal 2004. The consolidated results for the
twelve months ending June 30, 2004 and the historical
consolidated results for the twelve months ended June 30,
2003 have been restated to reflect the discontinued IPS
operations. See additional discussion in Note 3 of the
Consolidated Financial Statements.

The following table represents the summarized
results for the discontinued operations:

|                   |  |                       |        |      |  |   |        |  
|------------------ |  | --------------------- | ------ | ---- |  | - | ------ | -
|                   |  |                      
|                   |  | For the Twelve Months
|                   |  | Ending June 30,      
|                   |  |                      
|                   |  | 2004*                 |        | 2003
|                   |  |                       |        |     
|                   |  |                      
|                   |  | (In thousands)       
|Revenue            |  | $                     | 20,078 |      |  | $ | 39,830 |  
|Cost of sales      |  |                       | 17,550 |      |  |   | 35,023 |  
|Operating Expenses |  |                       | 3,337  |      |  |   | 8,241  |  
|                   |  |                       |        |      |  |   |        |  
|Net Loss           |  | $                     | (809   | )    |  | $ | (3,434 | )
|                   |  |                       |        |      |  |   |        |  



---



|  |                                                                                                                    
|- | -------------------------------------------------------------------------------------------------------------------
|* | This period reflects activity only through
    February 13, 2004 as the disposition was consumated on that
    day.

Fiscal Years Ended June 30, 2003 and
2002

Revenues.Revenues
for fiscal 2003 were $52,684,000 compared to $33,465,000 for
fiscal 2002. For fiscal 2003 the increase in total revenues of
57% is due to the merger between Visionics and Identix that took
place on June 25, 2002. As a result, 2003 reflects twelve
months operations as a combined company; whereas 2002 only
reflects three business days of activity for Visionics this was
partially offset by lower than anticipated demand for the
Companys products due to delayed customer-spending
decisions.

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##### Table of Contents



International sales accounted for $4,925,000 or
9% of the Companys revenues for fiscal 2003, compared to
$3,603,000 or 11% for fiscal 2002. The decrease as a percentage
of revenue is the result of domestic revenue increasing
significantly as the result of the Visionics merger. The former
Visionics company had significantly less international revenue.
The Companys international sales are generally denominated
in U.S. dollars. The Company monitors its foreign currency
exchange exposure and, if significant, will take action to
reduce foreign exchange risk. To date, the Company has not
entered into any hedging transactions.

Gross Margin.Gross
margin on revenues was 33% for fiscal 2003, as compared to 29%
in fiscal 2002. The increase gross margin was due to a change in
the mix of products sold and reduced overhead expenses as a
result of the Visionics merger. A primary contributor to the
higher margin sales was an order from the DOD in the third
quarter of fiscal year 2003, for 5.4 million user licenses
for the Companys BioEngine® fingerprint recognition
technology. The Company expects gross margins to fluctuate in
future periods due to changes in the product mix, the costs of
components and the competition in the industry.

Research and
Development.Research and development
expenses were $11,060,000 or 21% of revenues for fiscal 2003,
compared to $10,620,000 or 32% of revenues for fiscal 2002. The
increase of dollars in research and development expenses was the
result of the Companys continued emphasis on the
investment in research and development, which is critical to
developing new and innovative products intended to allow the
Company to maintain a strong technological position in the
industry.

Marketing and
Selling.Marketing and selling
expenses were $12,137,000 for fiscal 2003, compared to
$12,604,000 for fiscal 2002. The percentage of marketing and
selling expenses of total revenue was 23% and 38% for the twelve
months ending June 30, 2003 and 2002, respectively. The
decrease was due to improved cost controls in the areas of
travel, consultants, and employee terminations that were not
replaced including a small number of highly paid employees.

General and
Administrative.General and
administrative expenses were $12,930,000 or 24% of total
revenues for fiscal 2003, compared to $11,577,000 or 35% of
total revenues for fiscal 2002. General and administrative
expense increased in dollars from 2002 to 2003, while as a
percentage of revenue it decreased. The decrease in general and
administrative expressed as a percentage of revenue is the
result of efficiencies realized from the Visionics merger.

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

Impairment of
Goodwill.In accordance with Statement
of Financial Accounting Standards No. 142, the Company
performed its annual assessment for goodwill impairment as of
June 30, 2003 for all of the Companys goodwill. The
fair value of the product reporting unit was determined using a
weighted-average of both the market and income approaches. The
market approach utilized public company comparables while the
income approach was based on the present value of estimated
future cash flows that the reporting unit is expected to
generate over its estimated remaining life. In the application
of the income approach, the Company was required to make
estimates of future operating trends and judgments on discount
rates and other variables. Actual future results and other
assumed variables could differ from these estimates. The Company
engaged an independent valuation consultant to assist the
Company in determining the fair values used in the impairment
assessment. In the Companys application of the income
approach, it assumed a cash flow period of 10 years, a
discount rate of 15%, and a terminal value based on the tenth
years estimated future cash flows. The assumptions
supporting the cash flows, including the discount rate and
estimated terminal value were determined using managements
best estimates available at the time the impairment assessment
was made. The results of this impairment assessment indicated
that the implied fair value of the goodwill was less than its
carrying value, resulting in a non-cash impairment charge of
$154,799,000 at June 30, 2003.

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##### Table of Contents





| |                
| | ---------------
| | Special Charges

Fiscal 2003

During the twelve months ended June 30,
2003, the Company recorded restructuring and other related
charges totaling $10,206,000. Of this amount $6,327,000 is
classified as special charges on the Consolidated Statements of
Operations with the remaining amount classified in discontinued
operations. For the twelve months ended June 30, 2003,
these costs consisted of $2,283,000 related to employees with
extended terminations to assist in the integration, $370,000
associated with the disposal of fixed assets, $4,940,000 related
to lease exit costs and $2,613,000 in relocation costs.

Of the lease exit costs of $4,940,000 recorded
during the twelve months ended June 30, 2003, $3,879,000
was due to the sublease of a portion of its Fairfax, Virginia
facility. The charge represented the difference between the
remaining lease obligation of $5,222,000, abandoned property and
equipment of $445,000 and costs to sublet the facility of
$375,000, partially offset by estimated sublease income of
$1,981,000 and a recovery on the closure of the Law Enforcement
Solutions Division of $182,000.

The following table represents a summary of
restructuring and other related charges:

|                              |       |                                           |        |                |  |                  |       |          |  |          |       |                 |  |   |     |     |  |   |       |        |  |   |        |        | 
|----------------------------- | ----- | ----------------------------------------- | ------ | -------------- |  | ---------------- | ----- | -------- |  | -------- | ----- | --------------- |  | - | --- | --- |  | - | ----- | ------ |  | - | ------ | ------ | 
|                              |       |                                          
|                              |       | For the Twelve Months Ended June 30, 2003
|                              |       |                                          
|                              |       |                                           |        | Additions from |  | Additions from   |       |         
|                              |       | Liability as of                           |        | Continuing     |  | IPS Discontinued |       | Non-Cash |  | Cash     |       | Liability as of
|                              |       | June 30, 2002                             |        | Operations     |  | Operations       |       | Charges  |  | Payments |       | June 30, 2003  
|                              |       |                                           |        |                |  |                  |       |          |  |          |       |                
|                              |       |                                          
|                              |       | (In thousands)                           
|Severance and benefits        |       | $                                         | 2,493  |                |  | $                | 2,283 |          |  | $        |      |                 |  | $ |    |     |  | $ | 4,162 |        |  | $ | 614    |       
|Disposal of fixed assets      |       |                                           |       |                |  |                  | 370   |          |  |          |      |                 |  |   | 370 |     |  |   |      |        |  |   |       |       
|Lease exit costs              |       |                                           | 10,340 |                |  |                  | 1,061 |          |  |          | 3,879 |                 |  |   | 388 |     |  |   | 2,741 |        |  |   | 12,151 |       
|Internal merger costs & other |       |                                           | 814    |                |  |                  | 2,613 |          |  |          |      |                 |  |   |    |     |  |   | 3,396 |        |  |   | 31     |       
|                              |       |                                           |        |                |  |                  |       |          |  |          |       |                 |  |   |     |     |  |   |       |        |  |   |        |       
|                              | Total |                                           | $      | 13,647         |  |                  | $     | 6,327    |  |          | $     | 3,879           |  |   | $   | 758 |  |   | $     | 10,299 |  |   | $      | 12,796 | 
|                              |       |                                           |        |                |  |                  |       |          |  |          |       |                 |  |   |     |     |  |   |       |        |  |   |        |       

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

Fiscal 2002

During the twelve months ended June 30,
2002, the Company recorded restructuring and other related
charges totaling $18,798,000. Of this amount $17,965,000 is
classified as special charges on the Consolidated Statements of
Operations with the remaining amount classified in discontinued
operations on the Consolidated Statements of Operations. The
Company recorded the following restructuring and other related
charges during the fiscal year ended June 30, 2002:

|                                |       |                      |       |                    |  |          |     |               |  |                 |       |       |  |   |       |       |  |   |        |        | 
|------------------------------- | ----- | -------------------- | ----- | ------------------ |  | -------- | --- | ------------- |  | --------------- | ----- | ----- |  | - | ----- | ----- |  | - | ------ | ------ | 
|                                |       |                      |       | Total Charges from |  |          |     | Cash Payments |  | Restructuring  
|                                |       | Total Charges from   |       | IPS Discontinued   |  | Non-Cash |     | through       |  | Liability as of
|                                |       | Continuing Operation |       | Operations         |  | Charges  |     | June 30, 2002 |  | June 30, 2002  
|                                |       |                      |       |                    |  |          |     |               |  |                
|                                |       |                     
|                                |       | (In thousands)      
|Severance and benefits          |       | $                    | 6,093 |                    |  | $        |    |               |  | $               | 900   |       |  | $ | 2,700 |       |  | $ | 2,493  |       
|Disposal of fixed assets        |       |                      | 1,294 |                    |  |          |    |               |  |                 | 1,294 |       |  |   |      |       |  |   |       |       
|Lease exit costs                |       |                      | 9,507 |                    |  |          | 833 |               |  |                 |      |       |  |   |      |       |  |   | 10,340 |       
|Internal merger costs and other |       |                      | 1,071 |                    |  |          |    |               |  |                 |      |       |  |   | 257   |       |  |   | 814    |       
|                                |       |                      |       |                    |  |          |     |               |  |                 |       |       |  |   |       |       |  |   |        |       
|                                | Total |                      | $     | 17,965             |  |          | $   | 833           |  |                 | $     | 2,194 |  |   | $     | 2,957 |  |   | $      | 13,647 | 
|                                |       |                      |       |                    |  |          |     |               |  |                 |       |       |  |   |       |       |  |   |        |       

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##### Table of Contents



Severance and Benefits

In July 2001, the Company initiated a workforce
reduction of approximately 42 employees, or 10% of its workforce
to streamline its worldwide functions, operations and resources
primarily in marketing, selling and administration. The
workforce reduction resulted in a $1,712,000 charge during the
quarter ended September 30, 2001 relating primarily to
severance and fringe benefits. Related cash payments of
$1,597,000 were made during the fiscal year ended June 30,
2002. The remaining liability at June 30, 2002 of $115,000
is included in accrued compensation in the consolidated balance
sheet.

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

Disposal of fixed assets

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

Lease exit costs

A charge of $9,507,000 was recorded for the
estimated cost to terminate or sublease two excess leased
facilities in Northern California. The estimate is based on
current comparable rates for leases in respective markets.
Should facilities rental rates continue to decrease in these
markets or should it take longer than expected to sublease these
facilities, the actual loss could exceed this estimate. The
costs are expected to be paid through fiscal 2008, based on the
underlying lease agreements. For the twelve months ended
June 30, 2002, $833,000 of special charges related to lease
exit costs are included in the income (loss) from discontinued
operations in the Companys Consolidated Statement of
Operations.

Internal merger costs and other

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

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

Acquired In-Process Research and
Development.In connection with the
Companys merger with Visionics in fiscal year 2002, the
Company recorded a charge of $6,400,000 for the write-off of
acquired in-process research and development (see Note 4 of
the Consolidated Financial Statements).

Interest and Other Income (Expense),
net.For fiscal 2003, interest and
other income was $1,848,000 compared to $914,000 for fiscal
2002. The increase for the twelve months ended June 30,
2003 is primarily the result of a net gain realized on the sale
of investments of $458,000 during fiscal year 2003 and interest
from investments totaling $872,000 for the twelve months ending
June 30, 2003. Investment and interest income in fiscal
2002 was $212,000. The increase in interest and realized gains
in fiscal 2003 is primarily the result of returns from higher
average cash balances in fiscal 2003 compared to fiscal 2002.
These items were partially offset by a loss on the disposal of
fixed assets totaling $192,000 in fiscal year 2003.

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##### Table of Contents



Interest Expense.Interest expense was $14,000 for fiscal year 2003, compared to
$0 for fiscal year 2002. Interest expense in fiscal year 2003
resulted from leases for office equipment.

Provision for Income
Taxes.The Company had income tax
expense, consisting of certain State franchise taxes, in fiscal
2003 of $180,000 and $46,000 in fiscal 2002. In fiscal years
2003 and 2002, the Companys effective tax rate was below
the statutory rate due to a full valuation allowance being
required on the net losses incurred. As of June 30, 2003
and 2002, the Company had federal net operating loss
carryforwards of approximately $184,900,000 and $156,674,000,
respectively, which may be available to offset future taxable
income. The carryforwards expire on various dates from fiscal
2004 through fiscal 2024 and may be subject to certain
limitations on annual utilizations due to changes in ownership,
as defined by federal and state law.

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

Discontinued
Operations.On February 13, 2004,
the Company consummated the sale of IPS to Alion. The IPS
operations are presented in the Companys Consolidated
Statements of Operations as discontinued operations. During the
twelve months ended June 30, 2003 and 2002, the Company
recorded a loss from discontinued operations of $3,434,000 and
$6,058,000, respectively. See additional discussion in
Note 3 of the Consolidated Financial Statements. The
decrease in the net loss on discontinued operations was the
result of decreased discretionary spending and other operational
efficiencies in fiscal year 2003.

The following table represents the summarized
results for the discontinued operations:

|                   |  |                       |        |      |  |   |        |  
|------------------ |  | --------------------- | ------ | ---- |  | - | ------ | -
|                   |  |                      
|                   |  | For the Twelve Months
|                   |  | Ending June 30,      
|                   |  |                      
|                   |  | 2003                  |        | 2002
|                   |  |                       |        |     
|                   |  |                      
|                   |  | (In thousands)       
|Revenue            |  | $                     | 39,830 |      |  | $ | 39,725 |  
|Cost of sales      |  |                       | 35,023 |      |  |   | 37,533 |  
|Operating Expenses |  |                       | 8,241  |      |  |   | 8,250  |  
|                   |  |                       |        |      |  |   |        |  
|Net Loss           |  | $                     | (3,434 | )    |  | $ | (6,058 | )
|                   |  |                       |        |      |  |   |        |  

Liquidity and Capital Resources

The Company financed its operations during the
twelve months ended June 30, 2004, primarily from its
working capital at June 30, 2003. As of June 30, 2004,
the Companys principal sources of liquidity consisted of
$45,822,000 of working capital including $45,416,000 in cash and
cash equivalents and short-term marketable securities.

Cash used in operating activities was $12,942,000
during fiscal year 2004. The cash used in operations consisted
primarily of the net loss of $18,371,000; increased gross
inventories of $1,366,000, decreased accounts payable of
$2,674,000 and decreased other liabilities of $3,172,000. These
items were partially offset by noncash charges for depreciation
and amortization of $7,822,000; gain on sale of discontinued
operations of $5,934,000 and the provision for inventory
obsolescence of $3,563,000. Cash provided by investing
activities for the twelve months ended June 30, 2004 was
primarily the result of $7,808,000 from the proceeds of the sale
of discontinued operations, net of transaction costs and
$1,307,000 from the cash acquired during the acquisition
of IIS net of cash paid. Cash provided by financing
activities for the twelve months ended June 30, 2004 was
due solely to proceeds from the sale of the Companys
equity securities and the exercise of employee stock options.

Cash used in operating activities was $26,721,000
during fiscal year 2003. The cash used in operations consisted
primarily of the net loss of $187,374,000; decreased accounts
payable of $2,702,000 and decreased accrued compensation of
$2,489,000. These items were partially offset by noncash charges
for the impairment

42



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##### Table of Contents



of goodwill of $154,799,000; depreciation and
amortization of $8,280,000; stock based compensation expense of
$1,673,000 and $2,344,000 for the provision for inventory
obsolescence. Cash provided by investing activities for the
twelve months ended June 30, 2003 was primarily the result
of net sales of marketable securities partially offset by
additions to property, plant and equipment and intangible
assets. Cash provided by financing activities for the twelve
months ended June 30, 2003 was due solely to proceeds from
the sale of the Companys equity securities and the
exercise of employee stock options.


Cash used for operating activities was
$25,343,000 during fiscal 2002. Cash used for operating
activities primarily reflects a net loss of $55,438,000,
decreased accounts payable of $2,924,000 and decreased deferred
revenue of $906,000. This was partially reduced by increased
other accrued liabilities of $9,511,000, decreased accounts
receivable of $6,643,000 and increased accrued compensation of
$2,862,000. In addition, cash used for operating activities in
fiscal 2002 was reduced by non-cash charges for acquired
in-process research and development of $6,400,000, amortization
of intangibles and depreciation of $3,487,000, stock-based
compensation expenses of $1,447,000, allowance for doubtful
accounts of $1,439,000 and restructuring, write-offs and other
merger related charges of $1,351,000. Cash provided by investing
activities for the twelve months ended June 30, 2002 was
primarily the result of net cash acquired in the Visionics
merger partially offset by purchases of marketable securities
and additions to property, plant and equipment. Cash provided by
financing activities for the twelve months ended June 30,
2002 was due solely to proceeds from the sale of the
Companys equity securities and the exercise of employee
stock options.

The Company did not have any material capital
purchase commitments at June 30, 2004. Currently, the
Companys anticipated cash requirements relate primarily to
funding operations and paying remaining obligations related to
restructuring and other merger related charges recorded in
fiscal years 2004 and 2003.

The Company currently occupies its headquarters
under a lease that expires in March 2008, and is required to pay
taxes, insurance, and maintenance as well as monthly rental
payments. In addition, the Company leases space for its former
headquarters in Los Gatos, California under a lease that expires
in December of 2007; and a space in Dublin, California for its
former research and development activities that expires in March
2006. Further, the Company leases office space for its sales
force and customer support activities under operating leases,
which expire at various dates through 2008. The leases contain
escalation provisions requiring rental increases for increases
in operating expense and real estate taxes. The Company also
leases approximately 16,000 square feet in Fairfax,
Virginia for certain operations including a potion of the
Identix sales force with two leases, one expiring in March 2006
and the other one expiring in February 2009.

Future net minimum lease payments for operating
leases are as follows (in thousands):

|                                        |       |          |       |                      |  |       |       |       |  |   |       |        | 
|--------------------------------------- | ----- | -------- | ----- | -------------------- |  | ----- | ----- | ----- |  | - | ----- | ------ | 
|                                        |       | Occupied |       | Unoccupied or Sublet |  | Total
|                                        |       |          |       |                      |  |      
|Periods or fiscal years ending June 30: |       |          |       |                      |  |       |       |       |  |   |       |       
|2005                                    |       | $        | 2,079 |                      |  | $     | 2,451 |       |  | $ | 4,530 |       
|2006                                    |       |          | 1,887 |                      |  |       | 2,512 |       |  |   | 4,399 |       
|2007                                    |       |          | 1,576 |                      |  |       | 2,210 |       |  |   | 3,786 |       
|2008                                    |       |          | 1,279 |                      |  |       | 1,132 |       |  |   | 2,411 |       
|2009                                    |       |          | 341   |                      |  |       |      |       |  |   | 341   |       
|Thereafter                              |       |          |      |                      |  |       |      |       |  |   |      |       
|                                        |       |          |       |                      |  |       |       |       |  |   |       |       
|                                        | Total |          | $     | 7,162                |  |       | $     | 8,305 |  |   | $     | 15,467 | 
|                                        |       |          |       |                      |  |       |       |       |  |   |       |       

Included in the above net future minimum payments
for unoccupied or sublet facilities is $8,305,000 related to two
leased facilities in Northern California that were vacated in
connection the Companys merger with Visionics.

The Companys existing line of credit was
entered into on May 30, 2003. This line of credit provides
for up to the lesser of $15,000,000 or the cash collateral base
or the borrowing base. Borrowings under the line of credit are
collateralized by substantially all of the assets of the Company
and bear interest at the banks prime

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rate that was 4.25% at June 30, 2004. The
line of credit expires on October 30, 2004. Until the
Company establishes a net income before taxes for two
consecutive fiscal quarters, the Company will be required to
deposit with the lender an amount equal to the sum of the
aggregate outstanding principal amount of all prior advances
plus any portion of the line of credit reserved to support
unexpired letters of credit plus the amount of the requested
advance before an advance will be given. In addition, all
advances must be used for working capital. At June 30,
2004, there were no amounts outstanding under this line of
credit. The line of credit agreement contains financial,
operating and reporting covenants. At June 30, 2004, the
Company was in compliance with all covenants.


While the Company believes that existing working
capital will be adequate to fund the Companys current cash
requirements for at least the next twelve months, the Company
may need to raise additional debt or equity financing in the
future. The Company may not be able to obtain additional debt or
equity financing. If successful in raising additional financing,
the Company may not be able to do so on terms that are not
excessively dilutive to existing stockholders or less costly
than existing sources of financing. Failure to secure additional
financing in a timely manner and on favorable terms in the
future could have a material adverse impact on the
Companys financial performance and stock price and require
the Company to implement certain cost reduction initiatives and
curtail certain of its operations.






|         |                                                               
|-------- | --------------------------------------------------------------
|Item 7A. | Quantitative and Qualitative Disclosures
    about Market Risk

Interest Rate Risk.Certain of the Companys short-term and long-term
marketable securities are classified as available-for-sale
securities and the cost of securities sold is based on the
specific identification method. At June 30, 2004,
short-term marketable securities consisted of $7,975,000 of
government securities, $506,000 of high-grade corporate bonds
and $991,000 of commercial paper. The market value of these
investments on any given day during the investment term may vary
as a result of market interest rate fluctuations. A hypothetical
10% movement in interest rates during the investment term would
not likely have a material impact on investment income. The
actual impact on investment income in the future may differ
materially from this analysis, depending on actual balances and
changes in the timing and the amount of the interest rate
movements and maturities of investments.

Foreign Currency Exchange Rate
Risk.Certain of the Companys
foreign revenues, cost of revenues and marketing expenses are
transacted in local currencies. As a result, the Companys
results of operations and certain receivables and payables are
subject to foreign exchange rate fluctuations. The Company does
not currently hedge against foreign currency rate fluctuations.
Gains and losses from such fluctuations are not material to the
Companys consolidated results of operations or balance
sheet.

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|        |                                                
|------- | -----------------------------------------------
|Item 8. | Financial Statements and Supplementary
    Data

INDEX TO CONSOLIDATED FINANCIAL
STATEMENTS

AND FINANCIAL STATEMENT SCHEDULE


|                              |                                                                                                                                 |      |  |    | 
|----------------------------- | ------------------------------------------------------------------------------------------------------------------------------- | ---- |  | -- | 
|                              |                                                                                                                                 | Page
|                              |                                                                                                                                 |     
|Financial Statements:         |                                                                                                                                 |      |  |   
|                              | Report of Independent Registered Public
    Accounting Firm                                                                     |      |  | 46 | 
|                              | Consolidated Balance Sheets as of June 30,
    2004 and 2003                                                                    |      |  | 47 | 
|                              | Consolidated Statements of Operations for the
    years ended June 30, 2004, 2003 and 2002                                      |      |  | 48 | 
|                              | Consolidated Statements of Stockholders
    Equity and Comprehensive Loss for the years ended June 30,
    2004, 2003 and 2002 |      |  | 49 | 
|                              | Consolidated Statements of Cash Flows for the
    years ended June 30, 2004, 2003 and 2002                                      |      |  | 50 | 
|                              | Notes to Consolidated Financial Statements                                                                                      |      |  | 51 | 
|Financial Statement Schedule: |                                                                                                                                 |      |  |   
|                              | Schedule II  Valuation and
    Qualifying Accounts and Reserves for the years ended
    June 30, 2004, 2003 and 2002           |      |  | 85 | 

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REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM

To the Board of Directors and Stockholders of
Identix Incorporated:

In our opinion, the consolidated financial
statements listed in the accompanying index present fairly, in
all material respects, the financial position of Identix
Incorporated and its subsidiaries at June 30, 2004 and
2003, and the results of their operations and their cash flows
for each of the three years in the period ended June 30,
2004 in conformity with accounting principles generally accepted
in the United States of America. In addition, in our opinion,
the financial statement schedule listed in the accompanying
index presents fairly, in all material respects, the information
set forth therein when read in conjunction with the related
consolidated financial statements. These financial statements
and financial statement schedule are the responsibility of the
Companys management. Our responsibility is to express an
opinion on these financial statements and financial statement
schedule based on our audits. We conducted our audits of these
statements in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles
used and significant estimates made by management, and
evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our
opinion.

As discussed in Note 9 to the consolidated
financial statements, the Company adopted Statement of Financial
Accounting Standards No. 142, Goodwill and other
Intangible Assets, on July 1, 2001.

/s/ PRICEWATERHOUSECOOPERS LLP

Minneapolis, Minnesota

July 29, 2004


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IDENTIX INCORPORATED

CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share
amounts)


|                                                    |                                                                                                                                              |                                            |         |          |         |  |         |          |         | 
|--------------------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | ------- | -------- | ------- |  | ------- | -------- | ------- | 
|                                                    |                                                                                                                                              | June 30,                                   |         | June 30,
|                                                    |                                                                                                                                              | 2004                                       |         | 2003    
|                                                    |                                                                                                                                              |                                            |         |         
|ASSETS                                             
|Current assets:                                     |                                                                                                                                              |                                            |         |          |         |  |         |         
|                                                    | Cash and cash equivalents                                                                                                                    |                                            | $       | 35,944   |         |  | $       | 34,712   |        
|                                                    | Marketable securities  short-term                                                                                                           |                                            |         | 9,472    |         |  |         | 8,991    |        
|                                                    | Accounts receivable, net                                                                                                                     |                                            |         | 11,412   |         |  |         | 21,434   |        
|                                                    | Inventories                                                                                                                                  |                                            |         | 7,171    |         |  |         | 9,920    |        
|                                                    | Prepaid expenses and other assets                                                                                                            |                                            |         | 1,052    |         |  |         | 1,677    |        
|                                                    |                                                                                                                                              |                                            |         |          |         |  |         |         
|                                                    |                                                                                                                                              | Total current assets                       |         |          | 65,051  |  |         |          | 76,734  | 
|Marketable securities  long-term                   |                                                                                                                                              |                                            |        |          |         |  | 505     |         
|Property and equipment, net                         |                                                                                                                                              |                                            | 2,153   |          |         |  | 4,157   |         
|Goodwill                                            |                                                                                                                                              |                                            | 141,213 |          |         |  | 140,945 |         
|Acquired intangible assets, net                     |                                                                                                                                              |                                            | 18,497  |          |         |  | 19,854  |         
|Other assets                                        |                                                                                                                                              |                                            | 1,913   |          |         |  | 3,075   |         
|                                                    |                                                                                                                                              |                                            |         |          |         |  |         |         
|                                                    |                                                                                                                                              | Total assets                               |         | $        | 228,827 |  |         | $        | 245,270 | 
|                                                    |                                                                                                                                              |                                            |         |          |         |  |         |         
|                                                   
|LIABILITIES AND STOCKHOLDERS
    EQUITY           
|Current liabilities:                                |                                                                                                                                              |                                            |         |          |         |  |         |         
|                                                    | Accounts payable                                                                                                                             |                                            | $       | 4,881    |         |  | $       | 8,025    |        
|                                                    | Accrued compensation                                                                                                                         |                                            |         | 2,948    |         |  |         | 3,593    |        
|                                                    | Other accrued liabilities                                                                                                                    |                                            |         | 4,992    |         |  |         | 4,522    |        
|                                                    | Deferred revenue                                                                                                                             |                                            |         | 6,408    |         |  |         | 7,197    |        
|                                                    |                                                                                                                                              |                                            |         |          |         |  |         |         
|                                                    |                                                                                                                                              | Total current liabilities                  |         |          | 19,229  |  |         |          | 23,337  | 
|Deferred revenue                                    |                                                                                                                                              |                                            | 462     |          |         |  | 419     |         
|Other liabilities                                   |                                                                                                                                              |                                            | 5,647   |          |         |  | 10,250  |         
|                                                    |                                                                                                                                              |                                            |         |          |         |  |         |         
|                                                    |                                                                                                                                              | Total liabilities                          |         |          | 25,338  |  |         |          | 34,006  | 
|                                                    |                                                                                                                                              |                                            |         |          |         |  |         |         
|Commitments and contingencies (Notes 16 and
    17) |                                                                                                                                              |                                            |         |          |         |  |         |         
|Stockholders equity:                               |                                                                                                                                              |                                            |         |          |         |  |         |         
|                                                    | Convertible preferred stock, $0.01 par
    value; 2,000,000 shares authorized; 0 and
    234,558 shares issued and outstanding, respectively |                                            |         |         |         |  |         | 3,702    |        
|                                                    | Common stock, $0.01 par value;
    200,000,000 shares authorized 88,429,821 and
    85,944,951 shares issued and outstanding, respectively   |                                            |         | 884      |         |  |         | 859      |        
|                                                    | Additional paid-in capital                                                                                                                   |                                            |         | 549,956  |         |  |         | 536,173  |        
|                                                    | Accumulated deficit                                                                                                                          |                                            |         | (347,193 | )       |  |         | (328,651 | )      
|                                                    | Deferred stock-based compensation                                                                                                            |                                            |         | (14      | )       |  |         | (663     | )      
|                                                    | Accumulated other comprehensive loss                                                                                                         |                                            |         | (144     | )       |  |         | (156     | )      
|                                                    |                                                                                                                                              |                                            |         |          |         |  |         |         
|                                                    |                                                                                                                                              | Total stockholders equity                 |         |          | 203,489 |  |         |          | 211,264 | 
|                                                    |                                                                                                                                              |                                            |         |          |         |  |         |         
|                                                    |                                                                                                                                              | Total liabilities and stockholders equity |         | $        | 228,827 |  |         | $        | 245,270 | 
|                                                    |                                                                                                                                              |                                            |         |          |         |  |         |         

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

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IDENTIX INCORPORATED

CONSOLIDATED STATEMENTS OF
OPERATIONS

(In thousands, except per share
amounts)


|                                                                                        |                                              |                                            |                          |        |       |        |          |         |        |         |         |        |        |        | 
|--------------------------------------------------------------------------------------- | -------------------------------------------- | ------------------------------------------ | ------------------------ | ------ | ----- | ------ | -------- | ------- | ------ | ------- | ------- | ------ | ------ | ------ | 
|                                                                                        |                                              |                                           
|                                                                                        |                                              | Fiscal Year Ended June 30,                
|                                                                                        |                                              |                                           
|                                                                                        |                                              | 2004                                       |                          | 2003   |       | 2002  
|                                                                                        |                                              |                                            |                          |        |       |       
|Revenues                                                                                |                                              | $                                          | 55,199                   |        |       | $      | 52,684   |         |        | $       | 33,465  |       
|Cost and expenses:                                                                      |                                              |                                            |                          |        |       |        |          |         |        |         |         |       
|                                                                                        | Cost of revenues                             |                                            |                          | 37,660 |       |        |          | 35,057  |        |         |         | 23,871 |       
|                                                                                        | Research and development                     |                                            |                          | 9,675  |       |        |          | 11,060  |        |         |         | 10,620 |       
|                                                                                        | Marketing and selling                        |                                            |                          | 10,867 |       |        |          | 12,137  |        |         |         | 12,604 |       
|                                                                                        | General and administrative                   |                                            |                          | 13,814 |       |        |          | 12,930  |        |         |         | 11,577 |       
|                                                                                        | Amortization of acquired intangible assets   |                                            |                          | 5,543  |       |        |          | 5,683   |        |         |         | 1,005  |       
|                                                                                        | Impairment of Goodwill                       |                                            |                          |       |       |        |          | 154,799 |        |         |         |       |       
|                                                                                        | Acquired in process research and development |                                            |                          |       |       |        |          |        |        |         |         | 6,400  |       
|                                                                                        | Special Charges                              |                                            |                          | 2,115  |       |        |          | 6,327   |        |         |         | 17,965 |       
|                                                                                        |                                              |                                            |                          |        |       |        |          |         |        |         |         |       
|                                                                                        |                                              |                                            | Total costs and expenses |        |       | 79,674 |          |         |        | 237,993 |         |        |        | 84,042 | 
|                                                                                        |                                              |                                            |                          |        |       |        |          |         |        |         |         |       
|Loss from operations                                                                    |                                              |                                            | (24,475                  | )      |       |        | (185,309 | )       |        |         | (50,577 | )     
|Interest and other income, net                                                          |                                              |                                            | 1,164                    |        |       |        | 1,848    |         |        |         | 914     |       
|Interest expense                                                                        |                                              |                                            | (11                      | )      |       |        | (14      | )       |        |         |        |       
|Equity interest in (loss)income of joint venture                                        |                                              |                                            | (302                     | )      |       |        | (285     | )       |        |         | 329     |       
|                                                                                        |                                              |                                            |                          |        |       |        |          |         |        |         |         |       
|Loss from continuing operations before income
    taxes                                 |                                              |                                            | (23,624                  | )      |       |        | (183,760 | )       |        |         | (49,334 | )     
|Provision for income taxes                                                              |                                              |                                            | (43                      | )      |       |        | (180     | )       |        |         | (46     | )     
|                                                                                        |                                              |                                            |                          |        |       |        |          |         |        |         |         |       
|Loss from continuing operations                                                         |                                              |                                            | (23,667                  | )      |       |        | (183,940 | )       |        |         | (49,380 | )     
|Discontinued operations:                                                                |                                              |                                            |                          |        |       |        |          |         |        |         |         |       
|                                                                                        | Loss from discontinued IPS operations        |                                            |                          | (809   | )     |        |          | (3,434  | )      |         |         | (6,058 | )     
|                                                                                        | Gain on sale of IPS                          |                                            |                          | 5,934  |       |        |          |        |        |         |         |       |       
|                                                                                        |                                              |                                            |                          |        |       |        |          |         |        |         |         |       
|                                                                                        |                                              | Income (loss) from discontinued operations |                          |        | 5,125 |        |          |         | (3,434 | )       |         |        | (6,058 | )     
|Net loss                                                                                |                                              | $                                          | (18,542                  | )      |       | $      | (187,374 | )       |        | $       | (55,438 | )     
|                                                                                        |                                              |                                            |                          |        |       |        |          |         |        |         |         |       
|Basic and diluted loss per share from continuing
    operations                         |                                              | $                                          | (0.27                    | )      |       | $      | (2.16    | )       |        | $       | (1.19   | )     
|Basic and diluted income (loss) per share from
    discontinued operations              |                                              | $                                          | 0.06                     |        |       | $      | (0.04    | )       |        | $       | (0.14   | )     
|Basic and diluted net loss per share                                                    |                                              | $                                          | (0.21                    | )      |       | $      | (2.20    | )       |        | $       | (1.33   | )     
|                                                                                        |                                              |                                            |                          |        |       |        |          |         |        |         |         |       
|Weighted average common shares used in basic
    and diluted loss per share computation |                                              |                                            | 86,758                   |        |       |        | 85,242   |         |        |         | 41,609  |       

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

48



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IDENTIX INCORPORATED

CONSOLIDATED STATEMENTS OF STOCKHOLDERS
EQUITY AND COMPREHENSIVE LOSS

(In thousands, except share amounts)


|                                                                                      |                                                                 |                          |          |              |   |            |        |             |   |                 |            |               |   |              |     |      |   |       |         |   |   |   |          |          |   |   |        |   |   |   |      |    |   |   |         |          |          |  
|------------------------------------------------------------------------------------- | --------------------------------------------------------------- | ------------------------ | -------- | ------------ | - | ---------- | ------ | ----------- | - | --------------- | ---------- | ------------- | - | ------------ | --- | ---- | - | ----- | ------- | - | - | - | -------- | -------- | - | - | ------ | - | - | - | ---- | -- | - | - | ------- | -------- | -------- | -
|                                                                                      |                                                                 |                          |          |              |   |            |        |             |   |                 |            |               |   |              |     |     
|                                                                                      |                                                                 | Convertible              |          |              |   |            |        |             |   |                 |            | Accumulated   |   |             
|                                                                                      |                                                                 | Preferred Stock          |          | Common Stock |   |            |        |             |   | Deferred        |            | Other         |   |             
|                                                                                      |                                                                 |                          |          |              |   | Additional |        | Accumulated |   | Stock-based     |            | Comprehensive |   |             
|                                                                                      |                                                                 | Shares                   |          | Amount       |   | Shares     |        | Amount      |   | Paid in Capital |            | Deficit       |   | Compensation |     | Loss |   | Total
|                                                                                      |                                                                 |                          |          |              |   |            |        |             |   |                 |            |               |   |              |     |      |   |      
|Balance June 30, 2001                                                                 |                                                                 |                          | 234,558  |              |   | $          | 3,702  |             |   |                 | 36,601,242 |               |   | $            | 366 |      |   | $     | 147,100 |   |   | $ | (85,839  | )        |   | $ | (1,066 | ) |   | $ | (181 | )  |   | $ | 64,082  |         
|Components of comprehensive loss:                                                     |                                                                 |                          |          |              |   |            |        |             |   |                 |            |               |   |              |     |      |   |       |         |   |   |   |          |          |   |   |        |   |   |   |      |    |   |   |         |         
|                                                                                      | Net loss                                                        |                          |          |             |   |            |        |            |   |                 |            |              |   |              |     |     |   |       |         |  |   |   |          | (55,438  | ) |   |        |  |   |   |      |   |   |   |         | (55,438  | )       
|                                                                                      | Unrealized gain on available-for-sale marketable
    securities |                          |          |             |   |            |        |            |   |                 |            |              |   |              |     |     |   |       |         |  |   |   |          |         |   |   |        |  |   |   |      | 35 |   |   |         | 35       |         
|                                                                                      |                                                                 |                          |          |              |   |            |        |             |   |                 |            |               |   |              |     |      |   |       |         |   |   |   |          |          |   |   |        |   |   |   |      |    |   |   |         |         
|                                                                                      |                                                                 | Total comprehensive loss |          |              |  |            |        |             |  |                 |            |               |  |              |     |      |  |       |         |   |  |   |          |          |  |   |        |   |  |   |      |    |  |   |         |          | (55,403  | )
|Sale of common stock under stock option plans                                         |                                                                 |                          |         |              |   |            |       |             |   |                 | 976,884    |               |   |              | 10  |      |   |       | 4,306   |   |   |   |         |          |   |   |       |   |   |   |     |    |   |   | 4,316   |         
|Sale of common stock under employee stock
    purchase plan                           |                                                                 |                          |         |              |   |            |       |             |   |                 | 139,417    |               |   |              | 1   |      |   |       | 694     |   |   |   |         |          |   |   |       |   |   |   |     |    |   |   | 695     |         
|Sale of common stock by private placement in
    December 2001, net of issuance costs |                                                                 |                          |         |              |   |            |       |             |   |                 | 7,390,000  |               |   |              | 74  |      |   |       | 48,273  |   |   |   |         |          |   |   |       |   |   |   |     |    |   |   | 48,347  |         
|Issuance of common stock in connection with
    Visionics acquisition                 |                                                                 |                          |         |              |   |            |       |             |   |                 | 39,421,959 |               |   |              | 394 |      |   |       | 305,128 |   |   |   |         |          |   |   |       |   |   |   |     |    |   |   | 305,522 |         
|Issuance of options and warrants in connection
    with Visionics acquisition         |                                                                 |                          |         |              |   |            |       |             |   |                 |           |               |   |              |    |      |   |       | 25,745  |   |   |   |         |          |   |   | (2,178 | ) |   |   |     |    |   |   | 23,567  |         
|Issuance of common stock for services received
    relating to Visionics acquisition  |                                                                 |                          |         |              |   |            |       |             |   |                 | 121,556    |               |   |              | 1   |      |   |       | 749     |   |   |   |         |          |   |   |       |   |   |   |     |    |   |   | 750     |         
|Amortization of deferred stock-based compensation                                     |                                                                 |                          |         |              |   |            |       |             |   |                 |           |               |   |              |    |      |   |       |        |   |   |   |         |          |   |   | 704    |   |   |   |     |    |   |   | 704     |         
|Stock-based compensation                                                              |                                                                 |                          |         |              |   |            |       |             |   |                 |           |               |   |              |    |      |   |       | 743     |   |   |   |         |          |   |   |       |   |   |   |     |    |   |   | 743     |         
|                                                                                      |                                                                 |                          |          |              |   |            |        |             |   |                 |            |               |   |              |     |      |   |       |         |   |   |   |          |          |   |   |        |   |   |   |      |    |   |   |         |         
|Balance June 30, 2002                                                                 |                                                                 |                          | 234,558  |              |   |            | 3,702  |             |   |                 | 84,651,058 |               |   |              | 846 |      |   |       | 532,738 |   |   |   | (141,277 | )        |   |   | (2,540 | ) |   |   | (146 | )  |   |   | 393,323 |         
|Components of comprehensive loss:                                                     |                                                                 |                          |          |              |   |            |        |             |   |                 |            |               |   |              |     |      |   |       |         |   |   |   |          |          |   |   |        |   |   |   |      |    |   |   |         |         
|                                                                                      | Net loss                                                        |                          |          |             |   |            |        |            |   |                 |            |              |   |              |     |     |   |       |         |  |   |   |          | (187,374 | ) |   |        |  |   |   |      |   |   |   |         | (187,374 | )       
|                                                                                      | Cumulative Translation Adjustment                               |                          |          |             |   |            |        |            |   |                 |            |              |   |              |     |     |   |       |         |  |   |   |          |         |   |   |        |  |   |   |      | 20 |   |   |         | 20       |         
|Change in Unrealized gain on available for-sale
    marketable securities             |                                                                 |                          |         |              |   |            |       |             |   |                 |           |               |   |              |    |      |   |       |        |   |   |   |         |          |   |   |       |   |   |   | (30  | )  |   |   | (30     | )       
|                                                                                      |                                                                 |                          |          |              |   |            |        |             |   |                 |            |               |   |              |     |      |   |       |         |   |   |   |          |          |   |   |        |   |   |   |      |    |   |   |         |         
|                                                                                      |                                                                 | Total comprehensive loss |          |              |  |            |        |             |  |                 |            |               |  |              |     |      |  |       |         |   |  |   |          |          |  |   |        |   |  |   |      |    |  |   |         |          | (187,384 | )
|Sale of common stock under stock option plans                                         |                                                                 |                          |         |              |   |            |       |             |   |                 | 779,221    |               |   |              | 8   |      |   |       | 2,357   |   |   |   |         |          |   |   |       |   |   |   |     |    |   |   | 2,365   |         
|Sale of common stock under stock Identix
    401(k)Plan                               |                                                                 |                          |         |              |   |            |       |             |   |                 | 104,921    |               |   |              | 1   |      |   |       | 345     |   |   |   |         |          |   |   |       |   |   |   |     |    |   |   | 346     |         
|Sale of common stock under employee stock
    purchase plan                           |                                                                 |                          |         |              |   |            |       |             |   |                 | 127,170    |               |   |              | 1   |      |   |       | 557     |   |   |   |         |          |   |   |       |   |   |   |     |    |   |   | 558     |         
|Exercise of stock warrants                                                            |                                                                 |                          |         |              |   |            |       |             |   |                 | 282,581    |               |   |              | 3   |      |   |       | 380     |   |   |   |         |          |   |   |       |   |   |   |     |    |   |   | 383     |         
|Amortization of deferred stock-based compensation                                     |                                                                 |                          |         |              |   |            |       |             |   |                 |           |               |   |              |    |      |   |       |        |   |   |   |         |          |   |   | 1,673  |   |   |   |     |    |   |   | 1,673   |         
|Elimination of deferred compensation related to
    terminated employees              |                                                                 |                          |         |              |   |            |       |             |   |                 |           |               |   |              |    |      |   |       | (204    | ) |   |   |         |          |   |   | 204    |   |   |   |     |    |   |   |        |         
|                                                                                      |                                                                 |                          |          |              |   |            |        |             |   |                 |            |               |   |              |     |      |   |       |         |   |   |   |          |          |   |   |        |   |   |   |      |    |   |   |         |         
|Balance June 30, 2003                                                                 |                                                                 |                          | 234,558  |              |   |            | 3,702  |             |   |                 | 85,944,951 |               |   |              | 859 |      |   |       | 536,173 |   |   |   | (328,651 | )        |   |   | (663   | ) |   |   | (156 | )  |   |   | 211,264 |         
|Components of comprehensive loss:                                                     |                                                                 |                          |          |              |   |            |        |             |   |                 |            |               |   |              |     |      |   |       |         |   |   |   |          |          |   |   |        |   |   |   |      |    |   |   |         |         
|                                                                                      | Net loss                                                        |                          |          |             |   |            |        |            |   |                 |            |              |   |              |     |     |   |       |         |  |   |   |          | (18,542  | ) |   |        |  |   |   |      |   |   |   |         | (18,542  | )       
|                                                                                      | Cumulative Translation Adjustment                               |                          |          |             |   |            |        |            |   |                 |            |              |   |              |     |     |   |       |         |  |   |   |          |         |   |   |        |  |   |   |      | 11 |   |   |         | 11       |         
|Change in Unrealized gain on available for-sale
    marketable securities             |                                                                 |                          |         |              |   |            |       |             |   |                 |           |               |   |              |    |      |   |       |        |   |   |   |         |          |   |   |       |   |   |   | 1    |    |   |   | 1       |         
|                                                                                      |                                                                 |                          |          |              |   |            |        |             |   |                 |            |               |   |              |     |      |   |       |         |   |   |   |          |          |   |   |        |   |   |   |      |    |   |   |         |         
|                                                                                      |                                                                 | Total comprehensive loss |          |              |   |            |        |             |   |                 |            |               |   |              |     |      |   |       |         |   |   |   |          |          |   |   |        |   |   |   |      |    |   |   |         |          | (18,530  | )
|Sale of common stock under stock option plans                                         |                                                                 |                          |         |              |   |            |       |             |   |                 | 1,192,729  |               |   |              | 12  |      |   |       | 5,085   |   |   |   |         |          |   |   |       |   |   |   |     |    |   |   | 5,097   |         
|Sale of common stock under stock Identix
    401(k)Plan                               |                                                                 |                          |         |              |   |            |       |             |   |                 | 117,620    |               |   |              | 1   |      |   |       | 646     |   |   |   |         |          |   |   |       |   |   |   |     |    |   |   | 647     |         
|Issuance of common stock to IIS employees                                             |                                                                 |                          |         |              |   |            |       |             |   |                 | 143,402    |               |   |              | 2   |      |   |       | 747     |   |   |   |         |          |   |   |       |   |   |   |     |    |   |   | 749     |         
|Stock issued for acquisition of technology                                            |                                                                 |                          |         |              |   |            |       |             |   |                 | 675,000    |               |   |              | 7   |      |   |       | 3,416   |   |   |   |         |          |   |   |       |   |   |   |     |    |   |   | 3,423   |         
|Convertible preferred stock converted into common
    stock                           |                                                                 |                          | (234,558 | )            |   |            | (3,702 | )           |   |                 | 234,558    |               |   |              | 2   |      |   |       | 3,700   |   |   |   |         |          |   |   |       |   |   |   |     |    |   |   |        |         
|Exercise of stock warrants                                                            |                                                                 |                          |         |              |   |            |       |             |   |                 | 121,561    |               |   |              | 1   |      |   |       | 150     |   |   |   |         |          |   |   |       |   |   |   |     |    |   |   | 151     |         
|Issuance of stock options to consultants                                              |                                                                 |                          |         |              |   |            |       |             |   |                 |           |               |   |              |    |      |   |       | 39      |   |   |   |         |          |   |   |       |   |   |   |     |    |   |   | 39      |         
|Amortization of deferred stock-based compensation                                     |                                                                 |                          |         |              |   |            |       |             |   |                 |           |               |   |              |    |      |   |       |        |   |   |   |         |          |   |   | 649    |   |   |   |     |    |   |   | 649     |         
|                                                                                      |                                                                 |                          |          |              |   |            |        |             |   |                 |            |               |   |              |     |      |   |       |         |   |   |   |          |          |   |   |        |   |   |   |      |    |   |   |         |         
|Balance June, 2004                                                                    |                                                                 |                          |         |              |   | $          |       |             |   |                 | 88,429,821 |               |   | $            | 884 |      |   | $     | 549,956 |   |   | $ | (347,193 | )        |   | $ | (14    | ) |   | $ | (144 | )  |   | $ | 203,489 |         
|                                                                                      |                                                                 |                          |          |              |   |            |        |             |   |                 |            |               |   |              |     |      |   |       |         |   |   |   |          |          |   |   |        |   |   |   |      |    |   |   |         |         

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

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IDENTIX INCORPORATED

CONSOLIDATED STATEMENTS OF CASH
FLOWS

(In thousands)


|                                                             |                                                                                         |                                                   |        |         |        |      |         |          |         |   |        |         |        |  
|------------------------------------------------------------ | --------------------------------------------------------------------------------------- | ------------------------------------------------- | ------ | ------- | ------ | ---- | ------- | -------- | ------- | - | ------ | ------- | ------ | -
|                                                             |                                                                                         |                                                  
|                                                             |                                                                                         | Twelve Months Ended June 30,                     
|                                                             |                                                                                         |                                                  
|                                                             |                                                                                         | 2004                                              |        | 2003    |        | 2002
|                                                             |                                                                                         |                                                   |        |         |        |     
|Cash flows from operating
    activities:                    |                                                                                         |                                                   |        |         |        |      |         |          |         |   |        |        
|                                                             | Net loss                                                                                |                                                   | $      | (18,542 | )      |      | $       | (187,374 | )       |   | $      | (55,438 | )     
|                                                             | Adjustments to reconcile net loss to net cash
    used in operating activities:         |                                                   |        |         |        |      |         |          |         |   |        |         |       
|                                                             |                                                                                         | Impairment of Goodwill                            |        |         |       |      |         |          | 154,799 |   |        |         |       |  
|                                                             |                                                                                         | Gain on sale of discontinued IPS operations       |        |         | (5,934 | )    |         |          |        |   |        |         |       |  
|                                                             |                                                                                         | Depreciation and amortization                     |        |         | 7,822  |      |         |          | 8,280   |   |        |         | 3,487  |  
|                                                             |                                                                                         | Equity interest in loss (income) of joint venture |        |         | 302    |      |         |          | 285     |   |        |         | (329   | )
|                                                             |                                                                                         | Realized gain on sales of marketable securities   |        |         | (46    | )    |         |          | (458    | ) |        |         |       |  
|                                                             |                                                                                         | Stock-based compensation expense                  |        |         | 688    |      |         |          | 1,673   |   |        |         | 1,447  |  
|                                                             |                                                                                         | Amortization of premiums on marketable securities |        |         |       |      |         |          | 16      |   |        |         |       |  
|                                                             |                                                                                         | Bad debt (recoveries) expense  net               |        |         | (539   | )    |         |          | 801     |   |        |         | 1,439  |  
|                                                             |                                                                                         | Loss on disposal of equipment                     |        |         | 188    |      |         |          | 265     |   |        |         | 72     |  
|                                                             |                                                                                         | Inventory obsolescence provision                  |        |         | 3,563  |      |         |          | 2,344   |   |        |         | 2,448  |  
|                                                             |                                                                                         | Acquired in-process research and development      |        |         |       |      |         |          |        |   |        |         | 6,400  |  
|                                                             |                                                                                         | Non-cash special charges                          |        |         | 1,609  |      |         |          | 758     |   |        |         | 1,351  |  
|                                                             | Changes in assets and liabilities excluding
    impact of sale of IPS and acquisitions: |                                                   |        |         |        |      |         |          |         |   |        |         |       
|                                                             |                                                                                         | Accounts receivable                               |        |         | 4,745  |      |         |          | (2,335  | ) |        |         | 6,643  |  
|                                                             |                                                                                         | Inventories                                       |        |         | (1,366 | )    |         |          | (1,169  | ) |        |         | (2,326 | )
|                                                             |                                                                                         | Prepaid expenses and other assets                 |        |         | 911    |      |         |          | (539    | ) |        |         | 920    |  
|                                                             |                                                                                         | Accounts payable                                  |        |         | (2,674 | )    |         |          | (2,702  | ) |        |         | (2,924 | )
|                                                             |                                                                                         | Accrued compensation                              |        |         | (378   | )    |         |          | (2,489  | ) |        |         | 2,862  |  
|                                                             |                                                                                         | Other accrued liabilities                         |        |         | (3,172 | )    |         |          | 1,045   |   |        |         | 9,511  |  
|                                                             |                                                                                         | Deferred revenue                                  |        |         | (119   | )    |         |          | 79      |   |        |         | (906   | )
|                                                             |                                                                                         |                                                   |        |         |        |      |         |          |         |   |        |        
|                                                             | Net cash used in operating activities                                                   |                                                   |        | (12,942 | )      |      |         | (26,721  | )       |   |        | (25,343 | )     
|                                                             |                                                                                         |                                                   |        |         |        |      |         |          |         |   |        |        
|Cash flows from investing
    activities:                    |                                                                                         |                                                   |        |         |        |      |         |          |         |   |        |        
|                                                             | Cash acquired from Visionics acquisition, net of
    direct transaction costs           |                                                   |        |        |        |      |         |         |         |   |        | 24,330  |       
|                                                             | Proceeds from sale of IPS, net of transaction
    costs                                 |                                                   |        | 7,808   |        |      |         |         |         |   |        |        |       
|                                                             | Cash paid in acquisition, net of cash acquired                                          |                                                   |        | 1,307   |        |      |         |         |         |   |        |        |       
|                                                             | Net proceeds from the sales of marketable
    securities                                |                                                   |        | 21,000  |        |      |         | 42,472   |         |   |        |        |       
|                                                             | Purchases of marketable securities                                                      |                                                   |        | (20,929 | )      |      |         | (36,144  | )       |   |        | (15,607 | )     
|                                                             | Additions of intangibles and other assets                                               |                                                   |        |        |        |      |         | (500     | )       |   |        | (933    | )     
|                                                             | Intangible asset refund                                                                 |                                                   |        | 102     |        |      |         |         |         |   |        |        |       
|                                                             | Proceeds from the sale of equipment                                                     |                                                   |        |        |        |      |         |         |         |   |        | 20      |       
|                                                             | Capital expenditures                                                                    |                                                   |        | (1,009  | )      |      |         | (1,393   | )       |   |        | (3,292  | )     
|                                                             |                                                                                         |                                                   |        |         |        |      |         |          |         |   |        |        
|                                                             | Net cash provided by investing activities                                               |                                                   |        | 8,279   |        |      |         | 4,435    |         |   |        | 4,518   |       
|                                                             |                                                                                         |                                                   |        |         |        |      |         |          |         |   |        |        
|Cash flows from financing
    activities:                    |                                                                                         |                                                   |        |         |        |      |         |          |         |   |        |        
|                                                             | Proceeds from sales of common stock                                                     |                                                   |        | 5,895   |        |      |         | 3,652    |         |   |        | 53,394  |       
|                                                             |                                                                                         |                                                   |        |         |        |      |         |          |         |   |        |        
|                                                             | Net cash provided by financing activities                                               |                                                   |        | 5,895   |        |      |         | 3,652    |         |   |        | 53,394  |       
|                                                             |                                                                                         |                                                   |        |         |        |      |         |          |         |   |        |        
|Net increase (decrease) in cash and cash
    equivalents     |                                                                                         |                                                   | 1,232  |         |        |      | (18,634 | )        |         |   | 32,569 |        
|Cash and cash equivalents at period beginning                |                                                                                         |                                                   | 34,712 |         |        |      | 53,346  |          |         |   | 20,777 |        
|                                                             |                                                                                         |                                                   |        |         |        |      |         |          |         |   |        |        
|Cash and cash equivalents at period end                      |                                                                                         | $                                                 | 35,944 |         |        | $    | 34,712  |          |         | $ | 53,346 |        
|                                                             |                                                                                         |                                                   |        |         |        |      |         |          |         |   |        |        
|Supplemental disclosures of cash flow
    information:       |                                                                                         |                                                   |        |         |        |      |         |          |         |   |        |        
|                                                             | Cash paid during the year for:                                                          |                                                   |        |         |        |      |         |          |         |   |        |         |       
|                                                             |                                                                                         | Interest                                          |        | $       | 2      |      |         | $        | 8       |   |        | $       |       |  
|                                                             |                                                                                         | Taxes                                             |        | $       | 94     |      |         | $        | 128     |   |        | $       |       |  
|Schedule of non-cash investing and financing
    activities: |                                                                                         |                                                   |        |         |        |      |         |          |         |   |        |        
|                                                             | Stock issued for acquisition of technology                                              |                                                   | $      | 3,423   |        |      | $       |         |         |   | $      |        |       
|                                                             | Conversion of preferred stock to common stock                                           |                                                   | $      | 3,702   |        |      | $       |         |         |   | $      |        |       
|                                                             | Issuance of common stock to IIS employees                                               |                                                   | $      | 749     |        |      | $       |         |         |   | $      |        |       
|                                                             | Common stock, options and warrants issued in
    connection with Visionics acquisition  |                                                   | $      |        |        |      | $       |         |         |   | $      | 331,267 |       
|                                                             | Common stock issued for services received
    relating to the Visionics acquisition     |                                                   | $      |        |        |      | $       |         |         |   | $      | 750     |       

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

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

Identix Incorporated (Identix or the
Company) designs, manufactures, develops and markets
solutions for security, anti-fraud, law enforcement and other
applications. The principal markets for the Companys
products are the Americas, Asia, Australia, Europe and the
Middle East.



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

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



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

The preparation of financial statements in
conformity with accounting principles generally accepted in the
United States of America requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and reported amounts of
revenues and expenses during the reporting period. Actual
results could materially differ from those estimates.



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

While the Company believes that existing working
capital will be adequate to fund the Companys current cash
requirements through at least the next twelve months, the
Company may need to raise additional debt or equity financing in
the future. The Company may not be able to obtain additional
debt or equity financing. If successful in raising additional
financing, the Company may not be able to do so on terms that
are not excessively dilutive to existing stockholders or less
costly than existing sources of financing. Failure to secure
additional financing in a timely manner and on favorable terms
in the future could have a material adverse impact on the
Companys financial performance and stock price and require
the Company to implement certain cost reduction initiatives and
curtail certain of its operations.



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

In September 1997, the Company entered into a
joint venture agreement with Sylvan Learning Centers, Inc.
(Sylvan) to form Sylvan/ Identix Fingerprinting
Centers, LLC (SIFC) for the purpose of providing
fingerprinting services. On February 23, 2004, the Company
acquired the remaining 50% ownership of SIFC now known as
Identix Identification services (IIS) (see Note 2 to the
Consolidated Financial Statements). Prior to the acquisition
of IIS, the Company derived license fees from SIFC, which
were included within the interest and other (expense), net, line
item of the consolidated statement of operations in addition to
the Companys equity interest in the income (loss) from the
joint venture. License fees recognized from SFIC were $207,000,
$332,000 and $388,000 for the years ended June 30, 2004,
2003 and 2002, respectively.



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

Certain of the Companys equipment sales
such as its TouchPrint Live Scan Systems generally require
installation subsequent to shipment and transfer of title. The
Company recognizes revenue on such sales in accordance with
Staff Accounting Bulletin (SAB) 104, Revenue
Recognition, which superceded SAB No. 101. Revenue
related to equipment sales that require installation is deferred
until installation is complete and customer acceptance has been
obtained. Revenue related to product sales that require no
installation such as the Companys TP3000A and TP3100A
products as well as printers and other peripheral devices
including DFR-300, DFR-200 and FingerScan V20 are recognized in
accordance with the terms of the sale, generally upon shipment
by the Company, provided no significant obligations remain and
collection of the receivable is deemed reasonably assured.
Revenues from sales of products via authorized representatives,
dealers, distributors or other third party sales channels are
recognized at the time the risks and rewards have transferred.

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

The Company also sells several stand-alone
software products including ABIS systems, BioLogon and software
developer kits. Revenue is recognized on software products in
accordance with Statement of Position (SOP) 97-2,
Software Revenue Recognition, as amended. The
Company recognizes revenue on software products when persuasive
evidence of an arrangement exists, delivery has occurred, the
vendors fee is fixed or determinable and vendor-specific
objective evidence (VSOE) exists to allocate the
total fee to all undelivered elements of the arrangement and
collection is deemed reasonably assured. VSOE is established
based upon either sales of the element (e.g., maintenance,
training or consulting) in individual transactions, or, in
certain cases for maintenance, based upon substantive renewal
rates. In cases where the Company does not have VSOE for all
delivered elements in the transaction (e.g., for licenses), the
fees from these multiple-element agreements are allocated using
the residual value method. Maintenance revenue is deferred and
recognized rateably over the life of the service period of the
related agreement.

Revenues related to IIS which was acquired
in February 2004 are recognized as services are performed.



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

In fiscal 2004, 2003 and 2002, the Company had
one customer, the United States government, which accounted for
14%, 12% and 4% respectively, of total revenue. No single agency
of the U.S. government accounted for more than 10% of total
revenue. No other customer accounted for more than 10% of total
revenue.



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

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



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

Restricted cash consists of cash balances held by
a bank in the form of certificates of deposit. At June 30,
2004 and 2003, included in other assets are $1,761,000 and
$2,192,000, respectively, of restricted cash held as collateral
under the operating leases for the Companys Los Gatos,
California, and Dublin, California facilities as well for a
letter of credit.



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

Financial instruments that potentially subject
the Company to concentrations of credit risk consist principally
of cash, cash equivalents, marketable securities, and accounts
receivable. The Company places cash, cash equivalents, and
marketable securities in a variety of financial instruments and,
by policy, limit the

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amount of credit exposure by investing its excess
cash and cash equivalents with major banks in money market
accounts and by restricting investments in marketable securities
to highly rated securities.


The Company performs ongoing credit evaluations
of its customers and provides for expected losses. Management
believes that any risk of material loss is reduced due to the
Companys substantial number of federal government
customers.



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

Certain components and parts used in the
Companys products are procured from a single source or
limited group of suppliers. The Company does not have long-term
agreements with any of its suppliers. The failure of a supplier,
including a sub-contractor, to deliver on schedule could delay
or interrupt the Companys delivery of products and thereby
adversely affect the Companys revenues and results of
operations.



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

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



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

Inventories are stated at the lower of standard
cost (which approximates actual cost on a first-in, first-out
cost method) 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. During the
year ended June 30, 2004, 2003, and 2002 the Company
physically disposed of $768,000, $2,924,000 and $2,398,000
respectively of inventory due to obsolescence. The inventory
obsolescence reserve was $4,170,000 and $1,375,000 at
June 30, 2004 and 2003, respectively.



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

Property and equipment are stated at cost less
accumulated depreciation and amortization. Depreciation is
computed using the straight-line method with the estimated
useful lives of the assets ranging from two to ten years. The
major asset classes and associated lives are as follows:

|                        |  |      |                        | 
|----------------------- |  | ---- | ---------------------- | 
|Class                   |  | Life
|                        |  |     
|Tools and Dies          |  |      | 2 Years                | 
|Software                |  |      | 2 Years                | 
|Machinery and Equipment |  |      | 3 Years                | 
|Furniture and Fixtures  |  |      | 10 Years               | 
|Capital Lease Equipment |  |      | Over life of the lease | 
|Leasehold Improvements  |  |      | Over life of the lease | 

Depreciation of equipment held under capital
leases and leasehold improvements are computed using the
straight-line method and the shorter of the remaining lease term
or the estimated useful life of the related equipment or
improvements. Repair and maintenance costs are expensed as
incurred. Depreciation expense from continuing operations was
$1,979,000, $2,072,000 and $1,941,000 for the years ended
June 30, 2004, 2003 and 2002, respectively.

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

53



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

Acquired intangible assets include developed
technology, service/maintenance agreements, patents/core
technology, trade name/trademark, order backlog and employee
agreements. The acquired intangible assets are amortized over
their estimated useful lives ranging from three months to four
years, (see Note 4 and Note 8). Goodwill represents
the excess of the purchase price over the fair value of net
assets of acquired businesses.

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



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

Certain software development costs incurred are
capitalized after technological feasibility has been
demonstrated. Technological feasibility is determined when
planning, designing, coding and testing have been completed
according to design specifications. The period of time between
technological feasibility and general release of products to
customers is generally extremely short. Commencing with product
introduction, such capitalized amounts are amortized on a
product-by-product basis at the greater of the amount computed
using (a) the ratio of current revenues for a product to
the total of current and anticipated future revenues or
(b) the straight-line method over the remaining estimated
economic life of the product. Generally, the Company assigns an
estimated economic life of one to five years to capitalized
software costs. Research and development expenditures are
charged to research and development in the period incurred. At
June 30, 2004 and 2003, the net book value of the
capitalized software costs was zero.



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

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



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

The Company provides a warranty for manufacturing
and material defects on all units sold. A reserve for warranty
costs, based on estimates made by management utilizing projected
costs to repair units, is recorded and periodically adjusted to
reflect actual experience. See Note 17 to the Consolidated
Financial Statements.



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

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



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

The Company accounts for its employee and
director stock option plans and employee stock purchase plans in
accordance with provisions of the Accounting Principles Board
Opinion (APB) No. 25,

54



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Accounting for Stock Issued to
Employees. Additional pro forma disclosures on the
Companys stock plans are presented in Note 11. The
Company accounts for stock options issued to non-employees in
accordance with the provisions of SFAS 123, SFAS 148
and Emerging Issues Task Force (EITF) 96-18
Accounting for Equity Instruments that are Issued to Other
Than Employees for Acquiring or in Conjunction with Selling
Goods or Services. As permitted by SFAS No. 123,
Accounting for Stock Based Compensation, the Company
continues to measure compensation cost for the stock option plan
using the intrinsic value method of accounting.


Had Identix used the fair value method of
accounting for its stock plans and charged compensation costs
against operations over the vesting period, net loss and net
loss per share for 2004, 2003 and 2002 would have been adjusted
to the following pro forma amounts:

|                     |                                                                                                            |                            |         |        |   |      |          |        |   |   |         |         |  
|-------------------- | ---------------------------------------------------------------------------------------------------------- | -------------------------- | ------- | ------ | - | ---- | -------- | ------ | - | - | ------- | ------- | -
|                     |                                                                                                            |                           
|                     |                                                                                                            | Fiscal Year Ended June 30,
|                     |                                                                                                            |                           
|                     |                                                                                                            | 2004                       |         | 2003   |   | 2002
|                     |                                                                                                            |                            |         |        |   |     
|                     |                                                                                                            |                           
|                     |                                                                                                            | (In thousands)            
|Net Loss as reported |                                                                                                            | $                          | (18,542 | )      |   | $    | (187,374 | )      |   | $ | (55,438 | )      
|                     | Add: Stock Based compensation expense included in
    reported net loss                                    |                            |         | 649    |   |      |          | 1,673  |   |   |         | 1,206   |  
|                     | Deduct: Total stock based compensation expense
    determined under fair value based method for all awards |                            |         | (3,836 | ) |      |          | (8,257 | ) |   |         | (10,736 | )
|                     |                                                                                                            |                            |         |        |   |      |          |        |   |   |         |        
|Proforma net loss    |                                                                                                            | $                          | (21,729 | )      |   | $    | (193,958 | )      |   | $ | (64,968 | )      
|                     |                                                                                                            |                            |         |        |   |      |          |        |   |   |         |        
|Net Loss per share:  |                                                                                                            |                            |         |        |   |      |          |        |   |   |         |        
|                     | As Reported                                                                                                |                            | $       | (0.21  | ) |      | $        | (2.20  | ) |   | $       | (1.33   | )
|                     | Proforma                                                                                                   |                            | $       | (0.25  | ) |      | $        | (2.28  | ) |   | $       | (1.56   | )
|Shares               |                                                                                                            |                            | 86,758  |        |   |      | 85,242   |        |   |   | 41,609  |        

The weighted average fair value at date of grant
for options granted during fiscal 2004, 2003 and 2002 was $4.64,
$3.61 and $4.72 per option, respectively. The fair value of
options at date of grant was estimated using the Black-Scholes
option-pricing model with the following assumptions:

|                        |  |                   |      |      |  |      |      |   |  |  |      |  
|----------------------- |  | ----------------- | ---- | ---- |  | ---- | ---- | - |  |  | ---- | -
|                        |  |                  
|                        |  | Fiscal Year Ended
|                        |  | June 30,         
|                        |  |                  
|                        |  | 2004              |      | 2003 |  | 2002
|                        |  |                   |      |      |  |     
|Expected life (years)   |  |                   | 5.51 |      |  |      | 4.59 |   |  |  | 3.76 |  
|Risk free interest rate |  |                   | 4.00 | %    |  |      | 3.42 | % |  |  | 3.93 | %
|Volatility              |  |                   | 88   | %    |  |      | 91   | % |  |  | 93   | %
|Dividend yield          |  |                   |     | %    |  |      |     | % |  |  |     | %

The Companys fair value calculations for
employees stock purchase rights under the Employee Stock
Purchase Plan (ESPP) were made using the
Black-Scholes option-pricing model with weighted average
assumptions based on the one-year purchase period of the ESPP.
At June 30, 2004 and 2003 the ESPP was depleted of shares
of common stock for issuance there under, and the Company has no
plans to authorize or seek shareholder authorization for
additional shares of common stock for issuance under the ESPP.



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

Comprehensive loss includes net loss and other
comprehensive loss. Other comprehensive loss includes cumulative
translation adjustments and unrealized gains and losses on
available-for-sale securities. Identix

55



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comprehensive loss has been presented in the
Consolidated Statement of Stockholders Equity and
Comprehensive Loss. The components of accumulated other
comprehensive loss are as follows:


|                                           |  |                |      |          |  |   |      |  
|------------------------------------------ |  | -------------- | ---- | -------- |  | - | ---- | -
|                                           |  | June 30,       |      | June 30,
|                                           |  | 2004           |      | 2003    
|                                           |  |                |      |         
|                                           |  |               
|                                           |  | (In thousands)
|Cumulative translation adjustment          |  | $              | (150 | )        |  | $ | (161 | )
|Unrealized gain on marketable securities   |  |                | 6    |          |  |   | 5    |  
|                                           |  |                |      |          |  |   |      |  
|Total accumulated other comprehensive loss |  | $              | (144 | )        |  | $ | (156 | )
|                                           |  |                |      |          |  |   |      |  



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

Basic earnings per share are computed by dividing
the net loss available to common shareholders by the weighted
average number of common shares outstanding during the period.
Diluted earnings per share gives effect to all dilutive
potential common shares outstanding during the period, including
convertible preferred stock as well as stock options and
warrants, using the treasury stock method.

Options and warrants to purchase 7,213,910,
9,082,522 and 10,985,438 shares of common stock were
outstanding at June 30, 2004, 2003 and 2002, respectively,
but were not included in the computation of diluted net loss per
share as their effect was anti-dilutive. Also
234,558 shares of convertible preferred stock were
outstanding at June 30, 2003 and were convertible into
235,558 shares of common stock, but were not included in
the computation of diluted net loss per share as their effect
was anti-dilutive. These shares were converted to common stock
during the third quarter of fiscal year 2004.



|         |             
|-------- | ------------
|Note 2  | Acquisitions

On February 23, 2004, the Company acquired
the remaining 50% ownership of SIFC from Sylvan. SIFC is now
known as Identix Identification Services (IIS). The Company had
previously held a 50% interest in this joint venture and
accounted for its investment under the equity method of
accounting. The complete results of operations of IIS have
been included in the Companys consolidated statement of
operations since February 23, 2004. IIS provides
services to corporations and government agencies
whereby IIS captures fingerprints and transmits the data
for applicant background checks. IIS maintains a network of
Identix live scan systems at processing centers across the
country where certified technicians process applicants. In
consideration for Sylvans 50% interest in the joint
venture, Identix paid Sylvan $875,000 in cash and paid
acquisition costs of $50,000. At the date of acquisition,
Identix had a negative investment in the joint venture of
$235,000. The purchase price was allocated to other intangible
assets of $840,000, goodwill of $268,000 and net liabilities of
$418,000. The proforma impact of the IIS acquisition was
not significant to the results of operations of the Company for
the twelve months ended June 30, 2004.

On March 10, 2004, the Company acquired
certain technology from Delean Vision Worldwide Inc. (Delean).
This transaction was accounted for as a purchase of assets. The
technology acquired was biometric recognition algorithms known
as skin texture analysis (STA) that allows a unique
characteristic of the skin structure known as a
skinprint to be used to identify individuals. In
exchange for the technology and intellectual property rights,
the Company issued to Delean 675,000 shares of Identix
common stock with a value of $3,423,000. The purchase price was
allocated to intangible assets. The Company also issued Delean a
warrant with contingent future vesting rights to purchase up to
800,000 shares of Identix common stock at $4.70 per
share. The warrant expires in March 2014 and vests based upon
the successful issuance of certain patents with the US
government related to the technology acquired from Delean. The
fair value of any warrants which vest will be recorded as
additional cost of the intangible assets at the time of vesting.



|         |                        
|-------- | -----------------------
|Note 3  | Discontinued Operations

On February 13, 2004, the Company
consummated the sale of Identix Public Sector (IPS) to
Alion Science and Technology Corporation (Alion). In fiscal year
2004, the Company recognized income from discontinued operations
of $5,125,000 of which $5,934,000 is attributable to the gain on
the sale of IPS and

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$809,000 is attributable to the loss on the IPS
discontinued operations from July 1, 2003 to the date of
the sale. The IPS operations are presented in the Companys
Consolidated Statements of Operations as discontinued operations
for all periods presented. Under the terms of the agreement,
upon closing Alion paid the Company $8,850,000 million in
cash. This amount is shown as proceeds from sale of IPS, net of
transaction costs of $1,042,000, in the Consolidated Statement
of Cash Flows for the year ended June 30, 2004. The terms
of the sale include the potential for additional future payments
to the Company of up to $500,000 pending satisfaction of certain
conditions. The terms of the sale also include an obligation on
the part of the Company to indemnify Alion against certain
potential liabilities, including breaches of representations and
warranties made by the Company in the sales agreement, for an
amount not to exceed $2,125,000.


The following table represents the summarized
results for the discontinued operations:

|                   |  |                              |        |      |  |      |        |   |  |   |        |  
|------------------ |  | ---------------------------- | ------ | ---- |  | ---- | ------ | - |  | - | ------ | -
|                   |  |                             
|                   |  | For the Twelve Months Ending
|                   |  | June 30,                    
|                   |  |                             
|                   |  | 2004*                        |        | 2003 |  | 2002
|                   |  |                              |        |      |  |     
|                   |  |                             
|                   |  | (In thousands)              
|Revenue            |  | $                            | 20,078 |      |  | $    | 39,830 |   |  | $ | 39,725 |  
|Cost of sales      |  |                              | 17,550 |      |  |      | 35,023 |   |  |   | 37,533 |  
|Operating Expenses |  |                              | 3,337  |      |  |      | 8,241  |   |  |   | 8,250  |  
|                   |  |                              |        |      |  |      |        |   |  |   |        |  
|Net Loss           |  | $                            | (809   | )    |  | $    | (3,434 | ) |  | $ | (6,058 | )
|                   |  |                              |        |      |  |      |        |   |  |   |        |  



---



|  |                                                                                                                          
|- | -------------------------------------------------------------------------------------------------------------------------
|* | These periods represent activity through
    February 13, 2004 as the disposition of IPS was consummated
    on that day.



|         |                                  
|-------- | ---------------------------------
|Note 4  | Merger with Visionics Corporation

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

In connection with this stock-for-stock merger
transaction, each outstanding share of Visionics common stock
was exchanged for 1.3436 shares of Identix, resulting in
the issuance of an aggregate of 39,422,000 shares of
Identix common stock for all outstanding shares of Visionics
common stock. In addition, all options and warrants to purchase
shares of Visionics common stock outstanding immediately prior
to the consummation of the merger were converted into options
and warrants to purchase 3,860,000 shares of Identix
common stock. The fair value of Identix common stock
issued was determined to be $7.75 using the five trading day
average price surrounding February 22, 2002, the date the
merger was announced. The fair value of Identix stock
options and warrants issued was determined using the
Black-Scholes option pricing model. The following assumptions
were used to determine the fair value of the options: expected
life of 0.50 years to 2.79 years, risk-free interest
rate of 1.38% to 4.03%, expected volatility of 85% and no
expected dividend yield. The following assumptions were used to
determine the fair value of the warrants: expected life ranging
from 0.50 years to 4.67 years, risk-free interest rate
ranging from 4.32% to 5.17%, expected volatility of 85% and no
expected dividend yield.

The total purchase price consisted of the
following: (in thousands)

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

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

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

In accordance with SFAS 141, Business
Combinations and SFAS 142, Goodwill and Other
Intangible Assets, all identifiable assets acquired were
analyzed to determine their fair values and remaining useful
lives. The amortizable intangible assets acquired have useful
lives, as follows: Developed technology 
5 years; Service/ Maintenance agreements 
6 years; Patents/ Core technology  6 years;
Tradename/ Trademark  3 years; Order backlog and
employee agreements  3 months to 4 years.
Goodwill represents the excess of the purchase price over the
fair value of the net tangible and identifiable intangible
assets acquired. In accordance with SFAS No. 142,
goodwill will not be amortized, but will be tested for
impairment at least annually. The goodwill has been assigned to
the Companys product reporting unit, which is also a
reportable segment. The goodwill is not deductible for tax
purposes. See discussion of fiscal year 2003 goodwill impairment
in Note 9.



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

A portion of the purchase price has been
allocated to developed technology and in-process research and
development. The fair value was estimated through a discounted
cash flow method using the income approach, which determines the
fair value of an asset based on the value of the cash flows that
the asset can be expected to generate in the future. In-process
research and development guidelines discussed in the American
Institute of Certified Public Accountants IPR&D Practice Aid
were utilized in the traditional income approach. The rates used
to discount the net cash flows to their present value are based
on Visionics weighted average cost of capital and adjusted
upwards or downwards, as appropriate, for the asset being
valued. Discount rates ranging from 25% to 35% were used for the
individual in-process technology products due to

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the additional risks related to the development
and success, and based on the stage of completion of the
in-process products. A discount rate of 13% was applied to
developed technology to reflect the lack of technological and/or
market risk associated with achieving the forecasted sales
attributable to those technologies.


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

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

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

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

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

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

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

The biometric industry is a rapidly developing
market that requires innovative technology to address the
evolving needs of the consumer. Future success in the biometric
industry will depend on the Companys ability to achieve
scientific and technological advances and to translate such
advances into commercially competitive products on a timely
basis that keep pace with competing technological developments
and address the increasingly sophisticated needs of its
customers. Visionics in-process products are at various
stages of development that require further research and
development to determine technical feasibility and commercial
viability. Current engineering efforts are focused on adding the
planned functionalities to the LiveScan, IBIS,

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and BNP line of products. Developing the new
product releases is time-consuming, costly, and complex. There
is risk that the developments will not be competitive with other
products using alternative technologies that offer comparable
functionalities. The IBIS second generation RDT and the BNP ABIS
products were completed in fiscal 2003. The completion date for
the LiveScan 1000 dpi is anticipated to occur before the
end of fiscal year 2005.




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

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



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

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



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

The following unaudited pro forma information
presents a summary of the consolidated results of operations of
the Company, excluding the charge for acquired in-process
research and development, assuming the acquisition of Visionics
occurred on July 1, 2001: (in thousands, except per share
amounts)

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



|         |                
|-------- | ---------------
|Note 5  | Special Charges



| |                
| | ---------------
| | Special Charges

Special charges (such as restructuring and
acquisition related charges) result from unique facts and
circumstances that likely will not recur with similar
materiality or impact on continuing operations. Special charges
consisted of the following for the periods presented:

|                                 |  |                              |       |      |  |      |       |  |  |   |        | 
|-------------------------------- |  | ---------------------------- | ----- | ---- |  | ---- | ----- |  |  | - | ------ | 
|                                 |  |                             
|                                 |  | Twelve Months Ended June 30,
|                                 |  |                             
|                                 |  | 2004                         |       | 2003 |  | 2002
|                                 |  |                              |       |      |  |     
|                                 |  |                             
|                                 |  | (In thousands)              
|Restructuring related            |  | $                            | 860   |      |  | $    | 6,327 |  |  | $ | 17,965 | 
|Employment agreement obligations |  |                              | 506   |      |  |      |      |  |  |   |       | 
|SIFC acquisition related         |  |                              | 749   |      |  |      |      |  |  |   |       | 
|                                 |  |                              |       |      |  |      |       |  |  |   |        | 
|                                 |  | $                            | 2,115 |      |  | $    | 6,327 |  |  | $ | 17,965 | 
|                                 |  |                              |       |      |  |      |       |  |  |   |        | 

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| |            
| | -----------
| | Fiscal 2004

During the twelve months ended June 30,
2004, the Company incurred approximately $2,115,000 in special
charges. These charges consisted of $860,000 related to
restructuring, $506,000 related to payments made under the
former Chairman of the Boards employment agreement
associated with his retirement in February 2004 and $749,000 for
the value of shares of Company common stock issued to certain
former Sylvan Identix Fingerprint Center (SIFC) employees in
connection with the acquisition of 100% of SIFC (See
Note 2). The restructuring charges included $610,000
related to an increase in the reserve on the sublease of the
Companys Northern California facilities and $250,000
related to a reduction in force of 6% of the Companys
workforce in February 2004. The increase of lease exit costs by
$610,000 reflects an updated assessment by management of what
the Company will recover under the current conditions of the
Northern California real estate market. The additional sublease
reserve and the reduction in force expenses are reflected in the
restructuring schedule below:

|                                |       |                                           |        |             |  |                 |     |          |  |                 |       |       |  |   |       |       |  |   |       |       | 
|------------------------------- | ----- | ----------------------------------------- | ------ | ----------- |  | --------------- | --- | -------- |  | --------------- | ----- | ----- |  | - | ----- | ----- |  | - | ----- | ----- | 
|                                |       |                                          
|                                |       | For the Twelve Months Ended June 30, 2004
|                                |       |                                          
|                                |       |                                           |        | Liabilities |  |                
|                                |       | Restructuring                             |        |             |  | Satisfied in    |     |          |  | Restructuring  
|                                |       | Liability as of                           |        |             |  | Connection with |     | Cash     |  | Liability as of
|                                |       | June 30, 2003                             |        | Additions   |  | IPS Disposition |     | Payments |  | June 30, 2004  
|                                |       |                                           |        |             |  |                 |     |          |  |                
|                                |       |                                          
|                                |       | (In thousands)                           
|Severance and benefits          |       | $                                         | 614    |             |  | $               | 250 |          |  | $               |      |       |  | $ | 744   |       |  | $ | 120   |      
|Lease exit costs                |       |                                           | 12,151 |             |  |                 | 610 |          |  |                 | 2,267 |       |  |   | 2,894 |       |  |   | 7,600 |      
|Internal merger costs and other |       |                                           | 31     |             |  |                 |    |          |  |                 |      |       |  |   | 31    |       |  |   |      |      
|                                |       |                                           |        |             |  |                 |     |          |  |                 |       |       |  |   |       |       |  |   |       |      
|                                | Total |                                           | $      | 12,796      |  |                 | $   | 860      |  |                 | $     | 2,267 |  |   | $     | 3,669 |  |   | $     | 7,720 | 
|                                |       |                                           |        |             |  |                 |     |          |  |                 |       |       |  |   |       |       |  |   |       |      

The restructuring liability is classified in the
consolidated balance sheet based on the anticipated timing of
the respective payment. As of June 30, 2004, $5,152,000 of
the above restructuring liability is classified as long-term.
Management currently believes that of the $120,000 accrued for
severance and benefits, $11,000 will be paid over the next
twelve months with the remaining balance being paid through 2013
with the lease exit costs being paid over the remaining term of
the leases. The leases expire at various dates through fiscal
year 2008.

In conjunction with the restructuring and other
related charges recorded, the Company made certain estimates
regarding future sublease income that have a significant impact
on its anticipated cash obligations and restructuring reserves.
Although the Company believes that the lease commitment
estimates are appropriate in the circumstances, future changes
in real estate markets could impact the ultimate amount of cash
paid to resolve these obligations.



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

During the twelve months ended June 30,
2003, the Company recorded restructuring and other related
charges totaling $10,206,000. Of this amount $6,327,000 is
classified as special charges on the Consolidated Statements of
Operations with the remaining amount classified in discontinued
operations. For the twelve months ended June 30, 2003,
these costs consisted of $2,283,000 related to employees with
extended terminations to assist in the integration, $370,000
associated with the disposal of fixed assets, $4,940,000 related
to lease exit costs and $2,613,000 in relocation costs.

Of the lease exit costs of $4,940,000 recorded
during the twelve months ended June 30, 2003, $3,879,000
was due to the sublease of a portion of its Fairfax, Virginia
facility. The charge represented the difference between the
remaining lease obligation of $5,222,000, abandoned property and
equipment of $445,000 and costs to sublet the facility of
$375,000, partially offset by estimated sublease income of
$1,981,000 and a recovery on the closure of the Law Enforcement
Solutions Division of $182,000.

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The following table represents a summary of
restructuring and other related charges:

|                              |       |                                           |        |                |  |                  |       |          |  |          |       |                 |  |   |     |     |  |   |       |        |  |   |        |        | 
|----------------------------- | ----- | ----------------------------------------- | ------ | -------------- |  | ---------------- | ----- | -------- |  | -------- | ----- | --------------- |  | - | --- | --- |  | - | ----- | ------ |  | - | ------ | ------ | 
|                              |       |                                          
|                              |       | For the Twelve Months Ended June 30, 2003
|                              |       |                                          
|                              |       |                                           |        | Additions from |  | Additions from   |       |         
|                              |       | Liability as of                           |        | Continuing     |  | IPS Discontinued |       | Non-Cash |  | Cash     |       | Liability as of
|                              |       | June 30, 2002                             |        | Operations     |  | Operations       |       | Charges  |  | Payments |       | June 30, 2003  
|                              |       |                                           |        |                |  |                  |       |          |  |          |       |                
|                              |       |                                          
|                              |       | (In thousands)                           
|Severance and benefits        |       | $                                         | 2,493  |                |  | $                | 2,283 |          |  | $        |      |                 |  | $ |    |     |  | $ | 4,162 |        |  | $ | 614    |       
|Disposal of fixed assets      |       |                                           |       |                |  |                  | 370   |          |  |          |      |                 |  |   | 370 |     |  |   |      |        |  |   |       |       
|Lease exit costs              |       |                                           | 10,340 |                |  |                  | 1,061 |          |  |          | 3,879 |                 |  |   | 388 |     |  |   | 2,741 |        |  |   | 12,151 |       
|Internal merger costs & other |       |                                           | 814    |                |  |                  | 2,613 |          |  |          |      |                 |  |   |    |     |  |   | 3,396 |        |  |   | 31     |       
|                              |       |                                           |        |                |  |                  |       |          |  |          |       |                 |  |   |     |     |  |   |       |        |  |   |        |       
|                              | Total |                                           | $      | 13,647         |  |                  | $     | 6,327    |  |          | $     | 3,879           |  |   | $   | 758 |  |   | $     | 10,299 |  |   | $      | 12,796 | 
|                              |       |                                           |        |                |  |                  |       |          |  |          |       |                 |  |   |     |     |  |   |       |        |  |   |        |       



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

During the twelve months ended June 30,
2002, the Company recorded restructuring and other related
charges totaling $18,798,000. Of this amount $17,965,000 is
classified as special charges on the Consolidated Statements of
Operations with the remaining amount classified in discontinued
operations on the Consolidated Statement of Operations. The
Company recorded the following restructuring and other related
charges during the fiscal year ended June 30, 2002:

|                                |       |                |       |               |  |          |     |               |  |                 |       |       |  |   |       |       |  |   |        |        | 
|------------------------------- | ----- | -------------- | ----- | ------------- |  | -------- | --- | ------------- |  | --------------- | ----- | ----- |  | - | ----- | ----- |  | - | ------ | ------ | 
|                                |       | Total Charges  |       | Total Charges |  |          |     |               |  |                
|                                |       | from           |       | from IPS      |  |          |     | Cash Payments |  | Restructuring  
|                                |       | Continuing     |       | Discontinued  |  | Non-Cash |     | through       |  | Liability as of
|                                |       | Operation      |       | Operations    |  | Charges  |     | June 30, 2002 |  | June 30, 2002  
|                                |       |                |       |               |  |          |     |               |  |                
|                                |       |               
|                                |       | (In thousands)
|Severance and benefits          |       | $              | 6,093 |               |  | $        |    |               |  | $               | 900   |       |  | $ | 2,700 |       |  | $ | 2,493  |       
|Disposal of fixed assets        |       |                | 1,294 |               |  |          |    |               |  |                 | 1,294 |       |  |   |      |       |  |   |       |       
|Lease exit costs                |       |                | 9,507 |               |  |          | 833 |               |  |                 |      |       |  |   |      |       |  |   | 10,340 |       
|Internal merger costs and other |       |                | 1,071 |               |  |          |    |               |  |                 |      |       |  |   | 257   |       |  |   | 814    |       
|                                |       |                |       |               |  |          |     |               |  |                 |       |       |  |   |       |       |  |   |        |       
|                                | Total |                | $     | 17,965        |  |          | $   | 833           |  |                 | $     | 2,194 |  |   | $     | 2,957 |  |   | $      | 13,647 | 
|                                |       |                |       |               |  |          |     |               |  |                 |       |       |  |   |       |       |  |   |        |       



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

In July 2001, the Company initiated a workforce
reduction of approximately 42 employees, or 10% of its workforce
to streamline its worldwide functions, operations and resources
primarily in marketing, selling and administration. The
workforce reduction resulted in a $1,712,000 charge during the
quarter ended September 30, 2001 relating primarily to
severance and fringe benefits. Related cash payments of
$1,597,000 were made during the fiscal year ended June 30,
2002. The remaining liability at June 30, 2002 of $115,000
is included in accrued compensation in the consolidated balance
sheet.

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



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

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

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

A charge of $10,340,000 was recorded for the
estimated cost to terminate or sublease two excess leased
facilities in Northern California. The estimate is based on
current comparable rates for leases in respective markets.
Should facilities rental rates continue to decrease in these
markets or should it take longer than expected to sublease these
facilities, the actual loss could exceed this estimate. The
costs are expected to be paid through fiscal 2008, based on the
underlying lease agreements. For the twelve months ended
June 30, 2002, $833,000 of special charges related to lease
exit costs are included in the income (loss) from discontinued
operations in the Companys Consolidated Statement of
Operations.



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

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

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



|         |                     
|-------- | --------------------
|Note 6  | Balance Sheet Detail

|                                                |                                          |                |        |         |     |   |        |         |       | 
|----------------------------------------------- | ---------------------------------------- | -------------- | ------ | ------- | --- | - | ------ | ------- | ----- | 
|                                                |                                          |               
|                                                |                                          | June 30,      
|                                                |                                          |               
|                                                |                                          | 2004           |        | 2003   
|                                                |                                          |                |        |        
|                                                |                                          |               
|                                                |                                          | (In thousands)
|Accounts receivable:                            |                                          |                |        |         |     |   |        |        
|                                                | Commercial and other                     |                | $      | 11,669  |     |   | $      | 14,552  |      
|                                                | United States Government:                |                |        |         |     |   |        |         |      
|                                                |                                          | Billed         |        |         | 790 |   |        |         | 4,089 | 
|                                                |                                          | Unbilled       |        |         |    |   |        |         | 5,769 | 
|                                                | Other receivables                        |                |        | 77      |     |   |        | 50      |      
|Less: allowance for doubtful accounts           |                                          |                | (1,124 | )       |     |   | (3,026 | )      
|                                                |                                          |                |        |         |     |   |        |        
|                                                |                                          | $              | 11,412 | (a)     |     | $ | 21,434 |        
|                                                |                                          |                |        |         |     |   |        |        
|Inventories:                                    |                                          |                |        |         |     |   |        |        
|                                                | Purchased parts and materials            |                | $      | 1,620   |     |   | $      | 3,351   |      
|                                                | Work-in-process                          |                |        | 4,361   |     |   |        | 4,893   |      
|                                                | Finished goods, including spares         |                |        | 1,190   |     |   |        | 1,676   |      
|                                                |                                          |                |        |         |     |   |        |        
|                                                |                                          | $              | 7,171  |         |     | $ | 9,920  |        
|                                                |                                          |                |        |         |     |   |        |        
|Property and equipment:                         |                                          |                |        |         |     |   |        |        
|                                                | Manufacturing, test and office equipment |                | $      | 5,632   |     |   | $      | 4,449   |      
|                                                | Furniture and fixtures                   |                |        | 1,284   |     |   |        | 3,296   |      
|                                                | Leasehold improvements                   |                |        | 543     |     |   |        | 1,889   |      
|                                                |                                          |                |        |         |     |   |        |        
|                                                |                                          |                | 7,459  |         |     |   | 9,634  |        
|Less: accumulated depreciation and amortization |                                          |                | (5,306 | )       |     |   | (5,477 | )      
|                                                |                                          |                |        |         |     |   |        |        
|                                                |                                          | $              | 2,153  | (a)     |     | $ | 4,157  |        
|                                                |                                          |                |        |         |     |   |        |        
|Acquired intangible assets:                     |                                          |                |        |         |     |   |        |        
|                                                | Purchased technology                     |                | $      | 32,750  |     |   | $      | 28,563  |      
|                                                | Patents and licenses                     |                |        | 204     |     |   |        | 204     |      
|                                                | Capitalized software development costs   |                |        | 179     |     |   |        | 1,465   |      
|                                                | Less: accumulated amortization           |                |        | (14,636 | )   |   |        | (10,378 | )    
|                                                |                                          |                |        |         |     |   |        |        
|                                                |                                          | $              | 18,497 |         |     | $ | 19,854 |        
|                                                |                                          |                |        |         |     |   |        |        

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|                                     |                                                             |                |       |       |  |   |        |       | 
|------------------------------------ | ----------------------------------------------------------- | -------------- | ----- | ----- |  | - | ------ | ----- | 
|                                     |                                                             |               
|                                     |                                                             | June 30,      
|                                     |                                                             |               
|                                     |                                                             | 2004           |       | 2003 
|                                     |                                                             |                |       |      
|                                     |                                                             |               
|                                     |                                                             | (In thousands)
|Other assets:                        |                                                             |                |       |       |  |   |        |      
|                                     | Deposits                                                    |                | $     | 1,913 |  |   | $      | 2,573 | 
|                                     | Receivables from Companys 50% owned SIFC
    joint venture |                |       |      |  |   |        | 79    | 
|                                     | Other assets                                                |                |       |      |  |   |        | 423   | 
|                                     |                                                             |                |       |       |  |   |        |      
|                                     |                                                             | $              | 1,913 |       |  | $ | 3,075  |      
|                                     |                                                             |                |       |       |  |   |        |      
|Accrued compensation:                |                                                             |                |       |       |  |   |        |      
|                                     | Salary and wages                                            |                | $     | 1,016 |  |   | $      | 925   | 
|                                     | Severance                                                   |                |       | 136   |  |   |        | 492   | 
|                                     | Benefits                                                    |                |       | 1,724 |  |   |        | 1,962 | 
|                                     | Payroll taxes                                               |                |       | 72    |  |   |        | 214   | 
|                                     |                                                             |                |       |       |  |   |        |      
|                                     |                                                             | $              | 2,948 |       |  | $ | 3,593  |      
|                                     |                                                             |                |       |       |  |   |        |      
|Other accrued liabilities            |                                                             |                |       |       |  |   |        |      
|                                     | Lease exit costs                                            |                | $     | 2,448 |  |   | $      | 2,708 | 
|                                     | Other accrued liabilities                                   |                |       | 2,544 |  |   |        | 1,814 | 
|                                     |                                                             |                |       |       |  |   |        |      
|                                     |                                                             | $              | 4,992 |       |  | $ | 4,522  |      
|                                     |                                                             |                |       |       |  |   |        |      
|Other accrued liabilities-noncurrent |                                                             |                |       |       |  |   |        |      
|                                     | Lease exit costs                                            |                | $     | 5,152 |  |   | $      | 9,443 | 
|                                     | Severance                                                   |                |       | 85    |  |   |        | 96    | 
|                                     | Other accrued liabilities                                   |                |       | 410   |  |   |        | 711   | 
|                                     |                                                             |                |       |       |  |   |        |      
|                                     |                                                             | $              | 5,647 | (a)   |  | $ | 10,250 |      
|                                     |                                                             |                |       |       |  |   |        |      



---



|    |                                                                                                              
|--- | -------------------------------------------------------------------------------------------------------------
|(a) | The decrease is due primarily to the divestiture
    of the Companys IPS subsidiary during fiscal year 2004.



|         |               
|-------- | --------------
|Note 7  | Line of Credit

The Companys existing line of credit was
entered into on May 30, 2003. This line of credit provides
for up to the lesser of $15,000,000 or the cash collateral base
or the borrowing base. Borrowings under the line of credit are
collateralized by substantially all of the assets of the Company
and bear interest at the banks prime rate of interest plus
4.25% at June 30, 2004. The line of credit expires on
October 30, 2004. Until the Company establishes a net
income before taxes for two consecutive fiscal quarters, the
Company will be required to deposit with the lender an amount
equal to the sum of the aggregate outstanding principal amount
of all prior advances plus any portion of the line of credit
reserved to support unexpired letters of credit plus the amount
of the requested advance before an advance will be given. In
addition, all advances must be used for working capital. At
June 30, 2004, there were no amounts outstanding under this
line of credit. The line of credit agreement contains financial,
operating and reporting covenants. At June 30, 2004, the
Company was in compliance with all covenants.

64



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|         |                  
|-------- | -----------------
|Note 8  | Intangible Assets

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

|                                       |  |                |        |                |  |       |         |          |  |              |        |     |  |   |        |  |  |   |         |   |  |   |        | 
|-------------------------------------- |  | -------------- | ------ | -------------- |  | ----- | ------- | -------- |  | ------------ | ------ | --- |  | - | ------ |  |  | - | ------- | - |  | - | ------ | 
|                                       |  |                |        |               
|                                       |  | June 30, 2004  |        | June 30, 2003 
|                                       |  |                |        |               
|                                       |  | Gross          |        |                |  | Gross |         |         
|                                       |  | Carrying       |        | Accumulated    |  |       |         | Carrying |  | Accumulated  |        |    
|                                       |  | Amount         |        | Amortization   |  | Net   |         | Amount   |  | Amortization |        | Net
|                                       |  |                |        |                |  |       |         |          |  |              |        |    
|                                       |  |                |        |               
|                                       |  | (In thousands) |        | (In thousands)
|Acquired intangible assets:            |  |                |        |                |  |       |         |          |  |              |        |     |  |   |        |  |  |   |         |   |  |   |        | 
|Developed technology                   |  | $              | 16,100 |                |  | $     | (6,484  | )        |  | $            | 9,616  |     |  | $ | 16,100 |  |  | $ | (3,264  | ) |  | $ | 12,836 | 
|Service/maintenance agreements         |  |                | 4,440  |                |  |       | (1,287  | )        |  |              | 3,153  |     |  |   | 3,600  |  |  |   | (608    | ) |  |   | 2,992  | 
|Patents/core technology                |  |                | 11,410 |                |  |       | (5,895  | )        |  |              | 5,515  |     |  |   | 8,063  |  |  |   | (4,443  | ) |  |   | 3,620  | 
|Tradename/Trademark                    |  |                | 500    |                |  |       | (337    | )        |  |              | 163    |     |  |   | 500    |  |  |   | (169    | ) |  |   | 331    | 
|Order backlog and employee contracts   |  |                | 300    |                |  |       | (250    | )        |  |              | 50     |     |  |   | 300    |  |  |   | (225    | ) |  |   | 75     | 
|Patents and licenses                   |  |                | 204    |                |  |       | (204    | )        |  |              |       |     |  |   | 204    |  |  |   | (204    | ) |  |   |       | 
|Capitalized software development costs |  |                | 179    |                |  |       | (179    | )        |  |              |       |     |  |   | 1,465  |  |  |   | (1,465  | ) |  |   |       | 
|                                       |  |                |        |                |  |       |         |          |  |              |        |     |  |   |        |  |  |   |         |   |  |   |        | 
|                                       |  | $              | 33,133 |                |  | $     | (14,636 | )        |  | $            | 18,497 |     |  | $ | 30,232 |  |  | $ | (10,378 | ) |  | $ | 19,854 | 
|                                       |  |                |        |                |  |       |         |          |  |              |        |     |  |   |        |  |  |   |         |   |  |   |        | 

Aggregate amortization expense amounted to
$5,543,000, $5,683,000 and $1,005,000, for the years ended
June 30, 2004, 2003 and 2002, respectively. The increase in
the gross carrying amount and accumulated amortization from
fiscal 2003 to fiscal 2004 is primarily the result of additional
intangibles acquired as a result of the IIS and Delean
acquisitions totaling $4,287,000 in fiscal year 2004. This was
partially offset by the disposal of fully amortized intangibles
of $1,286,000 in connection with the IPS disposition. The
increase in the amortization expense from fiscal 2002 to fiscal
2003 is due to the intangibles acquired in the Visionics
acquisition.

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

|                             |       |   |       |        | 
|---------------------------- | ----- | - | ----- | ------ | 
|For year ended June 30, 2005 |       | $ | 5,093 |       
|For year ended June 30, 2006 |       | $ | 4,930 |       
|For year ended June 30, 2007 |       | $ | 4,861 |       
|For year ended June 30, 2008 |       | $ | 1,573 |       
|For year ended June 30, 2009 |       | $ | 429   |       
|Thereafter                   |       | $ | 1,611 |       
|                             |       |   |       |       
|                             | Total |   | $     | 18,497 | 
|                             |       |   |       |       



|         |         
|-------- | --------
|Note 9  | Goodwill

Effective July 1, 2001 the Company adopted
SFAS No. 142, Goodwill and Other Intangible Assets. As
a result of SFAS No. 142, goodwill is no longer
subject to amortization, but is instead subject to periodic (at
minimum, on an annual basis) impairment testing. Intangible
assets that have finite useful lives will continue to be
amortized over their respective useful lives. The goodwill test
for impairment consists of a two-step process that begins with
an estimation of the fair value of a reporting unit. The first
step is a screen for potential impairment and the second step
measures the amount of impairment, if any.

In accordance with SFAS 142, the Company
performed its annual assessment for goodwill impairment as of
June 30, 2004 and 2003, for all of the Companys
goodwill. The fair value of the goodwill was determined using a
weighted-average of both the market and income approaches. The
market approach utilized public company comparables while the
income approach was based on the present value of estimated
future cash flows that the reporting unit is expected to
generate over its estimated remaining life. In the application
of the income approach, the Company was required to make
estimates of future operating trends and judgments on discount
rates and other variables. Actual future results and other
assumed variables could differ materially from these estimates.
The Company engaged an independent valuation consultant to
assist the Company in

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determining the fair values used in the
impairment assessment. In the Companys application of the
income approach, it assumed a cash flow period of 10 years,
a discount rate of 15%, and a terminal value based on the tenth
years estimated future cash flows. The assumptions
supporting the cash flows, including the discount rate and
estimated terminal value, were determined using
managements best estimates available at the time the
impairment assessment was made. The results of this impairment
assessment indicated that the implied fair value of the goodwill
was not less than its carrying value for fiscal year 2004. For
fiscal year 2003, the same analysis was done and it indicated
that the implied fair value of goodwill was less than its
carrying value. This resulted in a non-cash impairment charge of
$154,799,000 at June 30, 2003.


The change in the carrying amount of goodwill for
the year ended June 30, 2004 resulted solely from the
acquisition of 100% ownership of IIS. For the year ended
June 30, 2003 the change in the carrying amount of goodwill
resulted solely from the impairment of the Companys
goodwill and is as follows:

|                                                            |  |                |         |          |  |   |          |  
|----------------------------------------------------------- |  | -------------- | ------- | -------- |  | - | -------- | -
|                                                            |  | June 30,       |         | June 30,
|                                                            |  | 2004           |         | 2003    
|                                                            |  |                |         |         
|                                                            |  |               
|                                                            |  | (In thousands)
|Balance at the beginning of the year                        |  | $              | 140,945 |          |  | $ | 295,744  |  
|Additions to goodwill related to the acquisition
    of IIS |  |                | 268     |          |  |   |         |  
|Impairment of goodwill                                      |  |                |        |          |  |   | (154,799 | )
|                                                            |  |                |         |          |  |   |          |  
|Balance at the end of the year                              |  | $              | 141,213 |          |  | $ | 140,945  |  
|                                                            |  |                |         |          |  |   |          |  

At both June 30, 2004 and 2003, $140,945,000
of the goodwill was attributable to the biometric systems
reporting unit with the balance of goodwill for fiscal year 2004
attributable to the other reporting unit.



|          |                      
|--------- | ---------------------
|Note 10  | Marketable Securities

The Companys portfolio of marketable
securities at June 30, 2004 and 2003 consists of the
following:

|                                       |  |                                 |       |            |  |            |   |  |  |   |       | 
|-------------------------------------- |  | ------------------------------- | ----- | ---------- |  | ---------- | - |  |  | - | ----- | 
|                                       |  |                                
|                                       |  | Fiscal Year Ended June 30, 2004
|                                       |  |                                
|                                       |  |                                 |       | Gross      |  |           
|                                       |  |                                 |       | Unrealized |  |           
|                                       |  | Cost                            |       | Gains      |  | Fair Value
|                                       |  |                                 |       |            |  |           
|                                       |  |                                
|                                       |  | (In thousands)                 
|U.S. government and agency obligations |  | $                               | 7,975 |            |  | $          |  |  |  | $ | 7,975 | 
|Commercial Paper                       |  |                                 | 991   |            |  |            |  |  |  |   | 991   | 
|Corporate Bonds                        |  |                                 | 500   |            |  |            | 6 |  |  |   | 506   | 
|                                       |  |                                 |       |            |  |            |   |  |  |   |       | 
|                                       |  | $                               | 9,466 |            |  | $          | 6 |  |  | $ | 9,472 | 
|                                       |  |                                 |       |            |  |            |   |  |  |   |       | 

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

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|             |                                    |                |   |       |  |  |   |       | 
|------------ | ---------------------------------- | -------------- | - | ----- |  |  | - | ----- | 
|             |                                    |               
|             |                                    | June 30,      
|             |                                    |               
|             |                                    | 2004           |   | 2003 
|             |                                    |                |   |      
|             |                                    |               
|             |                                    | (In thousands)
|Included in: |                                    |                |   |       |  |  |   |      
|             | Marketable securities  short-term |                | $ | 9,472 |  |  | $ | 8,991 | 
|             | Marketable securities  long-term  |                |   |      |  |  |   | 505   | 
|             |                                    |                |   |       |  |  |   |      
|             | Total                              |                | $ | 9,472 |  |  | $ | 9,496 | 
|             |                                    |                |   |       |  |  |   |      

The Companys portfolio of marketable
securities by contractual maturity at June 30, 2004 and
2003 is as follows:

|                        |       |                |       |       |  |   |       |       | 
|----------------------- | ----- | -------------- | ----- | ----- |  | - | ----- | ----- | 
|                        |       |               
|                        |       | June 30,      
|                        |       |               
|                        |       | 2004           |       | 2003 
|                        |       |                |       |      
|                        |       |               
|                        |       | (In thousands)
|Due in one year or less |       | $              | 9,472 |       |  | $ | 8,991 |      
|Due after one year      |       |                |      |       |  |   | 505   |      
|                        |       |                |       |       |  |   |       |      
|                        | Total |                | $     | 9,472 |  |   | $     | 9,496 | 
|                        |       |                |       |       |  |   |       |      



|          |              
|--------- | -------------
|Note 11  | Capital Stock



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

In July 2000, the Company entered into a
Securities Purchase Agreement with Motorola, Inc.
(Motorola), whereby the Company sold
234,558 shares of Series A Convertible Preferred Stock
(the Series A Preferred Stock) at
$15.99 per share, resulting in cash proceeds to the Company
of $3,702,000, net of issuance costs. The sale of the
Series A Preferred Stock was exempt from registration under
applicable securities laws. However, Motorola has demand
registration rights, which were effective beginning on
January 7, 2001. In the third quarter of fiscal year 2004,
Motorola converted the 234,558 shares of Series A
Convertible Preferred Stock into 234,558 shares of common
stock.

In connection with the issuance of the
Series A Preferred Stock, the Company also issued Motorola
a warrant to purchase 187,647 shares of the
Companys common stock at $17.11 per share. The
warrant was immediately exercisable and expires on July 7,
2005. The Company determined the fair value of the warrant using
the Black-Scholes option pricing model. Based on the net cash
proceeds received from the sale of Series A Preferred Stock
of $3,702,000, the relative fair values of the Series A
Preferred Stock and the warrant totaled $2,443,000 and
$1,259,000, respectively. The relative fair market value of the
warrant was credited to additional paid-in capital within
stockholders equity. The Company recognized a one-time
preferred stock and warrant expense of $1,259,000 relating to
the embedded beneficial conversion feature within the
Series A Preferred Stock.



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

In connection with the Companys merger with
Visionics (see Note 4), the Company issued an aggregate of
39,422,000 shares of Identix common stock for all
outstanding shares of Visionics common stock.

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

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

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

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

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

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

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

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

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

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

|                            |                                                                   |           |           |             |   |               |           |            |   |   |      |       | 
|--------------------------- | ----------------------------------------------------------------- | --------- | --------- | ----------- | - | ------------- | --------- | ---------- | - | - | ---- | ----- | 
|                            |                                                                   | Shares    |           |             |   |              
|                            |                                                                   | Available |           | Options     |   | Weighted     
|                            |                                                                   | for Grant |           | Outstanding |   | Average Price
|                            |                                                                   |           |           |             |   |              
|Balance as of June 30, 2001 |                                                                   |           | 1,435,090 |             |   |               | 6,288,382 |            |   | $ | 9.77 |      
|                            | Shares reserved upon adoption of amendment to
    2002 Plan       |           |           | 5,800,000   |   |               |           |           |   |   |      |       | 
|                            | Shares reserved for Visionics assumed options                     |           |           | 3,225,128   |   |               |           |           |   |   |      |       | 
|                            | Shares assumed for Visionics acquisition                          |           |           | (3,225,128  | ) |               |           | 3,225,128  |   |   | $    | 4.93  | 
|                            | Options granted                                                   |           |           | (2,124,794  | ) |               |           | 2,124,794  |   |   | $    | 7.86  | 
|                            | Options exercised                                                 |           |           |            |   |               |           | (976,884   | ) |   | $    | 4.25  | 
|                            | Options canceled                                                  |           |           | 1,292,943   |   |               |           | (1,292,943 | ) |   | $    | 11.46 | 
|                            | Options canceled and expired                                      |           |           |            |   |               |           | (14,037    | ) |   | $    | 11.46 | 
|                            |                                                                   |           |           |             |   |               |           |            |   |   |      |      
|Balance as of June 30, 2002 |                                                                   |           | 6,403,239 |             |   |               | 9,354,440 |            |   | $ | 7.61 |      
|                            | Shares reserved upon adoption of amendment to
    Directors Plan |           |           | 450,000     |   |               |           |           |   |   |      |       | 
|                            | Options granted                                                   |           |           | (2,008,118  | ) |               |           | 2,008,118  |   |   | $    | 4.66  | 
|                            | Options exercised                                                 |           |           |            |   |               |           | (779,221   | ) |   | $    | 2.77  | 
|                            | Options canceled                                                  |           |           | 2,323,673   |   |               |           | (2,323,673 | ) |   | $    | 10.10 | 
|                            |                                                                   |           |           |             |   |               |           |            |   |   |      |      
|Balance as of June 30, 2003 |                                                                   |           | 7,168,794 |             |   |               | 8,259,664 |            |   | $ | 6.62 |      
|                            | Options granted                                                   |           |           | (1,450,023  | ) |               |           | 1,450,023  |   |   | $    | 5.69  | 
|                            | Options exercised                                                 |           |           |            |   |               |           | (1,192,729 | ) |   | $    | 4.29  | 
|                            | Options canceled                                                  |           |           | 2,162,648   |   |               |           | (2,162,648 | ) |   | $    | 8.55  | 
|                            |                                                                   |           |           |             |   |               |           |            |   |   |      |      
|Balance as of June 30, 2004 |                                                                   |           | 7,881,419 |             |   |               | 6,354,310 |            |   | $ | 6.21 |      
|                            |                                                                   |           |           |             |   |               |           |            |   |   |      |      

During fiscal 2004 and 2003, the Company
recognized expense of $649,000 and $1,673,000 respectively,
primarily as a result of amortization of the intrinsic value of
the employee stock options assumed in the Visionics merger as
well as $39,000 of expense related to stock options that were
granted to a consultant in fiscal year 2004. During fiscal 2002,
the Company recognized expense of $1,447,000 for stock options
granted to employees at exercise prices below fair market value
at the time of grant, for a remeasurement charge related to the
modification of stock option terms upon termination of the
Companys former CEO and for stock options granted to
non-employees.

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The following table summarizes options
outstanding at June 30, 2004:

|                |  |                     |           |                     |  |                  |      |        |  |                  |       |  |  |  |           |  |  |   |       | 
|--------------- |  | ------------------- | --------- | ------------------- |  | ---------------- | ---- | ------ |  | ---------------- | ----- |  |  |  | --------- |  |  | - | ----- | 
|                |  |                     |           |                    
|                |  | Options Outstanding |           | Options Exercisable
|                |  |                     |           |                    
|Range of        |  |                     |           | Weighted Average    |  | Weighted Average |      |        |  | Weighted Average
|Exercise Prices |  | Number              |           | Remaining Life      |  | Exercise Price   |      | Number |  | Exercise Price  
|                |  |                     |           |                     |  |                  |      |        |  |                 
|                |  |                     |           | (in years)          |  |                  |      |        |  |                 
|$0.26-$1.01     |  |                     | 408,570   |                     |  |                  | 5.49 |        |  | $                | 0.80  |  |  |  | 402,043   |  |  | $ | 0.80  | 
|$1.08-$2.98     |  |                     | 264,122   |                     |  |                  | 3.41 |        |  |                  | 2.29  |  |  |  | 264,122   |  |  |   | 2.29  | 
|$3.26-$3.35     |  |                     | 105,857   |                     |  |                  | 2.90 |        |  |                  | 3.33  |  |  |  | 105,857   |  |  |   | 3.33  | 
|$3.91-$4.45     |  |                     | 719,045   |                     |  |                  | 7.00 |        |  |                  | 4.21  |  |  |  | 344,055   |  |  |   | 4.12  | 
|$4.61-$4.88     |  |                     | 734,889   |                     |  |                  | 8.34 |        |  |                  | 4.74  |  |  |  | 222,558   |  |  |   | 4.72  | 
|$4.95-$5.27     |  |                     | 950,231   |                     |  |                  | 8.45 |        |  |                  | 5.18  |  |  |  | 276,386   |  |  |   | 4.96  | 
|$5.31-$6.19     |  |                     | 1,086,900 |                     |  |                  | 7.86 |        |  |                  | 5.86  |  |  |  | 672,700   |  |  |   | 5.82  | 
|$6.30-$7.95     |  |                     | 789,404   |                     |  |                  | 7.32 |        |  |                  | 7.12  |  |  |  | 395,031   |  |  |   | 7.52  | 
|$8.10-$11.32    |  |                     | 921,638   |                     |  |                  | 5.26 |        |  |                  | 10.20 |  |  |  | 702,293   |  |  |   | 10.14 | 
|$11.47-$14.97   |  |                     | 338,654   |                     |  |                  | 5.94 |        |  |                  | 14.09 |  |  |  | 332,789   |  |  |   | 14.08 | 
|$16.38-$16.38   |  |                     | 35,000    |                     |  |                  | 6.01 |        |  |                  | 16.38 |  |  |  | 34,271    |  |  |   | 16.38 | 
|                |  |                     |           |                     |  |                  |      |        |  |                  |       |  |  |  |           |  |  |   |       | 
|                |  |                     | 6,354,310 |                     |  |                  | 6.93 |        |  | $                | 6.21  |  |  |  | 3,752,105 |  |  | $ | 6.49  | 
|                |  |                     |           |                     |  |                  |      |        |  |                  |       |  |  |  |           |  |  |   |       | 



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

On October 30, 1998, the Company adopted an
employee stock purchase plan (ESPP), through which
qualified employees of the Company may participate in stock
ownership of the Company. The cost of each share purchased was
85% of the lower of the closing prices for common stock on:
(i) the first trading day in the enrollment period in which
the purchase is made, and (ii) June 30 and
December 31 purchase date. Pursuant to the ESPP, 0,
127,170, and 139,417, shares were issued at a weighted average
price of $0, $4.39, and $4.99 per share during fiscal 2004,
2003 and 2002, respectively. At June 30, 2004 and 2003 the
ESPP was depleted of shares of common stock for issuance
thereunder, and the Company has no current plans to authorize or
seek shareholder authorization for additional shares of common
stock for issuance under the ESPP.



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

The Company has a retirement savings plan
pursuant to Section 401(k) of the Internal Revenue Code
(the Code), whereby an eligible employee may contribute a
portion of their earnings, not to exceed annual amounts
allowable under the Code. In addition, the Company may also make
contributions at the discretion of the Board of Directors. For
the years ended June 30, 2004, 2003 and 2002, the Company
provided for matching contributions in Identix common stock
totaling $605,000, $538,000 and $360,000, respectively.



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

In connection with the Companys merger with
Visionics (see Note 4), all warrants to purchase shares of
Visionics common stock outstanding immediately prior to the
consummation of the merger were converted into warrants to
purchase 635,211 shares of the Companys common
stock at exercise prices ranging from $1.24 per share to
$12.55 per share. All the warrants issued are immediately
exercisable and expire at various dates through October 23,
2006. Warrants to purchase 410,860, 142,344 and
82,007 shares of common stock had per share exercise prices
ranging from $1.24 to $1.40, from $4.22 to $5.82 and from $9.83
to $12.55, respectively.

In connection with the private placement of the
Companys common stock in July 1999, the Company issued to
the investors warrants to purchase 905,798 shares of
common stock for $11.33 per share until January 1,
2001 and an additional 362,319 shares at $11.18 per
share until July 1, 2004. The Company also issued a fully
exercisable warrant on July 1, 1999 to
purchase 33,186 shares of common stock for $10.85 per

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share to the broker who arranged the private
placement. In April 2000, warrants to purchase 905,798 of
the Companys common shares at $11.33 per share were
exercised. The Company received net cash proceeds of
$10,263,000. At June 30, 2004 and 2003 these warrants were
still outstanding.


In connection with the private placement of the
Companys Series A Convertible Preferred Stock, the
Company issued to the investor a warrant to
purchase 187,647 shares of the Companys common
stock at $17.11 per share. The warrant is immediately
exercisable and expires on July 7, 2005. The Company
determined the fair value of the warrant using the Black-Scholes
option pricing model and, based on the net cash proceeds
received from the sales of Series A Preferred Stock the
relative fair value of the warrant totaled $1,259,000. During
fiscal year 2004 the preferred shares were converted to common
shares.

Identix acquired certain technology from Delean
on March 10, 2004 (see Note 2 to the Consolidated
Financial Statements. In exchange for the technology and
intellectual property rights of Delean, the Company issued
675,000 shares of Identix common stock and a warrant with
contingent future vesting rights in favor of Delean to purchase
up to 800,000 shares of Identix common stock at
$4.70 per share. The warrant vests upon the successful
issuance of certain patents with the US government related to
the technology acquired from Delean. The fair value of any
warrants which vest will be recorded as additional cost of the
intangible assets at the time of vesting.



|          |                           
|--------- | --------------------------
|Note 12  | Related Party Transactions

A member of the Board of Directors presently
serves as chairman of the board of, and owns 38% of Integrated
Manufacturing Solutions, Inc., (IMS), a manufacturer
of integrated circuit boards that provides manufacturing
services to the Company. IMS billed the Company approximately
$0, $82,000 and $1,076,000 in fiscal 2004, 2003 and 2002,
respectively. There were no amounts outstanding to IMS at
June 30, 2004 and 2003, respectively.

The Company purchases certain complete biometric
security products, research and development, engineering and
administrative services from International Technology Concepts,
Inc. (IT Concepts). Two former officers and
shareholders of the Company are directors, officers and
principal shareholders of IT Concepts. IT Concepts billed the
Company approximately $1,036,000, $1,173,000 and $5,263,000 in
fiscal year 2004, 2003, and 2002 respectively. Amounts
outstanding to IT Concepts at June 30, 2004 and 2003 were
approximately $84,000 and $61,000, respectively.



|          |             
|--------- | ------------
|Note 13  | Income Taxes

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

|                                              |  |                            |        |      |  |      |         |   |  |   |         |  
|--------------------------------------------- |  | -------------------------- | ------ | ---- |  | ---- | ------- | - |  | - | ------- | -
|                                              |  |                           
|                                              |  | Fiscal Year Ended June 30,
|                                              |  |                           
|                                              |  | 2004                       |        | 2003 |  | 2002
|                                              |  |                            |        |      |  |     
|                                              |  |                           
|                                              |  | (In thousands)            
|Federal tax at statutory rate                 |  | $                          | (6,489 | )    |  | $    | (65,418 | ) |  | $ | (18,833 | )
|State tax, net of federal benefit             |  |                            | (1,119 | )    |  |      | 632     |   |  |   | (1,924  | )
|Stock-based compensation                      |  |                            | 239    |      |  |      | 647     |   |  |   | 239     |  
|Gain on sale of subsidiary                    |  |                            | 667    |      |  |      |        |   |  |   |        |  
|Goodwill impairment                           |  |                            |       |      |  |      | 54,180  |   |  |   |        |  
|Change in valuation allowance                 |  |                            | 6,544  |      |  |      | 10,348  |   |  |   | 18,634  |  
|In-process research and development write-off |  |                            |       |      |  |      |        |   |  |   | 2,176   |  
|Other                                         |  |                            | 201    |      |  |      | (208    | ) |  |   | (246    | )
|                                              |  |                            |        |      |  |      |         |   |  |   |         |  
|                                              |  | $                          | 43     |      |  | $    | 181     |   |  | $ | 46      |  
|                                              |  |                            |        |      |  |      |         |   |  |   |         |  

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Deferred tax assets (liabilities) comprise
the following:

|                                             |                                |                |         |        |   |   |         |        |  
|-------------------------------------------- | ------------------------------ | -------------- | ------- | ------ | - | - | ------- | ------ | -
|                                             |                                |               
|                                             |                                | June 30,      
|                                             |                                |               
|                                             |                                | 2004           |         | 2003  
|                                             |                                |                |         |       
|                                             |                                |               
|                                             |                                | (In thousands)
|Net operating loss carryforwards             |                                | $              | 74,616  |        |   | $ | 67,447  |       
|Restructuring reserves and basis differences |                                |                | 6,438   |        |   |   | 7,041   |       
|Accounts receivable and related allowances   |                                |                | 617     |        |   |   | 1,082   |       
|Deferred revenue                             |                                |                | 322     |        |   |   | 2,644   |       
|Tax credit carryforwards                     |                                |                | 2,786   |        |   |   | 3,021   |       
|Other                                        |                                |                | 664     |        |   |   | 406     |       
|                                             |                                |                |         |        |   |   |         |       
|                                             | Gross deferred tax assets      |                |         | 85,443 |   |   |         | 81,641 |  
|Valuation allowance                          |                                |                | (77,702 | )      |   |   | (72,212 | )     
|                                             |                                |                |         |        |   |   |         |       
|                                             | Net deferred assets            |                |         | 7,741  |   |   |         | 9,429  |  
|                                             |                                |                |         |        |   |   |         |       
|Unbilled accounts receivable                 |                                |                | (2,195  | )      |   |   | (2,130  | )     
|Acquired intangibles                         |                                |                | (5,546  | )      |   |   | (7,299  | )     
|                                             |                                |                |         |        |   |   |         |       
|                                             | Gross deferred tax liabilities |                |         | (7,741 | ) |   |         | (9,429 | )
|                                             |                                |                |         |        |   |   |         |       
|                                             | Total net deferred tax asset   |                | $       |       |   |   | $       |       |  
|                                             |                                |                |         |        |   |   |         |       

The Company has a valuation allowance of
$77,702,000 as of June 30, 2004. Based upon the results of
the current and other recent year operations, the Companys
projected operating results, and all other available objective
information, the Companys management does not believe it
is more likely than not that sufficient future taxable income
will be generated to realize all of the net deferred tax assets.
Included in the valuation allowance as of June 30, 2004 and
2003 are tax benefits attributable to non-compensatory stock
options of $4,890,000 and $3,715,000, respectively, which may
be, when realized, credited to additional paid-in-capital.

The Company has federal net operating loss
carryforwards of approximately $203,000,000 and $184,900,000 as
of June 30, 2004 and June 30, 2003, respectively,
available to reduce future taxable income. As of June 30,
2004 and 2003, the Company has state net operating loss
carryforwards of approximately $60,000,000 and $37,300,000,
respectively. These carryforwards begin to expire from 2004
through 2024. For federal and state tax purposes, the
Companys net operating loss carryforwards may be subject
to certain limitations on annual utilization in the event of
changes in ownership, as defined by federal and state law.
During the year ended June 30, 2004 approximately
$2,500,000 of federal net operating loss carryforwards expired
unused.

As of June 30, 2004 and 2003, the Company
has federal research and experimentation credit carryforwards of
approximately $2,490,000 and $2,680,000, respectively, which
begin to expire from 2005 to 2025. The Company also has state
research and experimentation tax credit carryforwards of
approximately $300,000 as of June 30, 2004, which will be
carried forward indefinitely.



|          |                        
|--------- | -----------------------
|Note 14  | Reportable Segment Data

The Companys reportable segments are
strategic business groups that offer different products and
services and include inter-segment revenues, corporate
allocations and administrative expenses. Due to the disposition
of IPS and the acquisition of 100% ownership of Identix
Identification Services (formerly SIFC) during 2004, the
business segments of Identix have correspondingly been changed
from previously reported

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periods to reflect this activity. Revenues are
attributed to the reportable segment that is responsible for
generating the revenue and the direct and indirect costs
incurred are similarly assigned.


|                                          |                   |                            |         |         |   |      |          |          |   |   |         |         |  
|----------------------------------------- | ----------------- | -------------------------- | ------- | ------- | - | ---- | -------- | -------- | - | - | ------- | ------- | -
|                                          |                   |                           
|                                          |                   | Fiscal Year Ended June 30,
|                                          |                   |                           
|                                          |                   | 2004                       |         | 2003    |   | 2002
|                                          |                   |                            |         |         |   |     
|                                          |                   |                           
|                                          |                   | (In thousands)            
|Total revenues:                           |                   |                            |         |         |   |      |          |          |   |   |         |        
|                                          | Biometric systems |                            | $       | 50,054  |   |      | $        | 48,658   |   |   | $       | 28,399  |  
|                                          | Other             |                            |         | 5,145   |   |      |          | 4,026    |   |   |         | 5,066   |  
|                                          |                   |                            |         |         |   |      |          |          |   |   |         |        
|                                          |                   | $                          | 55,199  |         |   | $    | 52,684   |          |   | $ | 33,465  |        
|                                          |                   |                            |         |         |   |      |          |          |   |   |         |        
|Depreciation and amortization             |                   |                            |         |         |   |      |          |          |   |   |         |        
|                                          | Biometric systems |                            | $       | 7,258   |   |      | $        | 7,803    |   |   | $       | 2,853   |  
|                                          | (1)Other          |                            |         | 564     |   |      |          | 477      |   |   |         | 634     |  
|                                          |                   |                            |         |         |   |      |          |          |   |   |         |        
|                                          |                   | $                          | 7,822   |         |   | $    | 8,280    |          |   | $ | 3,487   |        
|                                          |                   |                            |         |         |   |      |          |          |   |   |         |        
|Interest and other income (expense), net: |                   |                            |         |         |   |      |          |          |   |   |         |        
|                                          | Biometric systems |                            | $       | 1,162   |   |      | $        | 1,848    |   |   | $       | 914     |  
|                                          | Other             |                            |         | 2       |   |      |          |         |   |   |         |        |  
|                                          |                   |                            |         |         |   |      |          |          |   |   |         |        
|                                          |                   | $                          | 1,164   |         |   | $    | 1,848    |          |   | $ | 914     |        
|                                          |                   |                            |         |         |   |      |          |          |   |   |         |        
|Capital expenditures:                     |                   |                            |         |         |   |      |          |          |   |   |         |        
|                                          | Biometric systems |                            | $       | 969     |   |      | $        | 1,313    |   |   | $       | 1,041   |  
|                                          | (2)Other          |                            |         | 40      |   |      |          | 80       |   |   |         | 2,251   |  
|                                          |                   |                            |         |         |   |      |          |          |   |   |         |        
|                                          |                   | $                          | 1,009   |         |   | $    | 1,393    |          |   | $ | 3,292   |        
|                                          |                   |                            |         |         |   |      |          |          |   |   |         |        
|Loss from operations:                     |                   |                            |         |         |   |      |          |          |   |   |         |        
|                                          | Biometric systems |                            | $       | (24,349 | ) |      | $        | (185,574 | ) |   | $       | (50,027 | )
|                                          | Other             |                            |         | (126    | ) |      |          | 265      |   |   |         | (550    | )
|                                          |                   |                            |         |         |   |      |          |          |   |   |         |        
|                                          |                   | $                          | (24,475 | )       |   | $    | (185,309 | )        |   | $ | (50,577 | )      
|                                          |                   |                            |         |         |   |      |          |          |   |   |         |        

|                     |                   |          |         |          |  |   |         |         | 
|-------------------- | ----------------- | -------- | ------- | -------- |  | - | ------- | ------- | 
|                     |                   | June 30, |         | June 30,
|                     |                   | 2004     |         | 2003    
|                     |                   |          |         |         
|Identifiable assets: |                   |          |         |          |  |   |         |        
|                     | Biometric systems |          | $       | 226,047  |  |   | $       | 235,719 | 
|                     | (3)Other          |          |         | 2,780    |  |   |         | 9,551   | 
|                     |                   |          |         |          |  |   |         |        
|                     |                   | $        | 228,827 |          |  | $ | 245,270 |        
|                     |                   |          |         |          |  |   |         |        



---



|    |                                                                                                                                                                               
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Includes identifiable expense classified as
    discontinued operations of $300,000, $525,000 and $541,000 for
    the years ended June 30, 2004, 2003, and 2002 respectively.
|   
|(2) | Includes identifiable expenditures from
    discontinued operations of $40,000, $13,000, and $2,183,000 for
    the years ended June 30, 2004, 2003, and 2002 respectively.   
|   
|(3) | Includes identifiable assets of discontinued
    operations at June 30, 2003 of $8,747,000                                                                                    

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|          |                        
|--------- | -----------------------
|Note 15  | Foreign Operations Data

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

|                |               |                            |        |        |  |      |        |        |  |   |        |        | 
|--------------- | ------------- | -------------------------- | ------ | ------ |  | ---- | ------ | ------ |  | - | ------ | ------ | 
|                |               |                           
|                |               | Fiscal Year Ended June 30,
|                |               |                           
|                |               | 2004                       |        | 2003   |  | 2002
|                |               |                            |        |        |  |     
|                |               |                           
|                |               | (In thousands)            
|Total revenues: |               |                            |        |        |  |      |        |        |  |   |        |       
|                | North America |                            | $      | 48,334 |  |      | $      | 47,759 |  |   | $      | 29,862 | 
|                | International |                            |        | 6,865  |  |      |        | 4,925  |  |   |        | 3,603  | 
|                |               |                            |        |        |  |      |        |        |  |   |        |       
|                |               | $                          | 55,199 |        |  | $    | 52,684 |        |  | $ | 33,465 |       
|                |               |                            |        |        |  |      |        |        |  |   |        |       

|                     |                  |                |         |          |  |   |         |         | 
|-------------------- | ---------------- | -------------- | ------- | -------- |  | - | ------- | ------- | 
|                     |                  | June 30,       |         | June 30,
|                     |                  | 2004           |         | 2003    
|                     |                  |                |         |         
|                     |                  |               
|                     |                  | (In thousands)
|Identifiable assets: |                  |                |         |          |  |   |         |        
|                     | (1)North America |                | $       | 227,768  |  |   | $       | 244,115 | 
|                     | International    |                |         | 1,059    |  |   |         | 1,155   | 
|                     |                  |                |         |          |  |   |         |        
|                     |                  | $              | 228,827 |          |  | $ | 245,270 |        
|                     |                  |                |         |          |  |   |         |        



---



|    |                                                                                           
|--- | ------------------------------------------------------------------------------------------
|(1) | Includes identifiable assets of discontinued
    operations at June 30, 2003 of $8,747,000



|          |                              
|--------- | -----------------------------
|Note 16  | Commitments and Contingencies



| |       
| | ------
| | Leases

The Company currently occupies its headquarters
under a lease that expires in March 2008, and is required to pay
taxes, insurance, and maintenance as well as monthly rental
payments. In addition, the Company leases space for its former
headquarters in Los Gatos, California under a lease that expires
in December of 2007; and a space in Dublin, California for its
former research and development activities that expire in March
2006. Further, the Company leases office space for its sales
force and customer support activities under operating leases,
which expire at various dates through 2008. The leases contain
escalation provisions requiring rental increases for increases
in operating expense and real estate taxes. The Company also
leases approximately 16,000 square feet in Fairfax,
Virginia for certain operations including a potion of the
Identix sales force with two leases, one expiring in March 2006
and the other one expiring in February 2009.

Future net minimum lease payments for operating
leases are as follows (in thousands):

|                                        |       |          |       |                      |  |       |       |       |  |   |       |        | 
|--------------------------------------- | ----- | -------- | ----- | -------------------- |  | ----- | ----- | ----- |  | - | ----- | ------ | 
|                                        |       | Occupied |       | Unoccupied or Sublet |  | Total
|                                        |       |          |       |                      |  |      
|Periods or fiscal years ending June 30: |       |          |       |                      |  |       |       |       |  |   |       |       
|2005                                    |       | $        | 2,079 |                      |  | $     | 2,451 |       |  | $ | 4,530 |       
|2006                                    |       |          | 1,887 |                      |  |       | 2,512 |       |  |   | 4,399 |       
|2007                                    |       |          | 1,576 |                      |  |       | 2,210 |       |  |   | 3,786 |       
|2008                                    |       |          | 1,279 |                      |  |       | 1,132 |       |  |   | 2,411 |       
|2009                                    |       |          | 341   |                      |  |       |      |       |  |   | 341   |       
|Thereafter                              |       |          |      |                      |  |       |      |       |  |   |      |       
|                                        |       |          |       |                      |  |       |       |       |  |   |       |       
|                                        | Total |          | $     | 7,162                |  |       | $     | 8,305 |  |   | $     | 15,467 | 
|                                        |       |          |       |                      |  |       |       |       |  |   |       |       

Included in the above net future minimum payments
is $8,305,000 related to the leased facilities in Los Gatos and
Dublin California that were vacated in connection the
Companys merger with Visionics. In fiscal year 2003 the
Company recorded a charge of $4,940,000 representing the future
lease costs, net of estimated

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sublease income, related primarily to excess
leased facilities at its Fairfax, Virginia, Los Gatos and Dublin
California facilities.


Rent expense is recorded as incurred over the
term of the individual lease. Total rental expense from
continuing operations under operating leases was $3,648,000,
$3,632,000 and $3,042,000 for the years ended June 30,
2004, 2003 and 2002, respectively.



| |              
| | -------------
| | Legal Matters

On February 5, 2003, Roger Benson
(Benson), an individual, filed a lawsuit seeking
unspecified damages against the Company, Digital Biometrics,
Inc. (merged with Visionics), and Visionics Corporation in
California Superior Court, alleging that in 1998 he was issued a
duplicate electronic fingerprint number that was also held by a
convicted felon. He alleges that the fingerprint number was
generated by a live scan system manufactured by DBI and operated
by a Sheriffs office in the State of Oregon. The lawsuit
also alleges injuries from a 43-day incarceration after the
plaintiffs identity was allegedly mistaken for that of the
felon because of the duplicate fingerprint number. The complaint
alleges liability under strict product liability, failure to
warn, breach of implied warranty, negligence, and unfair
business practices, among other theories of liability. On
December 2, 2003, the court granted the Companys
motion for judgment on the pleadings, dismissing all of the
plaintiffs causes of action and granting leave to amend.
The plaintiff filed amended complaints on January 14, 2004,
and January 30, 2004. Additional individual plaintiffs were
added to the amended complaint and the State of Oregon and the
State of California, among others, were added as defendants. On
May 11, 2004, the Court denied the Companys motion to
dismiss. While discovery in the case is continuing, based on
currently available information, the Company believes that the
issuance of any duplicate fingerprint numbers was not the result
of any design, manufacturing or product defect or malfunction,
or any other error, omission or fault on the part the Company or
affiliated defendants. The Company intends to vigorously defend
this lawsuit.

On July 22, 2004, the Company was served
with a class action complaint naming Miguel Espinoza as a
purported class action plaintiff. Mr. Espinoza is also one
of the individual plaintiffs added to the Benson litigation via
the January 2004 amended complaints in that litigation.
Mr. Espinoza claims that he was denied a liquor license for
his business in Oregon on August 1, 2002 because he was
misidentified as a convicted felon. He alleges the
misidentification was a result of duplicate fingerprint
identification number also held by a convicted felon, and that
the duplicate number was generated by a live scan system
manufactured by DBI and operated by a Sheriffs office in
the State of Oregon. The complaint alleges liability under
strict product liability, failure to warn, breach of implied
warranty, negligence, product misrepresentation and 42 U.S.C
§1983 among other theories of liability. While the case is
in its earliest stages, based on currently available
information, the Company believes that the issuance of any
duplicate fingerprint numbers was not the result of any design,
manufacturing or product defect or malfunction, or any other
error, omission or fault on the part the Company or affiliated
defendants. The Company intends to vigorously defend this
lawsuit.

While it is not possible at this early stage of
the proceedings to predict with precision and certainty the
outcome of the actions discussed above, based on the facts and
information currently available to the Company (which are
subject to change based on discovery of further facts and
information) the Company believes that liabilities and costs
arising out of such actions will not have a material adverse
impact on the Companys consolidated financial position,
results of operations or cash flows.



|          |                                                        
|--------- | -------------------------------------------------------
|Note 17  | Indemnification Arrangements and Product
    Warranties

As part of the Visionics acquisition in June
2002, the Company undertook, and assumed from Visionics,
obligations to indemnify the officers and directors of the
acquired company for certain events or occurrences while the
officer or director served in such capacity. The maximum
potential amount of future payments the Company could be
required to make under this indemnification obligation is
unlimited; however, the Company purchased a directors and
officers insurance policy to cover former directors and
officers of Visionics that provides coverage until June 25,
2007 and may enable Identix to recover a portion of any future
amounts paid. Assuming the applicability of the coverage and the
willingness of the insurer to assume

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coverage and subject to certain retention, loss
limits and other policy provisions and except as provided below,
the Company believes the estimated fair value of the
indemnification obligations to Visionics directors and
officers is not material. However, no assurances can be given
that the covering insurers will not attempt to dispute the
validity, applicability or amount of coverage without expensive
and time-consuming litigation against the insurers. As of
October 30, 2003, the Company also entered into
indemnification agreements with its then current directors and
executive officers. The maximum potential amount of future
payments the Company could be required to make under these
indemnification obligations is unlimited; however, the Company
purchased certain directors and officers insurance
policies, effective August 19, 2004 and 2003, respectively,
to cover its directors and officers, and such policies may
enable Identix to recover a portion of any covered claims under
the agreements. Assuming the applicability of the coverage and
the willingness of the insurer to assume coverage and subject to
certain retention, loss limits and other policy provisions, the
Company believes the estimated fair value of the indemnification
obligations to its directors and officers is not material.
However, no assurances can be given that the covering insurers
will not attempt to dispute the validity, applicability or
amount of coverage without expensive and time-consuming
litigation against the insurers.


The terms of the sale of IPS include an
obligation on the part of the Company to indemnify Alion against
certain potential liabilities, including for breaches of
representations and warranties made by the Company in the sales
agreement, for an amount not to exceed $2,125,000.

From time to time, the Company agrees to
indemnify its customers against liability if the Companys
products infringe a third partys intellectual property
rights. As of June 30, 2004, the Company was not subject to
any pending litigation alleging that the Companys products
infringe the intellectual property rights of any third parties.

The Company offers a warranty on various products
and services. The Company estimates the costs that may be
incurred under its warranties and records a liability in the
amount of such costs at the time the product is sold. Factors
that affect the Companys warranty liability include the
number of units sold, historical and anticipated rates of
warranty claims and cost per claim. The Company periodically
assesses the adequacy of its recorded warranty liabilities and
adjusts the amounts as necessary. The amount of the reserve
recorded is equal to the costs to repair or otherwise satisfy
the claim. The following table presents changes in the
Companys warranty liability for fiscal years 2004 and 2003
respectively:

|                             |  |                   |       |      |  |   |      |  
|---------------------------- |  | ----------------- | ----- | ---- |  | - | ---- | -
|                             |  |                  
|                             |  | Fiscal Year Ended
|                             |  | June 30,         
|                             |  |                  
|                             |  | 2004              |       | 2003
|                             |  |                   |       |     
|                             |  |                  
|                             |  | (In thousands)   
|Balance at beginning of year |  | $                 | 374   |      |  | $ | 306  |  
|Warranty Expense             |  |                   | 1,121 |      |  |   | 285  |  
|Closed Warranty Claims       |  |                   | (574  | )    |  |   | (217 | )
|                             |  |                   |       |      |  |   |      |  
|Balance at end of year       |  | $                 | 921   |      |  | $ | 374  |  
|                             |  |                   |       |      |  |   |      |  

The increase from fiscal 2003 to fiscal 2004 is
the result of the Company changing its standard warranty on its
livescan products from 90 days to one-year at the beginning
of fiscal year 2004.



|          |                                                      
|--------- | -----------------------------------------------------
|Note 18  | Quarterly Consolidated Financial Data
    (Unaudited)

The following tables present certain unaudited
consolidated quarterly financial information for each of the
eight quarters ended June 30, 2004. In the opinion of the
Companys management, this quarterly information has been
prepared on the same basis as the consolidated financial
statements and includes all adjustments (consisting only of
normal recurring adjustments) necessary to present fairly the
unaudited quarterly results.

76



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##### Table of Contents



The Companys statement of operations data
for all periods presented reflects the classification of Identix
Public Sector as discontinued operations (see Note 3).


In thousands, except share and per share amounts:

|                                                                                        |  |                |        |              |  |           |        |          |  |       |        |   |  |   |        |   |  |   |         |  
|--------------------------------------------------------------------------------------- |  | -------------- | ------ | ------------ |  | --------- | ------ | -------- |  | ----- | ------ | - |  | - | ------ | - |  | - | ------- | -
|                                                                                        |  |               
|                                                                                        |  | Quarters Ended
|                                                                                        |  |               
|                                                                                        |  | September 30,  |        | December 31, |  | March 31, |        | June 30, |  |      
|                                                                                        |  | 2003           |        | 2003         |  | 2004      |        | 2004     |  | Total
|                                                                                        |  |                |        |              |  |           |        |          |  |      
|Revenues                                                                                |  | $              | 12,467 |              |  | $         | 12,056 |          |  | $     | 14,491 |   |  | $ | 16,185 |   |  | $ | 55,199  |  
|Gross profit                                                                            |  |                | 4,796  |              |  |           | 4,329  |          |  |       | 2,977  |   |  |   | 5,437  |   |  |   | 17,539  |  
|Loss from continuing operations                                                         |  |                | (4,934 | )            |  |           | (5,522 | )        |  |       | (8,417 | ) |  |   | (4,794 | ) |  |   | (23,667 | )
|Discontinued operations                                                                 |  |                | 278    |              |  |           | (37    | )        |  |       | 4,884  |   |  |   |       |   |  |   | 5,125   |  
|Net loss                                                                                |  | $              | (4,656 | )            |  | $         | (5,559 | )        |  | $     | (3,533 | ) |  | $ | (4,794 | ) |  | $ | (18,542 | )
|Basic and diluted loss per share, continuing
    operations                             |  | $              | (0.06  | )            |  | $         | (0.06  | )        |  | $     | (0.10  | ) |  | $ | (0.05  | ) |  | $ | (0.27   | )
|Basic and diluted income (loss) per share,
    discontinued operations                  |  | $              | 0.00   |              |  | $         | (0.00  | )        |  | $     | 0.06   |   |  | $ |       |   |  | $ | 0.06    |  
|Basic and diluted net loss per share                                                    |  | $              | (0.05  | )            |  | $         | (0.06  | )        |  | $     | (0.04  | ) |  | $ | (0.05  | ) |  | $ | (0.21   | )
|Weighted average common shares used in basic and
    diluted loss per share computation |  |                | 86,015 |              |  |           | 86,143 |          |  |       | 86,645 |   |  |   | 88,242 |   |  |   | 86,758  |  

|                                                                                        |  |                |         |              |  |           |        |          |  |          |        |   |  |   |          |   |  |   |          |  
|--------------------------------------------------------------------------------------- |  | -------------- | ------- | ------------ |  | --------- | ------ | -------- |  | -------- | ------ | - |  | - | -------- | - |  | - | -------- | -
|                                                                                        |  |               
|                                                                                        |  | Quarters Ended
|                                                                                        |  |               
|                                                                                        |  | September 30,  |         | December 31, |  | March 31, |        | June 30, |  |         
|                                                                                        |  | 2002           |         | 2002         |  | 2003      |        | 2003(a)  |  | Total(a)
|                                                                                        |  |                |         |              |  |           |        |          |  |         
|Revenues                                                                                |  | $              | 14,798  |              |  | $         | 11,968 |          |  | $        | 12,239 |   |  | $ | 13,679   |   |  | $ | 52,684   |  
|Gross profit                                                                            |  |                | 4,014   |              |  |           | 3,834  |          |  |          | 4,885  |   |  |   | 4,894    |   |  |   | 17,627   |  
|Loss from continuing operations                                                         |  |                | (10,283 | )            |  |           | (7,401 | )        |  |          | (6,767 | ) |  |   | (159,489 | ) |  |   | (183,940 | )
|Discontinued operations                                                                 |  |                | (3,916  | )            |  |           | (151   | )        |  |          | 257    |   |  |   | 376      |   |  |   | (3,434   | )
|Net loss                                                                                |  | $              | (14,199 | )            |  | $         | (7,552 | )        |  | $        | (6,510 | ) |  | $ | (159,113 | ) |  | $ | (187,374 | )
|Basic and diluted loss per share, continuing
    operations                             |  | $              | (0.13   | )            |  | $         | (0.09  | )        |  | $        | (0.08  | ) |  | $ | (1.86    | ) |  | $ | (2.16    | )
|Basic and diluted income (loss) per share,
    discontinued operations                  |  | $              | (0.04   | )            |  | $         | (0.00  | )        |  | $        | 0.00   |   |  | $ | 0.00     |   |  | $ | (0.04    | )
|Basic and diluted net loss per share                                                    |  | $              | (0.17   | )            |  | $         | (0.09  | )        |  | $        | (0.08  | ) |  | $ | (1.86    | ) |  | $ | (2.20    | )
|Weighted average common shares used in basic and
    diluted loss per share computation |  |                | 84,801  |              |  |           | 85,124 |          |  |          | 85,393 |   |  |   | 85,663   |   |  |   | 85,242   |  



---



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






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

None.






|         |                        
|-------- | -----------------------
|Item 9A. | Controls and Procedures

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

77



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




PART III






|         |                                                       
|-------- | ------------------------------------------------------
|Item 10. | Directors and Executive Officers of the
    Registrant

The information required by this Item with
respect to executive officers is set forth in Part I of
this Annual Report on Form 10-K and the information with
respect to the directors and the audit committee financial
expert are incorporated by reference to the information set
forth under the caption Election of Directors and
Board Meetings and Committees in the proxy statement
to be used in connection with the 2004 Annual Meeting of the
Stockholders (the Proxy Statement).

The Company has adopted a code of ethics that
applies all employees including the Companys principal
executive officer, and principal financial officer. This code of
ethics is available on the Companys website at
http://www.identix.com.






|         |                       
|-------- | ----------------------
|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 and Related Stockholder
    Matters

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

The following table gives information about the
Companys common stock that maybe issued upon the exercise
of options under all of the Companys existing equity
compensation plans as of June 30, 2004, including the 1992
plan, 1995 plan, new employee plan (2000), non-employee
directors plan, IDT holding plan, 2002 plan, VSNX-1990,
VSNX 1998, NJ SIP-plan. The Companys shareholders have
approved all of the compensation plans listed below other than
the new employee plan (2000).

|                                                           |                              |                         |  |                      |  |                                |   |      |  |  |  |           | 
|---------------------------------------------------------- | ---------------------------- | ----------------------- |  | -------------------- |  | ------------------------------ | - | ---- |  |  |  | --------- | 
|                                                           |                              |                         |  |                      |  | Number of Securities Remaining
|                                                           |                              | Number of Securities to |  | Weighted-Average     |  | Available for Future Issuance 
|                                                           |                              | be Issued upon Exercise |  | Exercise Price of    |  | under the Equity Compensation 
|                                                           |                              | of Outstanding Options, |  | Outstanding Options, |  | Plans (Excluding Securities   
|                                                           |                              | Warrants and Rights     |  | Warrants and Rights  |  | Reflected in the First Column)
|                                                           |                              |                         |  |                      |  |                               
|Equity compensation plans approved by shareholders         |                              |                         |  |                      |  |                                |   |      |  |  |  |          
|                                                           | 1992 Plan                    |                         |  | 15,400               |  |                                | $ | 4.95 |  |  |  |          | 
|                                                           | 1995 Plan                    |                         |  | 2,006,574            |  |                                | $ | 6.32 |  |  |  | 646,770   | 
|                                                           | Non-Employee Directors Plan |                         |  | 627,500              |  |                                | $ | 6.59 |  |  |  | 482,500   | 
|                                                           | IDT Holdings Plan            |                         |  | 3,000                |  |                                | $ | 0.26 |  |  |  |          | 
|                                                           | 2002 Plan                    |                         |  | 375,500              |  |                                | $ | 5.96 |  |  |  | 5,397,999 | 
|                                                           | VSNX-1990                    |                         |  | 86,578               |  |                                | $ | 1.93 |  |  |  |          | 
|                                                           | VSNX-1998                    |                         |  | 1,318,195            |  |                                | $ | 6.90 |  |  |  | 391,825   | 
|                                                           | NJ SIP-Plan                  |                         |  | 395,647              |  |                                | $ | 0.80 |  |  |  | 52,097    | 
|Equity compensation plans not approved by
    shareholders |                              |                         |  |                      |  |                                |   |      |  |  |  |          
|                                                           | New Employee Plan (2000)     |                         |  | 1,525,916            |  |                                | $ | 7.04 |  |  |  | 878,805   | 

78



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##### Table of Contents








|         |                                                   
|-------- | --------------------------------------------------
|Item 13. | Certain Relationships and Related
    Transactions

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






|         |                                           
|-------- | ------------------------------------------
|Item 14. | Principal Accountant Fees and
    Services

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




PART IV





|         |                                                                     
|-------- | --------------------------------------------------------------------
|Item 15. | Exhibits, Financial Statement Schedules,
    and Reports on Form 8-K

(a) 1     Financial
Statements.

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

(a) 2     Financial
Statement Schedules

Schedule II  Valuation and
Qualifying Accounts and Reserves

(a) 3     Exhibits.

|        |   |             |  |                                                                                                                                                                                                                                                                   
|------- | - | ----------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |   |            
|Number  |   | Description
|        |   |            
|        | 2 | .0          |  | Agreement and Plan of Merger dated as of
    February 22, 2002 by and among Identix, Visionics
    Corporation and Viper Acquisition Corporation (incorporated by
    reference to the February 22, 2002 Form 8-K)                                                
|        | 3 | .1          |  | Certificate of Incorporation (incorporated by
    reference to the December 16, 1998 Form 8-K)                                                                                                                                                                    
|        | 3 | .2          |  | Amended and Restated Bylaws (incorporated by
    reference to the May 15, 2002 Form 10-Q)                                                                                                                                                                         
|        | 4 | .1          |  | Registration Rights Agreement dated June 30,
    1999 (incorporated by reference to the registration statement on
    Form S-3, no. 333-82239, filed July 2, 1999)                                                                                                
|        | 4 | .2          |  | Form of Series I Warrant (incorporated by
    reference to the registration statement on Form S-3,
    no 333-82239, filed July 2, 1999)                                                                                                                          
|        | 4 | .3          |  | Warrant dated June 29, 2001 between
    Visionics Corporation and Morgan Keegan, Inc. (incorporated by
    reference to the post-effective amendment no. 1 to the
    registration statement on Form S-4, no. 333-84428,
    filed September 5, 2002)             
|        | 4 | .4          |  | Warrant dated October 11, 2001 between
    Visionics Corporation and Morgan Keegan & Company, Inc.
    (incorporated by reference to the post effective amendment
    no. 1 to the registration statement on Form S-4,
    no. 333-84428, filed September 5, 2002)
|        | 4 | .5          |  | Warrant dated October 24, 2001 between
    Visionics Corporation and Thomas Pierce (incorporated by
    reference to the post-effective amendment no. 1 to the
    registration statement on Form S-4, no. 333-84428,
    filed September 5, 2002)                
|        | 4 | .6          |  | Form of Warrant dated January 8, 1999
    (incorporated by reference to the post-effective amendment
    no. 1 to the registration statement on Form S-4,
    no. 333-84428, filed September 5, 2002)                                                             
|        | 4 | .7          |  | Form of Warrant dated June 28, 2001
    (incorporated by reference to the post effective amendment
    no. 1 to the registration statement on Form S-4,
    no. 333-84428, filed September 5, 2002)                                                               
|        | 4 | .8          |  | Securities Purchase Agreement between Identix and
    Motorola, Inc., dated July 2000 (incorporated by reference to
    the September 26, 2000 Form 10-K)                                                                                                         
|        | 4 | .9          |  | Certificate of Designation of Series A
    Preferred Stock of Identix (incorporated by reference to the
    September 26, 2000 Form 10-K)                                                                                                                         
|        | 4 | .10         |  | Information and Registration Rights Agreement
    between Identix and Motorola, Inc., dated July 7, 2000
    (incorporated by reference to the September 26, 2000
    Form 10-K)                                                                                  
|        | 4 | .11         |  | Warrant to Purchase 187,647 Shares of
    Identix Common Stock, dated July 6, 2000 (incorporated by
    reference to the September 26, 2000 Form 10-K)                                                                                                            

79



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|        |    |             |  |                                                                                                                                                                                                                                                        
|------- | -- | ----------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |            
|Number  |    | Description
|        |    |            
|        | 4  | .12         |  | Common Stock Purchase Agreement between Identix
    and VeriSign Capital Management, Inc., dated December 22,
    2000 (incorporated by reference to the February 14, 2001
    Form 10-Q)                                                              
|        | 4  | .13         |  | Share Purchase Agreement between Identix and
    State of Wisconsin Investment Board, dated, June 11, 2001
    (incorporated by reference to the registration statement on
    Form S-3, no. 333-63306, filed June 19, 2001)                           
|        | 4  | .14         |  | Form of Common Stock Purchase Agreement dated
    November 30, 2001 (incorporated by reference to the
    September 28, 2001 Form 10-K)                                                                                                                
|        | 10 | .1          |  | Identix 1983 Incentive Stock Option Plan and form
    of Incentive Stock Option Agreement and Non-Statutory Stock
    Option Agreement (incorporated by reference to Identix
    registration statement no. 29-95551)                                 
|        | 10 | .2          |  | ANADAC 1984 Incentive Stock Option Plan and forms
    of Incentive Stock Option Agreement and Non-Statutory Stock
    Option Agreement (incorporated by reference to Identix
    registration statement 33-55074)                                     
|        | 10 | .3          |  | Identix 1992 Employee Stock Option Plan, and
    forms of Incentive Stock Option Agreement and Non-Qualified
    Stock Option Agreement (incorporated by reference to the
    registration statement on Form S-8, no. 333-77803, filed
    May 5, 1999)
|        | 10 | .4          |  | Amendment to Identix 1992 Employee Stock Option
    Plan, dated June 18, 2001 (incorporated by reference to the
    September 28, 2001 Form 10-K)                                                                                                      
|        | 10 | .5          |  | Second Amendment to Identix 1992 Employee Stock
    Option Plan, dated January 29, 2002 (incorporated by
    reference to the May 15, 2002 Form 10-Q)                                                                                                  
|        | 10 | .6          |  | Identix 1995 Equity Incentive Plan, as amended
    June 18, 2001 and January 29, 2002 (incorporated by
    reference to the May 15, 2002 Form 10-Q)                                                                                                    
|        | 10 | .7          |  | Identix 1995 Non-employee Directors Stock Option
    Plan, as amended June 18, 2001 and January 29, 2002
    (incorporated by reference to the May 15, 2002
    Form 10-Q)                                                                             
|        | 10 | .8          |  | Identix New Employee Stock Incentive Plan, as
    amended June 18, 2001 and January 29, 2002
    (incorporated by reference to the May 15, 2002
    Form 10-Q)                                                                                         
|        | 10 | .9          |  | Identix 2002 Equity Incentive Plan (incorporated
    by reference to the registration statement on Form S-8, no.
    333-91858, filed July 7, 2002)                                                                                                    
|        | 10 | .10         |  | Visionics Corporation 1990 Stock Option Plan
    (incorporated by reference to the registration statement on
    Form S-8, no. 333-91858, filed July 7, 2002)                                                                                          
|        | 10 | .11         |  | Visionics Corporation 1998 Stock Option Plan
    (incorporated by reference to the registration statement on
    Form S-8, no. 333-91858, filed July 7, 2002)                                                                                          
|        | 10 | .12         |  | Visionics Corporation Stock Incentive Plan
    (incorporated by reference to the registration statement on
    Form S-8, no. 333-91858, filed July 7, 2002)                                                                                            
|        | 10 | .13         |  | Employee Stock Purchase Plan (incorporated by
    reference to the registration statement on Form S-8, no.
    333-69141, filed December 17, 1998)                                                                                                     
|        | 10 | .14         |  | Foreign Subsidiary Employee Stock Purchase Plan
    (incorporated by reference to the registration statement on
    Form S-8, no. 333-69141, filed December 17, 1998)                                                                                  
|        | 10 | .15         |  | Subcontract between ANADAC and Advanced
    Engineering and Research Associates, Inc., dated August 25,
    2000 (incorporated by reference to the September 28, 2001
    Form 10-K)                                                                   
|        | 10 | .16         |  | Deed of Lease between Brit Limited Partnership
    and Anadac, Inc. dated September 28, 2000 (incorporated by
    reference to the May 15, 2002 Form 10-Q)                                                                                             
|        | 10 | .17         |  | Standard Industrial Commercial Multi-Tenant Lease
    between Identix and Vasona Business Park, dated December 8,
    2000 (incorporated by reference to the February 14, 2001
    Form 10-Q)                                                          
|        | 10 | .18         |  | Office Building Lease between Identix and Pacific
    Gulf Properties Inc., dated July 19, 2000, as amended
    December 12, 2000 (incorporated by reference to the
    September 28, 2001 Form 10-K)                                                  
|        | 10 | .19         |  | Office Lease between ANADAC and Federal Center
    Limited Partnership dated April 2, 1999, as amended
    December 1, 1999 and April 11, 2001 (incorporated by
    reference to the September 28, 2001 Form 10-K)                                     

80



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|        |    |             |  |                                                                                                                                                                                                                                                 
|------- | -- | ----------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |            
|Number  |    | Description
|        |    |            
|        | 10 | .20         |  | Lease for the Minnetonka, Minnesota premises
    dated November 7, 1989 (incorporated by reference to
    Visionics Corporations registration statement on
    Form S-18, no. 33-36939C, dated December 6, 1990)                               
|        | 10 | .21         |  | Amendment to Lease for the Minnetonka, Minnesota
    premises dated March 11, 1996 (incorporated by reference to
    Visionics Corporations December 23, 1997
    Form 10-K)                                                                   
|        | 10 | .22         |  | Compensation Continuation Agreement between
    Identix and James P. Scullion, dated January 5, 2000
    (incorporated by reference to the March 31, 2000
    Form 10-Q)                                                                        
|        | 10 | .23         |  | Amendment No. 1 to Compensation Continuation
    Agreement between Identix and James P. Scullion, dated
    August 22, 2001 (incorporated by reference to the
    September 28, 2001 Form 10-K)                                                 
|        | 10 | .24         |  | Amendment No. 2 to Compensation Continuation
    Agreement between Identix and James P. Scullion, dated
    January 29, 2002 (incorporated by reference to the
    May 15, 2002 Form 10-Q)                                                      
|        | 10 | .25         |  | Form of Separation Agreement and Release between
    Identix and James P. Scullion (incorporated by reference to
    registration statement of Form S-4, no. 333-84428, filed
    May 15, 2002)                                                 
|        | 10 | .26         |  | Employment Agreement between Identix and Oscar
    Pieper, dated April 26, 1999 (incorporated by reference to
    the November 26, 2000 Form 10-Q)                                                                                              
|        | 10 | .27         |  | Employment Agreement between Identix and Grant
    Evans, dated April 26, 1999 (incorporated by reference to
    the November 26, 2000 Form 10-Q)                                                                                               
|        | 10 | .28         |  | Amendment No. 1 to Employment Agreement
    between Identix and Grant Evans, dated August 22, 2001
    (incorporated by reference to the September 28, 2001
    Form 10-K)                                                                      
|        | 10 | .29         |  | Amendment No. 2 to Employment Agreement
    between Identix and Grant Evans, dated October 25, 2001
    (incorporated by reference to the February 14, 2002
    Form 10-Q)                                                                      
|        | 10 | .30         |  | Compensation Agreement between ANADAC and Paul J.
    Bulger, dated May 11, 1999 (incorporated by reference to
    the September 28, 2001 Form 10-K)                                                                                            
|        | 10 | .31         |  | Employment Agreement between Identix and Daniel
    H. Dellegrotti, dated June 21, 2001 (incorporated by
    reference to the September 28, 2001 Form 10-K)                                                                                     
|        | 10 | .32         |  | Employment Agreement between Identix and Robert
    McCashin, dated October 19, 2000 and Option Agreement
    between Identix and Robert McCashin, dated October 19, 2000
    (incorporated by reference to the February 14, 2001
    Form 10-Q)
|        | 10 | .33         |  | Amendment No. 1 to Employment Agreement
    between Identix and Robert McCashin, dated August 22, 2001
    (incorporated by reference to the November 14, 2001
    Form 10-Q)                                                                   
|        | 10 | .34         |  | Form of Amendment No. 2 to Employment
    Agreement between Identix and Robert McCashin (incorporated by
    reference to the registration statement on Form S-4, no.
    333-84428, filed April 25, 2002)                                      
|        | 10 | .35         |  | Employment Agreement between Identix and Erik E.
    Prusch, dated April 2, 2001 (incorporated by reference to
    the March 5, 2001 Form 10-Q)                                                                                                 
|        | 10 | .36         |  | Amendment No. 1 to Employment Agreement
    between Identix and Erik E. Prusch, dated August 22, 2001
    (incorporated by reference to the November 14, 2001
    Form 10-Q)                                                                    
|        | 10 | .37         |  | Secured Promissory Note dated October 5,
    2001 by Erik E. Prusch in favor of Identix (incorporated by
    reference to the February 14, 2002 Form 10-Q)                                                                                      
|        | 10 | .38         |  | Second Deed of Trust and Assignment of Rents
    dated October 5, 2001 between Erik E. Prusch, as Trustor,
    and Identix, as Beneficiary (incorporated by reference to the
    February 14, 2002 Form 10-Q)                                   
|        | 10 | .39         |  | Form of Indemnification Agreement between Identix
    and certain of its officers (incorporated by reference to the
    November 26, 2000 Form 10-Q)                                                                                            
|        | 10 | .40         |  | Employment Agreement between Identix and Mark S.
    Molina, dated August 22, 2001 (incorporated by reference to
    the November 14, 2001 Form 10-Q)                                                                                           
|        | 10 | .41         |  | Employment Agreement between Identix and Linda J.
    Howard, dated August 22, 2001 (incorporated by reference to
    the November 14, 2001 Form 10-Q)                                                                                          
|        | 10 | .42         |  | Employment Agreement between Identix and Sunday
    Lewis, dated August 22, 2001 (incorporated by reference to
    the November 14, 2001 Form 10-Q)                                                                                             

81



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|        |    |             |  |                                                                                                                                                                                                             
|------- | -- | ----------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |            
|Number  |    | Description
|        |    |            
|        | 10 | .43         |  | Employment Agreement between Identix and Valerie
    J. Lyons, dated August 22, 2001 (incorporated by reference
    to the November 14, 2001 Form 10-Q)                                                     
|        | 10 | .44         |  | Form of Separation Agreement and Release between
    Identix and Valerie J. Lyons                                                                                                                           
|        | 10 | .45         |  | Form of Employment Agreement between Identix and
    Joseph J. Atick (incorporated by reference to the registration
    statement on Form S-4, no. 333-84428, filed April 25,
    2002)                     
|        | 10 | .46         |  | Loan and Security Agreement between Identix and
    Silicon Valley Bank, dated September 26, 2001 (incorporated
    by reference to the November 14, 2001 Form 10-Q)                                        
|        | 10 | .47         |  | Streamline Facility Agreement between Identix and
    Silicon Valley Bank, dated September 26, 2001 (incorporated
    by reference to the November 14, 2001 Form 10-Q)                                      
|        | 10 | .48         |  | Collateral Assignment, Patent Mortgage and
    Security Agreement between Identix and Silicon Valley Bank,
    dated September 26, 2001 (incorporated by reference to the
    November 14, 2001 Form 10-Q)  
|        | 10 | .49         |  | Amendment to Loan Documents dated March 28,
    2002 (incorporated by reference to the May 15, 2002
    Form 10-Q)                                                                                          
|        | 10 | .50         |  | Loan Agreement dated November 19, 2000
    between Visionics Corporation and Associated Bank Minnesota
    (incorporated by reference to Visionics Corporations
    December 8, 2000 Form 10-K)            
|        | 10 | .51         |  | Change in Terms Agreement dated December 19,
    2001 between Visionics Corporation and Associated Bank Minnesota
    (incorporated by reference to Visionics Corporations
    February 14, 2002 Form 10-Q)
|        | 10 | .52         |  | Business Loan Agreement dated December 19,
    2001 between Visionics Corporation and Associated Bank Minnesota
    (incorporated by reference to Visionics Corporations
    February 14, 2002 Form 10-Q)  
|        | 10 | .53         |  | Line of Credit Agreement dated May 30, 2003
    between Identix Corporation and Associated Bank Minnesota
    (incorporated by reference to the September 12, 2003
    Form 10-K)                           
|        | 10 | .54         |  | Employment Agreement between Identix and James H.
    Moar, dated as of April 14, 2003 (incorporated by reference
    to the September 12, 2003 Form 10-K)                                                  
|        | 10 | .55         |  | Employment agreement between Identix and Linda
    Howard, dated August 22, 2003(incorporated by reference to
    the November 14, 2004 Form 10-Q)                                                          
|        | 10 | .56         |  | Indemnification Agreement (incorporated by
    reference to the February 12, 2004 Form 10-Q)                                                                                                                
|        | 10 | .57         |  | IPS Stock Purchase Agreement (incorporated by
    reference to the May 17, 2004 Form 10-Q)                                                                                                                  
|        | 10 | .58         |  | LLC Membership Interest Transfer Agreement
    (incorporated by reference to the May 17, 2004
    Form 10Q)                                                                                                 
|        | 10 | .59         |  | Asset Purchase Agreement (incorporated by
    reference to Exhibit 4.1 to the registration statement on
    Form S-3 (333-113935) filed March 25, 2004)                                                     
|        | 10 | .60         |  | Employment Agreement between Identix and Elissa
    J. Lindsoe, dated as of June 21, 2004                                                                                                                   
|        | 10 | .61         |  | Amendment No. 2 to Employment Agreement
    between Identix and Mark S. Molina, dated August 22,
    2001                                                                                                   
|        | 21 | .1          |  | Subsidiaries of Identix                                                                                                                                                                                     
|        | 23 | .1          |  | Consent of Independent Registered Public
    Accounting Firm                                                                                                                                                
|        | 31 | .1          |  | 302 Certification by the Chief Executive Officer                                                                                                                                                            
|        | 31 | .2          |  | 302 Certification by the Chief Financial Officer                                                                                                                                                            
|        | 31 | .3          |  | 302 Certification by the Chief Operating Officer
    (former interim Chief Financial Officer)                                                                                                               
|        | 32 |             |  | 906 Certifications                                                                                                                                                                                          

(b) Reports on Form 8-K:

During the three months ended June 30, 2004,
the following report on Form 8-K was furnished:



| |     |                                                                                                                                                                        
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (a) | A Form 8-K was filed on April 29, 2004,
    which contained the Companys press release announcing its
    the financial results for the quarter ending March 31, 2004.

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SIGNATURES

Pursuant to the requirements of Section 13
or 15(d) of the Securities Exchange Act of 1934, the Registrant,
Identix Incorporated, a corporation organized and existing under
the laws of the State of Delaware, has duly caused this report
to be signed on its behalf by the undersigned thereunto duly
authorized, in the City of Minnetonka, State of Minnesota, on
the 9th day of September 2004.



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



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

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

POWER OF ATTORNEY

KNOW ALL PERSONS BY THESE PRESENTS, that each
person whose signature appears below constitutes and appoints
Joseph J. Atick and Mark S. Molina, jointly and severally, his
attorneys-in-fact, each with the power of substitution, for him
in any and all capacities, to sign any amendments to the Annual
Report for the fiscal year ended June 30, 2004 on
Form 10-K and to file the same, with exhibits thereto and
other documents in connection therewith, with the Securities and
Exchange Commission, hereby ratifying and confirming all that
each of said attorneys-in-fact, or his substitute or
substitutes, may do or cause to be done by virtue hereof.

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

|                                       |  |                                                                      |  |                  
|-------------------------------------- |  | -------------------------------------------------------------------- |  | -----------------
|Signature                              |  | Title                                                                |  | Date             
|                                       |  |                                                                      |  |                  
|                                      
|/s/ JOSEPH J. ATICKJoseph J. Atick     |  | President and Chief Executive Officer (Chief
    Executive Officer)  |  | September 9, 2004
|                                      
|/s/ ELISSA J. LINDSOEElissa J. Lindsoe |  | Chief Financial Officer (Chief Financial and
    Accounting Officer) |  | September 9, 2004
|                                      
|/s/ JAMES H. MOARJames H. Moar         |  | Chief Operating Officer (former interim Chief
    Financial Officer) |  | September 9, 2004
|                                      
|/s/ MILTON E. COOPERMilton E. Cooper   |  | Chairman                                                             |  | September 9, 2004
|                                      
|/s/ MALCOM J. GUDISMalcolm J. Gudis    |  | Director                                                             |  | September 9, 2004
|                                      
|/s/ JOHN E. HAUGOJohn E. Haugo         |  | Director                                                             |  | September 9, 2004
|                                      
|/s/ JOHN E. LAWLERJohn E. Lawler       |  | Director                                                             |  | September 9, 2004

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|                                       |  |          |  |                  
|-------------------------------------- |  | -------- |  | -----------------
|Signature                              |  | Title    |  | Date             
|                                       |  |          |  |                  
|/s/ GEORGE LATIMERGeorge Latimer       |  | Director |  | September 9, 2004
|                                      
|/s/ PATRICK H. MORTONPatrick H. Morton |  | Director |  | September 9, 2004

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SCHEDULE II

VALUATION AND QUALIFYING ACCOUNTS AND
RESERVES

|                                 |                          |                |   |            |  |            |   |               |     |  |   |       |     |  |   |       | 
|-------------------------------- | ------------------------ | -------------- | - | ---------- |  | ---------- | - | ------------- | --- |  | - | ----- | --- |  | - | ----- | 
|                                 |                          | Balance at     |   | Charges to |  |            |   |              
|                                 |                          | Beginning      |   | Costs and  |  |            |   | Balance at   
|Description                      |                          | of Period      |   | Expenses   |  | Deductions |   | End of Period
|                                 |                          |                |   |            |  |            |   |              
|                                 |                          |               
|                                 |                          | (In thousands)
|Allowance for Doubtful Accounts: |                          |                |   |            |  |            |   |               |     |  |   |       |     |  |   |      
|                                 | Year ended June 30, 2002 |                | $ | 1,402      |  |            | $ | 1,867         | (a) |  | $ | 575   |     |  | $ | 2,694 | 
|                                 | Year ended June 30, 2003 |                | $ | 2,694      |  |            | $ | 801           |     |  | $ | 469   |     |  | $ | 3,026 | 
|                                 | Year ended June 30, 2004 |                | $ | 3,026      |  |            | $ | (539          | )   |  | $ | 1,363 | (b) |  | $ | 1,124 | 
|Inventory Reserve:               |                          |                |   |            |  |            |   |               |     |  |   |       |     |  |   |      
|                                 | Year ended June 30, 2002 |                | $ | 2,448      |  |            | $ | 1,905         | (a) |  | $ | 2,398 |     |  | $ | 1,955 | 
|                                 | Year ended June 30, 2003 |                | $ | 1,955      |  |            | $ | 2,344         |     |  | $ | 2,924 |     |  | $ | 1,375 | 
|                                 | Year ended June 30, 2004 |                | $ | 1,375      |  |            | $ | 3,563         |     |  | $ | 768   |     |  | $ | 4,170 | 



---



|    |                                                                                                                                                                                                                                                                                      
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) | Included in charges to costs and expenses for the
    year ended June 30, 2002, are additions for allowance for
    doubtful accounts and provision for inventory reserves of
    $428,000 and $543,000, respectively, resulting from
    Identix merger with Visionics Corporation.
|   
|(b) | Included in deductions for the year ended
    June 30, 2004, is $457,000 related to the disposal of IPS                                                                                                                                                                              

85