L-1 Identity Solutions, Inc. – ‘10-K405’ for 12/31/96 – EX-13

As of:  Monday, 3/31/97   ·   For:  12/31/96   ·   Accession #:  927016-97-922   ·   File #:  0-21559

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Annual Report — [x] Reg. S-K Item 405   —   Form 10-K
Filing Table of Contents

Document/Exhibit                   Description                      Pages   Size 

 1: 10-K405     Annual Report -- [x] Reg. S-K Item 405                19     92K 
 2: EX-13       1996 Annual Report to Shareholders                    20    111K 
 3: EX-23       Consent of Arthur Andersen LLP                         1      5K 
 4: EX-24.1     Power of Attorney                                      1      8K 
 5: EX-27.1     Financial Data Schedule                                2      9K 

EX-13   —   1996 Annual Report to Shareholders
Exhibit Table of Contents

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                                                                      EXHIBIT 13

SELECTED FINANCIAL DATA 

The financial data set forth below should be read in conjunction with 
Management's Discussion and Analysis of Financial Condition and Results of      
Operations and the Financial Statements of the Company and related notes thereto
included elsewhere in this Annual Report.                                       

                                                        [Enlarge/Download Table]


                                                            YEAR ENDED DECEMBER 31,                   
                                        --------------------------------------------------------------
                                            1996            1995             1994            1993     
                                        -------------  ---------------  ---------------  -------------
                                                     (in thousands, except per share amounts)         
STATEMENT OF OPERATIONS DATA:                                                                         
                                                                                                      
Revenues...............................       $24,971         $11,221          $ 1,257        $   505 
Project costs..........................        19,484          10,361            1,140            456 
                                        -------------  ---------------  ---------------  -------------
Project margin.........................         5,487             860              117             49 
                                        -------------  ---------------  ---------------  -------------

Operating expenses:                                                                                   
  Sales and marketing..................         1,852             999            1,596          1,185 
  Research and development.............           235           1,089              201             47 
  General and administrative...........         1,880           1,204              681            289 
                                        -------------  ---------------  ---------------  -------------
      Total operating expenses.........         3,967           3,292            2,478          1,521 
                                        -------------  ---------------  ---------------  -------------

Operating income (loss)................         1,520          (2,432)          (2,361)        (1,472)
Interest expense, net..................           714             515               40              - 
                                        -------------  ---------------  ---------------  -------------

Income (loss) before income taxes......           806          (2,947)          (2,401)        (1,472)
Income taxes...........................           205               -                -              - 
                                        -------------  ---------------  ---------------  -------------
Net income (loss)......................       $   601         $(2,947)         $(2,401)       $(1,472)
                                        =============  ===============  ===============  =============
Net income (loss) per share(1).........       $  0.09         $ (0.47)         $ (0.39)        $(0.24)
                                        =============  ===============  ===============  =============
Weighted average common and equivalent                                                                
   shares..............................         6,587           6,225            6,225          6,225 
                                        =============  ===============  ===============  =============

                                                        [Enlarge/Download Table]

                                                                 DECEMBER 31,                         
                                        --------------------------------------------------------------
                                            1996            1995             1994            1993     
                                        -------------  ---------------  ---------------  -------------
                                                                                                      
BALANCE SHEET DATA:                                                                                   
Working Capital........................    $20,676        $ 7,413           $ 2,509         $   368   
Total assets...........................     36,119         11,285             3,999             914   
Long-term obligations..................      4,420          8,319               955               -   
Stockholders' equity...................     23,020              -                 -               -   
Net assets(2)..........................          -          1,323             1,554             368   

(1) See note 2 of Notes to Financial Statements for information concerning the  
computation of net income (loss) per share.                             
(2) Net assets represent divisional investment during the time the Company      
operated as a division of Lau Technologies.                     

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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF      
OPERATIONS                                                                      

   The following discussion and analysis contains forward-looking statements
that involve risks and uncertainties. The Company's actual results could differ 
materially from those discussed herein. Factors that could cause or contribute  
to such differences include, but are not limited to, those discussed in the     
section below entitled "Certain Factors that may Affect Future Results." The    
cautionary statements made herein should be read as being applicable to all     
related forward-looking statements in this Annual Report.                       

OVERVIEW                                                                        

    Viisage develops and implements turnkey digital identification systems and
solutions intended to deter fraud, reduce customers' identification program     
costs and improve security.  The Company combines its systems integration and   
software design capabilities with its proprietary software and hardware products
to create complete customized solutions.  Viisage's products are currently      
operating at over 450 locations.  Applications can include systems and cards for
national ID's, driver's licenses, social services, voter registration, law      
enforcement, corrections, healthcare, financial services, retail  and access    
control.  Viisage is also commercializing patented facial recognition technology
for the real-time identification and verification of individuals.               

   The Company began operations in 1993 as a division of Lau Technologies, a
provider of systems integration services and products for sophisticated         
electronic systems.  On November 6, 1996, Lau transferred substantially all of  
the assets, liabilities and operations of the division  to the Company in       
exchange for 5,680,000 shares of the Company's common stock and the Company     
completed its initial public offering in November 1996.  The Company is         
currently a 64%  owned subsidiary of Lau Technologies.                          

    Viisage has experienced significant revenue growth since 1993. The Company
believes that the increasing acceptance of and demand for digital identification
technology in recent years, its commitment to providing customized solutions for
its customers' needs, its expertise in facial imaging and its proprietary       
software and hardware products have contributed to its growth and will be       
important to its future success.                                                

    The Company provides systems and services principally under contracts that
have five-year terms and provide for several annual renewals after the initial  
contract term. Contracts generally provide for a fixed price for the system     
and/or for each card produced. Contract prices vary depending on, among other   
things, design and integration complexities, the nature and number of           
workstations and sites, the projected number of cards to be produced, the level 
of post-installation support and the competitive environment. Substantially all 
of the Company's revenues are currently derived from public sector customers and
contractors to such customers. The Company believes for the foreseeable future  
that it will continue to derive a significant portion of its revenues from a    
limited number of large contracts. For the years ended December 31, 1995 and    
1996, three customers and two customers, respectively, each accounted for more  
than 10% of                                                                     

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the Company's revenues and an aggregate of 85% and 50% of revenues for the      
years, respectively.                                                            

  The Company's results of operations are significantly affected by, among
other things, the timing of award and performance on contracts.  As a result,   
the Company's revenues and income may fluctuate from quarter to quarter, and    
comparisons over longer periods of time may be more meaningful.  The Company's  
results of operations are not seasonal since contracts are awarded and performed
throughout the year.                                                            

RESULTS OF OPERATIONS                                                           

The following table sets forth certain financial information as a percentage of 
revenues for the periods indicated.                                             

                                                                [Download Table]


                                     YEAR ENDED DECEMBER 31, 
                                     ----------------------- 
                                      1996    1995     1994  
                                      -----   -----   ------ 
                                                             
Revenues...........................    100%    100%     100% 
Project  costs.....................     78      92       91  
                                      ----    ----    -----  
Project margin.....................     22       8        9  
Operating expenses:                                          
    Sales and marketing............      7       9      127  
    Research and development.......      1      10       16  
    General and administrative.....      8      11       54  
                                      ----    ----    -----  
          Total operating expenses.     16      30      197  
                                      ----    ----    -----  
Operating income(loss).............      6     (22)    (188) 
Interest expense, net..............      3       4        3  
                                      ----    ----    -----  
Income (loss) before income taxes..      3     (26)    (191) 
Income taxes.......................      1       -        -  
                                      ----    ----    -----  
Net income (loss)..................      2 %   (26)%   (191)%
                                      ====     ====   =====  

Years ended December 31, 1996 and 1995                                          

  Revenues.  Revenues are derived principally from systems implementation,
card production and related services under multi-year contracts.  Revenues      
increased 123% to $25.0 million in 1996 from $11.2 million in 1995.  This       
increase was due to an increase in the number of contracts being performed      
during 1996.                                                                    

 Project Costs and Margin.  Project costs consist primarily of hardware,
consumables (printer ribbons, cards, holographic overlays, etc.), system design,
software development and implementation labor, maintenance and overhead.  As a  
percentage of revenues, project costs decreased to 78% for 1996 from 92% for    
1995.  This decrease reflects cost savings on design, development and           
implementation activities resulting from the Company's increased experience with
and resources for digital identification solutions.  Project margin increased   
538% to $5.5 million (22% of revenues) for 1996 from $860,000 (8% of revenues)  
for 1995, reflecting the increase in revenues and cost savings discussed above. 
The Company believes it could experience further improvements in project margin 
from project cost savings and improved pricing.  However, there can be no       
assurance that such improvements will be achieved.                              

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 Sales and Marketing.  Sales and marketing expenses consist primarily of
compensation and professional service fees for marketing, bid and proposal and  
customer support activities.  Sales and marketing expenses increased 85% to $1.9
million in 1996 from $1.0 million in 1995.  This increase principally reflects  
an increase in proposal activity and the addition of marketing personnel during 
1996.  As a percentage of revenues, sales and marketing expenses decreased to 7%
for 1996 from 9% for 1995 due to revenues increasing at a greater rate than such
expenses during 1996.  The Company anticipates that it will continue to make    
significant expenditures for sales and marketing as it adds resources and       
initiates operations in additional markets.                                     

Research and Development.  Research and development expenses consist  
principally of compensation, outside services and materials utilized for product
and software development activities that are not related to specific projects.  
Research and development expenses decreased 78% to $235,000 in 1996 from $1.1   
million in 1995, and decreased as a percentage of revenues to 1% for 1996 from  
10% for 1995.  These decreases reflect the completion in 1995 of proprietary    
software to support all industry standard computing environments and            
proprietary hardware products for the Company's card-based systems and the      
increase in revenues in 1996.  The Company believes that the software and       
hardware products developed in prior periods will support its card-based systems
offerings for the foreseeable future.  Expenditures for 1996 relate primarily to
the Company's facial recognition products and do not reflect the benefits to the
Company under license arrangements from the research and development efforts of 
Lau Technologies and the Massachusetts Institute of Technology for projects that
are not directly related to the Company.                                        

  General and Administrative.  General and administrative expenses consist
principally of compensation for executive management, finance and administrative
personnel and outside professional fees.  General and administrative expenses   
increased 56% to $1.9 million in 1996 from $1.2 million in 1995.  The increase  
in expenses was due primarily  to the addition of management personnel during   
the fourth quarter of 1995 and increased management activities related to the   
growth in the Company's business.  As a percentage of revenues, general and     
administrative expenses decreased to 8% for 1996 from 11% for 1995 due to       
revenues increasing at a greater rate than such expenses in 1996.               

     Interest Expense.  The increase in net interest expense to $714,000 in 1996
from $515,000 in 1995 principally reflects the increase in the level of         
borrowings during 1996.  This increase was partially offset by interest earned  
on the net proceeds from the Company's initial public offering.                 

 Income Taxes.  The Company's operations prior to the transfer discussed
above were included in the income tax returns of Lau Technologies, an S         
corporation.  Income tax expense for 1996 relates principally to corporate taxes
for the period following the transfer and a deferred tax charge of $110,000     
relating to the cumulative differences between the financial reporting and      
income tax bases of certain assets and liabilities as of the transfer date.     

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Years Ended December 31, 1995 and 1994.                                         

Revenues.  Revenues increased 793% to $11.2 million in 1995 from $1.3 
million in 1994.  This increase was due primarily to performance on several     
contracts awarded during the fourth quarter of 1994 and the first quarter of    
1995.  The Company began operations in 1993 and its first contract was awarded  
late that year.  Revenues for 1994 were derived solely from this contract.      

Project Costs and Margin.  As a percentage of revenues, project costs 
increased to 92% in 1995 from 91% in 1994.  These percentages reflect additional
development costs incurred to design, develop, and integrate system components  
and industry standard software for the first time.  Project margin increased    
635% to  $860,000 (8% of revenues) in 1995 from $117,000 (9% of revenues) in    
1994 reflecting the increases in revenues and development costs discussed above.

  Sales and Marketing.  Sales and marketing expenses decreased 37% to $1.0
million in 1995 from $1.6 million in 1994.  This decrease reflects improved     
controls over bid and proposal  costs and the Company's decision not to pursue  
certain opportunities due to funding constraints.  As a percentage of revenues, 
sales and marketing expenses decreased to 9% in 1995 from 127% in 1994 due      
primarily to revenues increasing at a greater rate than such expenses during    
1995.                                                                           

     Research and Development.  Research and development expenses increased 442%
to $1.1. million in 1995 from $201,000 in 1994.  The significant increase in    
expenses during 1995 reflects the completion of certain proprietary software to 
support all industry standard computing environments and the development of     
proprietary hardware products for the Company's card-based systems.  As a       
percentage of revenues, these expenses decreased to 10% in 1995 from 16% in 1994
due to the increase in revenues at a greater rate than such expenses in 1995.   

    General and Administrative.  General and administrative expenses increased
77% to $1.2 million in 1995 from $681,000 in 1994.  This increase reflects the  
increased level of management activity due to the growth in the Company's       
business and the addition of certain management personnel during the fourth     
quarter of 1995.  As a percentage of revenues, general and administrative       
expenses decreased to 11% in 1995 from 54% in 1994 due primarily to revenues    
increasing at a greater rate than such expenses during 1995.                    

Interest Expense.  Interest expense increased to $515,000 in 1995 from
$40,000 in 1994 due principally to the increase in borrowings to fund           
operations.                                                                     

LIQUIDITY AND CAPITAL RESOURCES                                                 

   In November 1996, the Company completed an initial public offering of its
common stock and received net proceeds of approximately $22.2 million.  The     
Company used approximately $8.8 million of the proceeds to repay long-term      
borrowings assumed in connection with the transfer discussed above.             

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  At December 31, 1996, working capital was $20.7 million compared to $7.4
million at December 31, 1995.  The increase in working capital was due primarily
to the proceeds from the initial public offering in November and increases in   
accounts receivable and costs and estimated earnings in excess of billings, net 
of increases in accounts payable and accrued expenses.                          

   For the year ended December 31, 1996, operations and investing activities
utilized cash of approximately $1.5 million and $5.1 million, respectively,     
principally to fund the working capital increases discussed above and increases 
in project assets and other assets.  Financing was provided by the initial      
public offering and the project lease financing arrangement referred to below.  

The Company has a revolving line of credit with a commercial bank that
provides for unsecured borrowings of up to $10.0 million through June 1998 at   
the prime rate or other LIBOR-based options.  This agreement requires the       
Company to maintain certain financial ratios and minimum levels of earnings and 
tangible net worth.  The Company also has a system project lease financing      
arrangement with a commercial leasing organization providing for project        
financing of up to $15.0 million.  Pursuant to this arrangement, the lessor     
purchases certain of the Company's digital identification systems and leases    
them back to Viisage for deployment with identified and contracted customers    
approved by the lessor.  The lessor retains title to systems and has an         
assignment of Viisage's rights under the related customer contracts, including  
rights to use the software and technology underlying the related systems.  Under
this arrangement, the lessor bears the credit risk associated with payments by  
Viisage's customers, but Viisage bears performance and appropriation risk and is
generally required to repurchase a system in the event of a termination by a    
customer for any reason except credit default.  These project lease arrangements
are accounted for as capital leases.  At December 31, 1996, the Company had $10 
million available under the revolving line of credit and approximately $11      
million available under the lease financing arrangement.                        

    The Company has historically not made substantial capital expenditures for
facilities, office and computer equipment and has satisfied its needs in these  
areas principally through leasing.                                              

The Company believes that the net proceeds from its initial public    
offering, together with cash flow from operations, available borrowings and     
project leasing will be sufficient to meet the Company's working capital and    
capital expenditure needs for the foreseeable future.  There can be no          
assurance, however, that additional financing, if needed, will be available on  
favorable terms or at all.  If the Company is unable to obtain additional       
capital, if needed, on acceptable terms the Company may be unable to take full  
advantage of future opportunities or respond to competitive pressures, which    
could adversely affect the Company's business, financial condition and results  
of operations.                                                                  

INFLATION                                                                       

    Although certain of the Company's expenses increase with general inflation
in the economy, inflation has not had a material impact on the Company's        
financial results to date.                                                      

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ACCOUNTING PRONOUNCEMENT                                                        

     In March 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 128, Earnings Per Share, which        
establishes standards for computing and presenting earnings per share for       
entities with publicly held common stock or potential common stock.  SFAS No.   
128 is effective for periods ending after December 15, 1997 and early adoption  
is not permitted.  Under the new pronouncement,  earnings (loss) per share would
not be materially different from the amounts presented.                         

CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS                                  

 The Company operates in an environment that involves a number of risks,
some of which are beyond the Company's control.  Forward-looking statements in  
this document and those made from time to time by the Company through its senior
management are made pursuant to the safe harbor provisions of the Private       
Securities Litigation Reform Act of 1995.  Forward-looking statements concerning
future plans or results are necessarily only estimates and  actual results could
differ materially from expectations.  Certain factors that could cause or       
contribute to such differences include, among other things, potential           
fluctuations in quarterly results, the size and timing of award and performance 
on contracts, dependence on large contracts and a limited number of customers,  
lengthy sales and implementation cycles, changes in management estimates        
incident to accounting for contracts, availability and cost of key components,  
market acceptance of new or enhanced products and services, proprietary         
technology and changing technology, competitive conditions, system performance, 
management of growth, dependence on key personnel and general economic and      
political conditions and other factors affecting spending by customers.         

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Viisage Technology, Inc.                                                        
Balance Sheets                                                                  
(in thousands, except per share amounts)                                        

                                                                [Download Table]

December 31,                                               1996           1995  
--------------------------------------------------------------------------------
                                                                                
Assets                                                                          

Current Assets:                                                                 
  Cash and cash equivalents (note 2)                    $11,073        $     -  
  Accounts receivable                                     1,499            378  
  Costs and estimated earnings in excess of billings     16,445          8,678  
  Other current assets (note 3)                             338              -  
--------------------------------------------------------------------------------
    Total current assets                                 29,355          9,056  

Property and equipment, net (note 4)                      5,857          2,229  

Other assets (note 3)                                       907              -  
--------------------------------------------------------------------------------
                                                        $36,119        $11,285  
================================================================================
Liabilities and Stockholders' Equity/Net Assets                                 

Current Liabilities:                                                            
  Accounts payable and accrued expenses (note 5)        $ 7,288        $ 1,153  
  Accrued and deferred income taxes (notes 2 and 9)         190              -  
  Obligations under capital leases (notes 6 and 7)        1,201            490  
--------------------------------------------------------------------------------
    Total current liabilities                             8,679          1,643  

Long-term debt (note 6)                                       -          6,656  

Obligations under capital leases (notes 6 and 7)          4,420          1,663  
--------------------------------------------------------------------------------
                                                         13,099          9,962  
--------------------------------------------------------------------------------
Commitments and contingencies (note 7)                                          

Stockholders' Equity/Net Assets (notes 1 and 10):                               
  Preferred stock, $.001 par value;                                             
    2,000,000 shares authorized; none issued                  -              -  
  Common stock, $.001 par value;                                                
    20,000,000 shares authorized;                                               
    8,055,000 shares issued and outstanding                   8              -  
  Additional paid-in capital                             22,994              -  
  Retained earnings                                          18              -  
  Net assets                                                  -          1,323  
--------------------------------------------------------------------------------
    Total stockholders' equity/net assets                23,020          1,323  
--------------------------------------------------------------------------------
                                                        $36,119        $11,285  
================================================================================

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

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Viisage Technology, Inc.                                                        
Statements of Operations                                                        
(in thousands, except per share amounts)                                        

                                                                [Download Table]

Year Ended December 31,                         1996          1995         1994 
--------------------------------------------------------------------------------
                                                                                
Revenues                                     $24,971       $11,221      $ 1,257 

Project costs                                 19,484        10,361        1,140 
--------------------------------------------------------------------------------
   Project margin                              5,487           860          117 
--------------------------------------------------------------------------------
Operating Expenses:                                                             
  Sales and marketing                          1,852           999        1,596 
  Research and development                       235         1,089          201 
  General and administrative                   1,880         1,204          681 
--------------------------------------------------------------------------------
    Total operating expenses                   3,967         3,292        2,478 
--------------------------------------------------------------------------------
    Operating income (loss)                    1,520        (2,432)      (2,361)

Interest expense, net                            714           515           40 
--------------------------------------------------------------------------------
    Income (loss) before income taxes            806        (2,947)      (2,401)

Income taxes (notes 2 and 9)                     205             -            - 
--------------------------------------------------------------------------------
    Net income (loss)                      $     601      $ (2,947)     $(2,401)
--------------------------------------------------------------------------------
Net income (loss) per share (note 2)       $    0.09      $  (0.47)     $ (0.39)
--------------------------------------------------------------------------------
Weighted average common and equivalent                                          
  shares (note 2)                              6,587         6,225        6,225 
--------------------------------------------------------------------------------

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

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Viisage Technology, Inc.                                                        
Statements of Changes in Stockholders' Equity/Net Assets                        
(in thousands)                                                                  

                                                        [Enlarge/Download Table]

                                                                  Additional                                               
                                  Preferred         Common         Paid-in        Retained                                 
                                    Stock           Stock          Capital        Earnings       Net Assets         Total  
---------------------------------------------------------------------------------------------------------------------------
                                                                                                                           
Balance, December 31, 1993      $       -       $       -       $        -      $      -        $    368        $      368 

  Net loss                              -               -                -             -          (2,401)           (2,401)

  Net transactions with parent          -               -                -             -           3,587             3,587 
---------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1994              -               -                -             -           1,554             1,554 

  Net loss                              -               -                -             -          (2,947)           (2,947)

  Net transactions with parent          -               -                -             -           2,716             2,716 
---------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1995              -               -                -             -           1,323             1,323 

  Net income                            -               -                -             -             583               583 

  Stock compensation expense            -               -                -             -             166               166 

  Net transactions with parent          -               -                -             -          (1,372)           (1,372)
---------------------------------------------------------------------------------------------------------------------------
Balance, November 6, 1996 (note 1)      -               -                -             -             700               700 

  Issuance of common stock in                                                                                              
    exchange for net assets (note 1)    -               6              694             -            (700)                - 

  Issuance of common stock in                                                                                              
    initial public offering (notes 1                                                                                       
    and 10)                             -               2           22,228             -               -            22,230 

  Net income                            -               -                -            18               -                18 

  Stock compensation expense            -               -               72             -               -                72 
---------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1996      $       -       $       8       $   22,994      $     18        $      -        $   23,020 
===========================================================================================================================

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

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Viisage Technology, Inc.                                                        
Statements Of Cash Flows                                                        
(in thousands)                                                                  

                                                        [Enlarge/Download Table]

Year Ended December 31,                                                 1996                    1995                    1994 
-----------------------------------------------------------------------------------------------------------------------------
                                                                                                                             
Cash Flows from Operating Activities:                                                                                        
  Net income (loss)                                                $     601                 $(2,947)                $(2,401)
  Adjustments to reconcile net income (loss)                                                                                 
    to net cash (used) by operating activities:                                                                              
      Depreciation and amortization                                      612                      88                       - 
      Stock compensation expense                                         238                       -                       - 
      Changes in operating assets and liabilities:                                                                           
        Accounts receivable                                           (1,121)                   (378)                  1,115 
        Costs and estimated earnings in excess of billings            (7,767)                 (4,679)                 (4,244)
        Other current assets                                            (338)                      -                      44 
        Accounts payable and accrued expenses                          6,135                     (25)                    632 
        Accrued and deferred income taxes                                190                       -                       - 
-----------------------------------------------------------------------------------------------------------------------------
          Net cash (used) by operating activities                     (1,450)                 (7,941)                 (4,854)
-----------------------------------------------------------------------------------------------------------------------------
Cash Flows from Investing Activities:                                                                                        
  Purchase of contract equipment converted to capital leases          (3,965)                 (2,216)                      - 
  Additions to property and equipment                                   (275)                   (101)                      - 
  Increase in other assets                                              (907)                      -                       - 
-----------------------------------------------------------------------------------------------------------------------------
          Net cash (used) by investing activities                     (5,147)                 (2,317)                      - 
-----------------------------------------------------------------------------------------------------------------------------
Cash Flows from Financing Activities:                                                                                        
  Net revolving credit (repayments) borrowings                        (6,656)                  6,610                      46 
  Proceeds from long-term borrowings                                       -                   1,862                   1,580 
  Proceeds from sale/leaseback of equipment                            3,965                   2,216                       - 
  Principal payments on long-term borrowings                               -                  (3,083)                   (359)
  Principal payments on obligations under capital leases                (497)                    (63)                      - 
  Net proceeds from initial public offering                           22,230                       -                       - 
  Net transactions with parent                                        (1,372)                  2,716                   3,587 
-----------------------------------------------------------------------------------------------------------------------------
          Net cash provided by financing activities                   17,670                  10,258                   4,854 
-----------------------------------------------------------------------------------------------------------------------------
Increase in cash and cash equivalents                                 11,073                       -                       - 

Cash and cash equivalents, beginning of year                               -                       -                       - 

Cash and cash equivalents, end of year                             $  11,073                 $     -                 $     - 
-----------------------------------------------------------------------------------------------------------------------------
Supplemental Cash Flow Information:                                                                                          
  Cash paid during the year for interest                           $     781                 $   465                 $    34 
-----------------------------------------------------------------------------------------------------------------------------

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

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Viisage Technology, Inc.                                                        
Notes to Financial Statements                                                   

(1) Business and Basis of Presentation                                          

Viisage Technology, Inc. (Viisage or the Company) develops and implements       
turnkey digital identification systems and solutions intended to deter fraud,   
reduce customers' identification program costs and improve security.  The       
Company combines its systems integration and software design capabilities with  
its proprietary software and hardware products to create complete customized    
solutions.  Viisage's products are currently operating at over 450 locations.   
Applications can include systems and cards for national ID's, driver's          
licenses, social services, voter registration, law enforcement, corrections,    
healthcare, financial services, retail and access control.  In addition,        
Viisage is commercializing patented facial recognition technology for the       
real-time identification and verification of individuals.                       

Viisage was incorporated in Delaware on May 23, 1996 as part of a planned       
reorganization of Lau Acquisition Corp. (Lau Technologies or Lau).  On          
November 6, 1996, Lau Technologies completed the transfer of substantially all  
of the assets, liabilities and operations of its Viisage Technology Division to 
the Company in exchange for 5,680,000 shares of the Company's common stock (the 
Transfer), and as discussed more fully in note 10, the Company completed its    
initial public offering in November 1996.  The Company is currently an          
approximately 64% owned subsidiary of Lau Technologies.  These transactions     
were between entities under common control and were accounted for using         
historical amounts in a manner similar to a pooling of interests.  The          
financial statements for all periods presented prior to the Transfer reflect    
the financial position, results of operations and cash flows of the Viisage     
Technology Division business that comprise the Company.  All changes in the     
Company's equity prior to the Transfer are reflected in net assets which        
represent the net investment of Lau Technologies in the Company.                

The statements of operations for all periods presented reflect allocations for  
the costs of shared facilities and certain administrative services. Such costs  
and expenses have been allocated to the Company based on actual usage or other  
methods that approximate actual usage. Management believes that the allocation  
methods are reasonable and that allocated costs and expenses approximate what   
such amounts would be if the Company had operated on a stand-alone basis. As    
discussed more fully in note 3, the Company entered into agreements with Lau    
Technologies covering certain facilities, equipment and administrative services 
after the Transfer. Although the Company has not filed separate income tax      
returns for periods prior to the Transfer, income taxes presented in the        
financial statements are computed on a separate return basis taking into        
consideration the tax-sharing arrangement with Lau Technologies described in    
note 2.                                                                         

The financial information included herein may not necessarily reflect the       
financial position, results of operations and cash flows of the Company in the  
future or what the financial position, results of operations and cash flows     
would have been had it been a separate, stand-alone company throughout the      
periods covered.                                                                

(2) Summary of Significant Accounting Policies                                  

Use of Estimates                                                                

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 and disclosure of         
contingent assets and liabilities at the date of the financial statements and   
the reported amounts of revenues and expenses during the reporting period.      
Actual results could differ from those estimates.                               

Contract Revenue and Cost Recognition                                           

The Company provides services principally under contracts that provide for a    
fixed price for the system and/or for each card produced. Revenue is recognized 
using the percentage of completion method based on labor costs incurred and/or  
cards produced. Contract losses, if any, are recognized in the period in which  
they become determinable. Costs and estimated earnings in excess of billings are
recorded as a current asset. Billings in excess of costs and estimated earnings 
and accrued contract costs are recorded as current liabilities. Generally,      
contracts provide for billing when contract milestones are met and/or cards are 
produced. Retainages and amounts subject to future negotiation are not material.
Costs and estimated earnings in excess of billings includes approximately $6.5  
million expected to be billed and collected after December 31, 1997.            

Fair Value of Financial Instruments                                             

The carrying amounts of the Company's financial instruments, including cash and 
cash equivalents, accounts receivable and payable and short-and long-term       
borrowings, approximate fair values.                                            

Cash and Cash Equivalents                                                       

The Company considers all highly liquid investments with original maturities of 
three months or less to be cash equivalents. At December 31, 1996, cash         
equivalents consisted of short-term Eurodollar investments with a commercial    
bank. These investments are carried at cost which approximates market value.    

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Viisage Technology, Inc.                                                        
Notes to Financial Statements (Continued)                                       

Accounts Receivable                                                             

Accounts receivable are due principally from government agencies and contractors
to government agencies. Management periodically reviews accounts receivable for 
possible uncollectible amounts. In the event management determines a specific   
need for an allowance, a provision for doubtful accounts is provided. Based on  
management's review, no allowance for doubtful accounts has been recorded for   
the periods presented.                                                          

All of the Company's revenues related to one customer in 1994. For 1996 and     
1995, two customers and three customers, respectively, each accounted for more  
than 10% of revenues, and approximately 50% and 85% in the aggregate of the     
Company's revenues, respectively.                                               

At December 31, 1996, 54% of accounts receivable and costs and estimated        
earnings in excess of billings related to three customers.                      

Property and Equipment                                                          

Property and equipment are recorded at cost or the lesser of fair value or the  
present value of minimum lease payments for items acquired under capital leases.
Depreciation and amortization are calculated using the straight-line or usage-  
based methods over the estimated useful lives of the related assets that        
approximate five years or the lease term, whichever is shorter.                 

Research and Development                                                        

Research and development costs are charged to expense as incurred.              

Software Development                                                            

The Company reviews software development costs incurred in accordance with the  
provisions of Statement of Financial Accounting Standards (SFAS) No. 86 which   
requires that certain costs incurred in the development of computer software to 
be sold or leased be capitalized once technological feasibility is reached. The 
Company has not capitalized any software development costs because development  
costs incurred subsequent to the establishment of technological feasibility have
not been material.                                                              

Costs related to internally developed software are expensed as incurred.        
Externally purchased software costs are capitalized and depreciated over their  
remaining useful lives not to exceed five years.                                

Income Taxes                                                                    

The Company's operations prior to the Transfer discussed in note 1, were        
included in the income tax returns of Lau Technologies, an S corporation. Income
tax allocations for such periods have been calculated as if the Company were    
filing separate income tax returns taking into consideration that operating     
losses and tax credits have been utilized by the shareholders of Lau            
Technologies.                                                                   

Subsequent to the Transfer, the Company will file separate tax returns. Any tax 
liability or refund that may arise for periods when the Company was a division  
of Lau Technologies is covered by a tax indemnification arrangement contained in
the Asset Transfer Agreement executed in connection with the Transfer. The      
indemnification provides for Lau Technologies to pay or receive reimbursement   
from the Company for any tax adjustment relating to the Viisage Technology      
Division for all periods prior to the effective date of the Transfer if such    
adjustments will result in tax expense or tax benefit, as the case may be, to   
the Company.                                                                    

The Company accounts for income taxes under SFAS No. 109. Deferred tax assets   
and liabilities are recognized for the estimated future tax consequences        
attributable to differences between the financial statement carrying amounts of 
existing assets and liabilities and their respective tax bases. Deferred income 
tax assets and liabilities are measured using enacted tax rates in effect for   
the year in which those temporary differences are expected to be recovered or   
settled. The effect on deferred tax assets and liabilities of a change in tax   
rates is recognized in income in the period that includes the enactment date.   

Net Income (Loss) Per Share                                                     

Net income (loss) per share is computed based on the weighted average number of 
common and common equivalent shares outstanding during the period. Pursuant to  
certain requirements of the Securities and Exchange Commission, common and      
common equivalent shares issued during the 12 months prior to the initial public
offering date (using the treasury stock method and the initial public offering  
price of $10.50 per share) have been included in the calculation of weighted    
average common and common equivalent shares for periods prior to the offering.  
For 1996, weighted average shares is comprised of 6,022,000 shares of common    
stock and 565,000 shares related to common equivalents. For 1995 and 1994,      
weighted average shares are comprised of 5,680,000 shares of common stock and   
545,000 shares related to common equivalents.                                   

In March 1997, the Financial Accounting Standards Board issued SFAS No. 128,    
Earnings Per Share, which establishes standards for computing and presenting    
earnings per share for entities with publicly held common stock or potential    
common stock. SFAS No. 128 is effective for periods ending after December 15,   
1997 and early adoption is not permitted. Under the new pronouncement, earnings 
(loss) per share would not be materially different from the amounts presented.  

Long-Lived Assets                                                               

In 1995, the Financial Accounting Standards Board adopted SFAS No. 121,         
Accounting for Impairment of Long-Lived Assets and for Long-Lived Assets To Be  
Disposed Of, which is effective for 1996. Adoption of SFAS No. 121 did not have 
a material impact on the Company's financial position or results of operations. 

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Viisage Technology, Inc.                                                        
Notes to Financial Statements (Continued)                                       

Stock-Based Compensation                                                        

The Company accounts for its stock-based compensation plans under Accounting    
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees. In   
October 1995, the Financial Accounting Standards Board issued SFAS No. 123,     
Accounting for Stock-Based Compensation, which is effective for 1996.           

SFAS No. 123 establishes a fair value based method of accounting for stock-based
compensation plans. The Company has adopted the disclosure only alternative     
under SFAS No. 123, which requires disclosure of the pro forma effects on       
earnings and earnings per share as if SFAS No. 123 had been adopted as well as  
certain other information. See note 10 for required disclosures.                

(3) Other Related Party Transactions                                            

In connection with the Transfer discussed in note 1, the Company and Lau        
Technologies entered into an Administration and Services Agreement, a Use and   
Occupancy Agreement and a License Agreement.                                    

Under the Administration and Services Agreement, Lau Technologies provides      
general accounting, data processing, payroll, human resources, employee benefits
administration and certain executive services to the Company. The agreement     
requires the Company to pay a monthly fee based on the estimated actual cost of 
such services and permits the Company to terminate selected services upon 30    
days written notice. The annual fee for services is approximately $660,000 and  
will be revised if the level of services is changed. The Company utilized the   
same allocation methods for prior periods. Amounts for 1995 and 1994 reflect the
use of additional services that were provided by Company personnel in 1996. The 
amounts for such services were approximately $660,000 in 1996, $1.1 million in  
1995, and $710,000 in 1994.                                                     

The Use and Occupancy Agreement requires the Company to pay its proportionate   
share of the cost of shared facilities and office services including rent,      
insurance, property taxes, utilities and other operating expenses, based on     
square footage or equipment utilized. In February 1997, the Company and Lau     
Technologies moved to larger facilities and extended the Agreement through      
February 2002. The annual fee for facilities and services is approximately      
$500,000 and will be revised for changes in operating expenses. The amounts for 
facilities and services were approximately $220,000 in 1996, $140,000 in 1995   
and $90,000 in 1994. See note 7 for lease information.                          

Company employees participate in various Lau Technologies employee benefit      
plans. The Company pays its proportionate share of the costs of such plans based
on the number of participating employees.                                       

Management believes the methods for allocating expenses and those costs related 
to shared facilities and equipment are reasonable and approximate what these    
costs would be on a stand-alone basis.                                          

The License Agreement grants the Company an exclusive, worldwide, royalty-free, 
paid-up, perpetual, irrevocable license to use proprietary technology used by   
the Viisage Technology Division at the time of the Transfer and improvements    
thereto. The license excludes the use of such technology for federal access     
control as defined in the License Agreement.                                    

The Company purchases certain system components and the services of technical   
personnel from Lau Technologies. The amounts for such components and services   
were approximately $1.7 million in 1996, $2.8 million in 1995 and $1.4 million  
1994.                                                                           

At December 31, 1996, the Company had approximately $180,000 of accounts        
receivable due from Lau Technologies and approximately $100,000 of accounts     
payable due to Lau Technologies. The Company also has a $1 million 9% note      
receivable from Lau Technologies due in monthly installments of principal and   
interest of approximately $21,000 through February 2002. At December 31, 1996,  
approximately $150,000 of the note was included in other current assets and the 
remaining amount was included in other assets in the accompanying balance sheet.

The Company has employment and noncompetition agreements with certain officers. 
Such agreements provide for employment and related compensation for initial     
terms of five years, renewal options for two years, and restrict the individuals
from competing, as defined, with the Company during the terms of their          
respective agreements and for up to two years thereafter. The agreements also   
provide for stock options under the Company's stock option plan and for         
severance payments upon termination under circumstances defined in such         
agreements.                                                                     

(4) Property and Equipment                                                      

Property and equipment are summarized as follows                                
(in thousands):                                                                 

                                                                [Download Table]

December 31,                                  1996             1995
-------------------------------------------------------------------
                                                                   
Assets held under capital leases            $6,181           $2,216

Computer equipment                             376              101
-------------------------------------------------------------------
                                             6,557            2,317

Less-Accumulated depreciation                  700               88
-------------------------------------------------------------------
                                            $5,857           $2,229
===================================================================

During 1996 and 1995, the Company sold and leased back under capital leases     
approximately $4.0 million and $2.2 million, respectively, of system equipment  
used to produce identification cards for certain contracts.                     

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Viisage Technology, Inc.                                                        
Notes to Financial Statements (Continued)                                       

(5) Accounts Payable and Accrued Expenses                                       

Accounts payable and accrued expenses consist of the following                  
(in thousands):                                                                 

                                                                [Download Table]

December 31,                                  1996            1995
------------------------------------------------------------------
                                                                  
Accounts payable                            $2,072         $   835
Accrued contract costs                       4,353               -
Accrued payroll and related taxes              445              90
Accrued vacation                               224             136
Other accrued expenses                         194              92
------------------------------------------------------------------
                                            $7,288          $1,153
==================================================================

(6) Revolving Credit and Project Lease Arrangements                             

The Company has a revolving credit agreement with a commercial bank that        
provides for unsecured borrowings of up to $10 million through June 1998 at the 
prime rate or other LIBOR-based options. The agreement requires the Company to  
maintain certain financial ratios and minimum levels of earnings and tangible   
net worth. The Company was in compliance with such covenants at December 31,    
1996 and there were no borrowings outstanding.                                  

Prior to the Transfer discussed in note 1, long-term debt consisted of          
borrowings under a revolving line of credit agreement between Lau Technologies  
and a commercial bank. Such borrowings related solely to the Company's          
operations and, accordingly, were assumed in connection with the Transfer and   
repaid in November 1996.                                                        

The Company has a system project lease arrangement with a commercial leasing    
organization providing for system project leases of up to $15 million. Pursuant 
to the facility, the lessor purchases certain of the Company's digital          
identification systems and leases them back to Viisage for deployment with      
identified and contracted customers approved by the lessor. The lessor retains  
title to the systems and has an assignment of Viisage's rights under the related
customer contracts, including rights to use the software and technology         
underlying the related systems. Under the facility, the lessor bears the credit 
risk associated with payments by Viisage's customers, but Viisage bears         
performance and appropriation risk and is generally required to repurchase a    
system in the event of a termination by a customer for any reason except credit 
default. At December 31, 1996, the Company had approximately $11 million        
available under this arrangement.                                               

(7) Commitments and Contingencies                                               

Leases                                                                          

The Company leases certain equipment used in its operations and the shared      
facilities discussed in note 3. Rental expense for operating leases was         
approximately $130,000 in 1996, $100,000 in 1995 and $55,000 in 1994.           

At December 31, 1996, approximate future minimum rentals under the lease for    
shared facilities and capital leases are as follows (in thousands):             

                                                                [Download Table]

                                    Capital       Operating
                                    Leases          Lease  
-----------------------------------------------------------
                                                           
Year ending:                                               
1997                                $1,628         $   198 
1998                                 1,823             212 
1999                                 1,723             212 
2000                                 1,163             212 
2001                                   582             212 
Thereafter                               -              34 
-----------------------------------------------------------
Total minimum lease payments         6,919          $1,080 
===========================================================
Less-Interest portion                1,298                 
Present value of net minimum                               
 lease payments                      5,621                 
Less-Current portion                 1,201                 
------------------------------------------                 
                                    $4,420                 
==========================================                 

Litigation                                                                      

On September 23, 1996, three minority shareholders of Lau Technologies filed    
suit against Lau Technologies, the Company and others in Superior Court in      
Berkshire County, Massachusetts, alleging that certain defendants breached the  
fiduciary duty owed the plaintiffs as shareholders of Lau Technologies. The     
plaintiffs requested, among other things, an injunction to delay the Company's  
public offering in an effort to obtain a direct, rather than an indirect,       
ownership interest in the Company. On October 4, 1996, the Superior Court denied
plaintiffs' request for such relief, although plaintiffs' claims for unspecified
money damages remain pending. Lau Technologies has agreed to indemnify and hold 
the Company harmless for any liabilities incurred by the Company as a result of 
judgments, settlements or litigation expenses arising out of this suit.         
Accordingly, the Company does not believe that the resolution of this matter    
would have a material adverse effect on its business, financial condition or    
results of operations.                                                          

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Viisage Technology, Inc.                                                        
Notes to Financial Statements (Continued)                                       

(8) Retirement Plans                                                            

The Company participates in the Lau Technologies 401(k) plan and pays its       
proportionate share of plan expenses based on the number of participants. The   
plan permits pretax contributions by participants of up to 15% of base          
compensation. The Company may make discretionary matching contributions of up to
3% of base compensation. Participants are fully vested in their contributions   
and vest 20% per year in employer contributions. The Company's allocation of    
costs for this plan amounted to approximately $70,000 for the year ended        
December 31, 1996. Amounts for the other years were not material.               

The Company does not offer any postretirement benefits.                         

(9) Income Taxes                                                                

As discussed in notes 1 and 2, the Company was treated as an S corporation prior
to the Transfer and operating losses and tax credits for prior periods have been
utilized by the shareholders of Lau Technologies. In connection with the        
Transfer, the Company changed its tax status and recorded a deferred tax        
provision of $110,000 relating to the cumulative differences between the        
financial reporting and income tax bases of certain assets and liabilities as of
the Transfer date.                                                              

The provision for income taxes for the year ended December 31, 1996 consists of 
the following (in thousands):                                                   

                                                                [Download Table]

                     Current        Deferred        Total  
-----------------------------------------------------------
                                                           
Federal               $  7            $132           $139  
State                   25              41             66  
-----------------------------------------------------------
                       $32            $173           $205  
===========================================================

A reconciliation of the federal statutory rate to the Company's effective tax   
rate for the year ended December 31, 1996 is as follows:                        

                                                                [Download Table]
                                                           
Federal statutory rate                               34.0% 
State taxes, net of federal benefit                   6.0  
Subchapter S earnings not taxed                     (28.0) 
Deferred taxes related to Transfer                   14.0  
Other, net                                           (1.0) 
-----------------------------------------------------------
                                                     25.0% 
-----------------------------------------------------------

The components and approximate tax effects of the Company's deferred tax assets 
and liabilities as of December 31, 1996 are as follows (in thousands):          

                                                                [Download Table]
                                                                        
Deferred tax assets:                                                    
  Accruals and other reserves                                      $325 
  Other                                                              30 
------------------------------------------------------------------------
    Total gross deferred tax assets                                 355 
------------------------------------------------------------------------

Deferred tax liabilities:                                               
  Bases differences related to contract assets                      517 
  Other                                                              11 
------------------------------------------------------------------------
    Total gross deferred tax liabilities                            528 
------------------------------------------------------------------------
Net deferred tax liability                                         $173 
------------------------------------------------------------------------

The net deferred tax liability is included in accrued and deferred income taxes 
in the accompanying 1996 balance sheet.                                         

(10) Stockholders' Equity                                                       

Initial Public Offering                                                         

In November 1996, the Company completed an initial public offering of 2,875,000 
shares of its common stock, of which 2,375,000 shares (including the over-      
allotment option) were sold by the Company and 500,000 shares were sold by Lau  
Technologies, the selling stockholder. The offering price was $10.50 per share  
and the net proceeds to the Company were approximately $22,230,000, net of      
underwriting discounts and other offering expenses.                             

Stock Option Plans                                                              

Lau Technologies granted 1,167,950 nonqualified options for the Company's common
stock on February 1, 1996 to management and 81,650 nonqualified options to      
directors. The exercise price for such options is $2.96 per share. Lau          
Technologies granted an additional 177,500 nonqualified options to management on
April 15, 1996 at $4.86 per share, the estimated fair value of such shares at   
the grant date. Director options become exercisable over three years and        
management options become exercisable in seven years or earlier if certain      
performance measures are met. The performance measures are based on each $1     
million increase in Company value up to $500 million. In connection with such   
options, the Company is recognizing compensation expense of approximately       
$700,000 over the estimated vesting period. The amount of compensation is       
calculated as the difference between the exercise price and the fair value of   
the Company's business on the grant dates based on an independent third-party   
appraisal. Stock compensation expense recorded for the year ended December 31,  
1996 was $238,000. The Company has reserved 1,437,750 shares of common stock for
issuance under the plans of which 10,650 are available for grant. At            

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Viisage Technology, Inc.                                                        
Notes to Financial Statements (Continued)                                       

December 31, 1996, 488,062 options were exercisable at a weighted average       
exercise price per share of $3.20 over a weighted average remaining contractual 
life of approximately nine years.  No options have been exercised or canceled   
under the plans.  The options expire ten years from the date of grant.          

On June 17, 1996, the Board of Directors of the Company ratified the foregoing  
option grants in connection with the adoption of the Stock Option Plans (the    
Plans) under which incentive and nonqualified stock options may be granted to   
employees and officers and nonqualified stock options may be granted to         
directors. Generally, incentive stock options are granted at fair value and are 
subject to the requirements of Section 422 of the Internal Revenue Code of 1986,
as amended. Nonqualified options are granted at exercise prices determined by   
the Board of Directors. Options vest over periods of up to seven years and      
vesting may be accelerated based on performance criteria set by the Board of    
Directors.                                                                      

The Company has computed the pro forma disclosures required under SFAS No.      
123 for options granted in 1996 using the Black-Scholes option pricing model    
prescribed by SFAS No. 123.  The weighted average assumptions used for 1996 are:

                                                                [Download Table]
                                                            
Risk free interest rate                                   6%
Expected dividend yield                                   --
Expected lives                                      10 years
Expected volatility                                      66%

The total value of options granted during 1996 was computed as approximately    
$4.2 million.  Of this amount, $1.4 million would be charged to operations for  
the year ended December 31, 1996 for currently vested options and the remaining 
amount, $2.8 million, would be amortized over the related vesting periods.  The 
pro forma effect of SFAS No. 123 for the year ended December 31, 1996 is as     
follows:                                                                        

                                                                [Download Table]

                             As Reported        Pro Forma 
----------------------------------------------------------
                                                          
Net income (loss)               $601,000        $(225,000)
Net income (loss) per share         0.09            (0.03)

(11) Quarterly Financial Data (Unaudited)                                       

The following table sets forth selected quarterly financial data for 1996 and   
1995 (in thousands, except per share amounts):                                  

                                                                [Download Table]

                             1st        2nd        3rd        4th   
                           Quarter    Quarter    Quarter    Quarter 
------------------------------------------------------------------- 
                                                                    
1996                                                                
Revenues                    $5,737     $6,133     $6,258     $6,843 
Project margin               1,026      1,191      1,542      1,728 
Net income                       6         68        285        242 
Net income per share            --       0.01       0.05       0.03 

1995                                                                
Revenues                    $2,549     $2,846     $2,711     $3,115 
Project margin                 236        187        223        214 
Net loss                      (580)      (671)      (748)      (948)
Net loss per share           (0.09)     (0.11)     (0.12)     (0.15)

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Report of Independent Public Accountants                                        

To Viisage Technology, Inc.:                                                    

We have audited the accompanying balance sheets of Viisage Technology, Inc. as  
of December 31, 1996 and 1995, and the related statements of operations, changes
in stockholders' equity/net assets and cash flows for each of the years in the  
three-year period ended December 31, 1996. 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 in accordance with generally accepted auditing          
standards. Those standards require that we plan and perform the audit to obtain 
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting 
the amounts and disclosures in the financial statements. An audit also includes 
assessing the accounting principles used and significant estimates made by      
management, as well as evaluating the overall financial statement presentation. 
We believe that our audits provide a reasonable basis for our opinion.          

In our opinion, the financial statements referred to above present fairly, in   
all material respects, the financial position of Viisage Technology, Inc. as of 
December 31, 1996 and 1995, and the results of its operations and its cash flows
for each of the years in the three-year period ended December 31, 1996, in      
conformity with generally accepted accounting principles.                       

                                                             Arthur Andersen LLP

Boston, Massachusetts                                                           
February 7, 1997                                                                

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Directors and Officers                                                          

Directors                                                                       
Denis K. Berube, Chairman /(3)/            Thomas J. Reilly /(1,2)/             
Executive Vice President  -                Retired Partner                      
Chief Operating Officer, Lau Technologies  Arthur Andersen LLP                  

Charles J. Johnson /(3,4)/                 Harriet Mouchly-Weiss /(2,4)/        
Principal, Finnegan, Hickey,               Managing Partner,                    
Dinsmoor & Johnson, P.C.                   Strategy XXI Group                   

Peter Nessen /(1,2)/                       /(1)/ Audit Committee                
Chairman of the Board                      /(2)/ Compensation Committee         
NCN Financial Corporation                  /(3)/ Executive Committee            
                               /(4)/ Marketing Committee

Officers                                                                        
Robert C. Hughes                           Robert J. Schmitt, Jr.               
President and Chief Executive Officer      Vice President, Marketing and Sales  
                              Worldwide Private Sector

Thomas J. Colatosti                        Yona Wieder                          
Vice President, Operations                 Vice President, Marketing and Sales  
                             Worldwide Public Sector

William A. Marshall                                                             
Vice President,                                                                 
Chief Financial Officer and Treasurer                                           

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Corporate and Investor Information                                              

Corporate Offices                                                               

Viisage Technology, Inc.                                                        
30 Porter Road                                                                  
Littleton, MA  01460                                                            
508-952-2200                                                                    

Common Stock Information                                                        

The Company's common stock is traded on the NASDAQ National Market under the    
symbol VISG. At March 6, 1997, the closing sale price of the common stock was   
$12.00 per share and there were approximately 13 holders of record of the       
Company's common stock. The quarterly high and low closing prices, as reported  
by NASDAQ, of Viisage's common stock in 1996 were as follows:                   

                                                                [Download Table]
Quarter Ended                     High              Low  
---------------------------------------------------------
                                                         
March 31                        $    --          $     --
June 30                              --                --
September 29                         --                --
December 31*                     15-1/2           12-1/16

*Public trading commenced on November 8, 1996.                                  

Dividend Policy                                                                 

The Company presently intends to retain earnings for use in the operation and   
expansion of its business and, therefore, does not anticipate paying any cash   
dividends in the foreseeable future.                                            

Shareholder Contact and Form 10-K                                               

Shareholders and prospective investors are welcome to call or write to Viisage  
with questions or requests for additional information. Copies of Viisage's Form 
10-K filed with the Securities and Exchange Commission for the year ended       
December 31, 1996 are also available. Inquires should be directed to: William A.
Marshall, Vice President, Chief Financial Officer and Treasurer, at Viisage's   
corporate offices.                                                              

Transfer Agent                                                                  

For information or assistance regarding individual stock records, transactions  
or stock certificates contact:                                                  

Boston EquiServe Limited Partnership                                            
150 Royall Street                                                               
Canton, MA  02021                                                               
617-575-2000                                                                    

Independent Public Accountants                                                  

Arthur Andersen LLP                                                             
225 Franklin Street                                                             
Boston, MA 02110                                                                

Legal Counsel                                                                   

Finnegan, Hickey, Dinsmoor & Johnson, P.C.                                      
20 Beacon Street                                                                
Boston, MA 02108                                                                

13-20 

Dates Referenced Herein   and   Documents Incorporated by Reference

				Referenced-On Page
This ‘10-K405’ Filing		Date		First		Last			Other Filings
		12/31/97		12					10-K405
		12/15/97		7		13
Filed on:		3/31/97
		3/6/97		20
		2/7/97		18
For Period End:		12/31/96		2		20
		11/8/96		20					424B4
		11/6/96		2		12
		10/4/96		15
		9/23/96		15
		6/17/96		17
		5/23/96		12
		4/15/96		16
		2/1/96		16
		12/31/95		2		18
		12/31/94		5		10
		12/31/93		10
									List all Filings