SECURITIES AND EXCHANGE COMMISSION

(Mark one)

For the quarterly period ended March 31, 2004 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

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:

88,208,078 shares of Common Stock
as of April 30, 2004

1

IDENTIX INCORPORATED

INDEX

2

IDENTIX INCORPORATED

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

3

IDENTIX INCORPORATED

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

4

IDENTIX INCORPORATED

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

5

IDENTIX INCORPORATED

		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 nine months ended March 31, 2004 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.
		On February 13, 2004, the Company closed on its sale of its wholly owned subsidiary Identix Public Sector (IPS). The results of operations for this subsidiary are included in the discontinued operations section of the statements of operations for all periods presented. The balance sheet as of March 31, 2004, excludes all assets and liabilities, which were sold as part of this transaction. Unless otherwise noted, disclosures of revenues and expenses in the Notes to Condensed Consolidated Financial Statements refer to continuing operations only.

		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 biometric system 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. Revenue related to equipment sales that require installation is deferred until installation is complete and customer acceptance has been obtained. Revenue related to 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. 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.

6

		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.
		Revenues related to IIS which was acquired in February 2004 (see Note 5) are recognized as services are performed.

		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 plans been recognized based 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:

On February 13, 2004, the Company consummated the sale of Identix Public Sector (IPS) to Alion Science and Technology Corporation (Alion). In the third quarter of 2004, the Company recognized income from discontinued operations of $4,884,000 of which $5,934,000 is attributable to the gain on the sale of IPS and $1,050,000 is attributable to a loss on discontinued operations. These operations are presented in the Company’s Consolidated Statements of Operations as discontinued operations. Under the terms of the agreement, upon closing Alion paid the Company $8,850,000 million in cash. This amount is shown as proceeds from sale of IPS, net of transaction costs, in the Consolidated Statement of Cash Flows for the nine months ended March 31, 2004. In addition, the Company is entitled to payments totaling approximately $1,700,000 during the next several months. The terms of the sale

7

		include the potential for additional future payments to the Company of up to $500,000 pending satisfaction of certain conditions. The terms of the sale also include an obligation on the part of the Company to indemnify Alion against liabilities, including for breaches of representations and warranties made by the Company in the sales agreement, for an amount not to exceed $2,125,000.
		The following table represents the summarized results for the discontinued operations:

*

These periods represent activity through February 13, 2004 as the disposition of IPS was consummated on that day.

		On February 23, 2004, the Company acquired the remaining 50% ownership of Sylvan Identix Fingerprint Centers, LLC (SIFC) from Sylvan Learning Centers, Inc. (Sylvan). SIFC is now known as Identix Identification services (IIS). The Company had previously held a 50% interest in this joint venture and accounted for its investment under the equity method of accounting. The complete results of operations of IIS have been included in the Company’s consolidated statement of operations since February 23, 2004. IIS provides services to corporations and government agencies whereby IIS captures fingerprints and transmits the data for applicant background checks. IIS maintains a network of Identix livescan systems at processing centers across the country where certified technicians process applicants. In consideration for Sylvan’s 50% interest in the joint venture, Identix paid Sylvan $875,000 in cash. The purchase price was allocated primarily to net current assets and other intangible assets, with the remainder allocated to goodwill. The proforma impact of the IIS acquisition was not significant to the results of the Company for the nine months ended March 31, 2004.
		On March 10, 2004, the Company acquired certain technology from Delean Vision Worldwide Inc. (Delean). This transaction was accounted for as a purchase of assets. The technology acquired was biometric recognition algorithms known as skin texture analysis (STA) that allows a unique characteristic of the skin structure known as a “skinprint” to be used to identify individuals. In exchange for the technology and intellectual property rights, the Company issued to Delean 675,000 shares of Identix common stock with a value of $3,423,000. The purchase price was allocated to intangible assets. The Company also issued Delean a warrant with contingent future vesting rights to purchase up to 800,000 shares of Identix common stock at $4.70 per share. The warrant expires in March 2014 and vests based upon the successful issuance of certain patents with the US government related to the technology acquired from Delean. The fair value of any warrants which vest will be recorded at the time of vesting.

		The Company financed its operations during the nine months ended March 31, 2004 primarily from cash provided by its working capital. As of March 31, 2004, the Company’s principal sources of liquidity consisted of $44,623,000 of working capital including $45,383,000 in cash and cash equivalents and short-term marketable securities.
		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 March 31, 2004. 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 March 31, 2004, there were no amounts outstanding under this line of credit.
		The Identix Line of Credit agreement contains financial, operating and reporting covenants. At March 31, 2004, the Company was in compliance with all covenants.

8

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:

During the nine months ended March 31, 2004 and 2003, the Company recorded provisions for excess and obsolete inventory items in the amount of $3,315,000 and $2,158,000, respectively.

Special charges (such as restructuring and acquisition related charges) result from unique facts and circumstances that likely will not recur with similar materiality or impact on continuing operations. Special charges consisted of the following for the periods presented:

In June 2002, the Company merged with Visionics and in connection with the merger recorded special charges of $18,798,000 related to the merger 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:

		Fiscal 2004
		During the three months ended March 31, 2004, the Company incurred approximately $2,115,000 in special charges. These charges consisted of $749,000 for the value of shares of Company common stock issued to certain former Sylvan

9

		Identix Fingerprint Center (SIFC) employees in connection with the acquisition of 100% of SIFC, $506,000 related to payments made under the former Chairman of the Board’s employment agreement related to his retirement in February 2004, $610,000 related to an increase in the reserve on the sublease of the Company’s Northern California facilities and $250,000 related to a reduction in force in February 2004. The additional sublease reserve and the reduction in force expenses are reflected in the restructuring schedule below.
		The following table represents a summary of restructuring and other merger related charges between June 30, 2003 and March 31, 2004:

		The additional severance and benefits expense of $250,000 recorded in the quarter ending March 31, 2004 is the result of a reduction in force where the Company eliminated 6% of the Company’s workforce. The increase of lease exit costs by $610,000 reflects an updated assessment by management of what the Company will recover under the current conditions of the Northern California real estate market. The restructuring liability is classified in the consolidated balance sheet based on the anticipated timing of the respective payment. As of March 31, 2004, $6,198,000 of the above restructuring liability is classified as long-term. Management currently believes that of the $366,000 accrued for severance and benefits, $255,000 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 nine months ended March 31, 2003, the Company recorded special charges related to the merger totaling $1,272,000 and $9,577,000, respectively. For the three months ended March 31, 2003 these costs consisted of $489,000 in relocation costs for Identix employees and facilities, $176,000 associated with the disposal of fixed assets, $476,000 increase in the reserve related to lease exit costs and $131,000 related to employees with extended terminations to assist in the integration. Such costs were expensed as incurred. For the nine months ended March 31, 2003, these costs consisted of $2,530,000 in relocation costs, $370,000 associated with the disposal of fixed assets, $4,541,000 related to lease exit costs and $2,136,000 related to employees with extended terminations to assist in the integration. Such costs were expensed as incurred. For the three months ended March 31, 2003, $295,000 and $3,879,000 of special charges related to the merger are included in income (loss) from discontinued operations in the Company’s Consolidated Statement of Operations.
		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.

		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 8,578,000 and 9,475,000 shares of common stock were outstanding at March 31, 2004 and 2003, 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 March 31, 2003. Such shares of preferred stock are convertible into 234,558 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. The convertible preferred stock was converted to common stock

10

during the three months ended March 31, 2004.

Comprehensive loss for the three and nine months ended March 31, 2004, was $3,531,000 and $13,737,000 compared to a loss of $6,498,000 and $28,261,000 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.

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. Due to the disposition of IPS and the acquisition of 100% ownership of Identix Identification Services (formerly SIFC), the business segments of Identix have correspondingly been changed from previously reported periods to reflect this activity. Revenues are attributed to the reportable segment that is responsible for generating the revenue and the direct and indirect costs incurred are similarly assigned.

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

11

		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.
		The terms of the sale of IPS, include an obligation on the part of the Company to indemnify Alion against liabilities, including for breaches of representations and warranties made by the Company in the sales agreement, for an amount not to exceed $2,125,000.
		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 March 31, 2004, 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 nine months of fiscal 2004:

Discussion of legal matters is cross-referenced to this Form 10-Q, Part II, Item 1, Legal Proceedings, and should be considered an integral part of the Consolidated Financial Statements and Notes.

12

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 third quarter of fiscal year 2004 was a quarter marked by significant positive and strategic change at Identix. The significant events that occurred were the disposition of Identix’ wholly owned subsidiary Identix Public Sector (IPS), the acquisition of technology from Delean Vision Worldwide, Inc., the acquisition of 100% ownership of Sylvan Identix Fingerprint Centers, LLC now renamed Identix Identification Services (IIS), and the streamlining of Identix’ operations with a reduction in force plan that reduced its total workforce by six percent. The Company believes these actions allow Identix to fully focus on it core biometric business while enhancing its biometric technology, expanding access to the commercial and civil markets while at the same time, streamlining its operations.
		On February 13, 2004, the Company consummated the sale of Identix Public Sector (IPS) to Alion Science and Technology Corporation (Alion). In the third quarter of 2004, the Company recognized income from discontinued operations of $4,884,000 of which $5,934,000 is attributable to the gain on the sale of IPS and $1,050,000 is attributable to a loss on discontinued operations. These operations are presented in the Company’s Consolidated Statements of Operations as discontinued operations. Under the terms of the agreement, upon closing Alion paid the Company $8,850,000 million in cash. This amount is shown as proceeds from sale of businesses, net of transaction costs, in the Consolidated Statement of Cash Flows for the nine months ended March 31, 2004. In addition, the Company is entitled to payments totaling approximately $1,700,000 during the next several months. The terms of the sale include the potential for additional future payments to the Company of up to $500,000 pending satisfaction of certain conditions. The terms of the sale also include an obligation on the part of the Company to indemnify Alion against liabilities, including for breaches of representations and warranties made by the Company in the sales agreement, for an amount not to exceed $2,125,000.
		On February 23, 2004, the Company acquired the remaining 50% ownership of Sylvan Identix fingerprint Centers, LLC now known as Identix Identification services (IIS). IIS provides services to corporations and government agencies whereby IIS captures fingerprints and transmits the data for applicant background checks. IIS maintains a network of Identix livescan systems at processing centers across the country where certified technicians process applicants. In consideration for the remaining 50% interest in the joint venture, Identix paid Sylvan Learning Centers, Inc. $875,000 in cash. The proforma impact of the IIS acquisition was not significant to the results of the Company for the nine months ended March 31, 2004.
		On February 26, 2004, the Company announced that it had streamlined its operations with a reduction in force of approximately 30 full time equivalent job positions, or approximately six percent of its workforce. The Company recognized approximately $250,000 in expense related to reduction in force severance costs.
		Identix acquired certain technology from Delean Vision Worldwide Inc. (Delean) on March 10, 2004. The technology acquired was biometric recognition algorithms known as skin texture analysis (STA) that allows a unique characteristic of the skin structure known as a “skinprint” to be used to identify individuals. In exchange for the technology and intellectual property rights of Delean, the Company issued 675,000 shares of Identix common stock and a warrant with contingent future vesting rights in favor of Delean to purchase up to 800,000 shares of Identix common stock at $4.70 per share. The warrant vests upon the successful issuance of certain patents with the US government related to the technology acquired from Delean. The fair value of any warrants which vest will be recorded at the time of vesting.

13

		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.
		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 March 31, 2004, 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 nine months ended March 31, 2004 were $14,491,000 and $39,014,000 compared to $12,239,000 and $39,005,000 for the same periods in the prior fiscal year. The vast majority of the Company’s revenues relate to its biometric systems segment. The Company had one customer, an agency of the U.S. Government that accounted for 7% of the total revenue for the three and nine months ended March 31, 2004, compared to 9% and 8% for the same periods in the prior fiscal year. The 18% increase in revenue when comparing the third quarter of fiscal year 2003 to the third quarter of fiscal year 2004 is primarily the result of a large live scan order that was recognized as revenue during the three months ended March 31, 2004. In addition, the Company recognized revenue from several large professional service contracts that were in place in the three months ended March 31, 2004 that were not present in the same period in the prior fiscal year. Results for the three months ended March 31, 2004 include $728,000 of revenue generated by IIS. The Company acquired IIS on February 23, 2004. The complete results of IIS have been included in the Company’s consolidated statement of operations since February 23, 2004.
		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 $2,817,000 and $4,905,000 or 19% and 13% of the Company’s revenues for the three and nine months ended March 31, 2004, respectively, compared to $901,000 and $2,930,000 or 7% and 8% of the Company’s biometric system revenues for the same periods in the prior fiscal year. The increase for both periods from fiscal year 2003 to fiscal year 2004 are primarily the result of two large international orders occurring during the three months ending March 31, 2004, one for the Company’s livescan systems and the other for contracted custom development work. In addition, during the fiscal year 2004 to date there was increased revenue from smaller but more numerous international orders that contributed to the increase seen above. 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.

14

		Gross margin on revenues was 20% and 31% for the three and nine months ended March 31, 2004 and 40% and 33% for the same periods of the prior fiscal year. The decrease in gross margin for the three and nine months ended March 31, 2004, is primarily the result of a provision for excess and obsolete inventory for $2,600,000 that occurred in the three months ended March 31, 2004. The majority of this adjustment was to reserve for inventory items that will be used to support products that the Company no longer manufactures but the Company is still obligated to provide services. For the nine months ended March 31, 2004 and 2003 the provisions for excess and obsolete inventory were $3,315,000 and $2,158,000 respectively. 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.
		Research, Development and Engineering
		Research, development and engineering expenses were $2,184,000 and $7,207,000 or 15% and 18% of revenues for the three and nine months ended March 31, 2004 compared to $2,613,000 and $8,407,000 or 21% and 22% of product revenues for the same periods in the prior fiscal year. The decrease of $1,200,000 in research and development expense in the nine month period in fiscal year 2004 from the nine month period in fiscal year 2003, is the result of several development projects ongoing in 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 for research and development, which has resulted in an additional reduction of research and development expense year over year.
		Marketing and Selling
		Marketing and selling expenses were $2,746,000 and $8,238,000 or 19% and 21% of total revenues for the three and nine months ended March 31, 2004, compared to $3,032,000 and $9,570,000 or 25% of total revenues for the both periods in the prior fiscal year. The decrease in marketing and selling expenses for the nine months ended March 31, 2004 as expressed in dollars, was driven primarily by a significant reduction in bad debt expense for the first and second quarters of fiscal year 2004. The reduction of bad debt expense totaling $625,000 in the nine months ended March 31, 2004 was due to the cash collections of several large accounts receivable which had been in dispute for more than one year and had been previously fully reserved consistent with Company policy.
		General and Administrative
		General and administrative expenses were $3,166,000 and $9,880,000 for the three and nine months ended March 31, 2004, compared to $3,761,000 and $10,542,000 for the same periods in the prior fiscal year. The decrease in general and administrative expense for the three and nine months ended March 31, 2004 was due primarily to the vacancy of two senior level finance positions, and a decrease in stock-based compensation expense of $413,000 and $833,000 when comparing the three and nine months ended March 31, 2004 to the same periods in the prior fiscal year. The decrease in the stock-based compensation expense is driven by a continued decline in the number of unvested options from period to period which originally generated the deferred compensation. These decreases on a year to date basis, were partially offset by certain professional services and increased insurance costs.
		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 $1,419,000 and $4,176,000 for the three and nine months ended March 31, 2004 compared to $1,346,000 and $4,006,000 for the same periods in the prior fiscal year.

15

Special Charges

Special charges (such as restructuring and acquisition related charges) result from unique facts and circumstances that likely will not recur with similar materiality or impact on continuing operations. Special charges consisted of the following for the periods presented:

In June 2002, the Company merged with Visionics and in connection with the merger recorded special charges of $18,798,000 related to the merger 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:

Fiscal 2004

During the three months ended March 31, 2004, the Company incurred approximately $2,115,000 in special charges. These charges consisted of $749,000 for the value of shares of Company common stock issued to certain former Sylvan Identix Fingerprint Center (SIFC) employees in connection with the acquisition of 100% of SIFC, $506,000 related to payments made under the former Chairman of the Board’s employment agreement related to his retirement in February 2004, $610,000 related to an increase in the reserve on the sublease of the Company’s Northern California facilities and $250,000 related to a reduction in force in February 2004. The additional sublease reserve and the reduction in force expenses are reflected in the restructuring schedule below.

16

The following table represents a summary of restructuring and other merger related charges between June 30, 2003 and March 31, 2004:

The additional severance and benefits expense of $250,000 recorded in the quarter ending March 31, 2004 is the result of a reduction in force where the Company eliminated 6% of the Company’s workforce. The increase of lease exit costs by $610,000 reflects an updated assessment by management of what the Company will recover under the current conditions of the Northern California real estate market. The restructuring liability is classified in the consolidated balance sheet based on the anticipated timing of the respective payment. As of March 31, 2004, $6,198,000 of the above restructuring liability is classified as long-term. Management currently believes that of the $366,000 accrued for severance and benefits, $255,000 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 nine months ended March 31, 2003, the Company recorded special charges related to the merger totaling $1,272,000 and $9,577,000, respectively. For the three months ended March 31, 2003 these costs consisted of $489,000 in relocation costs for Identix employees and facilities, $176,000 associated with the disposal of fixed assets, $476,000 increase in the reserve related to lease exit costs and $131,000 related to employees with extended terminations to assist in the integration. Such costs were expensed as incurred. For the nine months ended March 31, 2003, these costs consisted of $2,530,000 in relocation costs, $370,000 associated with the disposal of fixed assets, $4,541,000 related to lease exit costs and $2,136,000 related to employees with extended terminations to assist in the integration. Such costs were expensed as incurred. For the three months ended March 31, 2003, $295,000 and $3,879,000 of special charges related to the merger are included in income (loss) from discontinued operations in the Company’s Consolidated Statement of Operations.

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.

Interest and Other Income, net

For the three and nine months ended March 31, 2004, interest and other income, net were $304,000 and $978,000 respectively, compared to $378,000 and $1,404,000 for the same periods in the prior fiscal year. The decrease is primarily the result of lower cash balances in the first six months of fiscal year 2004 and realized gains on investments of $208,000 that occurred in the first nine months of fiscal year 2003 that did not occur in fiscal year 2004.

Interest Expense

Interest expense was $7,000 for the nine months ended March 31, 2004, compared to $10,000 for the same period in the prior fiscal year. There have been no borrowings under the Company’s line of credit during the nine months ended March 31, 2004. 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 $28,000 for the three and nine months ended March

17

31, 2004 and a provision of $146,000 and $159,000 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 Centers, LLC (SIFC) through February 23, 2004 when Identix acquired the remaining 50% interest in SIFC. For the three and nine months ended March 31, 2004, the Company’s equity interest in the joint venture loss was $55,000 and $302,000. For the same periods in the prior fiscal year the Company’s equity interest in the joint venture loss was $148,000 and $196,000.

Discontinued Operations

On February 13, 2004, the Company consummated the sale of Identix Public Sector (IPS) to Alion Science and Technology Corporation (Alion). In the third quarter of 2004, the Company recognized income from discontinued operations of $4,884,000 of which $5,934,000 is attributable to the gain on the sale of IPS and $1,050,000 is attributable to a loss on discontinued operations. These operations are presented in the Company’s Consolidated Statements of Operations as discontinued operations. Under the terms of the agreement, upon closing Alion paid the Company $8,850,000 million in cash. This amount is shown as proceeds from sale of businesses, net of transaction costs, in the Consolidated Statement of Cash Flows for the nine months ended March 31, 2004. In addition, the Company is entitled to payments totaling approximately $1,700,000 during the next several months. The terms of the sale include the potential for additional future payments to the Company of up to $500,000 pending satisfaction of certain conditions. During the three months ended March 31, 2004 and 2003, the Company recorded a loss from discontinued operations of $1,050,000 and income from discontinuing operations of $257,000, respectively. The Company recorded a loss of $809,000 and $3,810,000 from discontinuing operations during nine months ended March 31, 2004 and 2003 respectively. The historical consolidated results, including results from the prior periods in fiscal year 2004 and 2003 have been restated to reflect the divestiture of IPS.

The following table represents the summarized results for the discontinued operations:

* These periods represent activity through February 13, 2004 as the disposition of IPS was consummated on that day.

Liquidity and Capital Resources

The Company financed its operations during the nine months ended March 31, 2004, primarily from cash provided by its working capital. As of March 31, 2004, the Company’s principal sources of liquidity consisted of $44,623,000 of working capital including $45,383,000 in cash and cash equivalents and short-term marketable securities.

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 March 31, 2004. 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 March 31, 2004, there were no amounts outstanding under this line of credit.

The Identix Line of Credit agreement contains financial, operating and reporting covenants. At March 31, 2004, the Company was in compliance with all covenants.

For the nine months ended March 31, 2004, $8,469,000 of was used in operating and investing activities that was offset by the cash generated from investing and financing activities of $8,273,000 and $1,410,000 respectively. The cash that was generated

18

from investing activities primarily resulted from sale of the Company’s IPS subsidiary as well the acquisition of 100% interest in SIFC now known as Identix Identification Services (IIS). In addition, the cash generated from financing activities resulted primarily from the exercise of stock options. The net result of the Company’s cash flow activities resulted in $1,214,000 of cash and cash equivalents being generated. The Company used $20,412,000 of cash and cash equivalents during the nine months ended March 31, 2003. For the nine months ended March 31, 2003, operating activities used $21,645,000 that was partially offset by the Company’s financing activities that generated cash flows of $1,705,000. 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 currently has a commitment with a certain supplier to purchase by December 2004, approximately $1,000,000 of parts for use in the Company’s livescan systems. 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.

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

Included in the above future minimum payments is $8,823,000 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 March 31, 2003 and 2004. The Company is attempting to sublease the unoccupied facilities.

While the Company believes that existing working capital will be adequate to fund the Company’s current cash requirements for at least the next twelve months, the Company may need to raise additional debt or equity financing in the future. The Company may not be able to obtain additional debt or equity financing on favorable terms that are not excessively dilutive to existing stockholders. 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.

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 revenues are primarily 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;

19

•		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 similar 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, have increased performance or functionality or 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 significant amount of 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.

Additionally, public agency contracts are frequently awarded only after formal competitive bidding processes, which are often protracted, and typically impose provisions that permit cancellation in the event that funds are unavailable to the public agency. In some cases, unsuccessful bidders for public agency contracts are provided the opportunity to formally protest certain contract awards through various agency, administrative and judicial channels. The protest process may delay a successful bidder’s contract performance for a number of weeks, months or more, or result in the cancellation of the contract award entirely. 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 third party protests. For example, in October 2003, the Company announced that is had been awarded a Blanket Purchase Order (“BPO”) from the Department of Homeland Security (“DHS”) with an estimated value of approximately $27 million. The award was subsequently the subject of a formal protest by one

20

of our competitors who had been an unsuccessful participant in the bidding process for the BPO. In response to the protest, DHS decided to re-evaluate all responsible technical and price proposals previously submitted in response to the Governments RFQ and Source Selection Plan for the BPO. DHS also sought and obtained dismissal of the protest by the U.S. General Accounting Office and issued a stop work order, meaning procurement of Identix technology under the BPO would be held in abeyance until the re-evaluation was completed. On March 10, 2004, DHS notified Identix that DHS had completed its re-evaluation and re-confirmed Identix as the sole recipient of the BPO. DHS also immediately released the stop work order. Subsequently, the same competitor that had previously filed the original protest filed a second protest, and in response to the second protest, the Government issued a new stop work order, meaning procurement of technology under the BPO will be held in abeyance until the protest is resolved. Based on all available information, Identix continues to believe it will prevail and that its products and services will again be proven to represent the “best overall value” to the Government. However, there can be no assurance that the protest will be resolved in Identix’ favor, or that any additional affirmation of the previous BPO award to Identix will not be subject to further protest or challenge by unsuccessful third parties. Further substantial delays in DHS’ procurement of our technology under the BPO could result in adverse revenue volatility, making management of inventory levels, cash flow and profitability inherently difficult. Outright loss of the BPO award to Identix through the protest process or otherwise could have a material adverse effect on our financial results and stock price.

Similarly, state and local government agency contracts may be contingent upon availability of matching funds from federal or state entities. State and local 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.

As a result of the purchase by a buyer of our wholly-owned subsidiary, Identix Public Sector, Inc. (“IPS”) in February 2004, the buyer also now owns all the public contracts of IPS, including a GSA Multiple Award IT-70 schedule contract related to our product business. We entered into a reseller agreement with such third party concurrently with the closing of the sale of IPS, and we continue to sell our products through such reseller’s IT 70 Schedule. Such contract , now held by our reseller, is subject to future audit, and any material adverse findings or adjustments arising out of such audits may have a material adverse effect on ability to sell our products through the reseller’s contract, which could in turn materially adversely affect our business, financial condition and results of operations. Furthermore, the current IT-70 contract held by our reseller expires June 30, 2004. While efforts are underway by the reseller to obtain an extension to the contract term, the failure to obtain such extension may have a material adverse effect on ability to sell our products through the reseller’s contract, which could in turn materially adversely affect our business, financial condition and results of operations. While the Company is in the process of applying for a new IT-70 Schedule contract, there can be no assurance that we will successfully obtain such contract on a timely basis. Any failure to obtain such contract, or any significant delays we experience in obtaining such contract, could have a material adverse effect on our business operations, financial results and stock price.

The General Services Administration has recently completed its pre-award audit for the renewal of our GSA Multiple Award Schedule contract related to our certain of our products and services. The end result of the pre-award audit process was favorable to Identix, with no adverse findings or adjustments arising out of the process. The Company expects to undergo an additional audit of this contract in the near term, and revenue generated from this contract may be subject to future adjustment by negotiation with representatives of the government agencies. While we believe that the results of any future audits will have no material effect on our financial results or business operations, any material adverse findings or adjustments arising out of such audits may have a material adverse effect on our business, financial condition and results of operations.

Acquisitions and dispositions of companies, assets or technologies may result in disruptions to our business.

As part of our business roadmap, we may from time to time acquire businesses, assets or technologies relating to, or complementary to, our current strategies or operations, and we may also divest certain businesses or assets that we consider non-complementary to our current strategies or operations.

In March 2004, we acquired certain technology and intellectual property rights of Delean Vision Worldwide, Inc. In February 2004, we acquired the remaining 50% percent interest in Sylvan Identix Fingerprint Centers, LLC (“SIFC”) that we didn’t already own. We subsequently re-named SIFC “Identix Identification Services, LLC”. In February 2004, we sold our wholly owned subsidiary, Identix Public Sector, Inc., whose business principally consisted of providing project management and facilities engineering services to government agencies. We acquired certain proprietary software and source code assets from a third party in October 2002. We merged with Visionics in June 2002 and acquired Identicator Technology, Inc. in fiscal 1999. We also acquired one company in fiscal 1998 and two companies in fiscal 1996. These and any other acquisitions, mergers and divestitures by Identix are and will be accompanied by the risks commonly encountered in such transactions. These risks include, among other things:

•		exposure to unknown liabilities of acquired companies or assets;
•		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;
•		effects of consolidated revenue loss associated with dispositions of material subsidiaries or assets;
•		effects of costs and expenses of integrating and introducing new technologies;
•		the difficulty and expense of assimilating the operations and personnel of the companies;
•		disruption of our ongoing business;

21

•		diversion of management time and attention;
•		failure to maximize our financial and strategic position by the successful incorporation of acquired technology;
•		failure to realize the potential of acquired technologies, complete product development, or properly obtain or secure appropriate protection of intellectual property rights;
•		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.

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 by us or by 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.

22

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.

In connection with the Visionics merger, we recorded a substantial amount of goodwill. Generally accepted accounting principles requires that goodwill be tested for impairment at least annually and a non-cash charge to earnings must be recognized n 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 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, and the continuing threat of global terrorism, have increased financial expectations that may not materialize.

The September 11, 2001 terrorist attacks, and continuing concerns about global terrorism, 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 in Iraq, and the post-war 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 will be adequate to fund our operating cash requirements for at least the next 12 months, we may need to raise additional debt or equity financing in the future, which may not be available to us even if we are 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 could have a material adverse effect on our financial performance and stock price and require us to implement certain cost reduction initiatives resulting in the curtailment of our operations.

23

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 OEMs, 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 nine months ended March 31, 2004, we derived approximately 19% and 13% 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;

24

•		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.

Two 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 March 31, 2004, the State of Wisconsin Investment Board and Kern Capital Management LLC owned approximately 9% 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.

25

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 effect 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 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 effect 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 cost reductions or effectively provide for our growth.

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 our key employees or a sufficient number to execute our plans, nor can there be any assurance 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 effect 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.

26

     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 1. Legal Proceedings
		On February 5, 2003, Roger Benson, an individual, filed a lawsuit seeking unspecified damages against the Company, Digital Biometrics, Inc. (“DBI”), and Visionics Corporation in California Superior Court, alleging that in 1998 he was issued a duplicate electronic fingerprint number that was also held by a convicted felon. He alleges that the fingerprint number was generated by a live scan system manufactured by DBI and operated by a Sheriff’s office in the State of Oregon. The lawsuit also alleges injuries from a 43-day incarceration after the plaintiff’s identity was allegedly mistaken for that of the felon because of the duplicate fingerprint number. The complaint alleges liability under strict product liability, failure to warn, breach of implied warranty, negligence, and unfair business practices, among other theories of liability. On December 2, 2003, the court granted the Company’s motion for judgment on the pleadings, dismissing all of the plaintiff’s causes of action and granting leave to amend. The plaintiff filed amended complaints on January 14, 2004, and January 30, 2004. Additional individual plaintiffs were added to the amended complaint and the State of Oregon and the State of California, among others, were added as defendants. On May 11, 2004, the Court denied the Company’s motion to dismiss. While the case is still in early stages of discovery, based on currently available information, the Company believes that the issuance of any duplicate fingerprint numbers was not the result of any design, manufacturing or product defect or malfunction, or any other error, omission or fault on the part the Company or affiliated defendants. The Company intends to vigorously defend this lawsuit.

		Item 2. Changes in Securities, Use of Proceeds and Purchases of Equity Securities
		On March 10, 2004, Identix acquired certain technology from Delean Vision Worldwide Inc. (Delean) by issuing 675,000 shares of common stock and a warrant with contingent future vesting rights in favor of Delean to purchase up to 800,000 shares of common stock at $4.70 per share. The technology acquired was biometric recognition algorithms known as skin texture analysis (STA) that allows a unique characteristic of the skin structure known as a “skinprint” to be used to identify individuals. The warrant vests upon the successful issuance of certain patents with the US government related to the technology acquired from Delean.

27

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

(a)

Exhibits

(b)		A Form 8-K was filed on January 29, 2004, which contained the Company’s press release announcing it’s the financial results for the quarter ending December 31, 2004.
(c)		A Form 8-K was filed on February 13, 2004, which contained the Company’s press release announcing the sale of Identix Public Sector (IPS) a wholly owned subsidiary of Identix.

28

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 May 17, 2004.

29