<PAGE>

                                 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, 1997

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:

        Title of each Class             Name of exchange on which registered
        -------------------             ------------------------------------
    Common Stock $.001 par value               NASDAQ National Market

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

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. |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. |X|

The aggregate market value of the voting stock held by nonaffiliates of the
registrant as of March 18, 1998, was approximately $16 million.

As of March 18, 1998, the registrant had 8,067,398 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 12, 1998, are incorporated by reference into
Part III.


<PAGE>

                                    PART I

Item 1.  Business
         --------
     (a) General Development of Business
         -------------------------------
         Viisage Technology, Inc. (Viisage or the Company) develops and
     implements turnkey digital identification systems and solutions intended to
     improve personal convenience and security, deter fraud and reduce
     customers' identification program costs. The Company combines its systems
     integration and software design capabilities with its proprietary software
     and hardware products to create complete customized solutions. Viisage's
     products are currently operating at over 800 locations. Applications can
     include systems and cards for national IDs, driver's licenses, law
     enforcement, voter registration, social services, access control and
     information, healthcare, financial services and retail. Viisage is also
     commercializing patented facial recognition technology for the real-time
     identification and verification of individuals.

         The Company began operations in 1993 as a division of Lau Technologies
     (Lau), a provider of systems integration services and products for
     sophisticated electronic systems. In November 1996, Lau transferred
     substantially all of the assets, liabilities and operations of the division
     to the Company and the Company completed its initial public offering. The
     Company is currently a 64% owned subsidiary of Lau.

         During 1997, the Company's revenue growth slowed significantly due
     primarily to procurement delays in its principal markets. The Company
     attributes these delays to an increase in political considerations
     affecting these procurement decisions, such as state-wide elections, and
     increasing legislative interest in biometric solutions and inter-agency
     sharing of resources and information. The Company believes that election
     schedules could cause its public sector business to be more cyclical and
     legislative involvement could continue to lengthen procurement cycles until
     an appropriate model for inter-agency cooperation evolves. However, the
     Company believes that these developments should ultimately have a positive
     impact on growth because contracts involving multiple agencies could be
     larger and are more likely to incorporate biometrics like the Company's
     facial recognition technology. The Company believes that the acceptance of
     digital identification technology in recent years, its commitment to
     providing customized solutions for its customers needs, its expertise in
     facial imaging and biometric solutions and its proprietary software and
     hardware products will continue to contribute to its growth.

         The Company provides systems and services principally under contracts
     that generally have five-year terms and provide for several annual renewals
     after the initial contract term. Contracts generally provide for a fixed
     price for the system and/or for each 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. Substantially all of the Company's
     revenues are currently derived from public sector customers and contractors
     to such customers. The Company believes for the foreseeable

                                       1
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     future that it will continue to derive a significant portion of its
     revenues from a limited number of large contracts.

     (b) Financial Information about Industry Segments
         ---------------------------------------------
         The Company is engaged in one business segment; the design and
     implementation of digital identification systems and solutions intended to
     improve personal convenience and security, deter fraud, and reduce
     identification program costs.

     (c) Description of Business
         -----------------------
     (i)  Principal Products and Services
          -------------------------------
     Industry Background

         The need for proper identification impacts 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 fake 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.

         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. Further, records of these cards consist primarily of
     retained copies, which often require significant amounts of space and are
     inefficient to maintain and access.

         Advances in and the growing acceptance of digital technology has led to
     an increasing demand for digital identification systems to replace existing
     systems. Digital systems enable information and images to be captured and
     imbedded 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 through the use of 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 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


                                       2
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     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 single photograph, making it a practical means of
     identification. When two or more biometric identifiers are used together,
     the statistical probability of properly identifying an individual
     increases. The Company generally advocates the use of multiple biometrics
     and can incorporate these technologies into its solutions.

         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 applications for digital identification systems and
     biometrics will include national ID's, driver's licenses, law enforcement,
     voter registration, social services, access control and information, as
     well as commercial sector applications for access to telecommunications
     services, personal computer networks and facilities, ATMs, retail
     point-of-sale transaction processing and administration of health care
     benefits.

         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

         The Company develops and implements digital identification systems and
     solutions that improve personal convenience and security, deter fraud and
     reduce costs; combines systems integration and software design skills with
     its proprietary products and other best-in-class products to create
     complete customized solutions; provides turnkey solutions that integrate
     image and data capture, create relational databases, incorporate multiple
     biometrics and improve customers' ability to manage and move information;
     and offers patented facial recognition technology for instant
     identification (one-to-many) and verification (one-to-one) of individuals.

         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 and verification of
     individuals.

     Digital Identification Systems

         Depending on the customer's needs, the Company offers "instant issue"
     systems which produce identification cards on location in minutes, and
     central production systems which receive the information electronically
     from the point of capture and produce cards from a secure off-site
     processing location which are later mailed to recipients in several days.
     The


                                       3
<PAGE>

     facial images captured by the Company's card systems can provide the
     content (face bases) for the identification and verification applications.

         In a Viisage card system the facial image and other information is
     captured in digital format at the Company's PC-based Image Capture
     Workstation which usually incorporates the Company's proprietary
     SensorMast. 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 WWW. 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 Company 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.

         Proprietary Company Products. The Company's systems generally
     incorporate the Company's proprietary SensorMast within the Image Capture
     Workstation. Central production systems also typically include the
     Company's proprietary Visual Inspection System for quality assurance. These
     proprietary products and related software are described below:

            . The SensorMast is a fully-integrated, secure tower unit developed
              by the Company which 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.

                                       4
<PAGE>

            . 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 which 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.

         Customer Service and Support. Following the installation of its digital
     identification systems, the Company offers extensive customer training and
     help desk telephone support as well as ongoing maintenance services. The
     Company's service and support teams, which vary 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, particularly
     when there are a large number of installations, the Company has contracted
     with third party service organizations for maintenance support.

     Facial Recognition Systems

         The Company is continuing to improve the technology used in
     identification systems through the development of facial recognition
     technologies. The Company has focused on the facial image as a 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 no special training. The Company has
     several on-going facial recognition identification projects, including
     projects with the Massachusetts Department of Transitional Assistance and
     the Illinois Secretary of State.

         The Company's facial recognition software is based, in part, on
     technology developed by Professor Alex Pentland of the Massachusetts
     Institute of Technology (MIT). The Company licenses that 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 the
     proprietary software it has developed is integral to making these
     technologies commercially viable.

         The Company's patented facial recognition software provides a natural
     extension of its card systems and offers organizations the opportunity to
     create unique identification solutions. Using a sophisticated algorithm,
     the software instantly translates the characteristics of a face into a
     number, eigenface, that is unique to that face. The eigenface is used by
     the system for real-time identification, a one-to-many comparison of an
     individual's face against all faces in a database, and verification, a
     one-to-one match of a given individual's face against his or her stored
     image. The Company's facial recognition products are unique because they
     are scaleable to databases containing millions of faces. Viisage

                                       5
<PAGE>

     generally advocates the use of multiple biometrics and can integrate other
     biometrics such as iris, voice, signature and its proprietary fingerprint
     technology into its solutions.

         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 indentifier and can search an existing
     database of millions of records in less than 10 seconds for images similar
     to the image being searched. Applications can include fraud prevention,
     access control and information and law enforcement. The Company's
     verification software can be used for point-of-use applications such as
     ATM's, retail, and access control solutions using PIN's or identification
     cards.

         Viisage's Face in the Crowd technology can find and identify specific
     individuals in a crowd. The system searches real-time for a match between
     individuals in the field and images in a database. When a match is located,
     the system tracks the individual and reports to the user. This technology
     is ideal for a variety of applications such as marketing and access
     information systems, and can be incorporated into the Company's
     identification and verification solutions.

         Viisage licensees have also incorporated the Company's facial
     recognition technology into products to identify individuals from a digital
     composite sketch for law enforcement applications, and for certain
     surveillance applications in the gaming industry.

     Sales and Marketing

         The Company markets its products directly through its internal sales
     force, and continues to ally strategically with prominent 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 entails
     traveling with sales representatives to help explain the systems, defining
     solutions for customers, designing systems for proposal 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 are generally provided to public sector customers
     through a formal bidding process. The Company's 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 is issued, a six-to-twelve month proposal and award process
     usually ensues, followed by (if the bid is successful) a six-to-twelve
     month implementation and installation phase. In the aggregate, the time
     needed for agencies to secure funding for systems, the request for proposal
     and bid process, the execution of actual contracts and the installation of
     a system can extend over several years. As discussed more fully in section
     1 (a), the Company experienced procurement delays in 1997 in its principal
     markets and believes long sales


                                       6
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     cycles in its public sector markets 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.

     (ii) and (xi) Product Development
                   -------------------
         In prior years, the Company 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. In addition to its own development efforts, the
     Company has benefited and expects to continue to benefit from research and
     development conducted by Lau for projects that are not related to Viisage
     and, through its license with Facia Reco, from certain research activities
     at MIT. The Company also benefits from research and development activities
     conducted by the manufacturers of the components integrated into the
     Company's systems such as PC's, printers, etc.

         For the years ended December 31, 1997, 1996 and 1995, research and
     development expense was $152,000, $235,000 and $1.1 million, respectively.
     Such amounts do not include amounts for specific projects that are
     allocated to project costs or the benefits from the other research and
     development activities referred to above.

     (iii) Manufacturing and Sources of Supply
           -----------------------------------
         Proprietary subsystems and assemblies are made to the Company's
     specifications by contract manufacturers, including Lau Technologies. Other
     non-proprietary system components, such as personal computers, printers and
     related components, are purchased from third-party vendors. The Company
     generally purchases 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 has from time to time experienced
     delays as a result of the availability of component parts and assemblies.


                                       7
<PAGE>

     (iv) Patents, Trademarks and Licenses
          --------------------------------
         In addition to customized technology developed by the Company to meet
     customer requirements, the Company utilizes patented technology and trade
     secrets developed by its parent company Lau. The Company has an exclusive,
     perpetual, irrevocable, paid-up royalty-free, worldwide license to use all
     of the technology owned or controlled by Lau relating to the Company's
     business except for controlling human entry through doorways, gates,
     turnstiles, or similar thresholds in and to buildings or facilities located
     on properties owned or controlled by the United States federal government,
     or any other national government, using apparatus at the entry point. Lau
     has a U.S. patent which runs to 2014 on a card production system used by
     the Company, has several U.S. patent applications in process and has made
     copyright filings which relate to the Company's SensorMast, Visual
     Inspection System and proprietary software. Lau has also filed foreign
     patent applications, which correspond to three of these domestic patent
     applications.

              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 but does not extend to federal access
     control. 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 are exclusive through
     June 1, 2001, except for certain rights granted to sponsors of the MIT
     Media Lab and certain research rights. Thereafter, Facia Reco's patent
     license with MIT extends to 2010 on a non-exclusive basis. MIT has applied
     to extend its patent rights to certain jurisdictions in Europe and in
     Singapore. Further, at Lau's request and expense, broadened claims for the
     MIT patent have been allowed by the U.S. Patent and Trademark Office. The
     Company's license agreement with Facia Reco provides for a royalty of $350
     per machine copy incorporating the licensed technology. Until June 1, 2001,
     a minimum annual royalty applies of, generally, $21,000 for the U.S. rights
     and an amount ranging from $21,000 to $42,000 for the non-U.S. rights.

               The Company has applied to the U.S. Patent and Trademark Office
     to register its "Viisage" trademark.

         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 circumvent in
     order to practice under these patent and copyrights.


                                       8
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     (v) Seasonality
         -----------
         The Company's operations are not seasonal since contracts are awarded
     and performed throughout the year. However, as discussed more fully in
     section 1 (a), the Company believes its public sector business is subject
     to cyclical procurement delays that may be related to state-wide election
     cycles.

     (vi) 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.

     (vii)  Customers and End Users
            -----------------------
         The following lists and categorizes the Company's customers and end
users as of December 31, 1997:

State Departments of Motor Vehicles    Other State and Local Agencies

Arizona Department of Transportation   Auburn (Massachusetts) Police Department
Florida Department of Highway Safety   Connecticut Department of Social Services
 and Motor Vehicles*                   Massachusetts Department of Transitional
Illinois Secretary of State            Assistance
Massachusetts Registry of              New York Department of Social Services*
 Motor Vehicles                        Ohio Department of Public Safety
New Mexico Department of Taxation and
 Revenue
North Carolina Department of
 Transportation
Ohio Bureau of Motor Vehicles
Wisconsin Department of Transportation


Federal Agencies                       Foreign Contracts

U.S. Immigration and                   Electoral Office of Jamaica*
 Naturalization Service *              First National Bank of Southern Africa,
                                        Limited
* By subcontract.

         Revenues from three customers (Ohio Bureau of Motor Vehicles, Arizona
     Department of Transportation and the Massachusetts Registry of Motor
     Vehicles) each accounted for over 10% and an aggregate of 85% of revenues
     in 1995. For 1996, two customers (New York Department of Social Services
     and North Carolina Department of Transportation) each accounted for over
     10% of Company revenues and an aggregate of 50% of revenues for the year.
     For 1997, one customer (Illinois Secretary of State) accounted for an
     aggregate of 46%


                                       9
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     of revenues. The loss of any such customers could have a material adverse
     impact on the Company's business, operating results and financial
     condition.

     (viii) Backlog
            -------
           The Company measures backlog based on signed contracts, subcontracts
     and customer commitments for which revenue has not yet been recognized.
     However, backlog is not necessarily indicative of future revenue. A
     substantial amount of the Company's backlog can be cancelled at any time
     without penalty, except, in some cases, for the recovery of the Company's
     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.
     Accordingly, the Company believes that backlog cannot be considered a
     meaningful indicator of future financial performance.

           At December 31, 1997, the Company's backlog was approximately $61
     million, compared to approximately $34 million at December 31, 1996.
     Approximately 22% of the Company's backlog as of December 31, 1997, is
     expected to be earned during the current fiscal year.

     (ix)  Government Contacts
           -------------------
           Government contracts are generally subject to termination for
     convenience or lack of appropriation at the election of the subject agency.
     At December 31, 1997, amounts subject to future negotiation are not
     material.

     (x)   Competition
           -----------
           The market for the Company's products and services is extremely
     competitive and management expects this competition to intensify as the
     markets in which the Company's products and services are sold continue to
     develop.

           The Company faces competition in the identification systems market
     (for both digital and conventional systems) from technologically
     sophisticated companies, including Polaroid Corporation, De La Rue and NBS
     Imaging Systems, Inc., which, in some cases, have greater technical,
     financial, and marketing resources than the Company. In some cases, the
     Company may be competing with an entity which 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: systems and
     product performance; price; flexibility in terms of accommodating customer
     needs, architectures, platforms, systems and networks; and service support.
     The relative importance of each of these and other factors

                                       10
<PAGE>

     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, which generally increases the importance of price as a competitive
     factor. The Company believes that its competitive strength lies primarily
     in its systems integration and software design capabilities, with
     additional strengths including system performance and proprietary
     technologies, system configuration flexibility, price, and relative ease of
     use.

             In the field of biometric identification technology, the Company
     competes with other facial recognition providers as well as other providers
     of biometric solutions. Fingerprint recognition solutions have a long
     history of use, particularly in law enforcement applications. Other current
     suppliers of facial recognition solutions are software development firms.
     The Company expects that as the market for biometric solutions develops,
     companies with significant resources and capabilities may enter the market
     and competition will intensify.

     (xi)    Research and Development
             ------------------------
             See Product Development Section

     (xii)   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.

     (xiii)  Employees
             ---------
             As of December 31, 1997, the Company had 67 employees. The Company
     from time-to-time supplements its employee forces with independent
     contractors. As of December 31, 1997, the Company had 17 such contractors.
     During the first quarter of 1998, the Company reduced headcount by 7
     employees and 16 contractors to be in line with the 1998 business plan.
     None of the Company's employees is represented by a labor union, and the
     Company considers its relationship with its employees to be good.

     (d)     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
             ----------
             In February 1997, the Company moved to facilities located in
     Littleton, Massachusetts. The Company occupies approximately 23,000 square
     feet of space and has access to common areas under the terms of a Use and
     Occupancy Agreement with Lau Technologies through February 2002. 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.

                                       11
<PAGE>

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
         ---------------------------------------------------
         Pursuant to Delaware General Corporation Law and in compliance with
     Securities and Exchange Commission regulations, Viisage's majority
     shareholder, Lau, approved by written consent Board of Director's actions
     relating to employee stock ownership on November 3, 1997. Lau approved the
     Board of Director's increasing the number of shares available under the
     Viisage Technology, Inc. 1996 Management Stock Option Plan by 701,000
     shares, and the Board of Director's establishing the Viisage Technology,
     Inc. 1997 Employee Stock Purchase Plan and reserving 70,000 shares of
     Viisage common stock for issuance under that plan. The plans and actions
     are described more fully in the Schedule 14C Information Statement provided
     to shareholders on or about October 14, 1997.


                                     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 18, 1997, the closing price of the common
     stock was $5.50 per share and there were approximately 29 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 1997 and 1996 were as
     follows:

<TABLE>
<CAPTION>
                                          1997                     1996
                                          ----                     ----
Quarter                            High         Low        High          Low
-------                            ----         ---         ----         ---
<S>                              <C>           <C>        <C>            <C>
First Quarter                    14-3/4        9-1/8           -           -
Second Quarter                   18-1/4        7-7/8           -           -
Third Quarter                    20-1/2        9-7/8           -           -
Fourth Quarter*                  12-1/4        5-1/2      15-1/2          13
</TABLE>

*Public trading commenced on November 8, 1996.


     Dividend Policy

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

                                       12
<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,
                                             ------------------------------------------------------------------------
                                                     1997           1996          1995           1994          1993
                                                     ----           ----          ----           ----          ----
                                                     (1)               (in thousands, except per share amounts)
     <S>                                     <C>            <C>           <C>            <C>           <C>
     Statement of Operations Data:
     Revenues................................$      29,388  $      24,971 $      11,221  $       1,257 $        $505
     Project costs...........................       26,122         19,484        10,361          1,140           456
                                             -------------  ------------- -------------  ------------- -------------
     Project margin..........................        3,266          5,487           860            117            49
                                             -------------  ------------- -------------  ------------- -------------

     Operating expenses:
       Sales and marketing................           4,930          1,852           999          1,596         1,185
                                             -------------  ------------- -------------  ------------- -------------
       Research and development...........             152            235         1,089            201            47
                                             -------------  ------------- -------------  ------------- -------------
       General and administrative............        2,105          1,880         1,204            681           289
                                             -------------  ------------- -------------  ------------- -------------
           Total operating expenses...........       7,187          3,967         3,292          2,478         1,521
                                             -------------  ------------- -------------  ------------- -------------

     Operating income (loss).................       (3,921)          1,520       (2,432)        (2,361)       (1,472)
     Interest expense, net...................          441            714           515             40             -
                                             -------------  ------------- -------------  ------------- -------------

     Income (loss) before income taxes              (4,362)           806        (2,947)        (2,401)       (1,472)
     Income taxes............................            -            205             -              -             -
                                             -------------  ------------- -------------  ------------- -------------
     Net income (loss).......................       (4,362) $         601        (2,947)        (2,401)       (1,472)
                                             =============  ============= =============  ============= =============
     Basic net income (loss) per
     share(2)........                        $       (0.54) $        0.10 $       (0.52) $       (0.42)$       (0.26)
                                             =============  ============= =============  ============= =============
     Weighted average common shares..........        8,060          6,022         5,680          5,680         5,680
                                             =============  ============= =============  ============= =============
     Diluted net income (loss) per share(2)..        (0.54)          0.09         (0.52)         (0.42)        (0.26)
                                             =============  ============= =============  ============= =============
     Weighted average common shares..........        8,060          6,537         5,680          5,680         5,680
                                             =============  ============= =============  ============= =============

<CAPTION>
                                                                            December 31,
                                             ------------------------------------------------------------------------
                                                    1997           1996           1995           1994           1993
                                                    ----           ----           ----           ----           ----
     <S>                                     <C>            <C>           <C>            <C>           <C>
     Balance Sheet Data:                             (1)
     Working Capital..........................$     15,261  $      20,676 $       7,413  $       2,509 $         368
     Total assets.............................      47,463         36,119        11,285          3,999           914
     Long-term obligations....................      13,300          4,420         8,319            955             -
     Shareholders' equity.....................      18,736         23,020             -              -             -
     Net assets(3)...........................            -              -         1,323          1,554           368
</TABLE>

(1) 1997 amounts reflect the impact of non-recurring charges of $7.6
    million for investments in technology, services and markets
    discussed in note 2 of Notes to Financial Statements.

(2) See note 2 of Notes to Financial Statements for information concerning the
    computation of basic and diluted net income (loss) per share.

(3) Net assets represents divisional investment during the time the Company
    operated as a division of Lau Technologies.

                                       13
<PAGE>

Item 7. Management's Discussion and Analysis of Financial Condition and
        ---------------------------------------------------------------
        Results of Operations
        ---------------------
        The following discussion and analysis contains forward-looking
     statements that involve risks and uncertainties. The Company's actual
     results could differ 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 develops and implements turnkey digital identification systems
     and solutions intended to improve personal convenience and security, deter
     fraud and reduce customers' identification program costs. The Company
     combines its systems integration and software design capabilities with its
     proprietary software and hardware products to create complete customized
     solutions. Viisage's products are currently operating at over 800
     locations. Applications can include systems and cards for national ID's,
     driver's licenses, law enforcement, voter registration, social services,
     access control and information, healthcare, financial services and retail.
     In addition, Viisage is commercializing patented facial recognition
     technology for the real-time identification and verification of
     individuals.

        The Company began operations in 1993 as a division of Lau, a provider of
     systems integration services and products for sophisticated electronic
     systems. In November 1996, Lau transferred substantially all of the assets,
     liabilities and operations of the division to the Company and the Company
     completed its initial public offering. The Company is currently a 64% owned
     subsidiary of Lau.

        During 1997, the Company's revenue growth slowed significantly due
     primarily to procurement delays in its principal markets. The Company
     attributes these delays to an increase in political considerations
     affecting these procurement decisions, such as state-wide elections, and
     increasing legislative interest in biometric solutions and inter-agency
     sharing of resources and information. The Company believes that election
     schedules could cause its public sector business to be more cyclical and
     legislative involvement could continue to lengthen procurement cycles until
     an appropriate model for inter-agency cooperation evolves. However, the
     Company believes that these developments should ultimately have a positive
     impact on growth because contracts involving multiple agencies could be
     larger and are more likely to incorporate biometrics like the Company's
     facial recognition technology. The Company believes that the acceptance of
     digital identification technology in recent years, its commitment to
     providing customized solutions for its customers needs, its expertise in
     facial imaging and biometric solutions and its proprietary software and
     hardware products will continue to contribute to its growth.

        The Company provides systems and services principally under contracts
     that have five-year terms and provide for several annual renewals after the
     initial contract term. Contracts generally provide for a fixed price for
     the system and/or for each card produced. Contract prices vary depending
     on, among other things, design and integration complexities, the nature

                                       14
<PAGE>

     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. Substantially all of the Company's
     revenues are currently derived from public sector customers and contractors
     to such customers. The Company believes for the foreseeable 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, 1997,
     1996 and 1995, one customer, two customers and three customers,
     respectively, each accounted for more than 10% of the Company's revenues
     and an aggregate of 46%, 50% and 85% of revenues for each of the years,
     respectively.

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

     Results of Operations

         The following table sets forth certain financial information as a
     percentage of revenues for the periods indicated.

<TABLE>
<CAPTION>
                                                                Years Ended December 31,
                                                   -----------------------------------------------
                                                        1997             1996             1995
                                                        ----             ----             ----
     <S>                                           <C>              <C>             <C>
     Revenues......................................          100%             100%             100%
     Project costs.................................           89               78               92
                                                   -------------    -------------   --------------
     Project margin................................           11               22                8
     Operating expenses:
        Sales and marketing........................           17                7                9
        Research and development...................            1                1               10
        General and administrative.................            7                8               11
                                                   -------------    -------------   --------------
            Total operating expenses...............           25               16               30
                                                   -------------    -------------   --------------
     Operating income (loss).......................          (14)               6              (22)
     Interest expense, net.........................            1                3                4
                                                   -------------    -------------   --------------
     Income (loss) before income taxes.............          (15)               3              (26)
     Income taxes..................................            -                1                -
                                                   -------------    -------------   --------------
     Net income (loss).............................          (15)%              2%             (26)%
                                                   =============    =============   ==============
</TABLE>


     Year ended December 31, 1997 and 1996

         Non-recurring Charge. During the fourth quarter of 1997, the Company
     recorded non-recurring charges of approximately $7.6 million related to
     investments in technology, services and markets that are expected to
     benefit current and future customers and result in future revenues. These
     investments relate principally to upgrades and enhancements to older
     systems, enhancements to central production and data management
     capabilities and

                                       15
<PAGE>

     enhancements to certain systems to facilitate the future use of facial
     recognition technologies. These investments demonstrate the Company's
     commitment to its customers and to being a leading provider of biometric
     identification solutions. Approximately $5.3 million of such charges are
     included in project costs and $2.3 million are included in sales and
     marketing expenses in the statement of operations.

         Revenues. Revenues are derived principally from systems implementation,
     card production and related services under multi-year contracts. Revenues
     increased 18% to $29.4 million in 1997 from $25.0 million in 1996. This
     increase was due to an increase in the number of contracts being performed
     during 1997.

         Project Costs and Margin. Project costs consist primarily of hardware,
     consumables (printer ribbons, cards, holographic overlays, etc.), system
     design, software development and implementation labor, maintenance and
     overhead. As a percentage of revenues, project costs, excluding
     non-recurring charges, decreased to 71% for 1997 from 78% for 1996. This
     decrease reflects cost savings on design, development and implementation
     activities related to new contracts. Including non-recurring charges,
     project costs increased to 89% for 1997. Project margin, excluding
     non-recurring charges, increased 56% to $8.5 million (29% of revenues) from
     $5.5 million (22% of revenues) for 1996, reflecting the impact of newer
     contracts on the overall revenue mix for 1997. Including non-recurring
     charges, project margin decreased 40% to $3.3 million (11% of revenues).
     The Company expects the impact of older contracts on the overall revenue
     mix during 1998 to result in project margins in the range of 26% to 27%

         Sales and Marketing. Sales and marketing expenses consist primarily of
     compensation and professional service fees for marketing, bid and proposal
     and customer support activities. Sales and marketing expenses, excluding
     non-recurring charges, increased 43% to $2.6 million from $1.9 million in
     1996. This increase principally reflects the addition of marketing
     personnel during the second half of 1996 and the first half of 1997.
     Including non-recurring charges, sales and marketing expenses increased
     166% to $4.9 million in 1997. As a percentage of revenues, sales and
     marketing expenses, excluding non-recurring charges, increased to 9% from
     7% for 1996 due to such expenses increasing at a greater rate than revenues
     during 1997. Including non-recurring charges, sales and marketing expenses
     increased to 17% for 1997.

         Research and Development. Research and development expenses consist
     principally of compensation, outside services and materials utilized for
     product and software development activities that are not related to
     specific projects. Research and development expenses decreased 35% to
     $152,000 in 1997 from $235,000 in 1996, and remained constant as a
     percentage of revenues at approximately 1% each year. Expenditures for 1997
     and 1996 relate primarily to the Company's facial recognition products.
     Such amounts do not include amounts for specific projects that are
     allocated to project costs and do not reflect the benefits to the Company
     under license arrangements from the research and development efforts of Lau
     Technologies and MIT for projects that are not directly related to the
     Company.

                                       16
<PAGE>

         General and Administrative. General and Administrative expenses consist
     principally of compensation for executive management, finance and
     administrative personnel and outside professional fees. General and
     administrative expenses increased 12% to $2.1 million in 1997 from $1.9
     million in 1996. The increase in expenses was due primarily to public
     company expenses for a full year in 1997 and additional personnel added in
     1997. As a percentage of revenues, general and administrative expenses
     decreased to 7% in 1997 from 8% in 1996 due to revenues increasing at a
     greater rate than such expenses in 1997.

         Interest Expense. The decrease in net interest expense to $441,000 in
     1997 from $714,000 in 1996 principally reflects the interest earned on cash
     equivalents during 1997 as well as the reduced level of borrowings during
     the first half of 1997 compared to the first half of 1996.

         Income Taxes. Due to the loss for 1997, no provision for income taxes
     was recorded. The Company did not record any tax benefit for the loss due
     to the uncertainty of when such benefit will be realized. Income tax
     expense for 1996 related principally to corporate taxes for the period
     following the transfer discussed above and a deferred tax charge of
     $110,000 relating to the cumulative differences between the financial
     reporting and income tax bases of certain assets and liabilities as of the
     transfer date.

     Year ended December 31, 1996 and 1995

         Revenues.  Revenues  increased  123% to $25.0  million in 1996 from
     $11.2 million in 1995. This increase was due to an increase in the number
     of contracts being performed during 1996.

         Project Costs and Margin. As a percentage of revenues, project costs
     decreased to 78% for 1996 from 92% for 1995. This decrease reflects cost
     savings on design, development and implementation activities resulting from
     the Company's increased experience with and resources for digital
     identification solutions. Project margin increased 538% to $5.5 million
     (22% of revenues) for 1996 from $860,000 (8% of revenues) for 1995,
     reflecting the increase in revenues and cost savings discussed above.

         Sales and Marketing. Sales and marketing expenses increased 85% to $1.9
     million in 1996 from $1.0 million in 1995. This increase principally
     reflects an increase in proposal activity and the addition of marketing
     personnel during 1996. As a percentage of revenues, sales and marketing
     expenses decreased to 7% for 1996 from 9% for 1995 due to revenues
     increasing at a greater rate than such expenses during 1996.

         Research and Development. Research and development expenses decreased
     78% to $235,000 in 1996 from $1.1 million in 1995, and decreased as a
     percentage of revenues to 1% for 1996 from 10% for 1995. These decreases
     reflect the completion in 1995 of proprietary software to support all
     industry standard computing environments and proprietary hardware products
     for the Company's card-based systems and the increase in revenues in 1996.
     Expenditures for 1996 relate primarily to the Company's facial recognition
     products.

                                       17
<PAGE>

         General and Administrative. General and administrative expenses
     increased 56% to $1.9 million in 1996 from $1.2 million in 1995. The
     increase in expenses was due primarily to the addition of management
     personnel during the fourth quarter of 1995 and increased management
     activities related to the growth in the Company's business. As a percentage
     of revenues, general and administrative expenses decreased to 8% for 1996
     from 11% for 1995 due to revenues increasing at a greater rate than such
     expenses in 1996.

         Interest Expense. The increase in net interest expense to $714,000 in
     1996 from $515,000 in 1995 principally reflects the increase in the level
     of borrowings during 1996. This increase was partially offset by interest
     earned on the net proceeds from the Company's initial public offering.

         Income Taxes. The Company's operations prior to the transfer discussed
     above were included in the income tax returns of Lau Technologies, an S
     corporation. Income tax expense for 1996 relates principally to corporate
     taxes for the period following the transfer and a deferred tax charge of
     $110,000 relating to the cumulative differences between the financial
     reporting and income tax bases of certain assets and liabilities as of the
     transfer date.

     Liquidity and Capital Resources

         At December 31, 1997, working capital was $15.3 million compared to
     $20.7 million at December 31, 1996. The decrease in working capital is due
     primarily to  the non-recurring charges discussed above.

         For the year ended December 31, 1997, operations and investing
     activities utilized cash of approximately $8.1 million and $12.0 million,
     respectively, principally to fund increases in project assets and the non-
     recurring charges discussed above. Financing was provided by the initial
     public offering in 1996, long-term borrowings and the project lease
     financing arrangement referred to below.

         The Company has a revolving credit agreement with a commercial bank
     that provides for unsecured borrowings of up to $10 million through June
     1999 at the prime rate or other LIBOR-based options. There were no
     borrowings outstanding under the agreement at December 31, 1997. As
     discussed in note 6 of Notes to Financial Statements, the Company received
     a waiver for certain debt covenant violations as of December 31, 1997
     caused by the non-recurring charges recorded in the fourth quarter. The
     Company believes that it will meet its debt covenants in 1998, however,
     this expectation is dependent on achieving new business forecasts. If the
     Company does not meet such covenants, the bank could require immediate
     repayment of amounts outstanding.


         The Company also has a system project lease financing arrangement with
     a commercial leasing organization providing for project financing of up to
     $25.0 million. Pursuant to this arrangement, the lessor purchases certain
     of the Company's digital identification systems and leases them back to
     Viisage for deployment with identified and contracted customers approved by
     the lessor. The lessor retains title to systems and has an assignment of
     Viisage'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
     Viisage's customers, but Viisage bears performance


                                       18
<PAGE>

     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. These project lease arrangements are accounted for as capital
     leases. At December 31, 1997, the Company had approximately $13.8 million
     available under the lease financing arrangement.

         The Company has historically not made substantial capital expenditures
     for facilities, office and computer equipment and has satisfied its needs
     in these areas principally through leasing.

         The Company believes that cash flow from operations, available
     borrowings and project leasing will be sufficient to meet the Company's
     working capital and capital expenditure needs for the foreseeable future.
     There can be no assurance, however, that additional financing, if needed,
     will be available on favorable terms or at all. If the Company is unable to
     obtain additional capital, if needed, on acceptable terms the Company may
     be unable to take full advantage of future opportunities or respond to
     competitive pressures, which could adversely affect the Company's business,
     financial condition and results of operations.

     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.

     Accounting Pronouncements

              In March 1997, the Financial Accounting Standards Board (FASB)
     issued SFAS No. 128, Earnings per Share, which established standards for
     computing and presenting earnings per share for entities with publicly held
     common stock or potential common stock. SFAS No. 128 requires a basic
     earnings per share calculation that is based only on weighted average
     common shares outstanding and a diluted earnings per share calculation that
     includes the dilutive impact of potential common stock in a manner similar
     to the primary earnings per share calculation used before SFAS No. 128
     became effective. In February 1998, the Securities and Exchange Commission
     released Staff Accounting Bulletin (SAB) No. 98 that changed the
     calculation of earnings per share for U.S. public companies. As required,
     the Company has adopted SFAS No. 128 and SAB No. 98 in 1997 and restated
     per share calculations for all prior periods to conform to the new
     requirements.

         In February 1997, the FASB issued SFAS No. 129, Disclosure of
     Information about Capital Structure, which establishes standards for
     disclosing information about an entity's capital structure. In June 1997,
     the FASB issued SFAS No. 130, Reporting Comprehensive Income, which
     establishes standards for reporting and disclosure of comprehensive income
     and its components (revenues, expenses, gains and losses) in a full set of
     general-purpose financial statements. In June 1997, the FASB issued SFAS
     No. 131, Disclosures About Segments of an Enterprise and Related
     Information, which establishes standards for reporting and disclosure of
     information about operating segments as well as disclosures about products
     and services, geographic areas and major customers. These statements are
     effective for fiscal years beginning after December 15, 1997 and require
     certain additional disclosures. The

                                       19
<PAGE>

     Company anticipates that adoption of these statements will not have a
     significant impact on the Company's current disclosures.

     Certain Factors That May Affect Future Results

         The Company operates in an environment that involves a number of risks,
     some of which are beyond the Company's control. Forward-looking statements
     in this document and those made from time to time by the Company through
     its senior management are made pursuant to the safe harbor provisions of
     the Private Securities Litigation Reform Act of 1995. Forward-looking
     statements concerning future plans or results are necessarily only
     estimates and actual results could differ materially from expectations.
     Certain factors that could cause or contribute to such differences include,
     among other things, potential fluctuations in quarterly results, the size
     and timing of award and performance on contracts, dependence on large
     contracts and a limited number of customers, lengthy sales and
     implementation cycles, changes in management estimates incident to
     accounting for contracts, availability and cost of key components, market
     acceptance of new or enhanced products and services, proprietary technology
     and changing technology, competitive conditions, system performance,
     management of growth, dependence on key personnel and general economic and
     political conditions and other factors affecting spending by customers.


Item 8.  Financial Statements and Supplementary Data
         -------------------------------------------
     Information required by this item is included on pages F-1 through F-21 of
this Form 10K.


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

     Not applicable.

                                       20
<PAGE>

                                    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 delinquent filers pursuant to Item 405 of
     Regulation S-K is incorporated herein by reference from the material
     contained under the heading "Compliance with Section 16(a)" 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 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.

                                     PART IV

                                       21
<PAGE>

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 F-1.

                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
           -------------------
                During the quarter ended December 31, 1997, the Company filed a
          Form 8-K on October 22, 1997 to report the system sale, license and
          subcontract agreement with Unisys Corporation.

     (c)   Exhibits
           --------
               See Exhibit Index on pages 24 and 25.

                                       22
<PAGE>

                                   SIGNATURES

     Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized on this 30th day of
March, 1998.


                                            Viisage Technology, Inc.


                                  By:        /s/Robert C. Hughes
                                     -------------------------------------
                                               Robert C. Hughes
                                     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 registrant and
in the capacities indicated on the 30th day of March, 1998:

                 Signature                    Title
                 ---------                    -----
                     *
 By:                                     Chairman of the Board
                                         of Directors
    ---------------------------------
              Denis K. Berube
                     *
 By:                                     President and Chief
                                         Executive Officer
                                         (Principal Executive
                                         Officer)
    ---------------------------------
             Robert C. Hughes
                     *
 By:                                     Vice President, Chief
                                         Financial Officer and
                                         Treasurer (Principal
                                         Financial and Accounting
                                         Officer)

    ---------------------------------
            William A. Marshall
                     *
 By:                                     Secretary and Director
    ---------------------------------
            Charles J. Johnson
                     *
 By:                                     Director
    ---------------------------------
           Harriet Mouchly-Weiss
                     *
 By:                                     Director
    ---------------------------------
               Peter Nessen
                     *
 By:                                     Director
    ---------------------------------
             Thomas J. Reilly
                     *

 *By:       /s/ Robert C. Hughes
    ---------------------------------
             Robert C. Hughes
             Attorney-in-fact

                                       23
<PAGE>

                                  EXHIBIT INDEX
Exhibit
  No.                             Description
-------                           -----------

2.1*     Amended and Restated Asset Transfer Agreement, dated as of August 20,
         1996, between the Registrant and Lau Technologies.

3.1*     Restated  Certificate of Incorporation of the Registrant.

3.2*     By-Laws of the Registrant.

4.1*     Specimen certificates for shares of the Registrant's Common Stock.

10.1*    Amended and Restated License Agreement, dated as of August 20, 1996,
         between the Registrant and Lau Technologies.

10.2*    Form of Administration and Services Agreement between the Registrant
         and Lau Technologies.

10.3*    Form of Use and Occupancy Agreement between the Registrant and Lau
         Technologies.

10.4*    License Agreement, dated as of August 20, 1996, between the Registrant
         and Facia Reco Associates, Limited Partnership.

10.5*    Employment Agreement, dated as of February 1, 1996, between the
         Registrant and Robert C. Hughes.

10.6*    Employment Agreement, dated as of February 1, 1996, between the
         Registrant and William A. Marshall.

10.7*    Employment Agreement, dated as of July 1, 1996, between the Registrant
         and Yona Wieder.

10.8     1996 Management Stock Option Plan, as amended (filed as appendix to
         October 10, 1997 Schedule 14C Information Statement).

10.9     1996 Director Stock Option Plan, as amended (filed as appendix to 1997
         proxy statement).

10.10*   Form of Option Agreement for the 1996 Management Stock Option Plan.

10.11*   Form of Option Agreement for the 1996 Director Stock Option Plan.

10.12**  Amended and Restated Credit Agreement between the Registrant and State
         Street Bank and TrustCompany, dated October 31, 1997.

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

10.14*   Contract between the Registrant and the North Carolina Department of
         Transportation, dated as of April 26, 1996.

10.15*** Purchase Agreement (Project Finance Facility) between the Registrant
         and Sanwa Business Credit Corporation, dated as of September 12, 1996,
         as amended.

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

                                       24
<PAGE>

                                  EXHIBIT INDEX
Exhibit
  No.                             Description
-------                           -----------

10.17****Contract between the Registrant and the Illinois Secretary of State,
         dated June 2, 1997, as amended.

10.18    1997 Employee Stock Purchase Plan, filed as appendix to October 10,
         1997 Schedule 14C Information Statement.

23.1     Consent of Arthur Andersen LLP.

24.1     Power of Attorney.

27.1     Financial Data Schedule.


*    Filed as an exhibit to the registrant's Form S-1 Registration Statement
     dated November 8, 1996 (File No. 333-10649)
**   Filed as an exhibit to the registrant's Quarterly Report on Form 10-Q
     for the quarter ended September 29, 1996 (File No. 000-21559)
***  Original agreement filed as an exhibit to the Registrant's Form S-1
     Registration Statement dated November 8, 1996 (File No. 333-10649).
     Amendment filed as an exhibit to the Registrant's Report on Form 10-K
     for the year ended December 31, 1997.
**** Amendment filed as an exhibit to the Registrant's Report on Form 10-K
     for the year ended December 31, 1997.

                                       25
<PAGE>

                            VIISAGE TECHNOLOGY, INC.

                                      INDEX

                                                                         Page
                                                                         ----
Report of Independent Public Accountants                                  F-2

Balance Sheets as of December 31, 1997 and 1996                           F-3

Statements of Operations for the years ended December 31, 1997,
     1996 and 1995                                                        F-4

Statements of Changes in Shareholders' Equity/Net Assets for the
     years ended December 31, 1997, 1996 and 1995                         F-5

Statements of Cash Flows for years ended December 31, 1997, 1996
     and 1995                                                             F-6

Notes to Financial Statements                                             F-7

                                       F-1
<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, 1997 and 1996, and the related statements of operations, changes
in shareholders' equity/net assets and cash flows for each of the years in the
three year period ended December 31, 1997. 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 generally accepted auditing
standards. 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, 1997 and 1996, and the results of its operations and its cash flows
for each of the years in the three year period ended December 31, 1997, in
conformity with generally accepted accounting principles.


                                                  ARTHUR ANDERSEN LLP

Boston, Massachusetts
February 15, 1998

                                       F-2
<PAGE>

                          VIISAGE TECHNOLOGY, INC.
                                 BALANCE SHEETS
                      (in thousands, except share amounts)

<TABLE>
<CAPTION>
                                                                                     December 31,
                                                                          ---------------------------------
                                                                                1997               1996
                                                                          --------------     --------------
<S>                                                                       <C>                <C>
ASSETS
Current Assets:
     Cash and cash equivalents (note 2)                                   $       1,611      $      11,073
     Accounts receivable                                                          3,171              1,499
     Costs and estimated earnings in excess of billings (note 2)                 25,483             16,445
     Other current assets (note 3)                                                  423                338
                                                                          --------------     --------------
           Total current assets                                                  30,688             29,355
Property and equipment, net (note 4)                                             16,046              5,857
Other assets (note 3)                                                               729                907
                                                                          --------------     --------------
                                                                          $      47,463      $      36,119
                                                                          ==============     ==============

LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
     Accounts payable and accrued expenses (note 5)                       $      12,253      $       7,288
     Accrued and deferred income taxes (notes 2 and 9)                               16                190
     Current portion of long-term debt (note 6)                                     549                -
     Obligations under capital leases (notes 6 and 7)                             2,609              1,201
                                                                          --------------     --------------
           Total current liabilities                                             15,427              8,679
Long-term debt (note 6)                                                           3,505                -
Obligations under capital leases (notes 6 and 7)                                  9,795              4,420
                                                                          --------------     --------------
                                                                                 28,727             13,099
                                                                          --------------     --------------
Commitments and contingencies (note 7)
Shareholders' Equity (notes 1 and 10):
     Preferred stock, $.001 par value;
       2,000,000 shares authorized; none issued                                     -                  -
     Common stock, $.001 par value;
       20,000,000 shares authorized; issued and outstanding
       8,066,000 in 1997 and 8,055,000 in 1996                                        8                  8
     Additional paid-in capital                                                  23,072             22,994
     Retained earnings (deficit)                                                 (4,344)                18
                                                                          --------------     --------------
           Total shareholders' equity                                            18,736             23,020
                                                                          --------------     --------------
                                                                          $      47,463      $      36,119
                                                                          ==============     ==============
</TABLE>


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

                                       F-3
<PAGE>

                            VIISAGE TECHNOLOGY, INC.
                            STATEMENTS OF OPERATIONS
                    (in thousands, except per share amounts)
<TABLE>
<CAPTION>
                                                                             Year Ended December 31,
                                                               -----------------------------------------------------
                                                                     1997               1996               1995
                                                               --------------     --------------     ---------------
<S>                                                            <C>                <C>                <C>
Revenues                                                       $      29,388      $      24,971      $       11,221
Project costs (note 2)                                                26,122             19,484              10,361
                                                               --------------     --------------     ---------------
           Project Margin                                              3,266              5,487                 860
                                                               --------------     --------------     ---------------
Operating expenses:
     Sales and marketing (note 2)                                      4,930              1,852                 999
     Research and development                                            152                235               1,089
     General and administrative                                        2,105              1,880               1,204
                                                               --------------     --------------     ---------------
           Total operating expenses                                    7,187              3,967               3,292
                                                               --------------     --------------     ---------------
           Operating income (loss)                                    (3,921)             1,520              (2,432)
Interest expense, net                                                    441                714                 515
                                                               --------------     --------------     ---------------
           Income (loss) before income taxes                          (4,362)               806              (2,947)
Income taxes (notes 2 and 9)                                             -                  205                 -
                                                               ==============     ==============     ===============
           Net income (loss)                                   $      (4,362)     $         601      $       (2,947)
                                                               ==============     ==============     ===============

Basic net income (loss) per share (note 2)                     $       (0.54)     $        0.10      $        (0.52)
                                                               ==============     ==============     ===============
Weighted average common shares                                         8,060              6,022               5,680
                                                               ==============     ==============     ===============
Diluted net income (loss) per share (notes 2 and 10)           $       (0.54)     $        0.09      $        (0.52)
                                                               ==============     ==============     ===============
Weighted average common shares                                         8,060              6,537               5,680
                                                               ==============     ==============     ===============
</TABLE>

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

                                       F-4
<PAGE>

                            VIISAGE TECHNOLOGY, INC.
            STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY/NET ASSETS
                                 (in thousands)

<TABLE>
<CAPTION>
                                                                         Additional      Retained
                                                Preferred    Common       Paid-in        Earnings
                                                  Stock       Stock       Capital        (Deficit)     Net Assets        Total
                                                ---------  ----------  -------------   ------------   ------------   -------------
<S>                                             <C>         <C>         <C>            <C>            <C>            <C>
Balance, December 31, 1994                      $      -    $      -    $         -    $         -    $     1,554    $      1,554
     Net loss                                          -           -              -              -         (2,947)         (2,947)
     Net transactions with parent                      -           -              -              -          2,716           2,716
                                                ---------  ----------  -------------   ------------   ------------   -------------
Balance, December 31, 1995                             -           -              -              -          1,323           1,323
     Net income                                        -           -              -              -            583             583
     Stock compensation expense                        -           -              -              -            166             166
     Net transactions with parent                      -           -              -              -         (1,372)         (1,372)
                                                ---------  ----------  -------------   ------------   ------------   -------------
Balance, November 6, 1996                              -           -              -              -            700             700
     Issuance of common stock in
         exchange for net assets (note 1)              -           6            694              -           (700)              -
     Issuance of common stock in
         initial public offering (notes 1
         and 10)                                       -           2         22,228              -              -          22,230
     Net income                                        -           -              -             18              -              18
     Stock compensation expense                        -           -             72              -              -              72
                                                ---------  ----------  -------------   ------------   ------------   -------------
Balance, December 31, 1996                             -           8         22,994             18              -          23,020
     Exercise of stock options (note 10)               -           -             78              -              -              78
     Net loss                                          -           -              -         (4,362)             -          (4,362)
                                                =========  ==========  =============   ============   ============   =============
Balance, December 31, 1997                      $      -   $       8   $     23,072    $    (4,344)   $         -    $     18,736
                                                =========  ==========  =============   ============   ============   =============
</TABLE>

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

                                       F-5
<PAGE>

                            VIISAGE TECHNOLOGY, INC.
                            STATEMENTS OF CASH FLOWS
                                 (in thousands)
<TABLE>
<CAPTION>
                                                                                        Year Ended December 31,
                                                                          -----------------------------------------------------
                                                                                1997                1996               1995
                                                                          ---------------     --------------     --------------
<S>                                                                       <C>                 <C>                <C>
Cash Flows from Operating Activities:
     Net income (loss)                                                    $       (4,362)     $         601      $      (2,947)
     Adjustments to reconcile net income (loss) to net cash
     (used) provided by operating activities:
         Depreciation and amortization                                             1,964                612                 88
         Stock compensation expense                                                  -                  238                -
         Changes in operating assets and liabilities:
            Accounts receivable                                                   (1,672)            (1,121)              (378)
            Costs and estimated earnings in excess of billings                    (9,038)            (7,767)            (4,679)
            Other current assets                                                     (85)              (338)               -
            Accounts payable and accrued expenses                                  5,259              6,135                (25)
            Accrued and deferred taxes                                              (174)               190                -
                                                                          ---------------     --------------     --------------
                   Net cash used for operating activities                         (8,108)            (1,450)            (7,941)
                                                                          ---------------     --------------     --------------

Cash Flows from Investing Activities:
     Purchase of contract equipment converted to capital leases                   (7,800)            (3,965)            (2,216)
     Purchase of system assets                                                    (3,900)               -                  -
     Additions to property and equipment                                            (453)              (275)              (101)
     Decrease (increase) in other assets                                             178               (907)               -
                                                                          ---------------     --------------     --------------
                   Net cash used for investing activities                        (11,975)            (5,147)            (2,317)
                                                                          ---------------     --------------     --------------

Cash Flows from Financing Activities:
     Net revolving credit (repayments) borrowings                                    -               (6,656)             6,610
     Proceeds from long-term borrowings                                            4,100                -                1,862
     Proceeds from sale/leaseback of equipment                                     7,800              3,965              2,216
     Principal payments on long-term borrowings                                      (46)               -               (3,083)
     Principal payments on obligations under capital leases                       (1,311)              (497)               (63)
     Net proceeds from issuance of common stock                                       78             22,230                -
     Net transactions with parent                                                    -               (1,372)             2,716
                                                                          ---------------     --------------     --------------
                   Net cash provided by financing activities                      10,621             17,670             10,258
                                                                          ---------------     --------------     --------------

(Decrease) increase in cash and cash equivalents                                  (9,462)            11,073                -
Cash and cash equivalents, beginning of year                                      11,073                -                  -
                                                                          ---------------     --------------     --------------
Cash and cash equivalents,end of year                                     $        1,611      $      11,073      $         -
                                                                          ===============     ==============     ==============

Supplemental Cash Flow Information:
     Cash paid during the year for interest                               $          832      $         781      $         465
                                                                          ===============     ==============     ==============
     Cash paid during the year for income taxes                           $          122      $         -        $         -
                                                                          ===============     ==============     ==============
</TABLE>

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

                                       F-6
<PAGE>

                            VIISAGE TECHNOLOGY, INC.

                          NOTES TO FINANCIAL STATEMENTS


(1)    Business and Basis of Presentation

       Viisage Technology, Inc. (Viisage or the Company) develops and implements
       turnkey digital identification systems and solutions intended to improve
       personal convenience and security, deter fraud and reduce customers'
       identification program costs. The Company combines its systems
       integration and software design capabilities with its proprietary
       software and hardware products to create complete customized solutions.
       Applications can include systems and cards for national ID's, driver's
       licenses, law enforcement, voter registration, social services, access
       control and information, healthcare, financial services and retail. In
       addition, Viisage is commercializing patented facial recognition
       technology for the real-time identification and verification of
       individuals.

       Viisage was incorporated in Delaware on May 23, 1996 as part of a planned
       reorganization of Lau Acquisition Corp. (Lau Technologies or Lau). On
       November 6, 1996, Lau Technologies completed the transfer of
       substantially all of the assets, liabilities and operations of its
       Viisage Technology Division to the Company in exchange for 5,680,000
       shares of the Company's common stock (the Transfer) and, as discussed
       more fully in note 10, the Company completed its initial public offering
       in November 1996. The Company is currently an approximately 64% owned
       subsidiary of Lau Technologies. These transactions were between entities
       under common control and were accounted for using historical amounts in a
       manner similar to a pooling of interests. The financial statements for
       all periods presented prior to the Transfer reflect the financial
       position, results of operations and cash flows of the Viisage Technology
       Division business that comprise the Company. All changes in the Company's
       equity prior to the Transfer are reflected in net assets, which represent
       the net investment of Lau Technologies in the Company.

       The statements of operations for 1996 and 1995 reflect allocations for
       the costs of shared facilities and certain administrative services. Such
       costs and expenses were allocated to the Company based on actual usage or
       other methods that approximate actual usage. Management believes that the
       allocation methods were reasonable and that allocated costs and expenses
       approximate what such amounts would have been if the Company had operated
       on a stand-alone basis. As discussed more fully in note 3, the Company
       has agreements with Lau Technologies covering certain facilities,
       equipment and administrative services after the Transfer. Although the
       Company has not filed separate income tax returns for periods prior to
       the Transfer, income taxes presented in the financial statements for
       periods prior to the Transfer are computed on a separate return basis
       taking into consideration the tax-sharing arrangement with Lau
       Technologies described in note 2.

       The financial information included herein may not necessarily reflect the
       financial position, results of operations and cash flows of the Company
       in the future or what the financial position, results of operations and
       cash flows would have been had it been a separate, stand-alone company
       for the periods prior to the Transfer.


                                       F-7
<PAGE>

                            VIISAGE TECHNOLOGY, INC.

                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)

(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.

       Contract Revenue and Cost Recognition

       The Company provides services principally under contracts that provide
       for a fixed price for the system and/or for each 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
       $14 million expected to be billed and collected after December 31, 1998.

       During the fourth quarter of 1997, the Company recorded non-recurring
       charges of approximately $7.6 million related to investments in
       technology, services and markets that are expected to benefit current and
       future customers and result in future revenues. These investments relate
       principally to upgrades and enhancements to older systems, enhancements
       to central production and data management capabilities and enhancements
       to certain systems to facilitate the future use of facial recognition
       technologies. Approximately $5.3 million of such charges are included in
       project costs and $2.3 million are included in sales and marketing
       expenses in the statement of operations.

       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.

       Cash and Cash Equivalents

       The Company considers all highly liquid investments with original
       maturities of three months or less to be cash equivalents. At December
       31, 1997, cash equivalents consisted of short-term repurchase agreements
       of $1,229,000 with a commercial bank. The repurchase agreements are
       collateralized by investments principally consisting of Eurodollar
       securities in the amount of at least 100% of such obligation. These
       investments are carried at cost, which approximates market value.

                                       F-8
<PAGE>

                            VIISAGE TECHNOLOGY, INC.

                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)

(2)    Summary of Significant Accounting Policies (Continued)

       Accounts Receivable

       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. Based on management's review, no allowance
       for doubtful accounts has been recorded for the periods presented.

       For 1997, 1996 and 1995, one customer, two customers and three customers,
       respectively, each accounted for more than 10% of revenues individually,
       and approximately 46%, 50% and 85% in the aggregate of the Company's
       revenues, respectively.

       At December 31, 1997, 60% of accounts receivable and costs and estimated
       earnings in excess of billings related to two customers.

       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 that approximate five to seven years or the lease
       term, whichever is shorter.

       Research and Development

       Research and development costs are charged to expense as incurred.

       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.

                                       F-9
<PAGE>

                            VIISAGE TECHNOLOGY, INC.

                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)

(2)    Summary of Significant Accounting Policies (Continued)

       Income Taxes

       The Company's operations prior to the Transfer discussed in note 1 were
       included in the income tax returns of Lau Technologies, an S corporation.
       Income tax allocations for such periods have been calculated as if the
       Company were filing separate income tax returns taking into consideration
       that operating losses and tax credits have been utilized by the
       shareholders of Lau Technologies. Subsequent to the Transfer, the Company
       files separate tax returns. Any tax liability or refund that may arise
       for periods when the Company was a division of Lau Technologies is
       covered by a tax indemnification arrangement contained in the Asset
       Transfer Agreement executed in connection with the Transfer. The
       indemnification provides for Lau Technologies to pay or receive
       reimbursement from the Company for any tax adjustment relating to the
       Viisage Technology Division for all periods prior to the effective date
       of the Transfer if such adjustments will result in tax expense or tax
       benefit, as the case may be, to the Company.

       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 enacted tax rates in effect for the year
       in which those temporary differences are expected to be recovered or
       settled. The effect on deferred tax assets and liabilities of a change in
       tax rates is recognized in income in the period that includes the
       enactment date.

       Net Income (Loss) Per Share

       In March 1997, the Financial Accounting Standards Board (FASB) issued
       SFAS No. 128, Earnings per Share, which established standards for
       computing and presenting earnings per share for entities with publicly
       held common stock or potential common stock. SFAS No. 128 requires a
       basic earnings per share calculation that is based only on weighted
       average common shares outstanding and a diluted earnings per share
       calculation that includes the dilutive impact of potential common stock.
       In February 1998, the Securities and Exchange Commission released Staff
       Accounting Bulletin (SAB) No. 98 that changed the calculation of earnings
       per share for U.S public companies. As required, the Company adopted the
       provisions of SFAS No. 128 and SAB No. 98 in 1997 and restated per share
       calculations for all prior periods to conform to the new requirements.
       Per share amounts for 1996 and 1995 are presented as if the 5,680,000
       shares issued in November 1996 to capitalize the Company had been
       outstanding for all periods presented.

       For 1997, the diluted per share amounts do not reflect options
       outstanding for 1,770,550 shares because their effect is antidilutive.

                                      F-10
<PAGE>

                           VIISAGE TECHNOLOGY, INC.

                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)


(2)    Summary of Significant Accounting Policies (Continued)

       Net Income (Loss) Per Share (Continued)

       For 1996, diluted net income per share reflects the 515,000 share
       dilutive effect of common stock options outstanding during 1996 using the
       treasury stock method. For the periods prior to the IPO, the IPO price of
       $10.50 per share was used for the treasury stock calculation.

       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.

       Other New Accounting Pronouncements

       In February 1997, the FASB issued SFAS No. 129, Disclosure of Information
       about Capital Structure, which establishes standards for disclosing
       information about an entity's capital structure. In June 1997, the FASB
       issued SFAS No. 130, Reporting Comprehensive Income, which establishes
       standards for reporting and disclosure of comprehensive income and its
       components (revenues, expenses, gains and losses) in a full set of
       general-purpose financial statements. In June 1997, the FASB issued SFAS
       No. 131, Disclosures About Segments of an Enterprise and Related
       Information, which establishes standards for reporting and disclosure of
       information about operating segments as well as disclosures about
       products and services, geographic areas and major customers. These
       statements are effective for fiscal years beginning after December 15,
       1997 and require certain additional disclosures. The Company anticipates
       that adoption of these statements will not have a significant impact on
       the Company's current disclosures.

                                     F-11
<PAGE>

                           VIISAGE TECHNOLOGY, INC.

                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)

 (3)   Other Related Party Transactions

       In connection with the Transfer discussed in note 1, the Company and Lau
       Technologies entered into an Administration and Services Agreement, a Use
       and Occupancy Agreement and a License Agreement.

       Under the Administration and Services Agreement, Lau Technologies
       provides general accounting, data processing, payroll, certain human
       resources, employee benefits administration and certain executive
       services to the Company. The agreement requires the Company to pay a
       monthly fee based on the estimated actual cost of such services and
       permits the Company to terminate selected services upon 30 days written
       notice. The annual fee for services is approximately $660,000 and is
       revised if the level of services is changed. The Company utilized the
       same allocation methods for prior periods. Amounts for 1997 and 1995
       reflect the use of additional services. The amounts for such services
       were approximately $864,000 in 1997, $660,000 in 1996 and $1.1 million in
       1995, respectively.

       The Use and Occupancy Agreement 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. In February
       1997, the Company and Lau Technologies moved to larger facilities and
       extended the Agreement through February 2002. The annual fee for
       facilities and services is approximately $520,000 and is revised for
       changes in operating expenses. The amounts for facilities and services
       were approximately $512,000 in 1997, $220,000 in 1996 and $140,000 in
       1995, respectively. See note 7 for lease information.

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

       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 License Agreement grants the Company an exclusive, worldwide,
       royalty-free, paid-up, perpetual, irrevocable license to use proprietary
       technology used by the Viisage Technology Division at the time of the
       Transfer and improvements thereto. The license excludes the use of such
       technology for federal access control as defined in the License
       Agreement.

       The Company purchases certain system components and technical personnel
       from Lau Technologies. The amounts for such components and services were
       approximately $1.9 million 1997, $1.7 million in 1996 and $2.8 million in
       1995.


                                     F-12
<PAGE>

                           VIISAGE TECHNOLOGY, INC.

                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)

(3)    Other Related Party Transactions (Continued)

       At December 31, 1997 and 1996, the Company had approximately $23,000 and
       $180,000 of accounts receivable due from Lau Technologies, respectively,
       and approximately $713,000 and $100,000 of accounts payable due to Lau
       Technologies, respectively. The Company also has a 9% note receivable
       from Lau Technologies due in monthly installments of principal and
       interest of approximately $21,000 through February 28, 2002. At December
       31, 1997 and 1996, approximately $194,000 and $150,000 of the note was
       included in other current assets, respectively, and the remaining balance
       of approximately $664,000 and $850,000 was included in other assets,
       respectively, in the accompanying balance sheet.

       The Company has employment and noncompetition agreements with certain
       officers. Such agreements provide for employment and related compensation
       for initial terms of five years, renewal options for two years, 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,
                                                         1997            1996

        Assets held under capital lease            $    13,981     $     6,181
        System assets                                    3,900               -
        Computer equipment                                 829             376
                                                   -----------     -----------
                                                        18,710           6,557
        Less--Accumulated depreciation                   2,664             700
                                                   -----------     -----------
                                                   $    16,046     $     5,857
                                                   ===========     ===========


       During 1997 and 1996, the Company sold and leased back under capital
       leases approximately $7.8 million and $4.0 million, respectively, of
       system equipment used to produce identification cards for certain
       contracts.

                                      F-13
<PAGE>

                           VIISAGE TECHNOLOGY, INC.

                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)

(4)    Property and Equipment (Continued)

       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, to be made on
       December 16, 1998 and October 1, 2000. In addition, Viisage agreed to
       contingent additional 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 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,
                                                         1997            1996

        Accounts payable                           $     4,483     $     2,072
        Accrued contract costs                           6,700           4,353
        Accrued payroll and related taxes                  170             445
        Accrued vacation                                   285             224
        Other accrued expenses                             615             194
                                                   -----------     -----------
                                                   $    12,253     $     7,288
                                                   ===========     ===========


       Approximately $294,000 of accrued capital lease interest has been
       transferred from accounts payable and accrued expenses to obligations
       under capital leases during 1997.

(6)     Long-term Debt and Project Lease Arrangements

       Long-term debt consisted of the following at December 31, 1997 (in
thousands):



        Tranche A Term Loan                                  $      3,754
        Tranche B Term Loan                                           300
                                                             ------------
                                                                    4,054
        Less current portion of long-term debt                        549
                                                             ------------
                                                             $      3,505
                                                             ============



                                     F-14
<PAGE>

                           VIISAGE TECHNOLOGY, INC.

                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)

(6)    Long-term Debt and Project Lease Arrangements (Continued)

       In 1997, the Company executed an amended and restated credit agreement
       with a commercial bank to extend the maturity of the existing revolving
       credit facility to June 1999, provide a $3.8 million term facility to
       fund the Agreement discussed in note 4 (the Tranche A Term Loan) and
       provide an additional facility of up to $2 million through June 1998 to
       fund various projects (the Tranche B Term Loan).

       The revolving credit facility provides for unsecured borrowings of up to
       $10 million through June 1999 at the prime rate or other LIBOR-based
       options. At December 31, 1997 and 1996, there were no borrowings
       outstanding.

       The Tranche A Term Loan is unsecured, bears interest at 8.1% and is due
       in monthly installments of approximately $45,000, plus interest, through
       maturity in October 2004.

       Amounts borrowed under the Tranche B Term Loan are unsecured and bear
       interest at the prime rate through June 30, 1998 when such amounts
       convert to a term loan. The interest rate and principal amounts payable
       through June 1, 2002 will be determined when the loan converts.

       The amended and restated credit agreement requires the Company to
       maintain certain financial ratios and minimum levels of earnings and
       tangible net worth. Due to the charges of $7.6 million discussed in note
       2, the Company was not in compliance with certain of the covenants at
       December 31, 1997. The bank waived the covenant noncompliance as of
       December 31, 1997 and amended the covenant requirements for future
       periods.

       Prior to the Transfer discussed in note 1, long-term debt consisted of
       borrowings under a revolving line of credit agreement between Lau
       Technologies and a commercial bank. Such borrowings related solely to the
       Company's operations and, accordingly, were assumed in connection with
       the Transfer and repaid in November 1996.

       The Company has a system project lease arrangement with a commercial
       leasing organization providing for system project leases of up to $25
       million. Pursuant to the facility, the lessor purchases certain of the
       Company's digital identification systems and leases them back to Viisage
       for deployment with identified and contracted customers approved by the
       lessor. The lessor retains title to the systems and has an assignment of
       Viisage's rights under the related customer contracts, including rights
       to use the software and technology underlying the related systems. Under
       the facility, the lessor bears the credit risk associated with payments
       by Viisage's customers, but Viisage 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. At
       December 31, 1997, the Company had approximately $13.8 million available
       under this arrangement.

                                     F-15
<PAGE>

                           VIISAGE TECHNOLOGY, INC.

                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)

(7)    Commitments and Contingencies

       Leases

       The Company leases certain equipment used in its operations and the
       shared facilities discussed in note 3. Rental expense for operating
       leases was approximately $212,000 in 1997, $130,000 in 1996 and $100,000
       in 1995.

       At December 31, 1997, approximate future minimum rentals under the lease
       for shared facilities and capital leases are as follows (in thousands):


                                                       Capital        Operating
                                                       Leases           Lease
      Year Ending:
        1998                                         $  3,372       $    212
        1999                                            3,738            212
        2000                                            3,134            212
        2001                                            2,508            212
        2002                                            1,171             17
        Thereafter                                        946              -
                                                     --------       --------
             Total minimum lease payments              14,869       $    865
                                                     ========       ========
        Less--Interest portion                          2,465
                                                     --------
              Present value of net
              minimum lease payments                   12,404
        Less--Current portion                           2,609
                                                     --------
                                                     $  9,795
                                                     ========

       Litigation

       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.

                                     F-16
<PAGE>

                           VIISAGE TECHNOLOGY, INC.

                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)

 (8)   Retirement Plans

       The Company participates in the Lau Technologies 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 matching
       contributions of up to 3% of base compensation. 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 $95,000 and $70,000 for the years ended December 31, 1997
       and 1996, respectively. Amounts for the other periods were not material.

       The Company does not offer any postretirement benefits.

(9)    Income Taxes

       As discussed in notes 1 and 2, the Company was treated as an S
       corporation prior to the Transfer and operating losses and tax credits
       for prior periods have been utilized by the shareholders of Lau
       Technologies. In connection with the Transfer, the Company changed its
       tax status and recorded a deferred tax provision of $110,000 relating to
       the cumulative differences between the financial reporting and income tax
       bases of certain assets and liabilities as of the Transfer date.

       The provision for income taxes for the year ended December 31, 1996
consisted of the following (in thousands):


                                 Current       Deferred         Total

        Federal                  $     7         $  132        $   139
        State                         25             41             66
                                 -------         ------        -------
                                 $    32         $  173        $   205
                                 =======         ======        =======


       There was no provision for income taxes for the year ended December 31,
1997.

       A reconciliation of the federal statutory rate to the Company's effective
       tax rate for the years ended December 31, 1997 and 1996 is as follows:


                                                      1997          1996

        Federal statutory rate                      (34.0)%         34.0%
        State taxes, net of federal benefit          (6.0)           6.0
        Valuation allowance recorded                 40.0              -
        Subchapter S earnings not taxed                 -          (28.0)
        Deferred taxes related to Transfer              -           14.0
        Other, net                                      -           (1.0)
                                                  -------         ------
                                                        -%          25.0%
                                                  =======         ======


                                     F-17
<PAGE>

                           VIISAGE TECHNOLOGY, INC.

                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)

(9)    Income Taxes (Continued)

       The components and approximate tax effects of the Company's deferred tax
       assets and liabilities as of December 31, 1997 and 1996 are as follows
       (in thousands):
<TABLE>
<CAPTION>
                                                                           1997            1996
        <S>                                                            <C>            <C>
        Deferred tax assets:
           Net operating loss carryforwards for tax purposes           $       1,058  $          -
           Bases differences related to contract assets                           33             -
           Property, plant and equipment                                         245             -
           Accruals and other reserves                                           228           325
           Other                                                                   -            30
                                                                       -------------  ------------
             Total gross deferred tax assets                                   1,564           355
                                                                       -------------  ------------

        Deferred tax liabilities:
           Bases differences related to contract assets                            -           517
           Other                                                                   -            11
                                                                       -------------  ------------
             Total gross deferred tax liabilities                                  -           528
                                                                       -------------  ------------
        Net deferred tax asset (liability) before valuation
             allowance                                                         1,564          (173)
        Valuation allowance                                                   (1,564)            -
                                                                       -------------  ------------
        Net deferred tax liability                                     $           -  $       (173)
                                                                       =============  ============
</TABLE>

       The net deferred tax liability for 1996 is included in accrued and
       deferred income taxes in the balance sheet. 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, 1997, the Company had available estimated net operating
       loss carryforwards for federal tax purposes of approximately $2.6 million
       to reduce, subject to certain limitations, future income taxes. These
       carryforwards expire from 2111 to 2112 and are subject to review and
       possible adjustment by the Internal Revenue Service.

(10)   Shareholders' Equity

       Initial Public Offering

       In November 1996, the Company completed an initial public offering of
       2,875,000 shares of its common stock, of which 2,375,000 shares
       (including the over-allotment option) were sold by the Company and
       500,000 shares were sold by Lau Technologies, the selling stockholder.
       The offering price was $10.50 per share and the net proceeds to the
       Company were approximately $22,230,000, net of underwriting discounts and
       other offering expenses.

                                     F-18
<PAGE>

                           VIISAGE TECHNOLOGY, INC.

                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)

(10)   Shareholders' Equity (Continued)

       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 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 over three years from the date
       of grant and management options principally vest in seven years or
       earlier if certain performance measures are met. The performance measures
       are based on each $1 million increase in Company value up to
       approximately $860 million. All options granted under the Plans expire
       ten years from the date of grant.

       At December 31, 1997, the Company has reserved 2,057,100 shares of common
       stock for issuance under the management plan of which 432,468 shares are
       available for future grants, and 156,650 shares of common stock under the
       director plan which have all been granted.

       In connection with such options, the Company is recognizing compensation
       expense of approximately $700,000 over the estimated vesting period. The
       amount of compensation is calculated as the difference between the
       exercise price and the fair value of the Company's business on the grant
       dates based on an independent third-party appraisal. No stock
       compensation expense was recorded in 1997 and $238,000 was recorded in
       1996.

       A summary of stock option activity under the Plans is as follows:
<TABLE>
<CAPTION>
                                                                                           Weighted Average
                                                         Shares           Option Price       Option Price
        <S>                                          <C>                  <C>              <C>
        Outstanding, December 31, 1995                         -                    -                   -
           Granted                                     1,427,100         $ 2.96-$4.86         $      3.20
                                                     -----------         ------------         -----------
        Outstanding, December 31, 1996                 1,427,100            2.96-4.86                3.20
           Granted                                       362,000           6.25-13.00               12.50
           Exercised                                     (10,732)                2.96                2.96
           Cancelled                                      (7,818)                2.96                2.96
                                                     -----------         ------------         -----------
        Outstanding, December 31, 1997                 1,770,550         $2.96-$13.00         $      5.07
                                                     ===========         ============         ===========

        Exercisable, December 31, 1997                   502,180         $ 2.96-$4.86         $      3.20
                                                     ===========         ============         ===========
</TABLE>

       Subsequent to year end,  173,575  options with exercise  prices
       ranging from $2.96 to $13.00 were  cancelled in connection with employee
       terminations.

                                     F-19
<PAGE>

                           VIISAGE TECHNOLOGY, INC.

                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)

(10)   Shareholders' Equity (Continued)

       The following table summarizes information about outstanding options as
of December 31, 1997:
<TABLE>
<CAPTION>
                                         Options Outstanding                Options Exercisable
                                         -------------------                -------------------
                                                   Weighted       Weighted                        Weighted
                                                    Average       Average                          Average
           Range of                                Remaining      Exercise                        Exercise
           Exercise          Number               Contractual    Price per        Number          Price per
            Price         Outstanding                Life          Share       Outstanding          Share
        <S>               <C>                     <C>            <C>           <C>                <C>
         $2.96-$2.96       1,236,050               8.1 years       $2.96           439,955          $2.96
          4.86-6.25          198,500               8.4 years        5.01            62,225           4.86
         12.50-13.00         336,000               9.5 years       12.89                 -              -
                          ----------                                            ----------
                           1,770,550                                               502,180
                          ==========                                            ==========
</TABLE>

       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:


                                        1997          1996
Risk free interest rate                  6%            6%
Expected dividend yield                  -             -
Expected lives                       10 years      10 years
Expected volatility                     76%            66%


       The total value of options granted during 1997 and 1996 was computed as
       approximately $3.7 million and $4.2 million, respectively. Of these
       amounts, approximately $434,000 and $1.4 million would have been charged
       to operations for the years ended December 31, 1997 and 1996,
       respectively, for currently vested options and the remaining amounts,
       $6.1 million and $2.8 million, would be amortized over the related
       vesting periods. The pro forma effect of SFAS No. 123 is as follows:

<TABLE>
<CAPTION>
                                                                         1997              1996
<S>                                                                <C>                <C>
        Net income (loss), as reported                             $ (4,362,000)      $   601,000
        Pro forma net loss                                           (4,796,000)         (225,000)
        Basic net income (loss) per share, as reported                    (0.54)             0.10
        Pro forma basic net loss per share                                (0.60)            (0.04)
        Diluted net income (loss) per share, as reported                  (0.54)             0.09
        Pro forma diluted net loss per share                              (0.60)            (0.04)
</TABLE>

                                     F-20
<PAGE>

                           VIISAGE TECHNOLOGY, INC.

                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)

(10)   Shareholders' Equity (Continued)

       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.
       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, 1997, options to purchase 1,666 shares of common stock at
       $4.94 per share were vested under the plan. These shares were issued in
       1998.

(11)  Quarterly Financial Data (Unaudited)

       The following  table sets forth selected  quarterly  financial data for
       1997 and 1996 (in thousands,  except per share amounts):

<TABLE>
<CAPTION>
                                                            1st               2nd              3rd             4th
                                                          Quarter           Quarter          Quarter         Quarter
        <S>                                           <C>                 <C>              <C>             <C>
        1997
          Revenues                                    $      7,178        $    8,554       $    6,026      $    7,630
          Project margin (loss)                              2,029             2,474            1,608          (2,845)
          Net income (loss)                                    569               690              107          (5,728)
          Basic net income (loss) per share                   0.07              0.09             0.01           (0.71)
          Diluted net income (loss) per share                 0.07              0.08             0.01           (0.71)

        1996
          Revenues                                    $      5,737        $    6,133       $    6,258      $    6,843
          Project margin                                     1,026             1,191            1,542           1,728
          Net income                                             6                68              285             242
          Basic net income per share                             -              0.01             0.05            0.03
          Diluted net income per share                           -              0.01             0.05            0.03
</TABLE>

       Net income (loss) per share  amounts have been  restated to reflect the
       Company's  adoption of SFAS No. 128 and SAB No. 98.

       The 1997 fourth quarter amounts reflect the impact of non-recurring
       charges for certain investments in technology, services and markets
       discussed in note 2.

                                     F-21