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SECURITIES AND EXCHANGE COMMISSION

(Mark one)

x      Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

For the quarterly period ended December 31, 2002 or

o         Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from                       to                       

Commission File Number:   1-9641

IDENTIX INCORPORATED
(Exact name of registrant as specified in its charter)

Registrant’s telephone number, including area code: (952) 932-0888

     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 requirement for the past 90 days. YES  x   NOo

     Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). YES  x   NOo

APPLICABLE ONLY TO CORPORATE ISSUERS:

     Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:

85,403,374 shares of Common Stock
as of January 31, 2003

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IDENTIX INCORPORATED

INDEX

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IDENTIX INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)

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

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IDENTIX INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)

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

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IDENTIX INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

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

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IDENTIX INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

1.		Basis of Presentation
		These accompanying condensed consolidated financial statements and related notes are unaudited. However, in the opinion of management, all adjustments (consisting only of normal recurring adjustments), which are necessary for a fair presentation of the financial position and results of operations for the interim periods presented, have been included. These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto for the fiscal year ended June 30, 2002 included in the Identix Incorporated Form 10-K. Identix Incorporated is hereinafter referred to as “Identix” or the “Company”. The results of operations for the three or six months ended December 31, 2002 are not necessarily indicative of results to be expected for the entire fiscal year, which ends on June 30, 2003.
		The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts therein. Estimates are used for, but not limited to, the accounting for the allowance for doubtful accounts and sales returns, goodwill and other intangible asset impairments, inventory allowances, warranty costs, revenue recognition as well as loss contingencies and restructurings. Actual results could differ from these estimates.
2.		Revenue Recognition Policy
		The Company recognizes revenues in accordance with the provisions of the Securities and Exchange Commission Staff Accounting Bulletin (“SAB”) No. 101, “Revenue Recognition in Financial Statements” and of the American Institute of Certified Public Accountants Statement of Position (“SOP”) 97-2, “Software Revenue Recognition,” as amended by SOP 98-4 and SOP 98-9, as well as Technical Practice Aids issued from time to time by the American Institute of Certified Public Accountants.
		The Company’s product revenue is derived from the sale of equipment and software, as well as maintenance contracts related to the Company’s product lines. Certain of the Company’s equipment sales such as its Live Scan Systems generally require installation and training subsequent to shipment and transfer of title. Product revenue related to equipment sales that require installation is deferred until installation is complete and customer acceptance has been obtained. Revenue related to product sales that require no installation such as printers and other peripheral devices as well as certain security products including DFR-2080, DFR-300, DFR-200 and FingerScan V20 are recognized in accordance with the terms of the sale, generally upon shipment by the Company, provided no significant obligations remain and collection of the receivable is deemed reasonably assured. Revenues from sales of products via authorized representatives, dealers, distributors or other third party sales channels are recognized at the time the risks and rewards have transferred or, in the case of Live Scan Systems that generally require installation, upon the final installation, training and acceptance from the end user.
		The Company also sells several stand-alone software products including BioLogon and software developer kits. The Company recognizes revenue on software products when persuasive evidence of an arrangement exists, delivery has occurred, the vendor’s fee is fixed or determinable and vendor-specific objective evidence (“VSOE”) of fair value exists to allocate the total fee to all undelivered elements of the arrangement and collection is determined to be probable. VSOE is established based upon either sales of the element (e.g. maintenance, training or consulting) in individual transactions, or, in certain cases for maintenance, based upon substantive renewal rates. In cases where the Company does not have VSOE for all delivered elements in the transaction (e.g., for licenses), the fees from these multiple-element agreements are allocated using the residual value method. Maintenance revenue is deferred and recognized rateably over the life of the service period of the related agreement.
		The majority of the Company’s service revenues are generated from the U.S. Government under various firm fixed-price (“FFP”), time-and-material (“T&M”) and cost reimbursement contracts. Revenues on FFP contracts are generally recognized on the percentage-of-completion method based on costs incurred in relation to total estimated costs. Revenues on T&M contracts are recognized to the extent of billable rates multiplied by hours worked plus materials expense incurred. Revenues for cost plus fixed fee (“CPFF”) contracts are recognized as costs are incurred, including a proportionate amount of the fee earned. Unbilled accounts receivable represent revenue accrued which becomes billable per the terms of contract. Provisions for estimated contract losses are recorded in the period such losses are determined.

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		Services revenues from contracts directly with the U.S. Government, principally with the Department of Defense (“DOD”), and from subcontracts with other U.S. Government contractors, were approximately 80% and 82% of total services revenue for the three and six months ending December 31, 2002 compared to 78% and 84% for the same periods in the prior fiscal year. Contract costs for services revenues to the U.S. Government, including indirect expenses, are subject to audit and subsequent adjustment by negotiation between the Company and U.S. Government representatives. Revenues are recorded in amounts expected to be realized upon final settlement. Identix Public Sector (“IPS”) is currently being audited by the Defense Contract Audit Agency for the period from July 1, 1997 to June 30, 2000. While the Company believes that the results of such audit will have no material effect on the Company’s financial position, or results of operations, there can be no assurance that no adjustment will be made and that, if made, such adjustments will not have a material effect on the Company’s financial position, results of operations, or cash flows.
3.		Cash and Credit Facilities
		The Company financed its operations during the six months ended December 31, 2002, primarily from its working capital at June 30, 2002. As of December 31, 2002, the Company’s principal sources of liquidity consisted of $57,456,000 of working capital including $49,535,000 in cash and cash equivalents and short-term marketable securities. The Company also has $10,699,000 available for future borrowings under the Company’s bank lines of credit.
		At December 31, 2002, the Company has two lines of credit. The Company’s first line of credit (the “Identix Line of Credit”) was entered into in September 2001 and was amended on March 28, 2002. This line of credit provides for up to the lesser of $15,000,000 or 80% of the Company’s eligible product accounts receivable and 85% of the Company’s eligible service business accounts receivable. Borrowings under the Identix Line of Credit are collateralized by substantially all of the assets of the Company and bear interest at the bank’s prime rate of interest plus 50 basis points (4.75% at December 31, 2002). The Identix Line of Credit expires on March 28, 2003. At December 31, 2002, there were no amounts outstanding under this line of credit and approximately $8,699,000 was available to borrow.
		The Company’s second line of credit (the “Visionics Line of Credit”), which was established by Visionics Corporation (“Visionics”), a wholly owned subsidiary of the Company, is an inventory and receivables based line of credit for the lesser of eligible inventory and accounts receivables or $2,000,000. Borrowings under the Visionics Line of Credit are collateralized by Visionics’ inventory and accounts receivable. The Visionics Line of Credit bears interest at the bank’s prime rate of interest plus 50 basis points (4.75% at December 31, 2002). The line of credit will expire on March 30, 2003. At December 31, 2002 there were no amounts outstanding under this line of credit and $2,000,000 was available to borrow.
		The Identix Line of Credit and the Visionics Line of Credit agreements contain financial and operating covenants, including restrictions on the Company’s ability to pay dividends on its common stock. At December 31, 2002, the Company was in compliance with such covenants.
4.		Inventories
		Inventories are stated at the lower of standard cost (which approximates actual cost determined on a first-in, first-out method) or market and consisted of the following:

5.		Restructuring, Write-offs and Other Merger Related Charges
		Fiscal 2003
		During the three and six months ended December 31, 2002, the Company recorded restructuring and merger related

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		expenses totaling $1,550,000 and $8,305,000 respectively. For the three months ended December 31, 2002 these costs consisted of $397,000 in relocation costs for Identix employees and facilities, $194,000 associated with the disposal of fixed assets, $299,000 related to lease exit costs and $660,000 related to employees with extended terminations to assist in the integration. Such costs are expensed as incurred. For the six months ended December 31, 2002, these costs consisted of $2,041,000 in relocation costs, $194,000 associated with the disposal of fixed assets, $4,065,000 related to lease exit costs and $2,005,000 related to employees with extended terminations to assist in the integration. Such costs are expensed as incurred.
		Lease exit costs of $299,000 were recorded for the three months ended December 31, 2002, and are related to revised estimated lease exit costs that were non-recoverable at the Company’s Dublin, California facility.
		Of the lease exit costs of $4,065,000 recorded during the six months ended December 31, 2002, $3,766,000 of the loss was due to the sublease of a portion of its Fairfax, Virginia facility. The loss represented the difference between the remaining lease obligation of $5,222,000, abandoned property and equipment of $445,000 and costs to sublet the facility of $375,000, partially offset by estimated sublease income of $2,276,000. In conjunction with the restructuring related charges recorded, the Company made certain estimates regarding future sublease income that have a significant impact on its anticipated cash obligations and restructuring reserves. Although the Company believes that the lease commitment estimates are appropriate in the circumstances, future changes in real estate markets could impact the ultimate amount of cash paid to resolve these obligations. During the six months ended December 31, 2002, the Company reversed an earlier reserve of $182,000 relating to the shut down of the Company’s Virginia Beach-based Law Enforcement Solutions Division (“LESD”) as the actual costs to dispose of the division were less than estimated. In addition, the Company recorded a loss of $299,000 related to lease exit costs at the Company’s Dublin, California facility. The loss is associated with revised estimated lease exit costs.
		The following table represents a summary of restructuring, write-offs and other merger related charges:

		Fiscal 2002
		In June 2001, the Company initiated a restructuring of its worldwide operations to reduce costs and increase operational efficiencies. In connection with the restructuring, in July 2001, the Company initiated a workforce reduction of approximately 42 employees, or 10% of its workforce to streamline its worldwide functions, operations and resources primarily in marketing, selling and administration. The workforce reduction resulted in a $1,712,000 charge during the quarter ended September 30, 2001 relating primarily to severance and fringe benefits. Related cash payments of $1,306,000 were made during the six months ended December 31, 2001. The remaining liability was paid during the year ended June 30, 2002.
6.		Earnings Per Share
		Basic earnings per share are computed by dividing net income (loss) available to common stockholders by the weighted average number of common shares outstanding during the period. Diluted earnings per share gives effect to all dilutive potential common shares outstanding during the period, including convertible preferred stock as well as stock options and warrants, using the treasury stock method.
		Options and warrants to purchase 9,690,000 and 6,722,000 shares of common stock were outstanding at December 31, 2002 and 2001, respectively, but were not included in the computation of diluted net loss per share as their effect was anti-

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		dilutive. Also 235,000 shares of convertible preferred stock were outstanding at December 31, 2002 and are convertible into 236,000 shares of common stock, but were not included in the computation of diluted net loss per share as their effect was anti-dilutive.
7.		Comprehensive Loss
		Comprehensive loss for the three and six months ended December 31, 2002 was $7,821,000 and $21,763,000 compared to $6,203,000 and $14,680,000 for the same period in the prior fiscal year. Accumulated other comprehensive loss for the Company consisted of unrealized gain (loss) on available-for-sale marketable securities and cumulative translation adjustments.
8.		Unaudited Pro Forma Information
		On June 25, 2002, the Company completed its merger with Visionics Corporation (“Visionics”), a leading provider of biometric technologies and identification information systems. In connection with this stock-for-stock merger transaction, each outstanding share of Visionics’ common stock was exchanged for 1.3436 shares of the Company’s common stock, resulting in the issuance of an aggregate of 39,422,000 shares of the Company’s common stock for all outstanding shares of Visionics’ common stock. In addition, all options and warrants to purchase shares of Visionics’ common stock outstanding immediately prior to the consummation of the merger were converted into options and warrants to purchase 3,860,000 shares of the Company’s common stock. The total purchase price was $334,818,000.
		The following table presents the consolidated results of operations on an unaudited pro forma basis, excluding the charge for acquired in-process research and development, as if the June 2002 merger with Visionics Corporation had taken place at the beginning of the periods presented:

		The unaudited pro forma results of operations are for comparative purposes only and do not necessarily reflect the results that would have occurred had the merger occurred at the beginning of the periods presented or the results which may occur in the future. These pro forma amounts are not necessarily indicative of the results that would have been obtained if the merger had occurred as of the beginning of the period presented or that may occur in the future.
9.		Reportable Segment Data
		The Company has determined that its reportable segments are those based on its method of internal reporting. Effective July 1, 2002, the Company reorganized in conjunction with the merger with Visionics and the new reportable segments are Products and Services. The Company’s reportable segments are strategic business groups that offer different products and services and include inter-segment revenues, corporate allocations and administrative expenses. Revenues are attributed to the reportable segment of the sales or service organizations, and costs directly and indirectly incurred in generating revenues are similarly assigned.

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10.		Foreign Operations Data
		In geographical reporting, revenues are attributed to the geographical location of the sales and service organizations:

11.		Recent Accounting Pronouncements
		In June 2002, the Financial Accounting Standards Board (FASB) issued SFAS No. 146, “Accounting for Exit or Disposal Activities”. SFAS 146 addresses significant issues regarding the recognition, measurement, and reporting of costs that are associated with exit and disposal activities, including restructuring activities that are currently accounted for under EITF No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring).” The scope of SFAS 146 also includes costs related to terminating a contract that is not a capital lease and termination benefits that employees who are involuntarily terminated receive under the terms of a one-time benefit arrangement that is not an ongoing benefit arrangement or an individual deferred-compensation contract. SFAS 146 will be effective for the Company for exit or disposal activities that are initiated after December 31, 2002. The provisions of EITF No. 94-3 shall continue to apply for an exit activity initiated under an exit plan that met the criteria of EITF No. 94-3 prior to the adoption of SFAS 146. Adopting the provisions of SFAS 146 will change, on a prospective basis, the timing of when restructuring charges are recorded from a commitment date approach to when the liability is incurred.
		In December 2002 the Company adopted the provisions of FASB Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others.” The implementation of this accounting pronouncement did not have a material effect on the Company’s results of operations, financial position or cash flows.
		In December 2002 the FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation — Transition and Disclosure – an amendment of FAS 123.” SFAS No. 148 provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation and amends certain disclosure

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		requirements of SFAS No. 123. The transition provisions of this Statement are effective for fiscal years ending after December 15, 2002, and the disclosure requirements of the Statement are effective for interim periods beginning after December 15, 2002. The Company currently plans to continue to apply the intrinsic-value based method to account for stock options and will comply with the new disclosure requirements beginning with the third quarter of fiscal 2003.
12.		Subsequent Event
		In January 2003, the Company was notified that it’s service business will not be awarded a contract to continue providing professional support services and material acquisition support to the Naval Sea Systems Command. The original contract is a cost plus fixed fee award that expires on June 30, 2003. During the three and six months ended December 31, 2002, $3,100,000 and $5,500,000 of revenue was recognized under the contract.

Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS

Item 2.

     The statements in this report on Form 10-Q that relate to future plans, events, or performance are forward-looking statements. Actual results, events and performance may differ materially due to a variety of factors including the factors described under “Risk Factors” below. The Company undertakes no obligation to publicly update these forward-looking statements to reflect events or circumstances that occur after the date hereof or to reflect the occurrence of unanticipated events.

OVERVIEW

     Identix Incorporated (“Identix” or the “Company”) provides a broad range of fingerprint and facial recognition technology offerings that empower the identification of individuals who wish to gain access to information or facilities, conduct transactions and obtain identifications. Additionally, the Company’s products and solution offerings can help identify those who perpetrate fraud and otherwise pose a threat to public safety. Identix’ products serve a broad range of industries and market segments – most notably, government, law enforcement, aviation, financial, healthcare and corporate enterprise. A world leader in multi-biometric technology, Identix believes it has more fingerprint and facial biometric installations worldwide than any other company. The Company also provides project management and facilities engineering services to government agencies through Identix Public Sector, Inc. (“IPS”), a wholly owned subsidiary of the Company.

     On June 25, 2002, the Company completed its merger with Visionics Corporation (“Visionics”), a leading provider of biometric technologies and identification information systems. In connection with this stock-for-stock merger transaction, each outstanding share of Visionics’ common stock was exchanged for 1.3436 shares of the Company’s common stock, resulting in the issuance of an aggregate of 39,422,000 shares of the Company’s common stock for all outstanding shares of Visionics’ common stock. In addition, all options and warrants to purchase shares of Visionics’ common stock outstanding immediately prior to the consummation of the merger were converted into options and warrants to purchase 3,860,000 shares of the Company’s common stock. The total purchase price was $334,818,000.

CRITICAL ACCOUNTING POLICIES

     The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the United States requires management to make judgments, assumptions and estimates that affect the amounts reported in the Consolidated Financial Statements and accompanying notes. Note 1 to the Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2002 describes the significant accounting policies and methods used in the preparation of the Consolidated Financial Statements. Estimates are used for, but not limited to, the accounting for the allowance for doubtful accounts and sales returns, goodwill and other intangible asset impairments, inventory allowances, warranty costs, revenue recognition as well as loss contingencies and restructurings. Actual results could differ from these estimates. Management’s Discussion and Analysis of Financial Condition and Results of Operations in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2002 describes the critical accounting policies that are impacted significantly by judgments, assumptions and estimates used in the preparation of the Consolidated Financial Statements.

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RESULTS OF OPERATIONS

Revenues, Cost of Revenues and Gross Margins

     Revenues for the three and six months ended December 31, 2002 were $22,516,000 and $47,578,000 compared to $19,512,000 and $36,276,000 for the same period in the prior fiscal year. The increase in revenues of 15% and 31% for the three and six months ended December 31, 2002 was primarily the result of an increase in product sales resulting from the Visionics merger, partially offset by lower services revenue. For comparable periods for the prior fiscal year, Visionics revenue was $7,479,000 and $15,638,000 respectively. The Company had one customer, the Department of Defense “DOD” which accounted for 30% of the total revenue for the three and six months ended 2002, and 45% and 46% for the same periods respectively in the prior fiscal year.

     Product revenues were $12,512,000 and $26,664,000 for the three and six months ended December 31, 2002, compared to $6,527,000 and $12,583,000 for the same periods in the prior fiscal year. The increase in product revenue of 92% and 112% for the three and six months ended December 31, 2002 was primarily due to the Visionics merger. For comparable periods last year Visionics revenue was $7,479,000 and $15,638,000.

     International sales accounted for $1,084,000 and $2,029,000 or 9% and 8% of the Company’s product revenues for the three and six months ended respectively December 31, 2002 compared to $1,039,000 and $1,379,000 or 16% and 11% respectively for the same period in the prior fiscal year. The Company’s international sales are predominately denominated in U.S. dollars, and the Company actively monitors its foreign currency exchange exposure and, if significant, will take action to reduce foreign exchange risk. To date, the Company has not entered into any hedging transactions.

     Services revenues were $10,004,000 and $20,914,000 for the three and six months ended December 31, 2002 down 23% and 12% when compared to services revenues of $12,985,000 and $23,693,000 for the same periods in the prior fiscal year. The decrease for the three and six months ended is the result of delayed or reduced spending on several of the Company’s long-term contracts. The delays have been caused by the lack of a federal budget and some of the reduction has been due to the Naval Sea Systems Command reorganization as well as a reduced level of spending on government contractors such as Identix. The majority of the Company’s services revenues are generated directly from contracts with the U.S. Government, principally the DOD. For the three and six months ended December 31, 2002, revenues directly from the DOD and from other U. S. Government agencies accounted for 80% and 82% of the Company’s total services revenues compared to 78% and 84% respectively, for the same periods in the prior fiscal year. Services revenues were not affected by the merger with Visionics.

     In January 2003, the Company was notified that it’s service business will not be awarded a contract to continue providing professional support services and material acquisition support to the Naval Sea Systems Command. The original contract is a cost plus fixed fee award that expires on June 30, 2003. During the three and six months ended December 31, 2002, $3,100,000 and $5,500,000 of revenue was recognized under the contract. This contract would have generated an estimated $3,250,000 per quarter of additional revenue over the life of the contract.

     The Company’s services business generates a significant amount of its revenues from firm fixed-price (“FFP”) contracts and from time-and-materials (“T&M”) contracts. During the three and six months ended December 31, 2002, the Company derived 90% and 91%, respectively, of services revenues from FFP and T&M contracts. During the three and six months ended December 31, 2001, the Company derived 88% and 89%, respectively, of services revenues from FFP and T&M contracts. FFP contracts provide for a fixed price for stipulated services or products, regardless of the costs incurred, which may result in losses from cost overruns. T&M contracts typically provide for payment of negotiated hourly rates for labor incurred plus reimbursement of other allowable direct and indirect costs. The Company assumes greater performance risk on T&M and FFP contracts and the failure to accurately estimate ultimate costs or to control costs during performance of the work can result in reduced profit margins or losses. There can be no assurance that the Company’s services business will not incur cost overruns for any FFP and T&M contracts it is awarded. The Company’s services business also generates revenues from cost plus fixed fee (“CPFF”) contracts, which accounted for approximately 10% and 9%, respectively, of its services revenues for the three and six months ended December 31, 2002 and approximately 12% and 11% respectively, of its services revenues for the same period in the prior fiscal year. CPFF contracts provide for the reimbursement of allowable costs, including indirect costs plus a fee or profit. Revenues generated from contracts with government agencies are subject to audit and subsequent adjustment by negotiation between the Company and representatives of such government agencies. IPS is currently being audited by the Defense Contract Audit Agency for the period from July 1, 1997 to June 30, 2000. While the Company believes that the results of such audits will have no material effect on the Company’s financial position or results of operations, there can be no assurance that no adjustments will be made and that, if made, such adjustments will not have a material effect on the Company’s financial position, results of operations, or cash flows.

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     Gross margin on product revenues was 30% and 28% for the three and six months ended December 31, 2002 and 39% and 36% for the same periods of the prior fiscal year. The decrease in product gross margin for the three and six months ended December 31, 2002, was due to a combination of continued market price pressures on the Company’s product lines, costs associated with integrating facilities and lower unit volumes that resulted in underabsorbed overhead costs and a change in the product mix. The Company expects gross margins to fluctuate in future periods due to changes in the product mix, the costs of components and the competition in the industry.

     Gross margin on services revenues was 12% and 11% for the three and six months ended December 31, 2002 as compared to 9% and 8% for the same periods in the prior fiscal year. The increase in gross margins for the three and six months ended December 31, 2002 compared to the prior year was due to a combination of decreased indirect overhead expenses and a change in the mix of services provided.

Research, Development and Engineering

     Research, development and engineering expenses were $2,690,000 and $5,778,000 or 21% and 22% of product revenues for the three and six months ended December 31, 2002 compared to $2,254,000 and $4,868,000 or 35% and 39% of product revenues for the same periods in the prior fiscal year. The increase in research, development and engineering expenses was the result of continued emphasis on the investment in research and development that is critical in maintaining a strong technological position in the industry.

Marketing and Selling

     Marketing and selling expenses were $3,401,000 and $6,652,000 or 15% and 14% of total revenues for the three and six months ended December 31, 2002 compared to $3,497,000 and $6,948,000 or 18% and 19% of total revenues for the same periods in the prior fiscal year. The decrease in marketing and selling expenses was primarily due to reduced staffing in the marketing area and the Company’s continued efforts to control its marketing expenditures.

General and Administrative

     General and administrative expenses were $4,056,000 and $8,939,000 or 18% and 19% of total revenues for the three months and six months ended December 31, 2002, compared to $4,121,000 and $7,649,000 or 21% of total revenues for the same periods in the prior fiscal year. The decrease in general and administrative expenses for the three months ended December 31, 2002, compared to the same period in the prior fiscal year was due to efforts by the Company to reduce costs as well as efficiencies resulting from the Visionics merger. The increase in general and administrative expenses when comparing the six months ended December 31, 2002 to December 31, 2001 was the result of increased costs in the first quarter of fiscal year 2002 in the areas of recruitment, subcontractors, the Company’s information technology department as well as an increase in stock option amortization expense from $307,000 in the six months ended December 31, 2001 to $932,000 in the six months ended December 31, 2002, associated with the Visionics merger.

Amortization of Acquired Intangible Assets

     The amortization expense consists primarily of acquired intangible assets such as developed technology, patents and capitalized software development cost. The amortization expense related to acquired intangible assets was $1,373,000 and $2,919,000 for the three and six months ended December 31, 2002 compared to $233,000 and $466,000 for the same periods in the prior fiscal year. The increase in amortization expense is primarily the result of intangible assets which were acquired during the Visionics acquisition which are now being amortized over their estimated useful lives.

Restructuring Write-offs and Other Merger Related Charges

     Fiscal 2003

     During the three and six months ended December 31, 2002, the Company recorded restructuring and merger related expenses totaling $1,550,000 and $8,305,000 respectively. For the three months ended December 31, 2002 these costs consisted of $397,000 in relocation costs for Identix employees and facilities, $194,000 associated with the disposal of fixed assets, $299,000 related to lease exit costs and $660,000 related to employees with extended terminations to assist in the integration. Such costs are expensed as incurred. For the six months ended December 31, 2002, these costs consisted of $2,041,000 in relocation costs, $194,000 associated with the disposal of fixed assets, $4,065,000 related to lease exit costs and $2,005,000 related to employees with extended terminations to assist in the integration. Such costs are expensed as incurred.

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	Lease exit costs of $299,000 were recorded for the three months ended December 31, 2002, and are related to revised estimated lease exit costs that were non-recoverable at the Company’s Dublin, California facility.

Of the lease exit costs of $4,065,000 recorded during the six months ended December 31, 2002, $3,766,000 of the loss was due to the sublease of a portion of its Fairfax, Virginia facility. The loss represented the difference between the remaining lease obligation of $5,222,000, abandoned property and equipment of $445,000 and costs to sublet the facility of $375,000, partially offset by estimated sublease income of $2,276,000. In conjunction with the restructuring related charges recorded, the Company made certain estimates regarding future sublease income that have a significant impact on its anticipated cash obligations and restructuring reserves. Although the Company believes that the lease commitment estimates are appropriate in the circumstances, future changes in real estate markets could impact the ultimate amount of cash paid to resolve these obligations. During the six months ended December 31, 2002, the Company reversed an earlier reserve of $182,000 relating to the shut down of the Company’s Virginia Beach-based Law Enforcement Solutions Division (“LESD”) as the actual costs to dispose of the division were less than estimated. In addition, the Company recorded a loss of $299,000 related to lease exit costs at the Company’s Dublin, California facility. The loss is associated with revised estimated lease exit costs.

     The following table represents a summary of restructuring, write-offs and other merger related charges:

     Fiscal 2002

     In June 2001, the Company initiated a restructuring of its worldwide operations to reduce costs and increase operational efficiencies. In connection with the restructuring, in July 2001, the Company initiated a workforce reduction of approximately 42 employees, or 10% of its workforce to streamline its worldwide functions, operations and resources primarily in marketing, selling and administration. The workforce reduction resulted in a $1,712,000 charge during the quarter ended September 30, 2001 relating primarily to severance and fringe benefits. Related cash payments of $1,306,000 were made during the six months ended December 31, 2001. The remaining liability was paid during the year ended June 30, 2002.

Interest and Other Income (Expense), net

     For the three and six months ended December 31, 2002 and 2001, interest and other income (expense), net was $673,000 and $1,047,000 compared to $178,000 and $400,000 for the same periods in the prior fiscal year. The increase for the three and six months ended December 31, 2002 is primarily the result of a net gain realized on the sale of investments of $235,000 in the second quarter of fiscal year 2002 and interest from investments totaling $334,000 and $502,000 for the three and six months ending December 31, 2002. Interest income is up for the fiscal 2003 periods due to much higher average cash balances in fiscal 2003 because of cash acquired in the Visionics’ acquisition in late June 2002 and from the remaining proceeds from a Company private placement in December 2001.

Interest Expense

     Interest expense was $5,000 and $4,000 for the three and six months ended December 31, 2002, compared to zero for the same periods in the prior fiscal year. There have been no borrowings under the Company’s lines of credit for the three and six months ended December 31, 2002 and 2001. Interest expense is comprised primarily of interest costs associated with the Company’s leased vehicles in the United Kingdom as well as interest connected to leased equipment in the U.S.

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Benefit (Provision) for Income Taxes

     The Company recorded an income tax benefit of $8,000 for the three months ended December 31, 2002 and a provision of $14,000 for the six months ended December 31, 2002. For the three months ended December 31, 2001, the tax provision was zero and for the six months ended December 31, 2002 the company experienced a tax benefit for $1,000. The tax provision recorded for the six months ended December 31, 2002 is related to state minimum taxes.

Equity Interest in Income of Joint Venture

     The equity interest in income of joint venture represents the Company’s 50% share of the results of Sylvan Identix Fingerprinting Centers (“SIFC”). For the three and six months ended December 31, 2002, the Company’s equity interest in the joint venture loss was $106,000 and $48,000 respectively. For the same periods in the prior fiscal year the company experienced income of $21,000 and $113,000. The decrease in the equity interest is due to decreased net income of SIFC.

Liquidity and Capital Resources

     The Company financed its operations during the six months ended December 31, 2002, primarily from its working capital at June 30, 2002. As of December 31, 2002, the Company’s principal sources of liquidity consisted of $57,456,000 of working capital including $49,535,000 in cash and cash equivalents and short-term marketable securities. The Company also has $10,699,000 available for future borrowings under the Company’s bank lines of credit.

     At December 31, 2002, the Company has two lines of credit. The Company’s first line of credit (the “Identix Line of Credit”) was entered into in September 2001 and was amended on March 28, 2002. This line of credit provides for up to the lesser of $15,000,000 or 80% of the Company’s eligible product accounts receivable and 85% of the Company’s eligible service business accounts receivable. Borrowings under the Identix Line of Credit are collateralized by substantially all of the assets of the Company and bear interest at the bank’s prime rate of interest plus 50 basis points (4.75% at December 31, 2002). The Identix Line of Credit expires on March 28, 2003. At December 31, 2002, there were no amounts outstanding under this line of credit and approximately $8,699,000 was available to borrow.

     The Company’s second line of credit (the “Visionics Line of Credit”), which was established by Visionics Corporation (“Visionics”), a wholly owned subsidiary of the Company, is an inventory and receivables based line of credit for the lesser of eligible inventory and accounts receivables or $2,000,000. Borrowings under the Visionics Line of Credit are collateralized by Visionics’ inventory and accounts receivable. The Visionics Line of Credit bears interest at the bank’s prime rate of interest plus 50 basis points (4.75% at December 31, 2002). The line of credit will expire on March 30, 2003. At December 31, 2002 there were no amounts outstanding under this line of credit and $2,000,000 was available to borrow.

     The Identix Line of Credit and the Visionics Line of Credit agreements contain financial and operating covenants, including restrictions on the Company’s ability to pay dividends on its common stock. At December 31, 2002, the Company was in compliance with such covenants.

     The Company used $12,279,000 of cash and cash equivalents during the six months ended December 31, 2002 of which $7,501,000 was related to restructuring and merger costs. Cash used in operating activities for the periods presented was primarily due to net losses offset by certain non-cash items. Cash provided by investing activities for the six months ended December 31, 2002 was primarily the result of net sales of marketable securities partially offset by additions to property, plant and equipment and intangible assets. Cash used in investing activities for the six months ended December 31, 2001 was primarily due to capital expenditures and additions to intangible assets. Cash provided by financing activities for the periods presented was due solely to proceeds from the sale of the Company’s equity securities and the exercise of employee stock options.

The Company did not have any material capital expenditure commitments as of December 31, 2002.

     The Company currently occupies its Minnesota headquarters under a lease that expires in March 2008, and is required to pay taxes, insurance, and maintenance as well as monthly rental payments. In addition, the Company leases space for its former headquarters in Los Gatos, California under a lease that expires in December of 2007; and a space in Dublin, California for its former research, development and engineering activities that expire in March 2006. Further, the Company leases office space for its sales force and customer support activities under operating leases, which expire at various dates through 2008. The Company leases office space for its IPS business under operating leases expiring at various dates through 2011. The leases contain escalation provisions requiring rental increases for increases in operating expense and real estate taxes.

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     Future minimum lease payments for operating leases are as follows:

     Included in the above future minimum payments is $11,820,000 related to two leased facilities that were vacated in connection with the Company’s merger with Visionics. At June 30, 2002 the Company recorded a charge of $10,340,000 representing a portion of the future lease costs related to these excess leased facilities.

     In January 2003, the Company was notified that it’s service business will not be awarded a contract to continue providing professional support services and material acquisition support to the Naval Sea Systems Command. The original contract is a cost plus fixed fee award that expires on June 30, 2003. During the three and six months ended December 31, 2002, $3,100,000 and $5,500,000 of revenue was recognized under the contract. The loss of this contract will not materially affect the Company’s cash flows.

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

Recent Accounting Pronouncements

     In June 2002, the Financial Accounting Standards Board (FASB) issued SFAS No. 146, “Accounting for Exit or Disposal Activities.” SFAS 146 addresses significant issues regarding the recognition, measurement, and reporting of costs that are associated with exit and disposal activities, including restructuring activities that are currently accounted for under EITF No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring).” The scope of SFAS 146 also includes costs related to terminating a contract that is not a capital lease and termination benefits that employees who are involuntarily terminated receive under the terms of a one-time benefit arrangement that is not an ongoing benefit arrangement or an individual deferred-compensation contract. SFAS 146 will be effective for the Company exit or disposal activities that are initiated after December 31, 2002. The provisions of EITF No. 94-3 shall continue to apply for an exit activity initiated under an exit plan that met the criteria of EITF No. 94-3 prior to the adoption of SFAS 146. Adopting the provisions of SFAS 146 will change, on a prospective basis, the timing of when restructuring charges are recorded from a commitment date approach to when the liability is incurred.

     In December 2002 the Company adopted the provisions of FASB Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others.” The implementation of this accounting pronouncement did not have a material effect on the Company’s results of operations, financial position or cash flows.

     In December 2002 the FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation — Transition and Disclosure.” SFAS No. 148 provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation and amends the disclosure requirements of SFAS No. 123. The transition provisions of this Statement are effective for fiscal years ending after December 15, 2002, and the disclosure requirements of the Statement are effective for interim periods beginning after December 15, 2002. The Company currently plans to continue to apply the intrinsic-value based method to account for stock options and will comply with the new disclosure requirements beginning with the third quarter of fiscal 2003.

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RISK FACTORS

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

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

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

	•		the cost, performance and reliability of our products and services and the products and services of competitors;
	•		customers’ perception of the perceived benefit of biometric solutions;
	•		public perceptions of the intrusiveness of these solutions and the manner in which firms are using the fingerprint information collected;
	•		public perceptions regarding the confidentiality of private information;
	•		customers’ satisfaction with our products and services; and
	•		marketing efforts and publicity regarding these products and services.

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

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

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

     The products designed, developed and sold under our line of products known as our “Imaging” products also face intense competition from a number of competitors who are actively engaged in developing and marketing live scan products, including Heimann Biometric Systems GmbH, Sagem Morpho, Inc., Printrak International, Inc., (a company owned by Motorola), and CrossMatch Technologies, Inc.

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

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

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

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

	•		the lack of availability of government funds;
	•		reduced demand for products and services caused by competitors;
	•		price reductions, new competitors, or the introduction of enhanced products or services from new or existing competitors;
	•		changes in the mix of products and services we or our distributors sell;
	•		cancellations, delays or contract amendments by government agency customers;
	•		unforeseen legal expenses, including litigation costs;
	•		expenses related to acquisitions or mergers;
	•		other one-time financial charges;
	•		the lack of availability or increase in cost of key components and subassemblies; and
	•		the inability to successfully manufacture in volume certain of our products that may contain complex designs and components.

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

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

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

     In addition, public agency contracts are frequently awarded only after formal competitive bidding processes, which have been and may continue to be protracted, and typically impose provisions that permit cancellation in the event that funds are unavailable to the public agency. There is a risk that we may not be awarded any of the competitive bidding processes, which have been and may continue to be protracted, and typically impose provisions that permit cancellation in the event that funds are unavailable to the public agency. In some cases, unsuccessful bidders for public agency contracts are provided the opportunity to formally protest certain contract awards through various agency, administrative and judicial channels. The protest process may delay a successful bidder’s contract performance for a number of weeks, months or more, or cancel the contract award entirely. Although we have not previously experienced a substantial number of contract delays or cancellations due to protest initiated by losing bidders, there is a risk that we may not be awarded contracts for which we bid or, if awarded, that substantial delays or cancellation of purchases may follow as a result of such protests. In addition, local government agency contracts may be contingent upon availability of matching funds from federal or state entities. Also, law enforcement and other government agencies are subject to political, budgetary, purchasing and delivery constraints which may continue to result in quarterly and annual revenues and operating results that may be irregular and difficult to predict. Such revenue volatility makes management of inventory levels, cash flow and profitability inherently difficult. In addition, in the event we are successful in winning such procurements, there may be unevenness in shipping schedules, as well as potential delays and schedule changes in the timing of deliveries and recognition of revenue, or cancellation of such procurements.

     For the three and six months ended December 31, 2002, we derived approximately 80% and 82% of our services revenue directly from contracts relating to the Department of Defense and other U.S. Government agencies. The loss of a material government contract due to budget cuts or otherwise could have a severe negative impact on our financial results and stock price. In January 2003, the Company was notified that it’s service business will not be awarded a contract to continue providing professional support services and material acquisition support to the Naval Sea Systems Command. The original contract is a cost plus fixed fee award that expires on June 30, 2003. During the three and six months ended December 31, 2002, $3,100,000 and $5,500,000 of revenue was recognized under the contract. The contract that was not awarded to the Company would have generated an estimated $3,250,000 per quarter of additional revenue over the life of the contract.

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     For the three and six months ended December 31, 2002, we derived approximately 90% and 91% of our services revenue from time-and-materials (“T&M”) contracts and firm-fixed-price (“FFP”) contracts. We assume certain performance risk on these contracts. If we fail to estimate accurately ultimate costs or to control costs during performance of the work, our profit margins may be reduced and we may suffer losses. In addition, revenues generated from government contracts are subject to audit and subsequent adjustment by negotiation with representatives of the government agencies. The Defense Contract Audit Agency is currently auditing IPS for the periods from July 1, 1997 to June 30, 2000. While we believe that the results of such audit will have no material effect on our profits, if made, such adjustments may have a material adverse effect on our business, financial condition and results of operations.

Integration of our business and Visionics’ business following our merger may be difficult to achieve, which may adversely affect operations.

     Our merger with Visionics, which was completed in June 2002, continues to present risks related to the integration and management of technology, operations and personnel of two companies. The integration of the businesses of the two companies is a complex, time-consuming and expensive process and may disrupt our business if not completed in a timely and efficient manner. We operate with Visionics as a combined organization utilizing common information and communications systems, operating procedures, financial controls and human resources practices.

     We may encounter substantial difficulties, costs and delays involved in integrating the companies’ operations, including:

	•		potential conflicts between business cultures;
	•		adverse changes in business focus perceived by third-party constituencies;
	•		potential conflicts in distribution, marketing or other important relationships;
	•		inability to implement uniform standards, controls, procedures and policies;
	•		integration of the research and development and product development efforts;
	•		loss of key employees and/or the diversion of management’s attention from other ongoing business concerns; and
	•		costs associated with the integration of the two companies may be difficult to control or may be higher than anticipated.

     In addition, prior to the merger, Visionics was co-headquartered in New Jersey and Minnesota, with offices in five locations, and Identix was headquartered in Northern California, with offices in nine locations. After the merger, we moved our headquarters to Minnesota. The geographic distances and the consolidation of operations increase the risk that the integration will not be completed successfully or in a timely and cost-effective manner. We may not be successful in overcoming these risks or any other problems encountered in connection with the integration of the companies.

The substantial costs of the merger and the manner of accounting for the merger may affect Identix’ reported results of operations.

     Approximately $28 million of costs are expected to be incurred in connection with the merger. Such amount includes costs associated with combining the businesses of the two companies, including integration and restructuring costs, costs associated with the consolidation of operations and the fees of financial advisors, attorneys and accountants. A significant portion of these costs will be charged to expense in the period incurred, reducing our earnings or increasing our loss for such period. The remaining costs, consisting primarily of fees and expenses paid to financial advisors, attorneys and accountants, will be a component of the purchase price and capitalized as an element of goodwill. Goodwill is required to be tested for impairment at least annually and we will be required to record a charge to earnings in the period any impairment of goodwill is determined. There is a risk that the management of the combined company will not be able to effectively control the costs associated with the integration of the two companies or that such costs may be higher than anticipated. The failure to manage such integration costs effectively could have a material adverse effect on the business operations, financial results and stock price of the combined company.

     The market price of our common stock could decline.

     The market price of our common stock could decline if:

	•		our integration with Visionics is unsuccessful;
	•		the combined company is unable to successfully market its products and services to both companies’ customers;

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	•		the combined company does not achieve the perceived benefits of the merger as rapidly as, or to the extent, anticipated by financial or industry analysts, or such analysts do not perceive the same benefits to the merger as do we; or
	•		the effect of the merger on our financial results is not consistent with the expectations of financial or industry analysts.

The terrorist attacks of September 11, 2001 have increased financial expectations that may not materialize.

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

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

     While we believe that future cash flows from operations, together with existing working capital and available lines of credit, may be adequate to fund our operating cash requirements for at least the next twelve months, we may need to raise additional debt or equity financing in the future. We may not be able to obtain additional debt or equity financing. If successful in raising additional financing, we may not be able to do so on terms that are not excessively dilutive to existing stockholders or less costly than existing sources of financing. Failure to secure additional financing in a timely manner and on favorable terms in the future could have a material adverse impact on our financial performance and stock price and require us to implement certain cost reduction initiatives and curtail certain of our operations.

Future growth depends in part on the success of itrust, a relatively new business activity with little operating history.

     Our future growth may depend on the success of itrust, which was formed in July 2000 and has a limited operating history. itrust’s success will depend on many factors, including, but not limited to:

	•		our ability to form additional collaborative partnerships that will contribute technical and commercial value to itrust;
	•		the demand for our security products and itrust products and services;
	•		our ability to successfully and rapidly manufacture, disseminate and deploy biometric enabled products and services;
	•		the ability and willingness of our collaborative partners to successfully and rapidly promote, manufacture, disseminate and deploy biometric enabled products services;
	•		the levels of competition in the space for Internet and wireless web security services;
	•		the perceived need for secure communications and commerce in such markets;
	•		our ability to successfully introduce new products and services; and
	•		our ability to expand its operations and attract, integrate, retain and motivate qualified sales, marketing, and research and development personnel.

     A significant number of established and startup companies have developed or are developing and marketing security and/or authentication solutions that currently compete or will compete directly with itrust’s solutions. Some of these companies have significantly more cash and resources than we do, and may currently offer a broader or more robust range of solutions than those currently available through the itrust offering. The wired and wireless security and authentication marketplace is rapidly evolving and intensely competitive and we believe that additional competitors may yet enter the market and become significant long-term competitors.

     We have experienced net losses in the last two fiscal years and expect additional losses in the future. itrust is not expected to contribute significant revenues or positive cash flows in the foreseeable future. At the same time, however, we will incur significant costs in the design, development, manufacture, sale and deployment of itrust products and services and in the execution of itrust’s business plan. In part because of the significant investment we will make in itrust, we expect to incur substantial additional losses and negative cash flows from it in the foreseeable future.

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We face substantial competition from professional service providers of all sizes in the government marketplace.

     Our wholly-owned subsidiary, IPS, is increasingly being required to bid on firm fixed price and similar contracts that result in greater performance risk to IPS. If IPS is not able to maintain a competitive cost structure, support specialized market niches, retain highly qualified personnel or align with technology leaders, we may lose our ability to compete successfully in the services business.

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

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

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

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

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

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

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

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

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

     We extend substantial credit to federal, state and local governments in connection with sales of our products and services. Sales to sizeable customers requiring large and sophisticated networks of fingerprint recognition and live scan systems and peripheral equipment often include technical requirements which may not be fully known at the time requirements are specified by the customer. In addition, contracts may specify performance criteria that must be satisfied before the customer accepts the products and services. Collection of accounts receivable may be dependent on completion of customer requirements, which may be unpredictable, subject to change by the customer, and not fully understood at the time of acceptance of the order, and may involve investment of additional resources. These investments of additional resources are accrued when amounts can be estimated but may be uncompensated and negatively affect profit margins and our liquidity.

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

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

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

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

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

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We rely on products and services provided by International Technology Concepts, Inc. (“IT Concepts”).

     Certain of our product lines require the purchase of products, components of products and research, development and engineering services related to the development of products from IT Concepts. In turn, IT Concepts subcontracts portions of its work to an affiliate in Russia and brings in a portion of its engineering and personnel resources from Russia.

     If we were to lose IT Concepts as a supplier of certain products and engineering services, or if IT Concepts were prohibited or restricted from importing a portion of its engineering requirements or resources, because of lack of availability of applicable immigration visas or otherwise, we would be required to find alternative suppliers of products and services or hire additional engineering personnel to provide the services. This could require us to incur significant additional research and development costs and delay shipment of certain products to customers. There is a risk that we would not be able to find such personnel or suppliers at a reasonable cost, or at all. Any delay in product development or shipment could have a material adverse effect on our business, operations, financial results and stock price. Identix is a party to a series of agreements with IT Concepts governing IT Concepts’ supply of research, development and engineering services to Identix. Identix relies in part on these agreements to protect its ownership, and the confidentiality of Identix’ proprietary technology, trade secrets and other intellectual property rights developed under the agreements. There is a risk that these agreements may be inadequate to protect Identix, or that such agreements may be breached, and that the remedies available to Identix may not be adequate.

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

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

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

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

     For the year ended June 2002, and the three and six months ended December 31, 2002, we derived approximately 13%, 9% and 8%, respectively, of our product revenues from international sales. We currently have a local presence in the United Kingdom and the Commonwealth of Australia.

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

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

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

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involuntary renegotiations of contracts with foreign governments.