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                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 10-K

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

                   For the Fiscal Year Ended December 31, 2001

                                       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 000-21559

                            VIISAGE TECHNOLOGY, INC.
                            ------------------------
             (Exact name of registrant as specified in its charter)

Delaware                                                   04-3320515
--------------------------------                           ----------
(State or other jurisdiction of                            (I.R.S. Employer
incorporation or organization)                              Identification No.)

30 Porter Road,  Littleton,  MA                            01460
------------------------------------------------           ---------
(Address of principal executive offices)                   (Zip Code)

Registrant's telephone number, including area code         (978)-952-2200
                                                           --------------

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

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

                          Common Stock $.001 par value

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. [X] Yes [_] 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 the registrant's knowledge, in definitive proxy or information statements
incorporated by reference into Part III of this Form 10-K or any amendment to
this Form 10-K. [_]

The aggregate market value of the voting stock held by nonaffiliates of the
registrant as of March 19, 2002, was approximately $125 million.

As of March 19, 2002, the registrant had 19,846,926 shares of Common Stock
outstanding.

                       DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant's definitive Proxy Statement for the Annual Meeting
of Shareholders to be held on May 14, 2002 are incorporated by reference in Part
III of this 10-K.

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                                     PART I

Item 1. Business
        --------

General Development of Business
-------------------------------

Viisage Technology, Inc. (Viisage or the Company) is a leader in the emerging
field of biometrics technology and in providing digital identification systems
and solutions. The Company focuses on identification solutions that improve
personal convenience and security, deter fraud, and reduce identification
program costs. Viisage combines its systems integration and software design
capabilities with its proprietary software and hardware products and other
industry standard products to create complete customized solutions. These
turnkey solutions integrate image and data capture, create relational databases,
incorporate multiple biometrics and improve customers' ability to move and
manage information. Applications can include driver's licenses, voter
registration, national identification cards, law enforcement, social services,
access control and PC network and Internet access security. Viisage's primary
customers have been government agencies with particular penetration in
Departments of Motor Vehicles. The Company has captured approximately 30% of the
domestic driver's license market. Viisage products annually produce more than 25
million identification documents at more than 1,200 locations in 15 states. The
Company has also provided services under subcontracts for projects in Jamaica,
the Philippines and for the U.S. Immigration and Naturalization Service.
Originally developed at MIT, face-recognition technology is widely recognized as
the most convenient, non-intrusive and cost-effective biometric available.
Viisage's patented face-recognition technology is focused on five major product
application areas.

FaceEXPLORER(TM), Viisage's technology for image retrieval and analysis, is
recognized for its leadership technology performance in real-time and
large-database applications. FaceEXPLORER(TM) is deployed in the world's largest
face-recognition application with a database of more than 9.5 million enrolled
images and is growing by 15,000 new images per day. The product family of
face-recognition applications also includes: FaceNET(TM) for Internet and
e-commerce security; FacePIN(TM) for point-of-sale transactions verification;
FacePASS(TM) for physical access control and keyless entry; and FaceFINDER(TM)
for surveillance and identification.

Financial Information about Industry Segments
---------------------------------------------

The Company is engaged in one business, the development and implementation of
digital identification systems and solutions. The Company has an integrated
business model: identification solutions through system integration systems and
biometric software. Substantially all of the Company's revenues have been
derived within the United States of America.


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Description of Business
-----------------------

      Principal Products and Services
      -------------------------------

Industry Background

The need for proper identification affects most people every day. The desire for
personal convenience, the significant and increasing costs of fraud and the
growing concern over declining personal security have become driving forces
behind the global need for effective identification solutions. Starting with
only a fraudulent driver's license, an individual is able to create multiple
identities, commit fraud, evade law enforcement and engage in other criminal
activities that have significant financial and societal implications. Password
security and identity card systems can also be compromised if someone obtains a
password or identity card and uses this information to gain unauthorized access
to facilities, networks or information.

In an effort to combat fraud and tampering, photographic identification cards
encapsulated within laminated pouches were developed. However, photographic
identification cards can be replicated using widely available advanced color
copiers and printers, and laminated pouches have proven easy to delaminate.
Advances in and the acceptance of digital technology have led to an increasing
demand for digital identification systems to replace existing systems. Digital
systems enable information and images to be captured and embedded within the
fabric of the card through the use of dye-sublimation techniques, making digital
cards more resistant to tampering than laminated pouches. Information can be
stored in and later accessed from the card itself using bar codes, magnetic
stripes and "smart" cards (cards which contain computer chips). Digital systems
also facilitate the storage of information in computer databases, thereby
reducing the need for manual record keeping, file cabinets, and cumbersome
indexing systems. Finally, digital systems can be networked to enable up-to-date
information to be shared and distributed across geographic and organizational
boundaries. This ability to move and manage information helps to increase
personal convenience and security for system users.

As an additional means of improving personal convenience and security and
deterring fraud, identification systems have increasingly used biometrics
(unique biological characteristics) to verify personal identities. Biometric
identifiers include facial images, fingerprints, iris scans, retinal scans,
voice data, hand geometry and others, with fingerprints enjoying wide usage in
law enforcement. However, unlike other biometrics, a facial image can be easily
verified visually and can be captured in an unobtrusive manner via a photograph,
making it a practical means of identification.

Applications for digital identification systems and biometrics are increasing,
as they become more sophisticated and easier to use. For example, the typical
U.S. state has multiple licensing or other agencies, including its department of
motor vehicles, which require the verification of personal identity. The public
sector is also focusing on the value of sharing databases to avoid redundant
data gathering efforts, distribute information in a timely manner, increase
efficiency and deter fraud. The Company believes that public and commercial
sector applications for digital identification systems and biometrics will
include national identifications, driver's licenses, law enforcement, voter
registration, social services, access control, PC network and internet access
security, ATMs, retail point-of-sale transaction processing, and administration
of health care benefits.


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The emergence of digital identification systems and biometrics present
significant challenges for integrating these systems with customers' existing
software, hardware and computing environments. Consequently, customers are
seeking complete, integrated solutions to overcome these issues.

Products and Services

      Digital Identification Systems

The Company's systems integration business develops and implements digital
identification systems and solutions. The Company's systems can produce
identification cards that are virtually tamper proof, and utilize facial
recognition and other biometrics with or without cards for the real-time
identification (one-to-many) and verification (one-to-one) of individuals.

Depending on the customer's needs, the Company offers two types of
identification systems. The first is an instant issue system that produces
identification cards on location in minutes. The second is a central production
system that receives the information electronically from the point of capture,
and produces cards from a secure off-site processing location which are later
mailed to recipients in several days. The facial images captured by the card
systems can provide the content (face bases) for identification and verification
applications.

In a Viisage card system, the facial images and other information are captured
in digital format at a PC-based Image Capture Workstation, which usually
incorporates the Company's proprietary SensorMast(TM) unit. Compact and
self-contained, Viisage workstations can easily be linked to a central image
storage device, central card production unit and other remote devices using an
existing network, custom designed data communications or the World Wide Web.
This flexibility makes the Image Capture Workstation ideal for instant issue,
central production, mobile use and multiple site systems. The Viisage Quality
Advisor can be used to assess image quality at the point of capture. With an
instant issue system, a commercially available dye-sublimation printer produces
single-piece, tamper-resistant identification cards. Alternatively, with a
central production system, a high speed-manufacturing unit produces the cards,
and an integrated card delivery unit prepares the cards for mailing. When
central production is selected, such systems incorporate the Company's
proprietary Visual Inspection System for quality control of all cards produced.
Every system delivers top quality, tamper-resistant identification cards
customized to meet the customer's information, delivery and security needs. A
wide range of optional features are available, including bar codes, holographic
overlays, ghost imaging, ultraviolet or micro preprinting, smart cards and a
number of other features.

      Systems Integration and Software Design Capabilities

In addition to the Company's systems integration capabilities, an important
aspect of its services and ability to deliver turnkey solutions for its
customers involves the design of customized software. Viisage's proprietary
software controls the system and integrates the system components, including the
SensorMast and Visual Inspection System and a variety of third party components
and technologies used by its customers. The SI division has designed software to
support all current industry standard operating systems (e.g., Windows NT,
Windows 95, Unix and OS/2), network protocols (e.g., Novell Netware, TCP/IP and
SNA), database products (e.g., Sybase or Oracle) and client/server
architectures. The Company's software design and systems integration
capabilities enable it to accommodate most computing environments and customers
with special requirements.


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      Proprietary Products

The Company's proprietary products and related software are described below:

      .     The SensorMast is a fully integrated, secure tower unit that
            incorporates computer-controlled image capture equipment. This
            equipment includes commercially available digital cameras,
            adjustable lighting, frame grabbers, step motors, fingerprint and
            signature capture devices and barcode readers. An integrated version
            of the SensorMast also includes the computer in the SensorMast.

      .     The Visual Inspection System automatically evaluates cards produced
            by the Company's central production systems to determine whether the
            image and data on a person's identification card correspond to the
            information about that person in the system database. If the
            information does not match, the Visual Inspection System rejects the
            printed card and identifies the defect for immediate corrective
            action. This system, which incorporates robotics, high-speed cameras
            and sophisticated software, automates an activity that is otherwise
            performed manually and is a potential source of cost savings for
            customers.

      .     The Viisage Quality Advisor can be used by customers to ensure
            proper image quality. This software product instantly and precisely
            assesses image quality against desired standards. Images that fail
            to meet such standards are immediately rejected.

      .     The ImageCAM is a secure video camera for the creation of
            high-quality picture identification cards. It consists of a 24-bit
            CCD color video camera assembly, a telescoping mounting rod, and a
            tabletop mounting base. Captured images are transmitted to a host
            computer via an S-Video. All image capture is accomplished
            automatically or through the keyboard for ease-of-use.

      Customer Service and Support

Following the installation of its digital identification systems, the systems
integration (SI) division offers extensive customer training and help desk
telephone support as well as ongoing maintenance services. The SI division's
service and support teams, which vary in size depending on the customer and
contract, are able to draw extensively upon the expertise of the Company's
software and hardware engineers. For some contracts, the SI division has
contracted with third party service organizations for maintenance support.

      Facial Recognition Systems

In developing its facial recognition technologies, the Company has focused on
the face image as the key biometric because the human face is a unique and
prominent feature that can be easily captured (in image) by a digital camera and
verified visually in most cases by an individual with little special training.
Viisage is concentrating on five principal areas: physical keyless entry and
access control; PC network and Internet access security; real-time large
database applications; point-of-sale applications, such as ATM's; and
surveillance applications. The Company has several on-going facial recognition
identification projects, including projects with the Massachusetts Department of


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Transitional Assistance, the Illinois Secretary of State, Illinois State Police,
CMS, Global Cash Access/Infonox and a number of other installations, including
more than 150 surveillance applications in casinos.

Viisage has advanced the facial recognition technology, initially developed by
Professor Alex Pentland of the Massachusetts Institute of Technology (MIT), and
has developed products for access control, point-of-sale, Internet access,
surveillance, and real-time large database identification and verification of
individuals. Viisage licenses the underlying MIT technology through Facia Reco
Associates Limited Partnership (Facia Reco), an entity formed by Dr. Pentland.
While Dr. Pentland's software forms the basis of the Company's facial
recognition technologies, the Company believes that its proprietary software,
developed over the last six years, is integral to making these technologies more
robust and commercially viable.

Viisage's patented facial recognition software offers organizations the ability
to create unique identification solutions and enhances both existing
identification solutions and offers opportunities for new applications. Using a
sophisticated algorithm, the software translates the characteristics of a face
into a unique number or eigenface. The eigenface is used by the system for
identification, a one-to-many search of a database, and verification, a
one-to-one match to a specific stored image. The Company's facial recognition
products are unique because they are scalable to databases of millions of faces.

Viisage offers several facial recognition software systems that can be utilized
in virtually any solution requiring identification or verification of an
individual. The Company's identification software instantly calculates an
individual's eigenface identifier and can search an existing database of
millions of records in less than 10 seconds for images similar to the image
being searched.

      Proprietary Products

The Biometric division's proprietary products and related software are described
below:

      .     FaceFinder(TM) is a modern surveillance identification solution.
            Viisage's patented real-time video technology scans crowds of people
            and matches individuals to selected faces previously stored in an
            image database. Facefinder assists customers, such as casinos,
            domestic and international airports, military bases and government
            buildings identify suspects either from long distance or from large
            crowds. Viisage provides these security conscious customers with the
            tools to identify potential threats before trouble occurs.

      .     FaceExplorer(TM) is a large image database research tool that
            provides the ability to reduce fraud and crime by identifying
            duplicate images in large databases, such as licensed drivers,
            benefit recipients, missing children and visa holders. Additionally,
            law enforcement officials can use FaceExplorer to match images and
            computer composites against image databases to identify suspects and
            known criminals. Enterprise customers can use FaceExplorer to verify
            identities and reduce fraud by effectively retrieving, managing and
            analyzing their image databases. Viisage has deployed FaceExplorer
            in the world's largest facial recognition system for the Illinois
            Secretary of State and State Police. This system provides both
            duplicate identity fraud reduction and identity


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            investigation capabilities. When fully deployed, the system will
            contain up to 20 million images with the ability to retrieve images
            within seconds.

      .     FacePass(TM) keyless entry system is used for convenient and
            authorized physical access to office buildings, factories,
            dormitories, etc. Physical access control currently has a ubiquitous
            set of escort devices, such as magnetic cards, PIN numbers and
            electronic keys to access office buildings, dormitories and homes.
            The security problem with all these devices is their propensity to
            be lost or accessed by unauthorized individuals. FacePass replaces
            PINs and intrusive biometrics with an affordable, reliable and
            sanitary solution.

      .     FacePIN(TM)provides both security and convenience for consumers and
            merchants by using facial recognition technology to recognize and
            verify customer identities. Consumers are currently accustomed to
            being recognized by their face at retail locations by providing
            merchants with a driver's license or other form of photo ID
            verification. In sharp contrast to today's widely used signature
            verification process, which is highly unreliable and cannot be
            accurately determined by unskilled and untrained clerks, FacePin
            makes verification reliable, automatic and fast. In banking, for
            example, FacePIN(TM)uses ATM cameras to recognize and verify
            customer identities so the financial transaction can be quickly and
            effortlessly conducted. Facial recognition technology such as
            FacePin has the potential to obviate the need for consumers to
            remember their personal identification numbers (PINs) and other such
            password mechanisms.

      .     FaceNet(TM)provides security, authentification and convenience for
            accessing the Internet by replacing passwords and user names with
            your face. FaceNet can be used across numerous communication
            devices, including personal computers, laptops, personal digital
            assistants (PDAs), cell phones and other new network appliances. The
            growth of e-commerce across the Internet has accelerated the need
            for better security solutions in both business-to-consumer (B2C) and
            business-to-business (B2B) financial transactions that require
            secure authenticity between parties. Currently, solutions include a
            combination of public/private key encryption and digital
            identification certificates. These solutions include encryption
            technology, such as 128-bit SSL and the reliance on trusted
            certification authorities. These are necessary elements, but they do
            not provide a comprehensive solution. FaceNet provides the most
            cost-effective, convenient, non-intrusive method available for
            protection against Internet fraud and risks of lost or stolen
            Internet access devices.

      .     SecureFLIGHT(TM) integrates an illumination source with a
            high-resolution color camera to capture optimal live video of
            passengers' faces as they enter airport security checkpoints. It
            features an audio speaker and indicator lights to notify passengers
            when they can proceed through the checkpoint. It also features a
            live video monitor to gain the attention of passengers prior to
            walking through the checkpoint. Once a passenger enters the
            checkpoint, SecureFLIGHT transmits live video stream to Viisage's
            biometric networked processor (BNP) running FaceFINDER in order to
            process the image. The image is then compared against a database of
            known criminals and terrorists that has been


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            provided by law enforcement. The entire process, from entering the
            checkpoint to exiting, takes on average 5 seconds.

      .     The Biometricam is a compact camera with built-in facial recognition
            software that plugs directly into an Ethernet connection. Software
            is automatically downloaded from a server to the camera, enabling
            the camera to operate unattended. The camera remains constantly
            alert, checking for faces that might be on a database. The camera
            can also be integrated into other devices for application
            development. The Company acquired the rights to this product on
            March 18, 2002, when it acquired the capital stock of Biometrica
            Systems, Inc.

Sales and Marketing

The Company markets its products directly through its internal sales force, and
continues to develop strategic partnerships and distribution channels with
vendors, systems integrators and service organizations, particularly in
international markets, in order to gain access to such organizations' existing
relationships, marketing resources and credibility in new markets. The Company's
engineering department supports the direct sales staff by providing pre- and
post-sale technical support. This support includes traveling with sales
representatives to help explain the systems, defining solutions for customers,
designing systems for public procurement activity, supporting the implementation
process and providing post-implementation support. The Company also uses its
program management group to identify opportunities with existing customers and
coordinate related selling efforts.

The Company's systems and solutions are generally provided to public sector
customers through a formal bidding process. The sales and marketing personnel
regularly conduct visits and attend industry trade shows to identify bid
opportunities and particular customer preferences and to establish and cultivate
relationships in advance of any bid. Once a request for proposal (RFP) is
issued, a comprehensive proposal is developed and usually followed by an on-site
customer demonstration. The process from the issuance of an RFP to the ultimate
award can take up to six months. Following the bid award a six-to-twelve month
implementation and installation process usually ensues. The Company believes
that long sales cycles in its public sector markets is endemic to the market and
will continue. Further, customers may seek to modify the system either during or
after the implementation of the system. While this long sales and implementation
cycle requires the commitment of marketing resources and investments of working
capital, the Company believes that it also serves as a barrier to entry for
smaller companies and as an early indicator of potential competitors for
particular projects. For existing customers, a considerably shorter sales and
implementation cycle may be involved.

The biometrics applications consist primarily of software content. The Company's
marketing efforts and business development activities are focused on
establishing OEM and other distribution arrangements with vendors, systems
integrators and service organizations serving its principal market areas.


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Product Development
-------------------

The Company has developed proprietary software that supports all current
industry standard operating systems and networking environments, and proprietary
image capture and inspection products for its card-based identification systems.
The Company believes that these products will support its card-based
identification system offerings for the foreseeable future. Development costs
that benefited specific projects were recorded as project costs and costs that
did not benefit specific projects were recorded as research and development
expenses. The Company has not capitalized any software development costs because
costs incurred subsequent to achieving technological feasibility have not been
material. The Company's current development activities are focused on its facial
recognition products and the further commercialization of its facial recognition
technology. The Company also benefits from research and development activities
conducted by the manufacturers of the components integrated into the Company's
systems such as cameras, database software, computers, etc.

For the years ended December 31, 2001, 2000 and 1999, research and development
expense was $2,054,000, $688,000 and $253,000, respectively. Such amounts do not
include amounts for specific projects that are reported as project costs, and
are material expenditures, or the benefits from the other research and
development activities referred to above.

Manufacturing and Sources of Supply
-----------------------------------

Contract manufacturers make proprietary subsystems and assemblies, to the
Company's specifications. Other non-proprietary system components, such as
certain software, cameras, personal computers, printers and related components
are purchased from third-party vendors. The Company purchases some of the major
contracted assemblies from single vendors to help ensure high quality, prompt
delivery and low cost. The Company does, however, qualify second sources for
most components, contracted assemblies and purchased subsystems, or at least
identifies alternative sources of supply. The Company believes that the open
architecture of its systems facilitates substitution of components or software
when this becomes necessary or desirable. The Company may from time to time
experienced delays due to a lack of the availability of component parts and
assemblies.

Patents, Trademarks and Licenses
--------------------------------

In addition to customized technology developed by the Company to meet customer
requirements, the Company has a number of U.S. patent applications in process
for facial recognition technologies, has filed a copyright application for the
SensorMast software and has made a copyright filing for the Company's Visual
Inspection System and related proprietary software.

The Company also makes use of patented technology and trade secrets owned or
controlled by Facia Reco in the field that relates to de-duplicating or querying
databases created, controlled and/or managed by the Company or its sublicensees
and/or utilizing, directly or indirectly, personal identification cards. This
license extends until the expiration of the final patent included in the license
and includes Facia Reco's rights to use patented facial recognition technology
of MIT, which rights became non-exclusive in June 2001. MIT has applied to
extend its patent rights to certain jurisdictions in Europe and in Singapore.
The U.S. Patent and Trademark Office has allowed further


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broadened claims for the MIT patent. The Company's license agreement with Facia
Reco provides for a royalty payment on a per machine copy basis incorporating
the licensed technology.

The Company has registered its "Viisage Technology" trademark with the U.S.
Patent and Trademark Office.

On January 10, 2002, Viisage acquired the assets of Lau Security Systems, a
division of Lau Technologies, including all of its intellectual property,
contracts and distribution channels. The intellectual property acquired from Lau
included, among other things, thirty-one U.S. or foreign patent grants or
applications for inventions relating to facial recognition technologies or the
production of identification cards, the patent acquired by Lau from Daozeng Lu
and Simon Lu for verifying the identity of an individual using identification
parameters carried on an escort memory, and numerous invention disclosures that
are being considered for patent application. The transaction also included an
exclusive license of Lau's rights to use the patented facial recognition
technology it licensed from MIT for use in the federal access control field. As
a result of this transaction, certain obligations on the part of Viisage to
license intellectual property to Lau were terminated.

On March 18, 2002, Viisage acquired the capital stock of Biometrica Systems,
Inc. ("Biometrica"), a former licensee and distributor of Viisage's facial
recognition technologies in the casino market. Biometrica's assets included,
among other things, intellectual property relating to the BiometriCam, a compact
camera with built-in facial recognition software that is further described under
"Item 1 - Facial Recognition Systems - Proprietary Products" above.

There can be no assurance that the Company's efforts to prevent the
misappropriation of the intellectual property used in its business will be
successful. Further, there can be no assurance that any of the additional U.S.
or foreign patents applied for by Lau or the foreign patents applied for by MIT
will be issued or that, if issued, they will provide protection against
competitive technologies or will be held valid and enforceable if challenged.
Finally, there can be no assurance that the Company's competitors would not be
able to design around any such proprietary right or obtain rights that the
Company would need to license or design around in order to practice under these
patent and copyrights.

Seasonality
-----------

The Company's operations are not seasonal since contracts are awarded and
performed throughout the year. However, the Company believes its public sector
business could be subject to cyclical procurement delays that may be related to
state election cycles.

Working Capital Requirements
----------------------------

The Company is generally required to fund the development and implementation of
large digital identification system projects for public sector customers.
Historically, the Company has utilized bank borrowings and project lease
financing to meet these needs. There are no special requirements or customer
terms that are expected to have a material adverse effect on the Company's
working capital. As discussed more fully in Management's Discussion and Analysis
of Financial Condition and Results of Operations, the Company may raise capital,
as needed, to fund working capital needs or growth activities.


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Customers and End Users

The following lists and categorizes the Company's customers and end users as of
December 31, 2001:

      State Departments of Motor Vehicles, Other State and Local Agencies
      Arizona Department of Transportation
      Arkansas Department of Human Services
      Arkansas Office of Driver Services
      Connecticut Department of Social Services
      Florida Department of Highway Safety and Motor Vehicles*
      Illinois Secretary of State
      Illinois State Police
      Kentucky Transportation Cabinet
      Maryland Department of Transportation and Motor Vehicle Administration*
      Massachusetts Department of Transitional Assistance
      New Mexico Department of Taxation and Revenue
      New York Department of Social Services*
      North Carolina Department of Transportation
      Ohio Bureau of Motor Vehicles
      Ohio Department of Public Safety
      Pennsylvania Department of Transportation
      Pinellas County Sheriff's Office
      South Carolina Department of Public Safety*
      Wisconsin Department of Corrections
      Wisconsin Department of Transportation

      Federal Agencies Foreign Contracts
      U.S. Immigration and Naturalization Services *
      Commission on Elections of the Republic of the Philippines *
      Electoral Commission of Jamaica *
      Electoral Commission of Uganda

      Airports
      Fresno Yosemite International Airport
      St. Petersburg - Clearwater International Airport
      Logan International Airport

      Commercial Customers and Distribution Partners
      Control Monitor Systems
      Curtiss-Wright Corporation
      Global Cash Access/Infonox
      Insurance Corp of British Columbia
      Logicon
      Rapor
      Unisys
      Vision Interactive

* By subcontract.


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For 2001, four customers (Illinois Secretary of State, Unisys Corporation
(Florida Department of Safety and Motor Vehicles), Kentucky Transportation
Cabinet and Pennsylvania Department of Transportation each accounted for over
10% of Company revenues and an aggregate of 49% of revenues for the year. For
2000, four customers (Ohio Bureau of Motor Vehicles, Unisys Corporation (Florida
Department of Safety and Motor Vehicles), Pennsylvania Department of
Transportation, and Maryland Department of Transportation) each accounted for
over 10% of Company revenues and an aggregate of 58% of revenues for the year.
For 1999, four customers (Ohio Bureau of Motor Vehicles, Unisys Corporation
(Florida Department of Safety and Motor Vehicles), Arkansas Department of
Revenue, and Illinois Secretary of State) each accounted for over 10% of Company
revenues and an aggregate of 52% of revenues for the year. The loss of any such
customers could have a material adverse impact on the Company's business,
operating results and financial condition.

Backlog
-------

The Company measures backlog based on signed contracts, subcontracts and
customer commitments for which revenue has not yet been recognized. Backlog does
not include amounts for phase-outs or other extension opportunities included in
such contracts. Accordingly, backlog is only somewhat indicative of future
revenue because contracts may be changed positively or negatively. Backlog could
be cancelled at any time for lack of performance, without penalty. However,
cancellations not caused by the Company's lack of performance will be subject to
recovery of all actual committed costs and profit on work performed through the
date of cancellation. Any failure of the Company to meet an agreed-upon schedule
could lead to the cancellation of the related order. The timing of award and
performance on contracts as well as variations in size, complexity and
requirements of the customer and modifications to contract awards may result in
substantial fluctuations in backlog from period to period. Further, backlog
typically represents a limited portion of the Company's annual plan. Therefore,
the Company believes that backlog cannot be considered a meaningful indicator of
future financial performance.

At December 31, 2001, the Company's backlog was approximately $73 million,
compared to approximately $69 million at December 31, 2000.

Government Contacts
-------------------

Government contracts are generally subject to termination for convenience or
lack of appropriation at the determination of the subject agency. While
termination is a significant financial risk, the Company has never experienced a
contract termination.


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Competition
-----------

The market for the Company's products and services is extremely competitive and
management expects this competitive environment to intensify as the market for
the Company's products continues to grow.

The Company faces competition in the identification systems market from
companies, including Digimarc (formerly Polaroid Corporation) and Unisys
Corporation, which, in some cases, have greater financial and marketing
resources than the Company. In some cases, the Company may be competing with an
entity that has a pre-existing relationship with a potential customer, which
could put the Company at a significant competitive disadvantage. As the digital
identification market expands, additional competitors may seek to enter the
market.

The Company believes that competition in the digital identification systems
market is based primarily upon the following factors: service, support,
technical excellence, price credibility, flexibility in terms of accommodating
customer technical and business needs, and responsiveness. The relative
importance of each of these and other factors depends upon the specific customer
and situation involved. Substantially all of the Company's sales to new
customers have been the result of competitive bidding for contracts pursuant to
public sector procurement rules. The Company believes that its competitive
strength is its systems integration and software design capabilities, system
performance and architecture technologies, operating flexibility, price, and
robust service and project management.

In the field of biometric identification technology, the Company competes with
several facial recognition providers, none of whom have any market dominance, as
well as providers of other biometric solutions. Fingerprint recognition
solutions have a long history of use, particularly in law enforcement
applications. The Company expects that as the market for biometric solutions
develops new companies and companies with significant resources and capabilities
may enter the market and competition will intensify.

Environmental Protection Regulations
------------------------------------

The Company believes that compliance by the Company with federal, state and
local environmental regulations will not have a material adverse effect on its
financial position or results of operations.

Employees
---------

As of December 31, 2001, the Company had 78 employees. The Company significantly
supplements its employee resources with independent contractors. None of the
Company's employees is represented by a labor union, and the Company considers
its relationship with its employees and contractors to be very good.

Officers
--------

Executive officers of the Company are elected by the Board of Directors annually
and serve until their successors have been duly elected and qualified.


                                       13

<PAGE>

Thomas J. Colatosti, 54, became President and Chief Executive Officer of the
Company in November 1998. From July 1998 until November 1998, Mr. Colatosti
served as Chief Operating Officer of the Company. He joined the Company in 1997
as Vice President of Operations. From April 1995 through December 1996, Mr.
Colatosti was President and Chief Executive Officer of CIS, a software and
systems integration company. Mr. Colatosti held various senior finance, sales,
and operations positions with Digital Equipment Corporation from 1973 to March
1995, serving as Vice President of the Northeast Region from 1993 through 1994
and Vice President of the Federal Systems Division from 1991 to 1993.

Iftikhar A. Ahmad, 50, was elected as an officer in March 1999 with the title of
Vice President of Engineering and Program Management of the Company. From
November 1996 until March 1999, Mr. Ahmad served as a Director in the Company's
Software Engineering Department. From January 1995 to November 1996, he was a
senior consultant in Lau's Systems Engineering Department, and prior to that, he
held various senior engineering positions at Digital Equipment Corporation.

Milton A. Alpern, 50, joined Viisage in March 2002 as Vice President and Chief
Financial Officer. Mr. Alpern previously served as Vice President (and from
October 2000, Senior Vice President), Finance and Administration and Chief
Financial Officer of Eprise Corporation, a publicly held provider of web content
management software and services, from March 1998 until Eprise was acquired in
December 2001. From 1992 to 1998 Mr. Alpern served as Vice President of Finance
at National Transaction Network, Inc., a publicly held provider of software
solutions to the electronic payments industry. He also served from 1987 to 1992
as Vice President of Finance at Henco Software, Inc., a venture-funded producer
of information management software products.

Stanley Duci, 49, was elected as an officer in January of 2000 with the title of
Vice President of Customer Service of the Company. Mr. Duci has served as Vice
President of Customer Service since February 1999. From November 1995 to
February 1999 Mr. Duci served the Company as Customer Service Manager. Prior to
joining Viisage, Mr. Duci was employed by Data General Corporation, where he was
responsible for directing worldwide customer service engineering, technology,
reliability and performance management systems.

Gretchen Lewis, 48, was appointed to the position of Vice President of ID
Systems Marketing in January 2002. Prior to that, Ms Lewis served as Vice
President of Partner Marketing since January 2001, and as Director of Marketing
from June 1997 through December 2000. Prior to joining Viisage, Gretchen was
Secretary of Health and Human Resources under Governor Gaston Caperton of West
Virginia. She had been a practicing lawyer in Williamson and Charleston, West
Virginia. Previously, she served under West Virginia Governor Jay Rockefeller as
his Budget Planning Director and Commissioner of Workers' Compensation.

Sean F. Mack, 39, was elected as an officer in January of 2000 with the title of
Vice President, Treasurer and Controller of the Company. From July 1999 until
January 2000, Mr. Mack served as the Corporate Controller. Previously, Mr. Mack
served in various capacities at Lau Technologies, including Controller and
Treasurer of Lau Defense Systems from October 1994 to July 1999, and as Cost
Manager of Lau Technologies from May 1989 to October 1994. Prior to joining Lau,
Mr. Mack worked as a senior cost accountant at Benjamin Thompson & Associates in
Cambridge, Massachusetts for two years, and as a financial program analyst for
Raytheon Company in Marlboro, Massachusetts from 1985 to 1987.


                                       14

<PAGE>

Mike Mazzu, 34, was elected as an officer in February 2001 with the title of
Vice President of Biometric Engineering of the Company. From July 1998 until
February 2001, Mr. Mazzu served as Director of Biometrics engineering.
Previously, from October 1993 to July 1998, Mr. Mazzu served in various
capacities at Lau. He has over ten years of experience in the fields of image
processing, software development, systems integration and biometrics. Prior to
joining Lau, Mike worked on the development of a missile launch detection
technology for a GE and Lockheed Martin joint venture.

Financial Information about Foreign and Domestic Operations and Export Sales
-----------------------------------------------------------------------------

The Company's foreign operations and export sales are currently not material.

Item 2. Properties
        ----------

The Company currently uses approximately 51,000 square feet of space in
facilities located in Littleton, Massachusetts. The area is subleased to the
Company from Lau Technologies and Inforonics through January 31, 2004 and
October 31, 2004 respectively. The Company believes that its facilities are in
good condition and are suitable and adequate for its present operations and that
suitable space is available if such lease is not extended.

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

The Company does not believe that there are any legal matters that would have a
material adverse effect on its business, financial condition or results of
operations.

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

On or about November 28, 2001, the Company mailed a Consent Solicitation
Statement to all stockholders of record as of November 2, 2001, seeking approval
of an amendment to the Company's Restated Certificate of Incorporation to
increase the number of authorized shares of common stock, $.001 par value, from
26,000,000 to 45,000,000. The Company received the written consent of
stockholders representing 14,824,834 shares of the Company's outstanding common
stock, which was sufficient to approve the amendment, with 213,908 shares voting
to withhold consent and 9,705 shares abstaining.


                                       15

<PAGE>

                                     PART II

Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
        ---------------------------------------------------------------------

The Company's common stock is traded on the Nasdaq National Market under the
symbol VISG. On March 19, 2002, the closing price of the common stock was $6.30
per share and there were approximately 175 holders of record of the Company's
common stock. The quarterly high and low closing prices, as reported by Nasdaq,
of Viisage's common stock in 2001 and 2000 were as follows:

                                    [CHART]
<TABLE>
<CAPTION>
                                            2001                     2000
                                            ----                     ----
Quarter                               High         Low         High         Low
-------                               ----         ---         ----         ---
<S>                                  <C>          <C>         <C>          <C>
First Quarter                        $ 3.25       $ 0.84      $14.25       $ 6.50
Second Quarter                       $ 2.70       $ 1.56      $ 7.38       $ 2.56
Third Quarter                        $ 8.36       $ 1.75      $ 5.19       $ 3.00
Fourth Quarter                       $15.97       $ 6.15      $ 2.81       $ 0.81
</TABLE>

Dividend Policy

The Company presently intends to retain its cash for use in the operation and
expansion of its business and, therefore, does not anticipate paying any cash
dividends in the foreseeable future.


                                       16

<PAGE>

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

The financial data set forth below should be read in conjunction with
Management's Discussion and Analysis of Financial Condition and Results of
Operations and the Financial Statements of the Company and related notes thereto
included elsewhere in this Form 10-K.

<TABLE>
<CAPTION>
Years Ended December 31,                            2001        2000        1999           1998 (1)       1997 (2)
------------------------                          --------    --------    --------       --------       --------
                                                             (in thousands, except per share amounts)
<S>                                               <C>         <C>         <C>            <C>            <C>
Statement of Operations Data:

Revenues ......................................   $ 26,280    $ 27,539    $ 19,297       $ 16,259       $ 29,388
Project costs .................................     19,602      21,136      15,131         15,957         26,122
                                                  --------    --------    --------       --------       --------
Project margin ................................      6,678       6,403       4,166            302          3,266
                                                  --------    --------    --------       --------       --------
Operating expenses:
  Sales and marketing .........................        809         787         739          2,195          4,930
  Research and development ....................      2,054         688         253            358            152
  General and administrative ..................      2,500       2,489       1,939          2,247          2,105
  Non recurring - acquisition expenses ........      1,639          --          --             --             --
                                                  --------    --------    --------       --------       --------
      Total operating expenses ................      7,002       3,964       2,931          4,800          7,187
                                                  --------    --------    --------       --------       --------
Operating income (loss) .......................       (324)      2,439       1,235         (4,498)        (3,921)
Interest expense, net .........................      1,210       1,637       2,230          1,667            441
                                                  --------    --------    --------       --------       --------
Income (loss) before income taxes and
  cumulative effect of  change in accounting
  principle ...................................     (1,534)        802        (995)        (6,165)        (4,362)
Provision for income taxes ....................         --          --          --             --             --
                                                  --------    --------    --------       --------       --------
Income (loss) before cumulative effect of
    change in accounting principle ............     (1,534)        802        (995)        (6,165)        (4,362)
Cumulative effect of change in accounting
  principle ...................................         --          --          --         (1,038)            --
                                                  --------    --------    --------       --------       --------
Net income (loss) .............................     (1,534)        802        (995)        (7,203)        (4,362)
Preferred stock dividends .....................         (5)       (327)     (1,003)            --             --
                                                  --------    --------    --------       --------       --------
Income (loss) applicable to common
  shareholders before cumulative effect .......     (1,539)        475      (1,998)        (7,203)        (4,362)
Cumulative effect of implementing EITF 00-27 ..         --        (277)         --             --             --
                                                  --------    --------    --------       --------       --------
 Net income (loss) applicable to common
    shareholders ..............................   $ (1,539)   $    198    $ (1,998)      $ (7,203)      $ (4,362)
                                                  ========    ========    ========       ========       ========
Basic income (loss) per share before
 cumulative effect ............................   $  (0.09)   $   0.05    $  (0.23)      $  (0.75)      $  (0.54)
                                                  ========    ========    ========       ========       ========
Basic net income (loss) per share
  applicable to common shareholders (3) .......   $  (0.09)   $   0.02    $  (0.23)      $  (0.88)      $  (0.54)
                                                  ========    ========    ========       ========       ========
Weighted average basic common shares
  outstanding .................................     16,265      10,460       8,610          8,175          8,060
                                                  ========    ========    ========       ========       ========
Diluted income (loss) per share before
 cumulative effect ............................   $  (0.09)   $   0.03    $ (0.23)       $  (0.75)      $  (0.54)
                                                  ========    ========    ========       ========       ========

Diluted net income (loss) per share
  applicable to common shareholders (3) .......   $  (0.09)   $   0.01    $  (0.23)      $  (0.88)      $  (0.54)
                                                  ========    ========    ========       ========       ========
Weighted average diluted common shares
  outstanding .................................     16,265      14,504       8,610          8,175          8,060
                                                  ========    ========    ========       ========       ========
</TABLE>


                                       17

<PAGE>

December 31,
------------

<TABLE>
<CAPTION>
                                                      2001        2000        1999       1998 (1)       1997 (2)
                                                      ----        ----        ----       --------       --------
<S>                                               <C>         <C>         <C>            <C>            <C>
Balance Sheet Data:
Working Capital ...............................   $ 38,115    $ 15,225    $ 13,549       $ 11,089       $ 15,261
Total assets ..................................     67,663      45,273      44,680         46,444         47,463
Long-term obligations .........................     10,368       9,526      15,721         18,058         13,300
Shareholders' equity ..........................     46,294      20,728      15,790         12,618         18,736
</TABLE>

(1)   1998 amounts reflect the impact of charges of $230 for restructuring,
      $1,321 for the early adoption of SOP 98-5, Reporting on the Costs of
      Start-Up Activities, and $2,322 to revise project margins and contract
      cost-to-complete estimates.
(2)   1997 amounts reflect the impact of charges of $7.6 million for investments
      in technology, services and markets.
(3)   See note 2 of Notes to Financial Statements for information concerning the
      computation of basic and diluted net income (loss) per share.

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

The following discussion and analysis contains forward-looking statements and
information that are based on the beliefs of management as well as assumptions
made by and information currently available to the Company. Such statements
reflect the current views of the Company with respect to future events and are
subject to certain risks, uncertainties and assumptions. Should one or more of
these risks or uncertainties materialize, or should underlying assumptions prove
incorrect, actual results may vary materially from those discussed herein.
Factors that could cause or contribute to such differences include, but are not
limited to; those discussed in the section below entitled "Certain Factors that
May Affect Future Results." The cautionary statements made herein should be read
as being applicable to all related forward-looking statements in this Form 10-K.

Overview

Viisage Technology, Inc. (Viisage or the Company) is a leader in the emerging
field of biometrics technology and in providing digital identification systems
and solutions. The Company focuses on identification solutions that improve
personal convenience and security, deter fraud, and reduce identification
program costs. Viisage combines its systems integration and software design
capabilities with its proprietary software and hardware products and other
industry standard products to create complete customized solutions. These
turnkey solutions integrate image and data capture, create relational databases,
incorporate multiple biometrics and improve customers' ability to move and
manage information. Applications can include driver's licenses, voter
registration, national identification cards, law enforcement, social services,
access control and PC network and Internet access security. Viisage's primary
customers have been government agencies with particular penetration in
Departments of Motor Vehicles. The Company has captured approximately 30% of the
domestic driver's license market. Viisage products annually produce more than 25
million identification documents at more than 1,200 locations in 15 states. The
Company has also provided services under subcontracts for projects in Jamaica,
the Philippines and for the U.S. Immigration and Naturalization Service.
Originally developed at MIT, face-recognition technology is widely recognized as
the most convenient, non-intrusive and cost-effective biometric available.
Viisage's patented face-recognition technology is focused on five major product
application areas.


                                       18

<PAGE>

FaceEXPLORER(TM), Viisage's technology for image retrieval and analysis, is
recognized for its leadership technology performance in real-time and
large-database applications. FaceEXPLORER(TM) is deployed in the world's largest
face-recognition application with a database of more than 9.5 million enrolled
images and is growing by 15,000 new images per day. The product family of
face-recognition applications also includes: FaceNET(TM) for Internet and
e-commerce security; FacePIN(TM) for point-of-sale transactions verification;
FacePASS(TM) for physical access control and keyless entry; and FaceFINDER(TM)
for surveillance and identification.

The Company is engaged in one business, the development and implementation of
digital identification systems and solutions. The Company has an integrated
business model: identification solutions through system integration systems and
biometric software. Substantially all of the Company's revenues have been
derived within the United States of America.

The Company provides systems and services principally under contracts that have
five to seven year terms and several optional annual renewals after the initial
contract term. Contracts generally provide for a fixed price for the system
and/or for each identification card produced. Contract prices vary depending on,
among other things, design and integration complexities, the nature and number
of workstations and sites, the projected number of cards to be produced, the
size of the database, the level of post-installation support and the competitive
environment.

Biometric revenues were approximately 14% of total revenues in 2001, although no
single customer accounted for over 10%. The balance of the Company's revenue is
primarily derived from the secure identification systems customers. The Company
believes for the near future that it will continue to derive a significant
portion of its revenues from a limited number of large contracts. For the years
ended December 31, Customers who accounted for more than 10% of the Company's
revenue in a given year were as follows:

      .     For 2001, four customers accounted for an aggregate of 49%
      .     For 2000, four customers accounted for an aggregate of 58%
      .     For 1999, four customers accounted for an aggregate of 52%

The Company's results of operations are significantly affected by, among other
things, the timing of awards and performance on contracts. As a result, the
Company's revenues and income may fluctuate from quarter to quarter, and
comparisons over longer periods may be more meaningful. The Company's results of
operations are not seasonal since contracts are awarded and performed throughout
the year. However, the Company believes its public sector business is subject to
cyclical procurement delays that may be related to election cycles.

Critical Accounting Policies

The Company considers the following accounting policies critical to its results
of operations and financial condition:

      -     Contract Revenue and Cost Recognition


                                       19

<PAGE>

      The Company provides services principally under contracts that provide for
      a fixed price for each system and/or for each identification card
      produced. Revenue is recognized using the percentage of completion method
      based on labor costs incurred and/or cards produced. Contract losses, if
      any, are recognized in the period in which they become determinable. Costs
      and estimated earnings in excess of billings are recorded as a current
      asset. Billings in excess of costs and estimated earnings and accrued
      contract costs are recorded as current liabilities. Generally, contracts
      provide for billing when contract milestones are met and/or cards are
      produced. These contracts are typically long term contracts, typically
      five years or longer. The value of these contracts are based on estimated
      volume of identification cards to be produced and estimated contract
      costs. Any significant reductions in volume will have a negative impact on
      the Company's financial condition. Volumes can be impacted by legislative
      changes to the life of the identification credentials; lack of government
      funding; or termination of contract for lack of performance. Management
      reviews the historical trends of card productions quarterly to estimate
      the volumes that are to be used to calculate contract values.

      -     Use of Estimates

      The preparation of financial statements in conformity with generally
      accepted accounting principles requires management to make estimates and
      assumptions that affect the reported amounts of assets and liabilities 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. The Company, on a quarterly basis, estimates the cost to
      complete on each contract by reviewing the performance against budgets
      that are established during the quoting process. Adjustments are made to
      reflect the current information that is available such as: card volumes;
      per card consumable costs; ongoing maintenance costs and site inventory
      levels. The financial performance of the Company could be impacted by any
      negative change in management's estimates and assumptions that are
      inherent in contract accounting.

Results of Operations

Year ended December 31, 2001 and 2000
-------------------------------------

Revenues are derived principally from multi-year contracts for system
implementation, card production and related services. Revenue decreased to $26.3
million in 2001 from $27.5 million in 2000. The 4.4% decrease in revenue between
the two years was primarily the result of customer delays in the State of
Pennsylvania and Maryland.

Gross margins increased to 25.4% in 2001 from 23.3% in 2000. The increase in
gross margins between the two years is due principally to the positive impact of
new higher margin business and the positive effect of contract extensions on the
overall revenue mix in 2001.

Sales and marketing expenses increased by 2.8% or $0.02 million in 2001 from
2000. This represents an increase to 3.1% from 2.9% of revenue. The increase is
due principally to the


                                       20

<PAGE>

Company's continuing efforts in marketing its patented biometric solutions as
the Company continues to increase its distribution and marketing capabilities
for its facial recognition solutions by adding and certifying new system
integrators and reseller partners. This allows the Company to control its costs
while increasing its marketing capabilities.

Research and development expenses increased by 198.5% or $1.4 million in 2001
from 2000. This represents an increase to 7.8% from 2.5% of revenue. The
increase is due principally to the Company's continued investment in biometrics.
Research and development costs do not include amounts for specific projects that
are allocated to project costs, and do not reflect the benefits to Viisage under
license arrangements from the research and development efforts of Lau
Technologies and the Massachusetts Institute of Technology for projects that are
not directly related to the Company. The Company expects to continue to invest
in product development as the market for its products continues to expand in
fiscal 2002 at approximately the same levels as 2001.

General and administrative expenses remained relatively unchanged between 2001
and 2000. This represents an increase to 9.5% from 9.0% of revenue. The increase
as a percentage of revenue is due to the slight decrease in business volume and
resulting revenues from 2000 to 2001.

The Company incurred fourth quarter non-recurring expenses of $1.6 million
relating to costs incurred in its attempt to purchase Polaroid Corporation's
Identification Systems Business in the fourth quarter of 2001. These expenses
related to legal and professional activities for due diligence as well as
financing break up fees associated with this unsuccessful acquisition.

Interest expense decreased $0.4 million in 2001 from 2000. This represents a
decrease to 4.6% from 5.9% of revenue. This decrease reflects a reduction in
borrowings during 2001.

The Company did not record any tax for the fiscal year 2001 due to the net loss
for the year. For the fiscal year 2000, no tax was provided due to the
availability of tax loss carry forwards.

Year ended December 31, 2000 and 1999
-------------------------------------

Revenues are derived principally from multi-year contracts for system
implementation, card production and related services. Revenue grew to $27.5
million in 2000 from $19.3 million in 1999. The 42.7% increase in revenue
between the two years was primarily the result of a new contract with the State
of Pennsylvania and contract extensions with our existing customers.

Gross margins increased to 23.3% in 2000 from 21.6% in 1999. The increase in
gross margins between the two periods is due principally to the positive impact
of new higher margin business and the positive effect of contract extensions on
the overall revenue mix in 2000.

Sales and marketing expenses remained relatively unchanged between 2000 and
1999. Sales and marketing expense decreased, as a percentage of revenue, to 2.9%
from 3.8% for the year-to-year period. The Company continued to increase its
distribution and marketing capabilities for its facial recognition solutions by
adding and certifying new system integrators and reseller partners, which allows
the Company to control its costs while increasing its marketing capabilities
resulting in the decrease as a percentage of revenue.


                                       21

<PAGE>

Research and development expenses increased $0.4 million in 2000 from 1999. This
represents an increase to 2.5% from 1.3% of revenue. The increase was due
principally to the Company's continued investment in the biometrics division.
Research and development costs do not include amounts for specific projects that
are allocated to project costs, and do not reflect the benefits to Viisage under
license arrangements from the research and development efforts of Lau
Technologies and the Massachusetts Institute of Technology for projects that are
not directly related to the Company.

General and administrative expenses increased $0.6 million in 2000 from 1999, a
decrease to 9.0% from 10.0% of revenue. The reduction, as a percentage of
revenue, is due principally to stringent cost management and the increase in the
business volume.

Interest expense decreased $0.6 million in 2000 from 1999. This represents a
decrease to 5.9% from 11.6% of revenue. This decrease reflects a reduction in
borrowings during 2000.

The Company did not record any tax for the fiscal year 2000 due to the
availability of tax loss carry forwards. The Company did not record any tax for
the fiscal year 1999 due to the net loss for the year.

Accounting Change. During the fourth quarter of 2000, the Financial Accounting
Standards Board issued Emerging Issues Task Force (EITF) 00-27 "Application of
EITF issue No. 98-5, Accounting for Convertible Securities with Beneficial
Conversion Features or Contingency Adjustable Conversion Ratios, to Certain
Convertible Instruments". EITF No. 00-27 requires the remeasurement of the
original issue discount on preferred stock with characteristics similar to the
convertible preferred stock issued by the Company during fiscal year 1999. This
accounting change required the value of the warrants issued with the preferred
stock to be included in calculating the beneficial conversion value. This
resulted in a cumulative charge of $277,000 to income applicable to common
shareholders in the fourth quarter of fiscal 2000.

Liquidity and Capital Resources

Cash and cash equivalents were $20.7 million at December 31, 2001, which
consisted entirely of cash. There were no cash or cash equivalents at December
31, 2000.

The Company has a $4.0 million revolving line of credit which is a sweep
account, set up to maintain the lowest possible balance on the revolver, by
maintaining a zero balance of cash at all times. As a result of the Company's
private sale of common stock and warrants in December 2001, the revolving line
of credit was paid in full and the daily sweep account is earning interest for
the Company. The revolving line of credit expires on June 15, 2003.

Accounts receivable increased approximately 45.9% from December 31, 2000 to
December 31, 2001. This was the result of the timing of billings, which
liquidated a portion of the costs and estimated earnings in excess of billings.


                                       22

<PAGE>

Costs and estimated earnings in excess of billings decreased approximately 11.4%
from December 31, 2000 to December 31, 2001, which reflects the billing of
accumulated contract costs incurred in prior periods.

In February 2001, the Company's revolving credit agreement was amended to
provide for a term note in the amount of $4,000,000 related to project
financing. The term note bears interest at 8.00% and is payable in monthly
installments of approximately $83,600, including principal and interest, and
matures in March 2006. As of December 31, 2001 the outstanding balance was
approximately $3,768,000.

In September 2001, the revolving credit agreement was amended to provide for a
term note in the amount of $3,200,000 related to project financing. The term
note bears interest at 6.25% and is payable in monthly installments of
approximately $71,700, including principal and interest, and matures in March
2006. As of December 31, 2001 the outstanding balance was $3,200,000.

The term notes are subject to the same financial covenants as the revolving line
of credit. Upon notice by the lender, the entire principal and accrued interest
can become immediately due and payable following the termination of the revolver
in June 2003. This would result in the acceleration of the then principal
balance of $4.7 million to be due June 2003. The equipment for the specific
project collateralizes the term notes.

The Company also has system project lease financing arrangements with commercial
leasing organizations. Pursuant to these arrangements, the lessor purchases
certain of the Company's digital identification systems and leases them back to
the Company for deployment with identified and contracted customers approved by
the lessor. The lessor retains title to systems and has an assignment of the
Company's rights under the related customer contracts, including rights to use
the software and technology underlying the related systems. Under these
arrangements, the lessor bears the credit risk associated with payments by the
Company's customers, but the Company bears performance and appropriation risk
and is generally required to repurchase a system in the event of a termination
by a customer for any reason except credit default. The Company is also required
to maintain certain financial ratios and minimum levels of tangible capital
funds, as defined by each lessor. These project lease arrangements are accounted
for as capital leases. At December 31, 2001, the Company had approximately $7.7
million outstanding under these lease-financing arrangements.

Future minimum payments related to project capital leases, term notes, and
operating leases are approximately (in thousands):

                                                Capital      Term      Operating
                                                Leases       Notes      Leases
                                                ------       -----      ------
Year Ending:
   2002                                        $   3,364   $   1,402   $   1,198
   2003                                            3,173       1,507       1,254
   2004                                            1,557       1,619         523
   2005                                              436       1,742          --
   2006                                               --         698          --
                                               ---------   ---------   ---------
       Total minimum payments                      8,530       6,968   $   2,975
                                                                       ---------
Less--Interest portion                               853
                                               ---------
       Present value of net
       minimum lease payments                      7,677
Less--Current portion                              2,875       1,402
                                               ---------   ---------
Long term portion                              $   4,802   $   5,566
                                               =========   =========


                                       23

<PAGE>

For the fiscal year ended December 31, 2001 the existing financial covenants
under the revolving line of credit and two of the project financing arrangements
were amended to allow for the impact of the unsuccessful acquisition of the
Polaroid Identification Systems division and the impact of the $25 million
private placement. Effective for fiscal year ended December 31, 2001 all
financial covenants for these agreements were eliminated as long as the Company
maintains a cash balance greater than the total of the long-term debt and
project financing. The financial covenants of the remaining financing
arrangements were not amended as of December 31, 2001 and the Company was in
violation of the positive net income covenant. Subsequent to December 31, 2001,
the Company received a waiver for this covenant violation. The Company believes
that it will be in compliance with the amended debt covenants. However, this
expectation is dependent on achieving the Company's business plan. If the
Company does not meet such covenants, the bank and the lessors could require
immediate repayment of outstanding amounts.

In April 1999, the Company received a commitment from Lau to lend up to $2.0
million in exchange for a 4% convertible subordinated note. Amounts drawn under
the note, with Lau's consent, and related accrued interest could be converted at
Lau's option into shares of the Company's common stock at any time through the
expiration date of January 1, 2001 at $1.26 per share. As of December 31, 2000,
the Company had borrowed $1.0 million under this commitment. On January 1, 2001
the debt and accrued interest were converted into 847,354 shares of common stock
and the commitment terminated.

In March 2000, for an initial investment of $4.0 million (of which $1.5 million
was funded in May 15, 2000, following the effectiveness of the registration
statement on Form S-3), the Company agreed to issue to Strong River Investments,
Inc. ("SRI") 391,917 shares of common stock, a closing warrant to purchase
97,979 shares of the Company's common stock, exercisable for five years at
$11.77 per share, and an adjustable warrant which has been exercised for a total
of 3,152,939 shares of common stock. The closing warrant was adjusted, subject
to an anti-dilution provision, in December 2001. The adjusted closing warrant is
to purchase 98,442 shares of common stock at a price of $11.71. In connection
with the SRI transaction, the Company paid an investment banking fee of $160,000
to Cardinal Securities, L.L.C. ("Cardinal"), and issued warrants to purchase
75,000 shares of the Company's common stock to Cardinal exercisable for five
years, of which 46,875 shares have an exercise price of $12.35 per share which
are still outstanding, and 28,125 shares have an exercise price of $6.175 per
share, which were exercised in October 2001.

In January and February of 2001, Strong River Investments, Inc. received
1,106,203 shares of common stock from the December 2000 cashless exercise of its
second adjustable warrant.

In February and June 2001, Strong River Investments, Inc. exercised its third
adjustable warrant and received 1,586,305 shares of common stock from the
Company through a cashless exercise.

In January 2001, 370 shares of the series A preferred stock and accrued
dividends were converted into 655,565 shares of common stock.

In January 2001, 650 shares of the series B preferred stock and accrued
dividends were converted into 796,593 shares of common stock.


                                       24

<PAGE>

In October 2001, Citizens Financial Group, Inc. received 20,579 shares of common
stock from a cashless exercise of its common stock purchase warrants.

In October and December 2001, J. P. Turner & Company exercised its common stock
purchase warrants and received a total of 16,250 shares of common stock.

In November 2001, the Shaar Fund received 50,000 shares of common stock from the
exercise of its common stock purchase warrant.

On December 14, 2001, the Company entered into a Common Stock and Warrants
Purchase Agreement with a number of institutional investors in a private
placement placed by Ladenburg Thalmann & Co. Inc. The investors purchased an
aggregate of 2,380,952 shares of the Company's common stock at a purchase price
of $10.50 per share, and warrants to purchase an aggregate of 357,152 shares of
the Company's common stock at an exercise price of $12.08 per share. In
connection with this transaction, Viisage paid an investment banking fee of 5%,
or $1,250,000, to Ladenburg.

During 2001, the Company's Board of Directors received an aggregate of 294,864
shares of common stock in lieu of cash compensation. The fair market value of
the common stock on the grant date was approximately $297,000 and was expensed
during the year ended December 31, 2001.

In February 2002, Lau Technologies exercised an option to purchase 60,000 shares
of common stock at $1.90 per share, pursuant to an agreement entered into with
the Company in 1999 under which Lau guaranteed a contract indemnification
obligation of the Company.

The Company believes that if it meets its business forecast for 2002, cash flows
from available borrowings, project leasing, operations and capital raised will
be sufficient to meet its working capital and capital expenditure needs for the
foreseeable future. The Company's ability to meet its business forecast is
dependent on a number of factors, including those described under "Certain
Factors That May Affect Future Results" in Item 7A below.

Inflation

Although certain of the Company's expenses increase with general inflation in
the economy, inflation has not had a material impact on the Company's financial
results to date.

Recent Accounting Pronouncements

In June 2001, the Financial Accounting Standards Board finalized FASB Statements
No. 141, "Business Combinations" (SFAS 141), and No. 142, "Goodwill and Other
Intangible Assets" (SFAS 142). SFAS 141 requires the use of the purchase method
of accounting and prohibits the use of the pooling-of-interests method of
accounting for business combinations initiated after June 30, 2001. SFAS 141
also requires that the Company recognize acquired intangible assets apart from
goodwill if they meet certain criteria. SFAS 141 applies to all business
combinations initiated after June 30, 2001 and for purchase business
combinations completed on or after July 1, 2001. It also requires, upon adoption
of SFAS 142, that the Company reclassify the carrying amounts of intangible
assets and goodwill based on the criteria in SFAS 141.


                                       25

<PAGE>

SFAS 142 requires, among other things, that companies no longer amortize
goodwill, but instead test goodwill for impairment at least annually. In
addition, SFAS 142 requires that the Company identify reporting units for the
purposes of assessing potential future impairments of goodwill, reassess the
useful lives of other existing recognized intangible assets, and cease
amortization of intangible assets with an indefinite useful life. An intangible
asset with an indefinite useful life should be tested for impairment in
accordance with the guidance in SFAS 142. SFAS 142 is required to be applied in
fiscal years beginning after December 15, 2001 to all goodwill and other
intangible assets recognized at that date, regardless of when those assets were
initially recognized. The Company has no goodwill or acquired intangible assets
as of December 31, 2001.

In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets," which addresses financial accounting and
reporting for the impairment or disposal of long-lived assets. This statement
supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets To Be Disposed Of," and APB Opinion No. 30, "Reporting the
Results of Operations - Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions for the Disposal of a Segment of a Business." SFAS No. 144 becomes
effective for the fiscal years beginning after December 15, 2001. The Company
expects to adopt SFAS No. 144 in the first quarter quarter of fiscal 2002 and
does not expect adopting SFAS No.144 to affect its financial position or results
of operations.

Item 7A. Market Risk
--------------------

Except for the Company's revolving credit facility, which has a variable
interest rate, the Company has no material exposure to market risk that could
affect its future results of operations and financial condition. The Company
currently has no outstanding balances on the revolving credit facility. Refer to
the "Liquidity and Capital Resources" section of "Management's Discussion and
Analysis of Financial Condition and Results of Operations".

Certain Factors That May Affect Future Results

The risks and uncertainties described below are not the only ones we face.
Additional risks and uncertainties, including those not presently known to us or
that we currently deem immaterial, may also impair our business.

Our business depends on large public sector contracts, which can involve delays.

Our business depends on a limited number of large public sector contracts. These
contracts result from purchasing decisions made by public sector agencies that
are often subject to political influence, onerous procurement procedures, budget
changes and award protests. These factors can cause delays, which make our
quarterly results difficult to predict. This can also make our ability to meet
analysts' expectations equally uncertain and adversely affect the price of our
common stock.


                                       26

<PAGE>

Our quarterly results could be volatile and may cause our stock price to
fluctuate.

We have experienced fluctuations in our quarterly operating results and expect
those fluctuations to continue. Our quarterly results are affected by, among
other things, factors such as:

      .     The size and timing of contract awards;
      .     The timing of our contract performance;
      .     Variations in the mix of our products and services; and
      .     Contract losses and changes in management estimates inherent to
            accounting for contracts.

The loss of any significant customer could cause our revenue to decline.

For the year ended December 31, 2001, four customers each accounted for over 10%
of Company revenues and an aggregate of approximately 49% of revenues. For 2000,
four customers each accounted for over 10% of our revenues and a total of
approximately 58% of our revenues for the year. For 1999, four customers each
accounted for over 10% of our revenues and a total of approximately 52% of our
revenues for the year. The loss of any significant customer could cause our
revenue to decline and thus have an adverse material effect on our business and
financial condition.

We have had a history of operating losses.

Our business operations began in 1993 and, except for fiscal years 1996 and
2000, have resulted in net losses in each fiscal year. At December 31, 2001, we
had an accumulated deficit of approximately $14.9 million. We intend to continue
to invest in the development of our biometrics technologies and thus we cannot
predict when or if we will ever achieve overall profitability.

The market for our common stock has been volatile.

The market for stock of many security-related businesses, including Viisage, has
been highly volatile, especially since the terrorist attacks of September 11,
2001. It is likely that the market price of our common stock will fluctuate
widely in the future. Factors affecting the trading price of our common stock
are likely to include:

..     Responses to quarter-to-quarter variations in our results of operations;
..     The announcement of new contracts, products or product enhancements by us
      or our competitors;
..     Technological innovation by our competitors; or us
..     General market conditions or market conditions specific to particular
      industries; and
..     Changes in earnings estimates by analysts.


                                       27

<PAGE>

Our leverage creates financial and operating risk that could limit the growth of
our business.

We have a significant amount of indebtedness. As of December 31, 2001, we had
approximately $14.6 million in short and long-term debt and lease financing. Our
leverage could have important consequences to us including:

..     Limiting our ability to obtain necessary financing for future working
      capital;
..     Limiting our ability to finance the acquisition of equipment needed to
      meet customer requirements;
..     Limiting our ability to finance the development of new technologies;
..     Requiring that we use a substantial portion of our cash flow from
      operations for debt service and not other operating purposes; and
..     Requiring us to comply with financial and operating covenants, which could
      cause an event of default under our debt instruments.

Further, our ability to make principal and interest payments under long-term
indebtedness and bank loans will be dependent upon our future performance, which
is subject to financial, economic and other factors affecting us, some of which
are beyond our control.

We may be unable to obtain additional capital required to fund our operations
and finance our growth.

The installation of our digital identification systems requires significant
capital expenditures. In addition, the further development of our biometric and
other advanced technologies is expected to require additional capital. Although
we recently completed a $25 million private placement of our common stock and
have been successful in the past in obtaining project financing, we will have
ongoing capital needs as we expand our business. If we are unable to obtain
additional funds in a timely manner or on acceptable terms, we may not be able
to fund our operations or expand our business to meet our plans. If we are
unable to obtain capital when we need it, we may have to restructure our
business or delay or abandon our development and expansion plans. That could
have a material adverse effect on our business and financial condition.

Our reliance on sole and single-source suppliers could cause delays or increases
in project costs.

We rely on outside vendors to manufacture or develop components, software and
consumables, which are used for our systems and services. Some of these items
are obtained from a single supplier or a limited group of suppliers. Our
inability to obtain adequate deliveries or alternative sources of supply could
cause delays or increases in project costs.


                                       28

<PAGE>

If we do not successfully expand our direct sales and services organizations and
partnering arrangements, we may not be able to increase our sales or support our
customers.

In the fiscal year ended December 31, 2000 and 2001, we licensed substantially
all of our products through our direct sales organization. Our future success
depends on substantially increasing the size and scope of our direct sales force
and partnering arrangements, both domestically and internationally. There is
intense competition for personnel, and we cannot guarantee that we will be able
to attract, assimilate or retain additional qualified sales personnel on a
timely basis. Moreover, we believe that as our sales increase, and given the
large-scale deployment required by our customers, we will need to hire and
retain a number of highly trained customer service and support personnel. We
cannot guarantee that we will be able to increase the size of our customer
service and support organization on a timely basis to provide the high quality
of support required by our customers. Failure to add additional sales and
customer service representatives would have a material adverse effect on our
business, operating results and financial condition.

If we lose any key personnel, or fail to attract and retain additional
personnel, we may be unable to continue expanding our business and product line.

The loss of the services of one or more of our key personnel could have a
material adverse effect on our business, operating results and financial
condition. We cannot guarantee that we will be able to retain our key personnel.
Our future success also depends on our continuing ability to attract, assimilate
and retain highly qualified sales, technical and managerial personnel.
Competition for these individuals is intense, and there can be no assurance that
we can attract, assimilate or retain necessary personnel in the future.

If our target customers do not accept our biometric technologies, our growth may
be restricted.

Our growth plan assumes, in part, that biometric technologies will gain
widespread market acceptance. Although we have had success with several recent
biometric projects, the widespread market acceptance of biometric technologies
remains uncertain.

If we fail to keep pace with changing technologies, we may not win new
customers.

Rapidly changing customer requirements and evolving industry standards
characterize our market. If we cannot keep pace with these changes, our business
could suffer. To achieve our goals, we need to develop cost-effective business
solutions and methodologies to keep pace with continuing changes in industry
standards and customer preferences.

System failures could seriously damage our business.

We depend on our ability to provide customers with complex systems, which can
operate on an "as needed" basis. Although we deploy back up systems, system
failures could result in increased costs, lower margins, liquidated damage
payment obligations and harm to our reputation. This could result in contract
terminations and have a material adverse effect on our business and financial
results.


                                       29

<PAGE>

We are controlled by a single stockholder, which could result in it taking
actions, which other stockholders do not approve.

Lau Technologies ("Lau") beneficially owns approximately 32% of our outstanding
common stock. As a result, Lau has a strong influence on matters requiring
approval by our stockholders, including the election of all of the directors and
most corporate actions. We have certain contractual relations with Lau that
could give rise to conflicts of interest.

Competition from new entrants and bigger, more established competitors with
greater financial resources could diminish our business opportunities and limit
our growth.

The business areas in which we compete are intensely competitive and subject to
rapid technological change. We expect competition to continue. In particular,
the events of September 11, 2001 have heightened interest in the use of
biometric technologies and competition in this field is expected to intensify.
There is no assurance that companies with greater financial resources and name
recognition will not enter our business sectors. Our competitors may be able to
respond more quickly to technological developments and changes in customers'
needs.

Misappropriation of our intellectual property could harm our reputation, affect
our competitive position and cost us money.

We believe our intellectual property, including our proprietary methodologies,
is important to our success and competitive position. If we are unable to
protect our intellectual property against others' unauthorized use, our
reputation among existing and potential customers could be damaged and our
competitive position adversely affected.

Our strategies to deter misappropriation could be undermined in light of the
following risks:

..     Non-recognition of the proprietary nature of or inadequate protection of
      our methodologies in the United States or foreign countries;
..     Undetected misappropriation of our proprietary methodologies; and
..     Development of similar software or applications by our competitors.

The materialization of any of these risks could require us to spend significant
amounts to defend our rights and could divert our managerial resources. In
addition, our proprietary methodologies may decline in value or our rights to
them may be unenforceable.


                                       30

<PAGE>

Others could claim that we infringe on their intellectual property rights, which
may result in substantial costs, diversion of resources and management
attention, and harm to our reputation.

Although we believe that our products and services do not infringe the
intellectual property rights of others, we cannot give any assurances that we
can successfully defend an infringement claim. A successful infringement claim
against us could materially and adversely affect us in the following ways:

..     We may be liable for damages and litigation costs, including attorneys'
      fees;
..     We may be enjoined from further use of the intellectual property;
..     We may have to license the intellectual property, incurring licensing
      fees;
..     We may have to develop a non-infringing alternative, which could be costly
      and delay projects; and
..     We may have to indemnify clients with respect to losses incurred as a
      result of our infringement of the intellectual property.

Regardless of the outcome, an infringement claim could result in substantial
costs, diversion of resources and management attention, termination of customer
contracts and harm to our reputation.

You may be subject to dilution.

We have outstanding stock purchase warrants and stock options that could result
in dilution for our common stockholders, depending upon the market price of the
Company's common stock from time to time.

You should not expect dividends from us.

We do not expect to declare or pay any cash dividends in the near future.


                                       31

<PAGE>

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

                                      INDEX


                                                                         Page
                                                                         ----
Report of Independent Public Accountants                                   33

Balance Sheets as of December 31, 2001 and 2000                            34

Statements of Operations for the years ended December 31, 2001, 2000
     and 1999                                                              35

Statements of Changes in Shareholders' Equity for the years ended
     December 31, 2001, 2000 and 1999                                   36-37

Statements of Cash Flows for the years ended December 31, 2001, 2000
     and 1999                                                              38

Notes to Financial Statements                                           39-56


                                       32

<PAGE>

                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To Viisage Technology, Inc.:

We have audited the accompanying balance sheets of Viisage Technology, Inc. as
of December 31, 2001 and 2000, and the related statements of operations, changes
in shareholders' equity and cash flows for each of the three years in the period
ended December 31, 2001. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.

We conducted our audits 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 audits provide a
reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Viisage Technology, Inc. as of
December 31, 2001 and 2000, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 2001, in conformity
with accounting principles generally accepted in the United States of America.


                                                           /s/ BDO SEIDMAN, LLP

Boston, Massachusetts
February 13, 2002, except
for Note 14 which is as of
March 18, 2002


                                       33

<PAGE>

                            VIISAGE TECHNOLOGY, INC.
                                 Balance Sheets
                    (in thousands, except share information)

                                                               December 31,
                                                             2001        2000
                                                           --------    --------
           Assets
Current Assets:
   Cash and cash equivalents                               $ 20,662    $     --
   Accounts receivable                                        4,821       3,305
   Costs and estimated earnings in excess of billings        23,331      26,338
   Other current assets                                         302         601
                                                           --------    --------
      Total current assets                                   49,116      30,244
Property and equipment, net                                  18,178      14,605
Other assets                                                    369         424
                                                           --------    --------
                                                           $ 67,663    $ 45,273
                                                           ========    ========

           Liabilities and Shareholders' Equity
Current Liabilities:
   Accounts payable and accrued expenses                   $  6,724    $ 10,331
   Convertible subordinated debt                                 --       1,000
   Current portion of project financing                       4,277       3,688
                                                           --------    --------
      Total current liabilities                              11,001      15,019
Long-term debt                                                   --       2,515
Obligations under project financing                          10,368       4,749
Obligations under related party capital leases                   --       2,262
                                                           --------    --------
      Total liabilities                                      21,369      24,545
                                                           --------    --------
Commitments and Contingencies
Shareholders' equity:
Preferred stock, $0.001 par value; 2,000,000 shares
     authorized; 1,020 shares issued and
     outstanding at December 31, 2000                            --       1,020
Common stock, $0.001 par value; 45,000,000
     shares authorized; 19,656,142 and 11,203,131
     shares issued and outstanding at December 31,
     2001 and 2000, respectively                                 20          11
Additional paid-in capital                                   61,161      33,045
Accumulated deficit                                         (14,887)    (13,348)
                                                           --------    --------
      Total shareholders' equity                             46,294      20,728
                                                           --------    --------
                                                           $ 67,663    $ 45,273
                                                           ========    ========

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


                                       34

<PAGE>

                            VIISAGE TECHNOLOGY, INC.
                            Statements of Operations
                      (in thousands, except per share data)
                        For the Years Ended December 31,

<TABLE>
<CAPTION>
                                                           2001        2000        1999
                                                         --------    --------    --------
<S>                                                      <C>         <C>         <C>
Revenues                                                 $ 26,280    $ 27,539    $ 19,297
Project costs                                              19,602      21,136      15,131
                                                         --------    --------    --------
   Project margin                                           6,678       6,403       4,166
                                                         --------    --------    --------
Operating Expenses:
   Sales and marketing                                        809         787         739
   Research and development                                 2,054         688         253
   General and administrative                               2,500       2,489       1,939
   Non recurring - acquisition expenses                     1,639          --          --
                                                         --------    --------    --------
      Total operating expenses                              7,002       3,964       2,931
                                                         --------    --------    --------
      Operating income (loss)                                (324)      2,439       1,235
Interest expense, net                                       1,210       1,637       2,230
                                                         --------    --------    --------
   Income (loss) before income taxes                       (1,534)        802        (995)
Provision for income taxes                                     --          --          --
                                                         --------    --------    --------
   Net income (loss)                                       (1,534)        802        (995)
Preferred stock dividends                                      (5)       (327)     (1,003)
                                                         --------    --------    --------
   Income (loss) applicable to common shareholders
     before cumulative effect                              (1,539)        475      (1,998)
Cumulative effect of implementing EITF 00-27                   --        (277)         --
                                                         --------    --------    --------
   Net income (loss) applicable to common shareholders   $ (1,539)   $    198    $ (1,998)
                                                         ========    ========    ========
Basic income (loss) per share before cumulative effect   $  (0.09)   $   0.05    $  (0.23)
                                                         ========    ========    ========
Basic income (loss) per share applicable to common
   Shareholders                                          $  (0.09)   $   0.02    $  (0.23)
                                                         ========    ========    ========
Weighted average basic common shares outstanding           16,265      10,460       8,610
                                                         ========    ========    ========
Diluted income (loss) per share before cumulative
   Effect                                                $  (0.09)   $   0.03    $  (0.23)
                                                         ========    ========    ========
Diluted income (loss) per share applicable to common
   Shareholders                                          $  (0.09)   $   0.01    $  (0.23)
                                                         ========    ========    ========
Weighted average dilutive common shares outstanding        16,265      14,504       8,610
                                                         ========    ========    ========
</TABLE>

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


                                       35

<PAGE>

                            VIISAGE TECHNOLOGY, INC.
                  Statements of Changes in Shareholders' Equity
                                 (in thousands)

<TABLE>
<CAPTION>
                                                          Additional
                                   Common     Preferred     Paid-in     Accumulated
                                   Stock        Stock       Capital       Deficit        Total
                                  --------    ---------   ----------    -----------     --------
<S>                               <C>          <C>          <C>           <C>           <C>
Balance, December 31, 1998        $      8     $     --     $ 24,157      $(11,547)     $ 12,618
Exercise of employee stock
   options                              --           --          301            --           301
Common stock issued for
   services                             --           --          144            --           144
Common stock issued under
   employee stock purchase
   plan                                 --           --           39            --            39
Exercise of private placement
   warrants                             --           --          134            --           134
Conversion of Lau debt                   1           --          832            --           833
Issuance of preferred stock
   with beneficial conversion
   feature of $896                      --        2,104          896            --         3,000
Issuance costs of preferred
   stock                                --           --         (271)           --          (271)
Amortization of beneficial
   conversion feature of
   preferred stock                      --          678           --          (678)           --
Accrued dividends on
   preferred stock                      --           --           --           (49)          (49)
Issuance of warrants to
   preferred stock investors            --           --          277          (277)           --
Issuance of options for
   services                             --           --           36            --            36
Net loss                                --           --           --          (995)         (995)
                                  --------     --------     --------      --------      --------
Balance, December 31, 1999        $      9     $  2,782     $ 26,545      $(13,546)     $ 15,790
                                  --------     --------     --------      --------      --------
</TABLE>

    The accompanying notes are an integral part of these financial statements


                                       36

<PAGE>

<TABLE>
<CAPTION>
                                                            Additional
                                   Common      Preferred      Paid-in    Accumulated
                                    Stock        Stock        Capital      Deficit        Total
                                   --------    ---------    ----------   -----------     --------
<S>                                <C>         <C>          <C>          <C>             <C>
Balance, December 31, 1999         $      9     $  2,782      $ 26,545     $(13,546)     $ 15,790
Exercise of employee stock
   options                               --           --           193           --           193
Common stock issued for
   services                              --           --            85           --            85
Common stock issued under
   employee stock purchase
   plan                                  --           --            57           --            57
Exercise of warrants                     --           --           115           --           115
Private placement of common
   stock, net of expenses                 1           --         3,686           --         3,687
Amortization of beneficial
   conversion feature of
   preferred stock                       --          218            --         (218)           --
Conversion of preferred stock
   and accrued dividends                  1       (1,980)        2,087           --           108
Cumulative effect of change in
   accounting principle                  --           --           277         (277)           --
Preferred stock dividends                --           --            --         (109)         (109)
Net income                               --           --            --          802           802
                                   --------     --------      --------     --------      --------
Balance, December 31, 2000               11        1,020        33,045      (13,348)       20,728

Warrants issued for services             --           --           994           --           994
Exercise of employee stock
   options                                1           --         1,085           --         1,086
Common stock issued for
   services                              --           --           297           --           297
Common stock issued under
   employee stock purchase
   plan                                  --           --            51           --            51
Exercise of warrants                      3           --           764           --           767
Conversion of debt and accrued
   interest                               1           --         1,067           --         1,068
Private placement of common
   stock, net of expenses                 2           --        22,750           --        22,752
Conversion of preferred stock
   and accrued dividends                  2       (1,020)        1,108           --            90
Preferred stock dividends                --           --            --           (5)           (5)
Net loss                                 --           --            --       (1,534)       (1,534)
                                   --------     --------      --------     --------      --------
Balance, December 31, 2001         $     20     $     --      $ 61,161     $(14,887)     $ 46,294
                                   ========     ========      ========     ========      ========
</TABLE>

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


                                       37

<PAGE>

                            VIISAGE TECHNOLOGY, INC.
                            Statements of Cash Flows
                                 (in thousands)

<TABLE>
<CAPTION>
                                                                        December 31,
                                                              2001          2000          1999
                                                            --------      --------      --------
<S>                                                         <C>           <C>           <C>
Cash Flows from Operating Activities:
 Net income (loss)                                          $ (1,534)     $    802      $   (995)
 Adjustments to reconcile net income (loss) to net cash
    provided by operating activities:
     Depreciation and amortization                             4,511         2,794         4,422
     Value of warrants issued for services                       994            --            --
     Expenses paid in common stock                               297            85           212
 Change in operating assets and liabilities:
     Accounts receivable                                      (1,516)          (41)        1,021
     Costs and estimated earnings in excess of billings        3,007        (4,122)         (494)
     Other current assets                                        299           196          (113)
     Accounts payable and accrued expenses                    (3,773)        3,710        (2,516)
     Accrued and deferred taxes                                   --            --           (28)
                                                            --------      --------      --------
 Net cash provided by operating activities                     2,285         3,424         1,509
                                                            --------      --------      --------
Cash Flows from Investing Activities:
     Purchase of equipment converted to project
       financing                                              (7,946)           --        (3,125)
     Purchase of system assets                                    --          (100)           --
     Additions to property and equipment                         (54)          (62)          (21)
     (Increase) decrease in other assets                         (29)          301           349
                                                            --------      --------      --------
 Net cash provided (used) by investing activities             (8,029)          139        (2,797)
                                                            --------      --------      --------
Cash Flows from Financing Activities:
 Net revolving credit repayments                              (2,515)       (3,985)       (2,054)
 Proceeds from long-term borrowings                               --            --         1,000
 Proceeds from project financing                               7,946            --         3,125
 Principal payments on project financing                      (4,000)       (4,070)       (3,711)
 Net proceeds from issuance of common stock                   24,975         4,051           474
 Net proceeds from issuance of preferred stock                    --            --         2,729
                                                            --------      --------      --------
 Net cash provided (used) by financing activities             26,406        (4,004)        1,563
                                                            --------      --------      --------
 Net increase (decrease) in cash and cash equivalents         20,662          (441)          275
 Cash and cash equivalents, beginning of year                     --           441           166
                                                            --------      --------      --------
 Cash and cash equivalents, end of year                     $ 20,662      $     --      $    441
                                                            ========      ========      ========
Supplemental Cash Flow Information:
 Cash paid during the year for interest                     $  1,161      $  1,529      $  1,788
 Cash paid during the year for income taxes                 $     --      $     --      $     --
Non-cash Transactions:
 Conversion of convertible debt and accrued interest to
  common stock                                              $  1,068      $     --      $    800
 Conversion of preferred stock and accrued dividends to
  common stock                                              $  1,110      $  2,087      $     --
 Directors fees paid in common stock                        $    297      $     85      $     --
 Value of warrants issued for service                       $    994      $     --      $     --
 Accrual of private placement costs                         $    319      $     --      $     --
</TABLE>

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


                                       38

<PAGE>

                            VIISAGE TECHNOLOGY, INC.
                    Notes To Condensed Financial Statements

1. DESCRIPTION OF BUSINESS

Viisage Technology, Inc. (Viisage or the Company), is a leader in the emerging
field of biometrics technology and in providing digital identification systems
and solutions. The Company focuses on identification solutions that improve
personal convenience and security; deter fraud; and reduce identification
program costs. Viisage combines its systems integration and software design
capabilities with its proprietary software and hardware products and other
industry standard products to create complete customized solutions. These
turnkey solutions integrate image and data capture, create relational databases,
incorporate multiple biometrics and improve customers' ability to move and
manage information. Applications can include driver's licenses, voter
registration, national ID's, law enforcement, social services, access control
and PC network and internet access security. Viisage's primary customers have
been government agencies with particular penetration in Departments of Motor
Vehicles.

Viisage's patented face-recognition technology is focused on five major product
application areas. FaceEXPLORER(TM), Viisage's technology for image retrieval
and analysis, is recognized for its leadership role and technology performance
in real-time and large-database applications. The product family of
face-recognition applications also includes: FaceNET(TM) for Internet and
e-commerce security; FacePIN(TM) for point-of-sale transactions verification;
FacePASS(TM) used for physical access control and keyless entry; FaceFINDER(TM)
for surveillance and identification.

As of December 31, 2001, Lau Acquisition Corporation d/b/a Lau Technologies
("Lau") owned approximately 32% of the Company's outstanding common stock.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Use of Estimates

The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities 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.

Computation of Net Income (Loss) per Share

The Company follows SFAS No. 128 "Earnings Per Share" where basic earnings
(loss) per share is computed by dividing income (loss) available to common
shareholders by the weighted average number of common shares outstanding. The
computation of diluted earnings (loss) per share is similar to the basic
earnings (loss) per share computation except the denominator is increased to
include the number of additional shares that would have been outstanding if the
dilutive potential


                                       39

<PAGE>

common shares had been issued. In addition, the numerator is adjusted for any
changes in income or loss that would result from the assumed conversions of
those potential shares.

Basic and diluted earnings (loss) per share calculations are as follows (in
thousands):

<TABLE>
<CAPTION>
Year Ended December 31,                           2001          2000         1999
-----------------------                         --------      --------     --------
<S>                                             <C>           <C>          <C>
Net income (loss) available to
   common shareholders used  in
   basic and diluted EPS                        $ (1,539)     $    198     $ (1,998)
                                                ========      ========     ========

Weighted average common
   shares used in basic EPS                       16,265        10,460        8,610

Effect of dilutive securities:
      Convertible preferred stock                     --            --           --
      Warrants                                        --         2,694           --
      Options                                         --         1,350           --
      Convertible debt                                --            --           --
                                                --------      --------     --------

Weighted average common shares and dilutive
potential common shares used in diluted EPS       16,265        14,504        8,610
                                                ========      ========     ========
</TABLE>

The diluted per share amounts do not reflect the impact of options outstanding,
the conversion of convertible subordinated debt, the conversion of convertible
preferred stock, or stock warrants, for approximately 3,163,000 shares in 2001,
2,707,000 shares in 2000, and 2,472,000 shares in 1999, because the effect of
each is antidilutive.

Contract Revenue and Cost Recognition

The Company provides services principally under contracts that provide for a
fixed price for each system and/or for each identification card produced.
Revenue is recognized using the percentage of completion method based on labor
costs incurred and/or cards produced. Contract losses, if any, are recognized in
the period in which they become determinable. Costs and estimated earnings in
excess of billings are recorded as a current asset. Billings in excess of costs
and estimated earnings and accrued contract costs are recorded as current
liabilities. Generally, contracts provide for billing when contract milestones
are met and/or cards are produced. Retainages and amounts subject to future
negotiation are not material. Costs and estimated earnings in excess of billings
include approximately $5.1 million expected to be billed and collected after
December 31, 2002.


                                       40

<PAGE>

Cash and Cash Equivalents

The Company considers all highly liquid instruments, with maturity of three
months or less when acquired, to be cash equivalents. As of December 31, 2001,
cash and cash equivalents consisted entirely of cash.

Fair Value of Financial Instruments

The carrying amounts of the Company's financial instruments, including cash and
cash equivalents, accounts receivable and payable and short- and long-term
borrowings, approximate fair values.

Accounts Receivable and Concentrations of Credit Risk

Accounts receivable are due principally from government agencies and contractors
to government agencies. Management periodically reviews accounts receivable for
possible uncollectible amounts. In the event management determines a specific
need for an allowance, a provision for doubtful accounts is provided. As of
December 31, 2001 and 2000, management determined that no allowance was
necessary.

For 2001, four customers (Illinois Secretary of State, Unisys Corporation
(Florida Department of Safety and Motor Vehicles), Kentucky Transportation
Cabinet and Pennsylvania Department of Transportation) each accounted for over
10% of Company revenues and an aggregate of 49% of revenues for the year. As of
December 31, 2001, the accounts receivable balances for these customers totaled
approximately $2.4 million. For 2000, four customers (Ohio Bureau of Motor
Vehicles, Unisys Corporation (Florida Department of Safety and Motor Vehicles),
Pennsylvania Department of Transportation, and Maryland Department of
Transportation) each accounted for over 10% of Company revenues and an aggregate
of 58% of revenues for the year. For 1999, four customers (Ohio Bureau of Motor
Vehicles, Unisys Corporation (Florida Department of Safety and Motor Vehicles),
Arkansas Department of Revenue, and Illinois Secretary of State) each accounted
for over 10% of Company revenues and an aggregate of 52% of revenues for the
year. The loss of any such customers could have a material adverse impact on the
Company's business, operating results and financial condition.

Property and Equipment

Property and equipment are recorded at cost or the lesser of fair value or the
present value of minimum lease payments for items acquired under capital leases.
Depreciation and amortization are calculated using the straight-line or
usage-based methods over the estimated useful lives of the related assets
(3 to 7 years) or the lease term, whichever is shorter.

Research and Development

Research and development costs are charged to expense as incurred.


                                       41

<PAGE>

Software Development

The Company reviews software development costs incurred in accordance with the
provisions of Statement of Financial Accounting Standards (SFAS) No. 86,
"Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise
Marketed", which requires that certain costs incurred in the development of
computer software to be sold or leased be capitalized once technological
feasibility is reached. The Company has not capitalized any software development
costs because development costs incurred subsequent to the establishment of
technological feasibility have not been material.

Costs related to software developed for internal use are expensed as incurred,
except for externally purchased software, which is capitalized and depreciated
over its estimated useful life not to exceed five years.

Income Taxes

The Company accounts for income taxes under SFAS No. 109, Accounting for Income
Taxes. Deferred tax assets and liabilities are recognized for the estimated
future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred income tax assets and liabilities are measured
using currently enacted tax rates. 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. Due to the uncertainty surrounding the realization
of the Company's net deferred tax asset, the Company has provided a full
valuation allowance against this amount.

Stock-Based Compensation

The Company accounts for its stock-based compensation plans under Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees. SFAS
No. 123, Accounting for Stock-Based Compensation, establishes a fair value based
method of accounting for stock-based compensation plans. The Company has adopted
the disclosure only alternative under SFAS No. 123, which requires disclosure of
the pro forma effects on earnings and earnings per share as if SFAS No. 123 had
been adopted as well as certain other information. See Note 10 for required
disclosures.

Recent Accounting Pronouncements

In June 2001, the Financial Accounting Standards Board finalized FASB Statements
No. 141, "Business Combinations" (SFAS 141), and No. 142, "Goodwill and Other
Intangible Assets" (SFAS 142). SFAS 141 requires the use of the purchase method
of accounting and prohibits the use of the pooling-of-interests method of
accounting for business combinations initiated after June 30, 2001. SFAS 141
also requires that the Company recognize acquired intangible assets apart from
goodwill if they meet certain criteria. SFAS 141 applies to all business
combinations initiated after June 30, 2001 and for purchase business
combinations completed on or after July 1, 2001. It also requires, upon adoption
of SFAS 142, that the Company reclassify the carrying amounts of intangible
assets and goodwill based on the criteria in SFAS 141.


                                       42

<PAGE>

SFAS 142 requires, among other things, that companies no longer amortize
goodwill, but instead test goodwill for impairment at least annually. In
addition, SFAS 142 requires that the Company identify reporting units for the
purposes of assessing potential future impairments of goodwill, reassess the
useful lives of other existing recognized intangible assets, and cease
amortization of intangible assets with an indefinite useful life. An intangible
asset with an indefinite useful life should be tested for impairment in
accordance with the guidance in SFAS 142. SFAS 142 is required to be applied in
fiscal years beginning after December 15, 2001 to all goodwill and other
intangible assets recognized at that date, regardless of when those assets were
initially recognized. The Company has no goodwill or acquired intangible assets
as of December 31, 2001.

In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets," which addresses financial accounting and
reporting for the impairment or disposal of long-lived assets. This statement
supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets To Be Disposed Of," and APB Opinion No. 30, "Reporting the
Results of Operations - Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions for the Disposal of a Segment of a Business." SFAS No. 144 becomes
effective for the fiscal years beginning after December 15, 2001. The Company
expects to adopt SFAS No. 144 in the first quarter quarter of fiscal 2002 and
does not expect adopting SFAS No.144 to affect its financial position or results
of operations.

3. RELATED PARTY TRANSACTIONS

Debt

During the first quarter of 1999, the Company issued Lau options to purchase
60,000 shares of the Company's common stock in exchange for Lau's guarantee of
an indemnification obligation of the Company. The fair value of the options,
amounting to $36,000, was credited to shareholders' equity and included in
deferred financing cost as a component of other assets. The value of these
options is being amortized over the indemnification period and charged to
interest expense. The options were exercised in February 2002 at $1.90 per
share.

In April 1999, the Company received a commitment from Lau to lend to the Company
up to $2.0 million in exchange for a 4% convertible subordinated note. Amounts
drawn under the note, with Lau's consent, and related accrued interest are
convertible at Lau's option into shares of the Company's common stock at any
time prior to January 1, 2001 at $1.26 per share. In May 1999, the Company
borrowed $1.0 million under this commitment, which was outstanding as of
December 31, 2000. On January 1, 2001 Lau converted this subordinated note and
accrued interest into 847,354 shares of common stock and the commitment
terminated.

The Company had a project lease financing arrangement with Lau that provided for
up to $5.0 million of capital lease financing. This financing arrangement had a
maturity date of August 2005 with interest calculated at approximately 11.3%.
Viisage refinanced this note with a commercial leasing company in July 2001 and
terminated this financing arrangement.


                                       43

<PAGE>

On October 14, 1999, Lau exercised an option to convert $800,000 of 4%,
subordinated convertible debt, borrowed prior to 1999, plus accrued interest of
$33,000, into 526,582 shares of the Company's common stock at the conversion
price of $1.58 per share.

Licenses

The Company had two non-exclusive license agreements with Lau, whereby Lau acted
as a distributor of the Company's "Facial Recognition" Technology for certain
European Markets, U.S. Airports and other end users that are Federal Agencies.
Through December 31, 2001, no royalties had been earned. This license was
terminated in 2002. See "Subsequent Events" below.

The Company also obtained from Lau an exclusive (except for limited fields
reserved by Lau), perpetual, worldwide license to use the U.S. patent 5,432,864
purchased by Lau from Daozeng Lu and Simon Lu, and all improvements thereto,
which relates to a system for automatically verifying the identity of an
individual using identification parameters that are carried on an escort memory
such as an identification or credit card. This license required royalty payments
to Lau for each unit sold or licensed by Viisage. The agreement also required
the issuance of 50,000 shares of Viisage common stock to Lau following the
royalty commencement date. No royalty amount was incurred and this license was
assigned in 2002 to the Company. See "Susequent Events" below.

Other

On January 10, 2002, the Company acquired the business of Lau Security Systems,
including technology, patents, contracts and distribution channels. In return,
Viisage will pay Lau a royalty of 3.1% of facial recognition revenues over the
next 12 and a half years, up to a maximum of $27.5 million and assume certain
liabilities related to the acquired business.

Under an Administration and Services Agreement that was terminated effective
February 1, 2002, Lau provided general accounting, data processing, payroll,
certain human resources, employee benefits administration and certain executive
services to the Company. The agreement required the Company to pay a monthly fee
based on the estimated actual cost of such services and permitted the Company to
terminate selected services upon 30 days written notice. The annual fee for
services for 2001, 2000 and 1999 were approximately $348,000, $355,000 and
$418,000, respectively. This agreement has been terminated for 2002 and the
Company is performing these tasks internally.

A Use and Occupancy Agreement with Lau requires the Company to pay its
proportionate share of the cost of shared facilities and office services
including rent, insurance, property taxes, utilities and other operating
expenses, based on square footage or equipment utilized. The annual fee for
facilities and services is revised for changes in space utilized and in
operating expenses. The amounts for facilities and services were approximately
$217,000 per year for 2001, 2000 and 1999, respectively. See Note 7 for lease
information.

Company employees participate in various Lau employee benefit plans. The Company
pays its proportionate share of the costs of such plans based on the number of
participating employees.


                                       44

<PAGE>

Management believes the methods for allocating expenses and those costs related
to shared facilities and equipment are reasonable and approximate what these
costs would be on a stand-alone basis.

The Company purchases certain system components and technical personnel services
from Lau. The amounts for such components and services were approximately
$522,000 in 2001, $200,000 in 2000 and $500,000 in 1999. During 2001, 2000, and
1999, the Company provided software development services as a subcontractor to
Lau amounting to $203,000, $345,000 and $120,000, respectively.

At December 31, 2001 and 2000, the Company had approximately $13,000 and $14,000
of accounts receivable due from Lau, respectively, and approximately $156,000
and $95,000 of accounts payable due to Lau, respectively.

The Company has employment and noncompetition agreements with certain officers.
Such agreements provide for employment and related compensation, and restrict
the individuals from competing, as defined, with the Company during the terms of
their respective agreements and for up to two years thereafter. The agreements
also provide for stock options under the Company's stock option plan and for
severance payments upon termination under circumstances defined in such
agreements.

4. PROPERTY AND EQUIPMENT

Property and equipment are summarized as follows (in thousands):

                                                             December 31,
                                                            2001        2000
                                                            ----        ----
System assets held under capital leases                   $23,097     $22,351
System assets                                              11,300       4,100
Computer equipment                                          1,110       1,056
                                                          -------     -------
                                                           35,507      27,507
Less--Accumulated depreciation                             17,329      12,902
                                                          -------     -------
                                                          $18,178     $14,605
                                                          =======     =======

During 2001, the Company had additions to capital leases totaling $700,000. The
net book value of system assets under capital leases was $8,582,000 and
$11,757,000 as of December 31, 2001 and 2000, respectively.

In October 1997, Viisage completed a System Sale, License and Subcontract
Agreement (the Agreement) with Unisys Corporation (Unisys). Under the Agreement,
Viisage purchased and licensed certain assets from Unisys and agreed to perform
certain services as Unisys' subcontractor relating to a digital imaging system
for the Florida Department of Highway Safety and Motor Vehicles. The purchase
price was $4 million, consisting of $3.8 million paid in 1997 and two payments
of $100,000 each, one made in December 1998 and the other made on October 1,
2000. In addition, Viisage agreed to additional contingent payments of up to
$754,000 depending largely on Unisys' support of Viisage's efforts to generate
incremental revenues from Florida state agencies. The purchase, including
approximately $100,000 of transaction costs, was recorded using the


                                       45

<PAGE>

purchase method of accounting and has been allocated to system assets which are
being amortized over the estimated remaining useful life of the system.

5. ACCOUNTS PAYABLE AND ACCRUED EXPENSES

Accounts payable and accrued expenses consist of the following (in thousands):

                                                              December 31,
                                                            2001          2000
                                                            ----          ----
Accounts payable                                          $  1,843      $  3,127
Accrued accounts payable                                       452           522
Accrued earned and unbilled costs                            2,797         6,165
Accrued payroll and related taxes                              208            --
Accrued vacation                                               299           216
Other accrued expenses                                       1,125           301
                                                          --------      --------
                                                          $  6,724      $ 10,331
                                                          ========      ========

6. LONG TERM DEBT AND PROJECT FINANCING ARRANGEMENTS

In June 2000, the Company refinanced its revolving line of credit. The new
revolver, which provides for available borrowings up to the lesser of $4.0
million or one third of the amount which from time to time constitutes the
Company's "eligible contract cash flow", as defined, with interest calculated at
the banks base rate plus 1.5%. The revolving line of credit expires in June 2003
and is a sweep account that is set up to maintain the lowest possible balance on
the revolver by maintaining a zero balance of cash at all times. The line of
credit contains various financial covenants and is collaterized by substantially
all of the Company's assets. As of December 31, 2001, none of the $4.0 million
line of credit was being utilized. In comparison, the Company utilized $2.5
million of the $4.0 million line as of December 31, 2000. The highest amount of
debt outstanding against this revolver was approximately $3.3 million and $3.4
million for the years ended December 31, 2001 and 2000, respectively. Prior to
the refinancing in June 2000, the highest amount outstanding was $4.1 million in
2000.

For the fiscal year ended December 31, 2001 the existing financial covenants
under the revolving line of credit and two of the project financing arrangements
were amended to allow for the impact of the unsuccessful acquisition of the
Polaroid Identification Systems division and the impact of the $25 million
private placement. Effective for fiscal year ended December 31, 2001 all
financial covenants for these agreements were eliminated as long as the Company
maintains a cash balance greater than the total of the long-term debt and
project financing. The financial covenants of the remaining financing
arrangements were not amended as of December 31, 2001 and the Company was in
violation of the positive net income covenant. Subsequent to December 31, 2001,
the Company received a waiver for this covenant violation. The Company believes
that it will be in compliance with the amended debt covenants. However, this
expectation is dependent on achieving the Company's business plan. If the
Company does not meet such covenants, the bank and the lessors could require
immediate repayment of outstanding amounts.

In February 2001, the revolving credit agreement was amended to provide for a
term note in the amount of $4.0 million related to project financing. The term
note bears interest at 8.00% and is payable in monthly installments of
approximately $83,600, including principal and interest, and


                                       46

<PAGE>

matures in March 2006. As of December 31, 2001 the outstanding balance was
approximately $3.8 million.

In September 2001, the revolving credit agreement was amended to provide for a
term note in the amount of $3.2 million related to project financing. The term
note bears interest at 6.25% and is payable in monthly installments of
approximately $71,700, including principal and interest, and matures in March
2006. As of December 31, 2001 the outstanding balance was $3.2 million.

The term notes are subject to the same financial covenants as the revolving line
of credit. Upon notice by the lender, the entire principal and accrued interest
can become immediately due and payable following the termination of the revolver
in June 2003. This would result in the acceleration of the then principal
balance of $4.7 million to be due on June 2003. The equipment for the specific
project collateralizes the term notes.

The Company also has system project lease financing arrangements with commercial
leasing organizations with interest rates ranging from 7.6% and 9.5%. Pursuant
to these arrangements, the lessor purchases certain of the Company's digital
identification systems and leases them back to the Company for deployment with
identified and contracted customers approved by the lessor. The lessor retains
title to systems and has an assignment of the Company's rights under the related
customer contracts, including rights to use the software and technology
underlying the related systems. Under this arrangement, the lessor bears the
credit risk associated with payments by the Company's customers, but the Company
bears performance and appropriation risk and is generally required to repurchase
a system in the event of a termination by a customer for any reason except
credit default. The Company is also required to maintain certain financial
ratios and minimum levels of tangible capital funds, as defined. These project
lease arrangements are accounted for as capital leases. At December 31, 2001,
the Company had approximately $7.7 million outstanding under the lease financing
arrangements.

At December 31 of each year, approximate future minimum payments under project
financing capital leases and maturities of term notes are as follows (in
thousands):

                                                          Capital         Term
                                                           Leases        Notes
                                                           ------        -----
Year Ending:
   2002                                                   $  3,364      $  1,402
   2003                                                      3,173         1,507
   2004                                                      1,557         1,619
   2005                                                        436         1,742
   2006                                                         --           698
                                                          --------      --------
       Total minimum payments                                8,530         6,968
Less--Interest portion                                         853
                                                          --------
       Present value of net
       minimum lease payments                                7,677
Less--Current portion                                        2,875         1,402
                                                          --------      --------
Long term portion                                         $  4,802      $  5,566
                                                          ========      ========


                                       47

<PAGE>

7. COMMITMENTS AND CONTINGENCIES

Leases

The Company leases certain equipment and facilities used in its operations and
the shared facilities discussed in Note 3. Rental expense for operating leases
was approximately $131,000 per year in 2001, 2000 and 1999.

At December 31, 2001, approximate future minimum rentals under the operating
leases and lease for shared facilities are as follows (in thousands):

                                                        Operating
                                                          Leases
                                                          ------

 Year Ending:
    2002                                                $  1,198
    2003                                                   1,254
    2004                                                     523
    2005                                                      --
                                                        --------
                       Total minimum lease payments     $  2,975
                                                        ========

Employment Agreements

The Company has employment agreements with certain individuals that provide for
six months severance payments a result of early termination by the Company. The
agreements also provide for non competition either directly or indirectly for
one year after the termination of employment.

8. RETIREMENT BENEFITS

The Company participates in the Lau 401(k) plan and pays its proportionate share
of plan expenses based on the number of participants. The plan permits pretax
contributions by participants of up to 15% of base compensation. The Company may
make discretionary contributions to the plan, subject to certain limitations.
Participants are fully vested in their contributions and vest 20% per year in
employer contributions. The Company's costs for this plan amounted to
approximately $99,000, $91,000 and $79,000 for the years ended December 31,
2001, 2000 and 1999, respectively.

The Company does not offer any postretirement benefits.

9. INCOME TAXES

There was no provision for income taxes for the years ended December 31, 2001,
2000 and 1999 due to the net operating losses (NOL) or NOL carryovers.


                                       48

<PAGE>

A reconciliation of the federal statutory rate to the Company's effective tax
rate for the years ended December 31, 2001, 2000 and 1999 is as follows:

                                          2001           2000           1999
                                          ----           ----           ----
Federal statutory rate                   (34.0)%         34.0%         (34.0)%
State taxes, net of federal benefit       (6.0)           6.0           (6.0)
Valuation allowance recorded              40.0          (40.0)          40.0
                                        --------       --------       --------
                                            --%            --%            --%
                                        ========       ========       ========

The components and approximate tax effects of the Company's deferred tax assets
and liabilities as of December 31, 2001, and 2000 are as follows (in thousands):

                                                           2001          2000
                                                           ----          ----
   Deferred tax assets (liabilities):
    Net operating loss carryforwards for tax purposes    $ 11,280      $  7,249
    Bases differences related to contract assets           (5,518)       (4,536)
    Property, plant and equipment                            (108)           (8)
    Accruals and other reserves                               160           123
                                                         --------      --------
Net deferred tax asset before valuation allowance           5,814         2,828
Valuation allowance                                        (5,814)       (2,828)
                                                         --------      --------
Net deferred tax asset                                   $     --      $     --
                                                         ========      ========

Due to the uncertainty surrounding the realization of the Company's net deferred
tax asset, the Company has provided a full valuation allowance against this
amount.

At December 31, 2001, the Company had available estimated net operating loss
carryforwards for federal tax purposes of approximately $28.2 million to reduce,
subject to certain limitations, future income taxes. These carryforwards expire
from 2011 through 2021 and are subject to review and possible adjustment by the
Internal Revenue Service.

10. SHAREHOLDERS' EQUITY

Stock Option Plans

Under the 1996 Management Stock Option Plan and the 1996 Director Stock Option
Plan (the Plans), the Board of Directors may grant incentive and nonqualified
stock options to employees and officers and nonqualified stock options to
directors. Generally, incentive stock options are granted at fair market value
and are subject to the requirements of Section 422 of the Internal Revenue Code
of 1986, as amended. Nonqualified options are granted at exercise prices
determined by the Board of Directors. Options granted to date to directors vest
immediately or between one to four years from the date of grant. Options granted
to management and employees vest at various rates over periods ranging from
three to seven years or, in some cases, earlier if certain performance criteria
are met. The performance criteria are based on each $1 million increase in
Company value up to approximately $500 million, as adjusted. All options granted
under the Plans expire ten years from the date of grant.

In fiscal year 2001 the Company adopted the "2001 Stock in Lieu of Cash
Compensation for Directors Plan" to compensate the non-employee members of the
Board of Directors. The number of shares that may be issued under the Plan shall
not exceed, in the aggregate, 800,000 shares of the Company's common stock.

During 2001, the Company's Board of Directors received an aggregate of 294,864
shares of Common Stock in lieu of cash compensation. The fair market value of
the common stock on the grant date was approximately $297,000 and was expensed
during the year ended December 31, 2001.


                                       49

<PAGE>

At December 31, 2001, the Company has reserved 3,807,100 shares of common stock
for issuance under the management plan, of which 1,084,279 shares are available
for future grants. The Company has reserved 576,616 shares of common stock for
issuance under the directors' plan, of which 225,000 are available for future
grants.

A summary of stock option activity under the Plans is as follows:

<TABLE>
<CAPTION>
                                                                   Exercise Price  Weighted Average
                                                     Shares           Per Share     Exercise Price
                                                     ------           ---------     --------------
<S>                                                 <C>            <C>              <C>
Options outstanding, December 31, 1998              1,752,827      $ 0.63 - $12.50     $ 2.53
  Granted                                             167,996        1.19 -   1.51       1.36
  Exercised                                          (101,751)                2.96       2.96
  Cancelled                                          (129,249)       0.63 -   2.96       2.68
                                                   ----------      ---------------     ------
Options outstanding, December 31, 1999              1,689,823      $ 0.94 - $12.50     $ 2.38
  Granted                                             336,000        3.19 -  12.25      10.11
  Exercised                                           (75,332)       0.94 -   2.96       2.64
  Cancelled                                           (13,500)       5.92 -  12.25      10.58
                                                   ----------      ---------------     ------
Options outstanding, December 31, 2000              1,936,991       $0.94 - $12.50     $ 3.65
  Granted                                             961,500        0.84 -   3.99       2.98
  Exercised                                          (603,077)       0.84 -  12.25       1.80
  Cancelled                                           (13,334)       1.38 -  12.25       2.57
                                                   ----------      ---------------     ------
Options outstanding, December 31, 2001              2,282,080       $0.84 - $12.50     $ 3.87
                                                   ==========      ===============     ======
</TABLE>

The following table summarizes information about outstanding options as of
December 31, 2001:

<TABLE>
<CAPTION>
                     Options Outstanding                    Options Exercisable
                     -------------------                     -------------------
                                             Weighted          Weighted                     Weighted
                                             Average          Average                        Average
                                            Remaining         Exercise                      Exercise
         Range of            Number        Contractual       Price Share      Number       Price Share
     Exercise Prices      Outstanding          Life             Share       Exercisable       Share
     ---------------      -----------          ----             -----       -----------       -----
      <S>                 <C>               <C>                <C>            <C>            <C>
      $0.84 - $ 1.88         457,003        7.04 years         $  1.01        223,384        $  1.01
       2.25 -   3.99       1,423,732        7.69 years            2.92        377,982           2.78
       4.44 -   5.92          99,970        7.93 years            4.89         34,970           4.76
       8.75 -  12.50         301,375        7.53 years           12.31        106,500          12.37
      --------------       ---------                           -------        -------        -------
      $0.84 - $12.50       2,282,080                           $  3.87        742,836        $  3.71
                           =========                           =======        =======        =======
</TABLE>


                                       50

<PAGE>

The Company has computed the pro forma disclosures required under SFAS No. 123
for options granted using the Black-Scholes option-pricing model prescribed by
SFAS No. 123. The weighted average assumptions used are:

<TABLE>
<CAPTION>
                                          2001                 2000                 1999
                                          ----                 ----                 ----
<S>                                   <C>                  <C>                  <C>
Risk free interest rate                 4.0 - 5.0%            5.0 - 6.0%          4.95 - 5.7%

Expected dividend yield                        --                   --                   --

Expected lives                        3 - 10 years         3 - 10 years         3 - 10 years

Expected volatility                             80%                  80%             71 - 78%

Fair value of options granted                $2.51                $8.55                $1.06
</TABLE>

The total value of options granted under the Company's plans was computed as
approximately $3.0 million for 2001, $2.9 million for 2000, and $0.2 million for
1999, respectively. Of these amounts, approximately $3.0 million, $1.2 million,
and $0.7 million would have been charged to operations for the years ended
December 31, 2001, 2000 and 1999, respectively, for currently vested options.
The remaining unvested amount of $3.2 million as of the year ended December 31,
2001 will be amortized over the related future vesting periods.

The pro forma effect of SFAS No. 123 is as follows:

<TABLE>
<CAPTION>
                                                             2001                  2000                  1999
                                                             ----                  ----                  ----
<S>                                                     <C>                   <C>                   <C>
Net income (loss), as reported                          $  (1,534,000)        $     802,000         $    (995,000)
Pro forma net income (loss)                                (4,570,000)             (381,000)           (1,711,000)
Basic net income (loss) per share, as reported                  (0.09)                 0.02                 (0.23)
Diluted net income (loss) per share, as reported                (0.09)                 0.01                 (0.23)
Pro forma basic net income (loss) per share                     (0.28)                (0.09)                (0.32)
Pro forma diluted net income (loss) per share                   (0.28)                (0.09)                (0.32)
</TABLE>

Employee Stock Purchase Plan

In 1997, the Company adopted the 1997 Employee Stock Purchase Plan and reserved
70,000 shares of common stock for issuance under such plan. In January 2000, an
additional 70,000 were reserved for issuance under the plan. In May 2001, an
additional 200,000 were reserved for issuance under the plan. The purchase price
is determined by taking the lower of 85% of the closing price on the first or
last day of periods defined in the plan. As of December 31, 2001, 151,584 shares
have been issued and options to purchase 10,666 shares of common stock at $2.125
per share were vested under the plan.

Preferred Stock

In June 1999, the Company completed a $1.5 million private placement of Series A
Convertible Preferred Stock (the "Series A Preferred Stock") and warrants with a
private equity fund. As of December 31, 2001 all Series A Convertible Preferred
and accrued interest have been converted into 1,089,979 shares of common stock.
The Company also issued closing warrants to purchase 75,000 shares of the
Company's common stock, which have been exercised at the exercise price of $1.58
per share to the investor. In connection with this transaction, the Company paid
an investment-banking


                                       51

<PAGE>

fee of $112,500 and warrants to purchase 75,000 shares of the Company's common
stock, which have been exercised at $1.79 per share.

In January 2001, 370 shares of the series A preferred stock and accrued
dividends were converted into 655,565 shares of common stock. As of December 31,
2001 all series A preferred stock had been converted into common stock.

In December 1999, the Company completed a $1.5 million private placement of
Series B Convertible Preferred Stock (the "Series B Preferred Stock") and
warrants with a private equity fund. As of December 31, 2001 all Series B
Convertible Preferred and accrued interest have been converted into 1,220,827
shares of common stock. The Company also issued closing warrants to purchase
50,000 shares of the Company's common stock, which have been exercised at the
exercise price of $8.94 per share to the investor. In connection with this
transaction, the Company paid an investment-banking fee of $60,000 and warrants
to purchase 25,000 shares of the Company's common stock, exercisable for three
years, at an exercise price of $9.02 per share of which 16,250 shares have been
exercised.

In January 2001, 650 shares of the series B preferred stock and accrued
dividends were converted into 796,593 shares of common stock. As of December 31,
2001 all series B preferred stock had been converted into common stock.

Common Stock

In March 2000, for an initial investment of $4.0 million (of which $1.5 million
was funded in May 15, 2000, following the effectiveness of the registration
statement on Form S-3), the Company agreed to issue to Strong River Investments,
Inc. ("SRI") 391,917 shares of common stock, a closing warrant to purchase
97,979 shares of the Company's common stock, exercisable for five years at
$11.77 per share, and an adjustable warrant which has been exercised for a total
of 3,152,939 shares of common stock. The closing warrant was adjusted, subject
to an anti-dilution provision, in December 2001. The adjusted closing warrant is
to purchase 98,442 shares of common stock at a price of $11.71. In connection
with the SRI transaction, the Company paid an investment banking fee of $160,000
to Cardinal Securities, L.L.C. ("Cardinal"), and issued warrants to purchase
75,000 shares of the Company's common stock to Cardinal exercisable for five
years, of which 46,875 shares have an exercise price of $12.35 per share which
are still outstanding, and 28,125 shares have an exercise price of $6.175 per
share, which were exercised in October 2001.

In January and February of 2001, Strong River Investments, Inc. received
1,106,203 shares of common stock from the December 2000 cashless exercise of its
second adjustable warrant.

In February and June 2001, Strong River Investments, Inc. exercised its third
adjustable warrant and received a total of 1,586,305 shares of common stock from
the Company through a cashless exercise.

In January 2001, Lau converted its $1,000,000 subordinated note and accrued
interest into 847,354 shares of common stock.

In October 2001, Citizens Financial Group, Inc. received 20,579 shares of common
stock from a cashless exercise of its common stock purchase warrants for
modifications to the Company's revolving line of credit in 1998.


                                       52

<PAGE>

In October and December 2001, J. P. Turner & Company exercised its common stock
purchase warrants and received a total of 16,250 shares of common stock. These
warrants were issued as a result of the series B preferred stock placement.

In November 2001, the Shaar Fund received 50,000 shares of common stock from the
exercise of its common stock purchase warrant. These warrants were issued as a
result of the series B preferred stock placement.

On December 14, 2001, the Company entered into a Common Stock and Warrants
Purchase Agreement with a number of institutional investors in a private
placement placed by Ladenburg Thalmann & Co. Inc. The investors purchased an
aggregate of 2,380,952 shares of the Companies common stock at a purchase price
of $10.50 per share, and warrants to purchase an aggregate of 357,152 shares of
the Company's common stock at an exercise price of $12.08 per share. In
connection with this transaction, Viisage paid an investment-banking fee of 5%,
or $1,250,000, to Ladenburg.

In February 2002, Lau exercised an option to purchase 60,000 shares of common
stock at $1.90 per share, pursuant to an agreement entered into with the Company
in 1999 under which Lau guaranteed a contract indemnification obligation of the
Company.

At December 31, 2001, the Company had outstanding warrants, which can be
converted into 881,219 shares of common stock, with exercise prices ranging from
$1.90 to $12.35.

11. BUSINESS SEGMENTS, GEOGRAPHICAL INFORMATION, AND CONCENTRATIONS OF RISK

The Company is engaged in one business, the development and implementation of
digital identification systems and solutions. The Company has an integrated
business model: identification solutions through system integration systems and
biometric software. For the years prior to December 31, 2000, the Company
reported two business segments, however the Company's current mission is to
design, develop and deliver integrated identification solutions. Virtually all
of the Company's direct revenue has been derived within the United States.

12. ACQUISITION EXPENSES

In the fourth quarter of fiscal 2001, the Company was unsuccessful in its bid to
acquire the Polaroid Corporation's Identification Division and incurred $1.6
million of non-recurring expenses in this effort. These expenses consisted of
approximately $994,000 of non-cash charges for the fair market value of warrants
issued for services related to this transaction and approximately $664,000 of
additional expenses related to financing break up fees and consulting and
professional fees associated with the due diligence of this transaction.


                                       53

<PAGE>

13. QUARTERLY FINANCIAL DATA (UNAUDITED)

The following table sets forth selected quarterly financial data for 2001 and
2000 (in thousands, except per share amounts):

<TABLE>
<CAPTION>
                                            1st          2nd          3rd          4th
                                          Quarter      Quarter      Quarter      Quarter
                                          -------      -------      -------      -------
<S>                                      <C>          <C>          <C>          <C>
2001
----
  Revenues                               $   6,368    $   6,871    $   6,116    $   6,925
  Operating income (loss)                      525          505          521       (1,875)
  Net income (loss)                            218          220          190       (2,162)
  Net income (loss) applicable to
    common shareholders                        213          220          190       (2,162)
  Basic net income (loss) per share
    before cumulative effect                  0.01         0.01         0.01        (0.12)
  Diluted net income (loss) per share
    before cumulative effect                  0.01         0.01         0.01        (0.12)
  Basic net income (loss) per share
    applicable to common shareholders         0.01         0.01         0.01        (0.12)
  Diluted net income (loss) per share
    applicable to common shareholders         0.01         0.01         0.01        (0.12)

2000
----
  Revenues                               $   5,336    $   6,150    $   8,280    $   7,773
  Operating income                             665          628          588          558
  Net income                                   187          194          205          216
  Net income (loss) applicable to
     common shareholders                        95          109          173         (179)
  Basic net income (loss) per share
     before cumulative effect                 0.01         0.01         0.02         0.01
  Diluted net income (loss) per share
     before cumulative effect                 0.01         0.01         0.01         0.01
  Basic net income (loss) per share
   applicable to common shareholders          0.01         0.01         0.02        (0.01)
  Diluted net income (loss) per share
   applicable to common shareholders          0.01         0.01         0.01        (0.01)
</TABLE>

The net income (loss) applicable to shareholders reflects the impact of the
preferred stock dividends in 2001 and the impact of preferred stock dividends,
the amortization of the beneficial conversion feature of the preferred stock and
accounting changes in 2000.

During the fourth quarter of 2001, the Company incurred non-recurring expenses
(See note 12).

During the fourth quarter of 2000, the Financial Accounting Standards Board
issued Emerging Issues Task Force (EITF) No. 00-27 "Application of EITF issue
No. 98-5, Accounting for Convertible Securities with Beneficial Conversion
Features or Contingency Adjustable Conversion Ratios, to Certain Convertible
Instruments". EITF No. 00-27 requires the remeasurement of the original issue
discount on preferred stock with characteristics similar to the convertible
preferred stock issued by the Company during fiscal year 1999. This accounting
change required the value of the warrants issued with the preferred stock to be
included in calculating the beneficial conversion value. This


                                       54

<PAGE>

resulted in a cumulative charge of $277,000 to income applicable to common
shareholders in the fourth quarter of fiscal 2000.

14. SUBSEQUENT EVENTS

On January 10, 2002, Viisage acquired the assets of Lau Security Systems, a
division of Lau Technologies, including all of its intellectual property,
contracts and distribution channels. The intellectual property acquired from Lau
included, among other things, thirty-one U.S. or foreign patent grants or
applications for inventions relating to facial recognition technologies or the
production of identification cards, the patent acquired by Lau from Daozeng Lu
and Simon Lu for verifying the identity of an individual using identification
parameters carried on an escort memory, and numerous invention disclosures that
are being considered for patent application. The transaction also included an
exclusive license of Lau's rights to use the patented facial recognition
technology it licensed from MIT for use in the federal access control field. As
a result of this transaction, certain obligations on the part of Viisage to
license intellectual property to Lau were terminated. The Company will pay Lau
a royalty of 3.1% of facial  recognition revenues over the next twelve and a
half years, up to a maximum of $27.5 million and assume certain liabilities
related to the acquired business.

On March 18, 2002, Viisage acquired the capital stock of Biometrica Systems,
Inc. ("Biometrica"), a former licensee and distributor of Viisage's facial
recognition technologies in the casino market for approximately $2.4 million in
cash. Biometrica's assets included, among other things, intellectual property
relating to the BiometriCam, a compact camera with built-in facial recognition
software.


                                       55

<PAGE>

                                     PART II

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

None

                                    PART III

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

The information concerning directors required under this item is incorporated
herein by reference from the material contained under the caption "Election of
Directors" in the registrant's definitive proxy statement to be filed with the
Securities and Exchange Commission pursuant to Regulation 14A, not later than
120 days after the close of the fiscal year. The information concerning
executive officers required under this item is contained in Part I of this Form
10-K under the caption "Officers."

Item 11. Executive Compensation
         ----------------------

The information required under this item is incorporated herein by reference
from the material contained under the caption "Executive Compensation" in the
registrant's definitive proxy statement to be filed with the Securities and
Exchange Commission pursuant to Regulation 14A, not later than 120 days after
the close of the fiscal year.

Item 12. Security Ownership of Certain Beneficial Owners and Management
         --------------------------------------------------------------

The information required under this item is incorporated herein by reference
from the material contained under the caption "Security Ownership" in the
registrant's definitive proxy statement to be filed with the Securities and
Exchange Commission pursuant to Regulation 14A, not later than 120 days after
the close of the fiscal year.

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

The information required under this item is incorporated herein by reference
from the material contained under the caption "Certain Relationships and Related
Transactions" in the registrant's definitive proxy statement to be filed with
the Securities and Exchange Commission pursuant to Regulation 14A, not later
than 120 days after the close of the fiscal year.


                                       56

<PAGE>

                                     PART IV

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

(a), (d) Financial Statements and Schedules
         ----------------------------------

For a list of financial statements included herein see Index on page 30.

All schedules are omitted because they are not applicable or not required, or
because the required information is shown either in the financial statements or
in the notes thereto.

(b) Reports on Form 8-K
    -------------------

The Company filed a current report on Form 8-K on December 20, 2001, to report
the completion of a private placement of $25 million in common stock and
warrants to a number of institutional investors.

(c) Exhibits
    --------

See Exhibit Index on pages 60 through 63.


                                       57

<PAGE>

                                  EXHIBIT INDEX

Exhibit
-------
No.         Note        Description
---         ----        -----------
2           (a)         Amended and Restated Asset Transfer Agreement, dated as
                        of August 20, 1996, between the Company and Lau
                        Technologies.

3.1         (a)         Restated Certificate of Incorporation of the Company.

3.2         (m)         Certificate of Amendment to Restated Certificate of
                        Incorporation of the Company.

3.3         (a)         By-Laws of the Company.

3.4         (b)         Certificate of Designation of series A convertible
                        preferred stock.

3.5         (h)         Certificate of Designation of series B convertible
                        preferred stock.

4           (a)         Specimen certificates for shares of the Company's Common
                        Stock.

10.1        (a)         Amended and Restated License Agreement, dated as of
                        August 20, 1996, between the Company and Lau
                        Technologies.

10.2        (a)         Form of Administration and Services Agreement between
                        the Company and Lau Technologies.

10.3        (a)         Form of Use and Occupancy Agreement between the Company
                        and Lau Technologies.

10.4        (a)         License Agreement, dated as of August 20, 1996, between
                        the Company and Facia Reco Associates, Limited
                        Partnership.

10.5        (h)         1996 Management Stock Option Plan, as amended.

10.6        (a)         Form of Option Agreement for the 1996 Management Stock
                        Option Plan.

10.7        (h)         1996 Director Stock Option Plan, as amended.

10.8        (a)         Form of Option Agreement for the 1996 Director Stock
                        Option Plan.

10.9        (a)         Contract between the Company and Transactive, Inc.
                        (relating to the New York Department of Social
                        Services), dated as of December 8, 1994, as amended.

10.10       (a)         Subcontract between the Company and Information
                        Spectrum, Inc. (relating to the U.S. Immigration &
                        Naturalization Service), dated as of October 19, 1995.

10.11       (a)         Contract between the Company and the North Carolina
                        Department of Transportation, dated as of April 26,
                        1996.

10.12       (c)         Contract between the Company and the Illinois Secretary
                        of State, dated June 2, 1997, as amended.

10.13       (d)         1997 Employee Stock Purchase Plan.

10.14       (f)         Purchase Agreement (Project Finance Facility) between
                        the Company and Sanwa Business Credit Corporation, dated
                        as of November 20, 1998, as amended.

10.15       (g)         Amended and Restated Credit Agreement between the
                        Company and State Street Bank and Trust Company, dated
                        December 7, 1998.


                                       58

<PAGE>
                                  EXHIBIT INDEX

Exhibit
No.       Note   Description
---       ----   -----------
10.16      (h)   $2,000,000 Convertible Subordinated Note between the
                 Company and Lau Acquisition Corporation, dated May 3,
                 1999.

10.17      (h)   Securities Purchase Agreement dated June 30, 1999
                 between the Company and Shaar Fund Ltd.

10.18      (h)   Registration Rights Agreement dated June 30, 1999
                 between the Company and Shaar Fund Ltd.

10.19      (h)   Common Stock Purchase Warrants dated June 30, 1999
                 between the Company and Shaar Fund Ltd.

10.20      (h)   Subcontract Agreement, dated December 6, 1999 between
                 the Company and Compaq Computer Corporation.

10.21      (h)   Securities Purchase Agreement dated December 30, 1999
                 between the Company and Shaar Fund Ltd.

10.22      (h)   Registration Rights Agreement dated December 30, 1999
                 between the Company and Shaar Fund Ltd.

10.23      (h)   Common Stock Purchase Warrants, dated December 30, 1999
                 between the Company and Shaar Fund Ltd.

10.24      (h)   Securities Purchase Agreement, dated March 10, 2000
                 between the Company and Strong River Investments, Inc.

10.25      (h)   Registration Rights Agreement, dated March 10, 2000
                 between the Company and Strong River Investments, Inc.

10.26      (h)   Common Stock Purchase Warrant, dated March 10, 2000
                 between the Company and Strong River Investments, Inc.

10.27      (h)   Adjustable Common Stock Purchase Warrant, dated March
                 10, 2000 between the Company and Strong River
                 Investments, Inc.

10.28      (h)   Letter Agreement, dated March 10, 2000 between the
                 Company and Strong River Investments, Inc.

10.29      (i)   Security Agreement dated June 15, 2000, between the
                 Company and Commerce Bank & Trust Co.

10.30      (i)   Collateral Assignment of "Unencumbered" Customer
                 Contracts dated June 15, 2000, between the Company and
                 Commerce Bank & Trust Co.

10.31      (i)   Loan Agreement, dated June 15, 2000, between the Company
                 and Commerce Bank & Trust Co.

10.32      (i)   Security Agreement dated June 15, 2000, between the
                 Company and Commerce Bank & Trust Co.

10.33      (i)   Revolving Credit Note dated June 15, 2000, by the
                 Company in favor of Commerce Bank & Trust Co.

10.34      (j)   Pennsylvania Department of Transportation Contract,
                 dated June 19, 2000.

10.35      (k)   Employment agreement dated as of November 3, 2001
                 between the Company and Thomas J. Colatosti.

10.36      (l)   Common Stock and Warrants Purchase Agreement among the
                 Company and the Investors named therein, dated as of
                 December 14, 2001 (including Exhibit B - Form of
                 Warrant).

10.37      (l)   Form of Registration Rights Agreement among the Company
                 and the Investors named therein, dated as of December 14, 2001.


                                       59

<PAGE>

                                  EXHIBIT INDEX

Exhibit
-------
No.         Note        Description
---         ----        -----------
10.38       (n)         Asset Purchase Agreement dated as of January 10, 2002,
                        by and between the Company and Lau Acquisition
                        Corporation d/b/a Lau Technologies.

10.39       (n)         Consulting Agreement dated as of January 10, 2002, by
                        and between the Company and Denis Berube.

10.40       (n)         Consulting Agreement dated as of January 10, 2002, by
                        and between the Company and Joanna Lau.

10.41       (o)         Employment Agreement dated as of March 5, 2002 by and
                        between the Company and Milton A. Alpern.

10.42       (o)         2001 Stock in Lieu of Cash Compensation for Directors
                        Plan, as amended.

23.1        (o)         Consent of BDO Seidman, LLP.


<PAGE>

                             Notes to Exhibit Index

Note       Description
----       -----------

(a)        Filed as an exhibit to the Company's Form S-1 Registration Statement
           (File No. 333-10649) dated November 4, 1996.

(b)        Filed as an exhibit to the Company's Quarterly Report on Form 10-Q
           for the quarter ended June 27, 1999.

(c)        Amendment filed as an exhibit to the Company's Report on Form 10-K
           for the year ended December 31, 1997.

(d)        Filed as appendix to October 10, 1997 Schedule 14C Information
           Statement.

(e)        Amendment filed as an exhibit to the Company's Report on Form 10-K
           for the year ended December 31, 1998.

(f)        Original agreement filed as an exhibit to the Company's Form S-1
           (File No. 333-10649) Registration Statement dated November 4, 1996.

(g)        Amendment filed as an exhibit to the Company's Report on Form 10-K
           for the year ended December 31, 1997.

(h)        Amendment filed as an exhibit to the Company's Report on Form 10-K
           for the year ended December 31, 1999.

(i)        Filed as an exhibit to the Company's Quarterly Report on Form 10-Q
           for the quarter ended July 2, 2000.

(j)        Filed as an exhibit to the Company's Quarterly Report on Form 10-Q
           for the quarter ended September 29, 2000.

(k)        Filed as an exhibit to the Company's Quarterly Report on Form 10-Q
           for the quarter ended September 30, 2001.

(l)        Filed as an exhibit to the Company's Current Report on Form 8-K
           filed December 20, 2001.

(m)        Filed as an exhibit to the Company's Registration Statement on Form
           S-3 (File No. 333-76560) filed January 10, 2002.

(n)        Filed as an exhibit to the Company's Current Report on Form 8-K
           filed January 25, 2002.

(o)        Filed herewith.


<PAGE>

                                   SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Company has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized on this 29th day of March 2002.

VIISAGE TECHNOLOGY, INC.


By:     /s/ Thomas J. Colatosti
   -----------------------------------
            Thomas J. Colatosti
President and Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed by the following persons on behalf of the Company and in the
capacities indicated on the 29th day of March 2002:

<TABLE>
<CAPTION>

               Signature                    Title
               ---------                    -----
<S>                                         <C>

By:         /s/ Denis K. Berube             Chairman of the Board of Directors
   ------------------------------------
              Denis K. Berube


By:       /s/ Thomas J. Colatosti           President and Chief Executive Officer
   ------------------------------------     (Principal Executive Officer)
            Thomas J. Colatosti


By:          /s/ Sean F. Mack               Vice President, Corporate Controller and
   ------------------------------------     Treasurer (Principal Financial and
               Sean F. Mack                 Accounting Officer)


By:       /s/ Charles J. Johnson            Secretary
   ------------------------------------
            Charles J. Johnson


By:        /s/ Charles E. Levine            Director
   ------------------------------------
             Charles E. Levine


By:      /s/ Harriet Mouchly-Weiss          Director
   ------------------------------------
           Harriet Mouchly-Weiss


By:          /s/ Peter Nessen               Director
   ------------------------------------
               Peter Nessen


By:        /s/ Thomas J. Reilly             Director
   ------------------------------------
             Thomas J. Reilly


By:       /s/ Paul T. Principato            Director
   ------------------------------------
            Paul T. Principato



</TABLE>