IDENTIX INC - 10-Q Quarterly Report

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SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

(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, 2003 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: 1-9641

IDENTIX INCORPORATED

(Exact name of registrant as specified in its charter)


Delaware		94-2842496

(State or other jurisdiction of incorporation of organization)		(IRS Employer Identification No.)

5600 Rowland Road, Minnetonka, Minnesota (Address of principal executive offices)		55343 (Zip Code)

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] NO [ ]

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). YES [X] NO [ ]

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:

86,294,125 shares of Common Stock
as of January 31, 2003

TABLE OF CONTENTS


		CONDENSED CONSOLIDATED BALANCE SHEETS
		CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
		CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
		NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
	Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
	Item 3. Quantitative and Qualitative Disclosures about Market Risk
	Item 4. Controls and Procedures
PART II OTHER INFORMATION
	Item 4. Submission of Matters to a Vote of Security Holders
	Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
Indemnification Agreement
CEO Certification
CFO Certification
906 Certifications

IDENTIX INCORPORATED

INDEX


PART I		FINANCIAL INFORMATION
	Item 1	Unaudited Financial Statements
		Condensed Consolidated Balance Sheets - December 31, 2003 and June 30, 2003	3
		Condensed Consolidated Statements of Operations - Three and six months ended December 31, 2003 and 2002	4
		Condensed Consolidated Statements of Cash Flows - Three and Six months ended December 31, 2003 and 2002	5
		Notes to Condensed Consolidated Financial Statements	6
	Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	12
	Item 3	Quantitative and Qualitative Disclosures About Market Risk	25
	Item 4	Controls and Procedures	25
PART II		OTHER INFORMATION
	Item 4	Submission of Matters to a Vote of Security Holders	26
	Item 6	Exhibits and Reports on Form 8-K	26
	Signature		27

IDENTIX INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)


				December 31,			June 30,
				2003			2003

ASSETS
Current assets:
	Cash and cash equivalents			$	29,742,000		$	34,712,000
	Marketable securities - short-term				7,993,000			8,991,000
	Accounts receivable, net				19,101,000			21,434,000
	Inventories				10,387,000			9,920,000
	Prepaid expenses and other assets				897,000			1,677,000

		Total current assets			68,120,000			76,734,000
Marketable securities - long-term					1,504,000			505,000
Property and equipment, net					3,693,000			4,157,000
Goodwill					140,945,000			140,945,000
Acquired intangible assets, net					16,995,000			19,854,000
Other assets					2,584,000			3,075,000

		Total assets		$	233,841,000		$	245,270,000

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
	Accounts payable			$	5,811,000		$	8,025,000
	Accrued compensation				3,903,000			3,593,000
	Other accrued liabilities				4,132,000			4,522,000
	Deferred revenue				8,745,000			7,197,000

		Total current liabilities			22,591,000			23,337,000
Deferred revenue					90,000			419,000
Other liabilities					8,768,000			10,250,000

		Total liabilities			31,449,000			34,006,000

Stockholders’ equity:
	Convertible preferred stock, $0.01 par value; 2,000,000 shares authorized; 234,558 shares issued and outstanding				3,702,000			3,702,000
	Common stock, $0.01 par value; 200,000,000 shares authorized 86,264,683 and 85,944,951 shares issued and outstanding, respectively				863,000			859,000
	Additional paid-in capital				537,086,000			536,173,000
	Accumulated deficit				(338,866,000	)		(328,651,000	)
	Deferred stock-based compensation				(246,000	)		(663,000	)
	Accumulated other comprehensive loss				(147,000	)		(156,000	)

		Total stockholders’ equity			202,392,000			211,264,000

			Total liabilities and stockholders’ equity	$	233,841,000		$	245,270,000

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

IDENTIX INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)


				Three Months Ended December 31,						Six Months Ended December 31,

				2003			2002			2003			2002

Revenues:
		Product revenues		$	12,460,000		$	12,512,000		$	25,178,000		$	26,664,000
		Services revenues			7,508,000			10,004,000			16,122,000			20,914,000

			Total revenues		19,968,000			22,516,000			41,300,000			47,578,000

Cost and expenses:
		Cost of product revenues			8,008,000			8,781,000			16,016,000			19,086,000
		Cost of services revenues			6,900,000			8,787,000			14,371,000			18,631,000
		Research, development and engineering			2,768,000			2,690,000			5,023,000			5,778,000
		Marketing and selling			2,769,000			3,401,000			5,446,000			6,652,000
		General and administrative			3,923,000			4,056,000			8,312,000			8,939,000
		Amortization of acquired intangible assets			1,375,000			1,373,000			2,757,000			2,919,000
		Restructuring, write-offs and other merger related charges			—			1,550,000			—			8,305,000

			Total costs and expenses		25,743,000			30,638,000			51,925,000			70,310,000

Loss from operations					(5,775,000	)		(8,122,000	)		(10,625,000	)		(22,732,000	)
Interest and other income, net					367,000			673,000			683,000			1,047,000
Interest expense					—			(5,000	)		(8,000	)		(4,000	)

Loss before income taxes and equity interest in loss of joint venture					(5,408,000	)		(7,454,000	)		(9,950,000	)		(21,689,000	)
(Provision) Benefit for income taxes					(9,000	)		8,000			(18,000	)		(14,000	)

Loss before equity interest in loss of joint venture					(5,417,000	)		(7,446,000	)		(9,968,000	)		(21,703,000	)
Equity interest in loss of joint venture					(142,000	)		(106,000	)		(247,000	)		(48,000	)

Net loss				$	(5,559,000	)	$	(7,552,000	)	$	(10,215,000	)	$	(21,751,000	)

	Basic and diluted net loss per share			$	(0.06	)	$	(0.09	)	$	(0.12	)	$	(0.26	)

Weighted average common shares used in basic and diluted loss per share computation					86,143,000			85,124,000			86,079,000			84,962,000

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

IDENTIX INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)


			Six Months Ended December 31,

			2003			2002

Cash flows from operating activities:
	Net loss		$	(10,215,000	)	$	(21,751,000	)
	Adjustments to reconcile net loss to net cash used in operating activities:
		Depreciation and amortization		3,891,000			4,167,000
		Equity interest in loss of joint venture		247,000			48,000
		Realized gain on sales of marketable securities		(39,000	)		(236,000	)
		Stock-based compensation expense		413,000			932,000
		Amortization of premiums on marketable securities		—			88,000
		Bad debt (recoveries) expense		(696,000	)		589,000
		Loss on disposal of equipment		38,000			—
		Non-cash restructuring write-offs and other charges		—			441,000
	Changes in assets and liabilities:
		Accounts receivable		3,037,000			(3,013,000	)
		Inventories		(467,000	)		2,358,000
		Prepaid expenses and other assets		1,024,000			273,000
		Accounts payable		(2,214,000	)		(2,270,000	)
		Accrued compensation		310,000			(2,200,000	)
		Other accrued liabilities		(1,872,000	)		2,383,000
		Deferred revenue		1,219,000			(221,000	)

	Net cash used in operating activities			(5,324,000	)		(18,412,000	)

Cash flows from investing activities:
	Net proceeds from the sales of marketable securities			9,000,000			15,599,000
	Purchases of marketable securities			(8,961,000	)		(9,492,000	)
	Additions of intangibles and other assets			—			(500,000	)
	Capital expenditures			(606,000	)		(820,000	)

	Net cash (used in) provided by investing activities			(567,000	)		4,787,000

Cash flows from financing activities:
	Proceeds from sales of common stock			921,000			1,346,000

	Net cash provided by financing activities			921,000			1,346,000

Net decrease in cash and cash equivalents				(4,970,000	)		(12,279,000	)
Cash and cash equivalents at period beginning				34,712,000			53,346,000

Cash and cash equivalents at period end			$	29,742,000		$	41,067,000

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

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, unless otherwise noted), 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, 2003 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 and six months ended December 31, 2003 are not necessarily indicative of results to be expected for the entire fiscal year, which ends on June 30, 2004.

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. 104, “Revenue Recognition”, which superceded SAB No. 101, 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 adopted Emerging Issues Task Force Issue No. 00-21 “Accounting for Revenue Arrangements with Multiple Deliverables,”(“EITF 00-21”) effective April 1, 2003. There was no cumulative effect of a change in accounting policy upon the adoption of EITF 00-21. Under EITF 00-21, a company must determine whether any or all of the deliverables of a multiple deliverable agreement can be separated from one another. If separation is possible, revenue is recognized for each deliverable (based on objective and reliable evidence of the fair value) as the applicable revenue recognition criteria are achieved for that specific deliverable. Alternatively, if separation is not possible, revenue recognition may need to be spread evenly over the performance of all deliverables, or deferred until all elements of the arrangement have been delivered to the customer.

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 was audited by the Defense Contract Audit Agency for the period from July 1, 1997 to June 30, 2000 and the results of the audit did not have a material effect on the Company’s financial position or results of operations for these periods. The Company is currently undergoing a General Services Administration pre-award audit for the renewal of a GSA Multiple Award Schedule contract. While the Company believes that the results of such audit will have no material effect on the results of operation, any material adverse findings or adjustments arising out of such audit may have a material adverse effect on our business, financial condition and results of operations.

The Company also sells several stand-alone software products including BioLogon®, BioEngine® and Faceit® 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 accrued revenue that becomes billable per the terms of contract. Provisions for estimated contract losses are recorded in the period such losses are determined.

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 71% of total services revenue for both the three and six months ending December 31, 2003 compared to 80% and 82% 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.

3. Stock Based Compensation

The Company accounts for its employee and director stock option plans and employee stock purchase plans in accordance with provisions of the Accounting Principles Board Opinion (“APB”) No. 25, “Accounting for Stock Issued to Employees”. The Company accounts for stock options issued to non-employees in accordance with the provisions of SFAS 123 and Emerging Issues Task Force (“EITF”) 96-18 “Accounting for Equity Instruments that are Issued to Other Than Employees for Acquiring or in Conjunction with Selling Goods or Services”. As permitted by SFAS No. 123, “Accounting for Stock Based Compensation”, the Company continues to measure employee compensation cost for its stock option plans using the intrinsic value method of accounting.

Had compensation cost for the Company’s employee stock options been recognized upon the estimated fair value on the grant date under the fair value methodology prescribed by SFAS No. 123, as amended by SFAS No. 148, the Company’s net loss and net loss per share would have been as follows:


		Three Months Ended December 31,						Six Months Ended December 31,

		2003			2002			2003			2002

Net loss as reported		$	(5,559,000	)	$	(7,552,000	)	$	(10,215,000	)	$	(21,751,000	)
	Add: Stock based compensation expense included in reported net loss, net of related tax effects		179,000			409,000			413,000			932,000
	Deduct: Total stock based compensation expense determined under fair value based method for all awards, net of related tax effects		(1,475,000	)		(2,064,000	)		(3,306,000	)		(4,128,000	)

Proforma net loss		$	(6,855,000	)	$	(9,207,000	)	$	(13,108,000	)	$	(24,947,000	)

Net loss per share:
	As reported	$	(0.06	)	$	(0.09	)	$	(0.12	)	$	(0.26	)
	Proforma	$	(0.08	)	$	(0.11	)	$	(0.15	)	$	(0.29	)
Shares			86,143,000			85,124,000			86,079,000			84,962,000

4. Cash and Credit Facilities

The Company financed its operations during the six months ended December 31, 2003 primarily from cash provided by its working capital. As of December 31, 2003, the Company’s principal sources of liquidity consisted of $45,529,000 of working capital including $37,735,000 in cash and cash equivalents and short-term marketable securities. In addition, the Company if needed, has $1,504,000 in long-term marketable securities that can be used to finance operations.

The Company’s existing line of credit (the “Identix Line of Credit”) was entered into on May 30, 2003. This line of credit provides for up to the lesser of $15,000,000 or the cash collateral base or the borrowing base. 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, which was 4.00% at December 31, 2003. The Identix Line of Credit expires on October 30, 2004. Until the Company establishes a net income before income taxes for two consecutive fiscal quarters, the Company will be required to deposit with the lender an amount equal to the sum of the aggregate outstanding principal amount of all prior advances plus any portion of the line of credit reserved to support unexpired letters of credit plus the amount of the requested advance before an advance will be given. In addition, all advances must be used for working capital. At December 31, 2003, there were no amounts outstanding under this line of credit.

The Identix Line of Credit agreement contains financial, operating and reporting covenants. At December 31, 2003, the Company was in compliance with all covenants.

5. 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:


	December 31,		June 30,
	2003		2003

Purchased parts and materials	$	4,260,000	$	3,351,000
Work-in-process		4,779,000		4,893,000
Finished goods, including spares		1,348,000		1,676,000

	$	10,387,000	$	9,920,000

6. Restructuring, Write-offs and Other Merger Related Charges

In June 2002, the Company merged with Visionics and in connection with the merger recorded restructuring charges of $18,798,000 for the termination of 110 employees, and the closure of its facilities in Dublin and Los Gatos California. During the year ended June 30, 2003, the Company recorded additional restructuring and other merger related charges of $10,206,000, including a loss of $186,000 on the sublease portion of its Dublin facility. 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. The following is a summary of the charges incurred and payments made from the time of the merger through June 30, 2003:


		Activity during the period June 25, 2002 to June 30, 2003

						Cash Payments
						through June 30,		Liability as of
		Total Charges		Non-Cash Charges		2003		June 30, 2003

Severance and benefits		$	8,376,000	$	900,000	$	6,862,000	$	614,000
Disposal of fixed assets			1,664,000		1,664,000		—		—
Lease exit costs			15,280,000		388,000		2,741,000		12,151,000
Internal merger costs & other			3,684,000		—		3,653,000		31,000

	Total	$	29,004,000	$	2,952,000	$	13,256,000	$	12,796,000

Fiscal 2004

The following table represents a summary of restructuring, write-offs and other merger related charges which relate to the merger of Identix and Visionics that was consummated on June 25, 2002:


		For the six months ended December 31, 2003

		Restructuring Liability				Non-Cash				Restructuring Liability as
		as of June 30, 2003		Additions		Charges		Cash Payments		of December 31, 2003

Severance and benefits		$	614,000	$	—	$	—	$	241,000	$	373,000
Disposal of fixed assets			—		—		—		—		—
Lease exit costs			12,151,000		—		—		1,657,000		10,494,000
Internal merger costs and other			31,000		—		—		—		31,000

	Total	$	12,796,000	$	—	$	—	$	1,898,000	$	10,898,000

The restructuring liability is classified in the consolidated balance sheet based on the anticipated timing of the respective payment. As of December 31, 2003, $7,973,000 of the above restructuring liability is classified as long-term. Management currently believes that of the $373,000 accrued for severance and benefits, $260,000 will be paid over the next twelve months with the remaining balance being paid through 2013 with the lease exit costs being paid over the remaining term of the leases. The leases expire at various dates through 2011.

Fiscal 2003

During the three and six months ended December 31, 2002, the Company recorded 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 were 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 were expensed as incurred.

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 operations 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.

7. Earnings Per Share

Basic earnings per share are computed by dividing net income (loss) 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 8,711,000 and 9,690,000 shares of common stock were outstanding at December 31, 2003 and 2002, respectively, but were not included in the computation of diluted net loss per share as their effect was anti-dilutive. Also 234,558 shares of convertible preferred stock were outstanding at December 31, 2003 and 2002. Such shares of preferred stock are convertible into 236,000 shares of the Company’s common stock, but were not included in the computation of diluted net loss per share as their effect was anti-dilutive.

8. Comprehensive Loss

Comprehensive loss for the three and six months ended December 31, 2003, was $5,555,000 and $10,206,000 compared to a loss of $7,821,000 and $21,763,000 for the same periods 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.

9. Reportable Segment Data

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.


		Three Months Ended December 31,						Six Months Ended December 31,

		2003			2002			2003			2002

Total revenues:
	Product	$	12,460,000		$	12,512,000		$	25,178,000		$	26,664,000
	Services		7,508,000			10,004,000			16,122,000			20,914,000

		$	19,968,000		$	22,516,000		$	41,300,000		$	47,578,000

Loss from operations:
	Products	$	(5,461,000	)	$	(7,991,000	)	$	(10,485,000	)	$	(18,668,000	)
	Services		(314,000	)		(131,000	)		(140,000	)		(4,064,000	)

		$	(5,775,000	)	$	(8,122,000	)	$	(10,625,000	)	$	(22,732,000	)


		December 31,		June 30,

		2003		2003

Identifiable assets:
	Product	$	226,386,000	$	235,719,000
	Services		7,455,000		9,551,000

		$	233,841,000	$	245,270,000

10. Foreign Operations Data

In geographical reporting, revenues are attributed to the geographical location of the sales and service organizations:


		For the Three Months Ended December 31,				For the Six Months Ended December 31,

		2003		2002		2003		2002

Total revenues:
	North America	$	18,613,000	$	21,432,000	$	39,212,000	$	45,549,000
	International		1,355,000		1,084,000		2,088,000		2,029,000

		$	19,968,000	$	22,516,000	$	41,300,000	$	47,578,000


		December 31,		June 30,

		2003		2003

Identifiable assets:
	North America	$	232,827,000	$	244,115,000
	International		1,014,000		1,155,000

		$	233,841,000	$	245,270,000

11. Indemnification Arrangements and Product Warranties

As part of the Visionics acquisition in June 2002, the Company undertook, and assumed from Visionics, obligations to indemnify the officers and directors of the acquired company for certain events or occurrences while the officer or director served in such capacity. The maximum potential amount of future payments the Company could be required to make under this indemnification obligation is unlimited; however, the Company purchased a directors’ and officers’ insurance policy to cover former directors and officers of Visionics that provides coverage until June 25, 2007 and may enable Identix to recover a portion of any future amounts paid. Assuming the applicability of the coverage and the willingness of the insurer to assume coverage and subject to certain retention, loss limits and other policy provisions and except as provided below, the Company believes the estimated fair value of the indemnification obligations to Visionics’ directors and officers is not material. However, no assurances can be given that the covering insurers will not attempt to dispute the validity, applicability or amount of coverage without expensive and time-consuming litigation against the insurers. As of October 30, 2003, the Company also entered into indemnification agreements with its then current directors and executive officers. The maximum potential amount of future payments the Company could be required to make under these indemnification obligations is unlimited; however, the Company purchased certain directors’ and officers’ insurance policies, effective August 19, 2003 and September 21, 2003, respectively, to cover its directors and officers, and such policies may enable Identix to recover a portion of any covered claims under the agreements. Assuming the applicability of the coverage and the willingness of the insurer to assume coverage and subject to certain retention, loss limits and other policy provisions, the Company believes the estimated fair value of the indemnification obligations to its directors and officers is not material. However, no assurances can be given that the covering insurers will not attempt to dispute the validity, applicability or amount of coverage without expensive and time-consuming litigation against the insurers.

From time to time, the Company agrees to indemnify its customers against liability if the Company’s products infringe a third party’s intellectual property rights. As of December 31, 2003, the Company was not subject to any pending litigation alleging that the Company’s products infringe the intellectual property rights of any third parties.

The Company offers a warranty on various products and services. The Company estimates the costs that may be incurred under its warranties and records a liability in the amount of such costs at the time the product is sold. Factors that affect the Company’s warranty liability include the number of units sold, historical and anticipated rates of warranty claims and cost per claim. The Company periodically assesses the adequacy of its recorded warranty liabilities and adjusts the amounts as necessary. The amount of the reserve recorded is equal to the costs to repair or otherwise satisfy the claim. The following table presents changes in the Company’s warranty liability during the first six months of fiscal 2004:


Balance at July 1, 2003	$	374,000
Warranty Expense		517,000
Closed Warranty Claims		(377,000	)

Balance at December 31, 2003	$	514,000

12. Recent Accounting Pronouncements

In January 2003, the FASB issued FASB Interpretation No. (FIN) 46, “Consolidation of Variable Interest Entities.” FIN 46 addresses the requirements for business enterprises to consolidate related entities, for which they do not have controlling interests through voting or other rights, if they are determined to be the primary beneficiary as a result of variable economic interests. FIN 46 provides guidance for determining the primary beneficiary for entities with multiple economic interests. FIN 46 is effective at the time of investment for interests obtained in a variable economic entity after January 31, 2003. Beginning in the Company’s third quarter of fiscal year 2004, FIN 46, as amended, will be applied to interests in variable interest entities (VIE’s) acquired prior to February 1, 2003. Management believes the adoption of FIN 46 will not have a material impact on the Company’s consolidated results of operations, financial position, or cash flows.

13. Subsequent Events

Mr. Milton E. Cooper, a member of the Company’s Board of Directors since 2001, was appointed Chairman of the Board effective February 1, 2004. Concurrent with such appointment, Mr. Robert McCashin, the former Chairman of the Board of Directors, retired and resigned from the Board of Directors as a result of his resignation Mr. McCashin’s agreement entitled him to receive payment of approximately $890,000 of which approximately $400,000 was previously accrued. As a result the Company will record a charge to the statement of operations for approximately $490,000 during the three months ended March 31, 2004.

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. The Visionics results of operations have been included in the Company’s consolidated financial statements since the date of acquisition. 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.

For the quarter ended December 31, 2003, while Identix continued to win major awards in the biometrics industry, revenue was less than expected by management. The shortfall was due to a combination of factors including a stop work order by the Department of Homeland Security on the initial purchase order under the previously awarded Blanket Purchase Agreement in response to a protest by a competitor, customer infrastructure development requirements on the major awards received by Identix during the quarter ended December 31, 2003. and additional softness in its Service business where year-end holiday hours limit the opportunities for billable hours. Identix remained focused internally on executing well on cost controls and does not anticipate that fluctuations in revenue from expectations will affect operating costs or Identix’ ability to win industry awards or meet the market’s demand for new and improved finger and facial recognition technology. The focus on cost controls was demonstrated during the quarter by the decrease in cash, cash equivalents and marketable securities of $3,911,000 and a decrease in working capital of $5,094,000 compared to a net loss of $5,559,000 for the quarter ended December 31, 2003. At December 31, 2003, the Company maintained cash, cash equivalents and marketable securities of $39,200,000 and working capital of $45,529,000. Currently, the Company’s anticipated cash requirements relate primarily to funding operations and paying remaining obligations related to restructuring and other merger related charges recorded in fiscal years 2003 and 2002.

CRITICAL ACCOUNTING POLICIES

The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the United States of America 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, 2003 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 materially 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, 2003 describes the critical accounting

policies that are impacted significantly by judgments, assumptions and estimates used in the preparation of the Consolidated Financial Statements. At December 31, 2003, the Company’s critical accounting policies and estimates continue to include revenue recognition, allowance for doubtful accounts and sales returns, goodwill impairments, inventory allowances, warranty costs and loss contingencies and restructurings. The Company’s annual impairment analysis was performed during the fourth quarter of fiscal year 2003 and resulted in an impairment charge to goodwill of $154,799,000.

RESULTS OF OPERATIONS

Revenues, Cost of Revenues and Gross Margins

Revenues for the three and six months ended December 31, 2003 were $19,968,000 and $41,300,000 compared to $22,516,000 and $47,578,000 for the same periods in the prior fiscal year. The Company had one customer, the Department of Defense (DOD) that accounted for 20% of the total revenue for the three and six months ended December 31, 2003, compared to 30% for the same periods in the prior fiscal year.

Product revenues were $12,460,000 and $25,178,000 for the three months and six months ended December 31, 2003, compared to $12,512,000 and $26,664,000 for the same periods in the prior fiscal year. The 6% decrease in product revenue when comparing the first six months of fiscal year 2003 to the same period for fiscal year 2004, is primarily due to the Visionics merger in June 2002; as a result of the merger, there was, a build up of orders that were recognized as revenue in the first quarter of fiscal year 2003 which did not occur during the same time period in fiscal year 2004. In addition, a decrease in sales volume from the Company’s Live Scan products and competitive pricing pressures also contributed to this decrease. This decrease was partially offset by increased maintenance revenue in the first and second quarters of fiscal year 2004 as well as increased sales of the Company’s Software Development Kits and the Company’s Identification Based Information System (“IBIS”) in the first quarter of fiscal year 2004. The Company may continue to experience downward competitive pricing pressures in the future. The Company is currently undergoing a General Services Administration pre-award audit for the renewal of a GSA Multiple Award Schedule contract. While the Company believes that the results of such audit will have no material effect on the results of operation, any material adverse findings or adjustments arising out of such audit may have a material adverse effect on our business, financial condition and results of operations.

International sales accounted for $1,355,000 and $2,088,000 or 11% and 8% of the Company’s product revenues for the three months and six months ended December 31, 2003, respectively, compared to $1,084,000 and $2,029,000 or 9% and 8% of the Company’s product revenues for the same periods in the prior fiscal year. Identix is actively pursuing business in the international biometric market. 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 of $7,508,000 and $16,122,000 for the three and six months ended December 31, 2003, were down 25% and 23%, respectively, when compared to services revenues of $10,004,000 and $20,914,000 for the same periods in the prior fiscal year. The decrease in service revenues for the three and six months ended December 31, 2003, is primarily the result of the lack of revenues from the Naval Sea Systems Command contracts that were in effect for the same periods last fiscal year. The contracts’ period of performance ended June 30, 2003. 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, 2003, revenues directly from the DOD and from other U. S. Government agencies accounted for 71% of the Company’s total services revenues compared to 80% and 82% for the same periods in the prior fiscal year.

In January 2003, the Company was notified that its service business would not be awarded a contract to continue providing professional support services and material acquisition support to the Naval Sea Systems Command under contract PMS-325. The original contract was a cost plus fixed fee award that expired on June 30, 2003. The contract that was not awarded would have generated an estimated $3,250,000 per quarter of additional revenue over the life of the contract. During the three and six months ended December 31, 2002 the Company recognized revenues of approximately $3,100,000 and $5,500,000 respectively, under this contract. Due to the low margins on this contract, its loss did not materially affect the Company’s cash flows.

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, 2003, the Company derived 83% and 86% of services revenues from FFP and T&M contracts. During the three and six months ended December 31, 2002, the Company derived 90% and 91% 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 17% and 14% of its services revenues for the three and six months ended December 31, 2003 and approximately 10% and 9% of its services revenues for the same periods 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. The Company was audited by the Defense Contract Audit Agency for the period from July 1, 1997 to June 30, 2000 and the results of the audit did not have a material effect on the Company’s financial position or results of operations for these periods.

Gross margin on product revenues was 36% for the three and six months ended December 31, 2003 and 30% and 28% for the same periods of the prior fiscal year. The increase of the product gross margins for the three months ended December 31, 2003, is primarily the result of fewer sales which required lower margin professional services, as well as a lower reserve related to excess and obsolete inventory items. The increase in gross margins for the six months ended is a combination of the factors previously explained and due to unusually low gross margins for the first part of fiscal year 2003 because of inventory purchase accounting adjustments made in connection with the Visionics merger that did not occur in fiscal year 2004. 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 8% and 11% for the three and six months ended December 31, 2003 as compared to 12% and 11% for the same periods in the prior fiscal year. The decrease in gross margins in the second quarter of fiscal year 2004 from the second quarter of fiscal year 2003 is primarily the result of certain fixed costs of on-site overhead expenses and indirect costs remaining the same as fiscal year 2003 yet the Company generated less revenue to absorb these costs in fiscal year 2004.

Research, Development and Engineering

Research, development and engineering expenses were $2,768,000 and $5,023,000 or 22% and 20% of product revenues for the three and six months ended December 31, 2003 compared to $2,690,000 and $5,778,000 or 21% and 22% of product revenues for the same periods in the prior fiscal year. The decrease of $755,000 in research and development expense in fiscal year 2004 from fiscal year 2003, is the result of several development projects ongoing in the first quarter of fiscal year 2003 that were completed before the start of fiscal year 2004. In addition, there has been a concerted effort by the Company to decrease its reliance on its principle subcontractor, which has resulted in an additional reduction of research and development expense year over year.

Marketing and Selling

Marketing and selling expenses were $2,769,000 and $5,446,000 or 14% and 13% of total revenues for the three and months ended December 31, 2003, compared to $3,401,000 and $6,652,000 or 15% and 14% of total revenues for the same periods in the prior fiscal year. The decrease in marketing and selling expenses expressed in dollars was driven primarily by a significant reduction in bad debt expense for the first quarter and second quarters of fiscal year 2004. The reduction of bad debt expense in the first and second quarters of fiscal year 2004 was due to the cash collections of several large accounts receivable which had been previously fully reserved. The specific receivables in both quarters had been in dispute for more than one year and consistent with Company policy, were fully reserved.

General and Administrative

General and administrative expenses were $3,923,000 and $8,312,000 for the three and six months ended December 31, 2003, compared to $4,056,000 and $8,939,000 for the same periods in the prior fiscal year. The decreases in general and administrative expense for the two fiscal 2004 periods were due to a number of different factors. Deferred compensation expense decreased by $230,000 from the second quarter of fiscal 2003 to the second quarter of fiscal 2004 and $519,000 on a year to date basis from fiscal 2003 to fiscal 2004 as the number of unvested options continues to decline. In addition, for the six months ended December 31, 2003, the Company reduced its reliance on outside recruiters and temporary employees, lowering expenses in each category by $168,000 and $57,000 respectively. Finally, during the six months ended December 31, 2003, the Company experienced lower costs associated with its board and annual meetings totaling $246,000. These decreases were partially offset by certain professional services and increased insurance costs totaling $575,000 for the six months ended December 31, 2003.

Amortization of Acquired Intangible Assets

The amortization expense is primarily related to acquired intangible assets such as developed technology, and patents. The amortization expense related to acquired intangible assets was $1,375,000 and $2,757,000 for the three and six months ended December 31, 2003 compared to $1,373,000 and $2,919,000 for the same periods in the prior fiscal year. The decrease is primarily the result of certain intangibles being fully amortized by September 30, 2002.

Restructuring Write-offs and Other Merger Related Charges

In June 2002, the Company merged with Visionics and in connection with the merger recorded restructuring charges of $18,798,000 for the termination of 110 employees, and the closure of its facilities in Dublin and Los Gatos California. During the year ended June 30, 2003, the Company recorded additional restructuring and other merger related charges of $10,206,000, including a loss of $186,000 on the sublease portion of its Dublin facility. 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. The following is a summary of the charges incurred and payments made from the time of the merger through June 30, 2003:


		Activity during the period June 25, 2002 to June 30, 2003

						Cash Payments
						through June 30,		Liability as of
		Total Charges		Non-Cash Charges		2003		June 30, 2003

Severance and benefits		$	8,376,000	$	900,000	$	6,862,000	$	614,000
Disposal of fixed assets			1,664,000		1,664,000		—		—
Lease exit costs			15,280,000		388,000		2,741,000		12,151,000
Internal merger costs & other			3,684,000		—		3,653,000		31,000

	Total	$	29,004,000	$	2,952,000	$	13,256,000	$	12,796,000

Fiscal 2004

Merger costs decreased by $1,550,000 and $8,305,000 when comparing the three and six months ended December 31, 2003 to the same periods in the prior fiscal year. The decrease is due entirely to merger costs being fully recognized during fiscal year 2003.

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


		For the six months ended December 31, 2003

		Restructuring Liability								Restructuring Liability as
		as of June 30, 2003		Additions		Non-Cash Charges		Cash Payments		of December 31, 2003

Severance and benefits		$	614,000	$	—	$	—	$	241,000	$	373,000
Disposal of fixed assets			—		—		—		—		—
Lease exit costs			12,151,000		—		—		1,657,000		10,494,000
Internal merger costs and other			31,000		—		—		—		31,000

	Total	$	12,796,000	$	—	$	—	$	1,898,000	$	10,898,000

Fiscal 2003

During the three and six months ended December 31, 2002, the Company recorded 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 were 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 were expensed as incurred.

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 operations 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.

Interest and Other Income, net

For the three and six months ended December 31, 2003, interest and other income, net were $367,000 and $683,000 respectively, compared to $673,000 and $1,047,000 for the same periods in the prior fiscal year. The decrease is primarily the result of lower cash balances in fiscal year 2004 and realized gains on investments of $236,000 that occurred in the first six months of fiscal year 2003 that did not occur in fiscal year 2004.

Interest Expense

Interest expense was $8,000 for the six months ended December 31, 2003, compared to $4,000 for the same period in the prior fiscal year. There have been no borrowings under the Company’s line of credit during the six months ended December 31, 2003. 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.

Provision for Income Taxes

The Company recorded a provision for income tax expense of $9,000 and $18,000 for the three and six months ended December 31, 2003 and a benefit of $8,000 and provision of $14,000 for the same periods in prior fiscal year. The tax amounts recorded for both fiscal years are related to state income taxes.

Equity Interest in Loss of Joint Venture

The equity interest in loss of the joint venture represents the Company’s 50% share of the results of Sylvan Identix Fingerprint Center. For the three and six months ended December 31, 2003, the Company’s equity interest in the joint venture loss was $142,000 and $247,000. For the same periods in the prior fiscal year the Company’s equity interest in the joint venture loss was $106,000 and $48,000.

Liquidity and Capital Resources

The Company financed its operations during the six months ended December 31, 2003, primarily from cash provided by its working capital. As of December 31, 2003, the Company’s principal sources of liquidity consisted of $45,529,000 of working capital including $37,735,000 in cash and cash equivalents and short-term marketable securities. In addition, the Company has $1,504,000 in long-term securities that can be used to finance operations.

The Company’s existing line of credit (the “Identix Line of Credit”) was entered into on May 30, 2003. This line of credit provides for up to the lesser of $15,000,000 or the cash collateral base or the borrowing base. 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 which was 4.00% at December 31, 2003. The Identix Line of Credit expires on October 30, 2004. Until the Company establishes a net income before income taxes for two consecutive fiscal quarters, the Company will be required to deposit with the lender an amount equal to the sum of the aggregate outstanding principal amount of all prior advances plus any portion of the line of credit reserved to support unexpired letters of credit plus the amount of the requested advance before an advance will be given. In addition, all advances must be used for working capital. At December 31, 2003, there were no amounts outstanding under this line of credit.

The Identix Line of Credit agreement contains financial, operating and reporting covenants. At December 31, 2003, the Company was in compliance with all covenants.

For the six months ended December 31, 2003, $5,324,000 and $567,000 of cash was used in operating and investing activities respectively, which was partially offset by $921,000 of cash generated from financing activities. The net result of the Company’s cash flow activities resulted in $4,970,000 of cash and cash equivalents being consumed. The Company used $12,279,000 of cash and cash equivalents during the six months ended December 31, 2002. For the six months ended December 31, 2002, operating activities used $18,412,000 that was partially offset by the Company’s investing and financing activities that generated cash flows of $4,787,000 and $1,346,000 respectively. 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, 2003. Currently, the Company’s anticipated cash requirements relate primarily to funding operations and paying remaining obligations related to restructuring and other merger related charges recorded in fiscal years 2003 and 2002. As discussed in note 13 to Notes to Condensed Consolidated Financial Statements, Mr. Robert McCashin, the former Chairman of the Board of Directors, retired from the Board of Directors effective February 1, 2004 as a result of his resignation Mr. McCashin’s agreement entitled him to receive a payment of approximately $890,000 of which $400,000 was previously accrued. As a result the Company will record a charge to the statement of operations for approximately $490,000 during the three months ended March 31, 2004.

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. IPS leases office space for its service 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.

Future minimum lease payments for operating leases are as follows:


Periods or fiscal years ending June 30:		Occupied		Unoccupied or Sublet		Total

2004		$	2,004,000	$	1,286,000	$	3,290,000
2005			4,122,000		2,780,000		6,902,000
2006			3,462,000		2,959,000		6,421,000
2007			3,309,000		2,604,000		5,913,000
2008			1,864,000		1,569,000		3,433,000
Thereafter			3,375,000		3,140,000		6,515,000

	Total	$	18,136,000	$	14,338,000	$	32,474,000

Included in the above future minimum payments is $9,787,000 related to two leased facilities in Northern California that were vacated in connection with the Company’s merger with Visionics. The Company has accrued for the estimated losses on these leases at December 31, 2002 and 2003. The Company is attempting to sublease the unoccupied facilities.

While the Company believes that existing working capital may be adequate to fund the Company’s current cash requirements, 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 January 2003, the FASB issued FASB Interpretation No. (FIN) 46, “Consolidation of Variable Interest Entities.” FIN 46 addresses the requirements for business enterprises to consolidate related entities, for which they do not have controlling interests through voting or other rights, if they are determined to be the primary beneficiary as a result of variable economic interests. FIN 46 provides guidance for determining the primary beneficiary for entities with multiple economic interests. FIN 46 is effective at the time of investment for interests obtained in a variable economic entity after January 31, 2003. Beginning in the Company’s third quarter of fiscal year 2004, FIN 46, as amended, will be applied to interests in variable interest entities (VIE’s) acquired prior to February 1, 2003. Management believes the adoption of FIN 46 will not have a material impact on the Company’s consolidated results of operations, financial position, or cash flows.

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 our 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 information collected;

• public perceptions regarding the confidentiality of private information;

• proposed or enacted legislation related to privacy of 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. If 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 facial and/or fingerprint biometric products and applications that currently compete or will compete directly with our current facial and fingerprint offerings. Some of these companies have developed or are developing and marketing semiconductor or optically based direct

contact fingerprint image capture devices, or retinal blood vessel, iris pattern, hand geometry, voice or facial structure solutions. If one or more of these technologies or approaches were widely adopted, it would significantly reduce the potential market for our products. Our security and identity related line of products and applications also compete with non-biometric technologies such as certificate authorities, smart card security solutions, and traditional key, card, surveillance systems and passwords. Many competitors offering products that are competitive with our security and identity related line of products and applications have significantly more financial and other resources than the Company. The biometric security market is a rapidly evolving and intensely competitive market, and we believe that additional competitors will continue to enter the market and become significant long-term competitors.

Our facial biometric products face intense competition from a number of competitors who are actively engaged in developing and marketing facial-based recognition or security products, including Viisage Technology, Inc., Cognitech and Imagis Technologies, Inc. The products designed, developed and sold under our line of products known as our “Live Scan” 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 Motorola company), 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 design, 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.

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 for convenience at any time 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 expensive. 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. For example, the Company was recently awarded a Blanket Purchase Order from the Department of Homeland Security (“DHS”) with an estimated value of approximately $27 million, and such award was the subject of a formal protest by one of our competitors. As a result of the protest, DHS decided to undertake a new evaluation of previously submitted proposals. There can be no assurance such new evaluation process will not result in substantial delays in purchases under the DHA award or in the cancellation of all or part of the Blanket Purchase Award itself. 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, if 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, 2003, we derived approximately 71% 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. For example, in January 2003, we were notified that our service business would not be awarded a contract to continue providing professional support services and material acquisition support to the Naval Sea Systems Command. The original contract was a cost plus fixed fee award that expired on June 30, 2003. During the twelve months ended June 30, 2003, $7,300,000 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.

For the three and six months ended December 31, 2003, we derived approximately 83% and 86% 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. We were audited by the Defense Contract Audit Agency for the period from July 1, 1997 to June 30, 2000 and the results of the audit did not have a material effect on the Company’s financial position or results of operations.

We are currently undergoing a General Services Administration pre-award audit for the renewal of a GSA Multiple Award Schedule contract related to our product business. While we believe that the results of such audit will have no material effect on our results of operations, any material adverse findings or adjustments arising out of such audit may have a material adverse effect on our business, financial condition and results of operations.

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, for example, 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;

• protests of federal, state or local government contract awards by competitors;

• unforeseen legal expenses, including litigation and/or administrative protest costs;

• expenses related to acquisitions or mergers;

• impairment charges arising out of our assessments of goodwill and intangibles;

• other one-time financial charges;

• the lack of availability or increase in cost of key components and subassemblies; and

• the inability to timely and successfully complete development of complex designs and components, or manufacture in volume and install certain of our products.

Particularly important is the need to invest in planned technical development programs to maintain and enhance our competitiveness, and to successfully develop and launch new products and services on a timely basis. 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.

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

In many instances, the procurements of our federal, state and local customers 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.

We also 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 by us 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.

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.

The substantial costs of our merger with Visionics Corporation, which was completed in June 2002, and the manner of accounting for the merger may affect Identix’ reported results of operations.

Approximately $30 million of costs have been incurred in connection with our merger with Visionics. These include 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. While the vast majority of costs associated with the merger are behind us, we may incur additional integration costs, for example, costs associated with the sublease of our former office and manufacturing space in California, and these costs may be higher than anticipated.

Goodwill is required to be tested for impairment at least annually and we will be required to record a non-cash charge to earnings in the period any impairment of goodwill is determined. During the fourth quarter of fiscal year 2003, we recorded an impairment charge to goodwill in the amount of $154,799,000.

The market price of our common stock could decline.

The market price of our common stock could decline if:

• our merger with Visionics ultimately proves to be unsuccessful;

• the combined company is unable to successfully market its products and services to both companies’ customers;

• 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, the war with Iraq, and the post-reconstruction efforts in 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 existing working capital 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.

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

Our wholly owned subsidiary, Identix Public Sector, Inc. (“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 and or install 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.

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 revenue 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.

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

We obtain certain hardware components and complete products, as well as software applications, 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 three and six months ended December 31 2003, we derived approximately 11% and 8% 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 or political 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

• involuntary renegotiations of contracts with foreign governments.

In addition, foreign laws treat the protection of proprietary rights differently from laws in the United States and may not protect our proprietary rights to the same extent as U.S. laws. The failure of foreign laws or judicial systems to adequately protect our proprietary rights or intellectual property, including intellectual property developed on our behalf by foreign contractors or subcontractors may have a material adverse effect on our business, operations, financial results and stock price.

Three stockholders own a significant portion of our stock and may delay or prevent a change in control or adversely affect the stock price through sales in the open market.

As of December 31, 2003, the State of Wisconsin Investment Board, Kern Capital Management LLC, and Mazama Capital Management, Inc. owned approximately 9%, 5%, and 5% respectively of the Company’s outstanding common stock. The concentration of large percentages of ownership in any single stockholder may delay or prevent change in control of the Company. Additionally, the sale of a significant number of our shares in the open market by a single stockholder or otherwise could adversely affect our stock price.

We may be subject to loss in market share and market acceptance as a result of manufacturing errors, delays or shortages.

Performance failure in our products or certain of our services may cause loss of market share, delay in or loss of market acceptance, additional warranty expense or product recall, or other contractual liabilities. The complexity of certain of our fingerprint readers makes the manufacturing and assembly process of such products, especially in volume, complex. This may in turn lead to delays or shortages in the availability of certain products, or, in some cases, the unavailability of certain products. The negative effects of any delay or failure could be exacerbated if the delay or failure occurs in products or services that provide personal security, secure sensitive computer data, authorize significant financial transactions or perform other functions where a security breach could have significant consequences.

If a product or service launch is delayed or is the subject of an availability shortage because of problems with our ability to manufacture or assemble the product or service successfully on a timely basis, or if a product or service otherwise fails to meet performance criteria, we may lose revenue opportunities entirely and/or experience delays in revenue recognition associated with a product or service in addition to incurring higher operating expenses during the period required to correct the defects. There is a risk that for unforeseen reasons we may be required to repair or replace a substantial number of products in use or to reimburse customers for products that fail to work or meet strict performance criteria. We carry product liability insurance, but existing coverage may not be adequate to cover potential claims.

We may be subject to repair, replacement, reimbursement and liability claims as a result of products that fail to work or to meet applicable performance criteria.

There is a risk that for unforeseen reasons we may be required to repair or replace a substantial number of products in use or to reimburse customers for products that fail to work or meet strict performance criteria. We attempt to limit remedies for product or service failure to the repair or replacement of malfunctioning or noncompliant products or services, and also attempt to exclude or minimize exposure to product and related liabilities by including in our standard agreements warranty disclaimers and disclaimers for consequential and related damages as well as limitations on our aggregate liability. From time to time, in certain complex sale or licensing transactions, we may negotiate liability provisions that vary from such standard forms. There is a risk that our contractual provisions may not adequately minimize our product and related liabilities or that such provisions may be unenforceable. We carry product liability insurance, but existing coverage may not be adequate to cover potential claims. We maintain warranty reserves as deemed adequate by management.

Failure by us to maintain the proprietary nature of our technology, intellectual property and manufacturing processes could have a material adverse effect on our business, operating results, financial condition and stock price and on our ability to compete effectively.

We principally rely upon patent, trademark, copyright, trade secret and contract law to establish and protect our proprietary rights. There is a risk that claims allowed on any patents or trademarks we hold may not be broad enough to protect our technology. In addition, our patents or trademarks may be challenged, invalidated or circumvented and we cannot be certain that the rights granted thereunder will provide competitive advantages to us. Moreover, any current or future issued or licensed patents, or trademarks, or currently existing or future developed trade secrets or know-how may not afford sufficient protection against competitors with similar technologies or processes, and the possibility exists that certain of our already issued patents or trademarks may infringe upon third party patents or trademarks or be designed around by others. In addition, there is a risk that others may independently develop proprietary technologies and processes, which are the same as, substantially equivalent or superior to ours, or become available in the market at a lower price.

There is a risk that we have infringed or in the future will infringe patents or trademarks owned by others, that we will need to acquire licenses under patents or trademarks belonging to others for technology potentially useful or necessary to us, and that licenses will not be available to us on acceptable terms, if at all.

We may have to litigate to enforce our patents or trademarks or to determine the scope and validity of other parties’ proprietary rights. Litigation could be very costly and divert management’s attention. An adverse outcome in any litigation may have a severe negative impact on our financial results and stock price. To determine the priority of inventions, we may have to participate in interference proceedings declared by the United States Patent and Trademark Office or oppositions in foreign patent and trademark offices, which could result in substantial cost us and limitations on the scope or validity of our patents or trademarks.

We also rely on trade secrets and proprietary know-how, which we seek to protect by confidentiality agreements with our employees, consultants, service providers and third parties. There is a risk that these agreements may be breached, and that the remedies available to us may not be adequate. In addition, our trade secrets and proprietary know-how may otherwise become known to or be independently discovered by others.

If we fail to adequately manage the size of our business, it could have a severe negative impact on our financial results or stock price.

Our management believes that in order to be successful we must appropriately manage the size of our business. This may mean reducing costs and overhead in certain economic periods, and selectively growing in periods of economic expansion. In addition, we will be required to implement operational, financial and management information procedures and controls that are efficient and appropriate for the size and scope of our operations. The management skills and systems currently in place may not be adequate and we may not be able to manage any significant reductions or growth effectively.

Acquisitions of companies or technologies may result in disruptions to our business.

As part of our business strategy, we may acquire assets and businesses principally relating to or complementary to our current operations. We merged with Visionics in June 2002 and acquired Identicator Technology, Inc. (“Identicator Technology”) in fiscal 1999, one company in fiscal 1998 and two companies in fiscal 1996. We also acquired certain software and source code assets in October 2002. These and any other acquisitions and/or mergers by Identix are and will be accompanied by the risks commonly encountered in acquisitions of companies. These risks include, among other things:

• exposure to unknown liabilities of acquired companies;

• higher than anticipated acquisition costs and expenses;

• effects of costs and expenses of acquiring and integrating new businesses on our operating results and financial condition;

• the difficulty and expense of assimilating the operations and personnel of the companies;

• disruption of our ongoing business;

• diversion of management time and attention;

• failure to maximize our financial and strategic position by the successful incorporation of acquired technology;

• the maintenance of uniform standards, controls, procedures and policies;

• loss of key employees and customers as a result of changes in management;

• the incurrence of amortization expenses;

• incurring impairment charges arising out of our assessments of goodwill and intangibles and;

• possible dilution to our stockholders.

In addition, geographic distances may make integration of businesses or the acquisition of assets more difficult. We may not be successful in overcoming these risks or any other problems encountered in connection with any mergers or acquisitions.

If we fail to attract and retain qualified senior executive and key technical personnel, our business will not be able to expand.

We are dependent on the continued availability of the services of our employees, many of whom are individually key to our future success, and the availability of new employees to implement our business plans. The market for skilled employees is highly competitive, especially for employees in technical fields. Although our compensation programs are intended to attract and retain the employees required for us to be successful, there can be no assurance that we will be able to retain the services of all of the key employees or a sufficient number to execute our plans, nor can there be any assurances that we will be able to continue to attract new employees as required.

Our personnel may voluntarily terminate their relationship with us at any time, and competition for qualified personnel, especially engineers, is intense. The process of locating additional personnel with the combination of skills and attributes required to carry out our strategy could be lengthy, costly and disruptive.

If we lose the services of key personnel, or fail to replace the services of key personnel who depart, we could experience a severe negative impact on our financial results and stock price. In addition, there is intense competition for highly qualified engineering and marketing personnel in the locations where we principally operate. The loss of the services of any key engineering, marketing or other personnel or our failure to attract, integrate, motivate and retain additional key employees could have a material adverse effect on our business, operating and financial results and stock price.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Interest Rate Risk. The Company’s exposure to market risk for changes in interest rates relates primarily to the Company’s cash equivalents, marketable securities and line of credit. The Company does not use derivative financial instruments. The Company’s cash equivalents are invested in money market accounts with major financial institutions. Due to the short duration and conservative nature of the Company’s cash equivalents, their carrying value approximates fair market value. The Company has performed an analysis to assess the potential effect of reasonably possible near-term changes in interest rates. The effect of such rate changes is not expected to be material to the Company’s results of operations, cash flows or financial condition.

The Company primarily enters into debt obligations to support general corporate purposes including working capital requirements and capital expenditures. The Company is subject to fluctuating interest rates that may impact, adversely or otherwise, its results of operation or cash flows for its variable rate lines of credit and cash equivalents.

Foreign Currency Exchange Rate Risk. Certain of the Company’s foreign revenues, cost of revenues and marketing expenses are transacted in local currencies, primarily the British Pound. As a result, the Company’s results of operations and certain receivables and payables are subject to foreign exchange rate fluctuations. The Company does not currently hedge against foreign currency rate fluctuations. Gains and losses from such fluctuations have not been material to the Company’s consolidated results of operations or balance sheet.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures. Based on their evaluation as of the end of the period covered by this Quarterly Report on Form 10-Q, our chief executive officer and chief financial officer have concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934) are effective to ensure that information required to be disclosed by us in reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms.

Changes in Internal Control Over Financial Reporting. There were no changes in our internal control over financial reporting identified in connection with our evaluation that occurred during our second fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II OTHER INFORMATION

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

(a) The Annual Meeting of Shareholders was held on October 30, 2003.

(b) All Board of Directors nominees referenced in Item 4 (c) below were elected at the Annual Meeting of Shareholders on October 30, 2003.

(c) The matters voted upon and the results of the voting were as follows:

(1) The following eight persons were elected to the Board of Directors:


Name	Votes For		Votes Withheld

Robert McCashin		81,526,299		1,401,517
Joseph J. Atick		81,723,513		1,204,303
Milton E. Cooper		81,318,987		1,608,829
Malcolm J. Gudis		81,279,803		1,648,013
John E. Haugo		81,265,535		1,662,281
George Latimer		81,240,615		1,687,201
John E. Lawler		81,208,053		1,639,763
Patrick H. Morton		80,208,042		2,719,774

(2) The appointment of PricewaterhouseCoopers LLP as independent accountants of the Company for the fiscal year ending June 30, 2004 was ratified. The number of shares voted in favor of the appointment was 81,583,256 the number of shares voted against were 1057,425, and the number of shares that abstained was 287,135.

Item 6. Exhibits and Reports on Form 8-K.

(a) Exhibits


Exhibit
Number		Description

10.56		Indemnification Agreement
31.1		CEO Certification
31.2		CFO Certification
32		906 Certifications

(b) A Form 8-K was filed on October 30, 2003, which contained the Company’s press release announcing its the financial results for the quarter ending September 30, 2003.

(c) A Form 8-K was filed on December 23, 2003, which disclosed material non-public information regarding the Company’s anticipated results of operations for the quarter ending December 31, 2003.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant, Identix Incorporated, a corporation organized and existing under the laws of the State of Delaware, has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized, in the City of Minnetonka, State of Minnesota, on February 12, 2004.


		IDENTIX INCORPORATED

		BY: /s/ James H. Moar

		James H. Moar
		Chief Financial Officer

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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, unless otherwise noted), 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, 2003 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 and six months ended December 31, 2003 are not necessarily indicative of results to be expected for the entire fiscal year, which ends on June 30, 2004.

		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. 104, “Revenue Recognition”, which superceded SAB No. 101, 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 adopted Emerging Issues Task Force Issue No. 00-21 “Accounting for Revenue Arrangements with Multiple Deliverables,”(“EITF 00-21”) effective April 1, 2003. There was no cumulative effect of a change in accounting policy upon the adoption of EITF 00-21. Under EITF 00-21, a company must determine whether any or all of the deliverables of a multiple deliverable agreement can be separated from one another. If separation is possible, revenue is recognized for each deliverable (based on objective and reliable evidence of the fair value) as the applicable revenue recognition criteria are achieved for that specific deliverable. Alternatively, if separation is not possible, revenue recognition may need to be spread evenly over the performance of all deliverables, or deferred until all elements of the arrangement have been delivered to the customer.

		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 was audited by the Defense Contract Audit Agency for the period from July 1, 1997 to June 30, 2000 and the results of the audit did not have a material effect on the Company’s financial position or results of operations for these periods. The Company is currently undergoing a General Services Administration pre-award audit for the renewal of a GSA Multiple Award Schedule contract. While the Company believes that the results of such audit will have no material effect on the results of operation, any material adverse findings or adjustments arising out of such audit may have a material adverse effect on our business, financial condition and results of operations.

		The Company also sells several stand-alone software products including BioLogon®, BioEngine® and Faceit® 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 accrued revenue that becomes billable per the terms of contract. Provisions for estimated contract losses are recorded in the period such losses are determined.

		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 71% of total services revenue for both the three and six months ending December 31, 2003 compared to 80% and 82% 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.

3.		Stock Based Compensation

		The Company accounts for its employee and director stock option plans and employee stock purchase plans in accordance with provisions of the Accounting Principles Board Opinion (“APB”) No. 25, “Accounting for Stock Issued to Employees”. The Company accounts for stock options issued to non-employees in accordance with the provisions of SFAS 123 and Emerging Issues Task Force (“EITF”) 96-18 “Accounting for Equity Instruments that are Issued to Other Than Employees for Acquiring or in Conjunction with Selling Goods or Services”. As permitted by SFAS No. 123, “Accounting for Stock Based Compensation”, the Company continues to measure employee compensation cost for its stock option plans using the intrinsic value method of accounting.

		Had compensation cost for the Company’s employee stock options been recognized upon the estimated fair value on the grant date under the fair value methodology prescribed by SFAS No. 123, as amended by SFAS No. 148, the Company’s net loss and net loss per share would have been as follows:

4.		Cash and Credit Facilities

		The Company financed its operations during the six months ended December 31, 2003 primarily from cash provided by its working capital. As of December 31, 2003, the Company’s principal sources of liquidity consisted of $45,529,000 of working capital including $37,735,000 in cash and cash equivalents and short-term marketable securities. In addition, the Company if needed, has $1,504,000 in long-term marketable securities that can be used to finance operations.

		The Company’s existing line of credit (the “Identix Line of Credit”) was entered into on May 30, 2003. This line of credit provides for up to the lesser of $15,000,000 or the cash collateral base or the borrowing base. 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, which was 4.00% at December 31, 2003. The Identix Line of Credit expires on October 30, 2004. Until the Company establishes a net income before income taxes for two consecutive fiscal quarters, the Company will be required to deposit with the lender an amount equal to the sum of the aggregate outstanding principal amount of all prior advances plus any portion of the line of credit reserved to support unexpired letters of credit plus the amount of the requested advance before an advance will be given. In addition, all advances must be used for working capital. At December 31, 2003, there were no amounts outstanding under this line of credit.

		The Identix Line of Credit agreement contains financial, operating and reporting covenants. At December 31, 2003, the Company was in compliance with all covenants.

5.		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:

		Options and warrants to purchase 8,711,000 and 9,690,000 shares of common stock were outstanding at December 31, 2003 and 2002, respectively, but were not included in the computation of diluted net loss per share as their effect was anti-dilutive. Also 234,558 shares of convertible preferred stock were outstanding at December 31, 2003 and 2002. Such shares of preferred stock are convertible into 236,000 shares of the Company’s common stock, but were not included in the computation of diluted net loss per share as their effect was anti-dilutive.

8.		Comprehensive Loss

		Comprehensive loss for the three and six months ended December 31, 2003, was $5,555,000 and $10,206,000 compared to a loss of $7,821,000 and $21,763,000 for the same periods 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.

9.		Reportable Segment Data

		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.

11.		Indemnification Arrangements and Product Warranties

		As part of the Visionics acquisition in June 2002, the Company undertook, and assumed from Visionics, obligations to indemnify the officers and directors of the acquired company for certain events or occurrences while the officer or director served in such capacity. The maximum potential amount of future payments the Company could be required to make under this indemnification obligation is unlimited; however, the Company purchased a directors’ and officers’ insurance policy to cover former directors and officers of Visionics that provides coverage until June 25, 2007 and may enable Identix to recover a portion of any future amounts paid. Assuming the applicability of the coverage and the willingness of the insurer to assume coverage and subject to certain retention, loss limits and other policy provisions and except as provided below, the Company believes the estimated fair value of the indemnification obligations to Visionics’ directors and officers is not material. However, no assurances can be given that the covering insurers will not attempt to dispute the validity, applicability or amount of coverage without expensive and time-consuming litigation against the insurers. As of October 30, 2003, the Company also entered into indemnification agreements with its then current directors and executive officers. The maximum potential amount of future payments the Company could be required to make under these indemnification obligations is unlimited; however, the Company purchased certain directors’ and officers’ insurance policies, effective August 19, 2003 and September 21, 2003, respectively, to cover its directors and officers, and such policies may enable Identix to recover a portion of any covered claims under the agreements. Assuming the applicability of the coverage and the willingness of the insurer to assume coverage and subject to certain retention, loss limits and other policy provisions, the Company believes the estimated fair value of the indemnification obligations to its directors and officers is not material. However, no assurances can be given that the covering insurers will not attempt to dispute the validity, applicability or amount of coverage without expensive and time-consuming litigation against the insurers.

		From time to time, the Company agrees to indemnify its customers against liability if the Company’s products infringe a third party’s intellectual property rights. As of December 31, 2003, the Company was not subject to any pending litigation alleging that the Company’s products infringe the intellectual property rights of any third parties.

		The Company offers a warranty on various products and services. The Company estimates the costs that may be incurred under its warranties and records a liability in the amount of such costs at the time the product is sold. Factors that affect the Company’s warranty liability include the number of units sold, historical and anticipated rates of warranty claims and cost per claim. The Company periodically assesses the adequacy of its recorded warranty liabilities and adjusts the amounts as necessary. The amount of the reserve recorded is equal to the costs to repair or otherwise satisfy the claim. The following table presents changes in the Company’s warranty liability during the first six months of fiscal 2004:

12.		Recent Accounting Pronouncements

		In January 2003, the FASB issued FASB Interpretation No. (FIN) 46, “Consolidation of Variable Interest Entities.” FIN 46 addresses the requirements for business enterprises to consolidate related entities, for which they do not have controlling interests through voting or other rights, if they are determined to be the primary beneficiary as a result of variable economic interests. FIN 46 provides guidance for determining the primary beneficiary for entities with multiple economic interests. FIN 46 is effective at the time of investment for interests obtained in a variable economic entity after January 31, 2003. Beginning in the Company’s third quarter of fiscal year 2004, FIN 46, as amended, will be applied to interests in variable interest entities (VIE’s) acquired prior to February 1, 2003. Management believes the adoption of FIN 46 will not have a material impact on the Company’s consolidated results of operations, financial position, or cash flows.

13.		Subsequent Events

		Mr. Milton E. Cooper, a member of the Company’s Board of Directors since 2001, was appointed Chairman of the Board effective February 1, 2004. Concurrent with such appointment, Mr. Robert McCashin, the former Chairman of the Board of Directors, retired and resigned from the Board of Directors as a result of his resignation Mr. McCashin’s agreement entitled him to receive payment of approximately $890,000 of which approximately $400,000 was previously accrued. As a result the Company will record a charge to the statement of operations for approximately $490,000 during the three months ended March 31, 2004.

•		the cost, performance and reliability of our products and services and the products and services of our 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 information collected;

•		public perceptions regarding the confidentiality of private information;

•		proposed or enacted legislation related to privacy of information;

•		customers’ satisfaction with our products and services; and

•		marketing efforts and publicity regarding these products and services.

•		the lack of availability of government funds;

•		reduced demand for products and services caused, for example, 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;

•		protests of federal, state or local government contract awards by competitors;

•		unforeseen legal expenses, including litigation and/or administrative protest costs;

•		expenses related to acquisitions or mergers;

•		impairment charges arising out of our assessments of goodwill and intangibles;

•		other one-time financial charges;

•		the lack of availability or increase in cost of key components and subassemblies; and

•		the inability to timely and successfully complete development of complex designs and components, or manufacture in volume and install certain of our products.

	•		our merger with Visionics ultimately proves to be unsuccessful;

	•		the combined company is unable to successfully market its products and services to both companies’ customers;

	•		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.

	•		regional economic or political 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

	•		involuntary renegotiations of contracts with foreign governments.

	•		exposure to unknown liabilities of acquired companies;

	•		higher than anticipated acquisition costs and expenses;

	•		effects of costs and expenses of acquiring and integrating new businesses on our operating results and financial condition;

	•		the difficulty and expense of assimilating the operations and personnel of the companies;

	•		disruption of our ongoing business;

	•		diversion of management time and attention;

	•		failure to maximize our financial and strategic position by the successful incorporation of acquired technology;

	•		the maintenance of uniform standards, controls, procedures and policies;

	•		loss of key employees and customers as a result of changes in management;

	•		the incurrence of amortization expenses;

	•		incurring impairment charges arising out of our assessments of goodwill and intangibles and;

	•		possible dilution to our stockholders.

	(a)		The Annual Meeting of Shareholders was held on October 30, 2003.

	(b)		All Board of Directors nominees referenced in Item 4 (c) below were elected at the Annual Meeting of Shareholders on October 30, 2003.

	(c)		The matters voted upon and the results of the voting were as follows:

	(b)		A Form 8-K was filed on October 30, 2003, which contained the Company’s press release announcing its the financial results for the quarter ending September 30, 2003.

	(c)		A Form 8-K was filed on December 23, 2003, which disclosed material non-public information regarding the Company’s anticipated results of operations for the quarter ending December 31, 2003.