<PAGE>

                      SECURITIES AND EXCHANGE COMMISSION
                            WASHINGTON, D.C.  20549

                                  FORM 10-K/A
                         Amendment No. 3 to Form 10-K

   FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTION 13 OR 15(d) OF THE
                        SECURITIES EXCHANGE ACT OF 1934

              [X]   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
                    OF THE SECURITIES EXCHANGE ACT OF 1934

                For the fiscal year ended December 31, 2000 or

            [_]   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
                    OF THE SECURITIES EXCHANGE ACT OF 1934

           For the transition period from  __________ to __________

                         Commission file number 0-2027

                              SAFLINK CORPORATION
            (Exact name of registrant as specified in its charter)

                   DELAWARE                           95-4346070
                   --------                           ----------
      (State or other jurisdiction of               (I.R.S. Employer
      incorporation or organization)               Identification No.)

                      18650 N.E. 67/th/ Court, Suite 210
            Redmond, Washington                          98052
    (Address of principal executive offices)           (Zip Code)
      Registrant's telephone number, including area code:  (425) 881-6766

          Securities registered pursuant to Section 12(b) of the Act:
                                     None

          Securities registered pursuant to Section 12(g) of the Act:
                    Common Stock, $.01 par value per share
                    --------------------------------------
                               (Title of Class)

     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 [_]   No [X]

     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.  [_]

     The aggregate market value of the voting stock held by non-affiliates of
the registrant, based upon the average bid and asked prices of such stock on May
30, 2001, was $2,677,211.  There were 31,504,195 shares of Common Stock
outstanding as of May 30, 2001.

     This Amendment No. 3 to the Registrant's Annual Report on Form 10-K for the
year ended December 31, 2000 (the "Report") is being filed to update the
information set forth in the Explanatory Note immediately preceding Part I of
the Report.

                      DOCUMENTS INCORPORATED BY REFERENCE

     None.



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                       ABOUT FORWARD-LOOKING STATEMENTS

          Certain statements in this Annual Report on Form 10-K constitute
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995, that are not historical facts but rather reflect
our current expectations concerning future results and events. Words such as
"believes," "expects," "intends," "plans," "anticipates," "likely," "will,"
"may," "shall" and similar expressions are intended to identify such forward-
looking statements. Such forward-looking statements involve known and unknown
risks, uncertainties and other important factors that could cause the actual
results, performance or achievements of SAFLINK Corporation (or entities in
which we have interests), or industry results, to differ materially from future
results, performance or achievements expressed or implied by such forward-
looking statements.

          Readers are cautioned not to place undue reliance on these forward-
looking statements which reflect management's view only as of the date of this
Annual Report on Form 10-K. SAFLINK undertakes no obligation to publicly release
the result of any revisions to these forward-looking statements which may be
made to reflect events or circumstances after the date hereof or to reflect the
occurrence of unanticipated events, conditions or circumstances.

     The risks, uncertainties and other factors that might cause such
differences are discussed in our Management's Discussion and Analysis of
Financial Condition and Results of Operations contained herein. Such risks and
uncertainties include, but are not limited to, the uncertainty of our ability to
obtain the additional funding we need to continue operations beyond the middle
of 2002.

                                EXPLANATORY NOTE

     SAFLINK Corporation is filing this Amendment No. 3 to its Annual Report on
Form 10-K for the year ended December 31, 2000 to update the Report for certain
recent developments, including the June 5, 2001 issuance of 40,000 shares of
Series E Preferred Stock and warrants in exchange for gross proceeds of
$8,000,000, including the conversion of certain bridge notes. The following
portions of the Report have been revised to reflect the impact of this
financing:

     .   Part I, Item 1.    Recent Developments
     .   Part I, Item 1.    Employees
     .   Part I, Item 3.    Legal Proceedings
     .   Part I, Item 5.    Market for Registrant's Common Equity and Related
                            Stockholder Matters
         Part II, Item 5.   Management's Discussion and Analysis of Financial
                            Condition and Results of Operations -Liquidity and
                            Capital Resources; and Factors that May Affect
                            Future Results
     .   Part II, Item 7.   Exhibits, Financial Statement Schedules and Reports
                            on Form 8-K
     .   Part IV, Item 14   Independent Auditors' Report
                            Footnotes to Financial Statements - Notes 12 and 13


                                    PART I

Item 1. BUSINESS

General

     SAFLINK Corporation provides cost-effective software that may be combined
with a variety of biometric hardware products to verify the identity of a user
accessing a computer network or the Internet.  Our products may be used to
protect business and personal information and to replace passwords and personal
identification numbers, known as PINs, in order to safeguard and simplify access
to electronic systems.  Biometric technologies identify and authenticate an
individual by using a digital representation of a specific biological
characteristic, such as a fingerprint or voice, captured by a biometric capture
device, transforming this digital representation into a unique identifier, and
then matching that identifier against one previously captured. Because this
process relies on largely unalterable human characteristics, positive
identification can be achieved independent of any information possessed by the
individual seeking authorization.

     The process of identity authentication typically requires that a person
present for comparison one or more of the following factors:

          .    something known such as a password, PIN, or mother's maiden name;
               ---------------

                                       1
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               .    something carried such as a token, card, or key; or
                    ----------------
               .    something physical such as fingerprint, iris or voice
                    ------------------
                    pattern, signature motion, facial shape or other biological
                    or behavioral characteristic.

          Comparison of biological and behavioral characteristics has
historically been the most reliable and accurate of the three factors, but has
also been the most difficult and costly to implement in a fully automated
environment. However, recent advances in biometric collection technologies and
processing algorithms have increased the speed and accuracy and reduced the cost
of implementing biometrics in commercial environments. We believe that
individuals, Web site operators and enterprises will increasingly use this
method of identity authentication.

          Our software products are built upon our proprietary Secure
Authentication Facility (SAF) client/server architecture that allows users to
use any of a number of biometric technologies. Our products are based on
published open systems application programming interface (API) standards. In
December 1997, we introduced and demonstrated the first implementation of the
Human Authentication - Application Programming Interface (HA-API). HA-API was
the first API to allow software developers and technology suppliers to build
their products using a common interface standard. After developing HA-API under
contract to the United States Department of Defense, we released it into the
public domain and it is now supported by more than thirty biometric technology
providers and systems developers. We are also a contributor to other leading API
standards-setting bodies including the Bio-API Consortium and Intel's Common
Data Security Architecture (CDSA) User Authentication Services (UAS) draft
standard. We intend to make our products compliant with whatever API standard is
ultimately adopted by the biometrics industry.

          Our SAF brand is being positioned and promoted with selected biometric
technologies currently available in the marketplace including those from
AuthenTec, Inc., SecuGen Corporation, Veridicom, Inc., and Identix, Inc. for
fingerprint imaging; Anovea, Inc., Lernout & Hauspie Speech Products NV and ITT
Industries, Inc. for speaker verification; Visionics Corporation for facial
recognition; and Iridian Technologies, Inc. for iris recognition. We have tested
and determined that additional biometric technologies are operational with our
software products and we intend to continue to qualify and negotiate license
arrangements with other leading biometric technology suppliers in the industry.

Recent Developments

 .    In December 2000, we purchased the intellectual property and fixed assets
     of Jotter Technologies Inc. As consideration for the sale of the assets,
     Jotter received 5.1 million shares of SAFLINK common stock, $.01 par value,
     and a two-year, 7%, unsecured promissory note for $1.7 million. Under the
     asset purchase agreement, in the event Jotter does not satisfy certain
     Canadian tax obligations, we will be entitled to pay the tax and reduce the
     purchase price or rescind the transaction. In addition, the common stock
     issued to Jotter is held in escrow on behalf of Jotter and will be released
     in monthly distributions beginning ninety days after the closing of the
     transaction, provided that no shares will be released to Jotter until we
     have notified the escrow agent that certain Canadian tax obligations have
     been met. We did not assume any material liabilities of Jotter and we hired
     substantially all of Jotter's technical and marketing personnel.

 .    In January 2001, we announced the release of a new SAF Module that extends
     the security functionality of Computer Associates' eTrust Single Sign-On
     (SSO) product. This new module provides support for biometric technologies
     including fingerprint, voice, face, and iris recognition. Computer
     Associates subsequently announced that it is using the eTrust SSO product,
     including SAFLINK's eTrust Module, as a solution to help healthcare
     organizations comply with the new data protection regulations under the
     U.S. Health Insurance Portability and Accountability Act of 1996.

 .    In February 2001, we announced the availability of our JotterSAF 1.0
     Preview, a pre-release version of our biometrically enabled e-wallet and
     privacy software. JotterSAF uses state-of-the-art voice recognition
     technology to restrict access to credit card numbers, mailing and billing
     addresses, user ID/passwords, phone numbers and other sensitive financial
     and personally identifiable information that is frequently required for
     electronic commerce transactions.

 .    In March 2001, we announced that St. Vincent Hospitals and Health Care
     Center, Inc., an Indiana-based healthcare provider with a network of eight
     hospitals and a number of health services locations, has ordered SAFLINK's
     recently announced SAF Module for Computer Associates' eTrust Single Sign-
     On product to secure its enterprise network of 5,000 users. St. Vincent has
     stated that the initial implementation of the biometric solution will focus
     on access to electronic systems containing patient information and that,
     over time, it expects to expand the solution to all areas of electronic
     information access.

                                       2
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 .    In April 2001, we announced that during March 2001, we received $413,750 in
     bridge financing from seven accredited investors including two of our
     directors, on substantially similar terms to those of the $2.5 million
     bridge financing completed in November 2000.

 .    In April 2001, we announced that Jotter Technologies Inc. agreed to convert
     the remaining balance ($1.64 million) of the $1.7 million note issued to it
     as partial consideration for the intellectual property and fixed assets
     acquired from Jotter in December 2000, plus accrued interest of $33,635,
     into shares of SAFLINK common stock at $1.00 per share. The conversion of
     such note is subject to shareholder approval. If approved by the
     shareholders at the upcoming annual meeting, upon conversion of the debt,
     Jotter will own 6,770,115 shares of SAFLINK common stock, representing
     approximately 20.4% of SAFLINK's issued and outstanding shares of common
     stock. The shares issued to Jotter will be held in escrow on behalf of
     Jotter and released in monthly distributions after Jotter satisfies certain
     Canadian tax obligations related to the asset purchase.

 .    In April 2001, we announced that we had delivered to a major U.S. financial
     institution the beta release of the SAF Module for Novell NMAS 2.1, our
     first new product to be based on a new architecture that leverages industry
     standards and widely adopted enterprise technologies, such as Directory
     Services, Public Key Encryption, and ActiveX Data Objects to facilitate
     integration of biometrics into an enterprise's existing network and
     security infrastructure.

 .    On June 5, 2001, we issued 40,000 shares of convertible preferred stock and
     warrants to purchase up to 44.3 million shares of common stock for gross
     proceeds of $8 million, including the conversion of certain bridge notes,
     in a private placement to accredited investors. The Series E preferred
     stock issued in this transaction is convertible into 40 million shares of
     SAFLINK common stock at any time until June 5, 2004. Pending receipt of
     stockholder approval of the financing, holders of the preferred stock and
     warrants will not be able to convert such securities into more than 19.99%
     of the number of shares of common stock outstanding prior to the
     transaction. We also issued placement agent warrants to purchase 3.0
     million shares of common stock at $0.20 per share exercisable until June 5,
     2006. Debt holders representing $2.3 million in bridge notes and accrued
     interest at the time of closing exercised their right to participate in the
     financing. In addition, RMS Limited Partnership agreed to extend its $1
     million bridge note and accrued interest for an additional 12 months and we
     agreed to apply 50% of any proceeds received from the exercise of the
     warrants issued in the transaction towards principal and interest payments
     during the extension period. The remaining $203,000 in outstanding bridge
     notes and accrued interest were repaid from the proceeds of the financing.
     In connection with the financing, we have agreed to seek stockholder
     approval at our next annual stockholders meeting for (i) the issuance of
     common stock upon conversion of the preferred stock and warrants issued in
     the financing, (ii) a new stock option plan, (iii) a reverse split of its
     common stock sufficient to meet NASDAQ's continued listing requirements
     (and in any event not less than 1:5), and (iv) the issuance of common stock
     to Jotter Technologies, Inc. upon conversion of the balance of the note
     issued to Jotter as partial consideration for the intellectual property and
     fixed assets acquired from Jotter on December 15, 2000.

 .    On April 16, 2001, the Company received a Nasdaq Staff Determination
     indicating that the Company has failed to comply with the minimum bid price
     requirement for continued listing set forth in Marketplace Rule 4310(c)(4),
     and that its securities are, therefore, subject to delisting from The
     Nasdaq SmallCap Market.

     On May 31, 2001, the Company was notified by Nasdaq that The Nasdaq
     SmallCap Market halted trading in SAFLINK's common stock, pursuant to Rule
     4330(a)(2) of the Nasdaq Marketplace Rules, due to the inclusion in
     SAFLINK's Annual Report on Form 10-K of a disclaimer opinion by SAFLINK's
     independent accountants with respect to financial statements required to be
     certified by such accountants.

     The Company received a Nasdaq Staff Determination, dated May 31, 2001,
     indicating that the Company has failed tocomply with the net tangible
     assets/market capitalization/net income and shareholder approval
     requirements for continued listing set forth in Nasdaq Marketplace Rules
     4310(c)(2) and 4350(i)(1)(c)(ii)(b), and that its securities are,
     therefore, subject to delisting from The Nasdaq SmallCap Market. Further,
     the Company was notified that the Company's Form 10-K for the fiscal year
     ended December 31, 2000 contained a "disclaimer opinion" and therefore did
     not comply with Nasdaq's filing requirement, as set forth in Marketplace
     Rule 4310(c)(14).

     The Company appealed the Staff's Determination and a hearing was held
     before the Nasdaq Listing Qualifications Panel on June 7, 2001 to address
     these issues. At the hearing, Nasdaq requested additional information and
     took no action. The Company has provided the requested information and
     continuing its efforts to meet The Nasdaq SmallCap's continued listing
     requirements.

 .    The Company has taken measures to restructure its operations and reduce
     operating expenses. As part of the restructuring, Glenn L. Argenbright, the
     former Chief Executive of Jotter Technologies, Inc., has replaced
     Jeffrey P.

                                       3
<PAGE>

     Anthony as the Company's Chairman, Chief Executive Officer and President.
     Mr. Anthony also resigned from the Board of Directors effective June 8,
     2001. Steven M. Oyer, a director of Jotter Technologies, Inc., has replaced
     James W. Shepperd as Chief Financial Officer. The Company has also taken
     measures to conserve working capital and enhance cash flow while pursuing
     revenue opportunities through sales. The plan includes an immediate 42%
     reduction in the Company's workforce and the closure or downsizing of
     certain offices.

Market Overview

     As the information age evolves into an increasingly networked environment,
individuals and organizations are becoming more aware and concerned about
protecting the privacy and ensuring the security of information maintained on
personal computers, the Internet, and enterprise-wide systems.  A number of
technologies and strategies have been developed to address this concern,
including new encryption methods, firewalls, intrusion detection tools, access
permission systems, passwords, identification cards or tokens, digital
certificates, and single sign-on applications.  However, the effectiveness of
each of these new technologies and strategies is dependent upon the most
critical and vulnerable component of the security process: positive personal
identification and authentication of the individual seeking access.

     With the continuing growth of electronic commerce, access points to the
Internet and enterprise networks have increased significantly, and now include
corporate desktops, home PCs, mobile laptops, and hand-held devices. Website
operators and organizations providing enterprise information systems can now
utilize biometric identification technology to secure access to restricted or
sensitive information.

     We believe that the market for biometric technologies used in information
security and data privacy applications is largely undeveloped.  However, there
are several evolving factors that we believe will contribute to the growth of
this industry in the near-term:

     .    Highly publicized security breaches in computer networks and Internet
          sites have been traced to the vulnerability of password-based
          authentication systems.

     .    The growth of e-commerce as a medium for business and consumer
          transactions mandates the implementation of technologies which
          facilitate the positive identification of anonymous parties.

     .    The use of multiple passwords is inconvenient for users and expensive
          for businesses to support.

     .    Enterprise information technology (IT) priorities are reportedly
          shifting to new information assurance initiatives that are intended to
          enhance the privacy and confidentiality of data under an
          organization's care, custody, and control.

     .    The IT industry is beginning to utilize public key infrastructure
          (PKI) as one solution for enhanced data security. We believe
          biometrics is a complementary technology to PKI that can play an
          important role in protecting the PKI certificate keys from
          unauthorized access. For the most part, these keys are now protected
          by simple PIN numbers and passwords.

     .    Industry leaders such as Computer Associates, Novell, Microsoft, IBM,
          Intel, Compaq, and Apple are actively supporting the integration of
          biometrics within their systems.

     .    Rapidly falling prices for biometric collection devices (fingerprint
          sensors, digital cameras, microphones, etc.) and improvements in the
          accuracy, performance and user acceptance of the technology have made
          integration of biometrics with desktop PCs and portable computers a
          cost effective security alternative for the commercial market. The
          proliferation of multimedia-ready PCs equipped with microphones and
          soundcards makes voice identification an affordable solution for the
          majority of potential users.

     .    New and even more powerful biometric technologies, such as silicon
          chip-based fingerprint sensors and iris recognition cameras, are also
          becoming commercially viable.

     .    Finally, the BioAPI Consortium, a group of over 75 organizations from
          the biometrics industry, government and information technology
          vendors, recently announced the release of Version 1.1 of the BioAPI
          Specification. This specification provides a single application
          programming interface (API) standard that is expected to encourage
          widespread implementation of biometrics by facilitating the
          interoperability of different biometric technologies.

                                       4
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          We believe that all of these factors will create increasing demand for
Internet and enterprise security software products that utilize biometrics. We
believe that one of the largest potential markets for biometrics is business to
business (B2B) and business to consumer (B2C) transactions conducted over the
Internet. We believe that biometrics offers a low-cost, simple solution to
ensure the positive identification of users seeking access to restricted
Internet services.

Products

Our software products use biometric technologies to improve network and Internet
security. Instead of being asked for a password, users are prompted for their
unique biometric characteristic using any one of a number of technologies. We
build software that will work with a variety of hardware devices. Sales of our
products have been limited to date. Our products can be divided into three
groups - Internet products, enterprise products and desktop products.

Internet Products:
------------------

          Our Internet products, SAFsite and JotterSAF, are designed to operate
in a non-domain environment and are built around an "Internet Client/Server"
model. We intend to make our client software ubiquitous over the Internet while
simultaneously promoting the availability of Web-based content accessible via
these clients and SAF enabled Web destinations.

 .    SAFsite - This server product enables the integration of biometric
     -------
     authentication into Web applications developed from leading web rapid
     application development (RAD) products such as Microsoft's InterDev,
     Allair's Cold Fusion, and Pervasive's Tango. SAFsite manages centralized
     storage and matching of user biometric credentials through its unique
     SAFserver(TM) component. SAFserver provides a means of storing biometric
     templates on an encrypted and physically secure database in close proximity
     to the Web server resource. The Web server sends authentication requests
     and receives match results from the SAFserver via a range of interface
     mechanisms that can be tailored to the specific Web environment. SAFsite
     also provides functionality including browser plug-ins and extensions to
     support a wide range of biometric capture devices and algorithms. An
     example of a site built using SAFsite can be found at www.safbank.com, a
     demonstration site that mimics an online bank requiring biometric
     authentication to access financial account information.

 .    JotterSAF - This client product is the first ever biometrically enabled
     ---------
     interactive desktop micro-portal that allows individual control of personal
     information shared over the Internet. JotterSAF combines convenience and
     ease of use features, such as form fill and password vaulting with the
     security of biometrics.

Enterprise Products:
--------------------

          Our enterprise products are designed to operate on domain-based
networks and include:

 .    SAF2000 - A professional software suite that includes:
     -------

     .    SAF/nt - Integrates with the Microsoft Windows NT security interface
          ------
          and enhances the password authentication provided by Windows NT with a
          multi-biometric capability. SAF/nt is the foundation of the SAF2000
          product line, offering baseline multi-biometric log-on capability for
          initial access to the Windows NT domain server from a variety of
          Windows client workstations including those based on Windows 95/98,
          Windows NT, or Windows 2000 operating systems.
     .    SAF/iis - Integrates into the Microsoft Internet Information Server
          -------
          (IIS), offering multi-biometric security to Web resources accessed
          through the combination of IIS and Microsoft's Internet Explorer
     .    SAF/netware - Integrated into the Novell NetWare NDS interface,
          -----------
          SAF/netware enhances the password authentication provided by NetWare
          with a multi-biometric capability. SAF/netware also supports a mixed
          environment of Windows NT and Novell servers within a corporate domain
          infrastructure.
     .    SAF/entrust - Provides a biometric authentication front-end to
          -----------
          Entrust's public key infrastructure (PKI) products. SAF/entrust
          provides secure access to critical encryption keys by replacing the
          standard password prompt with a range of biometric choices to provide
          positive identification of the user when releasing their private key
          for authentication, secure email, and digital signature transactions.
     .    SAF/transactions - For those situations where authentication is
          ----------------
          required above and beyond initial domain or workstation log-on,
          SAF/transactions provides an application interface that can be used to
          insert transaction-level biometric authentication into any enterprise
          client/server application.

                                       5
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 .    SAF/nmas - Shipped as a bundled feature with NMAS, Novell's unique
     --------
     framework that allows users to authenticate using different and multiple
     Novell Directory Service (NDS) authentication methods (including face,
     finger, voice, signature, iris, tokens, smart cards, and passwords).

 .    SAFeTrust - Extends the security functionality of Computer Associates'
     ---------
     eTrust Single Sign-On (SSO) product, to include support for a variety of
     biometric technologies, including face, finger and voice.

Desktop Products:
-----------------

 .    SAFtyLatch - Provides local PC file protection and privacy through
     ----------
     encryption and biometric authentication. Future releases of SAFtyLatch or
     successor products are expected to provide a complementary "front-end" to
     our SAFsite Internet product by providing an easy client interface to SAF
     enabled Web servers.

Marketing and Distribution

          We use both direct and indirect sales and marketing techniques to
market our products and services. Our near-term efforts will be focused on
direct sales to identified high profile end-user sales prospects. Our indirect
sales activities provide support to channel partners by geographic region and
vertical markets.

          We market our products into the horizontal markets for data and
network security primarily through:

               .  Distributors
               .  Value-added resellers ("VARs");
               .  Internet e-commerce service providers;
               .  Original equipment manufacturers ("OEMs"); and
               .  Strategic alliance partners.

          We market our products into vertical markets - such as healthcare,
government and banking - primarily through:

               .  Systems integrators ("SIs");
               .  Value-added resellers ("VARs"); and
               .  Strategic alliance partners.

          Our marketing goals include identifying potential resellers of our
products, creating awareness of our product offerings, generating leads for
follow-on sales and achieving significant order volume by disseminating our
products through multiple direct and indirect distribution channels worldwide.

          We also sell our products through biometric technology reseller
partners who combine our enterprise software with their own proprietary
biometric technology and sell it through their own sales channels. We are also
actively engaged in establishing relationships with international distributors
that will carry our products and make them available to a broad audience of
secondary distributors and resellers within their markets. Some of our reseller
partners are Data Construction AB of Sweden, Real Time Data Management Services,
Inc., SecuGen Corporation and Triton Secure, Ltd. of Australia.

     Our products are typically priced on the basis of the number of biometric
users in the SAFServer(TM) database. As the number of users on the server
database increases, the price per user decreases. Resellers purchase our
products at a favorable discount for resale at a price that provides an
attractive gross margin for the reseller. We believe that this pricing model is
competitive and cost-effective for the end user customer and is attractive to
our resellers.

Internet Products:
------------------

     We intend to market our Internet server products primarily through indirect
channels. For example, we have teamed with our technology reseller partner,
SecuGen Corporation, to provide a SAFsite-based Internet consumer banking
solution to ING Direct of Canada. We also intend to pursue those value-added
application developers that focus on Internet consumer and electronic business
solutions with a goal of developing a network of Internet solutions providers
that will offer our Internet products as part of their web-based product and
development service offerings.

                                       6
<PAGE>

     We intend to distribute our Internet client products, such as JotterSAF,
through original equipment manufacturer (OEM) agreements and through other
broad-based distribution channels including Web-based promotion and download.
JotterSAF is currently available as a free download from our Website at
www.jottersaf.com.

Enterprise Products:
--------------------

     We have a team of technology sales consultants who are located in various
regions of the country to call on high profile potential end-users as well as to
identify, recruit, train and support a network of resellers currently selling,
installing, and servicing Computer Associates, Novell and Microsoft enterprise
client/server network solutions. These resellers are characterized as regional
VARs that specialize in enterprise back office network solutions. They generally
provide a range of value-added services to their enterprise customers including
network component sales, network consulting, systems installation, and network
management services.

     Another primary market strategy is to cooperatively promote and sell our
Novell and Computer Associates integrated solutions through those companies'
extensive direct sales organizations and reseller networks.  We are actively
engaged at all levels of these organizations to support those joint efforts.

     We believe that our enterprise security products are complementary to the
network technology products currently sold by these resellers.  Our enterprise
products allow these resellers to add biometric authentication to the network
operating system without costly custom software development.

Desktop Products:
-----------------

     We intend to distribute our desktop products, SAFtyLatch and successor
products, through direct and indirect sales channels including original
equipment manufacturer (OEM) agreements and through other broad-based
distribution channels including web-based promotion and download.

Licensed Technology

        We have non-exclusive worldwide licenses to core biometric technology
from the following partners:

     .  AuthenTec, Inc. - Chip-based fingerprint technology for standalone and
        ---------------
        keyboard-integrated peripherals with USB and LPT interfaces.
     .  Precise Biometrics AB - Chip-based fingerprint technology for standalone
        ---------------------
        and keyboard-integrated peripherals with USB and LPT interfaces.
     .  SecuGen Corporation - Optics-based fingerprint technology for
        -------------------
        standalone, mouse-integrated, and keyboard-integrated peripherals with
        USB and LPT interfaces.
     .  Veridicom, Inc. - Chip-based fingerprint technology for standalone
        ---------------
        peripherals with USB and LPT interfaces.
     .  Anovea, Inc. - Speaker verification technology for text dependent
        ------------
        technology modules that work with a Windows sound card and microphone.
     .  Lernout & Hauspie Speech Products NV ("L&H") - Speaker verification
        --------------------------------------------
        technology for text dependent technology modules that work with a
        Windows sound card and microphone.
     .  Visionics Corporation - Face recognition technology for modules that
        ---------------------
        work with a Video for Windows compatible desktop videoconferencing
        camera.
     .  Iridian Technologies, Inc. - Iris recognition technology.
        --------------------------

        We are able to provide a customer's choice of technology by combining
the appropriate biometric plug-in module with our API-compliant product
framework. The customer may also purchase API-compliant modules, that will work
with our software, from third parties. Our strategy is to evaluate, qualify, and
integrate select biometric technology available from new and current technology
vendors. We are in various stages of qualification of additional potential
technology partners.

Competition

        Other companies which have also developed software products that utilize
biometric identification technology and are active in the United States include,
American Biometric Company, BioNetrix, Digital Persona, Inc., Identix Inc., I/O
Software, Inc., and Keyware, Inc. Our strategy is to differentiate our products
in the marketplace by offering products that are competitively priced, multi-
biometrics enabled, open standards based, and scalable for large users.

                                       7
<PAGE>

          We also expect to continue to face competition from non-biometric
technologies such as traditional passwords, token cards, smart cards or digital
certificates. While in some instances we will compete with these technologies,
our strategy is to integrate other factors of authentication into our products.
For example `digital certificates' provide a secure method of encrypting
messages and accessing services. However, the sender's certificate key is often
protected only by a password or PIN number. We currently offer SAF products that
support smart cards and digital certificates, and we intend to continue to
enhance these offerings.

          As a non-exclusive licensee of biometric technologies, we also expect
to experience competition from other products and services incorporating the
technology that we license.

Patents and Trademarks

          We hold four assigned patents covering fingerprint imaging technology
which we intend to utilize to enhance and create strategic relationships with
fingerprint technology companies, set-top hardware companies, and hand held
peripheral manufacturers that will promote/use SAF software products:

1.   Patent 5,546,471: Ergonomic Fingerprint Reader Apparatus issued August 13,
     -----------------
     1996, provides for an ergonomic fingerprint acquisition device. This device
     has two displaced surfaces that provide a natural grasping surface for the
     hand. The natural grasping surface ensures that a broad fingerprint surface
     area is applied with even pressure to the fingerprint reading device
     itself. We believe that this invention solves one significant problem of
     typical fingerprint capture devices; ensuring that the same finger is
     placed in the same position, with consistent orientation and pressure, to
     improve overall system performance by yielding a high quality fingerprint
     image capture at time of registration and verification.

2.   Patent 5,596,454: Uneven Surface Image Transfer Apparatus issued January
     -----------------
     21, 1997, provides for a high performance integrated optical system. We
     believe that this invention solves one significant problem of typical
     fingerprint capture devices: the large size of an optical element required
     to acquire a high resolution, distortion-free image of a fingerprint.
     Solving this problem dramatically reduces the physical footprint required
     for any peripheral device or integrated application of a fingerprint
     acquisition device. In addition, the invention specifies a single element
     multiple lens solution that dramatically reduces production cost while
     improving product reliability, durability and longevity.

3.   Patent 5,920,642: Ergonomic Fingerprint Reader Apparatus issued July 6,
     -----------------
     1999, is directed to improvements in set-top box technology. The remote
     control used with the set-top box captures fingerprint data and operator
     account information and transmits them to the set-top box to be matched
     with stored fingerprint data. The results are used to adjust an operator's
     preferences, modify the provided level of service, or authorize a
     transaction against a specific account.

4.   Patent 6,028,950: Fingerprint Controlled Set-Top Box issued February 22,
     -----------------
     2000, discloses a method for securing electronic commerce transactions
     initiated via a television set-top box using a fingerprint and is a
     continuation of Patent 5,920,642. The fingerprint can be acquired by a
     device built into the set top box or by a device built into the remote
     control unit. The stored fingerprint data of the customer can be stored in
     the set top box, a central server, distributed remote server, smart card,
     or other form of "portable data file." We believe that this invention
     solves the problem of positively identifying customers making e-commerce
     transactions from a home set top access terminal.

          In addition, we have pending applications for our SAF software. There
is no assurance that we will be granted any pending patents, that any patent
previously granted will prove enforceable, or that any competitive advantage
will exist for us because of such patents or patent applications.

          We also rely on unpatented know-how, trade secrets and continuing
research and development. We may not have any protection from other parties who
independently develop the same know-how and trade secrets. Protection of our
proprietary products and services may be important to our business, and our
failure or inability to maintain such protection could have a material adverse
affect on our business, condition (financial or otherwise), results of
operations and prospects. Moreover, while we do not believe that the production
and sale of our proposed products or services infringe on rights of third
parties, if we are incorrect in this regard, failure to obtain needed licenses
from such third parties could have a material adverse effect on our ability
either to complete the development of certain products or services or to produce
and market such products or services. Failure to obtain any such licenses could
adversely impact our business, condition (financial or otherwise), results of
operations and prospects.

          We have no rights to patents or other intellectual property (including
any biometric software algorithms or biometric service provider (BSP) modules)
that we license from others, other than pursuant to our license of rights. The
competitive nature of our industry makes any patents and patent applications of
our licensors important to us. There is no assurance that

                                       8
<PAGE>

any of the patent applications of such licensors will be granted, that patents
previously granted will prove enforceable, or that any such patents or patent
applications will lead to any competitive advantage for us.

         We have registered certain service marks and trademarks with the
United States Patent and Trademark Office. In addition, we have purchased the
rights to certain other service marks and trademarks registered with the
Canadian Trademark Office and the United States Patent and Trademark Office by
Jotter Technologies Inc. However, we have not registered certain other
trademarks and trade names which we use with the United States Patent and
Trademark Office nor in any foreign government trademark offices. With respect
to unregistered trademarks, we accompany the use of such trademarks with our
name to indicate the origin of the products to which they are applied, to
distinguish them from the products of competitors and to build goodwill in such
trademarks. Certain rights, however, are protected under the provisions of the
Lanham Act and under state law in respect of unregistered or common law
trademarks.

Employees

         As of June 13, 2001 we had 27 full-time employees as well as a full-
time contract controller, a part-time contract Chief Financial Officer and a
part-time contract Chief Executive Officer compared to 49 full-time employees
and 2 full-time contract employees at March 31, 2001 and 33 full-time employees
and 8 full-time contract employees as of March 13, 2000. The decrease between
March 31, 2001 and June 13, 2001 is due to a staff reduction initiated as part
of a corporate restructuring implemented following the closing of our recent
financing. The increase between March 13, 2000 and March 31, 2001 reflects the
hiring of 18 former employees of Jotter Technologies Inc, as well as our ongoing
effort to prepare for what we expect to be a rapidly growing market for network
and Internet security solutions. From time to time, we also utilize consultants
for specific assignments.

         We are an employment-at-will employer and none of our employees are
represented by a labor union.  We believe that our relationship with our
employees is good.  We believe that our future success will depend in part on
our ability to both retain our existing technical and other personnel and to
attract and retain other qualified employees.

Item 2.  PROPERTIES

         We lease our current principal executive offices and server-based
research and development facilities consisting of approximately 18,700 square
feet located at 18650 N.E. 67/th/ Court, Suite 210, Redmond, Washington 98052.
We also lease approximately 7,000 square feet of office space in Edmonton,
Alberta, Canada as well as 3,400 square feet of office space in Reston,
Virginia.

Item 3.  LEGAL PROCEEDINGS.

         On June 16, 1999, International Interest Group, Inc. filed suit against
us and Mr. J. Anthony Forstmann, a former director and chairman of SAFLINK, in
the Superior Court of the State of California for the County of Los Angeles
(Civil Action No.: BC212033). This lawsuit relates to our alleged failure to
perform under the terms of a settlement agreement relating to a prior lawsuit
filed by IIG. The complaint alleged three causes of action: (i) our breach of
contract with IIG causing IIG to sustain damages; (ii) fraud; and (iii)
recission by IIG against us and Mr. Forstmann. IIG's cause of action for
recission and IIG's cause of action for fraud were dismissed with prejudice by
the trial court during the first quarter of 2000. However, the appellate court
reinstated IIG's fraud cause of action in August 2000. On November 7, 2000, IIG
filed a third amended complaint adding causes of action for fraud by
concealment, negligent misrepresentation and breach of fiduciary duties. IIG is
seeking actual and consequential damages and attorneys' fees in connection with
its cause of action for breach of contract; actual, consequential and punitive
damages in connection with its fraud causes of action and its breach of
fiduciary duties cause of action; and actual and consequential damages in
connection with its negligent misrepresentation cause of action. On May 31,
2001, the Court ruled on the Defendants' Motions for Summary Judgment and
Summary Adjudication. The Court (i) dismissed the case as against J. Anthony
Forstmann; (ii) dismissed IIG's causes of action for fraud by concealment,
negligent misrepresentation and breach of fiduciary duty as against SAFLINK; and
(iii) limited the remaining issues in the case to breach of the Settlement
Agreement (settling the underlying lawsuit) and false promise (by failing to use
reasonable best efforts to file a Form S-3 Registration Statement or to use
reasonable best efforts to register stock given to IIG in settlement of the
prior lawsuit). Trial has been set for July 18, 2001. The Company does not
believe the claims have any merit and intends to vigorously defend itself at
trial.

Item 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

         On December 22, 2000, we obtained the written consent in lieu of a
meeting of stockholders from holders of approximately 55.6% of our issued and
outstanding common stock as of the record date approving the following actions:

                                       9
<PAGE>

     .    an amendment to our certificate of incorporation to increase the
          number of authorized shares of common stock from 50 million shares to
          100 million shares; and

     .    the issuance of up to 20 million shares of our common stock at a
          discount to market and warrants to purchase up to an additional 20
          million shares at a premium to such price.

          We mailed an Information Statement to holders of record on or about
January 25, 2001 to notify stockholders of these actions. For more information
about these matters, please read our Information Statement (File number 000-
20270), which was filed with the SEC on January 23, 2001.

                                       10
<PAGE>

                                    PART II

Item 5.  MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.

     Our common stock has been listed on the Nasdaq SmallCap Market since April
27, 1993 (NASDAQ:ESAF); however, on May 31, 2001, Nasdaq suspended trading in
our stock.  There is no assurance that trading will recommence on Nasdaq or, if
our stock is delisted, that a viable public market for our shares will develop
in the future or, if one develops, that such a market will be sustained.

     The following table sets forth the range of high and low sales prices for
our common stock as reported on the SmallCap Market for each full quarterly
period from January 1, 1999 through March 31, 2001.

                                       Common Stock Sales Price
                                       ------------------------
                                          High          Low
                                       -----------  -----------
1999
First Quarter                             $4.875        $0.938
Second Quarter                             2.750         1.000
Third Quarter                              1.844         0.813
Fourth Quarter                             2.406         1.125

2000
First Quarter                              8.813         2.031
Second Quarter                             5.500         2.031
Third Quarter                              2.750         1.250
Fourth Quarter                             1.734         0.281

2001
First Quarter                              1.938         0.625


     On May 30, 2001 (the last day before trading was suspended by Nasdaq) the
closing bid price of our common stock as reported on the SmallCap Market was
$0.24.  As of May 30, 2001 there were approximately 288 record holders of our
common stock.  As of March 29, 2001 there were approximately 7,530 beneficial
holders of our common stock.

     Since our incorporation, we have not paid or declared dividends on our
common stock, nor do we intend to pay or declare cash dividends on our common
stock in the foreseeable future.

                                       11
<PAGE>

Item 6.  SELECTED FINANCIAL DATA

                                (in thousands except per share data)

<TABLE>
<CAPTION>
                                                                            Year Ended December 31,
                                                       -------------------------------------------------------------------
Summary Operating Data                                     2000           1999          1998          1997           1996
--------------------------------------------------------------------------------------------------------------------------
<S>                                                    <C>              <C>           <C>           <C>           <C>
Revenue                                                  $ 1,523        $ 1,303       $ 4,920       $ 1,585       $ 2,305
Net loss                                                  (8,956)        (3,927)       (1,384)       (7,424)       (7,340)
Preferred stock deemed dividend                                -              -             -         1,470         1,412
Preferred stock dividend and accretion                       348            104           278           350           303
Net loss attributable to common stockholders              (9,304)        (4,031)       (1,662)       (9,244)       (9,055)
Net loss per common share                                  (0.43)         (0.23)        (0.23)        (1.57)        (1.93)
Weighted average number of common shares                  21,602         17,541         7,216         5,875         4,680

<CAPTION>
                                                                            As of December 31,
                                                       -------------------------------------------------------------------
Summary Balance Sheet Data                                 2000           1999          1998          1997           1996
--------------------------------------------------------------------------------------------------------------------------
<S>                                                    <C>              <C>           <C>           <C>           <C>
Total assets                                             $ 7,997        $ 6,782       $ 2,685       $ 2,578       $ 2,832
Total liabilities                                          6,395          1,184           716         1,807         1,348
Stockholders' equity                                       1,602          5,598         1,969           771         1,484
</TABLE>

                                       12
<PAGE>

Item 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
         OF OPERATIONS

Results of Operating Activities

     We incurred net losses of approximately $9.0 million for fiscal year 2000,
$3.9 million for fiscal year 1999, and $1.4 million for fiscal year 1998,
primarily due to our efforts in developing and marketing our biometric software
products.  Approximately $1.2 million or 82% of total revenue was from sales of
commercial software and services during 2000 compared to $895,000 or 69% in
1999.  The following discussion presents certain changes in our revenue and
operating expenses which have occurred between fiscal years 2000 and 1999 and
between fiscal years 1999 and 1998 and should be read in conjunction with our
Consolidated Financial Statements, including the notes thereto, included
elsewhere in this Form 10-K.

YEAR ENDED DECEMBER 31, 2000 COMPARED TO YEAR ENDED DECEMBER 31, 1999

Revenue and Cost of Revenue

     Revenue for the year ended December 31, 2000 increased by approximately
$220,000, from approximately $1.3 million for the year ended December 31, 1999
to approximately $1.5 million for the year ended December 31, 2000.  This
increase was primarily due to an increase in services and other revenue of
approximately $419,000, partially offset by decreases in commercial software
sales, hardware sales and post contract services revenue of approximately
$69,000, $35,000 and $95,000, respectively.  Payments from each of Home Shopping
Network, Kaiser Permanente, SecuGen Corporation and Triton Secure, Ltd.
accounted for 10% or more of revenue for 2000, and payments from each of Home
Shopping Network and Triton Secure, Ltd. accounted for 10% or more of revenue
for 1999.

     The approximately $122,000 increase in cost of revenue was primarily
attributable to the increase in revenue.

     Gross profit increased to approximately $1.0 million or 68% of revenue
during 2000 from approximately $944,000 or 72% of revenue in 1999 primarily due
to the change in the mix of product revenues.

Operating Expenses

     Operating expenses for 2000 increased by approximately $5.0 million, from
approximately $4.9 million for the year ended December 31, 1999, to
approximately $9.9 million for the year ended December 31, 2000.  This increase
was primarily due to the addition of new staff to enhance existing products,
develop new products and market our products to both commercial and governmental
organizations as they begin to redirect their information technology
expenditures to enhanced Internet and network security solutions and, to a
lesser degree, the relocation of our headquarters to Redmond, Washington during
the first half of 2000 and the acquisition of purchased in-process research and
development costs associated with the purchase of the intellectual property and
fixed assets of Jotter Technologies Inc. in December 2000.  These increased
expenses were partially offset by the expiration of our obligation to make
minimum royalty payments of $125,000 per quarter to Cogent Systems, Inc. as of
October 1, 1999.  The following table provides a breakdown of the dollar and
percentage changes in operating expenses:

<TABLE>
<CAPTION>
                                                          Changes In Operating Expenses
                                                        ---------------------------------
                                                          (000s)                Percent
                                                          ------                -------
<S>                                                      <C>                    <C>
Product development                                      $ 2,811                   204
Sales and marketing                                          424                    32
Minimum royalties                                           (375)                 (100)
Relocation expense                                           224                   N.M.*
Purchased in-process research and development                208                   N.M.*
General and administrative                                 1,679                    93
                                                         -------                 -----
                                                         $ 4,971                   102
                                                         =======                 =====
</TABLE>

* Not meaningful

Product Development

     The increase in product development expenses was primarily due to the
addition of staff to enhance current products and develop new products to meet
anticipated demand for our products.  While we expect product development
expenses to

                                       13
<PAGE>

decrease in the near-term as a result of our recently implemented cost reduction
initiative, if we obtain additional funding, we expect significant additional
increases in product development expenses as we expand our product development
efforts in the longer-term. If we do not obtain such additional funding, we
expect that it will be necessary to discontinue product development efforts.

Sales and Marketing

     The increase in sales and marketing expenses was primarily due to increases
in employee expenses, travel and advertising expenses as we added new staff to
market our products.  The sales cycle for our products has taken longer to
develop than management anticipated due to, among other things, the lack of
industry standards and acceptance by the commercial market, the cost of hardware
associated with the technology, and the extended period of time potential
customers require to test, evaluate and pilot applications.  However, we believe
that a convergence of factors, including recent decreases in hardware costs as
well as the development of industry standards, will lead to greater market
acceptance of biometric security solutions. While we expect sales and marketing
expenses to decrease in the near-term as a result of our recently implemented
cost reduction initiative, if we obtain additional funding, we expect
significant additional increases in sales and marketing expenses as we expand
our sales and marketing efforts in the longer-term.  If we do not obtain such
additional funding, we expect that it will be necessary to discontinue sales and
marketing efforts.

Relocation Expense

     We incurred $224,000 of non-recurring costs to relocate our executive
offices from Tampa, Florida to Redmond, Washington during the first half of
2000.

Purchased In-Process Research and Development

     In connection with our purchase of the intellectual property and fixed
assets of Jotter Technologies Inc. in December 2000, we recorded a non-recurring
charge of $208,000 for in-process research and development that had not yet
reached technological feasibility and had no alternative future use.  Among the
factors we considered in determining the amount of the allocation of the
purchase price to in-process research and development were the estimated stage
of development of each module of the technology, including the complexity and
technical obstacles to overcome, the estimated expected life of each module, the
estimated cash flows resulting from the revenues, margins, and operating
expenses generated from each module, and the discounted present value of the
cash flows associated with the in-process technologies.

General and Administrative

     The increase in general and administrative expense was the result of
increased spending on personnel, occupancy and professional services primarily
due to additions to infrastructure to support our increased product development
and sales and marketing activities and recognition of an impairment loss on
prepaid royalties of approximately $438,000 in 2000, with no such loss in 1999.
While we expect general and administrative expenses to decrease in the near-term
as a result of our recently implemented cost reduction initiative, if we obtain
additional funding, we expect significant additional increases in general and
administrative expenses as we add infrastructure to support increased product
development and sales and marketing activities in the longer-term.

Interest Expense

     The change in interest expense from approximately $5,000 in 1999 to
approximately $141,000 in 2000 was primarily due to the issuance of $2.5 million
of 12% bridge notes in November 2000 to fund operations while we continued to
seek equity financing and the issuance of a $1.7 million, 7% note payable issued
to Jotter Technologies Inc. in December 2000 as partial consideration for the
intellectual property and fixed assets acquired from Jotter pursuant to an asset
purchase agreement entered into on December 15, 2000.

Other Income, Net

     The change in other income from approximately $31,000 in 1999 to
approximately $11,000 in 2000 was primarily due to the loss on sale of
investment securities of approximately $121,000 incurred in 2000, with no such
loss in 1999, partially offset by an increase in interest income of
approximately $67,000 and a reduction in loss on disposal of fixed assets of
approximately $17,000.

                                       14
<PAGE>

Operating Expense Analysis by Functional Activity

The following table provides an analysis of the 2000 over 1999 change in total
operating expense by functional category:

<TABLE>
<CAPTION>
                                                          Changes In Operating Expenses
                                                        ---------------------------------
                                                          (000s)                Percent
                                                          ------                -------
<S>                                                     <C>                    <C>
Compensation and related benefits                        $ 2,778                   129
Legal and professional services                              821                   152
Travel and entertainment                                     184                    63
Advertising and promotion                                    245                   134
Telephone and Internet                                        88                    56
Occupancy                                                    195                    88
Relocation                                                   224                  N.M.*
In process-research and development                          208                  N.M.*
Minimum royalty payments                                    (375)                 (100)
Impairment of prepaid royalties                              438                  N.M.*
Amortization                                                 105                  N.M.*
Depreciation                                                 (31)                  (13)
Other                                                         91                     2
                                                         -------                ------
                                                         $ 4,971                   102
                                                         =======                ======
</TABLE>

* Not meaningful


YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998

Results of Operating Activities

     We incurred net losses of approximately $3.9 million for fiscal 1999 and
$1.4 million for fiscal 1998 primarily due to our efforts in developing and
marketing our biometric software products.  Approximately $786,000 or 60% of
total revenue was from commercial software sales during 1999 compared to $3.4
million or 69% in 1998.  The following discussion presents certain changes in
our revenue and operating expenses which have occurred between fiscal years 1999
and 1998 and should be read in conjunction with our Consolidated Financial
Statements, including the notes thereto, included elsewhere in this Form 10-K.

Revenue and Cost of Revenue

     Revenue for the year ended December 31, 1999 decreased by approximately
$3.6 million, from approximately $4.9 million for the year ended December 31,
1998 to approximately $1.3 million for the year ended December 31, 1999.  This
decrease was primarily due to the lack of a 1999 transaction comparable to the
sale of approximately $3.5 million of prepaid licenses to XL Vision, Inc. during
1998 coupled with a reduction in post contract services revenue of approximately
$443,000 due to the Company's decision to divest itself of contracts to manage
the identification and authentication aspects of the Connecticut and New Jersey
welfare systems in early 1999.

     The approximately $763,000 decrease in cost of revenue was primarily
attributable to the reduction in revenue.

     Gross profit decreased to $944,000 or 72% of revenue during 1999 from $3.8
million or 77% of revenue in 1998 primarily due to the change in the mix of
product revenues.

Operating Expenses

     Operating expenses for 1999 decreased by approximately $393,000, from
approximately $5.3 million for the year ended December 31, 1998 to approximately
$4.9 million for the year ended December 31, 1999.  This decrease was primarily
due to decreases in commissions and depreciation as well as the expiration of
our obligation to make minimum royalty payments of $125,000 per quarter to
Cogent Systems, Inc.  These decreases were partially offset by increased
operating costs

                                       15
<PAGE>

associated with personnel increases initiated during the fourth quarter of 1999.
The following table provides a breakdown of the dollar and percentage changes in
operating expenses:

<TABLE>
<CAPTION>
                                                          Changes In Operating Expenses
                                                        ---------------------------------
                                                          (000s)                Percent
                                                          ------                -------
<S>                                                     <C>                    <C>
Product development                                       $  93                     7
Sales and marketing                                        (226)                  (15)
Minimum royalties                                          (125)                  (25)
General and administrative                                 (135)                   (7)
                                                          -----                  ----
                                                          $(393)                   (7)
                                                          =====                  ====
</TABLE>

Product Development

     The increase in product development expenses was primarily due to a fourth
quarter increase of approximately $238,000 as we added staff to enhance current
products and develop new products to meet anticipated demand for our products as
organizations begin to redirect their information technology expenditures from
Y2K remediation efforts to enhanced Internet and network security solutions.

Sales and Marketing

     The decrease in sales and marketing expenses was primarily due to the lack
of commissions comparable to the approximately $351,000 commission paid on sales
to XL Vision in 1998.  This reduction was partially offset by increases in
travel and entertainment and advertising expenses as we increased our efforts to
promote our Internet and network security products beginning in 2000.

General and Administrative

     The decrease in general and administrative expense was centered in
depreciation expense and was primarily due to the final write-off of assets
acquired in prior years.

Interest and Other Income

     The $82,000 decrease in interest and other income was primarily due to a
$91,000 decrease in gain on sale of certain fixed assets, partially offset by an
increase in interest income due to higher cash available for investment in
interest-bearing overnight repurchase agreements.

Operating Expense Analysis by Functional Activity

The following table provides an analysis of the 1999 over 1998 change in total
operating expense by functional category:

<TABLE>
<CAPTION>
                                                          Changes In Operating Expenses
                                                        ---------------------------------
                                                          (000s)                Percent
                                                          ------                -------
<S>                                                     <C>                    <C>
Compensation and related benefits                         $ 283                     15
Legal and professional services                             (37)                    (6)
Travel and entertainment                                     30                     11
Advertising and promotion                                    92                     40
Telephone and Internet                                      (42)                   (21)
Commission                                                 (351)                  (100)
Depreciation                                               (333)                   (59)
Other                                                       (35)                    (2)
                                                          -----                  -----
                                                          $(393)                    (7)
                                                          =====                  =====
</TABLE>

                                       16
<PAGE>

Liquidity and Capital Resources

     Cash and working capital (deficit) as of December 31, 2000 were
approximately $1.1 million and $(3.3) million, respectively, as compared to cash
and working capital of approximately $5.3 million and $5.4 million,
respectively, as of December 31, 1999.  The decrease was primarily due to
operating losses, partially offset by $1.0 million of proceeds from the issuance
of 919,500 shares of common stock upon exercise of employee stock options and
investor warrants.  We expended cash for operating activities at a rate of
approximately $700,000 per month during the last three months of 2000.

     Cash as of June 13, 2001, was approximately $3.5 million.  The increase
from December 31, 2000 was primarily due to receipt of approximately $5.6
million of net proceeds from the private placement of 40,000 shares of Series E
Preferred Stock and common stock purchase warrants completed on June 5, 2001 and
receipt of approximately $854,000 of bridge loans in March through May 2001,
partially offset by operating losses, payments of approximately $1.5 million of
past due accounts payable, payments of approximately $100,000 of restructuring
charges, payments of approximately $200,000 of prepaid expenses, bridge loan
repayments of approximately $203,000, and payment of approximately $131,000 on
behalf of Jotter Technologies Inc.

     We used cash of approximately $7.2 million for operating activities in 2000
compared to approximately $3.6 million used in 1999.  The increased use of cash
was primarily due to increases in operating expenses as we increased our product
development, sales, and marketing activities in preparation for releases of our
new Internet products.

     We expended net cash at a rate of approximately $508,000 per month (before
considering approximately $414,000 of proceeds from the issuance of additional
bridge notes and the receipt of approximately $19,000 from the exercise of
warrants) during the first quarter of 2001.  We do not believe that our existing
working capital, together with anticipated cash flows from sales under current
contracts will be sufficient to meet our expected working capital needs beyond
the middle of 2002.

     Absent a significant increase in sales, which itself may require a
significant increase in working capital, we will require significant additional
funds to continue our operations beyond the middle of 2002.  While we anticipate
receiving additional funds from the exercise of warrants issued in connection
with the recently completed financing, we are also reviewing options to obtain
additional financing.  Such options include, but are not limited to, the sale
and issuance of additional stock, the sale and issuance of debt, the sale of
certain of our assets and entering into an additional strategic relationship or
relationships to either obtain the needed funding or to create what we believe
would be a better opportunity to obtain such funds.  It is possible that any
such additional infusion of capital would be in the form of the sale and
issuance of additional shares of our common stock or securities that are
convertible into our common stock, which would substantially increase the number
of shares of common stock outstanding on a fully-diluted basis.  The failure to
obtain such additional funds could cause us to cease or curtail operations.
Even if such additional funding is obtained, there is no assurance that we will
be able to generate significant sales of our products or services, or, if we are
able to consummate significant sales, that any such sales would be profitable.

Recently Issued Accounting Pronouncements

     The Financial Accounting Standards Board issued SFAS No. 133, Accounting
for Derivative Instruments and Hedging Activities, in June 1998. This statement
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities. It requires that an entity recognize all derivatives as
either assets or liabilities in the balance sheet and measure those instruments
at fair value. If certain conditions are met, a derivative may be specifically
designated as a hedge. The accounting for changes in the fair value of a
derivative depends on the intended use of the derivative and the resulting
designation. SFAS No. 133, as amended, is effective for all fiscal quarters of
fiscal years beginning after June 15, 2000.  The adoption of this statement on
January 1, 2001 did not have a material impact on our consolidated financial
statements.

     In June 2000, the SEC updated Staff Accounting Bulletin No. 101, Revenue
Recognition in Financial Statements (SAB 101).  The most recent update delayed
the effective date of SAB 101 to the fourth quarter for fiscal years beginning
after December 15, 1999. SAB 101 provides guidance on revenue recognition and
the SEC staff's views on the application of accounting principles to selected
revenue recognition issues. The Company adopted the provisions of SAB 101 in the
fourth quarter of 2000 and the implementation of these provisions did not have a
material impact on the consolidated financial statements.

     In March 2000, the Financial Accounting Standards Board (FASB) issued
Interpretation No. 44, Accounting for Certain Transactions Involving Stock
Compensation, an Interpretation of APB Opinion No. 25. Interpretation No. 44
clarifies the application of APB Opinion 25, Accounting for Stock Issued to
Employees, for issues, among others, regarding; (a) the definition of employees,
(b) defining non-compensatory plans, (c) modifications to previously fixed stock
option awards, and

                                       17
<PAGE>

(d) accounting for an exchange of stock compensation awards in a business
combination. The Company adopted Interpretation No. 44 in the third quarter of
2000 and it did not have a material impact on the consolidated financial
statements.

FACTORS THAT MAY AFFECT FUTURE RESULTS

     In addition to other information contained in this Annual Report on Form
10-K, the following factors, among others, sometimes have affected, and in the
future could affect our actual results and could cause future results to differ
materially from those in any forward looking statements made by us or on our
behalf.  Factors that could cause future results to differ from expectations
include, but are not limited to the following:

Our failure to obtain the substantial financing we will need for our operations
on acceptable terms, or at all, would severely impact our ability to run our
business.

     We believe that our existing working capital, together with anticipated
cash flows from sales from current contracts will be insufficient to meet our
expected working capital needs beyond the middle of 2002.  If we cannot raise
additional financing prior to that time on acceptable terms, or at all, we would
experience severe financial and operating difficulties, including the probable
discontinuance of operations.  If we discontinue operations our company will
likely liquidate and our stock will be delisted by Nasdaq and become worthless.
In order to raise additional working capital, we may need to issue additional
shares of common stock or securities that are convertible into common stock.
Our issuances of these securities could dilute the interests of stockholders.
Additional financing may be unavailable to us or only available on terms
unacceptable to us.  Furthermore, 50% of the proceeds received from the
exercises of warrants issued in the Series E Preferred Stock financing, which
otherwise could be used to fund our working capital needs, will be used to repay
principal and interest of the $1.0 million note issued to RMS Limited
Partnership.

We have accumulated significant losses since we started doing business and may
not be able to generate significant revenues or any net income in the future.

     We may continue to accumulate losses. We have accumulated net losses of
approximately $61.6 million on revenue of $11.9 million from our inception
through March 31, 2001.  We have continued to accumulate losses after March 31,
2001 to date and we may be unable to generate significant revenues or any net
income in the future.  We have funded our operations through issuances of debt
and equity securities to investors and may not be able to generate a positive
cash flow.

Our success depends on significant growth in the biometrics market and on broad
acceptance of products in this market.

     Because almost all of our revenues will come from the sale of products that
use biometric technologies, our success will depend largely on the expansion of
markets for biometric products domestically and internationally.  Even if use of
biometric technology gains market acceptance, our products may not achieve
sufficient market acceptance to ensure our viability.  We cannot accurately
predict the future growth rate of this industry or the ultimate size of the
biometric technology market.

Because they own approximately 65% of SAFLINK, a few stockholders will be able
to significantly influence our affairs.

     Given that RMS Limited Partnership, Home Shopping Network, Inc., Jotter
Technologies Inc., and Francis M. Santangelo own 65.3% of our common stock, they
are able to significantly influence the vote on those corporate matters to be
decided by our stockholders.  Three of these stockholders, RMS, Jotter and Mr.
Santangelo, are parties to voting agreements which governs the parties' voting
arrangements and further affects their influence over our corporate matters.  In
addition, if approved by our stockholders at the upcoming annual meeting, the
holders of the recently issued preferred stock will be able to convert their
shares into 40,000,000 shares of common stock, which would equal 55.9% of the
then outstanding common stock.   If the holders of the preferred stock were to
convert their preferred stock into common stock and exercise the 44,325,600
Series A and Series B Warrants held by them, they would own 84,325,600 shares,
or 72.8% of the then outstanding common stock.

Nasdaq could terminate the listing of our common stock on the Nasdaq SmallCap
Market if we fail to comply with Nasdaq's eligibility and maintenance
requirements. This delisting could affect the price of our common stock, the
ability of holders to sell their stock, our ability to raise funds in the
future, and trigger certain penalties under the terms of the recent financing.

                                       18
<PAGE>

     We are not in compliance with the Nasdaq SmallCap Market's eligibility and
maintenance requirements relating to (i) minimum bid price, (ii) tangible net
worth, and (iii) the requirement that the financial statements included on our
Annual Report on Form 10-K be certified by our independent accountants.

     Nasdaq notified us, on April 16, 2001, that our common stock will be
delisted for failure to meet the minimum bid price requirement. In addition, the
Company received a Nasdaq Staff Determination on May 31, 2001 indicating that
the Company fails to comply with the net tangible assets/market
capitalization/net income and shareholder approval requirements for continued
listing set forth in Marketplace Rules 4310(c)(2) and 4350(i)(1)(c)(ii)(b), and
that our securities are, therefore, subject to delisting from The Nasdaq
SmallCap Market. Further, on June 1, 2001, the Nasdaq SmallCap Market halted
trading in our common stock, pursuant to Rule 4330(a)(2) of the Nasdaq
Marketplace Rules, due to the inclusion in our Annual Report on Form 10-K of a
disclaimer opinion by our independent accountants with respect to financial
statements required to be certified by such accountants and therefore did not
comply with Nasdaq's filing requirement, as set forth in Marketplace Rule
4310(c)(14).

     On June 7, 2001, we appeared at a hearing before a Nasdaq Listing
Qualifications Panel to appeal the Staff Determinations. The Hearing Panel
requested additional information, which we have provided. Delisting of our
securities has been stayed pending Nasdaq's decision. There can be no assurance
we will be successful in our appeal of the Staff's Determination.

  If our common stock is delisted , it would adversely affect:

  .  the share price of our common stock;
  .  the ability of the holders of our common stock to sell their securities;
     and
  .  our ability to raise additional funds, especially by means of a stock sale.

     In addition, under the terms of the preferred stock financing, if our
common stock is delisted, we will be required to pay to the purchasers in that
transaction a penalty equal to 1.5% of the purchasers' respective purchase
prices for the preferred stock and warrants per month.

We may not be able to compete with our competitors with greater financial and
technical resources and greater ability to respond to market changes.

     We may not be able to compete successfully in our markets against our
competitors. We will face intense competition in both the biometric software and
Internet toolbar markets. Many of our competitors, such as BioNetrix, Digital
Persona, Inc., American Biometrics Company, Identix Inc., Keyware, Inc., I/O
Software, Inc. and Gator.com have greater resources than we do. In addition,
there are smaller competitors that may be able to respond more rapidly to
changes in the market. Our competitors may also be able to adapt more quickly to
new or emerging technologies and standards or changes in customer requirements
or devote greater resources to the promotion and sale of their products.

We may not be able to take advantage of certain sales opportunities in the
future given the reduction in our workforce of sales and marketing personnel.

     Given the reduced number of  the Company's sales and marketing personnel as
a result of the Company's recent restructuring, we may not be able to meet
demand for our products and/or take advantage of certain sales opportunities, if
such demand or opportunities arise.  If we cannot meet demand for our products,
we may not be able to compete with our competitors and our business may suffer.

We depend on attracting and retaining skilled employees, which may be difficult
due to the competitive employment market.

     If we lose any of our key, highly skilled technical, managerial and
marketing personnel due to the intense competition in the technology industry,
our operations may suffer.  The success of our company will depend largely upon
our ability to hire and retain such personnel.  If we are unable to raise
capital it is likely that our employees will leave or be terminated.

There is a limited public market for our common stock and so our stockholders
may not be able to sell their common stock easily or for a high price.

     Historically, there has been a limited public market for the shares of our
common stock.  Since May 31, 2001, our stock has been suspended from trading on
Nasdaq due to the inclusion in our Annual Report on Form 10-K of a disclaimer

                                       19
<PAGE>

opinion by our independent accountants with respect to financial statements
required to be certified by those accountants and there is no certainty that our
stock will be permitted to trade again on Nasdaq or that an active trading
market for our common stock will develop in the future.  This means that you may
not be able to sell your SAFLINK stock readily or at a profit.  Our common stock
has been listed on the Nasdaq SmallCap Market since April 27, 1993.  From
January 1, 1996 through January 2, 2001, our common stock's average daily
trading volume on the Nasdaq SmallCap Market was approximately 79,800 shares.
If we fail to raise capital and discontinue operations it is likely that we will
be delisted and there may be no market for our common stock.

If the market price of our common stock continues to be volatile the value of
your stockholdings may decline.

     Like many other technology companies, the market price of our common stock
has been, and may continue to be, volatile, which means the value of your
SAFLINK stock may fluctuate. Factors that are difficult to predict such as

 . quarterly revenue,
 . statements and ratings by financial analysts,
 . overall market performance, and
 . announcements by our competitors concerning new product developments

contribute to volatility and may have a significant impact on the market price
of our common stock.  If we are unable to raise additional capital our common
stock may become worthless.

We are dependent on third parties for our product distribution and if these
parties do not promote our products, we may not be able to generate revenue.

     If those third parties with whom we have business relationships to promote
sales of our products, such as resellers, distributors and makers of
complementary technology, do not actively promote our products, it will severely
limit our ability to generate revenue. Some of these business relationships are
formalized in agreements which can be terminated with little or no notice and
may be subject to amendment. We cannot control the amount and timing of
resources that these third parties devote to marketing activities on our behalf.
We also may not be able to negotiate acceptable distribution relationships in
the future and cannot predict whether current or future distribution
relationships will be successful.

In order to succeed, we will have to keep up with rapid technological change in
the biometric technology and Internet markets.

     Our future success will depend upon our ability to keep pace with a
changing marketplace and to integrate new technology into our software and
introduce new products and product enhancements to address the changing needs of
the marketplace. Various technical problems and resource constraints may impede
the development, production, distribution and marketing of our products and
services. More advanced or alternate technology employed by competitors and
unavailable to us could give our competitors a significant advantage. It is
possible that products and services developed by our competitors will
significantly limit the potential market for our products and services or render
our products and services obsolete. In addition, laws, rules, regulations or
industry standards may be adopted which could materially adversely affect how we
do business.

We are not experienced in doing business outside the United States and the
application of Canadian laws or regulations not previously applicable to our
business may have a negative effect on the business.

     We will have to become familiar with doing business in Canada which is a
new corporate and legal environment for us, and we may experience difficulties
in this regard. Prior to the asset purchase transaction with Jotter Technologies
Inc., we only had operations in the United States. Jotter, on the other hand,
had a facility in Alberta, Canada, which now serves SAFLINK.

If we lose current or future license rights to use the biometric technologies of
third parties, our ability to compete with products that already include this
technology will be substantially impaired and may be entirely precluded.

     If we lose our rights to use biometric identification and authentication
software, specifically software used for identifying voice and facial features,
our business may be negatively impacted. Biometric identification and
authentication is a critical step for a company like ours which uses biological
identifiers, like voice or fingerprints, to provide secure methods of access.
Our rights may be terminated if we fail to pay our license fees, including
minimum specified payments, or commit any

                                       20
<PAGE>

other material breach of these agreements. We cannot assure you that we will not
be in default under these agreements in the future.

If the Internet is not accepted by consumers and businesses as a means to
transact business, this may negatively impact our business.

     If the current popularity of the Internet and electronic commerce does not
last as a way to transact business, businesses may not wish to invest in
technology like ours that uses biological identifiers to secure transactions.
Because we are targeting the Internet to grow our business, a decline in the use
and acceptance of the Internet for business purposes will negatively impact our
revenues.

Provisions in our certificate of incorporation and our Certificate of
Designation, Preferences and Rights of the Series E Preferred Stock may prevent
or impact the value a takeover of our company even if it is beneficial to
stockholders

     Our certificate of incorporation authorizes our board of directors to issue
up to 1,000,000 shares of preferred stock, which may adversely affect our common
stockholders. We may issue shares of preferred stock without stockholder
approval and upon terms and conditions, and having such rights, privileges and
preferences, as the board of directors determines. Specifically, the issuance of
preferred stock may make it more difficult for a third party to acquire, or may
discourage a third party from acquiring, voting control of SAFLINK even if the
acquisition would benefit stockholders. In addition, the issuance of the Series
E Preferred Stock may impact the value of a takeover to common stockholders
because the sale of SAFLINK could entitle the holders of the Series E Preferred
Stock to demand that we redeem their stock for cash equal to 125% of the price
paid for such stock by the holders.

The Internet is not currently subject to much regulation, but this may change
which may negatively impact our business.

     Although today there are relatively few laws governing Internet services,
the application of new laws may negatively impact our business. Due to the
increasing popularity of the Internet and online services, it is possible that a
number of laws and regulations, specifically those relating to privacy, may be
adopted with respect to the Internet.

Shares eligible for future sale could adversely affect our ability to raise
capital and the market price for our stock

     As of June 13, 2001, 31,504,195 shares of our common stock were outstanding
before the issuance of an additional 1,670,515 shares of common stock to Jotter
Technologies Inc. pursuant to our recent agreement to issue such shares in
exchange for cancellation of the note payable issued to Jotter as partial
consideration for the intellectual property and fixed assets acquired from
Jotter in December 2000, for which we are seeking stockholder approval at the
upcoming annual meeting. In addition, we are required to register the 84,325,600
shares of common stock issuable upon the conversion of the recently issued
preferred stock and Series A and Series B Warrants, which shares will be able to
be resold in the public market once a Form S-1 registration statement,
registering those shares, is declared effective by the SEC. Furthermore,
substantially all of the currently outstanding shares will be able to be resold
in the public market once a Form S-1 registration statement, registering the
shares, is declared effective by the SEC. Sales of shares of common stock in the
public market or the perception that sales would occur could adversely affect
the market price of our common stock. These sales or perceptions of possible
sales could also impair our future ability to raise capital and the market price
for our common stock is likely to be volatile. It is possible that this
volatility will have an adverse effect on the market price of the common stock.

If we fail to register the shares issuable upon the conversion of the Series E
Preferred Stock and the Series A Warrants and Series B Warrants, we will be
required to pay certain penalties to the purchasers, the holders of the Series E
Preferred Stock will be entitled to demand that we redeem their stock for cash,
and the expiration date and exercise price of the Series A and Series B Warrants
may be adjusted.

     We are required to file by July 18, 2001 a registration statement to
register the shares of common stock issuable upon conversion of the Series E
Preferred Stock and upon exercise of the Series A and Series B Warrants issued
to the purchasers. If this registration statement is not declared effective by
the SEC by October 3, 2001, we will be required to pay a penalty of 1.5% of the
purchasers' respective purchase prices for the Series E Preferred Stock and
Warrants per month. In addition, if the registration statement is not declared
effective by the SEC by November 12, 2001 the holders of the Series E Preferred
Stock will be entitled to redeem for a 125% premium, which is equal to $250 per
share, any of their then outstanding shares of Series E Preferred Stock.
Furthermore, the expiration dates and pricing of the Series A and B Warrants may
be adjusted depending on the availability of an effective registration
statement.

                                       21
<PAGE>

Item 7(a).   QUALITATIVE AND QUANTITIVE DISCLOSURE ABOUT MARKET RISK

        Our exposure to market rate risk for changes in interest rates relates
primarily to the $102,000 time certificate of deposit included in our investment
portfolio.  Investments in fixed rate earning instruments carry a degree of
interest rate risk as their fair market value may be adversely impacted due to a
rise in interest rates.  As a result, our future investment income may fall
short of expectations due to changes in interest rates.  We do not use any
hedging transactions or any financial instruments for trading purposes and we
are not a party to any leveraged derivatives.

        The Company has certain foreign operations whose expenses are incurred
in its local currency. As exchange rates vary, transaction gains or losses will
be incurred and may vary from expectations and adversely impact overall
profitability. If in 2001, the US dollar uniformly changes in strength by 10%
relative to the currency of the foreign operations, our operating results would
likely not be significantly affected.

Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

        See Index to Financial Statements.

Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
        FINANCIAL DISCLOSURE.

        On April 24, 2000, the Company dismissed Ernst & Young LLP as the
Company's principal accountant and engaged KPMG LLP to audit the Registrant's
consolidated financial statements.

                                       22
<PAGE>

                                    PART III

Item 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

          Information concerning our directors and officers is included in the
definitive Proxy Statement for our 2001 Annual Meeting of Stockholders, which is
incorporated herein by reference.

Item 11.  EXECUTIVE COMPENSATION.

          Information concerning our executives' compensation is included in the
definitive Proxy Statement for our 2001 Annual Meeting of Stockholders, which is
incorporated herein by reference.

Item 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

          Information required to be disclosed hereunder is included in the
definitive Proxy Statement for our 2001 Annual Meeting of Stockholders, which is
incorporated herein by reference.

Item 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTONS.

          Information required to be disclosed hereunder is included in the
definitive Proxy Statement for our Annual Meeting of Stockholders, which is
incorporated herein by reference.

                                    PART IV

Item 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.

(a)  The following documents are filed as a part of this Annual Report on Form
     10-K:

          (1)  Consolidated Financial Statements

The financial statements filed as a part of this report are listed in the "Index
to Financial Statements".

          (2)  Financial Statement Schedules

     All schedules have been omitted because they are either not applicable, not
material or the required information has been given in the financial statements
or in notes to the financial statements.

(b)  Reports on Form 8-K

          None

(c)  Exhibits

Exhibit
No.                           Description
---                           -----------

3.1    Certificate of Incorporation of the Company (incorporated by reference to
       Exhibit 3.1 of the Company's Annual Report on Form 10-K for the fiscal
       year ended December 31, 1992).

3.1.1  Certificate of Amendment of Certificate of Incorporation (incorporated by
       reference to Exhibit 3.1.1 of the Company's Quarterly Report on Form 10-Q
       for the quarter ended September 30, 1999).

3.1.2  Certificate of Amendment to Certificate of Incorporation of the Company,
       dated as of July 2, 1996 (incorporated by reference to Exhibit 3.3 of the
       Company's Annual Report on Form 10-K for year ended December 31, 1996).

3.1.3  Certificate of Amendment to Certificate of Incorporation of the Company,
       dated as of May 26, 1998 (incorporated by reference to Exhibit 3.4 of the
       Company's Annual Report on Form 10-K for the year ended December 31,
       1998).

                                       23
<PAGE>

3.1.4    Certificate of Amendment to Certificate of Incorporation of the
         Company, dated as of March 16, 2001.*

3.2      By-laws of the Company (incorporated by reference to Exhibit 3.3 of the
         Company's Annual Report on Form 10-K for the fiscal year ended December
         31, 1991).

4.1      Certificate of the Voting Powers, Designations, Preferences, Rights,
         Qualifications, Limitations and Restrictions of the Series A Preferred
         Stock of the Company (incorporated by reference to Exhibit 4.1 of the
         Company's Quarterly Report on Form 10-Q for the period ended March 31,
         1997).

4.2      Certificate of Designation, Preferences and Rights of Series D
         Preferred Stock (incorporated by reference to Exhibit 4 of the
         Company's Current Report Form 8-K, dated November 12, 1999).

4.3      Certificate of Designation, Preferences and Rights of Series E
         Preferred Stock, dated as of June 5, 2001.

10.1     Stock Subscription Agreement by and between The National Registry Inc.
         and RMS Limited Partnership ("RMS"), dated November 9, 1999
         (incorporated by reference to Exhibit 4 of the Company's Current Report
         of Form 8-K, dated November 12, 1999).

10.2     Stockholders' Voting Agreement, dated as of March 14, 1995, by and
         between J. Anthony Forstmann, RMS and Francis R. Santangelo
         (incorporated by reference to the Exhibits to the Company's Current
         Report on Form 8-K, dated March 14, 1995).

10.3     First Amended and Restated Stockholders' Voting Agreement, dated as of
         June 25, 1999, by and between J. Anthony Forstmann, RMS and Francis R.
         Santangelo (incorporated by reference to Schedule 13D/A, dated June 30,
         1999).

10.4     Asset Purchase Agreement, dated as of December 15, 2000, by and between
         SAFLINK Corporation and Jotter Technologies Inc. ("Jotter")
         (incorporated by reference to the Company's Current Report on Form 8-K,
         dated January 2, 2001).

10.5     Stockholders' Voting Agreement, dated May 25, 2001, by and between RMS
         and Jotter (incorporated by reference to the Jotter Schedule 13D/A,
         dated June 15, 2001).

10.6     Form of Securities Purchase Agreement, dated June 5, 2001, between the
         Company and the Purchasers listed therein.

10.7     Form of Registration Rights Agreement, dated June 5, 2001, between the
         Company and the Purchasers listed therein.

10.8     Form of Series A Warrant, dated June 5, 2001.

10.9     Form of Series B Warrant, dated June 5, 2001.

10.10    Severance Agreement, dated December 10, 1998, as amended on May 15,
         2001, between SAFLINK Corporation and Jeffrey P. Anthony.

10.11    Severance Agreement, dated January 5, 2000, as amended on May 15, 2001,
         between SAFLINK Corporation and James W. Shepperd

11       Statement re: Computation of Earnings per Share.*

21       Subsidiaries of SAFLINK Corporation: SAFLINK International, Inc.,
         incorporated in the state of Delaware, is wholly-owned by SAFLINK
         Corporation.

23.1     Consent of Ernst & Young LLP

23.2     Consent of KPMG LLP

24       Power of Attorney (included in the signature page of this report).

*Previously filed

                                       24
<PAGE>

                                   SIGNATURES


     Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.

                                             SAFLINK CORPORATION
                                                 (Registrant)

Date: June 22, 2001                 By:  /s/ Glenn L. Argenbright
                                         ---------------------------------------
                                         Glenn L. Argenbright
                                         President, Chief Executive Officer and
Director



     KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Steven M. Oyer his true and lawful attorney-in-
fact and agent, with full power of substitution and resubstitution for him and
in his name, place and stead, in any and all capacities, to sign any and all
amendments to this Annual Report on Form 10-K, and all documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorney-in-fact and agent, full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorney-in-fact and
agent, or his substitute or substitutes, may lawfully do or cause to be done by
virtue hereof.

     Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed below by the following persons on behalf of
registrant and in the capacities and on the dates indicated.

<TABLE>
<CAPTION>
Signatures
----------
<S>                                     <C>                                       <C>
    /s/ Glenn L. Argenbright            President, Chief Executive Officer        June 22, 2001
--------------------------------         and Director (Principal Executive
        Glenn L. Argenbright             Officer)


    /s/ Steven M. Oyer                  Chief Financial Officer (Principal        June 22, 2001
--------------------------------         Financial Officer and Principal
        Steven M. Oyer                   Accounting Officer)


    /s/ Hector J. Alcalde               Director                                  June 22, 2001
--------------------------------
        Hector J. Alcalde

                                        Director
--------------------------------
        Frank M. Devine


    /s/ Robert J. Rosenblatt           Director                                   June 22, 2001
--------------------------------
        Robert J. Rosenblatt


                                       Director
--------------------------------
        Robert M. Smibert
</TABLE>

                                       25
<PAGE>

                         Index to Financial Statements

<TABLE>
<CAPTION>
                                                                                                  Page
                                                                                                 Number
                                                                                                 ------
<S>                                                                                              <C>
Reports of Independent Auditors                                                                    F-1

Consolidated Balance Sheets as of December 31, 2000 and 1999                                       F-3

Consolidated Statements of Operations for each of the years in the three
year period ended December 31, 2000                                                                F-4

Consolidated Statements of Stockholders' Equity (Deficit) and Comprehensive Income
(Loss) for each of the years in the three year period ended December 31, 2000                      F-5

Consolidated Statements of Cash Flows for each of the years in the three year
period ended December 31, 2000                                                                     F-6

Notes to Consolidated Financial Statements                                                         F-7
</TABLE>
<PAGE>

                         Independent Auditors' Report


The Board of Directors
SAFLINK Corporation:

We have audited the accompanying consolidated balance sheet of SAFLINK
Corporation as of December 31, 2000 and the related consolidated statements of
operations, stockholders' equity (deficit) and comprehensive income (loss), and
cash flows for the year then ended.  These consolidated financial statements are
the responsibility of the Company's management.  Our responsibility is to
express an opinion on these consolidated financial statements based on the
results of our audit.

We conducted our audit in accordance with auditing standards generally accepted
in the United States of America.  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.  An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation.  We believe that our audit provides a
reasonable basis for our opinion.

In our report dated April 13, 2001 we did not express an opinion on the 2000
consolidated financial statements due to material uncertainties relating to the
Company's ability to continue as a going concern.  As disclosed in the
consolidated financial statements in note 13, the Company has received financing
proceeds subsequent to December 31, 2000.  Accordingly, our present opinion on
the consolidated financial statements as presented herein, is different from our
previous report.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of SAFLINK
Corporation as of December 31, 2000, and the results of its operations and its
cash flows for the year then ended in conformity with accounting principles
generally accepted in the United States of America.

The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern.  As discussed in note 14 to
the consolidated financial statements, the Company has suffered recurring losses
from operations and has a working capital deficit that raise substantial doubt
about its ability to continue as a going concern.  Management's plans in regard
to these matters are also described in note 14.  The consolidated financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.

/s/ KPMG LLP


Seattle, Washington
April 13, 2001, except as to notes 12, 13 and 14
which are as of June 18, 2001

                                      F-1
<PAGE>

                        REPORT OF INDEPENDENT AUDITORS


Stockholders and Board of Directors
SAFLINK Corporation

    We have audited the accompanying consolidated balance sheet of SAFLINK
Corporation and subsidiary as of December 31, 1999 and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
two years in the period ended December 31, 1999.  These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits.

    We conducted our audits in accordance with auditing standards generally
accepted in the 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.  An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

    In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of SAFLINK
Corporation and subsidiary at December 31, 1999 and the consolidated results of
their operations and their cash flows for each of the two years in the period
ended December 31, 1999 in conformity with accounting principles generally
accepted in the United States.


                            /s/ Ernst & Young LLP


Tampa, Florida
February 25, 2000

                                      F-2
<PAGE>

                              SAFLINK Corporation
                          Consolidated Balance Sheets

<TABLE>
<CAPTION>
                                                                                        December 31,
                                                                                     2000          1999
                                                                                   --------      --------
                                                                                       (In thousands)
<S>                                                                                <C>           <C>
                                    Assets
Current Assets:
  Cash and cash equivalents                                                         $  1,108     $  5,335
  Accounts receivable, net of allowance for doubtful accounts of
    $12,000 and $13,000 at December 31, 2000 and 1999, respectively
    (including receivables from related party of $92,000 and $151,000 at
    December 31, 2000 and 1999, respectively)                                            153          180
  Inventory                                                                               25           38
  Investments                                                                            102          739
  Prepaid royalties                                                                        -          209
  Other prepaid expenses                                                                 244           77
                                                                                    --------     --------
    Total current assets                                                               1,632        6,578
  Furniture and equipment, net                                                           869          204
  Intangible assets, net                                                               5,344            -
  Other assets                                                                           152            -
                                                                                    --------     --------
                                                                                    $  7,997     $  6,782
                                                                                    ========     ========

                            Liabilities and stockholders' equity
Current liabilities:
  Accounts payable                                                                  $  1,494     $    296
  Accrued expenses                                                                       693          306
  Bridge notes payable                                                                 2,437            -
  Deferred revenue                                                                       286          582
                                                                                    --------     --------
    Total current liabilities                                                          4,910        1,184
Long-term debt, net of discounts                                                       1,485            -
                                                                                    --------     --------
    Total liabilities                                                                  6,395        1,184

Commitments, contingencies and subsequent events

Stockholders' equity:
  Preferred stock, $.01 par value convertible:
    Authorized - 1,000,000 shares
    Series A - Liquidation preference of $10,000,000 in aggregate as of
      December 31, 1999; 0 and 100,000 shares issued and outstanding as
      of December 31, 2000 and 1999, respectively                                          -            1
    Series D - Liquidation preference of $5,071,000 in aggregate as of
      December 31, 1999; 0 and 100,000 shares issued and outstanding as
      of December 31, 2000 and 1999, respectively                                          -            1
  Common stock, $.01 par value:
    Authorized - 50,000,000 shares as of December 31, 2000 and 1999
    Issued - 26,156,695 and 18,620,656 shares as of December 31, 2000
    and 1999, respectively                                                               262          186
  Common stock issuable in asset purchase                                              3,228            -
  Deferred stock-based compensation                                                      (81)           -
  Additional paid-in capital                                                          56,865       54,577
  Accumulated other comprehensive income                                                   -          201
  Accumulated deficit                                                                (58,672)     (49,368)
                                                                                    --------     --------
     Total stockholders' equity                                                        1,602        5,598
                                                                                    --------     --------
                                                                                    $  7,997     $  6,782
                                                                                    ========     ========
</TABLE>

          See accompanying notes to consolidated financial statements

                                      F-3
<PAGE>

                              SAFLINK Corporation
                     Consolidated Statements of Operations


<TABLE>
<CAPTION>
                                                                                   Year Ended December 31,
                                                                        2000               1999                1998
                                                                 ------------------    ---------------    -------------------
                                                                            (In thousands, except per share amounts)
<S>                                                               <C>                  <C>                <C>
Products and services revenue:
   Software (including sales to related party of $149,000,
       $593,000 and $0 during 2000, 1999, and 1998, respectively)           $   717            $   786                $ 3,517
   Hardware                                                                     278                313                    355
   Services and other                                                           528                109                    510
                                                                  -----------------    ---------------      -----------------
                                                                              1,523              1,208                  4,382
   Post contract services revenue - government                                    -                 95                    538
                                                                  -----------------    ---------------      -----------------
   Total revenue                                                              1,523              1,303                  4,920

Cost of revenue:
   Software                                                                      79                 57                    185
   Hardware                                                                     224                213                    353
   Services and other                                                           178                 42                    272
                                                                  -----------------    ---------------      -----------------
                                                                                481                312                    810
   Post contract services - government                                            -                 47                    312
                                                                  -----------------    ---------------      -----------------
   Total cost of revenue                                                        481                359                  1,122
                                                                  -----------------    ---------------      -----------------


   Gross profit                                                               1,042                944                  3,798

Operating expenses:
  Product development                                                         4,186              1,375                  1,282
  Sales and marketing                                                         1,756              1,332                  1,558
  Minimum royalty payments                                                        -                375                    500
  Relocation                                                                    224                  -                      -
  Purchased in-process research and development                                 208                  -                      -
  General and administrative                                                  3,494              1,815                  1,950
                                                                  -----------------    ---------------      -----------------
                                                                              9,868              4,897                  5,290
                                                                  -----------------    ---------------      -----------------
    Operating loss                                                           (8,826)            (3,953)                (1,492)
Interest expense                                                               (141)                (5)                     -
Other income, net                                                                11                 31                    108
                                                                  -----------------    ---------------      -----------------
  Net loss                                                                   (8,956)            (3,927)                (1,384)
Preferred stock dividend and accretion                                          348                104                    278
                                                                  -----------------    ---------------      -----------------
  Net loss attributable to common stockholders                              $(9,304)           $(4,031)               $(1,662)
                                                                  =================    ===============      =================



Basic and diluted loss per common share                                     $ (0.43)           $ (0.23)               $ (0.23)

Weighted average number of common shares outstanding                         21,602             17,541                  7,216
</TABLE>


          See accompanying notes to consolidated financial statements

                                      F-4
<PAGE>

                              SAFLINK Corporation
  Consolidated Statements of Stockholders' Equity (Deficit) and Comprehensive
                                 Income (Loss)
                   (In thousands, except per share amounts)

<TABLE>
<CAPTION>
                                                                                                                    Additional
                                                          Common stock                   Preferred stock              paid-in
                                                 ------------   --------------     --------------------------
                                                    Shares          Amount           Shares            Amount         Capital
                                                 ------------   --------------     ------------     ------------  -------------
<S>                                              <C>            <C>                <C>              <C>           <C>
Balance at December 31, 1997                            6,356   $          64              360      $         4   $      44,378
  Conversion of Series C preferred stock               10,280             103             (260)              (3)           (100)
  Common stock and warrants issued for legal
   settlement                                              41              --               --               --             307
  Series C preferred stock dividend at 6%                  --              --               --               --             278
  Issuance of warrants for services                        --              --               --               --             168
  Issuance of stock options for services                   --              --               --               --              78
  Expense related to stock option plans                    --              --               --               --              29
  Capital contribution                                     --              --               --               --           2,000
  Total comprehensive income (loss)-net loss               --              --               --               --              --
                                                 ------------   -------------      -----------      -----------   -------------
Balance at December 31, 1998                           16,677             167              100                1          47,138
Comprehensive income (loss):
  Net loss                                                 --              --               --               --              --
  Net unrealized gain on securities available
   for sale                                                --              --               --               --              --
  Net foreign currency translation adjustments             --              --               --               --              --
                                                 ------------   -------------      -----------      -----------   -------------
Total comprehensive income (loss)                          --              --               --               --              --
  Issuance of Series D preferred stock at $50,000
   per share, net of offering costs of $34,000             --              --              100                1           4,966
  Issuance of units of common stock and common
   stock purchase warrants at $1.25 per unit,
   net of offering costs of $24,000                     1,682              17               --               --           2,057
  Issuance of common stock upon exercise of
   stock options at various prices                        261               2               --               --             296
  Issuance of stock options for services                   --              --               --               --              16
  Series D preferred stock dividend at 10% and
   accretion of fees                                       --              --               --               --             104
                                                 ------------   -------------      -----------      -----------   -------------
Balance at December 31, 1999                           18,620             186              200                2          54,577
Comprehensive income (loss):
  Net loss                                                 --              --               --               --              --
  Net unrealized loss on securities available
   for sale                                                --              --               --               --              --
  Reclassification adjustment                              --              --               --               --              --
  Net foreign currency translation adjustments             --              --               --               --              --
                                                 ------------   -------------      -----------      -----------   -------------
Total comprehensive income (loss)                          --              --               --               --              --
  Conversion of Series A and Series D
   preferred stock                                      6,507              65             (200)              (2)            (63)
  Issuance of common stock upon exercise of
   stock options and warrants                             920               9               --               --           1,036
  Issuance of stock options and warrants for
   services                                                --              --               --               --             586
  Issuance of common stock warrants attached
   to bridge loan                                          --              --               --               --              94
  Issuance of stock options to employees                   --              --               --               --             123
  Issuance of common stock for services                   110               2               --               --             164
  Common stock to be issued in asset purchase              --              --               --               --              --
  Series D preferred stock dividend at 10%                 --              --               --               --             348
                                                 ------------   -------------      -----------      -----------   -------------
Balance at December 31, 2000                           26,157   $         262               --      $        --   $      56,865
                                                 ------------   -------------      -----------      -----------   -------------

<CAPTION>
                                                   Accumulated            Common
                                                      other               stock          Deferred                       Total
                                                   comprehensive          to be         stock-based     Accumulated   stockholders'

                                                   income (loss)          issued       compensation       deficit       equity
                                                  ----------------    --------------   ---------------  ------------  -------------
<S>                                               <C>                 <C>              <C>              <C>            <C>
Balance at December 31, 1997                       $            --    $           --    $           --    $ (43,675)   $    771
  Conversion of Series C preferred stock                        --                --                --           --          --
  Common stock and warrants issued for legal
   settlement                                                   --                --                --           --         307
  Series C preferred stock dividend at 6%                       --                --                --         (278)         --
  Issuance of warrants for services                             --                --                --           --         168
  Issuance of stock options for services                        --                --                --           --          78
  Expense related to stock option plans                         --                --                --           --          29
  Capital contribution                                          --                --                --           --       2,000
  Total comprehensive income (loss)-net loss                    --                --                --       (1,384)     (1,384)
                                                   ---------------    --------------   ---------------    ---------    --------
Balance at December 31, 1998                                    --                --                --      (45,337)      1,969
Comprehensive income (loss):
  Net loss                                                      --                --                --       (3,927)     (3,927)
  Net unrealized gain on securities available
   for sale                                                    212                --                --           --         212
  Net foreign currency translation adjustments                 (11)               --                --           --         (11)
                                                   ---------------    --------------   ---------------    ---------    --------
Total comprehensive income (loss)                              201                --                --       (3,927)     (3,726)
  Issuance of Series D preferred stock at $50,000
   per share, net of offering costs of $34,000                  --                --                --           --       4,967
  Issuance of units of common stock and common
   stock purchase warrants at $1.25 per unit,
   net of offering costs of $24,000                             --                --                --           --       2,074
  Issuance of common stock upon exercise of
   stock options at various prices                              --                --                --           --         298
  Issuance of stock options for services                        --                --                --           --          16
  Series D preferred stock dividend at 10% and
   accretion of fees                                            --                --                --         (104)         --
                                                   ---------------    --------------   ---------------    ---------    --------
Balance at December 31, 1999                                   201                --                --      (49,368)      5,598
Comprehensive income (loss):
  Net loss                                                      --                --                --       (8,956)     (8,956)
  Net unrealized loss on securities available
   for sale                                                   (263)               --                --           --        (263)
  Reclassification adjustment                                  121                --                --           --         121
  Net foreign currency translation adjustments                 (59)               --                --           --         (59)
                                                   ---------------    --------------   ---------------    ---------    --------
Total comprehensive income (loss)                             (201)               --                --       (8,956)     (9,157)
  Conversion of Series A and Series D
   preferred stock                                              --                --                --           --          --
  Issuance of common stock upon exercise of
   stock options and warrants                                   --                --                --           --       1,045
  Issuance of stock options and warrants for
   services                                                     --                --                --           --         586
  Issuance of common stock warrants attached
   to bridge loan                                               --                --                --           --          94
  Issuance of stock options to employees                        --                --               (81)          --          42
  Issuance of common stock for services                         --                --                --           --         166
  Common stock to be issued in asset purchase                   --             3,228                --           --       3,228
  Series D preferred stock dividend at 10%                      --                --                --         (348)         --
                                                   ---------------    --------------   ---------------    ---------    --------
Balance at December 31, 2000                       $            --    $        3,228    $          (81)   $ (58,672)   $  1,602
                                                   ---------------    --------------   ---------------    ---------    --------
</TABLE>

         See accompanying notes to consolidated financial statements.

                                      F-5
<PAGE>

                              SAFLINK Corporation
                     Consolidated Statements of Cash Flows


<TABLE>
<CAPTION>
                                                                                     Year Ended December 31,
                                                                        2000                  1999                  1998
                                                                  ----------------      ----------------      ----------------
                                                                                          (In thousands)
<S>                                                               <C>                   <C>                   <C>
Cash flows from operating activities:
Net loss                                                                   $(8,956)              $(3,927)              $(1,384)
 Adjustments to reconcile net loss to net cash used in operating
  activities
 Stock-based compensation                                                      389                    16                   275
 Depreciation and amortization                                                 313                   239                   587
 Purchased in-process research and development                                 208                     -                     -
 Issuance of stock and warrants for legal settlement                             -                     -                   307
 Loss on sale of securities available for sale                                 121                     -                     -
 Loss (gain) on disposal of furniture and equipment                              -                    17                   (57)
 Amortization of deferred financing costs                                       97                     -                     -
 Amortization of discount on note payable                                        3                     -                     -
 Changes in operating assets and liabilities:
    Accounts receivable                                                         27                   (31)                  301
    Inventory                                                                   13                    (1)                  325
    Prepaid royalties and other prepaid expenses                               145                    (9)                    2
    Accounts payable                                                           472                   107                  (488)
    Accrued expenses                                                           387                    84                  (734)
    Deferred revenue                                                          (296)                 (156)                  131
    Other, net                                                                 (63)                   20                    12
                                                                  ----------------      ----------------      ----------------
       Net cash used in operating activities                                (7,140)               (3,641)                 (723)

Cash flows from investing activities
Purchases of furniture and equipment                                          (684)                 (105)                  (52)
Proceeds from the sale of furniture and equipment                                -                     6                   213
Purchase of technology licenses                                               (100)                    -                     -
Proceeds from sale of securities available for sale                            315                     -                     -
                                                                  ----------------      ----------------      ----------------
       Net cash provided by (used) in investing activities                    (469)                  (99)                  161

Cash flows from financing activities
Proceeds from issuances of bridge notes and warrants                         2,400                     -                     -
Payments made on note payable                                                  (63)                    -                     -
Proceeds from stock options and warrants exercises                           1,045                     -                     -
Proceeds from capital contribution                                               -                     -                 2,000
Proceeds from issuance of preferred stock                                        -                 4,967                     -
Proceeds from issuance of common stock                                           -                 2,372                     -
                                                                  ----------------      ----------------      ----------------
       Net cash provided by financing activities                             3,382                 7,339                 2,000
                                                                  ----------------      ----------------      ----------------


       Net increase (decrease) in cash and cash equivalents                 (4,227)                3,599                 1,438
Cash and cash equivalents at beginning of period                             5,335                 1,736                   298
                                                                  ----------------      ----------------      ----------------
Cash and cash equivalents at end of period                                 $ 1,108               $ 5,335               $ 1,736
                                                                  ================      ================      ================

SUPPLEMENTAL CASH FLOW INFORMATION
Non-cash financing and investing activities:
    Preferred stock dividend                                                   348                  104                  278
    Issuance of common stock for services                                      166                    -                    -
    Issuance of common stock warrants attached to bridge loan                   94                    -                    -
    Common Stock issuable in asset purchase                                  3,228                    -                    -
    Assets and liabilities recognized upon acquisition:
     Furnitre and equipment                                                    182                    -                    -
     Intangibles                                                             5,174                    -                    -
     Note payable, net of $155 discount                                      1,545                    -                    -
 Direct acquisition costs included in accounts payable                         726                    -                    -
                                                                  ================     ================     ================
</TABLE>

         See accompanying notes to consolidated financial statements.

                                      -6-
<PAGE>

                              SAFLINK Corporation
                  Notes to Consolidated Financial Statements


1. The Company

     SAFLINK Corporation, a Delaware corporation organized on October 23, 1991,
and its wholly-owned subsidiary, ("SAFLINK" or the "Company") provides a suite
of Internet and enterprise security software products that utilize biometric
technologies to replace passwords or other user authentication methods for
accessing information over the Internet, on personal computers, or in networked
computing environments.

2. Summary of Significant Accounting Policies

Principles of Consolidation

     The consolidated financial statements include the accounts of SAFLINK
Corporation and its wholly owned subsidiary, SAFLINK International, Inc., a
Delaware corporation organized on June 25, 1998.  All intercompany accounts and
transactions have been eliminated.

Revenue Recognition

     During 2000, 1999 and 1998, revenue was derived from the sale of the
Company's software and hardware products, the performance of programming and
integration services, and, through the first quarter of 1999, post contract
customer support (PCS) for the welfare fraud systems in the states of
Connecticut and New Jersey.  The Company follows the provisions of the AICPA's
Statement of Position No. 97-2, Software Revenue Recognition (SOP 97-2) which
provides specific industry guidance and stipulates that revenue recognized from
software arrangements is to be allocated to each element of the arrangement
based on the relative fair values of the elements, such as software products,
upgrades, enhancements, post contract customer support, installation, or
training. Under SOP 97-2, the determination of fair value is based on objective
evidence that is specific to the vendor. If such evidence of fair value for each
element of the arrangement does not exist, all revenue from the arrangement is
deferred until such time that evidence of fair value does exist or until all
elements of the arrangement are delivered. In 1999, the SEC issued Staff
Accounting Bulletin No. 101, Revenue Recognition in Financial Statements (SAB
101). SAB 101 provides guidance on revenue recognition and the SEC staff's views
on the application of accounting principles to selected revenue recognition
issues.  The adoption of SAB 101 at October 1, 2000 did not have a material
effect on the Company's revenue recognition or the Company's results of
operations.

Major Customers

     Four customers accounted for approximately 38%, 20%, 17% and 10%,
respectively, of the Company's 2000 revenue.  Two customers accounted for
approximately 45% and 22%, respectively, of the Company's 1999 revenue.
Approximately 80% of the Company's 1998 revenue was from the sale of software
licenses and related services to one customer.  No other individual customer
accounted for significant sales in 1998.

Use of Estimates

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

Cash and Cash Equivalents

     The Company considers all highly liquid investments with maturity at
purchase of three months or less to be cash equivalents.  Cash and cash
equivalents consist of cash in bank and overnight investments in repurchase
agreements collateralized by United States Government or United States
Government Agency obligations.

Management of Credit Risk

     The Company is subject to concentrations of credit risk from its cash
investments.  The Company's credit risk is managed through monitoring the
stability of the financial institutions utilized and diversification of its
financial resources.  The Company's financial instruments consist of cash and
cash equivalents, overnight investments in repurchase agreements,

                                      F-7
<PAGE>

accounts receivable and investment in a bank time certificate of deposit and
accounts and notes payable. The fair value of these instruments approximates
their carrying value based on the current rate offered to the Company for
similar instruments.

Inventory

     Inventory is comprised of computer hardware to be purchased by customers in
connection with the installation of the Company's biometric products.
Inventories are stated at the lower of cost, on a first-in, first-out basis, or
market.

Investments

     Investments consist of a $102,000 bank time certificate of deposit and, for
1999, publicly traded equity securities.  The time certificate of deposit, which
is pledged to secure a letter of credit issued in lieu of a security deposit
related to the lease of the Company's headquarters facility, is carried at cost.
The equity securities are classified as available-for-sale and are carried at
fair value.  Unrealized gains and losses are excluded from operations and
reported as a separate component of other comprehensive income (loss) until
realized. Unrealized gains (losses) were $(263,000), $212,000 and $0 in 2000,
1999 and 1998 respectively.  Realized gains and losses from the sale of the
equity securities are determined on a specific identification basis.  Realized
losses were $122,000 for the year ended December 31, 2000.  There were no
realized gains or losses in 1999 and 1998.

Software Development Costs

     The Company expenses costs associated with the development of software as
incurred until technological feasibility is established.  The Company believes
its current process for developing software is essentially completed
concurrently with the establishment of technological feasibility; accordingly,
software costs incurred after establishment of technological feasibility have
not been material; and therefore, have been expensed.

Furniture and Equipment

     Furniture and equipment are recorded at cost.  Depreciation is provided
using the straight-line method over the following estimated useful lives of the
assets:

                                                               Years
                                                         -----------------

          Computer equipment and software                      1 to 3
          Office furniture, equipment and other               3 to 10

Intangible Assets

     Purchased technology and other intangibles are amortized on a straight-line
basis over their estimated useful lives of three years.  The Company assesses
the recoverability of intangible assets by determining whether the amortization
of the intangible balance over its remaining life can be recovered through
undiscounted future operating cash flows of the acquired operations.  The amount
of intangible asset impairment, if any, is measured based on projected
discounted future operating cash flows using a discount rate reflecting the
Company's average cost of funds.  The assessment of the recoverability of
intangible assets will be impacted if estimated future operating cash flows are
not achieved.

Advertising Costs

     The Company expenses advertising costs as incurred.  Advertising expense
was approximately $428,000, $298,000 and $228,000 in 2000, 1999, and 1998
respectively.

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 the 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.

Stock-Based Compensation

     The Company accounts for its employee stock options in accordance with the
provisions of Accounting Principles Board (APB) Opinion No. 25, Accounting for
Stock Issued to Employees, and related interpretations. As such, compensation

                                      F-8
<PAGE>

expense related to fixed employee stock options is recorded on a straight-line
basis over the vesting period of the option only if, on the date of grant, the
fair value of the underlying stock exceeded the exercise price. The Company has
adopted the disclosure-only requirements of Statement of Financial Accounting
Standards (SFAS) No. 123, Accounting for Stock-Based Compensation, which allows
entities to continue to apply the provisions of APB Opinion No. 25 for
transactions with employees and provide pro forma net income and pro forma
earnings per share disclosures as if the fair-value based method of accounting
in SFAS No. 123 had been applied to employee stock option grants.

     The Company accounts for non-employee stock-based compensation in
accordance with SFAS No. 123 and EITF No. 96-18.

Net Loss per Common Share

     In accordance with SFAS No. 128, Earnings Per Share, the Company has
reported both basic and diluted net loss per common share for each period
presented. Basic net loss per common share is computed on the basis of the
weighted-average number of common shares outstanding for the year. Diluted net
loss per common share is computed on the basis of the weighted-average number of
common shares plus dilutive potential common shares outstanding. Dilutive
potential common shares are calculated under the treasury stock method.

     The following tables sets forth the computation of basic and diluted loss
per common share:

<TABLE>
<CAPTION>
(In thousands, except net loss per common share)                 2000         1999         1998
                                                             ------------------------------------
<S>                                                          <C>             <C>          <C>
Numerator:
 Net loss                                                       $(8,956)     $(3,927)     $(1,384)
 Preferred Stock dividend and accretion                             348          104          278
                                                             ------------------------------------
 Net loss attributable to common stockholders                   $(9,304)     $(4,031)     $(1,662)
                                                             ====================================

Denominator:
 Weighted average number of common shares
     outstanding during the period                               21,367       17,541        7,216
 Common shares issuable but not outstanding                         235            -            -
                                                             ------------------------------------
                                                                 21,602       17,541        7,216
                                                             ====================================

 Net loss per common share                                      $(.43)       $  (.23)     $  (.23)
                                                             ====================================
</TABLE>

Securities that could potentially dilute basic income per share consist of
outstanding stock options and warrants and convertible preferred stock.  Net
loss attributable to common stockholders includes net loss and preferred stock
dividend.  As the Company had a net loss attributable to common shareholders in
each of the periods presented, basic and diluted net loss per common share are
the same.  Dilutive potential securities outstanding at year-end were not
included in the computation of diluted net loss per common share, because to do
so would have been anti-dilutive.  Dilutive potential securities for the years
ended December 31, 2000, 1999 and 1998 included preferred stock convertible into
approximately no shares, 6.2 million and 2.6 million common shares,
respectively, and options and warrants to purchase approximately 3.7 million,
3.7 million and 2.7 million common shares, respectively.

Segment Reporting

     Operating segments are revenue-producing components of the enterprise for
which separate financial information is produced internally for the Company's
management.  Under this definition, the Company operated, for all periods
presented, as a single segment.

Comprehensive Income

     SFAS No. 130, Reporting Comprehensive Income, establishes standards for
reporting and presentation of comprehensive income (loss) and its components in
a full set of financial statements.  Comprehensive loss consists of net loss,
foreign currency translation adjustments and net unrealized gains (losses) from
securities available for sale and is presented in the accompanying statements of
stockholders' equity and comprehensive income (loss).  SFAS No. 130 requires
only additional disclosures in the financial statements; it does not affect the
Company's financial position or operations.

                                      F-9
<PAGE>

Reclassifications

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

Foreign Currency

     The Company, as part of its acquisition of Jotter Technologies Inc., now
has operations in Canada and accordingly has expenses denominated in foreign
currencies.  Realized and unrealized gains an losses resulting from foreign
currency transactions are included in other income (expense).  There were no
significant gains or losses in 2000.

Recently Issued Accounting Pronouncements

     The Financial Accounting Standards Board issued SFAS No. 133, Accounting
for Derivative Instruments and Hedging Activities, in June 1998. This statement
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities. It requires that an entity recognize all derivatives as
either assets or liabilities in the balance sheet and measure those instruments
at fair value. If certain conditions are met, a derivative may be specifically
designated as a hedge. The accounting for changes in the fair value of a
derivative depends on the intended use of the derivative and the resulting
designation. SFAS No. 133, as amended, is effective for all fiscal quarters of
fiscal years beginning after June 15, 2000.  The adoption of this statement on
January 1, 2001 did not have a material impact on our consolidated financial
statements.

     In June 2000, the SEC updated Staff Accounting Bulletin No. 101, Revenue
Recognition in Financial Statements (SAB 101).  The most recent update delayed
the effective date of SAB 101 to the fourth quarter for fiscal years beginning
after December 15, 1999. SAB 101 provides guidance on revenue recognition and
the SEC staff's views on the application of accounting principles to selected
revenue recognition issues. The Company adopted the provisions of SAB 101 in the
fourth quarter of 2000 and the implementation of these provisions did not have a
material impact on the consolidated financial statements.

     In March 2000, the Financial Accounting Standards Board (FASB) issued
Interpretation No. 44, Accounting for Certain Transactions Involving Stock
Compensation, an Interpretation of APB Opinion No. 25. Interpretation No. 44
clarifies the application of APB Opinion 25, Accounting for Stock Issued to
Employees, for issues, among others, regarding; (a) the definition of employees,
(b) defining non-compensatory plans, (c) modifications to previously fixed stock
option awards, and (d) accounting for an exchange of stock compensation awards
in a business combination. The Company adopted Interpretation No. 44 in the
third quarter of 2000 and it did not have a material impact on the consolidated
financial statements.

3. Technology Licenses

     The Company has acquired certain rights to biometric identification and
authentication software (the "Licensed Technology") under agreements with
software algorithm suppliers including Anovea, Inc., AuthenTec, Inc., Lernout &
Hauspie Speech Products NV, Precise Biometrics AB, Veridicom, Inc. and Visionics
Corporation that may be terminated in the event the Company fails to pay license
fees (including minimum specified payments) or commits any other material breach
of any covenant of such agreements.  Prepayments in the amount of $280,000 and
$190,000 made during 2000 and 1999, respectively, were charged to general and
administrative expense in 2000 due to the uncertainty related to the Company's
ability to utilize them during the term of the license agreements.

4. Furniture and Equipment

     Furniture and equipment consists of the following:
                                                          December 31,
                                                          ------------
                                                       2000         1999
                                                     -------      -------
                                                        (In thousands)
          Computer equipment and software            $ 1,757      $ 1,006
          Office furniture, equipment and other          333          218
                                                     -------      -------
                                                       2,090        1,224
          Less: accumulated depreciation              (1,221)      (1,020)
                                                     -------      -------
                                                     $   869      $   204
                                                     =======      =======

     Depreciation expense amounted to $201,000 in 2000, $239,000 in 1999, and
$587,000 in 1998.

                                     F-10
<PAGE>

5. Intangibles

     Intangibles consists of the following at December 31, 2000 (in thousands):

          Developed product technology                      $3,819
          Assembled work force                                 729
          Sales channel/customer relationships                 626
          Technology licenses                                  274
                                                            ------
                                                             5,448
          Less:  accumulated amortization                     (104)
                                                            ------
                                                            $5,344
                                                            ======

     Amortization expense related to technology licenses was $32,000 for the
year ended December 31, 2000.  Technology licenses are amortized over their
contractual life.  Deferred rent is amortized over the term of the related
lease.

6. Bridge Notes Payable

     On November 13, 2000 the Company received approximately $2.4 million (net
of issuance costs of approximately $100,000) of unsecured notes  and warrants to
a group of investors, including the Company's largest stockholder, RMS Limited
Partnership, and two of the Company's officers.  The notes carry an effective
annual interest rate of 12% and will mature in May 2001.  Holders of the notes
will be entitled to participate in any financing undertaken by SAFLINK prior to
the maturity date of the notes by electing to receive, in lieu of repayment of
the notes, securities of the same class and on the same terms as issued in such
financing.  The Company also agreed to issue warrants allowing the note holders
to purchase one share of SAFLINK common stock for each $4.00 invested.  RMS and
the Company officers participating in the financing elected not to accept the
warrants; the Company therefore only issued warrants for the purchase of 362,500
shares of SAFLINK common stock for $1.50 per share exercisable at any time until
November 2005.

7. Income Taxes

     As of December 31, 2000, the Company had net operating loss carryforwards
of approximately $55.3 million for federal income tax purposes, which expire at
various dates through 2020.  The difference between the net operating loss
carryforward for federal income tax purposes and the deficit accumulated for
financial reporting arises primarily from temporary differences associated with
the Company's start-up expenses which were capitalized for income tax purposes
and, beginning January 1995, are being ratably amortized to expense over a 60-
month period.

     These temporary differences and net operating loss carryforwards give rise
to deferred tax assets of approximately $20.9 million and $14.0 million as of
December 31, 2000 and 1999, respectively, based on a combined federal and state
statutory rate of 37% in 2000 and 37.7% in 1999.  Due to the uncertainty of
achieving taxable income sufficient to realize the deferred tax asset, a
valuation allowance of $20.9 million and $14.0 million was recorded as of
December 31, 2000 and 1999, respectively, which fully offsets the deferred tax
asset.  The valuation allowance increased approximately $6.9 Million, $1.6
million and $2.8 million in 2000, 1999 and 1998, respectively.

     The future utilization of the tax benefit carryforward items is subject to
an annual limitation when a cumulative change in stock ownership of more that
50% occurs over a three year period.  The Company believes that such a change
has occurred, and that it is possible that taxable income and income taxes in
future years, which would otherwise be offset by net operating losses and
reduced by tax credits, will not be offset or reduced and, therefore, income tax
liabilities will be incurred.  The potential tax benefits of these carryforwards
at December 31, 2000 and 1999 of approximately $20.9 million and $14.0 million,
respectively, have been fully reserved in the financial statements due to the
uncertainty of realization.  Tax benefits will be recognized in future years and
when such benefits are judged to be realizable.

     An analysis of the reasons for the variations from the expected federal
corporate income tax rate of 34% and the effective rates provided is as follows:

<TABLE>
<CAPTION>
                                                   2000      1999       1998
                                                   ----      ----       ----
                                                           (Percent)
                                                  ----------------------------
<S>                                               <C>        <C>        <C>
Tax benefit computed                              (34.0)     (34.0)     (34.0)
State tax, net of federal benefit                  (3.0)      (3.7)      (3.6)
Nondeductible items (meals and entertainment)       0.0        0.1        0.5
Change in valuation allowance                      37.0       37.6       37.1
                                                  ------     ------     ------
  Effective tax rate                                0.0        0.0        0.0
                                                  ======     ======     ======
</TABLE>

                                     F-11
<PAGE>

8. Stockholders' Equity

Preferred Stock

     The Series A preferred stock was converted into 2,600,532 shares of common
stock of the Company on September 15, 2000.

     On February 6, 1997, the Company completed an equity financing (the "Series
C Preferred Stock Private Placement") pursuant to which two accredited
investment funds purchased an aggregate of 350,000 shares of the Company's
Series C Preferred Stock, $.01 par value per share (the "Series C Preferred
Stock"), for an aggregate purchase price of $7.0 million before commissions and
expenses which totaled approximately $613,000.  Shares of Series C Preferred
Stock were convertible at the option of the holder into shares of common stock,
based upon a defined conversion formula.  The Series C Preferred Stock carried a
six percent per annum accretion which the Company treated as a dividend
resulting in a charge to accumulated deficit and a credit to additional paid-in
capital.  The Company recorded accretion of $278,000 during 1998.  It also
recorded, during 1997, a deemed dividend of $1.5 million attributable to the
recognition of the market discount that the holders received upon conversion
into Common Stock.  90,250 shares of Series C Preferred Stock were converted
into 560,653 shares of Common Stock, including 23,442 shares attributable to
accrued dividends, during 1997.  The remaining 259,750 shares of Series C
Preferred Stock were converted into 10.3 million shares of Common Stock,
including 1.0 million shares attributable to accrued dividends, during 1998.

     On November 9, 1999 the Company issued 100,000 shares of Series D Preferred
Stock to RMS Limited Partnership ("RMS") for an aggregate purchase price of $5.0
million.  The holder converted the Series D Preferred Stock, and accumulated
dividends, into 3.9 million shares of the Company's Common Stock on September
11, 2000.  The Series D Preferred Stock carried a 10% per annum cumulative
dividend.

Common Stock

     During 2000, the Company issued 60,000 shares of Common Stock, valued at
$105,000 to H.C. Wainwright & Co., Inc. as partial consideration for services
performed in relation to obtaining additional financing and the acquisition of
Jotter Technologies Inc.  The Company recorded $41,000 as prepaid financing
costs, which will be netted against the proceeds of the equity financing when
completed, and recorded $64,000 as part of the acquisition costs of the assets
acquired from Jotter Technologies Inc.

     During 2000, the Company agreed to issue 50,000 shares of Common Stock,
valued at $61,000 to H.C. Wainwright & Co., Inc. as partial consideration for
services performed in relation to the $2.5 million bridge financing.

     During 1999, the Company issued units consisting of Common Stock and
warrants to purchase Common Stock, for a total of 1,681,670 shares of Common
Stock and 840,835 warrants, at $1.25 per share, for $2.1 million.  The warrants
may be exercised, for $1.00 per share, by the holders at any time until July 23,
2001.

     During 1998, the Company issued 41,667 shares of Common Stock, as well as
fully vested warrants to purchase 75,000 shares of Common Stock for $3.38 per
share, to International Interest Group, Inc. ("IIG") as part of the settlement
of a lawsuit filed by IIG on February 13,1997.  32,750 warrants are outstanding
at December 31, 2000 and remain exercisable until May 14, 2002.

Stock Options

     The Company maintains an employee stock incentive plan (the "Plan") for
officers, directors and key employees under which 4,000,000 shares of Common
Stock were reserved for issuance as of December 31, 2000.  In addition, the
Company has granted, outside of the Plan, options to purchase an aggregate of
695,000 shares of Common Stock to certain employees.  Options currently granted
by the Company generally have a contractual life of 10 years and vest ratably
over a three-year period.  Additionally, from time to time, the Company will
grant stock options to non-employees in exchange for services rendered.  During
1999, a total of 165,000 options were issued to contractors at an average
exercise price of $1.58.  Expense recorded related to these non-employee grants
during 2000 and 1999 was estimated using the Black-Scholes valuation model and
amounted to $72,000 and $16,000, respectively, which represents the vested
portion of such options.  A total of 137,917 options were outstanding to non-
employees at December 31, 2000.

     Certain options, including 1999 option grants to employees who agreed to
relocate from Tampa to either Redmond, Washington or Reston, Virginia, were
granted with exercise prices less than the market price of the underlying stock
on grant date and the Company has recorded compensation expense for these
options.  Compensation related to employee stock options is measured as of the
grant date.  The difference between market value of the options, at time of
issuance, and their exercise

                                     F-12
<PAGE>

price is charged to stockholders' equity and amortized to expense over the
options' vesting periods. The Company recognized $42,000, $4,000 and $29,000 as
compensation expense in 2000, 1999 and 1998, respectively, relating to
compensatory options.

     Disclosure of pro forma information regarding net loss and loss per share
is required by SFAS No. 123. If compensation expense related to employee stock
options issued had been determined based on the fair values at the grant dates
consistent with the method of accounting prescribed by SFAS No 123, the
Company's net loss attributable to common stockholders and loss per common share
would have been as follows:

<TABLE>
<CAPTION>
       (In thousands, except EPS)                                            2000            1999            1998
<S>                                                                        <C>             <C>             <C>
       Net loss attributable to common stockholders                        $(9,303)        $(4,031)        $(1,662)
       Pro forma net loss attributable to common stockholders               (9,927)         (4,385)         (4,558)
       Basic and diluted EPS, as reported                                    (0.45)          (0.23)          (0.23)
       Basic and diluted EPS, pro forma                                      (0.48)          (0.25)          (0.63)
</TABLE>

     The fair value for these options was estimated at the date of grant using a
Black-Scholes option pricing model based on the following assumptions: risk-free
interest rates of 6.0% for 2000, 6.0% for 1999, and 5.0% for 1998; no dividends;
volatility factors of the expected market price of the Company's Common Stock of
132% for 2000, 129% for 1999, and 127% for 1998; and a weighted-average expected
life of 5.6 years for 2000, 6.3 years for 1999, and 3.0 years for 1998. The
weighted-average fair value of options granted during 2000, 1999 and 1998 was
$0.84, $0.51 ($1.65 for options granted with exercise prices less than fair
value and $0.41 for options granted with exercise prices equal to fair value),
and $0.56 per share, respectively.

     The following table summarizes stock option activity:

<TABLE>
<CAPTION>
                                                                 Options Outstanding      Weighted-Average
                                                                    (In thousands)         Exercise Price
                                                                 -------------------      ----------------
<S>                                                              <C>                      <C>
Outstanding at December 31, 1997                                          757                   $8.34
   Granted: price equal to fair value                                   1,993                    1.82
   Expired or Cancelled                                                  (442)                   8.11
                                                                       ------                   -----
Outstanding at December 31, 1998                                        2,308                    2.24
   Granted: price less than fair value                                    138                    0.78
   Granted: price equal to fair value                                   1,560                    1.63
   Exercised                                                             (187)                   1.18
   Expired or Cancelled                                                  (326)                   4.33
                                                                       ------                   -----
Outstanding at December 31, 1999                                        3,493                    1.77
   Granted: price equal to fair value                                     935                    3.02
   Exercised                                                             (399)                   1.16
   Expired or Cancelled                                                (1,312)                   2.70
                                                                       ------                   -----
Outstanding at December 31, 2000                                        2,717                   $1.83
                                                                       ======                   =====
</TABLE>

     The following table summarizes information about employee stock options
outstanding at December 31, 2000:

<TABLE>
<CAPTION>
                                          Options outstanding                                  Options exercisable
                      -----------------------------------------------------------       ---------------------------------
                                         Weighted-average
                         Number             remaining           Weighted-average           Number        Weighted-average
   Range of           outstanding        contractual life      exercise price per       exercisable       exercise price
exercise prices         (000's)             (in years)                share               (000's)            per share
---------------       -----------        ----------------      ------------------       -----------      ----------------
<S>                   <C>                <C>                   <C>                      <C>              <C>
 $0.01 - $1.35           1,477                 8.5                   $1.01                   832               $0.85
  1.36 -  2.70             718                 8.5                    1.75                   401                1.49
  2.71 -  4.05             137                 7.1                    2.90                    67                2.82
  4.06 -  5.40             385                 6.6                    4.73                   355                4.68
---------------       -----------       ----------------       ------------------       -----------      ----------------
  0.01 -  5.40           2,717                 8.2                    1.83                 1,655                1.90
===============       ===========       ================       ==================       ===========      ================
</TABLE>

     At December 31, 2000, 1999, and 1998, exercisable options of 1,655,000,
1,943,000, and 1,348,000, respectively, were outstanding at weighted average
exercise prices of $1.90, $1.88, and $3.12 per share, respectively.  As of
December 31, 2000, approximately 917,570 shares were available for future grant
under the Plan.

Warrants

                                     F-13
<PAGE>

     During 2000, the Company issued 350,000 warrants to purchase Common Stock
to two vendors as partial consideration for services rendered to the Company by
such vendors. The value of the warrants ($449,000), as determined using a Black-
Scholes pricing model is being capitalized or recognized as expense over the
underlying awards' service period.  One warrant, to purchase up to 250,000
shares, vested as the services were performed and is exercisable until July 31,
2005 at an exercise price of $2.19 per share.  The other warrant, to purchase up
to 100,000 shares, was fully vested upon grant and is exercisable until
September 18, 2005 at an exercise price of $2.00 per share.

     Also during 2000, the Company issued a warrant to purchase up to 25,000
shares of its Common Stock as partial consideration for the lease it entered
into for its corporate offices.  This warrant was fully vested upon grant and is
exercisable until May 18, 2005 at an exercise price of $3.00 per share.  The
value of the warrant ($65,000), determined using a Black-Scholes pricing model,
is being charged to occupancy expense on a straight-line basis over the five-
year lease term.

     In addition, the Company recorded $94,000 also determined using a Black-
Scholes pricing model, as a prepaid financing cost related to the issuance of
362,500 warrants to purchase Common Stock issued in connection with the receipt
of $2.5 million of bridge note financing in November 2000.  The warrants were
fully vested on grant and are exercisable until November 13, 2005 at an exercise
price of $1.50 per share.  The value of the warrants is being recognized as
interest expense over the six-month term of the bridge notes.

     During 1998, the Company recognized $335,000 of expense related to the
issuance of 121,875 warrants to purchase Common Stock.  This expense was
computed using a Black-Scholes pricing model and assumptions discussed under
options above.  These warrants were issued in connection with the IIG settlement
(75,000 warrants) and to consultants in exchange for services (46,875 warrants).

     In connection with the 1997 Series C Preferred Stock Private Placement, the
Company issued warrants to purchase up to 90,000 shares of Common Stock at an
exercise price of $15.68 per share, subject to certain adjustments from time to
time.  Such warrants are exercisable at any time and expire in January 2001.
The Company has also agreed to certain registration rights with respect to such
warrants.

     In connection with the 1996 Series B Preferred Stock Private Placement, the
Company issued warrants to purchase 47,431 shares of common stock at an exercise
price of $15.18 per share.  Such warrants are exercisable at any time and expire
in January 2001.  The Company has also agreed to certain registration rights
with respect to such warrants.

     The fair value for these warrants was estimated at the date of grant using
a Black-Scholes option pricing model based on the following assumptions: risk-
free interest rates of 6.0% for 2000, 6.0% for 1999, and 5.0% for 1998; no
dividends; volatility factors of the expected market price of the Company's
Common Stock of 132% for 2000, 129% for 1999, and 127% for 1998; and a weighted-
average expected life of equal to the contractual life of 5 years.

Capital Contribution

     On December 17, 1998, RMS Limited Partnership ("RMS"), Francis R.
Santangelo ("Santangelo") and Clearwater Fund III, L.P. ("Clearwater") entered
into a stock purchase agreement pursuant to which RMS and Santangelo agreed to
purchase 195,500 and 34,500 shares, respectively, of the Series C Convertible
Preferred Stock (the "Series C Preferred") of the Company from Clearwater in
exchange for $1.0 million cash and 1 million shares of the Common shares
received upon conversion of the Series C Preferred.  Upon consummation of the
purchase of the Preferred Stock, RMS and Santangelo converted all of their
respective shares of Series C Preferred into 8,264,138 and 1,458,377 shares,
respectively, of Common Stock (representing approximately 49.6% and 8.7% of the
then issued and outstanding shares of Common Stock).  After the issuance of such
shares of Common Stock and the delivery of the applicable shares of Common Stock
to Clearwater, RMS and Santangelo were the beneficial owners of 8,080,805 and
1,308,377 shares of Common Stock, respectively, representing approximately 48.5%
and 7.8%, respectively, of the then issued and outstanding shares of Common
Stock.  As a result of the foregoing transactions, RMS and Santangelo
effectively acquired control of the Company through the ability to control the
vote on most if not all matters to be determined by the stockholders of the
Company, including, without limitation, the election of the directors of the
Company.  Also as a part of this transaction, RMS and Santangelo agreed to
contribute $2.0 million to the Company to fund working capital needs without the
issuance of any additional securities.  The Company received these funds on
December 30, 1998.

     As of December 31, 2000 RMS Limited Partnership was the holder of
11,927,312 shares (38.2%) of the Company's outstanding Common Stock and, based
upon a voting agreement between RMS and Francis R. Santangelo, had the ability
to vote 12,835,689 shares (41.1%) of the Company's outstanding Common Stock.

                                      F-14
<PAGE>

9.   Commitments and Contingencies

          The Company leases office space and equipment under various non-
cancelable operating leases. The lease obligation related to office space is
secured by a pledged bank time certificate of deposit. Future minimum payments
under these lease commitments are as follows (in thousands):


                            Year Ending
                            December 31,
                            ------------

                                2001      $  497
                                2002         426
                                2003         419
                                2004         441
                                2005         184
                                ----------------
                                          $1,967
                                          ======

          Rent expense was $415,000 $261,000 and $266,000 for 2000, 1999, and
1998, respectively.

          During 2000, the Company began subleasing a portion of its corporate
headquarters to a third party under a sublease expiring in July 2001.  Total
rent expense presented above has not been reduced by sublease income totaling
$41,000 in 2000.  Similarly, minimum lease payments indicated above do not
reflect minimum rentals of $55,000 due in the future under such non-cancelable
sublease.

10.  Business Combinations

          On December 15, 2000, the Company purchased substantially all of the
intellectual property and fixed assets of Jotter Technologies, Inc. in exchange
for 5.1 million shares of the Company's common stock and a two-year unsecured
promissory note for $1.7 million.  The total consideration was valued at
approximately $5.6 million.  The asset purchase was deemed a business
combination under APB No. 16 and as such was recorded using the purchase method
of accounting.  The Company reduced the recorded value of the intangible assets
and recorded a discount of $155,000 on the promissory note to reflect the fair
value of the note based on a discounted rate of 12% and 7% stated interest rate.
The purchase agreement was consummated on December 15, 2000; however, the 5.1
million shares were subsequently issued in 2001.  As of December 31, 2001, the
value for the share consideration is reflected within stockholders' equity.

          The above acquisition was accounted for under the purchase method of
accounting, and accordingly, the purchase price was allocated to the assets
acquired based on their respective fair values.  The results of operations of
the acquired company are included in the Company's consolidated financial
statements since the date of acquisition.

          A summary of the combined consideration paid and liabilities assumed
for the above acquisition is as follows (in thousands):

               Common stock                                    $3,228
               Note payable, net of $155 discount               1,545
               Direct acquisition costs                           791
                                                               ------
                  Total                                        $5,564
                                                               ======

          The combined consideration paid and liabilities assumed were allocated
as follows (in thousands):

               Fixed assets                                    $  182
               In-process research and development                208
               Developed product technology                     3,819
               Assembled workforce                                729
               Sales channel/customer relationships               626
                                                               ------
                  Total                                        $5,564
                                                               ======

          Identifiable intangibles are being amortized using the straight-line
method over their estimated useful lives of 3 years. In-process research and
development of $208,000 was expensed immediately as it does not have alternative
future use to the Company.

          The following unaudited pro forma financial information presents the
combined results of operations of the Company and Jotter Technologies Inc. as if
the acquisition had occurred as of the beginning of the Company's 2000 and 1999
fiscal years, after giving effect to certain adjustments, including amortization
of intangibles.  The pro forma financial information

                                      F-15
<PAGE>

does not necessarily reflect the results of operations that would have occurred
had the Company and Jotter Technologies, Inc. constituted a single entity during
such periods.

<TABLE>
<CAPTION>
               (In thousands, except per share amounts)                     Years ended December 31,
                                                                            ------------------------
                                                                               2000          1999
                                                                            ----------    ----------
               <S>                                                          <C>           <C>
               Revenue                                                         $ 1,600        $1,303
               Net loss applicable to common stockholders                       15,275         8,747
               Net loss per share applicable to common stockholders               0.58          0.39
</TABLE>

          Pursuant to the asset purchase agreement, as subsequently amended, and
an escrow agreement executed on the closing date, the shares have been deposited
into escrow to be held in the event of any breach of the asset purchase
agreement, and to secure certain indemnification rights under the asset purchase
agreement. Shares held in escrow shall be distributed to Jotter as follows: (i)
350,000 shares 90 days after the closing date, and (ii) 250,000 shares per month
beginning one month after the first share distribution, provided that no shares
shall be released until the Company has notified the escrow agent that certain
Canadian tax obligations have been met.

          In the event that Jotter does not satisfy certain Canadian tax
obligations arising as a result of the transaction, the Company may be obliged
to pay such tax obligations and will be entitled, at the Company's option to
reduce the purchase price in an equal amount by reducing the number of shares in
escrow as valued on the closing date or the principal amount of the note or
both. On April 9, 2001, the Company announced that Jotter agreed to exchange the
remaining balance of the note payable for 1,670,115 shares of the Company's
Common Stock, with such shares valued at $1.00 per share, subject to stockholder
approval.

11.  Defined Contribution Retirement Plan

          The Company offers an employee benefit plan pursuant to Section 401(k)
of the Internal Revenue Code covering substantially all employees. Matching
employer contributions are set at the discretion of the Board of Directors.
There were no employer contributions made for 2000, 1999, or 1998.

12.  Litigation

          On June 16, 1999, International Interest Group, Inc. filed suit
against us and Mr. J. Anthony Forstmann, a former director and chairman of
SAFLINK, in the Superior Court of the State of California for the County of Los
Angeles (Civil Action No.: BC212033). This lawsuit relates to our alleged
failure to perform under the terms of a settlement agreement relating to a prior
lawsuit filed by IIG. The complaint alleged three causes of action: (i) our
breach of contract with IIG causing IIG to sustain damages; (ii) fraud; and
(iii) recission by IIG against us and Mr. Forstmann. IIG's cause of action for
recission and IIG's cause of action for fraud were dismissed with prejudice by
the trial court during the first quarter of 2000. However, the appellate court
reinstated IIG's fraud cause of action in August 2000. On November 7, 2000, IIG
filed a third amended complaint adding causes of action for fraud by
concealment, negligent misrepresentation and breach of fiduciary duties. IIG is
seeking actual and consequential damages and attorneys' fees in connection with
its cause of action for breach of contract; actual, consequential and punitive
damages in connection with its fraud causes of action and its breach of
fiduciary duties cause of action; and actual and consequential damages in
connection with its negligent misrepresentation cause of action. On May 31,
2001, the Court ruled on the Defendants' Motions for Summary Judgment and
Summary Adjudication. The Court (i) dismissed the case as against J. Anthony
Forstmann; (ii) dismissed IIG's causes of action for fraud by concealment,
negligent misrepresentation and breach of fiduciary duty as against SAFLINK; and
(iii) limited the remaining issues in the case to breach of the Settlement
Agreement (settling the underlying lawsuit) and false promise (by failing to use
reasonable best efforts to file a Form S-3 Registration Statement or to use
reasonable best efforts to register stock given to IIG in settlement of the
prior lawsuit). Trial has been set for July 18, 2001. The Company does not
believe the claims have any merit and intends to vigorously defend itself at
trial.

13.  Subsequent Events

Bridge Loan Warrants
--------------------
          On April 13, 2001, the Company offered to reduce the exercise price on
warrants issued in conjunction with the November 2000 bridge notes from $1.50
per share to $0.50 per share for warrants exercised by April 20, 2001.  250,000
warrants were exercised at the reduced exercise price.

Anovea Warrants
---------------
          In conjunction with the breach of the Anovea license agreement due to
delinquent payments, the Company negotiated extensions of payment terms through
the issuance of 20,000 warrants to purchase common stock at an exercise price of
$1.00 per share at any time until April 20, 2003; 20,000 warrants to purchase
common stock at an exercise price of $1.00 per share at any time until April 30,
2003; and an additional 10,000 warrants to purchase common stock at an exercise
price of $0.50 per

                                      F-16
<PAGE>

share at any time until May 31, 2003. Also, on May 31, 2001, the 40,000 warrants
issued on April 20, 2001 and April 30, 2001 were repriced to $0.50 per share.

NASDAQ Staff Determination
--------------------------
          On April 16, 2001, the Company received a Nasdaq Staff Determination
indicating that the Company fails to comply with the minimum bid price
requirement for continued listing set forth in Marketplace Rule 4310(c)(4), and
that its securities are, therefore, subject to delisting from The Nasdaq
SmallCap Market.

          The Company received a Nasdaq Staff Determination, dated May 31, 2001,
indicating that the Company fails to comply with the net tangible assets/market
capitalization/net income and shareholder approval requirements for continued
listing set forth in Nasdaq Marketplace Rules 4310(c)(2) and
4350(i)(1)(c)(ii)(b), and that its securities are, therefore, subject to
delisting from The Nasdaq SmallCap Market. Further, the Company was notified
that the Company's Form 10-K for the fiscal year ended December 31, 2000
contained a "disclaimer opinion" and therefore did not comply with Nasdaq's
filing requirement, as set forth in Marketplace Rule 4310(c)(14).

          The Company addressed these issues and appealed the Staff's
Determination at a hearing before the Nasdaq Listing Qualifications Panel on
June 7, 2001. At the hearing, Nasdaq requested additional information and took
no action. The Company is in the process of providing the requested information
and continuing its efforts to meet The Nasdaq SmallCap's continued listing
requirements.

Series E Convertible Preferred Stock
------------------------------------
          On May 21, 2001, the Company authorized the issuance of up to 45,000
shares of its Series E convertible preferred stock, $0.01 par value. The Series
E convertible preferred stock has a liquidation preference of $200 per share and
is convertible into common stock at $0.20 per share. The Series E convertible
preferred stock has a redemption feature based on registration rights.

Financing
---------
          On June 5, 2001, the Company issued 40,000 shares of Series E
convertible preferred stock and common stock purchase warrants for an aggregate
price of $8 million, including the conversion of certain bridge notes, in a
private placement to accredited investors. The Series E convertible preferred
stock issued in this transaction is convertible into 40 million shares of
SAFLINK common stock at any time until June 5, 2004. The preferred stock will
not pay a dividend and holders of the stock will have no voting rights other
than the right to elect two members of the Board of Directors. In addition,
investors received Series A warrants to purchase 40 million shares of common
stock at $0.25 per share exercisable until June 5, 2002, after which the
purchase price will increase to $0.50 per share and will be exercisable until
June 5, 2006. Series B warrants to purchase approximately 4.3 million shares of
common stock at $0.25 per share until the later of December 5, 2001 or 120 days
after the effective date of the registration of such warrants were issued to
investors purchasing more than $1 million of Series E convertible preferred
stock. After allocation of the proceeds to the warrants, the Company will record
a beneficial conversion feature in the form of a dividend on the Series E
convertible preferred stock. Pending receipt of stockholder approval of the
financing, holders of the Series E convertible preferred stock and warrants will
not be able to convert such securities into more than 19.99% of the number of
shares of common stock outstanding prior to the transaction.

          Debt holders representing $2.3 million in bridge notes and accrued
interest at the time of closing exercised their right to participate in the
financing. RMS Limited Partnership agreed to extend its $1 million bridge note
and accrued interest for an additional 12 months and the Company agreed to apply
50% of any proceeds received from the exercise of Series A and Series B warrants
towards principal and interest payments during the extension period. The
remaining $203,000 in outstanding bridge notes and accrued interest were repaid
from the proceeds of the financing.

          In connection with the financing, the Company has agreed to seek
stockholder approval at its next annual stockholders meeting for (i) the
issuance of common stock upon conversion of the Series E preferred stock and
warrants issued in the financing, (ii) a new stock option plan, (iii) a reverse
split of its common stock sufficient to allow the Company to meet NASDAQ's
continued listing requirements (and in any event not less than 1:5), and (iv)
the issuance of common stock to Jotter Technologies, Inc. upon conversion of the
balance of the $1.7 million note payable issued to Jotter as partial
consideration for the intellectual property and fixed assets acquired from
Jotter on December 15, 2000.

          The securities issued in connection with the financing were privately
placed with accredited investors and the issuance of such securities was not
registered under the Securities Act of 1933, as amended (the "Act") and may not
be offered or sold in the United States absent registration or an applicable
exemption from the registration requirements of the Act.

                                      F-17
<PAGE>

          As part of the placement, the Company agreed to file a registration
statement with the Securities and Exchange Commission to register the shares of
common stock issuable upon exercise of the warrants and conversion of the
preferred stock.  If such registration statement is not declared effective
within 60 days or 120 days (depending on the form of registration statement
filed), such registration is suspended, or the Company's common stock is not
listed or included for quotation on Nasdaq or another exchange after being so
listed or included, the Company will be required to pay a 1.5% cash penalty per
month to the purchasers of the Series E preferred stock and warrants. In
addition, if the registration statement is not declared effective by the
Securities and Exchange Commission within 160 days after the closing of this
transaction, holders of the Series E preferred stock will be entitled to redeem
for $250 per share in cash any of their then outstanding shares of Series E
preferred stock. Furthermore, the expiration dates and pricing of the Series A
and B Warrants may be adjusted depending on the availability of an effective
registration statement.

In conjunction with the Series E Preferred Stock financing, the Company
negotiated the following:

     .    Obligations totaling approximately $591,000 were forgiven or converted
          into notes payable in consideration for receiving payment of remaining
          outstanding amounts subsequent to the financing. In accordance with
          Statement of Financial Accounting Standards No. 15, Accounting by
          Debtors and Creditors for Troubled Debt Restructuring, the forgiveness
          effectively represents a modification of terms of the debt and
          signifies the restructuring of debt. The gain realized on the
          restructuring will be classified as an extraordinary item in the
          statement of operations for the three months ending June 30, 2001. The
          balance sheet includes the original amounts due to these creditors and
          presents the financial position of the Company as of December 31,
          2000. Subsequent to the financing, the reduced amounts were paid in
          full satisfaction of the obligations.
     .    After payment of a $100,000 lease termination fee, the terms of the
          lease for the Company's corporate offices were modified to provide for
          a month-to-month tenancy, terminable by either party upon 20 days
          notice.
     .    Extension of the maturity date of the $1 million bridge note payable
          to RMS Limited Partnership to May 12, 2002. In addition, the Company
          agreed to apply 50% of any proceeds received from the exercise of
          warrants issued in the Series E Preferred Stock financing towards
          principal and interest payments during the extension period.
     .    Issuance of placement agent warrants to purchase 3.0 million shares of
          common stock for $0.20 per share exercisable until June 5, 2006.

Staff Reductions
----------------
          In conjunction with a corporate restructuring implemented immediately
following the closing of the Series E Preferred Stock financing, the Company
initiated a staff reduction. As part of the staff reduction, the Company is
obligated to pay approximately $324,000 under severance packages to certain
employees. Additionally, all terminated employees who did not hold any vested
stock options at the time of their termination immediately vested in one-third
of the options held by them on the date of their termination and the expiration
date of these and any other vested options held by employees terminated pursuant
to the restructuring were extended to June 6, 2002.

14.  Going Concern

          The Company incurred net losses of $9.0 million, $3.9 million and $1.4
million and used cash of $7.2 million, $3.6 million and $723,000 in operating
activities in 2000, 1999, and 1998, respectively. At December 31, 2000, the
Company has a net working capital deficit of $3.3 million and has an accumulated
deficit of $58.7 million.

          While the Company raised approximately $5.6 million of additional
working capital through the Series E Preferred Stock placement discussed in Note
13, the Company will require significant additional funds to continue its
operations beyond the middle of 2002. Options the Company is reviewing to obtain
such additional financing include, but are not limited to, the sale and issuance
of additional stock, the sale and issuance of debt, the sale of certain assets
and entering into an additional strategic relationship or relationships to
either obtain the needed funding or to create what the Company believes would be
a better opportunity to obtain such funds. The failure to obtain such additional
funds could cause the Company to cease or curtail operations.

          There can be no assurance that the Company will be able to sell
additional securities, achieve profitability, generate cash from operations or
obtain additional financing if required. The accompanying financial statements
have been prepared on the basis that the Company will be able to meet its
obligations as they become due and continue as a going concern.

15.   Quarterly Information (Unaudited)

          The following table summarizes the unaudited statements of operations
for each quarter of 2000 and 1999 (in thousands, except per share amounts):

<TABLE>
<CAPTION>
(In thousands)                                     Mar, 31    June, 30    Sept, 30    Dec, 31     Total
                                                  ---------  ----------  ----------  ---------   -------
 <S>                                              <C>        <C>         <C>         <C>         <C>
2000
</TABLE>

                                      F-18
<PAGE>

<TABLE>
<S>                                                 <C>         <C>         <C>        <C>       <C>
     Net revenues                                   $   416     $   463     $   277    $   367   $ 1,523
     Gross profit                                       215         373         198        256     1,042
     Operating loss                                  (1,954)     (1,990)     (2,036)    (2,846)   (8,826)
     Net loss                                        (1,892)     (1,947)     (2,066)    (3,051)   (8,956)
     Basic and diluted net loss per share             (0.11)      (0.11)      (0.10)     (0.15)    (0.43)

1999
     Net revenues                                       173         437         281        412     1,303
     Gross profit                                        78         412         130        324       944
     Operating loss                                  (1,063)       (751)     (1,072)    (1,067)   (3,953)
     Net loss                                        (1,053)       (766)     (1,057)    (1,051)   (3,927)
     Basic and diluted net loss per share             (0.06)      (0.05)      (0.06)     (0.06)    (0.23)
</TABLE>

                                      F-19
<PAGE>


                                EXHIBIT INDEX


Exhibit No.         Description
-----------         ---------------------------------

4.3                 Certificate of Designation, Preferences and Rights of Series
                    E Preferred Stock, dated as of June 5, 2001.

10.6                Form of Securities Purchase Agreement, dated June 5, 2001,
                    between the Company and the Purchasers listed therein.

10.7                Form of Registration Rights Agreement, dated June 5, 2001,
                    between the Company and the Purchasers listed therein.

10.8                Form of Series A Warrant, dated June 5, 2001.

10.9                Form of Series B Warrant, dated June 5, 2001.

10.10               Severance Agreement, dated December 10, 1998, as amended on
                    May 15, 2001, between SAFLINK Corporation and Jeffrey P.
                    Anthony.

10.11               Severance Agreement, dated January 5, 2000, as amended on
                    May 15, 2001, between SAFLINK Corporation and James W.
                    Shepperd

23.1                Consent of Ernst & Young LLP

23.2                Consent of KPMG LLP