IDENTIX INC, 10-K405, 1998-09-16

IDENTIX INC
10-K405, 1998-09-16
COMPUTER INTEGRATED SYSTEMS DESIGN

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 10-K
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(MARK ONE)

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

FOR THE FISCAL YEAR ENDED JUNE 30, 1998

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM ____________ TO ____________ .

COMMISSION FILE NUMBER: 1-9641

IDENTIX INCORPORATED
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

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CALIFORNIA 94-2842496
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)

510 NORTH PASTORIA AVENUE, SUNNYVALE, CALIFORNIA 94086
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
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REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (408) 731-2000

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
COMMON STOCK, NO PAR VALUE

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
NONE

NAME OF EACH EXCHANGE ON WHICH REGISTERED:
AMERICAN STOCK EXCHANGE

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 [X] .

The aggregate market value of the voting stock held by non-affiliates of the
registrant on September 1, 1998, based upon the closing price of the common
stock on the American Stock Exchange for such date, was approximately
$93,117,000. Shares of common stock held by each officer and director and by
each person who owns 5% or more of the outstanding common stock have been
excluded in that such persons may be deemed to be affiliates. This determination
of affiliate status is not necessarily a conclusive determination for other
purposes.

The number of outstanding shares of the registrant's common stock on
September 1, 1998 was 25,298,444.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Definitive Proxy Statement expected to be filed with the
Securities and Exchange Commission on or about September 16, 1998 and to be used
in connection with the Annual Meeting of Shareholders expected to be held
October 29, 1998 are incorporated by reference in Part III of this Form 10-K.

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TABLE OF CONTENTS

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Item 1. BUSINESS.................................................... 1
Item 2. PROPERTIES.................................................. 21
Item 3. LEGAL PROCEEDINGS........................................... 22
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS......... 22
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS......................................... 24
Item 6. SELECTED FINANCIAL DATA..................................... 25
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS................................... 26
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA................. 32
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.................................... 53
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.......... 53
Item 11. EXECUTIVE COMPENSATION...................................... 53
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.................................................. 53
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.............. 53
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM
8-K......................................................... 54
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PART I

ITEM 1. BUSINESS

The statements in this Annual Report on Form 10-K that relate to future
plans, events or performance are forward-looking statements. Actual results
could differ materially due to a variety of factors, including the factors
described under "Risk Factors" and the other risks described in this Annual
Report on Form 10-K. The Company undertakes no obligation to publicly update
these forward-looking statements to reflect events or circumstances after the
date hereof or to reflect the occurrence of unanticipated events.

OVERVIEW

Identix Incorporated ("Identix" or the "Company") is a leader in designing,
developing, manufacturing and marketing comprehensive solutions for the capture
or comparison of fingerprints for security, fraud prevention, law enforcement
and other applications. Identix's products are classified into two groups: (i)
Biometric Security products that verify the identity of an individual through
the unique biological characteristics of a fingerprint and (ii) Biometric
Imaging products that electronically capture forensic quality fingerprint images
directly from an individual's fingers for law enforcement and other
applications. At the core of Identix's Biometric Security and Biometric Imaging
products are its proprietary fingerprint capture technologies. The Company's
products employ patented algorithms and proprietary customizable application
software suites, as well as industry leading expertise in optics and high
resolution printing technology. Identix's technologies and know-how enable it to
produce biometric solutions for federal, state and local governmental entities
and commercial customers worldwide. As of June 30, 1998, Identix had shipped
over 15,000 Biometric Security products to customers in over 40 countries
through its worldwide network of sales offices and distributorships. In
addition, law enforcement and other government agencies in 38 states and four
foreign countries have installed Identix Biometric Imaging products. Through
ANADAC, Inc. ("ANADAC"), the Company provides information technology,
engineering and management consulting services, including the installation and
integration of Identix products, to private and public sector clients. Identix
also formed a joint venture in September 1997 with Sylvan Learning Systems, Inc.
("Sylvan") for the purpose of providing fingerprinting services through Sylvan's
testing centers nationwide.

BIOMETRIC INDUSTRY OVERVIEW

The analysis of unique biological characteristics of an individual, also
known as biometrics, is being used increasingly for identification and
verification purposes. Examples of unique biological characteristics that can be
used to identify an individual include fingerprints, retinal blood vessel or
iris patterns of the eye, hand geometry, voice and facial structure. Among
these, fingerprint analysis has gained the most widespread use for biometric
identification and verification purposes. Fingerprint analysis is an accurate
and reliable method to distinguish one individual from another, employs
well-developed and proven technology and processes and is viewed as less
intrusive relative to certain other biometric identification methods. The
process of capturing, storing, retrieving and comparing fingerprints has become
increasingly automated as a result of advances in optics, electronics and
computing. These advances have enabled fingerprint identification technology to
be used to confirm an individual's identity for a variety of commercial and
governmental applications.

Biometric Security

The costs of fraud are estimated to be in the billions of dollars each year
in the United States alone. In addition, damages resulting from security
breaches, such as unauthorized persons gaining improper access to confidential
information, may not be quantifiable, but can be equally as problematic.
Accordingly, the ability to verify the identity of a specific individual is of
critical importance in reducing acts of fraud and increasing security. Each day
an individual is required to identify himself numerous times with something the
individual has in his possession or with the knowledge of certain information,
such as: magnetic stripe cards and PINs to transact business at ATMs or
point-of-sale terminals; passwords to log-on to a computer or a computer
network; keys, cards or passwords to enter the workplace; PINs, passwords and
account numbers to complete a

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commercial transaction on-line; credit cards to make a credit purchase; time
cards to begin work; and a driver's license to write a check or transact
business at a bank.

However, these common verification methods generally cannot provide
positive identification. Keys, credit cards, ATM cards and card keys can be lost
or stolen. Passwords, account numbers or other information used for identity
verification can be divulged to or intercepted by unauthorized users through
electronic means and otherwise. In the workplace, time-and-attendance
information can be improperly altered by an employee punching a time card for a
tardy or absent co-worker.

The analysis of unique biological characteristics offers a more accurate
method of verifying an individual's identity. Over the last decade,
technological advances, including significant advances in two-dimensional
imagers, high performance microprocessors and computer memory, have enabled the
commercial development of equipment to read, record and analyze unique
biological data. Potential applications of biometric identification systems span
a broad range and include computer database and network access and security,
computer software, intranet and Internet security, electronic commerce,
communications devices, point-of-sale terminals, bank transaction authorization,
facility access and security, ATMs, time-and-attendance, home security and
automobiles. However, implementation of biometric equipment for these diverse
applications may require network management software, customer-specific
applications software and interfaces that allow integration with the customer's
existing computer systems to provide complete biometric solutions.

Biometric Imaging

Fingerprint images have emerged as an important means of identification and
verification in both government and civilian markets. In law enforcement in
particular, fingerprint identification is widely utilized and has been accepted
by courts around the world. Historically, fingerprints have been collected using
the traditional "ink-and-roll" process. Typically, this process starts at the
local law enforcement agency where usually three or more complete sets of
ink-and-roll prints are taken, one for the local agency, one for the state and
one for the Federal Bureau of Investigation ("FBI"). The FBI reports that it
currently receives over 34,000 fingerprint cards each work day. The fingerprint
is then compared at the local agency, state and/or FBI with a database of
fingerprints by means of an Automated Fingerprint Identification Systems
("AFIS"), a computer system developed in the 1970s which uses minutiae-based
recognition algorithms which detect fingerprint characteristics to accomplish
fingerprint matching. Before the AFIS can make the comparison, an ink-and-roll
card is run through a scanner which creates a digital image of the fingerprint.
The AFIS then compares the digital image with an existing database of
fingerprints to identify an individual if that individual's fingerprint is in
the database and, at the same time, updates the database with that fingerprint
image.

While the advent of computerized AFIS systems significantly improved the
ability to compare fingerprints against large databases of fingerprints, the
manual process of collecting and mailing ink-and-roll cards to the agency that
maintains the AFIS and scanning the fingerprint image into the AFIS has led to
significant bottlenecks. In addition, the fingerprinting process can be
complicated by a lack of cooperation of the person being fingerprinted, the need
to take multiple sets of prints and operator error. Various agencies have
reported that in excess of 30% of such cards are rejected because prints are
smudged or applied incorrectly. If the FBI or state agency rejects the card, the
local agency is often required to locate the individual, if possible, and have
another set of fingerprints taken. As a result, the time between taking a set of
fingerprints and receiving the results of the search may take several days,
several weeks or longer.

Live-scan biometric imaging systems, which electronically capture and
digitize an image of the fingerprint directly from a person's finger, were
developed to replace the manual ink-and-roll process. The digitized fingerprint
image captured by the live-scan system can then be compared with a database of
stored fingerprint images by an AFIS. If a state or federal agency can receive
electronic fingerprint cards, then the image can be electronically relayed to
that agency for comparison and the results can be returned to the local agency
within minutes or hours. In addition, because the fingerprint images are
captured electronically, multiple cards can be printed from one set of images,
eliminating the need to roll the fingerprint numerous

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times. Live-scan systems also generally have quality assurance features that
help reduce the chance of operator error during the fingerprinting process.

A number of domestic and certain international law enforcement communities
are in the process of converting from manual ink-and-roll fingerprint capture to
live-scan fingerprint capture. In the United States, the FBI has undertaken a
major program to upgrade its Identification Division and has announced that its
goal is to bring its new identification facility on-line and to receive a
majority of fingerprint submissions electronically. This announcement by the
FBI, coupled with increased automation at the federal and state levels, has
prompted other federal, state and local agencies to adopt live-scan systems as
their primary method for conducting background and identification checks. Other
federal agencies, including Immigration and Naturalization Service ("INS"),
Internal Revenue Service, U.S. Drug Enforcement Agency, U.S. Marshals Service
and the U.S. Secret Service use live-scan systems to perform identification and
background checks.

The ability to capture a forensic quality fingerprint image electronically
and compare that fingerprint with a database of fingerprint images also has
important civilian (non-law enforcement) applications, such as conducting
employee background checks (including jobs in federal or state government,
banking, airport, child care, stock brokers and other securities professionals
or gaming) or screening potential foster parents. Millions of fingerprint cards
are taken each year in the United States for civilian purposes. Traditionally,
local police stations have performed this service, with completed fingerprint
cards submitted to state authorities or the FBI to perform a background
investigation. This process usually takes several weeks to complete. In
addition, if an ink-and-roll fingerprint card is rejected, an applicant must go
through the process again, which can delay further an applicant's start date. In
some cases, employers or agencies find themselves with such a backlog of
applicants awaiting fingerprinting or results of the background check that they
allow applicants to start the job without the background check being complete,
placing the employer at risk if an applicant has a criminal record. The need for
reliable and convenient fingerprint capture in a non-law enforcement environment
and the need to streamline the background checking process have created a demand
for live-scan products and fingerprinting services.

THE IDENTIX SOLUTION

The Company has developed an industry-leading set of biometric security and
imaging solutions for security, fraud prevention, law enforcement and other
applications. The core of the Company's products are proprietary fingerprint
capture technologies developed through the application of Identix's
understanding of the science of fingerprint biometrics, optics, algorithms,
computing and networking.

BIOMETRIC SECURITY SOLUTIONS. In the Biometric Security market, the Company
provides a comprehensive line of integrated biometric hardware and software
solutions for a variety of applications, providing the Company's customers with
significant improvements over traditional security and identification measures.
The Company believes its Biometric Security technology is the most widely used
in the world. Identix has sold over 15,000 Biometric Security products to
customers in over 40 countries through its worldwide network of sales offices
and distributorships to provide complete biometric solutions for a wide variety
of applications, including the following:

Building access: Numerous organizations have installed the Company's
Biometric Security products to secure building access, including the Pentagon
and various other United States government agencies, banks and industrial
plants.

Bank transaction authorization: Three large international banks use the
Company's Biometric Security products for transaction authorization.

Network and computer database security: Identix has and continues to
develop a wide range of enterprise level security solutions for databases,
network security, e-commerce and other emerging computer user needs. For
example, Identix through a joint development and marketing agreement with
Oracle, provides a Biometric Security solution for use in authorizing access to
Oracle's database software. In addition, Identix has developed a Biometric
Security solution for advanced user biometric authentication for Computer
Associate's Unicenter TNG system management software.

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Airport security: The Company's Biometric Security products have been
chosen for use in pilot programs at Chicago International O'Hare Airport to
develop a universal air cargo security access system that is based on a
combination of biometric identification and smart cards and general door access
throughput the airport.

Time-and-attendance: Woolworth's Limited, a major Australian supermarket
chain, uses the Company's Biometric Security products to maintain accurate
time-and-attendance records for in excess of 80,000 employees in over 500
stores.

ATM service: Armaguard, an Australian armored car and cash carrying
company, uses the Company's Biometric Security products to secure access for
service personnel to approximately 1,200 ATMs across Australia.

Corrections: The California Department of Corrections and the California
Youth Authority ("CYA") are installing the Company's Biometric Security
fingerprint readers and networking software for physical access control in
prisons and CYA facilities statewide. The systems enable authorized staff
members to enter and exit secure areas, provide an exact record of each entry
and exit and alert security staff if authorized persons do not biometrically
check out of the secured areas when expected.

The Company believes that success in the Biometric Security industry
requires addressing the customer's needs by providing the necessary software
applications and necessary interfaces with the customer's legacy computer
systems. The Company has developed system management software to facilitate the
deployment of Biometric Security devices and to control and manage a distributed
network of Biometric Security devices. This management software enables an
authorized system manager to limit, as desired, the scope of access of
individuals and can create an audit trail of entries, alarms, enrollments,
system changes and impostor attempts. The Company has also developed a number of
customizable software applications to address specific customer's identification
and verification requirements. These applications include a secure sign-on for
Windows NT, a specialized tracking system for correctional institution
operations (Bio-Sentinel), and identity verification for digital certificate
authorization in electronic commerce. The Company has developed solutions to
interface Identix's Biometric Security products with customer legacy computer
systems, including Oracle databases, Computer Associates Unicenter TNG system
management software, smart card readers and legacy systems. In addition, the
Company has also developed the necessary software that encodes a smart card with
fingerprint information used to verify an individual's identity before
authorizing a transaction.

BIOMETRIC IMAGING SOLUTIONS. In the Biometric Imaging market, the Company
has established a leadership position by providing systems for the efficient
capture and management of digital fingerprint images and demographic data for
various law enforcement, immigration and civilian employment, screening and
background checks. Law enforcement and other government agencies in 38 states
and four foreign counties have installed the Company's Biometric Imaging
products for the following applications:

Law Enforcement: Identix provides live-scan systems for state-wide law
enforcement networks in California, Arizona, Texas, Illinois, Ohio, New Jersey,
Maryland and Georgia. Many large cities and counties also use a network of
Identix TouchPrint 600 live-scan systems for law enforcement, including New York
City Police Department, Cook County (Chicago) Sheriff's Department, Boston
Police Department and Detroit Police Department.

Fingerprinting Services for Civilian Application: The Company recently
entered into a joint venture with Sylvan for the purpose of providing
fingerprinting services for a variety of civilian applications through Sylvan's
testing centers nationwide. The joint venture currently has operations in ten
United States cities and has programs with the American Banking Association and
the National Association of Securities Dealers for performing background checks
on banking and securities personnel.

Immigration: The INS uses the Company's Biometric Imaging products to
perform background checks on persons who enter the United States and persons
seeking naturalization.

Social services: Social service agencies in five states use the Company's
Biometric Imaging products to provide forensic quality images to identify
welfare recipients and prevent collection of benefits by the same person under
different names.

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Motor vehicle licensing: Two states use the Company's Biometric Imaging
products to check whether driver's license applicants have received and/or had
revoked a license under different names in that state.

In order to meet the forensic quality standards required for identifying
individuals from within large AFIS systems, the Company has applied its optics
and image processing expertise to develop a system that it believes captures
higher resolution and more accurate images than other available systems. The
Identix fingerprint capture unit produces rolled finger and "slap" (four fingers
at once) images at 600 dots per inch and 500 dots per inch, respectively.

The Company's live-scan products contain proprietary high-resolution
printing technology and a number of proprietary software features, including
data management software and software for digitizing and processing fingerprint
data in accordance with FBI standards. The Company's expertise in networking and
systems integration has allowed it to implement large scale systems in some of
the largest law enforcement agencies in the United States to automate and
improve the efficiency of the identification process. In addition, the Company
has developed proprietary quality assurance software that can tell the operator
if a smudged or otherwise unreadable fingerprint image was captured, allowing
the operator to recapture the image and has developed capture sequence control
software that detects sequence errors resulting from the accidental rolling of
the wrong finger for placement on the fingerprint card.

STRATEGY

The Company's goal is to continue to develop and expand high level security
applications for information technology, banking, government and other Biometric
Security applications worldwide, to augment its presence in the domestic
Biometric Imaging markets and penetrate international Biometric Imaging markets.
The key elements of the Company's strategy include:

Deliver Comprehensive Biometric Solutions. In both the Biometric Imaging
and Biometric Security fields, the Company strives to provide comprehensive
solutions for its customers. Identix is able to deliver complete Biometric
Security systems for a range of different uses by integrating fingerprint image
capture devices, fingerprint analysis algorithms, operating systems to manage
networks of biometric devices and end-user software solutions that the Company
believes best meet the end-user's needs. The Company considers Biometric
Security software and algorithms to be critical in providing comprehensive
customer solutions and strives to maintain its leading edge in these areas,
unlike certain other companies which are focusing solely on the development of
image capture devices. In the Biometric Imaging industry, the Company intends to
offer expanded capabilities to encompass all phases of the booking operation in
a single, integrated system, through modular expansion. In addition, the
Company's field service organization continues to expand the scope of its
services to law enforcement agencies, assisting in systems analysis and
providing interfaces between Identix and existing computer systems to improve
the quality and efficiency of records collection. In both Biometric Security and
Biometric Imaging, the Company seeks to continue to provide superior technical
services and responsiveness and complete customer solutions that meet or exceed
specifications.

Penetrate New Markets Through Strategic Relationships. The Company is
establishing strategic relationships with a select group of market leaders to
provide Biometric Security solutions for a variety of applications. An extensive
infrastructure already exists for many of the markets in which the Company
wishes to participate. In such cases, the Company has and will pursue
relationships with companies with strong positions in these markets. For
example, the Company has developed Biometric Security products in cooperation
with both Oracle and Computer Associates to enhance the security of their
software. In addition, the Company has developed relationships with two of the
leading AFIS suppliers in the world, Sagem Morpho, Inc. ("Sagem Morpho") and NEC
Technologies, Inc. ("NEC"), to provide forensic quality Biometric Imaging to
government agencies. In September 1997, the Company entered into a joint venture
with Sylvan to provide fingerprinting services. The Company intends to continue
to focus on developing strategic relationships with OEMs, system integrators and
resellers who serve as prime contractors for large, integrated systems in the
domestic and international markets.

Maintain and Enhance Leadership in Biometric Technology. The Company's
success depends on providing technologically advanced, cost-effective solutions.
Accordingly, the Company intends to continue to

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invest in research and development and, where necessary, acquire companies or
technologies that are complementary to its business in order to maintain and
enhance its leadership position in biometric technology. These efforts include
development of low cost fingerprint capture devices, enhanced algorithms,
applications software, integration tools and software, highly integrated
hardware designs, and mechanical and electronic components designed for high
volume production.

Maintain a Global Presence and Perspective. The Company believes that there
are many opportunities to apply biometric technologies throughout the world and
that solutions provided in one area of the world can be used in other regions
for customers with similar requirements. Where fraud is prevalent, biometric
solutions have the potential of providing immediate substantial savings. The
Company has established a regional sales and support presence in North and South
America, Australia, Europe and Asia to address opportunities throughout the
world.

BIOMETRIC SECURITY PRODUCTS

The Company's Biometric Security products operate by comparing an
individual's fingerprint with a previously recorded mathematical
characterization, or template, of that fingerprint. The template can be stored
in a computer's memory, in a stand-alone Biometric Security product or a smart
card (a card similar to a credit card with an embedded computer chip). When
requesting access or authorization the user identifies himself with a PIN or
coded identification card and then places his finger on the platen of the
Biometric Security system. The system compares the finger placed on the platen
with the stored template to confirm the user's identity. If the fingerprint and
the stored template match, the user is positively identified and access or
transaction processing is authorized. If the fingerprint and the stored template
do not match, access or transaction processing is denied.

TouchSafe II and TouchNet II. TouchSafe II and TouchNet II for Oracle are
used for controlling access to computers, computer databases and networks in a
wide range of solutions including government, airports, banking and healthcare.
TouchSafe II and TouchNet II are designed to be connected to both personal
computers and sophisticated client/server networks to provide advanced user
authentication through Identix developed solutions, such as the Oracle and
Computer Associates specific solutions, or third party custom developed
solutions. TouchNet II features data hashing security which encodes and decodes
network-based communications and fingerprint data for heightened security.

TouchSAFE Personal and TouchNet III. TouchSAFE Personal and TouchNet III
are the next generation products which serve the same market applications as
TouchSafe II and TouchNet II. Both products connect to the host computer via a
serial interface and perform enrollment and verification functions within the
device using Identix proprietary pattern-matching algorithms and either a custom
ASIC microprocessor or an off-the-shelf microcontroller. Both products will
operate with all Identix Biometric Security systems and application software.
TouchSAFE Personal also incorporates an optional internal smart card read/write
device, all within its streamlined desktop configuration. The Company believes
that these products can provide identity authentication on computer networks for
electronic commerce, database access and other computer-related information and
data security applications.

TouchLock II. TouchLock II is an access control system which may be used in
many different applications, including securing access to physical space such as
buildings, vaults and ATMs or authorizing financial transactions. TouchLock
products, which are very rugged and recognized for their mission-critical
reliability, have been installed in the Pentagon and various other United States
government agencies and in banks and industrial plants around the world. These
products may be connected in a network configuration through a personal computer
and have the flexibility to permit access to designated entry points, thereby
allowing a customer to install different levels of security at different
locations within the same system. In addition, TouchLock II can be used as a
stand-alone system eliminating the need for a personal computer or network
connection. TouchLock II is also marketed under the name Fingerscan
internationally.

TouchClock II. TouchClock II is specifically designed for employee
time-and-attendance applications, to be used as an alternative to, or in
conjunction with, traditional punchcard time-and-attendance systems.

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TouchClock II can track an individual's time of arrival and departure as well as
breaks. TouchClock II is based on the same core proprietary technology as
TouchLock II.

TouchBlock II, TouchBlock 2.5 and F3. The Company sells fingerprint
identification kits to OEMs consisting of a tooled optics subsystem, custom
integrated circuit or off-the-shelf microcontrollers, and supporting software
modules which allows biometric identification to be integrated into third party
OEM systems.

Fingerlan III. Fingerlan III is system management software for use with
TouchLock designed to allow the authorized system manager the ability to limit
access of specific individuals to certain times or to certain locations, as well
as to create an audit trail of all entries, alarms, enrollments, system changes
and impostor attempts. Fingerlan III is compatible with Microsoft Windows.

Application Software. The Company's Biometric Security software products
comprise two major categories: applications developed internally and software
interfaces to third party products. Applications developed internally include a
secure sign-on for Windows NT, a specialized tracking system for correctional
institution operations (Bio-Sentinel), and identity verification for digital
certificate authorization in electronic commerce. The Company has developed
solutions to interface Identix's Biometric Security products with customer
legacy computer systems, including Oracle databases, Computer Associates
Unicenter TNG system management software, smart card readers and legacy
applications. In addition, the Company has also developed the necessary software
that encodes a smart card with fingerprint information used to verify an
individual's identity before authorizing a transaction. The Company works with
its customers to develop software applications and provides software developer
kits for customized applications.

Algorithms. The Company has developed proprietary pattern recognition
algorithms. Most competitors use minutiae-based algorithms, the same fingerprint
matching algorithm used by law enforcement. The use of this publicly available
minutiae algorithm creates the risk that the minutiae fingerprint template
captured for personal access or authorization may be used for background checks
against law enforcement databases without the knowledge or consent of the
individual. The Company's pattern recognition algorithms operate on an entirely
different basis than the minutiae-based algorithm, thereby reducing the civil
liberties concerns associated with fingerprinting generally.

BIOMETRIC IMAGING PRODUCTS

The Company's Biometric Imaging products are used for the capture, storage
and management of high resolution forensic quality fingerprint images and other
identifying information.

TouchPrint 600 Live-Scan System. The Company's TouchPrint products are
computer-based, inkless live-scan systems that electronically scan and capture
forensic quality fingerprint images directly from an individual's finger. The
fingerprint images then can be printed using a laser printer or transmitted over
telephone lines or a wide area network (WAN) to AFIS systems for identification
matching at local, state or federal agencies. TouchPrint was designed for use by
law enforcement agencies as a more accurate and efficient method of recording
fingerprint and demographic information than the conventional "ink-and-roll"
method. The TouchPrint 600 workstation and printer system was the first system
accredited under the FBI's Image Quality Specifications standard. Accreditation
to this specification is required for direct electronic submission of
fingerprint images to the FBI's integrated AFIS. In addition to law enforcement
applications, other applications for the TouchPrint systems include background
checks of prospective employees by public and private sector employers.
TouchPrint 600 systems typically integrate a high resolution scanner with
digital signal and video processing boards, multi-processing application
software, a multi-tasking computer, monitors as well as a laser printer enclosed
in a cabinet.

TouchPrint 600 Card Scan System. The TouchPrint 600 Card Scan System
provides digitization of inked fingerprint images that were originally recorded
on 10-print card stock. The TouchPrint 600 Card Scan System is designed to be
used primarily by lower volume booking sites that want to participate in an
electronic fingerprint identification network. The TouchPrint Card Scan System
has a flat-bed scanner on which the user places the inked fingerprint card. The
system checks for lateral and angular misalignment of the card, digitizes

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the complete card, applies automatic contrast equalization and extracts the
digital image of each individual fingerprint on the card. The digitized
fingerprint record can be forwarded by mail or electronically for identification
processing by the FBI, or a local or state AFIS or for archive at a central
records repository.

TouchPrint 600 Palm Scanner. The TouchPrint 600 Palm Scanner is an inkless
live-scan system that electronically captures high quality palm images for
forensic matching. The TouchPrint 600 Palm Scanner can be integrated with
existing TouchPrint 600 live-scan networks. The palm images can be transmitted
to identification bureaus for examination using existing TouchPrint 600
communication software and printed using existing TouchPrint 600 printing
systems with upgrade.

TouchView II. TouchView II is specifically designed to capture and display
a high resolution video fingerprint image on a customer-supplied workstation.
TouchView is designed to be used primarily by system integrators as an optical
fingerprint capture device which supplies fingerprint images to a frame grabber
which digitizes the image for computerized fingerprint database systems for
identification matching. The Company's TouchView single-finger imagers are
incorporated by OEMs into turnkey systems and are used for civilian applications
in welfare fraud prevention, immigration and border control, and motor vehicle
licensing.

DocuColor. The DocuColor mugshot and image file management system is an
image management system that provides the capability to create an "electronic
file folder" containing color video images, document images, fingerprints, forms
and digitized data. The system provides compact storage and easy retrieval of a
large volume of criminal justice information such that a user can, by querying
the system and utilizing certain physical characteristics of a suspect, produce
from a search of thousands of suspect records a photo line-up for comparison.
The system operates on a personal computer workstation. A digital video camera
is used for capturing color photographs and a high resolution scanner is used to
digitize documents to store in an electronic file folder. A high-capacity
relational database is used to index and store information and images. Images
and data from the electronic file folders can be displayed on high resolution
monitors or printed on black and white or color printers. The DocuColor system
provides networking capabilities to allow multiple users access to a central
database and image storage system.

TouchPrint 600 Store & Forward System. The TouchPrint 600 Store & Forward
System located at central processing sites manage the flow of electronic
fingerprint records from a network of TouchPrint live-scan systems. The
high-performance, multi-function Store & Forward platform simultaneously
supports record receiving, interactive record editing, selective record
transmitting and record printing on locally attached printers.

TouchPrint 600 Print Server. TouchPrint 600 Print Servers provide automated
receipt and printing of live-scan fingerprint records at remote or central
facilities. High-capacity record storage options ensure uninterrupted record
flow during peak load periods.

Software. The TouchPrint 600 live-scan comes with Identix's proprietary
user interface software, which can be custom configured to meet the demanding
demographic data entry and specialized workflow requirements of law enforcement
agencies. TouchPrint's Image Quality Assurance (QA) software automatically
checks each fingerprint image and alerts the operator if the fingerprint should
be re-scanned. In addition, Identix offers software options such as AccuCapture
Sequence Control that provides true "slap-to-roll" comparison eliminating
fingerprint sequence errors by the live-scan operators. The TouchPrint 600 also
supports selective management reporting functions to evaluate system and
operator performance.

FINGERPRINT SERVICES

Certain employers (including federal or state government agencies, child
care, securities and gaming licensing agencies) require a background check,
including a fingerprint check, as a condition of employment. Usually, an
applicant is required to go to a police station for ink fingerprinting and then
submit the fingerprint card to the employer for submission to the state
authorities or the FBI to perform a background investigation. If the fingerprint
card is rejected, an applicant then must go through the process again.

The need for reliable and convenient fingerprint capture for diverse
applications has given rise to the fingerprinting business. In September 1997,
the Company and Sylvan entered into a joint venture to pursue

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opportunities created by this demand for fingerprint services. The joint venture
provides fingerprinting services on a contract basis using Identix live-scan
systems at locations provided by Sylvan or government agencies and through
mobile units which are dispatched from a central location and make periodic
visits to different locales. The business maintains an "800" number which people
can call to find out the most convenient location for them to have fingerprints
taken (including the times at which mobile units are servicing various
locations) and to schedule an appointment. The joint venture earns a fee for
each user of the services. The joint venture currently provides fingerprinting
services in ten United States cities. In the last year, the joint venture has
established programs with the American Banking Association and the National
Association of Securities Dealers for performing background checks on banking
and securities personnel.

The fingerprint services business provides the applicant and employer with
the following advantages: fingerprinting takes place in a non-police
environment; background checks can be completed more quickly allowing the
applicant to begin work sooner; re-submissions can be done automatically; the
rejection of cards because of poor print quality is virtually eliminated; and
employers may not be subject to the unnecessary risk of discovering that an
employee who has begun work may have a criminal record.

ANADAC SERVICES

The Company provides information technology, engineering and management
consulting services to private and public sector clients through ANADAC, which
is headquartered in Arlington, Virginia. ANADAC's services support the
development, installation, integration and operation of hardware and software
technology solutions, including Identix products, for a variety of client
operating environments. ANADAC provides such services through the following
groups and subsidiary:

Information Technology Group. ANADAC's Information Technology Group ("IT
Group") provides business process analysis and business process engineering as
well as system design, development, integration and implementation services to
automate a client's workflow thereby improving operational efficiency and
solving business problems. The IT Group's solutions incorporate a variety of
technologies such as digital imaging, Biometric Imaging, networking, relational
database development and management, telecommunications and integration of
nonhomogeneous software and hardware into a single homogeneous environment.

The IT Group focuses on providing acquisition, design, development and
integration support for imaging systems in a variety of different applications
ranging from law enforcement to office and business applications to automated
storage and retrieval. The IT Group utilizes the Company's DocuColor image file
management system to provide customers a file management system that allows
users to capture, catalog, index, store and retrieve data, digital video images
and document images using a file folder paradigm. The IT Group also develops and
implements biometric solutions using the Company's products. For example, the IT
Group has been a systems integrator for the Maryland Department of Public Safety
and Cook County Sheriff's Department whereby they integrated the Company's
TouchPrint 600 live-scan system, the Company's DocuColor mugshot and file
management system and the customers' criminal justice information systems. The
IT Group also functioned as the software development facility to integrate the
Company's TouchLock and TouchSafe product lines into Computer Associates
Unicenter TNG system management software and Identix's Bio-Sentinel software.
The IT Group also designs and implements other imaging systems using "off-
the-shelf" or commercially available products that satisfy its clients'
requirements.

The IT Group has used internally developed technology to develop the
Identix General Services Administration ("GSA") computerized catalog that
enables federal and state agencies to call up specifications and pricing, then
order equipment and services from its GSA Federal Supply Schedule Contract
("FSS"). Through the GSA FSS program, Identix streamlines the acquisition
process and allows federal and state agencies to procure Identix equipment in an
expedient matter. Originally the IT Group implemented the GSA FSS program for
internal use; now however, the IT Group allows third parties for a fee to sell
through the Company's GSA computerized catalog.

Systems Engineering Group. ANADAC's System Engineering Group is a leader in
providing consulting, scheduling, project monitoring, financial and contract
management planning and implementing system acquisition programs in both the
public and private sectors. The Systems Engineering Group has extensive

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expertise in planning and executing weapon system acquisitions. In September
1995, ANADAC's System Engineering Group was awarded a contract for program
management engineering services by the Naval Sea Systems Command in support of
the AEGIS Combat Shipbuilding Program. The contract generated approximately $7
million per year in revenue in the past three years, and is estimated to have a
total contract value of approximately $38 million over a five-year period if all
contract options are exercised. There can be no assurance that any contract
extensions will be exercised or that funding will be provided beyond the base
year.

Facilities Group. ANADAC's Facilities Group provides strategic program
management, including monitoring and cost control, facility engineering audits,
assessments, inspections and maintenance management and construction management
programs. An example contract includes functioning as the construction manager
for GSA's 10-year renovation of the White House and Executive Office buildings.

Legislative Demographic Services, Inc. ANADAC's wholly owned subsidiary
Legislative Demographic Services, Inc. provides demographic data information and
services principally to Fortune 500 companies for use in lobbying Federal and
state legislatures.

A substantial portion of ANADAC's business comes from government agencies,
which subjects the business to certain additional risks.

PRODUCT DEVELOPMENT

The Company continues to invest in research, development and engineering to
enhance the performance and functionality, and in certain cases reduce the
costs, of its existing products as well as to increase the breadth of the
Company's product offerings. The Company's expenditures for research,
development and engineering totaled $4,572,000, $2,754,000, and $1,486,000, in
the fiscal years ended June 30, 1998, 1997 and 1996, respectively. In addition,
research, development and engineering expenditures funded by customers were
$16,000, $269,000, and $255,000 in the fiscal years ended June 30, 1998, 1997
and 1996, respectively.

The Company's development programs have recently focused on: the next
generation Biometric Security devices which are being developed to be faster,
more reliable and cost effective than currently available devices; Biometric
Security end user software applications; development of the recently introduced
palm scanner; and enhancement of the Company's other live-scan products.

SALES, MARKETING AND SUPPORT

The Company markets its Biometric Security and Biometric Imaging product
lines directly to end users through its internal sales force, and indirectly
through authorized agents, distributors, VARs, system integrators and OEMs. The
Company's sales organization is divided into four regions: North America; Asia/
Pacific; Latin America; Europe, Middle East and Africa.

Biometric Security Products. The Company's Biometric Security products are
sold through a worldwide network of direct sales personnel, distributors,
systems integrators, VARs and OEMs. Sales activity is concentrated in the
markets of database and network access security, banking (financial
transactions), time-and-attendance, access control and government (personal
verification). The Company has sales, service, product marketing and application
engineering expertise in each regional sales offices to provide the customers
with complete sales and maintenance support.

Sales activity varies widely from single access control devices sold by a
dealer or system integrator to complicated, networked solutions sold by several
companies working cooperatively, such as, financial transaction authorization,
time-and-attendance and building access. The success of these sales depends on
the Company's ability to provide integrated solutions that are usually software
based. The majority of the service and support activities relate to these
software and integration issues.

Biometric Imaging Products. The Company's Biometric Imaging products are
marketed domestically primarily through a direct sales force and internationally
through sales representatives. Identix also teams with two major AFIS vendors,
NEC and Sagem Morpho, to provide TouchPrint 600 systems or OEM versions thereof
for law enforcement applications. In addition, the Company works closely with
skilled system

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integrators for civil and commercial applications of its Biometric Imaging
technology. The Company develops proposals, either directly or in cooperation
with its partners, and is often directly involved in negotiating the contract
terms.

The Company's TouchPrint 600 live-scan system is generally sold through a
competitive bid process based on a RFP. Funding for such projects often comes
from federal, state and local agencies. The funding, proposal, contract
negotiation and implementation process can extend over several months or years,
although for existing customers that are adding to or upgrading their systems,
the sales cycle is considerably shorter and these sales often are not required
to go through the bid process.

Product Support. Installation and maintenance support comes from the
Company's 24 hour/7 days per week TouchCare support center, regional technical
staffs as well as the Company's engineering staff. This support generally
includes travel to the customer site to explain the technical operation of the
system, clarify the configurations, detail any necessary software customization
and define the integration issues. The systems are then installed and supported
by the TouchCare support center, regional staffs and the Identix trained system
integrators, VARs or partners. The Company provides ongoing training at its
Sunnyvale, California facility for customers and distributors, as well as
providing on-site training for customers.

The Company's Biometric Imaging products carry a 90-day warranty and
extended service and warranty are offered through a choice of maintenance
contracts. The Company's Biometric Security products carry a one year warranty
and additional support is available for a fee after the expiration of the
warranty period. For equipment produced by other companies, the Company passes
on to its customers the standard warranties provided by those manufacturers.
Service centers are located in California, Australia, Indonesia and Switzerland.

ANADAC Services. ANADAC markets its services directly to United States
government agencies, including the DOD, and to commercial entities.

BACKLOG

Product sales are generally made pursuant to purchase orders, which are
subject to cancellation. The Company typically ships its products within sixty
days of receipt of an order. For its ANADAC services business, amounts in
backlog are often not funded and, even if they are funded, are subject to
cancellation by the contracting agency. Accordingly, the Company believes that
backlog at any given time cannot be considered a meaningful indicator of future
financial performance.

PATENTS AND TRADE SECRETS

The Company's ability to compete effectively will depend in part on its
ability to maintain the proprietary nature of its technology, products and
manufacturing processes. The Company principally relies upon patent, copyright,
trade secret and contract law to establish and protect its proprietary rights.
The success of the Company's products business will depend in part on its
proprietary technology and the Company's protection of such technology. The
Company holds the following patents: one U.S. patent expiring in 2004 and ten
foreign patents on one version of the Company's optical fingerprint reading
device; one U.S. patent expiring in 2008 and six foreign patents on a
fingerprint analysis algorithm; one U.S. patent expiring in 2013 covering an
enhanced method of recording a fingerprint; one U.S. patent expiring in 2014 on
the Company's curved platen design palm scanner; one U.S. patent expiring in
2015 covering a different version of the Company's optical fingerprint reading
device; and one U.S. patent expiring in 2016 covering a system for reducing
smear in rolled fingerprint capture. Identix has an ongoing policy of filing
patent applications to seek protection for novel features of its products and
currently has four patent applications pending in the United States and five in
foreign countries. No assurance can be given that the claims allowed on any
patents held by the Company will be sufficiently broad to protect the Company's
technology. In addition, no assurance can be given that any patents issued to
the Company will not be challenged, invalidated or circumvented or that the
rights granted thereunder will provide competitive advantages to the Company.
The loss of patent protection on the Company's technology or the circumvention
of its patent protection by competitors could have a material adverse effect on
the Company's ability to compete successfully in its products business. There
can be no

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assurance that any existing or future patent applications by the Company will
result in issued patents with the scope of the claims sought by the Company, or
at all, that any current or future issued or licensed patents, trade secrets or
know-how will afford sufficient protection against competitors with similar
technologies or processes, or that any patents issued will not be infringed upon
or designed around by others. In addition, there can be no assurance that others
will not independently develop proprietary technologies and processes which are
the same as or substantially equivalent or superior to those of the Company.
Further, there can be no assurance that the Company has not or will not infringe
prior or future patents owned by others, that the Company will not need to
acquire licenses under patents belonging to others for technology potentially
useful or necessary to the Company, or that such licenses will be available to
the Company, if at all, on terms acceptable to the Company.

The Company also relies on trade secrets and proprietary know-how which it
seeks to protect by confidentiality agreements with its employees and
consultants and with third parties. There can be no assurance that these
agreements will not be breached, that the Company will have adequate remedies
for any breach, or that its trade secrets and proprietary know-how will not
otherwise become known or be independently discovered by others.

COMPETITION

The markets for Biometric Security and Biometric Imaging products are
extremely competitive and are characterized by rapid technological change, both
as a result of technical developments exploited by competitors, the changing
technical needs of the customers and frequent introductions of new features. The
Company expects competition to increase as other companies introduce additional
and more competitive products. In order to compete effectively in this
environment, the Company must continually be able to develop and market new and
enhanced products and market those products at competitive prices. There can be
no assurance that the Company will be able to make the technological advances
necessary to compete successfully in its products business. Some of the
Company's present and potential competitors have financial, marketing and
research resources substantially greater than those of the Company. Existing and
new competitors may enter or expand their efforts in the Company's product
markets, or develop new products to compete against the Company's products. No
assurance can be given that the Company's competitors will not develop new
technologies or enhancements to existing products or introduce new products that
will offer superior price or performance features or that new products or
technologies will not render obsolete the products of the Company. Recently, a
significant number of established and startup companies have become engaged in
developing software and hardware for fingerprint Biometric Security applications
that could compete directly with the Company's Biometric Security products,
including a number of companies that are developing semiconductor or
optically-based direct contact fingerprint image capture devices. In addition,
other companies are developing currently or have developed other methods of
biometric identification such as retinal blood vessel or iris pattern, hand
geometry, voice and facial structure, which could significantly reduce the
potential market for the Company's products if widely adopted. The Company's
Biometric Security products also face competition from non-biometric
technologies such as traditional key, card and surveillance systems, PINs and
similar traditional verification methods. The Company believes that in an effort
to remain competitive in the future it will need to invest increasing financial
resources in research and development.

The Company believes that the most important competitive factors for
Biometric Security products are the degree of security provided, ease of use,
functionality, price and reliability. In applications such as controlled access
to computers, ATMs and electronic funds transfer, the Company faces competition
from technologies relying on PIN numbers or passwords. In competing with these
non-biometric products, the

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Company believes that the most important competitive issue is the trade-off
between the additional security provided by positive personal identification and
the higher price. In some instances, however, products using non-biometric
technologies may be complementary to, rather than competitive with, the
Company's Biometric Security products. For example, card key systems can be
integrated with Biometric Security systems to supply different levels of
security within a facility.

The Company believes that the most important competitive factors for the
Biometric Imaging products are the quality of fingerprint images, the capability
to work within large criminal history networks, ease of use, price and
reliability. The Company is aware of other companies that are currently
marketing live-scan products competing with Identix's TouchPrint products.

In its services business, the Company faces substantial competition from
professional services providers and systems integrators of all sizes in the
government marketplace. ANADAC is increasingly being required to bid on firm
fixed price and similar contracts that result in greater performance risk to
ANADAC. If ANADAC is not able to maintain a competitive cost structure, support
specialized market niches, retain its highly qualified personnel or align with
technology leaders, its ability to compete successfully will be materially and
adversely affected.

MANUFACTURING

The Company limits its manufacturing activities to the assembly and testing
of proprietary subassemblies, final system assembly and functional testing.
Printed circuit board assemblies are fabricated by highly automated outside
suppliers. The Company believes this would permit rapid expansion of production
capacity to meet any significant increase in product demand. The Company
believes that the cost of material and fabricated subassemblies will decline if
manufacturing volume increases. Quality control tests are performed at all
stages of the manufacturing process.

The Company currently uses certain components which are sole sourced, the
most important of which are the charge coupled and CMOS imaging devices and
ASICs for the Biometric Security products and the charge coupled devices for the
Biometric Imaging products. The partial or complete loss of supplies available
from sole or limited sources of supply or the delay in receiving supplies from
these sources could result in delays in manufacturing and shipping of products
to customers and require the incurrence of development and other costs to
establish alternative sources of supply. While the Company attempts to maintain
a few months worth of inventory on sole sourced components, it may take the
Company several months to locate alternative supplies if required, or redesign
its products to accommodate components from different suppliers. If the Company
is required to seek alternative suppliers, there can be no assurance that the
Company will be able to obtain such components within the time frames required
by the Company at an affordable cost, or at all. Any delays resulting from
suppliers failing to deliver components on a timely basis in sufficient
quantities or of sufficient quality or any significant increase in the price of
components from existing or alternative suppliers could have a material adverse
effect on the Company's business, financial condition and results of operations.

EMPLOYEES

As of September 1, 1998, Identix had 167 employees working in its products
business, of whom 36 were engaged in research, development and engineering, 22
in production and production support, 80 in sales, marketing and field service
and 29 in general administration and finance. As of September 1, 1998, Identix
had 252 employees working in its services business, of whom 213 were service
providers, 17 were engaged in sales and marketing and 22 were engaged in general
administration and finance. None of Identix's employees is represented by a
union and Identix has never experienced a work stoppage. Management considers
its employee relations to be good.

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RISK FACTORS

The Company's future operations, financial performance, business and share
price may be affected by a number of factors, including the following, any of
which could cause actual results to vary materially from anticipated results or
from those expressed in any forward-looking statements made by the Company in
this Annual Report on Form 10-K or in other reports, press releases or other
statements issued from time to time.

FLUCTUATIONS IN QUARTERLY RESULTS

The Company's quarterly operating results have in the past been, and will
continue to be, subject to significant variations resulting from a number of
factors, many of which are outside of the Company's control and any one of which
could substantially affect the Company's results of operations for any
particular fiscal period. The Company's revenues in any period have been, and in
the near term are expected to be, derived from large orders from a limited
number of customers. Accordingly, revenues in a particular quarter will be
dependent upon the timing and size of major orders and the timing of recognition
of revenues from those orders. A majority of the Company's revenues are derived
from the sale of products and services directly to governmental agencies or
OEMs, systems integrators or resellers who sell products and services to
government agencies. Government agencies are subject to political and budgetary
constraints and orders from them may be canceled or substantially delayed or the
receipt of revenues or payments substantially delayed due to political and
budgetary processes or other scheduling delays relating to the contract or
bidding process. In addition, the Company's contracts with local government
agencies may be contingent upon availability of matching funds from state or
federal entities. Other factors which can result in fluctuations in quarterly
results of operations include budgetary and purchasing cycles of government
agencies; changes in the mix of products and services sold and the mix of
product sales by distribution channels; the pricing of existing and future
products by the Company's competitors; the introduction of new or enhanced
products by the Company or its competitors and the market acceptance thereof;
expenses related to, and results of, litigation; percentage of and costs
associated with firm fixed price ("FFP") contracts and time and materials
("T&M") contracts; the availability and cost of key components; and fluctuations
in general economic conditions. The Company also may choose to reduce prices or
to increase spending in response to competition or to pursue new market
opportunities, all of which may adversely affect the Company's business,
financial condition and results of operations. Further, the lead-time for
ordering parts and materials and building the Company's products can be many
months and the Company orders parts and materials and builds products based on
its forecasted demand for the products. If demand for the Company's products
lags significantly behind the Company's forecasts, the Company runs the risk of
building too large an inventory, which may adversely affect cash flow and may
result in write-offs or writedowns of inventory because of product obsolescence.
Due to the foregoing factors, the Company's operating results may differ from
the expectations of securities analysts and investors, which could adversely
affect the trading price of the Company's common stock. The Company believes
that period-to-period comparisons of its results of operations should not be
relied upon as indications of future performance.

DEPENDENCE UPON NEW AND UNCERTAIN MARKETS; UNCERTAINTY OF MARKET ACCEPTANCE

Substantially all of the Company's product revenues to date have been, and
for the foreseeable future are anticipated to be, derived from Biometric
Security products and Biometric Imaging products. Biometric Security products
represent a new approach to identity verification, which has only been used in
limited applications to date, and these products have not gained widespread
commercial acceptance. The expansion of the market for the Company's products
depends on a number of factors, including the cost and reliability of the
Company's products and products of competitors, customers' perception of the
perceived benefits of these products, public perceptions of the intrusiveness of
these products and the manner in which agencies are using the fingerprint
information collected, public confidence as to confidentiality of private
information, customers' satisfaction with the Company's products and publicity
regarding these products. Public objections have been raised as to the use of
biometric products for some applications on civil liberties grounds and certain
legislation has been proposed to regulate the use of Biometric Security
products. The Company's future success is dependent upon the development and
expansion of markets for Biometric Security products and Biometric Imaging
products both domestically and internationally. In addition, even if markets
develop for Biometric

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Security products and additional markets develop for Biometric Imaging products,
there can be no assurance that the Company's products will gain wide market
acceptance in these markets. A number of factors may limit the market acceptance
of the Company's products, including the performance and price of the Company's
products compared to competitive products or technologies, the practicalities of
developing the infrastructure necessary to support certain Biometric Security
applications such as ATMs and point-of-sale applications, the nature of
technological innovations and new product development activities by the Company
and its competitors, and the extent of marketing efforts by the Company's
collaborators or partners. If the markets for the Company's products fail to
develop or develop more slowly than anticipated or if the Company's Biometric
Security products fail to gain wide market acceptance, or Biometric Imaging
products lose market share, the Company's business, financial condition and
results of operations would be materially and adversely affected.

COMPETITION AND TECHNOLOGICAL CHANGE

The markets for Biometric Security and Biometric Imaging products are
extremely competitive and are characterized by rapid technological change, both
as a result of technical developments exploited by competitors, the changing
technical needs of customers and frequent introductions of new features. The
Company expects competition to increase as other companies introduce additional
and more competitive products. In order to compete effectively in this
environment, the Company must continually be able to develop and market new and
enhanced products and market those products at competitive prices. There can be
no assurance that the Company will be able to make the technological advances
necessary to compete successfully in its products business. Some of the
Company's present and potential competitors have financial, marketing and
research resources substantially greater than those of the Company. Existing and
new competitors may enter or expand their efforts in the Company's product
markets, or develop new products to compete against the Company's products. No
assurance can be given that the Company's competitors will not develop new
technologies or enhancements to existing products or introduce new products that
will offer superior price or performance features or that new products or
technologies will not render obsolete the products of the Company. Recently, a
significant number of established and startup companies have become engaged in
developing software and hardware for fingerprint Biometric Security applications
that could compete directly with the Company's Biometric Security products,
including a number of companies that are developing semiconductor or
optically-based direct contact fingerprint image capture devices. In addition,
other companies are developing currently or have developed other methods of
biometric identification such as retinal blood vessel or iris pattern, hand
geometry, voice and facial structure, which could significantly reduce the
potential market for the Company's products if widely adopted. The Company's
Biometric Security products also face competition from non-biometric
technologies such as traditional key, card and surveillance systems, PINs and
similar traditional verification methods. The Company believes that in an effort
to remain competitive in the future it will need to invest increasing financial
resources in research and development.

In its services business, the Company faces substantial competition from
professional services providers of all sizes in the government marketplace.
ANADAC is increasingly being required to bid on FFP and similar contracts that
result in greater performance risk to ANADAC. If ANADAC is not able to maintain
a competitive cost structure, support specialized market niches, retain its
highly qualified personnel or align with technology leaders, its ability to
compete successfully will be materially and adversely affected.

DEPENDENCE ON NEW PRODUCT INTRODUCTIONS

The Company's future success will depend upon its ability to address the
needs of the market by enhancing its current products and by developing and
introducing new products on a timely basis that keep pace with technological
developments and emerging industry standards (including FBI accreditation
standards and evolving standards for the interface of Biometric Security
products), respond to evolving customer requirements and achieve market
acceptance. The development of new, technologically-advanced products and
product enhancements is a complex and uncertain process requiring high levels of
innovation, as well as the accurate anticipation of technological and market
trends. Any failure by the Company to anticipate or adequately respond to
technological developments or end user requirements, or any significant delays
in

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product development or introduction, could result in a loss of competitiveness
or revenue. There can be no assurance that the Company will be successful in
developing and marketing product enhancements or new products on a timely basis
if at all, that the Company will not experience difficulties that could delay or
prevent the successful development, introduction and sale of these products, or
that any of its new products and product enhancements will adequately meet the
requirements of the marketplace and achieve market acceptance. If the Company is
unable, for technological or any other reason, to develop, introduce and sell
its products in a timely manner, the Company's business, financial condition and
results of operations would be materially and adversely affected. In addition,
because a number of the Company's Biometric Imaging products and Biometric
Security products are incorporated into systems marketed by other companies, or
are co-marketed together with other products or services sold by other
companies, the failure to introduce products in a timely manner may cause such
companies to seek alternative suppliers or marketing partners. From time to
time, the Company or its present or future competitors may announce new
products, capabilities or technologies that have the potential to replace the
Company's existing products. There can be no assurance that announcements of
currently planned or other new products will not cause customers to delay or
alter their purchasing decisions in anticipation of such products, which could
have a material adverse effect on the Company's business, financial condition
and results of operations. In addition, new product introductions may contribute
to fluctuations in quarterly operating results or result in the early
obsolescence of the Company's products, because customers may forego ordering
the Company's existing products. If the Company's new products have reliability
or quality problems, the Company may experience reduced orders, higher
manufacturing costs, delays in collecting accounts receivable and additional
service and warranty expense.

DEPENDENCE ON STRATEGIC RELATIONSHIPS FOR PRODUCT DISTRIBUTION

The Company's strategy for the distribution of certain of its products
requires entering into various strategic relationships with OEMs, systems
integrators and resellers. Some of these relationships are formalized in
agreements; however, such agreements are often terminable with little or no
notice, and subject to periodic amendment. Although the Company believes that
the OEMs, systems integrators and resellers with which it works have an economic
motivation to promote or use the Company's products, the amount and timing of
resources to be devoted to these activities are not within the control of the
Company. There can be no assurance that such parties will actively promote the
Company's products or pursue installations which use the Company's equipment,
that any distribution or other arrangements with the Company will not be
terminated or renegotiated or that the Company will derive any revenues from
such arrangements. The Company intends to continue to seek strategic
relationships to distribute and sell certain of its products. There can be no
assurance that the Company will be able to negotiate acceptable strategic
relationships in the future or that current or future strategic relationships
will be successful.

PUBLIC AGENCY CONTRACT CONSIDERATIONS

A majority of the Company's revenues are derived from the sale of products
and services either directly to governmental agencies or to OEMs, systems
integrators or resellers who sell products to government agencies. Government
agencies frequently require provisions in contracts that are not standard in
private commercial transactions, such as bonding requirements and provisions
permitting the purchasing agency to cancel the contract without penalty if
funding for the contract is no longer available or is not obtained. As public
agencies, the Company's prospective customers are also subject to public agency
contract requirements, which vary from jurisdiction to jurisdiction. Future
sales to public agencies will depend on the Company's ability to meet public
agency contract requirements, certain of which may be onerous or even impossible
for the Company to satisfy. In addition, public agency contracts are frequently
awarded only after formal competitive bidding processes, which have been and may
continue to be protracted, and typically contain provisions that permit
cancellation in the event that funds are unavailable to the public agency. There
can be no assurance that the Company will be awarded any of the contracts for
which its products are bid or, if awarded, that substantial delays or
cancellations of purchases will not result from protests initiated by losing
bidders.

16
<PAGE> 19

UNCERTAINTY RELATED TO CONTRACTS FOR SERVICES WITH GOVERNMENT AGENCIES

During fiscal 1998, the Company derived approximately 89% of its services
revenue directly from contracts relating to the DOD and other U.S. Government
agencies. Loss of any material government contract due to budget cuts or
otherwise could have a material adverse effect on the Company's business,
financial condition and results of operations.

During fiscal 1998, the Company derived approximately 68% of services
revenues from T&M contracts and FFP contracts. T&M contracts typically provide
for payment of negotiated hourly rates for labor incurred plus reimbursement of
other allowable direct and indirect costs. FFP contracts provide for a fixed
price for stipulated services or products, regardless of the costs incurred,
which may result in losses from cost overruns. The Company assumes certain
performance risk on FFP and T&M contracts and the failure to estimate accurately
ultimate costs or to control costs during performance of the work can result in
reduced profit margins or losses. There can be no assurance that the Company's
services business will not incur such overruns for any FFP and T&M contracts it
is awarded. In addition, revenues generated from contracts with government
agencies are subject to audit and subsequent adjustment by negotiation between
the Company and representatives of such government agencies. ANADAC is currently
undergoing such an audit by the Defense Contract Audit Agency for the period
from July 1, 1992 to June 30, 1995. While the Company believes that the results
of such audit will have no material effect on the Company's revenues, there can
be no assurance that no adjustments will be made and that, if made, such
adjustments will not have a material adverse effect on the Company's business,
financial condition and results of operations.

RISKS ASSOCIATED WITH INTERNATIONAL BUSINESS

During fiscal 1998, the Company's net product revenues from international
sales were 18%. A key component of the Company's strategy is to pursue product
sales in international markets. There can be no assurance that the Company will
be able to market, sell and deliver its products in these foreign countries. In
addition to the uncertainty as to the Company's ability to expand its
international presence, there are certain risks inherent in foreign operations,
including general economic conditions in each country, seasonal reductions in
business activity during the summer months in Europe and certain other parts of
the world, delays in or prohibitions on exporting products resulting from export
restrictions for certain products and technologies (including "crime control"
products and encryption technology), fluctuations in foreign currencies and the
U.S. dollar which can increase the sales price of the Company's products in
local currencies, loss of revenue, property and equipment from expropriation,
nationalization, war, insurrection, terrorism and other political risks, the
overlap of different tax structures, risks of increases in taxes and other
government fees and involuntary renegotiation of contracts with foreign
governments. The Company is also at risk from changes in foreign and domestic
laws, regulations and policies governing foreign operations. There can be no
assurance that laws or administrative practices relating to taxation, foreign
exchange or other matters of countries within which the Company operates or will
operate will not change. Any such change could have a material adverse effect on
the Company's business, financial condition and results of operations. In
addition, the laws of foreign countries treat the protection of proprietary
rights differently from, and may not protect the Company's proprietary rights to
the same extent as, laws in the United States.

The Company's international sales generally are denominated in U.S.
dollars. The Company monitors its foreign currency exchange exposure and, if
significant, will take action to reduce foreign exchange risk. To date, the
Company has not entered into any hedging transactions.

DEPENDENCE ON LARGE ORDERS BY CUSTOMERS

The Company's revenues principally consist of large orders from a limited
number of customers. While the individual customers may vary from period to
period, the Company is nevertheless dependent upon these large orders for a
substantial portion of its total revenues. There can be no assurance that the
Company will be able to obtain large orders on a consistent basis. The Company's
inability to obtain sufficient large orders would have a material adverse effect
on the Company's business, financial condition and results of operations.
Moreover, the timing and shipment of such orders may cause the operating results
of the Company in any

17
<PAGE> 20

given quarter to differ from the expectations of securities analysts, which
could adversely affect the trading price of the Company's common stock. Losses
arising from customer disputes regarding shipping schedules, product condition
or performance, or the Company's inability to collect accounts receivable from
any major customer could also have a material adverse effect on the Company's
business, financial condition and results of operations.

Orders for the Company's Biometric Imaging products are often subject to
delays associated with the lengthy approval processes that typically accompany
large capital expenditures by government agencies. The Company's total revenues
depend in significant part upon the decision of a government agency to adopt and
integrate the Company's systems, which often involves a significant capital
commitment as well as significant future support costs. Similar delays may also
be experienced from government agencies procuring the Company's services. The
Company often has a lengthy sales cycle while the customer evaluates and
receives approvals for the purchase of the Company's products or services. Any
significant failure by the Company to receive an order after expending
significant funds and effort could have a material adverse effect on its
business, financial condition and results of operations. It may be difficult to
predict accurately the sales cycle of any large order. In the event one or more
large orders fail to be shipped as forecasted for a fiscal quarter, the
Company's total revenues and operating results for such quarter could be
materially and adversely affected. In addition, even if the Company receives
such an order, the order may be contingent upon availability of matching funds
from state or federal entities or may be canceled or receipt of revenues may be
substantially delayed due to political and budgetary processes.

RISKS ASSOCIATED WITH ACQUISITIONS

As part of its business strategy, the Company intends to acquire assets and
businesses principally relating to or complementary to its current operations.
The Company acquired two companies in fiscal 1996 and one in fiscal 1998. These
and any other acquisitions by the Company will be accompanied by the risks
commonly encountered in acquisitions of companies. Such risks include, among
other things, potential exposure to unknown liabilities of acquired companies or
to acquisition costs and expenses exceeding amounts anticipated for such
purposes; fluctuations in the Company's quarterly and annual operating results
due to the costs and expenses of acquiring and integrating new businesses; the
difficulty and expense of assimilating the operations and personnel of the
companies; the potential disruption of the Company's ongoing business and
diversion of management time and attention; the inability of management to
maximize the Company's financial and strategic position by the successful
incorporation of acquired technology; the maintenance of uniform standards,
controls, procedures and policies; the impairment of relationships with and
possible loss of key employees and customers as a result of changes in
management; the incurrence of amortization expenses if an acquisition is
accounted for as a purchase; and dilution to the shareholders of the Company if
the consideration for the acquisition consists of the Company's equity. In
addition, the difficulty of integrating certain companies may be increased by
geographic distances. There can be no assurance that the Company will be
successful in overcoming these risks or any other problems encountered in
connection with such acquisitions.

RISK OF PRODUCT DEFECTS AND FAILURE TO MEET PERFORMANCE CRITERIA

Complex products such as those offered by the Company may contain
undetected or unresolved defects or may fail initially to meet customers'
performance criteria when first introduced or as new versions are released.
There can be no assurance that, despite testing by the Company, defects or
performance flaws will not be found in new products or new versions of products
following commercial release or that performance failures will not result,
causing loss of market share, delay in or loss of market acceptance, additional
warranty expense or product recall. In addition, the failure of products to meet
performance criteria could result in delays in recognition of revenue and higher
operating expenses during the period required to correct such defects. There is
a risk that for unforeseen reasons the Company may be required to repair or
replace a substantial number of products in use or to reimburse persons for
products that fail to work or meet strict performance criteria. Any such
occurrence could have a material adverse effect on the Company's business,
financial condition and results of operations. The Company does carry product
liability insurance, but there

18
<PAGE> 21

can be no assurance that existing coverage is adequate for current operations or
will be adequate for future operations. The Company's business could be
materially and adversely affected by the assertion of product liability claims.

PROTECTION OF PROPRIETARY TECHNOLOGY

No assurance can be given that the claims allowed on any patents held by
the Company will be sufficiently broad to protect the Company's technology. In
addition, no assurance can be given that any patents issued to the Company will
not be challenged, invalidated or circumvented or that the rights granted
thereunder will provide competitive advantages to the Company. The loss of
patent protection on the Company's technology or the circumvention of its patent
protection by competitors could have a material adverse effect on the Company's
ability to compete successfully in its products business. There can be no
assurance that any existing or future patent applications by the Company will
result in issued patents with the scope of the claims sought by the Company, or
at all, that any current or future issued or licensed patents, trade secrets or
know-how will afford sufficient protection against competitors with similar
technologies or processes, or that any patents issued will not be infringed upon
or designed around by others. In addition, there can be no assurance that others
will not independently develop proprietary technologies and processes, which are
the same as, substantially equivalent or superior to those of the Company.
Further, there can be no assurance that the Company has not or will not infringe
prior or future patents owned by others, that the Company will not need to
acquire licenses under patents belonging to others for technology potentially
useful or necessary to the Company, or that such licenses will be available to
the Company, if at all, on terms acceptable to the Company.

Litigation, which could result in substantial cost to the Company and
diversion of management attention, may also be necessary to enforce any patents
issued to the Company or to determine the scope and validity, of other parties'
proprietary rights. If the outcome of any such litigation is adverse to the
Company, its business, financial condition and results of operations could be
materially and adversely affected. To determine the priority of inventions, the
Company may have to participate in interference proceedings declared by the
United States Patent and Trademark Office or oppositions in foreign patent
offices, which could result in substantial cost to the Company and limitations
on the scope or validity of the Company's patents. The Company also relies on
trade secrets and proprietary know-how which it seeks to protect by
confidentiality agreements with its employees and consultants and with third
parties. There can be no assurance that these agreements will not be breached,
that the Company will have adequate remedies for any breach, or that its trade
secrets and proprietary know-how will not otherwise become known or be
independently discovered by others.

RISKS ASSOCIATED WITH MANAGING EXPANSION OF OPERATIONS

The Company has experienced substantial growth in recent years and believes
that in order to be successful it must continue to grow rapidly. If the Company
is to grow rapidly, the Company will be required to expand, train and manage its
employee base, particularly skilled technical, marketing and management
personnel. Rapid growth will also require an increase in the level of
responsibility for both existing and new management and will require the Company
to implement and improve operational, financial and management information
procedures and controls. The Company competes with some of the major technology,
consulting and software companies in seeking to attract qualified personnel.
There can be no assurance that the management skills and systems currently in
place will be adequate or that the Company will be able to manage effectively
any significant growth it experiences and to hire or assimilate new personnel
necessary to

19
<PAGE> 22

pursue its growth strategy. Any failure to adequately manage growth could
materially and adversely affect the Company's business, financial condition and
results of operations.

DEPENDENCE UPON SOLE AND LIMITED SOURCES OF SUPPLY; RISKS ASSOCIATED WITH
IMPLEMENTATION OF LARGER SCALE MANUFACTURING CAPABILITIES

Certain of the components included in the Company's products are obtained
from a single source or a limited group of suppliers, the most important of
which are the charge coupled and CMOS imaging devices and ASICs for the
Biometric Security products and the charge coupled devices for the Biometric
Imaging products. The Company has no long term agreements with any of its
suppliers. Although the Company seeks to reduce dependence on these sole and
limited sources of suppliers, the partial or complete loss of certain of these
sources or the delay in receiving supplies from these sources could result in
delays in manufacturing and shipping of products to customers. This may require
the incurrence of development and other costs to establish alternative sources
of supply. While the Company attempts to maintain a few months of inventory on
sole source components, it may take the Company several months to locate
alternative suppliers if required, and/or to re-tool its products to accommodate
components from different suppliers. If the Company is required to seek
alternative suppliers, there can be no assurance that the Company will be able
to obtain such components within the time frames required by the Company at an
affordable cost, or at all. Any delays resulting from suppliers failing to
deliver components on a timely basis in sufficient quantities and of sufficient
quality or any significant increase in the price of components from existing or
alternative suppliers could have a material adverse effect on the Company's
business, financial condition and results of operations.

Historically, the volume of the Company's production requirements for the
law enforcement and public sectors has not placed significant capacity
constraints on the Company's manufacturing and assembling capabilities. However,
if the Company begins to market its products for potentially larger volume
applications, the Company may be required to fulfill larger orders in a short
period of time and to implement measures to decrease product costs. There can be
no assurance that the Company will be able to scale-up its manufacturing and
assembling capacities to fulfill such orders and to decrease manufacturing
costs. Any failure by the Company to implement higher volume manufacturing or
reduce product costs for commercial applications could have a material adverse
effect on the Company's business, financial condition and results of operations.

DEPENDENCE UPON KEY PERSONNEL; NEED TO HIRE ADDITIONAL QUALIFIED PERSONNEL

The Company's success will depend upon its ability to retain its current
senior management team and key technical, marketing and sales personnel and its
ability to identify, attract and retain additional highly qualified personnel.
The Company's employees may voluntarily terminate their employment with the
Company at any time, and competition for qualified employees, especially
engineers, is intense. The process of locating additional personnel with the
combination of skills and attributes required to carry out the Company's
strategy is often lengthy. The loss of the services of key personnel, or the
inability to attract additional qualified personnel, could have a material
adverse effect on the Company's business, financial condition and results of
operations.

VOLATILITY OF STOCK PRICE

The stock market has from time to time experienced significant price and
volume fluctuations that may be unrelated to the operating performance of
particular companies. In addition, the market price of the common stock, like
the stock prices of many technology companies, has been, and may continue to be,
highly volatile. Variations in quarterly operating results, the timing and
volume of procurements for the Company's products and services, announcements of
technological innovations or new products or services by the Company or by the
Company's competitors, announcements regarding product pricing by the Company or
its competitors, failure of the Company to meet earnings or revenue expectations
of securities analysts, the commencement of litigation, the developments in or
outcome of any litigation, developments in patent or other proprietary rights,
and economic and other external factors, among other factors, may have a
material adverse effect on the market price of the common stock.

20
<PAGE> 23

SHARE HOLDINGS OF ASCOM USA

As of September 1, 1998, Ascom USA Inc. ("Ascom"), beneficially owned
approximately 20% of the outstanding common stock. This concentration of
ownership may have the effect of delaying or preventing a change in control of
the Company. The Company is a party to a Voting Trust Agreement ("Voting Trust
Agreement") with Ascom whereby Ascom deposited all of its 5,048,924 shares of
the Company's common stock ("Voting Stock") into a voting trust ("Voting
Trust"). The Trustee has voting control of the Voting Stock. The Voting Trust
Agreement expires in 2004. Ascom has preemptive rights with respect to issuances
of the Company's securities and registration rights with respect to the
securities it holds. Ascom has recently requested registration of approximately
1,700,000 shares. The sale of a significant number of shares by Ascom in the
open market could have an adverse effect on the trading price of the Company's
common stock. The Company's ability to obtain additional financing on favorable
terms in the future may be adversely affected by the existence of these
preemptive rights and registration rights.

IMPACT OF YEAR 2000

The Company has evaluated the products and services it offers, as well as
its information technology infrastructure, in an effort to determine whether the
Company or its customers may have exposure to Year 2000 problems caused by
computer systems that only use a two-digit year value and, accordingly, will be
subject to error or failure when the year 2000 arrives. The Company has also
made inquiries of its key suppliers to determine their readiness with respect to
Year 2000 problems.

The Company has identified certain internal software that requires updating
in order to be Year 2000 compliant. As part of the Company's maintenance
contract for that software, the vendor of that software has provided the Company
with an upgrade that addresses the Year 2000 problem. The Company has not
installed the software upgrade yet, but expects to have the installation
completed by early 1999. The Company is also aware that it has sold certain
Biometric Imaging products that, at the request of the customers, use a
two-digit value for the year. The Company is informing its customers of the
potential issues that may be raised by this feature and how they can be
remediated. The Company believes that the costs to the Company not borne by
customers for such remediation will be insignificant. The Company is also aware
that its TouchLock I product (which is only used by one customer and is no
longer in production) is not Year 2000 compliant. The Company, at its cost,
upgraded the software on the installed TouchLock I products to make them Year
2000 compliant. The expenditure required to complete this upgrading was
insignificant.

The Company is at risk of disruption to its business if Year 2000 problems
are experienced by its key suppliers. The Company has sent inquiries to its
suppliers to determine their readiness with respect to Year 2000 problems. The
Company is still in the process of collecting responses. The Company will be
able to better determine what actions may be necessary to address potential
problems with key suppliers after it receives responses back from these
suppliers. A failure of a key supplier to provide the Company with necessary
components or services could result in a delay by the Company in providing
products or services to the Company's customers and have a material adverse
effect on the Company's business, financial condition and results of operations.

The Year 2000 problem is pervasive and complex and there can be no
assurance that the Company has been or will be able to identify all of the Year
2000 issues that may affect the Company or that any remedial efforts it takes
will adequately address any potential Year 2000 problems.

ITEM 2. PROPERTIES

Identix leases approximately 40,000 square feet of space in Sunnyvale,
California for manufacturing, research and administration. The monthly lease
payments are $33,000 a month plus taxes, insurance and maintenance costs and the
lease expires in 2001. Sales and service offices are leased in Australia,
Zurich, Rio de Janiero, Beirut and Singapore with an aggregate net monthly lease
payment of approximately $14,000. Identix also services customers from sales
offices in California, Georgia, Virginia and Michigan. Identix also has small
offices in Illinois and Missouri primarily providing engineering services.
ANADAC leases approximately 42,000 square feet in four locations in Virginia
with aggregate monthly lease payments of

21
<PAGE> 24

$83,000, which leases expire in 2000 and 2001. ANADAC also services customers
from offices leased in Mississippi, Maryland, and Virginia. The Company believes
that its facilities are adequate for its operations for the foreseeable future.

ITEM 3. LEGAL PROCEEDINGS

The Company was named as a defendant in a class action lawsuit, which was
filed in October 1996 in the United States District Court for the Northern
District of California. Certain executive officers of the Company were also
named as defendants. Plaintiffs sought to represent a class of all persons who
purchased the Company's common stock between January 31, 1996 and August 26,
1996 (the "Class Period"). The complaint alleged claims under the federal
securities laws and California law. Plaintiffs alleged that the Company and
certain of its executive officers made false and misleading statements regarding
the Company that caused the market price of its common stock to be "artificially
inflated" during the Class Period. The Company and its officers denied
plaintiffs' allegations. In December 1997, the Company and its officers reached
an agreement with plaintiffs and their counsel to settle the lawsuit. The
settlement was funded largely with directors and officers liability insurance
proceeds. The settlement was approved by the Court, following notice to the
class members, and the lawsuit was dismissed with prejudice on March 6, 1998.

On May 31, 1995, Digital Biometrics, Inc. ("DBI"), a competitor, filed a
lawsuit in the United States District Court for the Northern District of
California against the Company alleging that certain of the Company's TouchPrint
products violate a DBI patent and seeking injunctive relief and unspecified
damages. The lawsuit has no implication for other Identix products. On August
22, 1996, the District Court granted the Company's motion determining that the
TouchPrint 600 does not infringe the patent. On December 7, 1996, the District
Court issued another ruling determining that the predecessor product of the
TouchPrint 600, the TouchPrint 900 product, did not infringe the patent. As a
result, the District Court entered judgment in favor of Identix and awarded
Identix its costs of suit. On January 7, 1997, DBI filed a Notice of Appeal. On
July 2, 1998, the United States Court of Appeals for the Federal Circuit
affirmed the District Court's judgment. DBI has publicly announced that it has
no plans to appeal the ruling and, accordingly, the Company believes that the
judgment in favor of the Company will be the final disposition of the case.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS

No matters were submitted to a vote of security-holders during the fourth
quarter of the fiscal year ended June 30, 1998.

SUPPLEMENTAL ITEM. EXECUTIVE OFFICERS OF THE REGISTRANT

The executive officers of Identix, and their ages as of September 1, 1998,
are as follows:

<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Randall C. Fowler... 59 President, Chief Executive Officer and Director
Harrison N.
Walther........... 61 President and Chief Executive Officer of ANADAC and Director
Executive Vice President, Chief Financial Officer and
James P. Scullion... 42 Secretary
Daniel F. Maase..... 54 Vice President, Biometric Imaging Division
John Kirsten........ 54 Vice President, Biometric Security Division
Vice President, Worldwide Sales, Marketing and Customer
Alan Schallop....... 57 Support
Gary L. Cauble...... 47 Vice President, Manufacturing
John Bruce-Smith.... 41 Vice President, Finance
</TABLE>

RANDALL C. FOWLER is Chairman of the Board of Directors, President and
Chief Executive Officer of the Company, positions he has held since founding the
Company in 1982.

HARRISON N. WALTHER has been a director of the Company since February 1995.
Mr. Walther is the President and Chief Executive Officer of ANADAC. Mr. Walther
joined ANADAC in 1982. He served as

22
<PAGE> 25

Vice President of ANADAC from 1982 through 1984 and Executive Vice President
from 1984 through 1985 before assuming the duties of President in 1986.

JAMES P. SCULLION has been Executive Vice President and Chief Financial
Officer of the Company since July 1996 and, from 1990 to 1996, he was Vice
President, Finance and Chief Financial Officer of the Company. From 1986 to
1990, he was Vice President, Finance and Chief Financial Officer at DataTrak,
Inc., a manufacturer of security access systems.

DANIEL F. MAASE, Vice President, Biometric Imaging Division, joined the
Company in November 1988 and served as Vice President, Engineering from December
1988 until he was appointed to his present position in February 1998. Prior to
joining Identix he was an Operations Manager at Varian Associates, a
manufacturer of instruments and microwave power devices, medical equipment and
semiconductors, from 1987 to 1988.

JOHN KIRSTEN, Vice President, Biometric Security Division, joined the
Company in May 1998. Prior to joining the Company, he spent several years in the
software industry, serving as Vice President of International Operations for
Objectivity, Inc. from 1997 to 1998, Vice President of International Operations
for IDE/Aonix from 1995 to 1997, and Vice President of European Operations for
IMSL/Visual Numerics, Inc. from 1992 to 1995.

ALAN SCHALLOP, Vice President, Worldwide Sales, Marketing & Customer
Support, joined the company in October 1997 as the Vice President, North
American Sales, Marketing & Customer Support. He was appointed to his present
position in February 1998. Prior to joining Identix, Mr. Schallop was the Vice
President of Worldwide Sales and Customer Support of Zapex Technologies from
December 1996 to October 1997, the Chief Operating Officer of Pharm/Net from
June 1996 to December 1996, the Vice President of Worldwide Customer Support of
Wyse Technology from May 1995 to May 1996, the Vice President of North American
Sales and Channels of OpenVision Technologies Inc. from March 1994 to February
1995 and served in various positions with Sequent Computer Systems, Inc. from
December 1990 to February 1994, including Vice President and General Manager of
North American Sales. Mr. Schallop worked at Hewlett-Packard Co. from 1969 to
1990 in various positions, including U.S. Sales Manager for Networked Systems
and OEM products.

GARY L. CAUBLE, Vice President, Manufacturing, joined the Company in August
1995. Prior to joining the Company, from 1990 to 1995, he was assistant Division
Manager/Operations Manager at Bell Industries.

JOHN BRUCE-SMITH, Vice President, Finance, joined Identix Australia Pty
Limited as Controller in November 1997 and served as Controller of Identix from
April 1998 through August 1998, before being appointed to his present position
in September 1998. Prior to joining Identix, he worked as a financial project
manager at Racal Telecommunications Ltd in England from February 1997 through
September 1997. Prior to that, Mr. Bruce-Smith served in various financial
capacities with AWA Limited in Sydney from 1990 through 1996, most recently
serving as Assistant Chief Financial Officer.

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<PAGE> 26

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

The Company's common stock is listed on the American Stock Exchange
("AMEX") under the symbol IDX.

The following table sets forth the range of high and low closing prices as
reported on the AMEX for the fiscal periods indicated.

<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C>
YEAR ENDED JUNE 30, 1998
Fourth Quarter.............................................. 8 9/16 5 5/8
Third Quarter............................................... 10 1/2 8 1/2
Second Quarter.............................................. 11 5/8 9 5/16
First Quarter............................................... 11 13/16 8 3/4

YEAR ENDED JUNE 30, 1997
Fourth Quarter.............................................. 11 1/4 7 7/16
Third Quarter............................................... 12 3/4 8 3/8
Second Quarter.............................................. 10 3/4 7 1/4
First Quarter............................................... 13 7/8 8 3/16
</TABLE>

The last reported sale price of the common stock on the AMEX on September
1, 1998 was $4 15/16. As of September 1, 1998, there were 1,192 shareholders of
record.

The Company has not paid any cash dividends on its common stock during the
last five fiscal years. The Company currently intends to retain any earnings for
use in its business and does not anticipate paying any cash dividends in the
foreseeable future. In addition, the Company's bank lines of credit restrict the
Company's ability to pay dividends.

24
<PAGE> 27

ITEM 6. SELECTED FINANCIAL DATA

The selected consolidated financial data set forth below with respect to
the Company's statements of operations for each of the three fiscal years in the
period ended June 30, 1998 and with respect to the balance sheets at June 30,
1998 and 1997 are derived from the Company's audited consolidated financial
statements included elsewhere in this Annual Report on Form 10-K. Consolidated
statement of operations data for the years ended June 30, 1995 and 1994, and
consolidated balance sheet data at June 30, 1996, 1995 and 1994 have been
derived from audited consolidated financial statements of the Company not
included in this Annual Report on Form 10-K. The following selected consolidated
financial data should be read in conjunction with the consolidated financial
statements for Identix and the notes thereto appearing in Item 8 of this Annual
Report on Form 10-K and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" appearing in Item 7 of this Annual Report
on Form 10-K. Historical operating results are not necessarily indicative of the
results that may be expected in any future period.

<TABLE>
<CAPTION>
FISCAL YEAR ENDED JUNE 30,
-----------------------------------------------------
1998 1997(1) 1996 1995 1994
------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues............................... $79,374 $52,543 $38,541 $27,014 $20,135
Net income (loss)...................... 768 518 (3,441)(2) (715) (2,596)
Basic net income (loss) per share...... 0.03 0.02 (0.15) (0.04) (0.14)
Diluted net income (loss) per share.... 0.03 0.02 (0.15) (0.04) (0.14)
Weighted average common shares......... 25,104 24,817 23,485 19,371 18,304
Weighted average common shares assuming
dilution............................. 25,669 25,586 23,485 19,371 18,304
BALANCE SHEET DATA:
Cash and cash equivalents.............. $ 753 $ 2,510 $ 981 $ 3,842 $ 799
Working capital........................ 18,153 15,477 14,914 9,571 3,588
Total assets........................... 42,012 32,440 27,107 18,104 10,593
Long-term debt and convertible debt.... -- -- 127 -- 500
Shareholders' equity................... 22,910 20,898 19,472 12,274 5,751
</TABLE>

- ---------------
(1) Fiscal year 1997 has been adjusted for the acquisition of Biometric
Applications and Technology, Inc., which was accounted for as a pooling of
interests.

(2) Includes a $4.7 million write-off of acquired in-process research and
development related to the acquisition of Fingerscan Pty Ltd.

25
<PAGE> 28

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

FORWARD-LOOKING STATEMENTS

The statements in this Annual Report on Form 10-K that relate to future
plans, events or performance are forward-looking statements. Actual results,
events and performance may differ materially due to a variety of factors,
including the factors described under "Right Factors" in Item 1 and the other
risks identified in this Annual Report on Form 10-K. The Company undertakes no
obligation to publicly update these forward-looking statements to reflect events
or circumstances after the date hereof or to reflect the occurrence of
unanticipated events.

OVERVIEW

Identix designs, develops, manufactures and markets two categories of
products for security, anti-fraud, law enforcement and other applications: (i)
Biometric Security products that verify the identity of an individual through
the unique biological characteristics of a fingerprint and (ii) Biometric
Imaging products that electronically capture forensic quality fingerprint images
directly from an individual's fingers for law enforcement and other
applications. The Company provides information technology, engineering and
management consulting services to private and public sector clients through its
wholly owned subsidiary ANADAC. ANADAC's services support the development,
installation, integration and operation of hardware and software technology
solutions, including Identix products, for a variety of client operating
environments.

On March 26, 1996, the Company acquired Fingerscan Pty Limited
("Fingerscan"), a privately-held Australian-based company that designs and
markets Biometric Security products. Fingerscan had been a long-standing Identix
OEM partner integrating Identix fingerprint identification technology into
Fingerscan's fingerprint identity and verification products and systems. The
acquisition was accounted for as a purchase. Accordingly, the Company's fiscal
1996 consolidated financial statements include the results of Fingerscan from
the date of acquisition. Fingerscan's name was changed to Identix Australia Pty
Limited during fiscal 1998. See Item 8, Note 2 of Notes to Consolidated
Financial Statements.

On June 30, 1996, the Company acquired Innovative Archival Solutions, Inc.
("IAS"), a privately-held company which provides fingerprinting services using
the Company's Biometric Imaging systems. The acquisition was accounted for as a
pooling of interests. The Company's fiscal 1996 consolidated financial
statements include the accounts and operations of IAS. For fiscal 1995, the
effects of the combination with IAS were not significant and the Company has not
restated fiscal year 1995 to include the accounts and operations of IAS. See
Item 8, Note 2 of Notes to Consolidated Financial Statements.

On July 23, 1997, the Company acquired Biometric Applications and
Technology, Inc. ("BA&T"), a privately held developer of biometric and "smart"
card applications and solutions. BA&T had been a software development partner
that integrated its software into Identix's Biometric Security products. The
acquisition was accounted for as a pooling of interests. The Company's fiscal
1997 consolidated financial statements include the accounts and operations of
BA&T. For fiscal 1996, the effects of the combination with BA&T were not
significant and the Company has not restated fiscal year 1996 to include the
accounts and operations of BA&T. See Item 8, Note 2 of Notes to Consolidated
Financial Statements.

On September 30, 1997, the Company entered into a joint venture agreement
with Sylvan Learning Systems, Inc. for the purpose of providing fingerprinting
services through Sylvan's testing centers nationwide. As of October 1, 1997, the
business of IAS has been conducted through the joint venture, Sylvan/Identix
Fingerprint Centers, LLC ("SIFC").

RESULTS OF OPERATIONS

YEARS ENDED JUNE 30, 1998 AND 1997

Revenues. Revenues for fiscal 1998 were $79,374,000, compared to
$52,543,000 for fiscal 1997. For fiscal 1998 the increase in revenues of 51% is
due to increases in both the Company's net product revenues and services
revenues.

The Company's net product revenues were $34,720,000 for fiscal 1998,
compared to $26,652,000 in fiscal 1997. For fiscal 1998, the increases in net
product revenues of 30% were due to increased shipments of the Company's
Biometric Imaging product group, mainly the TouchPrint 600 product line. In
addition, increased

26
<PAGE> 29

sales of the TouchPrint 600 product line have generated additional revenues from
maintenance support agreements and related customer support. The increase in
Biometric Imaging sales was partially offset by a decline in the Company's
Biometric Security product group sales, which resulted primarily from a decline
in sales in Asia related to the adverse economic events in the region.
International sales accounted for $6,350,000 or 18% of the Company's net product
revenues for fiscal 1998, compared to $8,178,000 or 31% for fiscal 1997. The
decrease in international sales for the year was primarily due to a decline in
sales in Asia. The Company expects international sales to continue to represent
a significant portion of net product revenues although the percentage may
fluctuate from period to period. The Company's international sales generally are
denominated in U.S. dollars. The Company monitors its foreign currency exchange
exposure and, if significant, will take action to reduce foreign exchange risk.
To date, the Company has not entered into any hedging transactions. The Company
did not have any customer account for 10% or more of total product revenues in
either fiscal 1998 or fiscal 1997.

The Company's fingerprinting services revenues were $1,078,000 for fiscal
1998. For certain contracts that Identix held prior to the commencement of SIFC,
Identix subcontracted the fingerprinting services to the joint venture at
amounts equal to the amounts billed to the customers; therefore, no gross margin
was recognized by the Company except for a 5% license fee charged to SIFC for
use of certain of the Company's trademarks. As of July 1, 1998, all contracts
for fingerprinting services held by Identix have been assigned to SIFC and the
Company does not expect to report revenues for fingerprinting services in the
future.

The Company's services revenues were $43,576,000 for fiscal 1998 compared
to $25,891,000 for fiscal 1997. The increases in services revenues of 68% for
fiscal 1998 was due primarily to increases in U.S. government purchases through
the Company's General Services Administration ("GSA") contract which is operated
and maintained by ANADAC. The GSA contract allows Government agencies to
purchase the Company's products and services as well as third party products and
services at agreed upon prices and rates. The Company and the General Services
Administration negotiate the prices and rates periodically or as new products or
services are added. The majority of the Company's services revenues are
generated directly from contracts with the U.S. government, principally the
Department of Defense ("DOD"). For fiscal 1998, revenues directly from the DOD
and from other U.S. government agencies accounted for 89% of the Company's total
services revenues compared to 77% in fiscal 1997.

The Company's services business generates a significant amount of its
revenues from cost plus fixed fee ("CPFF") contracts, which accounted for
approximately 21% of its services revenues for fiscal 1998, compared to 39% for
fiscal 1997. The decrease in the percentage of services revenues generated by
CPFF contracts is primarily due to the increase in third party services
purchased through the Company's GSA contract. CPFF contracts provide for the
reimbursement of allowable costs, including indirect costs plus a fee or profit.
The Company's services business also generates revenue from time-and-materials
("T&M") contracts and from firm fixed-price ("FFP") contracts. During fiscal
1998, the Company derived approximately 68% of its services revenues from T&M
and FFP contracts compared to 46% in fiscal 1997. The increase in the percentage
of services revenues generated by T&M and FFP contracts is primarily due to the
increase in third party services purchased through the Company's GSA contract.
T&M contracts typically provide for payment of negotiated hourly rates for labor
incurred plus reimbursement of other allowable direct and indirect costs. FFP
contracts provide for a fixed price for stipulated services or products,
regardless of the costs incurred, which may result in losses from cost overruns.
The Company assumes greater performance risk on T&M and FFP contracts and the
failure to accurately estimate ultimate costs or to control costs during
performance of the work can result in reduced profit margins or losses. There
can be no assurance that the Company's services business will not incur cost
overruns for any FFP and T&M contracts it is awarded. In addition, revenues
generated from contracts with government agencies are subject to audit and
subsequent adjustment by negotiation between the Company and representatives of
such government agencies. ANADAC is currently undergoing an audit by the Defense
Contract Audit Agency for the period from July 1, 1992 to June 30, 1995.

Gross Margin. Gross margin on net product revenues was 51% for fiscal 1998,
as compared to 50% in fiscal 1997. The Company expects gross margins to
fluctuate in future periods due to changes in the product mix, the costs of
components and the competition in the industry.

27
<PAGE> 30

Gross margin on services revenues was 14% for fiscal 1998 as compared to
20% for fiscal 1997. The decrease in gross margin for the year was primarily due
to an increase in third party services purchased through the GSA contact
maintained by ANADAC. When the Company sells third party services through the
GSA contract, the Company earns a fee based on a percentage of the third party
purchased services. The fee earned on third party services is typically less
than the fee earned on services directly provided by the Company.

Research, Development and Engineering. Research, development and
engineering expenses were $4,572,000 or 13% of net product revenues for fiscal
1998, compared to $2,754,000 or 10% for fiscal 1997. The increase in research,
development and engineering expenses is primarily due to the addition of
engineering staff and related expenses to further develop and enhance the
Company's products. The Company believes that investment in research and
development is critical to maintaining a strong technological position in the
industry and therefore expects research, development and engineering expenses to
continue to increase in absolute dollars in fiscal 1999.

Marketing and Selling. Marketing and selling expenses were $9,107,000 or
11% of total revenues for fiscal 1998 compared to $8,076,000 or 15% of total
revenues for fiscal 1997. The increase in marketing and selling expenses in
absolute dollars is due to the increased staffing and expenses to promote the
Company's products and services and to expand its customer support organization.
The Company expects marketing and selling expenses to continue to increase in
absolute dollars in fiscal 1999.

General and Administrative. General and administrative expenses were
$8,474,000 or 11% of total revenues for fiscal 1998, compared to $7,171,000 or
14% of total revenues for fiscal 1997. The increase in general and
administrative expenses was primarily due to an increase in staffing and other
related administrative expenses to support the growth in operations and the
development of supporting infrastructure. The increase was partially offset by a
decrease in litigation charges which were $491,000 for fiscal 1998 compared to
$736,000 for fiscal 1997 (See Item 8, Note 10 of Notes to Consolidated Financial
Statements).

Reorganization Costs. Reorganization costs were $717,000 for fiscal 1998.
The costs were primarily due to the reorganization charges taken for severance
and related expenses in the streamlining of the Company's international sales
operations and currency translation adjustments.

Other Income and Expense, Net. For fiscal 1998, net other expense was
$8,000 compared to net other income of $210,000 for fiscal 1997. In fiscal 1997,
other income was primarily related to an export market development grant related
to a subsidiary's export sales.

Net Interest Expense. Net interest expense was $165,000 for fiscal 1998,
compared to $242,000 for fiscal 1997. The difference was due to increased
interest income earned on higher average cash balances during fiscal 1998
compared to fiscal 1997.

The weighted average interest rate paid by the Company on borrowings under
its line of credit (the "Identix Line of Credit") for fiscal 1998 and 1997 was
approximately 8.5% each year. The weighted average interest rate paid by ANADAC
on borrowings under its bank line of credit (the "ANADAC Line of Credit") during
fiscal 1998 and 1997 was 8.5% and 8.3%, respectively.

Income Taxes. No federal income taxes were paid or accrued in fiscal 1998
and 1997 due to the use of net operating loss ("NOL") carryforwards. The Company
had federal and state NOL carryforwards of approximately $19.6 million and $3.6
million, respectively, as of June 30, 1998 that may be applied to reduce future
taxable income. However, under the Tax Reform Act of 1986, a corporation's
ability to use its NOLs may be impaired or limited in certain circumstances,
including a cumulative stock ownership change of more than 50% over a three year
period (an "ownership change"). Management believes that the Company's public
offering of units in January 1993 caused the Company to experience an ownership
change under these provisions. As a result, there is an annual limitation on the
utilization of the Company's NOL carryforwards incurred prior to the ownership
change of approximately $2.5 million. The NOL carryforwards expire on various
dates through fiscal 2011.

28
<PAGE> 31

Equity Interest in Joint Venture. The equity interest in joint venture loss
of $171,000 for fiscal 1998 represents the Company's share of the results of
SIFC.

YEARS ENDED JUNE 30, 1997 AND 1996

Revenues. Revenues for fiscal 1997 were $52,543,000 compared to $38,541,000
for fiscal 1996. The increase in revenues of 36% for fiscal 1997 was due to
increases in both net product revenues and services revenues.

The Company's net product revenues were $26,652,000 for fiscal 1997
compared to $16,565,000 for fiscal 1996. The increase of 61% in net product
revenues for fiscal 1997 was due primarily to increased shipments of the
Company's Biometric Security products, primarily in international markets, and
TouchPrint 600 product line and increased fingerprint services. International
sales represented $8,178,000 or 31% of the Company's net product revenues for
fiscal 1997 compared to $2,198,000 or 13% for fiscal 1996. The overall impact of
currency fluctuations on operating results was not significant in fiscal 1997 or
fiscal 1996. In fiscal 1997, the Company did not have any customer account for
10% or more of total product revenues. In fiscal 1996, the Company's products
business had one customer which represented 14% of total revenues.

The Company's services revenues were $25,891,000 for fiscal 1997 compared
to $21,976,000 for fiscal 1996. The increase of 18% in services revenues for
fiscal 1997 was due to increased contract revenues from both U.S. Government and
commercial clients. The majority of the Company's services revenues are
generated from contracts with the U.S. Government, principally the DOD. For
fiscal 1997, revenues directly from the DOD and from other U.S. Government
agencies accounted for 77% of the Company's total services revenues compared to
78% for fiscal 1996.

CPFF contracts accounted for 39% of the Company's services revenues for
fiscal 1997 compared to 43% for fiscal 1996. During fiscal 1997, the Company
derived approximately 46% of services revenues from T&M contracts and FFP
contracts compared to 41% for fiscal 1996.

Gross Margin. Gross margin on net product revenues was 50% for fiscal 1997
compared to 47% for fiscal 1996. The increase in gross margin for fiscal 1997
compared to fiscal 1996 was primarily due to (i) the favorable mix of Biometric
Security and Biometric Imaging product sales, (ii) cost reductions in certain
components and (iii) increased manufacturing efficiencies because of the
increase in unit volume and the absorption of manufacturing overhead resulting
from higher production levels.

Gross margin on services revenues was 20% for fiscal 1997 compared to 18%
for fiscal 1996. The increase in the gross margin on services revenues was
primarily due to increased gross margins on revenues generated by ANADAC's
information technology group.

Research, Development and Engineering. Research, development and
engineering expenses were $2,754,000 or 10% of net product revenues for fiscal
1997 compared to $1,486,000 or 9% of net product revenues for fiscal 1996. In
addition, for fiscal 1997 and 1996, research, development and engineering
expenditures funded by customers were $269,000 and $255,000, respectively. The
increase in research, development and engineering expenses, in absolute dollars,
is primarily due to the inclusion of research, development and engineering
expenses incurred by Fingerscan to develop and maintain certain Biometric
Security products, and in general, the addition of engineering staff and related
expenses to further develop and enhance the Company's products, including the
Company's introduction of the TouchPrint 600 Card Scan System and new TouchPrint
printer line.

Marketing and Selling. Marketing and selling expenses were $8,076,000 or
15% of total revenues for fiscal 1997 compared to $4,958,000 or 13% of total
revenues for fiscal 1996. The increase in marketing and selling expenses was due
to the inclusion of Fingerscan's marketing and selling expenses for the entire
year in fiscal 1997 and increased staffing and expenses to (i) promote the
Company's products and services, (ii) expand international sales and
distribution and (iii) expand its customer service organization.

General and Administrative. General and administrative expenses were
$7,171,000 or 14% of total revenues for fiscal 1997 compared to $4,431,000 or
11% of total revenues for fiscal 1996. The increase in

29
<PAGE> 32

general and administrative expenses was primarily due to (i) the additional
administrative expenses related to the operations of Fingerscan, (ii) litigation
charges of $736,000 related to a patent infringement lawsuit filed by a
competitor and a class action suit filed against the Company compared to
litigation reserves and expenses of $390,000 for fiscal 1996 and (iii) an
increase in staffing and related administrative expenses.

Write-off of Acquired In-Process Research and Development. On March 26,
1996, the Company acquired Fingerscan. The excess of the purchase price over the
fair market value of the assets purchased and liabilities assumed was
$5,280,000, of which $4,723,000 was allocated to in-process research and
development, based on an independent appraisal, and was written-off in the
quarter ended March 31, 1996. See Item 8, Note 2 of Notes to Consolidated
Financial Statements.

Other Income and Expense, Net. Net other income was $210,000 during fiscal
1997 compared to $211,000 during fiscal 1996. In fiscal 1997, other income was
primarily related to an export market development grant related to a
subsidiary's export sales. In fiscal 1996, net other income was primarily
related to the proceeds from a licensing agreement related to one of the
Company's trademarks.

Interest Income and Expense, Net. Net interest expense of $242,000 was
incurred by the Company during fiscal 1997 compared to net interest income of
$85,000 for fiscal 1996. The difference was due to increased borrowings against
the Identix Line of Credit and lower cash balances for temporary investments
during fiscal 1997 compared to fiscal 1996.

The weighted average interest rate paid by the Company on the Identix Line
of Credit for fiscal 1997 was approximately 8.5%. During fiscal 1996, Identix
did not borrow against the Identix Line of Credit. The weighted average interest
rate paid on the ANADAC Line of Credit for fiscal 1997 and fiscal 1996 was
approximately 8.3% and 8.5%, respectively.

Income Taxes. No federal income taxes were paid or accrued in fiscal 1997
and fiscal 1996 due to the use of NOL carryforwards in fiscal 1997 and operating
losses incurred in fiscal 1996.

LIQUIDITY AND CAPITAL RESOURCES

The Company financed its operations during the year ended June 30, 1998
primarily from its existing working capital at June 30, 1997 and borrowings
under the Identix Line of Credit and the ANADAC Line of Credit. As of June 30,
1998, the Company's principal sources of liquidity consisted of $18,153,000 of
working capital including $753,000 in cash and cash equivalents, the Identix
Line of Credit and the ANADAC Line of Credit.

The Identix Line of Credit is a $6,000,000 bank line of credit secured by
the personal property of Identix. Under the bank line of credit, the Company may
borrow up to 80% of eligible accounts receivable and may borrow up to 50% of
eligible inventory. Amounts drawn bear interest at the bank's prime rate of
interest (8.5% at June 30, 1998). The line of credit expires on October 27,
1998. At June 30, 1998, $4,925,000 was outstanding and $1,075,000 was available
under the Identix Line of Credit. On July 6, 1998, the Identix Line of Credit
was amended to increase the bank line to $7,000,000. The Company now may borrow
up to 80% of eligible accounts receivable and may borrow up to 35% of eligible
inventory. The Identix Line of Credit agreement contains financial and operating
covenants, including restrictions on the Company's ability to pay dividends on
the Company's common stock.

The ANADAC Line of Credit is a $6,000,000 bank line of credit secured by
ANADAC's accounts receivable and certain other assets. Under the ANADAC Line of
Credit, ANADAC may borrow against qualified accounts receivable. Amounts drawn
bear interest at the bank's prime rate of interest (8.5% at June 30, 1998). The
line of credit expires on November 30, 1998. At June 30, 1998, $1,924,000 was
outstanding and $4,076,000 was available under the ANADAC Line of Credit. The
ANADAC Line of Credit agreement contains financial and operating covenants.

The Company used cash of $6,356,000 in its operating activities during the
year ended June 30, 1998 primarily due to increases in accounts receivable of
$9,839,000 and inventories of $1,868,000. These uses of cash were partially
offset by increases in deferred revenue, net of amortization, of $699,000 and
accounts

30
<PAGE> 33

payable of $2,114,000. The increase in accounts receivable was due primarily to
an increase in total revenues, and the increase in inventories was due primarily
to the stocking of certain inventory for the Company's Biometric Security and
Biometric Imaging product groups. The increase in deferred revenue was primarily
due to an increase in the number of TouchPrint 600 systems under maintenance
contracts. The increase in accounts payable was due to financing the increase in
inventories and timing of vendor payments.

The Company used cash of $1,575,000 in investing activities during the year
ended June 30, 1998 consisting of purchases of property and equipment of
$883,000 and additions to intangibles and other assets of $631,000.

The Company's financing activities provided cash of $6,174,000 during the
year ended June 30, 1998. Financing activities consisted of increased net
borrowings of $4,930,000 against the Company's lines of credit and proceeds from
exercises of stock options and warrants to purchase common stock of $1,244,000.

Identix did not have any material capital expenditure commitments as of
June 30, 1998.

The Company believes that cash flow from operations together with existing
working capital and two existing bank lines of credit will be adequate to fund
the Company's cash requirements through fiscal 1999. However, the Company may
require additional equity or debt financing beyond the amounts currently
forecasted to meet its working capital or capital equipment needs. There can be
no assurance that the Company would be able to obtain such financing or that the
terms of financing would be favorable to the Company.

IMPACT OF YEAR 2000

The Company has identified certain internal software that requires updating
in order to be Year 2000 compliant. As part of the Company's maintenance
contract for that software, the vendor of that software has provided the Company
with an upgrade that addresses the Year 2000 problem. The Company has not
installed the software upgrade yet, but expects to have the installation
completed by early 1999. The Company is also aware that it has sold certain
Biometric Imaging products that, at the request of the customers, use a
two-digit value for the year. The Company is informing its customers of the
potential issues that may be raised by this feature and how they can be
remediated. The Company believes that the costs to the Company not borne by the
customers for such remediation will be insignificant. The Company is also aware
that its TouchLock I product (which is only used by one customer and is no
longer in production) is not Year 2000 compliant. The Company, at its cost,
upgraded the software on the installed TouchLock I products to make them Year
2000 compliant. The expenditure required to complete this upgrading was
insignificant.

31
<PAGE> 34

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Financial Statements:
Report of Independent Accountants......................... 33
Consolidated Balance Sheets as of June 30, 1998 and
1997................................................... 34
Consolidated Statements of Operations for the years ended
June 30, 1998, 1997 and 1996........................... 35
Consolidated Statements of Shareholders' Equity for the
years ended June 30, 1998, 1997 and 1996............... 36
Consolidated Statements of Cash Flows for the years ended
June 30, 1998, 1997 and 1996........................... 37
Notes to Consolidated Financial Statements................ 38
Financial Statement Schedules:
Schedule II Valuation and Qualifying Accounts and Reserves
for the years ended June 30, 1998, 1997 and 1996....... 56
</TABLE>

32
<PAGE> 35

REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Shareholders of Identix Incorporated

In our opinion, the consolidated financial statements listed in the
accompanying index present fairly, in all material respects, the financial
position of Identix Incorporated and its subsidiaries at June 30, 1998 and 1997,
and the results of their operations and their cash flows for each of the three
years in the period ended June 30, 1998, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audits 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, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.

PricewaterhouseCoopers LLP

San Jose, California
July 28, 1998

33
<PAGE> 36

IDENTIX INCORPORATED

CONSOLIDATED BALANCE SHEETS

ASSETS

<TABLE>
<CAPTION>
JUNE 30,
--------------------------
1998 1997
----------- -----------
<S> <C> <C>
Current assets:
Cash and cash equivalents.............................. $ 753,000 $ 2,510,000
Accounts receivable, less allowance for doubtful
accounts of $866,000 and $625,000..................... 28,576,000 18,737,000
Inventories............................................ 7,163,000 5,295,000
Prepaid expenses and other assets...................... 586,000 323,000
----------- -----------
Total current assets.............................. 37,078,000 26,865,000
Property and equipment, net................................. 2,105,000 2,567,000
Intangibles and other assets................................ 2,768,000 3,008,000
Investment in joint venture................................. 61,000 --
----------- -----------
Total assets...................................... $42,012,000 $32,440,000
=========== ===========

LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable to banks................................. $ 6,849,000 $ 1,919,000
Accounts payable....................................... 8,428,000 6,314,000
Accrued compensation................................... 1,837,000 1,515,000
Other accrued liabilities.............................. 574,000 1,079,000
Deferred revenue....................................... 1,237,000 561,000
----------- -----------
Total current liabilities......................... 18,925,000 11,388,000
Deferred revenue............................................ 88,000 65,000
Other liabilities........................................... 89,000 89,000
----------- -----------
Total liabilities................................. 19,102,000 11,542,000
----------- -----------
Commitments and contingencies (Notes 9 and 10)
Shareholders' equity:
Common stock, no par value; 50,000,000 shares authorized;
25,255,577 and 24,942,778 shares issued and
outstanding............................................ 52,527,000 51,283,000
Accumulated deficit....................................... (29,436,000) (30,204,000)
Cumulative translation adjustment......................... (181,000) (181,000)
----------- -----------
Total shareholders' equity........................ 22,910,000 20,898,000
----------- -----------
Total liabilities and shareholders' equity........ $42,012,000 $32,440,000
=========== ===========
</TABLE>

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

34
<PAGE> 37

IDENTIX INCORPORATED

CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
FISCAL YEAR ENDED JUNE 30,
-----------------------------------------
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Revenues:
Net product revenues.............................. $34,720,000 $26,652,000 $16,565,000
Fingerprinting services revenues.................. 1,078,000 -- --
Services revenues................................. 43,576,000 25,891,000 21,976,000
----------- ----------- -----------
Total revenues............................ 79,374,000 52,543,000 38,541,000
----------- ----------- -----------
Costs and expenses:
Cost of product revenues.......................... 16,887,000 13,359,000 8,722,000
Cost of fingerprinting services revenues.......... 1,028,000 -- --
Cost of services revenues......................... 37,477,000 20,633,000 17,958,000
Research, development and engineering............. 4,572,000 2,754,000 1,486,000
Marketing and selling............................. 9,107,000 8,076,000 4,958,000
General and administrative........................ 8,474,000 7,171,000 4,431,000
Reorganization costs.............................. 717,000 -- --
Write-off of acquired in-process
research and development....................... -- -- 4,723,000
----------- ----------- -----------
Total costs and expenses.................. 78,262,000 51,993,000 42,278,000
----------- ----------- -----------
Income (loss) from operations....................... 1,112,000 550,000 (3,737,000)
Other income (expense), net......................... (8,000) 210,000 211,000
Interest income (expense), net...................... (165,000) (242,000) 85,000
----------- ----------- -----------
Income (loss) before equity interest in joint
venture........................................... 939,000 518,000 (3,441,000)
Equity interest in joint venture.................... (171,000) -- --
----------- ----------- -----------
Net income (loss)................................... $ 768,000 $ 518,000 $(3,441,000)
=========== =========== ===========
Basic net income (loss) per share................... $ 0.03 $ 0.02 $ (0.15)
=========== =========== ===========
Diluted net income (loss) per share................. $ 0.03 $ 0.02 $ (0.15)
=========== =========== ===========
Weighted average common shares...................... 25,104,000 24,817,000 23,485,000
Weighted average common shares assuming dilution.... 25,669,000 25,586,000 23,485,000
</TABLE>

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

35
<PAGE> 38

IDENTIX INCORPORATED

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

<TABLE>
<CAPTION>
COMMON STOCK
-------------------------- ACCUMULATED CUMULATIVE
SHARES AMOUNT DEFICIT TRANSLATION ADJ. TOTAL
----------- ------------ ------------ ---------------- -----------
<S> <C> <C> <C> <C> <C>
BALANCE JUNE 30, 1995......... 21,520,879 $39,437,000 $(27,163,000) $ -- $12,274,000
Sale of common stock under
stock option plans.......... 679,724 1,569,000 1,569,000
Sale of common stock under
warrant exercise............ 1,295,885 3,559,000 3,559,000
Issuance of common stock
related to acquisition of
Fingerscan Pty Limited...... 668,976 5,459,000 5,459,000
Issuance of common stock
related to acquisition of
Innovative Archival
Solutions, Inc.............. 155,000 70,000 70,000
Cumulative translation
adjustment.................. (18,000) (18,000)
Net loss...................... (3,441,000) (3,441,000)
----------- ----------- ------------ --------- -----------
BALANCE JUNE 30, 1996......... 24,320,464 50,024,000 (30,534,000) (18,000) 19,472,000
Sale of common stock under
stock option plans.......... 66,739 190,000 190,000
Sale of common stock under
warrant exercise............ 105,575 332,000 332,000
Cumulative translation
adjustment.................. (163,000) (163,000)
Issuance of common stock
related to acquisition of
Biometric Applications and
Technology, Inc............. 450,000 737,000 (188,000) 549,000
Net income.................... 518,000 518,000
----------- ----------- ------------ --------- -----------
BALANCE JUNE 30, 1997......... 24,942,778 51,283,000 (30,204,000) (181,000) 20,898,000
Sale of common stock under
stock option plans.......... 287,799 1,191,000 1,191,000
Sale of common stock under
warrant exercise............ 25,000 53,000 53,000
Net income.................... 768,000 768,000
----------- ----------- ------------ --------- -----------
BALANCE JUNE 30, 1998......... 25,255,577 $52,527,000 $(29,436,000) $(181,000) $22,910,000
=========== =========== ============ ========= ===========
</TABLE>

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

36
<PAGE> 39

IDENTIX INCORPORATED

CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
FISCAL YEAR ENDED JUNE 30,
------------------------------------------
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Increase (decrease) in cash and cash equivalents:
Net income (loss)................................. $ 768,000 $ 518,000 $ (3,441,000)
Adjustments to reconcile net income (loss) to net
cash provided by or used for operating
activities:
Depreciation................................... 1,345,000 1,116,000 1,045,000
Amortization of intangibles.................... 871,000 814,000 492,000
Amortization of deferred revenue............... (2,127,000) (937,000) (408,000)
Write-off of acquired in-process research and
development.................................. -- -- 4,723,000
Changes in assets and liabilities, net of effects
of acquisitions:
Accounts receivable............................ (9,839,000) (2,406,000) (7,966,000)
Inventories.................................... (1,868,000) (831,000) (1,719,000)
Prepaid expenses and other assets.............. (263,000) (57,000) 253,000
Accounts payable............................... 2,114,000 3,005,000 1,484,000
Accrued compensation........................... 322,000 279,000 169,000
Other accrued liabilities...................... (505,000) 424,000 (299,000)
Deferred revenue............................... 2,826,000 1,014,000 437,000
------------ ------------ ------------
Net cash provided by (used for) operating
activities..................................... (6,356,000) 2,939,000 (5,230,000)
------------ ------------ ------------
Cash flows used in investing activities:
Capital expenditures.............................. (883,000) (1,379,000) (1,951,000)
Investment in joint venture....................... (61,000) -- --
Additions to intangibles and other assets......... (631,000) (975,000) (898,000)
Cash received in acquisitions..................... -- 6,000 180,000
------------ ------------ ------------
Net cash used in investing activities............. (1,575,000) (2,348,000) (2,669,000)
------------ ------------ ------------
Cash flows provided by financing activities:
Borrowings under bank lines of credit............. 20,150,000 16,530,000 14,361,000
Payments under bank lines of credit............... (15,220,000) (16,457,000) (14,666,000)
Borrowings under long-term note................... -- -- 318,000
Principal payments on long-term note.............. -- (233,000) (85,000)
Proceeds from sale of common stock and warrants,
net............................................ 1,244,000 1,259,000 5,128,000
Other, net........................................ -- 2,000 --
------------ ------------ ------------
Net cash provided by financing activities......... 6,174,000 1,101,000 5,056,000
------------ ------------ ------------
Effect of exchange rate changes on cash and cash
equivalents....................................... -- (163,000) (18,000)
------------ ------------ ------------
Net increase (decrease) in cash and cash
equivalents....................................... (1,757,000) 1,529,000 (2,861,000)
Cash and cash equivalents at beginning of year...... 2,510,000 981,000 3,842,000
------------ ------------ ------------
Cash and cash equivalents at end of year............ $ 753,000 $ 2,510,000 $ 981,000
============ ============ ============
Supplemental disclosures of cash flow information:
Cash paid during the year for interest.............. $ 291,000 $ 206,000 $ 172,000
</TABLE>

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

37
<PAGE> 40

IDENTIX INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 -- THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES

Identix Incorporated (the "Company") designs, manufactures, develops and
markets two categories of products for security, anti-fraud, law enforcement and
other applications: (i) Biometric Security products that verify the identity of
an individual through the unique biological characteristics of a fingerprint and
(ii) Biometric Imaging products that electronically capture forensic quality
fingerprint images from an individual's fingers for law enforcement and other
applications. The Company provides information technology, engineering and
management consulting services to private and public sector clients through its
wholly owned subsidiary ANADAC, Inc. ("ANADAC"). The principal markets for the
Company's products are the Americas, Asia, Australia, Europe and the Middle
East.

On March 26, 1996, the Company acquired Fingerscan Pty Limited
("Fingerscan") pursuant to a share purchase agreement whereby Fingerscan became
a wholly owned subsidiary of the Company. The acquisition was accounted for as a
purchase (Note 2). In fiscal 1998, Fingerscan changed its name to Identix
Australia Pty Limited ("Identix Australia").

On June 30, 1996, the Company acquired Innovative Archival Solutions, Inc.
("IAS") pursuant to a share purchase agreement. The acquisition was accounted
for as a pooling of interests (Note 2). Since September 30, 1997, the business
of IAS has been conducted through Sylvan/Identix Fingerprinting Center, L.L.C.
("SIFC").

On July 23, 1997, the Company acquired Biometric Applications and
Technology, Inc. ("BA&T") pursuant to a share purchase agreement. The
acquisition was accounted for as a pooling of interests (Note 2).

Ascom USA Inc., a subsidiary of Ascom Hasler AG, a Swiss Company, owned
approximately 20% of the Company's common stock at June 30, 1998 (Note 6).

BASIS OF CONSOLIDATION

The consolidated financial statements include the accounts of Identix
Incorporated and its wholly owned subsidiaries: ANADAC, Identix Australia and
BA&T; all significant intercompany balances and transactions have been
eliminated in consolidation.

MANAGEMENT ESTIMATES AND ASSUMPTIONS

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.

JOINT VENTURE

On September 30, 1997, the Company entered into a joint venture agreement
with Sylvan Learning Centers, Inc. to form SIFC for the purpose of providing
fingerprinting services through Sylvan's testing systems nationwide. The Company
owns a 50% interest in the joint venture. For certain contracts held by Identix
prior to the joint venture, Identix subcontracts the fingerprinting services to
the joint venture. Revenues received by Identix under these contracts are
presented separately as fingerprinting services revenue in the consolidated
statement of operations. As of July 1, 1998, the contracts have been assigned to
SIFC.

REVENUE RECOGNITION

Revenue from product sales is recognized in accordance with the terms of
sale, generally upon shipment by the Company, provided no significant vendor
obligations remain and collection of the receivable is deemed

38
<PAGE> 41
IDENTIX INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

probable. Extended service and maintenance contract revenue is deferred and
recognized ratably over the life of the service period of the related agreement.

The majority of the Company's services are performed for the U.S.
Government under various cost-reimbursable, time and material and fixed-price
contracts. Revenues for cost-plus fixed fee contracts are recognized as costs
are incurred, including a proportionate amount of the fee earned. Revenues on
time-and-materials contracts are recognized to the extent of billable rates
times hours worked plus materials expense incurred. Revenues on fixed-price
contracts are generally recognized on the percentage-of-completion method based
on costs incurred in relation to total estimated costs. Unbilled accounts
receivable at June 30, 1998 represent revenue accrued which becomes billable
upon attainment of contract milestones. Provisions for estimated contract losses
are recorded in the period such losses are determined.

Services revenues directly from contracts with the U.S. Government,
principally with the Department of Defense, and from subcontracts with other
U.S. Government contractors were approximately 89% of total services revenues
for fiscal 1998, 77% for fiscal 1997 and 78% for fiscal 1996. Contract costs for
services revenues to the U.S. Government, including indirect expenses, are
subject to audit and subsequent adjustment by negotiation between the Company
and U.S. Government representatives. Revenues are recorded in amounts expected
to be realized upon final settlement. Audits of ANADAC's costs have been
completed by the Defense Contract Audit Agency through June 30, 1992. ANADAC is
currently undergoing an audit by the Defense Contract Audit Agency for the
period from July 1, 1992 to June 30, 1995. No material adjustments have been
made, and ANADAC does not anticipate adjustments for any open years that would
have a material effect on the consolidated financial statements.

MAJOR CUSTOMER AND INTERNATIONAL REVENUES

In fiscal 1998 and 1997, the Company had no non-U.S. Government customers
that accounted for 10% or more of total revenues. In fiscal 1996 one non-U.S.
Government customer in the Company's products business accounted for 14% of
total revenues.

Net product revenues included international revenues of $6,350,000 in
fiscal 1998, $8,178,000 in fiscal 1997, and $2,198,000 in fiscal 1996.

CASH AND CASH EQUIVALENTS

Cash equivalents consist of highly liquid investments with a maturity of
three months or less when purchased. These investments consist of income
producing securities, which are readily convertible to cash and are stated at
cost, which approximates market.

CONCENTRATION OF CREDIT RISK

The Company performs on-going credit evaluations of its customers'
financial conditions and limits the amount of credit extended when deemed
necessary. The Company maintains an allowance for potential credit losses which
are based upon the expected collectibility of all accounts receivable.
Management believes that any risk of loss is significantly reduced due to the
Company's substantial number of government customers. The write-off of
uncollectible amounts in current and prior years has not been significant.

Currently, the Company's policy is to limit its exposure in financial
instruments by investing its excess cash with major banks in money market
securities. The Company, by policy, limits the amount of exposure to any one
financial institution.

39
<PAGE> 42
IDENTIX INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

INVENTORIES

Inventories are stated at the lower of cost (determined on the first-in,
first-out cost method) or market. The Company provides for obsolete, slow moving
or excess inventories in the period when obsolescence or inventory in excess of
annual demand is first identified.

PROPERTY AND EQUIPMENT

Property and equipment are stated at cost. Depreciation is computed using
the straight-line method with the estimated useful lives of the assets ranging
from two to five years. Amortization of equipment held under capital leases and
leasehold improvements is computed using the straight-line method and the
shorter of the remaining lease term or the estimated useful life of the related
equipment or improvements. Repair and maintenance costs are expensed as
incurred.

INTANGIBLES AND OTHER ASSETS

Intangible assets include goodwill, purchased technology, capitalized
contract rights and capitalized software developments costs. Goodwill and
purchased technology are amortized over five to seven years. Capitalized
contract rights are amortized over the terms of the related contracts, usually
one to five years.

The Company accounts for software development costs in accordance with
Statement of Financial Accounting Standards No. 86 "Accounting for the Costs of
Computer Software to be Sold, Leased or Otherwise Marketed." Accordingly,
certain software development costs incurred are capitalized after technological
feasibility has been demonstrated. Technological feasibility is determined when
planning, designing, coding and testing have been completed according to design
specifications. Commencing with product introduction, such capitalized amounts
are amortized on a product-by-product basis at the greater of the amount
computed using (a) the ratio of current revenues for a product to the total of
current and anticipated future revenues or (b) the straight-line method over the
remaining estimated economic life of the product. Generally, the Company assigns
an estimated economic life of one to five years to capitalized software costs.
Amortization of capitalized software costs is charged to cost of product
revenues. Research and development expenditures are charged to research and
development in the period incurred.

In fiscal 1996, the Company adopted Statement of Financial Accounting
Standards No. 121 "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of." Accordingly, the Company evaluates asset
recoverability at each balance sheet date or when an event occurs that may
impair recoverability of the asset. The Company determines the recoverability of
the carrying amount of each intangible asset by reviewing the following factors:
the undiscounted value of expected operating cash flows in relation to its net
capital investments, the estimated useful or contractual life of the intangible
asset, the contract or product supporting the intangible asset, and in the case
of purchased technology and capitalized software development costs, the Company
periodically reviews the recoverability of the asset value by evaluating its
products with respect to technological advances, competitive products and the
needs of its customers.

PRODUCT WARRANTY

The Company provides a warranty for manufacturing and material defects on
all units sold. A reserve for warranty costs, based on estimates made by
management utilizing projected costs to repair units, is recorded at the time of
sale and periodically adjusted to reflect actual experience.

40
<PAGE> 43
IDENTIX INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

INCOME TAXES

Deferred tax assets and liabilities are recognized for the expected tax
consequences of temporary differences between the income tax bases of assets and
liabilities and the amounts reported for financial reporting purposes for all
periods presented (Note 7).

STOCK-BASED COMPENSATION

The Company accounts for its employee and director stock option plans and
employee stock purchase plans in accordance with provisions of the Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees"
("APB 25"). Additional pro forma disclosures as required under Statement of
Financial Accounting Standards No. 123 "Accounting for Stock-Based Compensation"
("SFAS 123") are presented in Note 5.

COMPREHENSIVE INCOME

In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130 "Reporting Comprehensive Income" ("SFAS
130"). This statement is effective for the Company's fiscal year ending June 30,
1999. The statement establishes presentation and disclosure requirements for
reporting comprehensive income. Comprehensive income includes charges or credits
to equity that are not the result of transactions with owners. The Company plans
to report comprehensive income as part of the Consolidated Statements of
Shareholders' Equity as required under SFAS 130 and expects there to be no
material impact on its financial position and results of operations as a result
of the adoption of this new accounting standard.

SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION

In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 131 "Disclosures about Segments
of an Enterprise and Related Information" ("SFAS 131"). This statement is
effective for the Company's fiscal year ending June 30, 1999. The statement
requires the Company to report certain financial information about operating
segments in a complete set of financial statements as well as in condensed
financial statements of interim periods. It also requires that the Company
report certain information about its products and services, the geographic areas
in which it operates and its major customers. The method the FASB chose for
determining what information to report is referred to as the "management
approach". The management approach is based on the way that management organizes
the segments within the enterprise for making operating decisions and assessing
performance. Company management has not yet completed its assessment of how the
"management approach" will impact existing segment disclosures, but does not
expect that this new standard will have a material adverse effect on the
consolidated financial statement disclosures.

FOREIGN CURRENCY TRANSLATION

The Company's foreign subsidiary used the local currency as the functional
currency until March 31, 1998. Since then, the functional currency has been the
US dollar. Accordingly, assets and liabilities were translated at the exchange
rate in effect at that date and revenue and expenses since then are recorded in
US dollars at current exchange rates. Any transaction gains or losses are
recorded as income or expense as incurred.

EARNINGS PER SHARE

The Company adopted Statement of Financial Accounting Standards No. 128,
"Earnings Per Share" ("SFAS 128") during the second quarter of fiscal 1998. This
statement simplifies the standards for computing

41
<PAGE> 44
IDENTIX INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

earnings per share (EPS) previously defined in Accounting Principles Board
Opinion No. 15 "Earnings Per Share." All prior-period earnings per share data
has been restated in accordance with SFAS 128. SFAS 128 requires presentation of
both Basic EPS and Diluted EPS on the face of the income statement. Basic EPS is
computed by dividing net income available to common stockholders (numerator) by
the weighted average number of common shares outstanding (denominator) during
the period. Diluted EPS gives effect to all dilutive potential common shares
outstanding during the period including stock options and warrants, using the
treasury stock method, and convertible preferred stock, using the if-converted
method. In computing Diluted EPS, the average stock price for the period is used
in determining the number of shares assumed to be purchased from the exercise of
stock options.

Following is a reconciliation of the numerators and denominators of the
basic and diluted earnings per share for the periods presented below:

<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
-----------------------------------------
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Net income (loss) (Numerator)............... $ 768,000 $ 518,000 $(3,441,000)
=========== =========== ===========
Weighted average common stock outstanding
(Denominator)............................. 25,104,000 24,817,000 23,485,000
Dilutive effect of stock options and
warrants.................................. 565,000 769,000 --
----------- ----------- -----------
Weighted average common stock outstanding
assuming dilution (Denominator)........... 25,669,000 25,586,000 23,485,000
=========== =========== ===========
Basic net income (loss) per share........... $ 0.03 $ 0.02 $ (0.15)
=========== =========== ===========
Diluted net income (loss) per share......... $ 0.03 $ 0.02 $ (0.15)
=========== =========== ===========
</TABLE>

Options to purchase 934,287 and 560,322 shares of common stock at weighted
average exercise prices of $10.21 and $11.09 per share were outstanding at June
30, 1998 and June 30, 1997, respectively, but were not included in the
computation of diluted EPS because they were anti-dilutive.

NOTE 2 -- ACQUISITIONS

BIOMETRIC APPLICATIONS AND TECHNOLOGY, INC

On July 23, 1997, pursuant to a share purchase agreement, the Company
issued 450,000 shares of the Company's common stock to acquire BA&T, a privately
held company located in Kansas City, Missouri. In connection with the
acquisition of BA&T, the Company incurred costs of approximately $45,000,
primarily for transaction and professional fees. BA&T develops and markets
biometric and "smart" card software applications and solutions and has been an
Identix software development partner. The acquisition has been accounted for as
a pooling of interests.

The Company's fiscal 1998 consolidated financial statements include the
accounts and operations of BA&T. The Company has restated the consolidated
financial statements for fiscal 1997 to include the results and operations of
BA&T. For fiscal 1996, the effects of the combination with BA&T were not
significant and the Company has not restated the fiscal 1996 consolidated
financial statements to include the accounts and operations of BA&T.

42
<PAGE> 45
IDENTIX INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Separate net revenues, net income (loss) and related per share amounts of
the combined entities for the year ended June 30, 1997 are presented in the
following table:

<TABLE>
<CAPTION>
IDENTIX BA&T COMBINED
----------- --------- -----------
<S> <C> <C> <C>
Net revenues......................... $52,390,000 $ 153,000 $52,543,000
Net income (loss).................... $ 1,250,000 $(732,000) $ 518,000
Net income per share
Basic.............................. $ 0.02
Diluted............................ $ 0.02
</TABLE>

FINGERSCAN

On March 26, 1996, the Company acquired Fingerscan, a privately-held
Australian-based company that designs and markets Biometric Security products,
pursuant to a Share Purchase Agreement whereby Fingerscan became a wholly owned
subsidiary of the Company. In accordance with the Share Purchase Agreement, the
shareholders of Fingerscan were issued 668,976 shares of the Company's no par
value common stock.

The acquisition was accounted for using the purchase method of accounting.
Accordingly, the Company's results for fiscal 1996 include the operations of
Fingerscan from the date of acquisition and the purchase price has been
allocated to the assets purchased and the liabilities assumed based upon the
fair values at the date of acquisition. Based upon an appraisal by an investment
banking firm, the value of the 668,976 shares of the Company's common stock
issued in the acquisition was determined to be $5,459,000 reflecting a 32%
discount for certain restrictions related to the resale of the common stock
issued to purchase Fingerscan. The excess of the purchase price over the fair
market value of the net tangible assets acquired aggregated approximately
$5,280,000, of which $4,723,000 was allocated to in-process research and
development and $557,000 was allocated to other intangibles including acquired
technology. An independent appraisal was performed which used the income
approach to determine the fair value of Fingerscan and its identifiable assets,
including the portion of the purchase price attributed to the in-process
research and development. The income approach includes an analysis of the
markets, completion costs, cash flows, other required assets, contributions made
by core technology and risks associated with achieving such cash flows. The
developmental products acquired were evaluated in context of Interpretation 4 of
SFAS No. 2 and SFAS No. 86 and the identified in-process research and
development was expensed in accordance with these provisions as technological
feasibility had not yet been reached. At the time of acquisition, the in-process
research and development charge represented a multiple of approximately 19 times
Fingerscan's trailing twelve month research and development expenditures. The
Company amortizes the amount allocated to other intangibles including acquired
technology over a five-year period.

The following unaudited pro forma information presents a summary of
consolidated results of operations of the Company and Fingerscan as if the
acquisition had occurred at the beginning of the respective periods. The pro
forma combined statements of operations do not include the adjustment for the
non-recurring write-off of acquired in-process research and development. The net
income per share is based on the average number of shares of common stock of
Identix outstanding during the period plus the common shares issued by Identix
to acquire Fingerscan. These pro forma results have been prepared for
comparative purposes only and do not purport to be indicative of what operating
results would have been had the acquisition actually taken place on the assumed
dates or of operating results which may occur in the future.

43
<PAGE> 46
IDENTIX INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

<TABLE>
<CAPTION>
FISCAL YEAR ENDED
JUNE 30, 1996
-----------------
<S> <C>
Net revenues................................................ $39,883,000
Net income.................................................. $ 966,000
Net income per share
Basic..................................................... $ 0.04
Diluted................................................... $ 0.04
</TABLE>

IAS

On June 30, 1996, pursuant to a share purchase agreement, the Company
issued 155,000 shares of the Company's common stock to acquire IAS, a privately
held company. In connection with the acquisition of IAS, the Company incurred
costs of approximately $40,000 primarily for transaction and professional fees,
before tax. The acquisition has been accounted for as a pooling of interests.
The Company's fiscal 1996 consolidated financial statements include the accounts
and operations of IAS. For fiscal 1995, the effects of the combination with IAS
were not significant and the Company has not restated the fiscal 1995
consolidated financial statements to include the accounts and operations of IAS.

Separate net revenues, net income (loss) and related per share amounts of
the combined entities for the year ended June 30, 1996 are presented in the
following table:

<TABLE>
<CAPTION>
IDENTIX IAS ADJUSTMENTS COMBINED
----------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Net revenues............................ $37,208,000 $2,194,000 $(861,000) $38,541,000
Net income (loss)....................... $(3,557,000) $ 256,000 $(140,000) $(3,441,000)
Net loss per share
Basic................................. $ (0.15)
Diluted............................... $ (0.15)
</TABLE>

44
<PAGE> 47
IDENTIX INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 3 -- BALANCE SHEET DETAIL

<TABLE>
<CAPTION>
JUNE 30,
--------------------------
1998 1997
----------- -----------
<S> <C> <C>
Accounts receivable:
Commercial and other........................................ $16,655,000 $11,914,000
United States Government:
Billed...................................................... 10,350,000 5,277,000
Unbilled.................................................... 2,062,000 1,730,000
Employee receivables........................................ 375,000 441,000
Less: allowance for doubtful accounts....................... (866,000) (625,000)
----------- -----------
$28,576,000 $18,737,000
=========== ===========
Inventories:
Purchased parts and materials............................... $ 3,518,000 $ 3,027,000
Work-in-process............................................. 906,000 1,076,000
Finished goods, including spares............................ 2,739,000 1,192,000
----------- -----------
$ 7,163,000 $ 5,295,000
=========== ===========
Property and equipment:
Manufacturing, test and office equipment.................... $ 5,356,000 $ 5,326,000
Furniture and fixtures...................................... 1,205,000 1,194,000
Leasehold improvements...................................... 149,000 127,000
----------- -----------
6,710,000 6,647,000
Less: accumulated depreciation and amortization............. (4,605,000) (4,080,000)
----------- -----------
$ 2,105,000 $ 2,567,000
=========== ===========
Intangibles and other assets:
Goodwill.................................................... $ 1,298,000 $ 1,370,000
Purchased technology........................................ 1,177,000 1,334,000
Capitalized software costs.................................. 2,408,000 2,367,000
Less: accumulated amortization.............................. (2,454,000) (2,516,000)
----------- -----------
2,429,000 2,555,000
Other assets................................................ 339,000 453,000
----------- -----------
$ 2,768,000 $ 3,008,000
=========== ===========
</TABLE>

NOTE 4 -- LINES OF CREDIT

The Company has a $6,000,000 bank line of credit (the "Identix Line of
Credit") secured by substantially all of the personal property of the Company.
Under the Identix Line of Credit, the Company may borrow up to 80% of eligible
accounts receivable and up to 50% of eligible inventory. Amounts drawn bear
interest at the bank's prime rate of interest (8.50% at June 30, 1998). The line
of credit expires on October 27, 1998. At June 30, 1998, $4,925,000 was
outstanding and $1,075,000 was available under this bank line of credit. The
line of credit agreement contains financial and operating covenants including
restrictions on the Company's ability to pay dividends on the Company's common
stock. During fiscal 1998, the Company was in default on one of its bank line of
credit covenants. The Company has obtained a waiver of default from the bank for
breaches of the covenant. At June 30, 1998, the Company was in compliance with
such bank covenants.

On July 6, 1998, the Identix Line of Credit was amended to increase the
maximum amount available to $7,000,000. The Company may now borrow up to 80% of
eligible accounts receivable and may borrow up to 35% of eligible inventory.

45
<PAGE> 48
IDENTIX INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

ANADAC has a $6,000,000 bank line of credit and outstanding balances bear
interest at the bank's prime lending rate (8.50% at June 30, 1998) and are
payable upon demand. Available borrowings under the line are based upon
qualifying accounts receivable balances. The line of credit expires November 30,
1998. At June 30, 1998, $1,924,000 was outstanding and $4,076,000 was available
under the ANADAC Line of Credit. The line of credit agreement includes, among
other things, certain financial covenants and maintenance of certain financial
ratios. At June 30, 1998, ANADAC was in compliance with such bank covenants.

NOTE 5 -- CAPITAL STOCK

EMPLOYEE STOCK OPTIONS

In May 1983, the Company adopted an incentive stock option plan which
expired in 1993 ("1983 Plan"). Under the 1983 Plan, the Company reserved a total
of 2,000,000 shares of the Company's common stock. In October 1992, the Company
adopted the 1992 Incentive Stock Option Plan ("1992 Plan"). The 1992 Plan will
expire in 2002. A total of 1,000,000 shares of the Company's common stock has
been reserved for issuance under the 1992 Plan. In July 1995, the Company
adopted the Identix Incorporated Equity Incentive Plan ("1995 Plan"). The 1995
Plan will expire in 2005. In October 1997, the Company amended the 1995 Plan so
that a total of 1,750,000 shares of the Company's common stock are reserved for
issuance under the 1995 Plan. The 1995 Plan provides for the discretionary award
of options, restricted stock, stock purchase rights, performance shares or any
combination of these awards to eligible employees, including executive officers
and consultants. In August 1995, the Company adopted the Non-employee Directors
Stock Option Plan ("Directors Plan"), under which nonqualified stock options are
granted to non-employee directors on a formula basis. A total of 250,000 shares
of the Company's common stock is reserved for issuance under the Directors Plan.

Under the 1983, 1992, and 1995 Plans, options are granted for a period of
10 years. All grants of incentive stock options must be made at a price at least
equal to the then fair market value of the Company's common stock at the date of
grant. All grants of nonqualified stock options must be made at a price of at
least 85% of the then fair market value of the Company's common stock at the
date of grant. Options generally vest on a monthly basis over a period of two to
five years.

Under the Directors Plan, options are granted for a period of 10 years at
an exercise price equal to the fair market value of the Company's common stock
on the date of the grant. Upon election or appointment, each director of the
Company who is not, and has not been an officer or employee of the Company,
receives an option to purchase 10,000 shares of the Company's common stock;
provided, however, that if a director was appointed to the Board of Directors
after six months of the date of the annual meeting of shareholders at which
directors are elected, that director receives an option to purchase 5,000 shares
of the Company's common stock. Thereafter, each director receives an option to
purchase 10,000 shares of the Company's common stock on the date of the first
meeting of the Board of Directors of the Company following the annual meeting of
the shareholders at which directors are elected. Options vest quarterly over a
one year period from the date of grant.

46
<PAGE> 49
IDENTIX INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

The following table summarizes the Company's stock option activity and
related information for the past three years:

<TABLE>
<CAPTION>
SHARES AVAILABLE OPTIONED SHARES WEIGHTED
FOR GRANT OUTSTANDING AVERAGE PRICE
---------------- --------------- -------------
<S> <C> <C> <C>
Balance June 30, 1995................................. 47,006 1,454,904 $ 2.48
Shares reserved upon adoption of the 1995 Plan........ 1,000,000 --
Shares reserved upon adoption of the Directors Plan... 250,000 --
Options Granted....................................... (730,000) 730,000 $ 9.28
Options Exercised..................................... -- (679,724) $ 2.28
Options Canceled...................................... 29,291 (29,291) $ 5.93
Options Canceled and Expired.......................... (8,000) $ 2.75
---------- ----------
Balance June 30, 1996................................. 596,297 1,467,889 $ 5.85

Shares reserved upon adoption of amendment to 1995
Plan................................................ 250,000 --
Options Granted....................................... (933,350) 933,350 $ 9.31
Options Exercised..................................... -- (66,739) $ 2.73
Options Canceled...................................... 260,534 (260,534) $10.55
Options Canceled and Expired.......................... (150) $ 4.00
---------- ----------
Balance as of June 30, 1997........................... 173,481 2,073,816 $ 6.90

Shares reserved upon adoption of amendment to 1995
Plan................................................ 500,000 --
Options Granted....................................... (1,672,633) 1,672,633 $ 8.26
Options Exercised..................................... -- (287,799) $ 4.14
Options Canceled...................................... 1,167,256 (1,167,256) $ 9.74
Options Canceled and Expired.......................... (133) $ 2.50
---------- ----------
Balance as of June 30, 1998........................... 168,104 2,291,261 $ 6.59
---------- ----------
</TABLE>

As of June 30, 1998 options for approximately 1,440,410 common shares were
exercisable under the 1983, 1992, 1995 and Directors Plans.

In April 1998, 903,833 outstanding options with exercise prices in excess
of the then fair market value of the common stock, $7.625, were repriced to
$7.625 per share. Such options have been included in the above table as both
canceled and granted in fiscal 1998. No other terms of the options were amended.

The following table summarizes significant option groups outstanding at
June 30, 1998 and related weighted average prices and lives as follows:

<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------- ----------------------------
RANGE OF NUMBER WEIGHTED AVERAGE WEIGHTED AVERAGE NUMBER WEIGHTED AVERAGE
EXERCISE PRICE OUTSTANDING REMAINING LIFE EXERCISE PRICE OF SHARES EXERCISE PRICE
- -------------- ----------- ---------------- ---------------- --------- ----------------
<S> <C> <C> <C> <C> <C>
$1.33 - $ 3.00 305,138 4.66 $2.42 287,570 $2.40
$3.19 - $ 5.31 171,958 5.61 3.26 167,026 3.24
$6.00 - $ 7.81 1,732,449 8.61 7.48 929,098 7.44
$9.88 - $12.25 81,716 8.81 10.46 56,716 10.72
</TABLE>

47
<PAGE> 50
IDENTIX INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

PRO FORMA DISCLOSURES

All options were granted at an exercise price equal to the fair market
value of the Company's common stock at the date of grant. The weighted average
fair value at date of grant for options granted during fiscal 1998, 1997 and
1996 were $3.67, $4.85 and $4.83 per option, respectively. The fair value of
options at date of grant was estimated using the Black-Scholes model with the
following assumptions:

<TABLE>
<CAPTION>
FISCAL YEAR ENDED JUNE 30,
---------------------------
1998 1997 1996
----- ----- -----
<S> <C> <C> <C>
Stock Options:
Expected life (years)............................ 4 4 4
Risk free interest rate.......................... 5.53% 6.32% 5.85%
Volatility....................................... 53% 60% 60%
Dividend yield................................... -- -- --
</TABLE>

Had compensation expense for the Company's stock-based compensation plans
been determined based on the methods prescribed by SFAS No. 123, the Company's
net income (loss) and net income (loss) per share for the years ended June 30,
1998, 1997 and 1996 would have been as follows:

<TABLE>
<CAPTION>
FISCAL YEAR ENDED JUNE 30,
---------------------------------------
1998 1997 1996
----------- --------- -----------
<S> <C> <C> <C>
Net income (loss):
As reported........................ $ 768,000 $ 518,000 $(3,441,000)
Pro forma.......................... $(1,701,000) $(893,000) $(3,813,000)
Net income (loss) per share:
As reported
Basic........................... $ 0.03 $ 0.02 $ (0.15)
Diluted......................... $ 0.03 $ 0.02 $ (0.15)
Pro forma
Basic........................... $ (0.07) $ (0.04) $ (0.16)
Diluted......................... $ (0.07) $ (0.04) $ (0.16)
</TABLE>

EMPLOYEE STOCK OWNERSHIP PLAN

The ANADAC, Inc. Employee Stock Ownership Plan ("ESOP") enables eligible
employees of ANADAC to share in the growth of the Company through the
acquisition of common stock. The ESOP provides for the Company, at its
discretion, to make contributions of up to 10% of each participant's base
salary. The amount of compensation expense related to the ESOP is based upon the
common stock allocated to participants. The Company's expense for ESOP was
$188,000 in fiscal 1998, $158,000 in fiscal 1997 and $183,000 in fiscal 1996.

WARRANTS

Under certain private transactions authorized by the Board of Directors of
the Company from 1992 through 1994, warrants to purchase 395,160 shares of the
Company's common stock were issued at exercise prices ranging from $2.125 to
$3.75 per share. At June 30, 1998, warrants from these transactions to purchase
40,000 shares of the Company's common stock were outstanding, which expire in
January 1999.

Warrants to purchase 2,250,000 shares of the Company's common stock at
$3.00 per share were issued as part of a public offering in 1993. Also, as part
of the public offering, the Company issued the underwriter a warrant to purchase
45,000 units at an exercise price of $12.00 per unit, each unit consisting of
five warrants to purchase common stock and one share of series A Preferred Stock
convertible into five shares of common

48
<PAGE> 51
IDENTIX INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

stock. On June 6, 1995, the Company announced that on July 6, 1995 it would
redeem, for $0.05 per warrant, all warrants issued in the public offering not
exercised by July 5, 1995. At June 30, 1996, all warrants were exercised or
redeemed. As part of the warrant redemption, the Company entered into a standby
underwriting agreement whereby the underwriter would purchase for $3.00 per
share all unexercised warrants related to the warrant redemption. Pursuant to
the agreement, the underwriter purchased 3,210 of the unexercised warrants.

On December 15, 1994, the Company issued warrants to purchase 250,000
shares of its common stock for $3.00 per share to an investment banking firm and
certain of its officers and employees for providing services to the Company. The
warrant holders exercised the warrants in August 1995.

NOTE 6 -- RELATED PARTY TRANSACTIONS

As of June 30, 1998, Ascom USA Inc. ("Ascom") beneficially owned 5,075,924
or approximately 20% of the Company's outstanding common stock ("the Voting
Stock"). The Company is a party to a Voting Trust Agreement with Ascom (the
"Agreement") whereby Ascom deposited all of its shares of the Company's common
stock held by Ascom, into a voting trust. The trustee of the voting trust is on
the Company's Board of Directors and has voting control of the Voting Stock. The
term of the Voting Trust Agreement expires in 2004. In consideration for Ascom
entering into the Agreement, the Company granted Ascom certain additional
registration rights with respect to the Voting Stock, modified certain
contractual transfer restrictions with respect to the Voting Stock, and granted
Ascom price protections regarding certain sales of Voting Stock.

Patrick H. Morton is a member of the Company's Board of Directors and
presently owns 38% of Integrated Manufacturing Solutions, Inc, ("IMS") a
manufacturer of integrated circuit boards, that provides manufacturer services
to the Company. IMS billed the Company approximately $2,437,000 and $427,000 in
fiscal 1998 and 1997, respectively. Amounts outstanding to IMS at June 30, 1998
were approximately $311,000. The Company did not do business with IMS prior to
fiscal 1997.

NOTE 7 -- INCOME TAXES

The following is a reconciliation between statutory federal income taxes
and the provision for income taxes:

<TABLE>
<CAPTION>
FISCAL YEAR ENDED JUNE 30,
-------------------------------------
1998 1997 1996
--------- --------- -----------
<S> <C> <C> <C>
Tax expense (benefit) at statutory rate........ $ 261,000 $ 438,000 $(1,204,000)
State taxes net of federal benefit............. 33,000 80,000 --
Release of valuation allowance................. (360,000) (578,000) --
Benefit of operating losses not recognized..... -- -- 1,174,000
Other.......................................... 66,000 60,000 30,000
--------- --------- -----------
$ -- $ -- $ --
========= ========= ===========
</TABLE>

49
<PAGE> 52
IDENTIX INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Deferred tax assets (liabilities) comprise the following:

<TABLE>
<CAPTION>
JUNE 30,
--------------------------
1998 1997
----------- -----------
<S> <C> <C>
Loss and credit carryforwards............................. $ 8,440,000 $ 9,200,000
Depreciation and amortization............................. 80,000 80,000
Inventory reserves and basis differences.................. 360,000 222,000
Compensation accruals..................................... 340,000 244,000
Accounts receivable and sales reserves.................... 336,000 237,000
Other..................................................... 384,000 280,000
----------- -----------
Gross deferred tax assets................................. 9,940,000 10,263,000
----------- -----------
Unbilled accounts receivable.............................. (908,000) (1,014,000)
Capitalized software...................................... (492,000) (535,000)
Other..................................................... (284,000) (283,000)
----------- -----------
Gross deferred tax liabilities............................ (1,684,000) (1,832,000)
----------- -----------
Net deferred tax asset before valuation allowance......... 8,256,000 8,431,000
Deferred tax asset valuation allowance.................... (8,256,000) (8,431,000)
----------- -----------
Total net deferred tax asset.................... $ -- $ --
=========== ===========
</TABLE>

The deferred tax asset valuation allowance is attributed to U.S. Federal,
State and foreign deferred tax assets. Management believes sufficient
uncertainty exists regarding the realizability of these assets, such that a full
valuation allowance is required.

As of June 30, 1998, the Company has federal and state net operating loss
carryforwards of approximately $19.6 million and $3.6 million, respectively, for
financial reporting and income tax purposes, which are available to offset
future taxable income. The carryforwards expire on various dates through fiscal
2011. Under the Tax Reform Act of 1986, the amounts of and the benefit from net
operating losses that can be carried forward may be impaired or limited in
certain circumstances, including a cumulative stock ownership change of more
than 50% over a three-year period. As a result of the public offering in January
1993, a change of ownership occurred, causing an annual limitation on the
utilization of the net operating loss carryforwards, incurred prior to the
ownership change, of approximately $2.5 million.

NOTE 8 -- FOREIGN OPERATIONS DATA

In geographical reporting, revenues are attributed to the geographical
location of the sales and service organizations, and costs directly and
indirectly incurred in generating revenues are similarly assigned. For fiscal
1996, the Company's revenues from unaffiliated customers and identifiable assets
were less than 10% of consolidated total revenues and total assets,
respectively.

50
<PAGE> 53
IDENTIX INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

<TABLE>
<CAPTION>
FISCAL YEAR ENDED JUNE 30,
--------------------------
1998 1997
----------- -----------
<S> <C> <C>
Net revenues from unaffiliated customers:
North America............................................. $73,024,000 $43,305,000
Asia-Pacific.............................................. 3,344,000 9,238,000
Europe, Middle East, Africa............................... 3,006,000 --
----------- -----------
$79,374,000 $52,543,000
----------- -----------
Operating results:
North America............................................. $ 4,482,000 $ 2,262,000
Asia-Pacific.............................................. (1,763,000) 30,000
Europe, Middle East, Africa............................... 229,000 --
General Corporate Expenses................................ (2,180,000) (1,774,000)
----------- -----------
$ 768,000 $ 518,000
----------- -----------
Identifiable assets:
North America............................................. $40,025,000 $27,079,000
Asia-Pacific.............................................. 1,312,000 5,361,000
Europe, Middle East, Africa............................... 675,000 --
----------- -----------
$42,012,000 $32,440,000
----------- -----------
</TABLE>

Intercompany transfers are at prices sufficient to recover a reasonable
profit. These transfers are eliminated in the consolidated financial statements.
Intercompany transfers of products from North America to other regions were
$1,991,000 and $3,814,000 for fiscal 1998 and 1997, respectively.

NOTE 9 -- COMMITMENTS

LEASES

The Company currently occupies its headquarters and products business
facility under a lease, which expires in April 2001 and is required to pay
taxes, insurance, and maintenance as well as monthly rental payments. Further,
the Company leases office space for its products sales force under operating
leases which expire at various dates through 2003. The Company leases office
space for its services business under operating leases expiring at various dates
through 2001. The leases contain escalation provisions requiring rental
increases for increases in operating expense and real estate taxes.

Future minimum lease payments for operating leases are as follows:

<TABLE>
<S> <C>
Year ending June 30,
1999............................................. $1,669,000
2000............................................. 1,508,000
2001............................................. 1,034,000
2002............................................. 32,000
Thereafter....................................... 25,000
----------
Total.................................. $4,268,000
==========
</TABLE>

Total rental expense under operating leases was $1,882,000, $1,788,000 and
$1,308,000 for the years ended June 30, 1998, 1997 and 1996, respectively.

51
<PAGE> 54
IDENTIX INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 10 -- CONTINGENT LIABILITIES

52
<PAGE> 55

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

Not applicable.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The information required by this Item with respect to executive officers is
set forth in Part I of this Annual Report on Form 10-K and the information with
respect to the directors is incorporated by reference to the information set
forth under the caption "Election of Directors" in the proxy statement to be
used in connection with the 1998 Annual Meeting of the Shareholders (the "Proxy
Statement").

ITEM 11. EXECUTIVE COMPENSATION

The information required by this Item is incorporated by reference to the
information set forth under the caption "Executive Compensation" in the Proxy
Statement.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The information required by this Item is incorporated by reference to the
information set forth under the caption "Security Ownership of Certain
Beneficial Owners and Management" in the Proxy Statement.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information required by this Item is incorporated by reference to the
information set forth under the caption "Certain Transactions" in the Proxy
Statement.

53
<PAGE> 56

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

(a)1 FINANCIAL STATEMENTS.

The information required by this Item appears in Item 8 of this Annual
Report on Form 10-K.

(a)2 FINANCIAL STATEMENT SCHEDULES.

Schedule II -- Valuation and Qualifying Accounts and Reserves

(a)3 EXHIBITS.

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <S>
3.1(2) Registrant's Amended and Restated Articles of Incorporation,
as amended
3.2(2) Registrant's Bylaws, as amended
10.1(3) Lease Agreement dated June 15, 1988, between Identix and
Santa Clara Property Associates
10.2(1) Identix's 1983 Incentive Stock Option Plan and forms of
Incentive Stock Option Agreement and Non-Statutory Stock
Option Agreement
10.3(2) Stock Option Agreement dated March 13, 1989 between Identix
and Ascom Hasler AG, as amended by Amendment Number 1
thereto dated April 20, 1989 and Amendment Number 2 thereto
dated August 8, 1989
10.4(4) Stock Purchase Agreement dated July 24, 1990 between Identix
and Ascom Hasler AG
10.5(5) Stock Purchase Agreement and Amendment Number 3 to Stock
Option Agreement dated December 14, 1990 between Identix and
Ascom Hasler AG
10.6(6) Loan Agreement and Amendment Number 4 to Stock Option
Agreement dated December 12, 1991 between Identix and Ascom
Hasler AG
10.7(2) Registrant's 1992 Employee Stock Option Plan and forms of
Incentive Stock Option Agreement and Nonqualified Stock
Option Agreement
10.8(2) Loan Agreement dated October 30, 1992 between Identix and
Ascom Hasler AG
10.9(2) Loan and Security Agreement dated January 9, 1991 among
Crestar Bank, Defense Systems Concepts, Inc. and ANADAC, as
amended August 5, 1992 and October 23, 1992
10.10(2) ANADAC 1984 Incentive Stock Option Plan and forms of
Incentive Stock Option Agreement and Nonstatutory Stock
Option Agreement
10.11(7) Voting Trust Agreement with Respect to Capital Stock of
Identix Incorporated among Identix Incorporated, the Voting
Trustee, and Ascom Holding Inc. dated as of September 2,
1994
10.12(7) Amendment No. 5 to Stock Option Agreement among Identix
Incorporated, Ascom Hasler, Ltd., and Ascom Holding Inc.
dated as of September 2, 1994
10.13(7) Amendment to Registration Rights Agreement among Identix
Incorporated, Ascom Hasler, Ltd., and Ascom Holding Inc.
dated as of September 2, 1994
10.14(8) Office Building Lease dated May 18, 1995, between ANADAC,
Inc. and Charles Smith Management, Inc.
10.15(9) Office Building Lease dated April 1, 1995 between ANADAC,
Inc., and U.S. AIR, Inc.
10.16(9) Office Building Lease dated July 27, 1995 between ANADAC,
Inc., and Third Gould Limited Liability Company
10.17(9) Identix's 1995 Equity Incentive Plan
10.18(9) Identix's 1995 Nonemployee Directors Stock Option Plan
10.19(9) Letter Agreement dated July 28, 1995 between Identix and
Ascom Holding Inc.
</TABLE>

54
<PAGE> 57

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <S>
10.20(10) AEGIS Combat Ship Building Contract Program
10.21(11) The Fourth Amendment dated February 9, 1996 to Lease
Agreement dated June 15, 1988 for the Company's corporate
offices and manufacturing facility
10.22(12) December 1996 Amendment to Loan and Security Agreement
between ANADAC, a wholly owned subsidiary of the Company,
and Crester Bank dated December 2, 1996
10.23(12) Amended and Restated Revolving Note Agreement between
ANADAC, a wholly owned subsidiary of the Company, and
Crestar Bank dated December 2, 1996
10.24(13) Security and Loan Agreement dated August 29, 1997 between
the Company and Imperial Bank
23.1 Consent of PricewaterhouseCoopers LLP, Independent
Accountants
24.1 Power of Attorney (see page 57)
27.1 Financial Data Schedule
</TABLE>

- ---------------
(1) Incorporated by reference to registrant's registration statement no.
29-95551.

(2) Incorporated by reference to registrant's registration statement no.
33-55074.

(3) Incorporated by reference to the June 30, 1989 Form 10-K.

(4) Incorporated by reference to the July 24, 1990 Form 8-K.

(5) Incorporated by reference to the December 14, 1990 Form 8-K.

(6) Incorporated by reference to the June 30, 1992 Form 10-K.

(7) Incorporated by reference to the September 30, 1994 Form 10-Q.

(8) Incorporated by reference to the March 31, 1995 Form 10-Q.

(9) Incorporated by reference to the June 30, 1995 Form 10-K.

(10) Incorporated by reference to the September 30, 1995 Form 10-Q.

(11) Incorporated by reference to the September 30, 1996 Form 10-Q.

(12) Incorporated by reference to the December 31, 1996 Form 10-Q.

(13) Incorporated by reference to the September 30, 1997 Form 10-Q.

(b) REPORTS ON FORM 8-K:

No reports on Form 8-K were filed by the Company during the three
months ended June 30, 1998.

55
<PAGE> 58

IDENTIX INCORPORATED

SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES

<TABLE>
<CAPTION>
BALANCE AT ADDITIONS
BEGINNING CHARGED TO BALANCE AT
DESCRIPTION OF PERIOD EXPENSE DEDUCTIONS END OF PERIOD
----------- ---------- ---------- ---------- -------------
<S> <C> <C> <C> <C>
Inventory Reserve:
Year ended June 30, 1996..................... $242,000 $177,000 $ 75,000 $344,000
Year ended June 30, 1997..................... $344,000 $284,000 $ 65,000 $563,000
Year ended June 30, 1998..................... $563,000 $338,000 $ 35,000 $866,000

Allowance for Doubtful Accounts:
Year ended June 30, 1996..................... $347,000 $238,000 $ 97,000 $488,000
Year ended June 30, 1997..................... $488,000 $500,000 $363,000 $625,000
Year ended June 30, 1998..................... $625,000 $862,000 $621,000 $866,000
</TABLE>

56
<PAGE> 59

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant, Identix Incorporated, a corporation
organized and existing under the laws of the State of California, has duly
caused this report to be signed on its behalf by the undersigned thereunto duly
authorized, in the City of Sunnyvale, State of California, on the 10th day of
September 1998.

IDENTIX INCORPORATED

By: /s/ RANDALL C. FOWLER

------------------------------------
Randall C. Fowler,
President, Chief Executive Officer
and Director

POWER OF ATTORNEY

KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Randall C. Fowler and James P. Scullion,
jointly and severally, his attorneys-in-fact, each with the power of
substitution, for him in any and all capacities, to sign any amendments to this
Annual Report on Form 10-K and to file the same, with exhibits thereto and other
documents in connection therewith, with the Securities and Exchange Commission,
hereby ratifying and confirming all that each of said attorneys-in-fact, or his
substitute or substitutes, may do or cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Exchange Act of 1934, this
Annual Report on Form 10-K has been signed below by the following persons on
behalf of the Registrant and in the capacities and on the dates indicated.

<TABLE>
<CAPTION>
NAME TILTE DATE
---- ----- ----
<C> <S> <C>

/s/ RANDALL C. FOWLER President, Chief Executive Officer September 10, 1998
- ------------------------------------------ and Director (Principal Executive
Randall C. Fowler Officer)

/s/ JAMES P. SCULLION Executive Vice President, September 10, 1998
- ------------------------------------------ Chief Financial Officer and Secretary
James P. Scullion (Principal Financial and Accounting
Officer)

/s/ RANDALL HAWKS, JR. Director September 10, 1998
- ------------------------------------------
Randall Hawks, Jr.

/s/ PATRICK H. MORTON Director September 4, 1998
- ------------------------------------------
Patrick H. Morton

/s/ FRED U. SUTTER Director September 10, 1998
- ------------------------------------------
Fred U. Sutter

/s/ HARRISON N. WALTHER Director September 10, 1998
- ------------------------------------------
Harrison N. Walther

/s/ LARRY J. WELLS Director September 10, 1998
- ------------------------------------------
Larry J. Wells

Director September , 1998
- ------------------------------------------
Ed Zschau
</TABLE>

57
<PAGE> 60

IDENTIX INCORPORATED

1998 FORM 10-K REPORT

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
3.1(2) Registrant's Amended and Restated Articles of Incorporation,
as amended
3.2(2) Registrant's Bylaws, as amended
10.1(3) Lease Agreement dated June 15, 1988, between Identix and
Santa Clara Property Associates
10.2(1) Identix's 1983 Incentive Stock Option Plan and forms of
Incentive Stock Option Agreement and Non-Statutory Stock
Option Agreement
10.3(2) Stock Option Agreement dated March 13, 1989 between Identix
and Ascom Hasler AG, as amended by Amendment Number 1
thereto dated April 20, 1989 and Amendment Number 2 thereto
dated August 8, 1989
10.4(4) Stock Purchase Agreement dated July 24, 1990 between Identix
and Ascom Hasler AG
10.5(5) Stock Purchase Agreement and Amendment Number 3 to Stock
Option Agreement dated December 14, 1990 between Identix and
Ascom Hasler AG
10.6(6) Loan Agreement and Amendment Number 4 to Stock Option
Agreement dated December 12, 1991 between Identix and Ascom
Hasler AG
10.7(2) Registrant's 1992 Employee Stock Option Plan and forms of
Incentive Stock Option Agreement and Nonqualified Stock
Option Agreement
10.8(2) Loan Agreement dated October 30, 1992 between Identix and
Ascom Hasler AG
10.9(2) Loan and Security Agreement dated January 9, 1991 among
Crestar Bank, Defense Systems Concepts, Inc. and ANADAC, as
amended August 5, 1992 and October 23, 1992
10.10(2) ANADAC 1984 Incentive Stock Option Plan and forms of
Incentive Stock Option Agreement and Nonstatutory Stock
Option Agreement
10.11(7) Voting Trust Agreement with Respect to Capital Stock of
Identix Incorporated among Identix Incorporated, the Voting
Trustee, and Ascom Holding Inc. dated as of September 2,
1994
10.12(7) Amendment No. 5 to Stock Option Agreement among Identix
Incorporated, Ascom Hasler, Ltd., and Ascom Holding Inc.
dated as of September 2, 1994
10.13(7) Amendment to Registration Rights Agreement among Identix
Incorporated, Ascom Hasler, Ltd., and Ascom Holding Inc.
dated as of September 2, 1994
10.14(8) Office Building Lease dated May 18, 1995, between ANADAC,
Inc. and Charles Smith Management, Inc.
10.15(9) Office Building Lease dated April 1, 1995 between ANADAC,
Inc., and U.S. AIR, Inc.
10.16(9) Office Building Lease dated July 27, 1995 between ANADAC,
Inc., and Third Gould Limited Liability Company
10.17(9) Identix's 1995 Equity Incentive Plan
10.18(9) Identix's 1995 Nonemployee Directors Stock Option Plan
10.19(9) Letter Agreement dated July 28, 1995 between Identix and
Ascom Holding Inc.
10.20(10) AEGIS Combat Ship Building Contract Program
10.21(11) The Fourth Amendment dated February 9, 1996 to Lease
Agreement dated June 15, 1988 for the Company's corporate
offices and manufacturing facility
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<PAGE> 61

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
10.22(12) December 1996 Amendment to Loan and Security Agreement
between ANADAC, a wholly owned subsidiary of the Company,
and Crester Bank dated December 2, 1996
10.23(12) Amended and Restated Revolving Note Agreement between
ANADAC, a wholly owned subsidiary of the Company, and
Crestar Bank dated December 2, 1996
10.24(13) Security and Loan Agreement dated August 29, 1997 between
the Company and Imperial Bank
23.1 Consent of PricewaterhouseCoopers LLP, Independent
Accountants
24.1 Power of Attorney (see page 57)
27.1 Financial Data Schedule
</TABLE>