<PAGE>

                      SECURITIES AND EXCHANGE COMMISSION
                            WASHINGTON, D.C.  20549

                                   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. 67th 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 [X]   No [_]

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

     The aggregate market value of the voting stock held by non-affiliates of
the registrant, based upon the average bid and asked prices of such stock on
April 6, 2001, was $7,985,238.  There were 32,216,695 shares of Common Stock
outstanding as of April 6, 2001.

                      DOCUMENTS INCORPORATED BY REFERENCE

     Portions of SAFLINK's definitive Proxy Statement for its Annual Meeting of
Stockholders to be filed with the Securities and Exchange Commission, no later
than April 30, 2001, are incorporated by reference into Part III hereof.

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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 significant additional funding we need to continue operations beyond
the near term. We are presently attempting to raise $10.0 million through a
private placement of Series E convertible preferred stock and warrants to
purchase common stock. While we have received expressions of interest from
certain accredited investors, including the receipt of a signed non-binding term
sheet for $3 million from a lead investor, there is no assurance that we will be
able to obtain the $10 million minimum amount (which may include conversion of
bridge notes) required to consummate this transaction. If the transaction is not
completed, we expect that it will be necessary to cease operations.

                                     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;
        ---------------

     .  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

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(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. after terminating a merger agreement previously
   entered into between us, Jotter and certain stockholders of Jotter. 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. As required under the asset purchase
   agreement, we have registered the shares issued to Jotter. 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.

 .  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. We issued unsecured notes, which bear
   interest at 12% per annum and mature in May 2001. Holders of the notes will
   be entitled to participate in any financing that we undertake prior to the
   maturity date of the notes by electing to receive, in lieu of repayment of
   the note, securities of the same class and on the same terms as issued in
   that financing. We also agreed to issue warrants allowing the note holders to
   purchase one share of our common stock for each $4.00 invested. The two
   directors elected not to accept the warrants; therefore we only issued
   warrants for the purchase of 79,688 shares of common stock exercisable for
   $1.50 per share at any time until March 2006. As an additional incentive to
   investors that had advanced more than $100,000 in the November 2000 bridge
   financing, we offered to reduce the exercise price of the warrants issued in
   the November 2000 financing from $1.50 to $0.50 per share if the investor
   agreed to exercise such warrant and advance additional bridge funds equal to
   $0.50 for every warrant share exercised before March 22, 2001. Warrants for
   37,500 shares were exercised before the deadline.

 .  In April 2001, we announced that Jotter Technologies Inc. has 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. Upon conversion of the
   debt, Jotter will own 6,770,115 shares of SAFLINK common stock, representing
   approximately 20.6%

                                       2
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   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.

 .  We are attempting to raise $10.0 million through the private placement of
   Series E convertible preferred stock and warrants to purchase common stock.
   There is no assurance that this transaction will be completed. If the
   transaction is not completed, we expect that it will be necessary to cease
   operations. If we discontinue operations, our company will likely liquidate
   and our stock will be delisted and become worthless.

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.

                                       3
<PAGE>

     .  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.

     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 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
        -------
        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.

                                       4
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     .  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.

 .  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 direct sales efforts are focused on the pursuit
of selected high profile end-user and original equipment manufacturer customers
as well as consumer sales through our corporate website on the Internet
(www.saflink.com).  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 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.

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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.

     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.

                                       6
<PAGE>

Competition

     Other companies which have also developed software products that utilize
biometric identification technology and are active in the United States include
BioNetrix, Digital Persona, Inc., American Biometric Company, Identix Inc.,
Keyware, Inc., and I/O Software, 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.

     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

                                       7
<PAGE>

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 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 March 31, 2001, we had 49 full-time employees and 2 full-time
contract employees compared to 33 full-time employees and 8 full-time contract
employees as of March 13, 2000.  The increase in staffing reflects the hiring of
18 former employees of Jotter Technologies Inc, as well as our ongoing effort to
prepare for what we believe will 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. 67th 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.  Trial has been
set for July 18, 2001.  We do not believe the claims have any merit and we
intend to vigorously defend ourselves in this lawsuit.

                                       8
<PAGE>

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:

     .  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.

                                       9
<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).  There is presently a limited public trading market for
our common stock.  There is no assurance 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.
<TABLE>
<CAPTION>

                                                  Common Stock Sales Price
                                                  ------------------------
                                                     High          Low
                                                  -----------  -----------
<S>                                               <C>           <C>
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
</TABLE>

     On April 6, 2001 the closing bid price of our common stock as reported on
the SmallCap Market was $0.688.  As of March 29, 2001 there were approximately
298 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.

                                       10
<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>

                                       11
<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.  If we obtain the additional funding we are
seeking, we

                                       12
<PAGE>

expect significant additional increases in product development expenses as we
expand our product development efforts in 2001. 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. If we obtain the additional funding
we are seeking, we expect our sales and marketing expenses to continue to
increase as we continue to expand our sales and marketing activities. 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.
If we obtain the additional funding we are seeking, we expect general and
administrative expenses, particularly personnel and occupancy costs, to increase
further as we add infrastructure to support our increased product development
and sales and marketing activities.

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.

                                       13
<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

                                       14
<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>

                                       15
<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 April 6, 2001, was approximately $10,000.  The decrease from
December 31, 2000, was primarily due to operating losses partially offset by an
increase in accounts payable of approximately $1.1 million and an increase in
bridge notes payable of approximately $414,000.  The resulting accounts payable
balance of approximately $2.6 million includes approximately $1.2 million of
obligations past due more than 90 days.

     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 immediate working capital
needs.

     We require significant additional funds to continue our operations. We are
presently attempting to raise $10.0 million of additional working capital
through a private placement of Series E convertible preferred stock and warrants
to purchase common stock. While we have received expressions of interest from
certain accredited investors, including the receipt of a signed non-binding term
sheet for $3 million from a lead investor, there is no assurance that we will be
able to obtain the $10.0 million minimum amount (which may include conversion of
bridge notes) required to consummate this transaction. If this transaction is
completed, the Series E preferred stock will be convertible into 13.3 million to
33.3 million shares of common stock, based upon performance milestones and
market conditions. If the transaction is not completed, we expect that it will
be necessary to cease operations.

     Even if the sale of the Series E preferred stock is completed, we will
require significant additional funds to continue our operations into the year
2002.  Options we are 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 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.

                                       16
<PAGE>

     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.

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 equity financing we need for our
operations on acceptable terms, or at all, would severely impact our ability to
run our business.

     If we cannot raise the financing we need for our operations 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. We are presently considering a
financing involving the issuance of equity securities (on an as converted basis)
representing as much as 37.5% of the outstanding common stock of our company,
after issuance, at a discount to market and warrants to purchase additional
shares at a premium to such price. The completion of this proposed financing may
result in substantial dilution of the equity ownership of our existing
stockholders.

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 $58.7 million on revenue of $11.7 million from our inception
through December 31, 2000.  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 66% 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 65.8% of our common stock, they
are able to significantly influence the vote on those corporate matters to be
decided by our stockholders.  Two of these stockholders, RMS and Mr. Santangelo,
are parties to a voting agreement which governs the parties' voting arrangements
and further affects their influence over our corporate matters.

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, and our ability to raise funds in the
future.

     We are not in compliance with the Nasdaq SmallCap Market's eligibility and
maintenance requirements relating to (i) minimum bid price or (ii) tangible net
worth. Nasdaq notified us, on April 12, 2001, that it has granted us an
extension of time, until May 12, 2001, to regain compliance with the eligibility
requirement relating to tangible net worth. In addition, Nasdaq notified us, on
April 16, 2001, that our common stock will delisted for failure to meet the
minimum bid price requirement on April 24, 2001. We are entitled to request a
hearing to appeal Nasdaq's determination. Such a request will stay the delisting
of our securities pending Nasdaq's decision.

     If we are not able to raise additional equity financing, and increase the
trading price of our stock, our common stock will be delisted from the

                                       17

<PAGE>


Nasdaq SmallCap Market and may become worthless.  If we raise the capital, but
fail to increase the trading price, our common stock will be delisted.  If this
were to happen, 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.

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 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.

We may not be able to find attractive acquisition candidates as part of our
growth strategy and even if we do, may not be able to integrate acquired
companies.

     We may not be able to identify acquisition targets and, if identified, we
may not be able to complete transactions with these targets.  We have undertaken
a growth strategy that may include acquisitions of companies involved in related
businesses, including e-commerce and the Internet.  Our inability to identify
and integrate acquisition targets may have a severe negative impact on our
financial results and stock price.  Even if acquisitions occur, we will face
significant issues associated with integrating the new business segments.
Acquisitions will place substantial demands on our management, working capital
and financial and management control systems.  We may not be successful in
responding to these demands.  Integration of some businesses may also require
the combination of complex software technology, product lines and software
development plans that may be technically incompatible or too costly or
difficult to integrate into our business.  We will be unable to pursue an
acquisition strategy if we fail to raise additional capital.

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.

     There is a limited public market for the shares of our common stock and
there is no certainty 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.

                                       18
<PAGE>

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 other material breach of these
agreements.  We are currently in default under one such agreement due to our
failure to make required payments in a timely manner.  We cannot assure you that
we will be able to cure this default in order to avoid termination of the
agreement, or that we will not be in default under this or other 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 may prevent 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.

                                       19
<PAGE>

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 April 6, 2001 31,216,695 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.  Substantially all of such outstanding shares may be
resold in the public market immediately.    In addition, the remaining shares of
common stock are available for resale in the public market under Rule 144.
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.

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.

                                       20
<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
incorporat ed 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
<TABLE>
<CAPTION>
Exhibit
No.                           Description
---                           -----------
<C>      <S>
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).

</TABLE>
                                       21
<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).

10.1     Stock Subscription Agreement by and between The National Registry Inc.
         and RMS Limited Partnership, 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. (incorporated by
         reference to the Company's Current Report on Form 8-K, dated January 2,
         2001).

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

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


                                       22
<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: April 16, 2001                By:    /s/ Jeffrey P. Anthony
                                         -------------------------------------
                                               Jeffrey P. Anthony
                                               President, Chief Executive
                                               Officer and Director

      KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints James W. Shepperd 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/ Jeffrey P. Anthony      President, Chief Executive Officer   April 16, 2001
--------------------------      and Director (Principal Executive
      Jeffrey P. Anthony        Officer)


  /s/ James W. Shepperd       Chief Financial Officer (Principal   April 16, 2001
--------------------------      Financial Officer and Principal
      James W. Shepperd         Accounting Officer)


  /s/ Hector J. Alcalde       Director                             April 16, 2001
--------------------------
      Hector J. Alcalde


   /s/ Glenn Argenbright      Director                             April 16, 2001
 -------------------------
       Glenn Argenbright


   /s/ Frank M. Devine        Director                             April 16, 2001
 -------------------------
       Frank M. Devine


  /s/ Robert J. Rosenblatt    Director                             April 16, 2001
 -------------------------
      Robert J. Rosenblatt


  /s/ Francis R. Santangelo   Director                             April 16, 2001
 --------------------------
      Francis R. Santangelo


 /s/ Robert M. Smibert        Director                             April 16, 2001
 --------------------------
     Robert M. Smibert
</TABLE>


                                       23
<PAGE>
                         Index to Financial Statements
<TABLE>
<CAPTION>
<S>                                                                                <C>
                                                                                      Page
                                                                                     Number
                                                                                     ------

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 consolidated balance sheet of SAFLINK Corporation and
subsidiary as of December 31, 2000 and the related consolidated statement 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 report.

     The accompanying consolidated financial statements have been prepared
assuming that SAFLINK Corporation will continue as a going concern. As discussed
in note 13 to the consolidated financial statements, the Company has suffered
recurring losses from operations and has a working capital deficit. At December
31, 2000, these circumstances raise substantial doubt about the entity's ability
to continue as a going concern. Management's plans in regard to these matters
are also described in note 13. The consolidated financial statements do not
include any adjustments that might result from the outcome of this uncertainty.

     Because of the significance of the uncertainty discussed in the preceding
paragraph, we are unable to express, and we do not express, an opinion on the
accompanying 2000 consolidated financial statements.

/s/ KPMG LLP


Seattle, Washington
April 13, 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,
                                                                             ---------------------------------
<S>                                                                           <C>                    <C>
                                                                                   2000                 1999
                                                                             ---------------        -----------
                                                                                       (In thousands)
                            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,            $   717              $   786           $ 3,517
    $593,000 and $0 during 2000, 1999, and 1998, respectively)
   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>
                                                     Common stock                     Preferred stock             Additional
                                               ------------------------        -------------------------------     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                6,507            65              (200)                (2)            (63)
 preferred stock
Issuance of common stock upon exercise of            920             9                --                 --           1,036
 stock options and warrants
Issuance of stock options and warrants for            --            --                --                 --             586
 services
Issuance of common stock warrants attached            --            --                --                 --              94
 to bridge loan
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 other      Common 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                    --                --                --           --         298
 stock options at various prices
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
                                                             --------              --------              --------
<S>                                                          <C>                   <C>                   <C>
                                                                               (In thousands)
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:
  Furniture 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.

                                      F-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, equity
investments,

                                      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:

<TABLE>
<CAPTION>
                                                           Years
                                                    ------------------
              <S>                                     <C>
              Computer equipment and software              1 to 3
              Office furniture, equipment and other        3 to 10
</TABLE>

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 set forth the computation of basic and diluted loss
per common share:

<TABLE>
<CAPTION>

                                                                2000              1999            1998
                                                            -------------    -------------    ------------
(In thousands, except net loss per common share)
<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:

<TABLE>
<CAPTION>
                                                             December 31,
                                                       ---------------------
                                                         2000         1999
                                                       -------       -------
                                                           (In thousands)
<S>                                                    <C>           <C>
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
                                                       =======       =======
</TABLE>

     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):

<TABLE>

<S>                                              <C>
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
                                                 ======
</TABLE>

     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>
                                                      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>
(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                                                     Weighted-
  Range of            Number                remaining            Weighted-average          Number              average
  exercise          outstanding         contractual life        exercise price per       exercisable        exercise price
   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

     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.

                                     F-13

<PAGE>

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 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):
<TABLE>
<CAPTION>
                                  Year Ending
                                 December 31,
                                  -----------
                             <S>             <C>
                            2001            $  497
                            2002               426
                            2003               419
                            2004               441
                            2005               184
                                            ------
                                            $1,967
                                            ======
</TABLE>

     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):

<TABLE>
                <S>                                         <C>
             Common stock                                  $3,228
             Note payable, net of $155 discount             1,545
             Direct acquisition costs                         791
                                                          -------
               Total                                       $5,564
                                                          =======
</TABLE>

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

<TABLE>
             <S>                                       <C>
             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
                                                          =======
</TABLE>

     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, Jotter and the Company 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.

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 the
Company 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 the Company's 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) the
Company's breach of contract with IIG causing IIG to sustain damages; (ii)
fraud; and (iii) recission by IIG against the Company 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.
Trial has been set for July 18, 2001.  The Company does not believe the claims
have any merit and it intends to vigorously defend itself in this lawsuit.

13.  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.  To address these liquidity issues, the Company has
taken steps to raise up to $10.0 million in additional financing through the
issuance of Series E preferred stock.

     There can be no assurance that the Company will be able to sell these
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.

                                     F-16
<PAGE>
14.  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
   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-17