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SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTION 13

OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2002 or

For the transition period from                  to                 

Commission file number 0-20270

SAFLINK CORPORATION

(Exact name of registrant as specified in its charter)

Registrant’s telephone number, including area code: (425) 278-1100

Securities registered pursuant to Section 12(b) of the Act:

None

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

Common Stock, $.01 par value per share

(Title of Class)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  x    No  ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ¨

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Securities Exchange Act of 1934).  Yes  ¨    No  x

The aggregate market value of the common stock held by non-affiliates of the registrant, based on the last sale price on March 20, 2003, as reported on the OTC Bulletin Board, was approximately $54,955,000(1). The aggregate market value of the common stock held by non-affiliates of the registrant, based on the last sale price on June 28, 2002, as reported on the OTC Bulletin Board, was approximately $32,711,000(1). There were 25,612,558 shares of common stock outstanding as of March 20, 2003.

DOCUMENTS INCORPORATED BY REFERENCE

The information required by Part III of this Report, to the extent not set forth herein, is incorporated herein by reference from the registrant’s definitive proxy statement relating to the registrant’s 2003 annual meeting of stockholders, which definitive proxy statement shall be filed with the Securities and Exchange Commission within 120 days after the end of the fiscal year to which this report relates.

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PART I

Item 1.    Business

Certain statements in this annual report on Form 10-K constitute forward-looking statements, within the meaning of the Private Securities Litigation Reform Act of 1995, that are not historical facts but rather reflect our current expectations concerning future results and events. Words such as “believe,” “expect,” “intend,” “plan,” “anticipate,” “likely,” “will,” “may,” “shall” and similar expressions are intended to identify such forward-looking statements. Such forward-looking statements involve known and unknown risks, uncertainties and other important factors that could cause the actual results, performance or achievements of our company (or entities in which we have interests), or industry results, to differ materially from historical results or future results, performance or achievements expressed or implied by such forward-looking statements.

Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management’s view only as of the date of this annual report on Form 10-K. These forward-looking statements include without limitation statements regarding our expectations and beliefs about the market and industry, our goals, plans, and expectations regarding our products and services and product development, our intentions and strategies regarding customers and customer relationships, our relationships with the software development community, our intent to continue to invest resources in research and development, our intent to develop relationships and strategic alliances, our beliefs regarding the future success of our products and services, our expectations and beliefs regarding competition, competitors, the basis of competition and our ability to compete, our beliefs regarding trademark and copyright protections, our beliefs and expectations regarding infringement claims, our beliefs regarding the development of industry standards, our expectations and beliefs regarding our ability to hire and retain personnel, our beliefs regarding period to period results of operations, our expectations regarding future growth and financial performance, our expectations regarding licensing arrangements and our revenue, our expectations and beliefs regarding revenue and revenue growth, our expectations regarding our strategies and long-term strategic relationships, our expectations regarding defects in products, our expectations regarding fluctuations in revenue and operating results, our beliefs and expectations regarding our existing facilities and the availability of additional space in the future, our intent to use all available funds for the development and the operation of our business and not to declare or pay any common stock cash dividends, our expectations regarding software development costs, our beliefs and expectations regarding our results of operations and financial position, our beliefs regarding estimates in valuing in-process research and development, our intentions and expectations regarding deferred tax assets, our beliefs and expectations regarding liquidity and capital resources and that cash flow from existing operations, existing cash, cash equivalents and short-term investments will be sufficient to meet our cash requirements, and our expectations regarding the impact of recent accounting pronouncements and revenue recognition matters. These statements are subject to risks and uncertainties that could cause actual results and events to differ materially from those anticipated. These risks and uncertainties include without limitation those identified in the section of this annual report on Form 10-K entitled “Risk Factors That May Affect Future Results” below. We undertake no obligation to publicly release the result of any revisions to these forward-looking statements, which may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events, conditions or circumstances.

As used in this annual report on Form 10-K, unless the context otherwise requires, the terms “we,” “us,” “the Company,” and “SAFLINK” refer to SAFLINK Corporation, a Delaware corporation, and its subsidiary.

Overview

We provide cost-effective network security software solutions to protect the safety of information assets and track network access by authorized personnel. We develop software and resell hardware from leading manufacturers of biometric hardware devices. Our products may be used to protect business and personal information and to replace passwords and personal identification numbers (PINS) in order to safeguard and

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simplify access to electronic systems. Biometric technologies identify computer users by electronically capturing a specific biological or behavioral characteristic of that individual, such as a fingerprint or voice or facial feature, and creating a unique digital identifier from that characteristic. Because this process relies on largely unalterable human characteristics, it is both highly secure and highly convenient for the individual seeking access.

The process of identity authentication typically requires that a person present for comparison one or more of the following factors:

Comparison of biological and behavioral characteristics has historically been the most reliable and accurate of the three factors, but has also been the most difficult and costly to implement given the complex nature of enterprise computer systems. However, recent advances in the development of integrated biometric software solutions, reduced cost of biometric devices, and the emergence of recognized industry standards to connect biometric components to applications have reduced the cost of implementing biometrics in commercial environments. We believe that government and private sector organizations will increasingly use this method of identity authentication because of the level of security and user convenience it provides and the reduced cost of password administration associated with such a security system.

Our software products are designed for large-scale and complex computer networks and allow computer users to be identified from various biometric technologies. Our products comply with recognized industry standards, which allows us to integrate a large variety of biometric technologies within a common application environment without costly development related to each technology. Our products also provide our customers with the flexibility to deploy a mixture of different biometric technologies within their network to meet specific user and environmental requirements while providing protection against technology obsolescence since new devices can be added to, or upgraded within, the system without replacing or modifying the underlying biometric network support infrastructure.

In December 1997, SAFLINK and the National Security Agency (NSA) jointly introduced and demonstrated the Human Authentication Application Programming Interface, or HA-API. HA-API was the first definition of a standard way to allow software developers and biometric technology suppliers to build their products using a uniform method for connecting many different biometric devices to computer systems. HA-API was developed by SAFLINK under a contract from the NSA and was subsequently released into the public domain as a proposed biometric interoperability standard. HA-API subsequently evolved into a new standard called BioAPI. BioAPI has recently been recognized by the American National Standard Institute (ANSI), and has been designated as ANSI/INCITS 358 BioAPI. This standard is now being considered for adoption by the International Organization for Standards (ISO) and ballot approval is expected to take place by the end of 2003. One of our employees serves as the elected Chair of the BioAPI Consortium that represents over 100 organizations that have collaborated to develop this new standard. We also support other related standards efforts, including the Common Biometric Exchange File Format (CBEFF) specification and we intend to keep all of our products compliant with these standards as they continue to evolve.

We are positioning and promoting our Secure Authentication Facility, or SAF, brand in conjunction with selected biometric technologies currently available in the marketplace including those from:

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Available Information

We are headquartered at 11911 NE 1st Street, Suite B-304 Bellevue, WA 98005. We file reports with the Securities and Exchange Commission (“SEC”), including annual reports on Form 10-K, quarterly reports on Form 10-Q and other reports from time to time. The public may read and copy any materials we file with the SEC at the SEC’s Public Reference Room at 450 Fifth Street, NW, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. We are an electronic filer and the SEC maintains an Internet site at http://www.sec.gov that contains the reports, proxy and information statements, and other information filed electronically.

Our Internet site is http://www.saflink.com. We make available free of charge, on or through our website, our annual, quarterly and current reports, and any amendments to those reports, as soon as reasonably practicable after electronically filing such reports with the SEC. Information contained on our website is not part of this report.

Market Overview

As computer use migrates towards a networked environment, and our economy shifts towards information as a primary asset, individuals and organizations are becoming more concerned with protecting individual privacy and ensuring the security of information maintained on personal computers, the Internet, and corporate networks. A number of technologies and strategies have been developed to address this concern, including encryption methods, firewalls, intrusion detection tools, access permission systems, passwords, identification cards or tokens, digital certificates, and single sign-on applications. However, the effectiveness of each of these technologies and strategies is dependent upon the most critical and vulnerable component of the security process: positive personal identification and authentication of the individual seeking access.

With the growth of electronic commerce, access points to the Internet and corporate networks (which we sometimes refer to as enterprise networks) have increased significantly, and now include corporate desktops, home PCs, mobile laptops, and hand-held devices. Using passwords as the primary method of verifying the identity of remote users is subject to a number of security weaknesses. Passwords are frequently shared. Passwords are often written down and placed where others can see them. Common passwords like a user’s pet’s name or spouse’s name can be guessed. More complex passwords can be broken in minutes through sophisticated “dictionary” attacks based on tools that are easily available from Internet websites. Disgruntled or unethical employees also account for a large percentage of the increasing incidence of significant financial loss from unauthorized access to electronic data or files. For large organizations, there is also a measurable cost of managing forgotten and expired passwords relating to administration overhead and lost employee productivity.

We believe that a sustainable market is developing for biometric technologies used in information security and data privacy applications. There are several factors that we believe will contribute to the growth of this industry:

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Quantifiable Business Benefits

In addition to replacing passwords with biometrics, our enterprise network security solutions provide a number of powerful benefits for customers regardless of the industry they occupy. At the highest level, our solutions are designed to ensure protection, security, and safety for a company’s computer network, facilities, and intellectual property. Specifically, these benefits include:

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Technical Features and Benefits

Our products also offer a number of technical features and benefits which help administrators, responsible for large-scale enterprise networks, easily deploy our products to their existing user bases and provide effective administration over the long term. Primary features include:

Industry-Specific Value Proposition

While our products may not need to provide features or functionality that are different across industries, it is important that we position them differently to address the unique requirements and business drivers of vertical markets. There are a number of internal and external market drivers which are specific to individual industries. For this reason, we have focused our sales and marketing efforts on the following sectors:

Healthcare

One of the strongest market drivers in the Healthcare industry is a broad series of government regulations, introduced by the Health Insurance Privacy and Accountability Act (HIPAA), designed to protect the privacy of patient data. These regulations specify that each healthcare organization must provide “irrefutable identification”

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of individuals accessing electronic patient information. Since biometric authentication is based on unique physical characteristics, it provides an effective solution to this problem—biometrics cannot be lost, borrowed or stolen. Multi-factor authentication is also a HIPAA requirement, which our products support through integration of unique user IDs, smart cards, tokens and RF badges.

Pharmaceutical Manufacturing

In the pharmaceutical manufacturing business, FDA regulations dictate that individuals who are completing electronic forms relating to the various steps in researching, testing, or manufacturing an FDA regulated product must record their identity through a digital signature for any specific action. On the manufacturing floor, employees have to authenticate as many as 300 times a shift. Not only is this cumbersome, but it takes time. Time, in the pharmaceutical manufacturing business, can be very costly—every day that a company is delayed going to market with a new product can cost the company millions in lost revenue. Since the utilization of biometrics can save time and provide audit trails and proof of identity, our value proposition here is very compelling.

Financial Services

Title V of the Financial Services Modernization Act of 1999 highlights the obligation of financial services institutions to protect the security and confidentiality of customer nonpublic personal information. Our products provide a valuable tool to help these institutions fulfill their obligations to protect information in their databases against unauthorized access. The elimination of passwords can provide banks a higher level of access protection while also providing financial savings by eliminating the management of multiple passwords. In the case of one of our Fortune 100 financial services clients, brokers are accessing as many as 30 applications in a given day, each with a unique username and password. By using biometric authentication and a single sign-on solution, these brokers can now substitute one fingerprint for multiple passwords and improve their productivity while reducing password management costs.

Government

Due in part to the increased recognition of the need for infrastructure security following 9/11, government agencies have been looking for a way to positively verify an individual’s identity. The use of biometric identification is being considered on a number of federal projects as a component of a broader identity management solution, often in conjunction with a smart card.

Interoperability is also a strong requirement in the government sector, since government agencies are often large and must accommodate a variety of individual and environmental requirements. We believe our standards-based approach to supporting multiple biometrics in a common software infrastructure addresses these concerns.

Education

In educational environments, IT administrators face several challenges, including students “borrowing” passwords from other students to surf undesirable Internet sites, delays in starting computer training classes due to password-related problems, and a constantly rotating end-user base. Since a biometric identifier is based on a physical characteristic and cannot be shared, lost, or stolen, it provides a reliable solution to these problems for students needing to access their work assignments and grades over the network.

Products

Our software products support a wide variety of biometric technologies to improve workstation and internal enterprise network security. Instead of being asked for a password, users are prompted for a unique biometric characteristic using any one of a number of biometric technologies. We design software that will work with a

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variety of biometric devices, including fingerprint readers, iris cameras, facial recognition cameras and microphones using speaker verification technology. Our products can be divided into two groups: enterprise network products and stand-alone workstation products.

Enterprise Products:

Our enterprise products that are designed to operate in the computer network environment of large organizations include:

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Standalone Workstation Product:

Marketing and Distribution

We use both direct and indirect sales and marketing to market our products and services. Our sales staff focuses on selling our products to end-user customers primarily within the sectors of healthcare, pharmaceuticals, education, government, and financial services in North America. Our business development staff trains and supports our indirect distribution channel partners, who resell our products worldwide.

We market our products to potential customers across a wide range of general business sectors primarily through:

Our relationships with distributors, resellers, original equipment manufacturer resellers and sales agents are generally formalized in written contracts that address the specific products that can be sold, applicable pricing discounts and the geographic territory within which our products can be sold. Our strategic alliances are with companies that have formal “partner” programs. These companies generally publicize our status as an alliance partner on their web sites and in other publications and forums. Alliance partnerships can provide us with specific benefits such as:

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Our marketing goals include identifying potential distributors and resellers of our products, creating awareness of our product offerings, generating leads for follow-on sales and achieving greater order volume by disseminating our products through multiple direct and indirect distribution channels worldwide.

Some of our reseller partners combine our enterprise software with their own biometric technology and sell the combined product through their own sales channels. We also have relationships with international distributors that carry our products and make them available to a broader audience of secondary distributors and resellers within their markets.

Our software products are typically priced on the basis of the number of users that have enrolled their biometric information into the central server database. As the number of users increases, the software license price per user decreases. Resellers purchase our products at a favorable discount for resale at a price that provides an attractive gross margin for the reseller. We believe that this pricing model is competitive and cost-effective for the end-user customer and is attractive to our resellers.

Enterprise Products:

We intend to focus on promoting our enterprise network security products to take advantage of the growing awareness of the importance of protecting enterprise network infrastructures from unauthorized access. We have a team of business development and sales professionals who are located in various regions of the country. They focus their marketing efforts on high profile end-user customers. They also identify, recruit, train and support a network of distributors and resellers. Typically, these resellers are already selling enterprise network products that are based on Citrix, Computer Associates, Microsoft or Novell products, which our products are designed to complement. Our network of resellers often provides a range of additional services to their customers, including network component sales, network consulting, security consulting, systems installation, technical services and network management services.

We also sell our products alongside the sales organizations of our strategic alliance partners. We believe that our products complement theirs and fill a customer need that would not otherwise be met. We strive to leverage the existing sales organizations and reseller networks of these companies to achieve sales of our products at minimum expense. We work closely with each of these strategic alliance partners to support these joint sales efforts.

Standalone Workstation Products:

We intend to offer our SAFsolution Workstation product through biometric technology resellers and volume distributors that want to package this product with biometric technology to create a bundled product for their customers. We intend to market SAFsolution Workstation through the direct and traditional reseller channels as a basic offering. We believe this will provide a set of biometric authentication functions that can be utilized “out of the box” as a first step to deploy biometric authentication within an enterprise setting to create a bundled product for the customer. We believe that SAFsolution Workstation will provide a straightforward upgrade path to the enterprise versions of our products.

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Technology Partnerships and Licensed Technology

Fifteen technology partners currently supply us with fingerprint-based hardware devices and algorithm software, which are used to capture a fingerprint image. The software that we develop allows our customers to use this fingerprint hardware and algorithm software to gain secure access to computer networks and workstations. Our technology partners’ products are packaged with ours into a single product for sale to our customers. Most of the business relationships with these companies can be characterized as manufacturer-to-reseller agreements. Most of the fingerprint device suppliers that we support have established no-cost software licensing arrangements with us. We are authorized to sell fingerprint readers or software provided by the following companies:

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We also resell iris recognition, voice verification and facial feature recognition software from various companies with which we have licensing arrangements. We bundle our technology partners’ recognition software into our own software products for sale to end-users. These license agreements are with the following companies:

We are not dependent on any of these licensing arrangements. Additionally, the bulk of our business relates to fingerprint technology and those relationships are primarily based on no-cost licensing arrangements.

We buy iris recognition camera hardware from Panasonic Security and Digital Imaging Company for use with the Iridian Technologies licensed software. Panasonic makes a dual-function iris recognition camera that provides iris capture and videoconferencing capability and connects to a desktop computer workstation through a USB port.

We also license our products to two original equipment manufacturer (OEM) companies that package our software with their biometric devices and sell them through their own distribution channel to end-users as a bundled solution. These OEM companies include the following:

We are able to provide our customers with a choice of technology by combining the appropriate biometric “plug-in” software module with our API standards-based, application software product framework. The customer may also purchase these plug-in API-compliant modules, and the related biometric device hardware, that will work with our third-party software. Our strategy is to evaluate, qualify, and integrate select biometric technology available from new and current technology vendors. We are in various stages of qualification of additional potential technology partners.

Competition

The markets for our products and solutions are highly competitive and are characterized by rapid technological change. We expect competition to increase as other companies introduce products that are competitively priced, which may have increased performance or functionality or that incorporate technological advances that we have yet developed or implemented. Other companies that have developed software products that utilizing biometric identification technology and are active in the United States include BioconX, Inc.,

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BioNetrix, Inc., Digital Persona, Identix, Inc. and I/O Software, Inc. Our strategy is to differentiate our products in the marketplace by offering products that:

We expect to continue to face competition from non-biometric technologies such as traditional passwords, token cards, smart cards, and digital certificates. While in some instances we will compete with these technologies, our strategy is to integrate other factors of authentication into our products. For example, “digital certificates” provide a secure method of encrypting messages and accessing services. However, only a password or PIN number often protects the sender’s certificate key. We currently offer SAF products that support smart cards, radio-frequency proximity badges and digital certificates, and we intend to continue to enhance these offerings.

As a non-exclusive licensee of biometric technologies, we could also experience competition from other products and services incorporating the technology that we license. Many of our present and potential competitors have substantially greater financial, marketing and research resources than we do. In order to effectively compete in this environment, we must continually develop and market new and enhanced products at competitive prices, and have the resources to invest in significant research and development activities. We may not be able to make the technological advances necessary to compete successfully. New or existing competitors may develop new technologies or enhancements to existing products or introduce new products that will offer superior price or performance features, which could render our products obsolete.

We believe that the most important competitive factors for our products are the degree of security provided, ease of use, functionality, price, size and reliability. In addition to competition from companies developing and marketing other biometric security applications, we face competition from technologies relying on PINs, smart cards, tokens or passwords. In competing with these non-biometric products, we believe that the most important competitive issue is the trade-off between the additional security provided by positive personal identification and the higher price. However, we believe the replacement of computer passwords by our products is a very cost effective solution. In some instances, however, products using non-biometric technologies may be complementary to, rather than competitive with, our products.

Patents and Trademarks

We hold five assigned patents covering fingerprint imaging technology which we believe can be utilized to enhance and create strategic relationships with fingerprint technology companies, television set-top companies, and hand held computer companies that will promote or use SAF software products:

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In addition, we have pending applications for our SAF software. There is no assurance that we will be granted any pending patents, that any patent previously granted will prove enforceable, or that any competitive advantage will exist for us because of these patents or patent applications.

We also rely on unpatented know-how, trade secrets and continuing research and development. We may not have any protection from other parties who independently develop the same know-how and trade secrets. Protection of our proprietary products and services may be important to our business, and our failure or inability to maintain this type of protection could have a material adverse affect on our business, financial condition, results of operations and prospects. Moreover, while we do not believe that the production and sale of our proposed products or services infringe on rights of third parties, if we are incorrect in this regard, our failure to obtain needed licenses from these third parties could have a material adverse effect on our ability either to complete the development of certain products or services or to produce and market these products or services. Failure to obtain any of these types of licenses could adversely impact our business, condition (financial or otherwise), results of operations and prospects.

We license certain patents or other intellectual property (including biometric hardware or software products) from other companies. The competitive nature of our industry makes any patents and patent applications of our licensors important to us. There is no assurance that any of the patent applications of these licensors will be granted, that patents previously granted will prove enforceable, or that any of these patents or patent applications will lead to any competitive advantage for us.

We have registered certain service marks and trademarks with the United States Patent and Trademark Office. However, we have not registered certain other trademarks and trade names which we use with the United States Patent and Trademark Office nor in any foreign government trademark offices. With respect to unregistered trademarks, we generally accompany the use of these trademarks with our name to indicate the origin of the products to which they are applied, to distinguish them from the products of competitors and to build goodwill in these trademarks.

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Employees

As of March 24, 2003, we had 51 full-time employees. From time to time, we also utilize consultants for specific assignments. None of our employees is represented by a labor union and we have never experienced a work stoppage. We believe that our relationship with our employees is good.

Item 2.    Properties

We lease our current principal executive offices, consisting of approximately 5,049 square feet, in Bellevue, Washington, under a lease that expires in April of 2003. In March of 2003, we signed a 3-year lease for 9,569 feet and will be moving our principal executive offices to this new Bellevue location in April. We also lease approximately 8,400 square feet of office space, under a lease expiring in March of 2007, in Edmonton, Alberta, Canada as well as 1,645 square feet of office space in Reston, Virginia, under a lease that expires in June 2004. We believe that our facilities are adequate to satisfy our projected requirements, and that additional space will be available if needed.

Item 3.    Legal Proceedings

On August 2, 2002, we settled with International Interest Group, Inc. (IIG), by paying a total sum of $540,000, for all claims brought by IIG stemming from a lawsuit originally filed in June of 1999. We had accrued the entire amount of the settlement prior to June 30, 2002.

On March 13, 2003, the receiver for Alex Jones, Ltd., an alleged creditor of Jotter Technologies, Inc., filed a civil complaint in United States District Court of Utah against Jotter Technologies and SAFLINK. The complaint alleges breach of contract and judgment on a promissory note against Jotter in connection with a promissory note executed by Jotter and delivered to Alex Jones, Ltd., and unjust enrichment, fraudulent conveyance and declaratory judgment against all parties in connection with our purchase of substantially all of the intellectual property and fixed assets of Jotter in December 2000. The complaint seeks relief from Jotter in the amount of $800,000 in principal and approximately $163,333 in interest on the promissory note, including attorneys’ fees and costs. The complaint also seeks unspecified monetary and equitable relief against SAFLINK and Jotter. We believe that Jotter has the obligation to indemnify us for any claims or losses in connection with the asset purchase pursuant to the terms of the asset purchase agreement between Jotter and SAFLINK, and we have demanded such indemnification from Jotter. We intend to vigorously and actively defend this action.

Litigation is subject to significant uncertainty and any final result could be greater or less than current management expectations. However, we believe that the outcome of these matters will not have a material adverse effect on our results of operations or financial condition.

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

In December of 2002, we obtained a written consent in lieu of a meeting of stockholders from no less than (i) a majority of the outstanding shares of our common stock, and (ii) two-thirds of the outstanding shares of our Series E preferred stock, then entitled to vote as of the record date of November 26, 2002, to approve the following actions:

We mailed a notice to the non-consenting stockholders on January 14, 2003 notifying them of these actions.

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PART II

Item 5.    Market for the Company’s Common Stock and Related Stockholder Matters

Prior to August 9, 2001, our common stock was listed on the Nasdaq SmallCap Market under the symbol “ESAF”; however, on May 31, 2001, Nasdaq suspended trading in our stock. On August 9, 2001, our stock was delisted from the Nasdaq SmallCap Market. Our stock began trading on the Pink Sheets on August 10, 2001 and is currently quoted on the OTC Bulletin Board (OTCBB). On November 19, 2001, we effected a one-for-seven reverse stock split and changed our stock symbol to SFLK. As of March 20, 2003, there were 401 record holders of our common stock. This does not include the number of people whose stock is in nominee or street name accounts through brokers.

The last sale price of our common stock as reported on the OTCBB on March 20, 2003 was $4.20 per share. The following table sets forth the range of high and low close prices for our common stock as reported on the Nasdaq SmallCap Market (without retail markup or markdown and without commissions) for each full quarterly period from January 1, 2001 through August 9, 2001 and the range of high and low close prices for our common stock as quoted on the OTCBB from August 10, 2001 through December 31, 2002, as adjusted for our one-for-seven reverse stock split on November 19, 2001. The over-the-counter market figures shown below reflect inter-dealer prices, without retail markup, markdown or commission, and may not necessarily represent actual transactions.

We have never paid or declared cash dividends on our common stock, nor do we intend to pay or declare cash dividends on our common stock in the foreseeable future.

Recent Sales of Unregistered Securities

On November 27, 2002, we raised approximately $3.5 million through a private placement of common stock and warrants. A total of 1,346,154 shares of our common stock were sold to a group of institutional and accredited investors led by a significant existing investor at a price of $2.60 per share, pursuant to the terms of a securities purchase agreement and common stock warrant. The investors were also issued 5-year warrants to purchase an aggregate of 807,692 shares of our common stock exercisable at $3.60 per share. We also issued warrants to purchase an aggregate of 161,538 shares of our common stock exercisable at $2.60 per share and warrants to purchase an aggregate of 80,769 shares of our common stock exercisable at $3.60 per share to placement agents in connection with this financing. The exemption from registration relied upon for this transaction was Section 4(2).

During October 2002, we issued 12,500 shares of common stock and 50,000 common stock warrants to Vfinance, Inc. pursuant to a financial advisory agreement. We also issued 50,000 common stock warrants to

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Viewtrade, Inc. and 100,000 common stock warrants to Spencer Trask Ventures, Inc. pursuant to financial advisory agreements. During November 2002, we issued 35,000 common stock warrants to Thomas Colatosti and 25,000 common stock warrants to Mark Kolibas pursuant to advisory services agreements. The exemption from registration relied upon for these transactions was Section 4(2).

During the period from October through December of 2002, 29,429 shares of common stock were issued due to conversion of Series E preferred stock. Also during this period, 240,165 shares of common stock were issued as a result of exercises of common stock warrants that were issued in connection with past financings. The exemption from registration relied upon for these transactions was Section 4(2).

Item 6.    Selected Financial Data

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

This Management’s Discussion and Analysis contains forward-looking statements. All statements other than statements of historical fact made in this annual report are forward-looking. Forward-looking statements reflect management’s current expectations and are subject to risks and uncertainties discussed below, and identified in the section of this annual report on Form 10-K entitled “Risk Factors That May Affect Future Results” that could cause actual results to differ materially from historical results or those anticipated.

Overview

We provide cost-effective software that may be combined with a variety of biometric hardware products to verify the identity of a user accessing a computer and related network resources. We develop and sell software and resell hardware from leading manufacturers of biometric hardware devices. Our products may be used to protect business and personal information and to replace passwords and personal identification numbers, known as PINs, in order to safeguard and simplify access to electronic systems. Biometric technologies identify computer users by electronically capturing a specific biological or behavioral characteristic of that individual, such as a fingerprint or voice or facial feature, and creating a unique digital identifier from that characteristic. Because this process relies on largely unalterable human characteristics, positive identification can be achieved independent of any information possessed by the individual seeking authorization.

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Our software products are designed for large-scale and complex computer networks and allow computer users to be identified from a variety of biometric technologies. Our products comply with a published industry standard that allows the use of multiple biometric technologies. In December 1997, we introduced and demonstrated the first example of this industry standard called the Human Authentication Application Programming Interface, or HA-API. HA-API was the first definition of a standard way to allow software developers and biometric technology suppliers to build their products using a uniform method for connecting many different biometric devices to computer systems. HA-API was developed by us under contract with the United States Department of Defense and was subsequently released into the public domain. We have also been a leading contributor of the new standard that replaced HA-API called BioAPI. One of our employees serves as the elected Chair of the BioAPI Consortium that represents over 100 organizations that have collaborated to develop this new standard. We also support other related standards efforts, including the Common Biometric Exchange File Format (CBEFF) specification, and we intend to make our products compliant with these standards as they continue to evolve.

Critical Accounting Policies and Estimates

Our discussion and analysis of financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses and related disclosure of commitments and contingencies. On an on-going basis, we evaluate our critical accounting policies and estimates. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

We believe the Company’s critical accounting policy is Revenue Recognition and it affects the more significant judgments and estimates used in the preparation of our consolidated financial statements. We derive revenue from license fees for software products, reselling of hardware and fees for services relating to the software products including maintenance services, technology and programming consulting services.

We recognize revenue in accordance with the provisions of Statement of Position 97-2, “Software Revenue Recognition” (SOP 97-2), as amended by SOP 98-9 and related interpretations, including Technical Practice Aids, which provide specific guidance and stipulate that revenue recognized from software arrangements is to be allocated to each element of the arrangement based on the relative fair values of the elements, such as software products, upgrades, enhancements, post contract customer support, installation or training. Under this guidance, the determination of fair value is based on objective evidence that is specific to the vendor. In multiple element arrangements in which fair value exists only for undelivered elements, the fair value of the undelivered elements is deferred and the residual arrangement fee is assigned to the delivered elements. If evidence of fair value for any of the undelivered elements does not exist, all revenue from the arrangement is deferred until such time that evidence of fair value does exist or until all elements of the arrangement are delivered.

Revenue from software license fees is recognized upon delivery, net of an allowance for estimated returns, provided persuasive evidence of an arrangement exists, collection is probable, the fee is fixed or determinable, and vendor-specific objective evidence exists to allocate the total fee to elements of the arrangement. If customers receive pilot or test versions of products, revenue from these arrangements is recognized upon customer acceptance of permanent license rights. If our software is sold through a reseller, revenue is recognized when the reseller delivers its product to the end-user or if there are non-refundable minimum guaranteed fees upon delivery to the reseller. We also act as a reseller of hardware. Such revenue is recognized upon delivery of the hardware, provided that all other conditions of the sale have been met.

Service and other revenue includes payments under support and upgrade contracts and fees from consulting. Support and upgrade revenue is recognized ratably over the term of the contract, which typically is twelve

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months. Consulting revenue is primarily related to installation, integration and training services performed on a time-and-materials basis under separate service arrangements. Fees from consulting are recognized as services are performed.

Revenue results are difficult to predict, and any shortfall in revenue or delay in recognizing revenue could cause our operating results to vary significantly from quarter to quarter and could result in future operating losses.

Results of Operating Activities

We believe that period-to-period comparisons of our operating results may not be a meaningful basis to predict our future performance. You should consider our prospects in light of the risks, expenses and difficulties frequently encountered by companies in new and rapidly evolving markets. We may not be able to successfully address these risks and difficulties.

We incurred a net loss attributable to common stockholders of approximately $11.0 million for the year ended December 31, 2002, as compared to a net loss of approximately $15.6 million for the year ended December 31, 2001. In January 2002, we issued approximately 4.8 million shares of our common stock upon exercise of warrants. In connection with the warrant exercises, the per share exercise price of the warrants was reduced from $1.75 to $1.00, and each exercising warrant holder received a warrant to purchase additional shares of our common stock. We accounted for the value of these inducements as an in-substance preferred stock dividend in the amount of $4.7 million. Excluding the preferred stock dividend of $4.7 million, related to our special warrant offering, the net loss for the year ended December 31, 2002 was $6.2 million.

The following discussion presents certain changes in our revenue and operating expenses which have occurred between fiscal years 2002 and 2001, and between fiscal years 2001 and 2000, and should be read in conjunction with our consolidated financial statements, including the notes thereto, included elsewhere in this Form 10-K.

Year Ended December 31, 2002 Compared to Year Ended December 31, 2001

Revenue and Cost of Revenue

Revenue of $2.0 million for the year ended December 31, 2002 increased approximately $1.6 million from revenue of approximately $402,000 for the year ended December 31, 2001. The increase was primarily due to a one-time large enterprise sale totaling approximately $933,000 recognized in December of 2002 as well as an ongoing revenue stream from services performed on the Department of Defense’s Common Access Card (CAC) program. Our large enterprise sale was a one-time revenue event that may not be a basis for predicting future revenue. Approximately $1.2 million in revenue came from product sales and $831,000 from services.

Three customers—Freddie Mac, Bearing Point (for the Department of Defense’s CAC program) and Kaiser Permanente—accounted for 46%, 24%, and 11% of our 2002 revenue, respectively.

Cost of revenue consists of software materials, computer hardware, and services costs in 2002 and 2001. Cost of revenue in 2001 also included amortization of intangibles and impairment of intangible assets. The cost of revenue decreased from $4.0 million in 2001 to $1.1 million in 2002. The decrease was primarily due to certain charges recorded in 2001 that did not recur in 2002. Such charges included nine months of amortization of purchased technology totaling $955,000, and an impairment loss on purchased developed product technology of $2.8 million, related to the acquisition of substantially all of the assets of Jotter Technologies in December 2000.

We anticipate that cost of revenue as a percentage of sales will be more consistent with 2002 results for the foreseeable future.

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Operating Expenses

Operating expenses decreased significantly in 2002 to approximately $7.4 million from $10.1 million in 2001. The decrease was primarily due to amortization of intangibles and charges related to impairments and restructuring activities occurring in 2001, and lower personnel, legal and professional service costs, partially offset by an increase in advertising and promotion expenses.

The following table provides a breakdown of the dollar and percentage changes in operating expenses from the prior year:

Product Development

Product development expenses consist primarily of salaries, benefits and equipment for software developers and quality assurance personnel. Product development expenses decreased from $2.6 million in 2001 to $1.8 million in 2002. The decrease in product development costs was primarily due to decreased personnel costs of $530,000, decreased professional service expenses of $160,000 and other occupancy and general expenses of $110,000 due to lower headcount. We reduced our staffing levels by approximately 13 staff members in product development during June of 2001, which lowered personnel costs for the remainder of 2001 and 2002. We expect to add a significant amount of new product development staff in the coming year as we add new products, and enhance existing products, for the enterprise network market. As a result, we expect our product development costs to gradually increase throughout 2003.

Amortization of Intangible Assets

Amortization of intangible assets reflects the amortization of certain identifiable intangible assets resulting from the acquisition of Jotter in December of 2000 and other licensed technology acquired from Anovea, Inc. We incurred amortization expenses on intangible assets in the amount of $374,000 during 2001 and no amortization expense in 2002 related to the Company’s operating expenses. As of December 31, 2002, we had no unamortized intangible assets.

Impairment loss on intangible assets

In 2001, we performed an impairment assessment of intangible assets recorded in connection with the Jotter acquisition. The assessment was performed primarily due to the fluctuations and declines in our stock price, the continuous decline in the technology sector and the belief that this trend may continue for an indefinite period, and finally, a decision by management of the Company to limit further integration and development of the Jotter technology into our current and anticipated product offering due to current resource limitations. We determined that the carrying value of certain intangible assets was not recoverable and recognized an impairment loss on intangible assets during the quarter ended September 30, 2001 of approximately $3.9 million relating to the remaining net carrying value of certain intangible assets acquired. The impairment loss on intangible assets was comprised of approximately $2.8 million of developed product technology included under the title of impairment

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loss on intangible assets in the cost of revenue section of the accompanying statements of operations. Additionally, we charged approximately $535,000 of assembled workforce, $460,000 of sales channel customer relationships and $132,000 related to development and distribution agreements under the caption impairment loss on intangible assets in the operating expenses section of the accompanying statements of operations. There was no similar expense in 2002.

Sales and Marketing

Sales and marketing expenses consist primarily of salaries and commissions earned by sales and marketing personnel, promotional expenses and travel and entertainment costs. Sales and marketing expenses increased from $929,000 in 2001 to $1.9 million in 2002. The increase in sales and marketing costs was primarily due to increases in personnel costs of $287,000, travel and entertainment expenses of $88,000, advertising and promotion expenses of $235,000, trade show costs of $190,000, and other occupancy, professional service and general expense increases of $168,000. We expect to increase our expenditures on sales and marketing substantially in the coming months, as we add headcount and increase our advertising and promotion activities.

Restructuring and Relocation

Restructuring and relocation expenses consist of costs resulting from the termination or relocation of employees and other expenses associated with a corporate restructuring program aimed at streamlining our underlying cost structure. During 2001, there were no relocation costs. The 2001 expense of $786,000 was primarily comprised of $304,000 in severance packages to certain employees, approximately $139,000 in lease termination costs and the write off of $328,000 in leasehold improvements and other furniture and equipment in conjunction with the restructuring. There were no restructuring or relocation costs incurred during 2002.

General and Administrative

General and administrative expenses consist primarily of salaries, benefits and related costs for our executive, finance, human resource and administrative personnel, professional services fees and allowances for bad debt. General and administrative expenses decreased from approximately $4.3 million in 2001 to approximately $3.8 million in 2002. The primary reason for the decrease in general and administrative costs was due to certain litigation-related expenses recorded in 2001. We recorded an accrued expense of $450,000 related to the IIG lawsuit in 2001 and $90,000 of additional expense in 2002 prior to the lawsuit being settled in August of 2002.

Included in general and administrative costs in 2002 were approximately $570,000 in non-cash professional services costs that represented the amortization of stock compensation under several financial advisory agreements. This increase in expense was mostly offset by the reduction of cash expenses for legal and other professional service costs during 2002.

We anticipate that general and administrative expenses will increase modestly in the coming year, but we do not expect any significant changes in our administrative operations that would materially impact costs in the near term.

Interest Expense

Interest expense consists of interest expense and bank fees associated with debt obligations and credit facilities. Interest expense decreased significantly from approximately $783,000 in 2001 to approximately $44,000 in 2002. Our debt as of December 31, 2001 was either converted to equity or paid off in the first quarter of 2002, thus interest expense on those debt obligations and credit facilities ceased.

Other Income, Net

Other income, net consists of earnings on our cash, cash equivalent and short-term investment balances, augmented by gains and offset by any miscellaneous charges. Other income, net increased from approximately

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$26,000 in 2001 to approximately $310,000 in 2002. The increase was primarily due to a non-recurring gain of approximately $292,000 resulting from a favorable settlement on an accounts payable obligation which was expensed in prior years over several operating and non-operating expense categories.

Operating Expense Analysis by Functional Activity

The following table provides an analysis of the 2002 over 2001 change in total operating expense by functional category:

Year Ended December 31, 2001 Compared to Year Ended December 31, 2000

Revenue and Cost of Revenue

Revenue of $402,000 for the year ended December 31, 2001 decreased approximately $1.1 million from revenue of approximately $1.5 million for the year ended December 31, 2000. The decrease was primarily due to reduced promotional activities caused by a shortage of funds during the first six months of the year. During the last six months of 2001, we refocused our efforts on the enterprise biometric market and concentrated on closing sales to potential customers.

Four customers—Triton Resources, Kaiser Permanente, Nufocus and Home Shopping Network, a related party, accounted for 36%, 29%, 16% and 11% of the Company’s 2001 revenue, respectively.

Cost of revenue consists of software materials, computer hardware, and services costs, amortization of intangibles and impairment of intangible assets. The cost of revenue increased from $481,000 in 2000 to $4.0 million in 2001. The increase was primarily due to nine months of amortization of purchased technology totaling $955,000, and an impairment loss of $2.8 million related to the acquisition of substantially all of the assets of Jotter Technologies in December 2000.

Late in 2001, in response to resource limitations, we decided not to pursue opportunities related to technologies acquired in the Jotter acquisition. Accordingly, we determined that the carrying value of the purchased technology was not recoverable and recognized the impairment loss.

The increase in cost of revenue due to amortization of purchased technology and the impairment charge were offset by decreases in software, hardware and services costs of approximately $210,000, combined. This decrease was primarily the result of lower revenue.

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Operating Expenses

Excluding amortization of intangibles and one-time charges related to impairments, restructuring and purchased in-process research and development, operating expenses for the year ended December 31, 2001 decreased approximately $2.2 million as compared to the year ended December 31, 2000. The decrease was primarily due to lower personnel costs as a result of restructuring as well as decreased travel, entertainment, advertising and promotion costs.

The following table provides a breakdown of the dollar and percentage changes in operating expenses from the prior year:

Product Development

Product development expenses consist primarily of salaries, benefits and equipment for software developers and quality assurance personnel. Product development expenses decreased from $4.2 million in 2000 to $2.6 million in 2001. The decrease in product development costs was primarily due to decreased personnel costs of $1.3 million. We reduced our staffing levels by approximately 13 staff members in product development during June of 2001.

Amortization of Intangible Assets

Amortization of intangible assets reflects the amortization of certain identifiable intangible assets resulting from the acquisition of Jotter in December of 2000 and other licensed technology acquired from Anovea, Inc. We incurred amortization of intangible expenses of $374,000 during 2001. There was no significant amortization of intangible assets for the year 2000 as the acquisition occurred in late December. These intangible assets were being amortized over periods between 2 to 3 years.

Impairment loss on intangible assets

In 2001, we performed an impairment assessment of intangible assets recorded in connection with the Jotter acquisition. The assessment was performed primarily due to the fluctuations and declines in our stock price, the continuous decline in the technology sector and the belief that this trend may continue for an indefinite period, and finally, a decision by management of the Company to limit further integration and development of the Jotter technology into the Company’s current and anticipated product offering due to current resource limitations. We determined that the carrying value of the intangible assets were not recoverable and recognized an impairment loss on intangible assets during the quarter ended September 30, 2001 of approximately $3.9 million relating to the remaining net carrying value of the intangible assets acquired. The impairment loss on intangible assets was

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comprised of approximately $2.8 million of developed product technology included under the title of impairment loss on intangible assets in the cost of revenue section of the accompanying statements of operations, and approximately $535,000 of assembled workforce, $460,000 of sales channel customer relationships and $132,000 related to development and distribution agreements included under the caption impairment loss on intangible assets in the operating expenses section of the accompanying statements of operations.

Sales and Marketing

Sales and marketing expenses consist primarily of salaries and commissions earned by sales and marketing personnel, promotional expenses and travel and entertainment costs. Sales and marketing expenses decreased from $1.8 million in 2000 to $929,000 in 2001. The decrease in sales and marketing costs was primarily due to decreases in personnel costs of $143,000 and decreases in travel of $185,000 and advertising expenses of $331,000.

Restructuring and Relocation

Restructuring and relocation expenses consist of costs resulting from the termination or relocation of employees and other expenses associated with a corporate restructuring program aimed at streamlining our underlying cost structure. During 2001, there were no relocation costs. The 2001 expense of $786,000 was primarily comprised of $304,000 in severance packages to certain employees, approximately $139,000 in lease termination costs and the write off of $328,000 in leasehold improvements and other furniture and equipment in conjunction with the restructuring.

In fiscal year 2000, we incurred $224,000 as a result of our relocation from Tampa, Florida to Redmond, Washington.

Purchased In-Process Research and Development

In connection with our purchase of the intellectual property and fixed assets of Jotter in December 2000, we recorded a non-recurring charge of $208,000 for in-process research and development that had not yet reached technological feasibility and had no alternative future use. Among the factors we considered in determining the amount of the allocation of the purchase price to in-process research and development were the estimated stage of development of each module of the technology, including the complexity and technical obstacles to overcome, the estimated expected life of each module, the estimated cash flows resulting from the revenue, margins, and operating expenses generated from each module, and the discounted present value of the cash flows associated with the in-process technologies. There was no similar expense in 2001.

General and Administrative

General and administrative expenses consist primarily of salaries, benefits and related costs for our executive, finance, human resource and administrative personnel, professional services fees and allowances for bad debt. General and administrative expenses increased from approximately $3.5 million in 2000 to approximately $4.3 million in 2001. Two large components of the increase in general and administrative costs were an increase in professional service fees of approximately $200,000 and the accrual of $450,000 related to the IIG lawsuit.

Interest Expense

Interest expense, net consists of interest expense and bank fees associated with debt obligations and credit facilities. Interest expense increased from approximately $141,000 in 2000 to approximately $783,000 in 2001. The increase in interest expense was primarily attributable to the beneficial conversion feature on the bridge notes valued at $232,000 with the remaining increase relating primarily to interest on the bridge notes.

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Other Income, Net

Other income, net consists of earnings on our cash, cash equivalent and short-term investment balances, offset by any miscellaneous charges. Other income, net increased from approximately $11,000 in 2000 to approximately $26,000 in 2001. The increase was primarily due to an increase in earnings on our cash and cash equivalent balances, which carried a higher average balance than in 2000.

Operating Expense Analysis by Functional Activity

The following table provides an analysis of the 2001 over 2000 change in total operating expense by functional category:

Liquidity and Capital Resources

We financed our operations during fiscal 2002 primarily from our existing working capital at December 31, 2001, the net proceeds of warrants exercised in January 2002, a $6.6 million private placement of common stock in June 2002 and a $3.5 million private placement of common stock in November 2002. As of December 31, 2002, our principal source of liquidity consisted of $7.1 million of working capital. As of December 31, 2002, we had cash and cash equivalents of $7.4 million compared to only $64,000 as of December 31, 2001. We invest our cash in excess of current operating requirements in a money market fund with a commercial bank. We had a working capital surplus of $7.1 million at December 31, 2002 compared to a working capital deficit of $3.3 million at December 31, 2001.

We currently occupy our headquarters in Bellevue, Washington under a lease that expires in April 2003, and are required to pay taxes, insurance, and maintenance as well as monthly rental payments. In addition, we lease office space in Edmonton, Alberta, Canada for our product development team that expires in March 2007. Further, we lease office space for our sales force and integrated solutions group in Reston, Virginia, which expires in June 2004.

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The following table reflects our contractual commitments for operating leases as of December 31, 2002 (in thousands):

In March of 2003, we signed a 3-year lease for 9,569 square feet in Bellevue, Washington that will become our new executive offices. Contractual commitments associated with this lease are $161,000, $217,000, $220,000, and $92,000 for the years 2003, 2004, 2005, and 2006, respectively.

During the period from January 2, 2003 through February 18, 2003, warrants to purchase approximately 4,820,000 shares of our common stock, which were issued in connection with prior financing transactions, were exercised for approximately $9,700,000. We intend to use the proceeds of the warrant exercises and common stock purchases for working capital and general corporate purposes.

We used cash of approximately $6.5 million for operating activities in 2002 which was approximately $626,000 less than the amount used in operations during 2001. The decrease in the use of cash was primarily due to increased revenue. Cash used in investing activities decreased $7,000 in 2002, to $74,000 from $81,000 in 2001. Net cash provided by financing activities increased to $14.0 million in 2002, compared to $6.2 million in 2001.

As a result of the financing in November of 2002 and warrant exercises in January and February of 2003, we believe we have sufficient funds to continue our operations into the year 2004, assuming no significant and unexpected uses of cash.

Recently Issued Accounting Pronouncements

During 2002, we adopted new accounting standards related to the accounting for impairment of long-lived assets. There was no cumulative translation adjustment recorded upon the adoption of this accounting standard and the adoption of this accounting standard did not have a material impact on our consolidated financial position, results from operations or cash flows. Following is a brief summary of recent accounting pronouncements:

In June 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 143, Accounting for Asset Retirement Obligations. SFAS No. 143 requires us to record the fair value of an asset retirement obligation as a liability in the period in which it incurs a legal obligation associated with the retirement of tangible long-lived assets that result from the acquisition, construction, development, and/or normal use of the assets. We would also record a corresponding asset that is depreciated over the life of the asset. Subsequent to the initial measurement of the asset retirement obligation, the obligation will be adjusted at the end of each period to reflect the passage of time and changes in the estimated future cash flows underlying the obligation. We were required to adopt SFAS No. 143 on January 1, 2003. The adoption of SFAS No. 143 is not expected to have a material effect on our financial statements.

In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections. SFAS No. 145 amends existing guidance on reporting gains and losses on the extinguishment of debt to prohibit the classification of the gain or loss as extraordinary, as the use of such extinguishments have become part of the risk management strategy of many companies. SFAS No. 145 also amends SFAS No. 13 to require sale-leaseback accounting for certain lease modifications that have economic effects similar to sale-leaseback transactions. The provisions of the Statement related to the rescission of Statement No. 4 is applied in fiscal years beginning after May 15, 2002. Earlier application of these provisions is encouraged. The provisions of the Statement related to Statement No. 13 were

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effective for transactions occurring after May 15, 2002, with early application encouraged. In 2003, upon adoption of SFAS No. 145, we will be required to reclassify our extraordinary gain from debt restructuring in 2001.

In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities. SFAS No. 146 addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force (EITF) Issue 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity. The provisions of this Statement are effective for exit or disposal activities that are initiated after December 31, 2002, with early application encouraged. The adoption of SFAS No. 146 is not expected to have a material effect on the our financial statements.

In November 2002, the FASB issued Interpretation No. 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness to Others, an interpretation of FASB Statements No. 5, 57 and 107 and a rescission of FASB Interpretation No. 34. This Interpretation elaborates on the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under guarantees issued. The Interpretation also clarifies that a guarantor is required to recognize, at inception of a guarantee, a liability for the fair value of the obligation undertaken. The initial recognition and measurement provisions of the Interpretation are applicable to guarantees issued or modified after December 31, 2002 and are not expected to have a material effect on our financial statements. The disclosure requirements are effective for financial statements of interim and annual periods ending after December 15, 2002.

In November 2002, the EITF reached a consensus on Issue No. 00-21 (“EITF 00-21”), Revenue Arrangements with Multiple Deliverables. EITF 00-21 addresses certain aspects of the accounting by a vendor for arrangements under which the vendor will perform multiple revenue generating activities. EITF 00-21 will be effective for periods beginning after June 15, 2003. The adoption of EITF 00-21 is not expected to have a material impact on our financial position and results of operations.

In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based Compensation—Transition and Disclosure, an amendment of FASB Statement No. 123. This Statement amends FASB Statement No. 123, Accounting for Stock-Based Compensation, to provide alternative methods of transition for a voluntary change to the fair value method of accounting for stock-based employee compensation. In addition, this Statement amends the disclosure requirements of Statement No. 123 to require prominent disclosures in both annual and interim financial statements. Certain disclosure modifications are required for fiscal years ending after December 15, 2002 and are included in the notes to our financial statements.

In January 2003, the FASB issued Interpretation No. 46, Consolidation of Variable Interest Entities, an interpretation of ARB No. 51. This Interpretation addresses the consolidation by business enterprises of variable interest entities as defined in the Interpretation. The Interpretation applies immediately to variable interests in variable interest entities created after January 31, 2003, and to variable interests in variable interest entities obtained after January 31, 2003. The application of this Interpretation is not expected to have a material effect on our financial statements. The Interpretation requires certain disclosures in financial statements issued after January 31, 2003 if it is reasonably possible that we will consolidate or disclose information about variable interest entities when the Interpretation becomes effective.

Factors That May Affect Future Results

This annual report on Form 10-K contains forward-looking statements that involve risks and uncertainties. Our 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 us in this annual report on Form 10-K or in other reports, press releases or other statements issued from

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time to time. Additional factors that may cause such a difference are set forth elsewhere in this annual report on Form 10-K.

In addition to other information contained in this annual report on Form 10-K, the following factors, among others, sometimes have affected, and in the future could affect our actual results and could cause future results to differ materially from those in any forward looking statements made by us or on our behalf. Factors that could cause future results to differ from expectations include, but are not limited to the following:

We have accumulated significant losses since we started doing business and may not be able to generate significant revenue or any net income in the future, which would negatively impact our ability to run our business.

We may continue to accumulate losses. We have accumulated net losses of approximately $85.2 million from our inception through December 31, 2002. We have continued to accumulate losses after December 31, 2002 to date and we may be unable to generate significant revenue or any net income in the future. We have funded our operations primarily through the issuance of equity securities to investors and may not be able to generate a positive cash flow in the future.

Our success depends on significant growth in the biometrics market and on broad acceptance of products in this market.

Because almost all of our revenue will come from the sale of products that use biometric technologies, our success will depend largely on the expansion of markets for biometric products domestically and internationally. Even if use of biometric technology gains market acceptance, our products may not achieve sufficient market acceptance to ensure our viability. We cannot accurately predict the future growth rate of this industry or the ultimate size of the biometric technology market.

Because they own approximately 48% of our company, two investors could significantly influence our affairs which may preclude other stockholders from being able to influence stockholder votes.

Given that two investors, combined, own in excess of 48% of our currently outstanding common stock, they are able to significantly influence the vote on those corporate matters to be decided by our stockholders. In addition, as of March 20, 2003, these investors held warrants to purchase an additional 3.5 million shares of outstanding common stock. If these investors exercised their warrants, they would own approximately 55% of the then outstanding common stock.

Our stock has been delisted from the Nasdaq SmallCap Market and there is a limited public market for our common stock. As a result, our stockholders may not be able to sell their common stock easily or may experience higher transaction costs resulting from pricing inefficiencies, which may result in a loss upon the disposition of our shares.

Historically, there has been a limited public market for the shares of our common stock. On August 9, 2001, our stock was delisted from the Nasdaq SmallCap Market and there is no certainty that our stock will be permitted to trade again on Nasdaq or that there will be an active trading market for our common stock. Our common stock is currently quoted on the OTC Electronic Bulletin Board (OTCBB) and investors may find it more difficult to obtain accurate price quotations of our common stock than they would if the stock were quoted on the Nasdaq SmallCap Market.

Timely and accurate quotations of the price of our common stock may not always be available and trading volume in this market is relatively small. Consequently, the activity of trading only a few shares may affect the market and result in wide swings in price and in volume and in broader spreads between the bid and ask prices. The price of our common stock may fall below the price at which an investor purchased shares, and an investor may receive less than the amount invested if the investor sells its shares, which could result in the loss of the investor’s entire investment.

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If the market price of our common stock continues to be volatile, the value of our stock may decline.

Like many other technology companies, the market price of our common stock has been, and may continue to be, volatile, which means the value of your SAFLINK stock may fluctuate. Factors which are difficult to predict such as

contribute to volatility and may have a significant impact on the market price of our common stock. If we are unable to raise additional capital, our common stock may become worthless.

The issuance of common stock reserved for our stock option plans and the exercise of warrants could dilute the value of our stock and may create a negative public perception of the value of our stock.

Our issuance of a large number of additional shares of our common stock upon the exercise of outstanding stock options or warrants could decrease the market price of our common stock. The market price of our common stock could decline as a result of sales of a large number of shares of our common stock in the market or the perception that these sales could occur. If we issue our common stock to option and warrant holders, it will dilute our investors’ interest. In addition, if a large number of option or warrant holders sell their shares of our common stock, it could create a negative public perception of the value of our stock.

We are partly dependent on third parties for our product distribution and if these parties do not promote our products, it may limit our ability to generate revenue.

We utilize third parties such as resellers, distributors and makers of complementary technology to complement our full-time sales staff in promoting sales of our products. If these third parties do not actively promote our products, our ability to generate revenue may be limited. We cannot control the amount and timing of resources that these third parties devote to marketing activities on our behalf. Some of these business relationships are formalized in agreements which can be terminated with little or no notice and may be subject to amendment. We also may not be able to negotiate acceptable distribution relationships in the future and cannot predict whether current or future distribution relationships will be successful.

Since a large percentage of our historic revenue has been derived from a limited number of customers, our sales have experienced wide fluctuations.

Three customers accounted for approximately for 46% (Freddie Mac), 24% (Bearing Point—for the Department of Defense’s CAC program), and 11% (Kaiser Permanente) of our 2002 revenue, respectively. Four customers accounted for approximately 36% (Triton Resources), 29% (Kaiser Permanente), 16% (Nufocus) and 11% (Home Shopping Network) of our 2001 revenue, respectively. As a result of this concentration of sales to a limited number of customers, our sales have experienced wide fluctuations, and may continue to experience wide fluctuations in the future.

In order to succeed, we will have to keep up with rapid technological change in the software industry and various factors could impact our ability to keep pace with these changes.

Software design and the biometric technology industry are characterized by rapid development and technological improvements. Because of these changes, our success will depend on our ability to keep pace with a changing marketplace and integrate new technology into our software and introduce new products and product

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enhancements to address the changing needs of the marketplace. Various technical problems and resource constraints may impede the development, production, distribution and marketing of our products and services. In addition, laws, rules, regulations or industry standards may be adopted in response to these technological changes, which in turn, could materially adversely affect how we do business.

Our future success will depend upon our ability to develop and introduce a variety of new products and services and enhancements to these new products 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 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.

Provisions in our Certificate of Incorporation and our Certificate of Designation, Preferences and Rights of the Series E preferred stock may prevent or impact the value of a takeover of our company even if a takeover is beneficial to stockholders.

Our Certificate of Incorporation authorizes our board of directors to issue up to 1,000,000 shares of preferred stock, which may adversely affect our common stockholders. We may issue shares of preferred stock without stockholder approval and upon terms and conditions, and having those types of rights, privileges and preferences, as the board of directors determines. Specifically, the issuance of preferred stock may make it more difficult for a third party to acquire, or may discourage a third party from acquiring, voting control of our company even if the acquisition would benefit stockholders. In addition, the issuance of the Series E preferred stock may impact the value of a takeover to common stockholders because the holders of the Series E preferred stock are entitled to demand that we redeem their stock for cash equal to 125% of the price paid for this stock by the holders in connection with certain acquisitions in which more than 40% of our stock is issued.

A significant number of shares of our common stock eligible for future sale could drive down the market price for our common stock and the availability of a large number of our shares on the open market could make it difficult for us to raise capital.

As of March 20, 2003, 25,612,558 shares of our common stock were outstanding. In addition, there are approximately 8.8 million shares of common stock issuable upon exercise or conversion of outstanding warrants and preferred stock. Sales of shares of common stock in the public market or the perception that sales of large numbers of our shares may occur could adversely affect the market price of our common stock. These sales or the perception of possible sales could also impair our ability to raise capital in the future. It is possible that this scenario will have an adverse effect on the market price of the common stock.

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

Our product revenue and a portion of our service revenue is 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:

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Even if biometric solutions gain wide market acceptance, our products and services may not adequately address the market requirements and may not gain wide market acceptance.

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:

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

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

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

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

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

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

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

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

We may have to litigate to enforce our patents or trademarks or to determine the scope and validity of other parties’ proprietary rights. Litigation could be very costly and divert management’s attention. An adverse outcome in any litigation may have a severe negative impact on our financial results and stock price. We also rely on trade secrets and proprietary know-how, which we seek to protect by confidentiality agreements with our employees, consultants, service providers and third parties. There is a risk that these agreements may be breached, and that the remedies available to us may not be adequate. In addition, our trade secrets and proprietary know-how may otherwise become known to or be independently discovered by others.

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

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

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

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

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

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

Item 7(a).    Qualitative and Quantitative Disclosure About Market Risk

Our exposure to market rate risk for changes in interest rates relates primarily to money market funds included in our investment portfolio. Investments in fixed rate earning instruments carry a degree of interest rate risk as their fair market value may be adversely impacted due to a rise in interest rates. As a result, our future investment income may fall short of expectations due to changes in interest rates. We do not use any hedging transactions or any financial instruments for trading purposes and we are not a party to any leveraged derivatives.

We have certain foreign operations whose expenses are incurred in its local currency. As exchange rates vary, transaction gains or losses will be incurred and may vary from expectations and adversely impact overall profitability. If in 2003, the US dollar uniformly changes in strength by 10% relative to the currency of the foreign operations, our operating results would likely not be significantly affected.

Item 8.    Financial Statements and Supplementary Data

See Index to Financial Statements.

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

None.

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PART III

Item 10.    Directors and Executive Officers of the Registrant

Information concerning our directors and officers is included in the definitive proxy statement for our 2003 Annual Meeting of Stockholders, which is incorporated herein by reference. We will file the proxy statement within 120 days of December 31, 2002.

Item 11.    Executive Compensation

Information concerning our executives’ compensation is included in the definitive proxy statement for our 2003 Annual Meeting of Stockholders, which is incorporated herein by reference. We will file the proxy statement within 120 days of December 31, 2002.

Item 12.    Security Ownership of Certain Beneficial Owners and Management

Information required to be disclosed hereunder is included in the definitive proxy statement for our 2003 Annual Meeting of Stockholders, which is incorporated herein by reference. We will file the proxy statement within 120 days of December 31, 2002.

Item 13.    Certain Relationships and Related Transactions

Information required to be disclosed hereunder is included in the definitive proxy statement for our 2003 Annual Meeting of Stockholders, which is incorporated herein by reference. We will file the proxy statement within 120 days of December 31, 2002.

PART IV

Item 14.    Controls and Procedures

(a)  Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of our disclosure controls and procedures, as such term is defined under Rule 13a-14(c) promulgated under the Securities Exchange Act of 1934, as amended, within 90 days of the filing date of this report. Based on their evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures are effective.

(b)  There have been no significant changes (including corrective actions with regard to significant deficiencies or material weaknesses) in our internal controls or in other factors that could significantly affect these controls subsequent to the date of the evaluation referenced in paragraph (a) above.

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Item 15.    Exhibits, Financial Statement Schedules and Reports on Form 8-K

(a)  The following documents are filed as a part of this annual report on Form 10-K:

(1)  Consolidated Financial Statements

The financial statements filed as a part of this report are listed in the “Index to Financial Statements.”

(2)  Financial Statement Schedules

All schedules have been omitted because they are either not applicable, not material or the required information has been given in the financial statements or related notes.

(b)  Reports on Form 8-K

On December 9, 2002, we filed a current report on Form 8-K regarding a letter, dated November 29, 2002, that we mailed on December 4, 2002, to our stockholders containing a brief review of our historical operations, current activities, and strategic goals for the next several quarters.

On March 6, 2003, we filed a current report on Form 8-K regarding the exercise of certain warrants during the first two months of 2003.

(c)  Exhibits

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SIGNATURES

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

KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Glenn L. Argenbright his true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution for him and in his name, place and stead, in any and all capacities, to sign any and all amendments to this Annual Report on Form 10-K, and all documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorney-in-fact and agent, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorney-in-fact and agent, or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by the following persons on behalf of registrant and in the capacities and on the dates indicated.

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FORM OF SARBANES-OXLEY SECTION 302(a) CERTIFICATION

I, Glenn L. Argenbright, certify that:

Date: March 28, 2003

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FORM OF SARBANES-OXLEY SECTION 302(a) CERTIFICATION

I, Jon C. Engman, certify that:

Date: March 28, 2003

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INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

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INDEPENDENT AUDITORS’ REPORT

The Board of Directors and Stockholders

SAFLINK Corporation:

We have audited the consolidated balance sheets of SAFLINK Corporation and subsidiary as of December 31, 2002 and 2001 and the related consolidated statements of operations, stockholders’ equity (deficit) and comprehensive income (loss), and cash flows for each of the years in the three-year period ended December 31, 2002. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on the results of our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States of America. These standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of SAFLINK Corporation and subsidiary as of December 31, 2002 and 2001, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2002 in conformity with accounting principles generally accepted in the United States of America.

/s/    KPMG LLP

Seattle, Washington

February 7, 2003, except as to Note 16, which is

as of March 24, 2003

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SAFLINK CORPORATION

CONSOLIDATED BALANCE SHEETS

(In thousands, except per share data)