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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

For the Fiscal Year Ended December 31, 2002

OR

For the Transition Period from                    to                     .

Commission File Number 000-21559

VIISAGE TECHNOLOGY, INC.

(Exact name of registrant as specified in its charter)

Registrant’s telephone number, including area code

(978)-952-2200

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

None

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

Common Stock $.001 par value

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.    x  Yes    ¨  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 the registrant’s knowledge, in definitive proxy or information statements incorporated by reference into Part III of this Form 10-K or any amendment to this Form 10-K.    x

Indicate by a check mark whether the Registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2) ¨  Yes    x  No

The aggregate market value of the voting stock held by nonaffiliates of the registrant as of March 26, 2003, was approximately $86 million.

As of March 26, 2003, the registrant had 20,259,647 shares of Common Stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant’s definitive Proxy Statement for the Annual Meeting of Shareholders to be held on May 13, 2003 are incorporated by reference in Part III of this 10-K.

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PART I

Item 1. Business

General Development of Business

We are the leading provider of advanced technology solutions for identity verification. We focus on identification solutions that improve personal convenience and security, deter fraud, and reduce identification program costs. We combine our systems integration and software design capabilities with our proprietary software and hardware products and other industry standard products to create complete customized solutions. These turnkey solutions integrate image and data capture, create relational databases, incorporate multiple biometrics and improve customers’ ability to move and manage information. Applications can include driver’s licenses, voter registration, national identification cards, law enforcement, social services, access control and PC network and Internet access security. Our primary customers have been government agencies with particular penetration in Departments of Motor Vehicles. We have captured approximately 32% of the domestic driver’s license market. Our products annually produce more than 28 million identification documents at more than 1,800 locations in 19 states. We have also provided services under subcontracts for projects in Jamaica, the Philippines and for the U.S. Immigration and Naturalization Service. Originally developed at MIT, face-recognition technology is widely recognized as the most convenient, non-intrusive and cost-effective biometric available. Our patented face-recognition technology is focused on three major product application areas.

Financial Information about Industry Segments

We are engaged in the business of developing and implementing digital identification systems and solutions. For the years prior to 2002, we reported our financial results as a single business segment. However, in 2002 we completed three acquisitions through which we significantly enhanced our portfolio of facial recognition technologies and acquired additional facial recognition customers and distribution channels. Accordingly, for the year ended December 31, 2002, we began reporting our results in two separate segments: secure identification products and services segment, or SIPS, and facial recognition segment, or FRS. Our secure identification business accounted for approximately 84.7%, 90.4% and 97.9% of our revenues in 2002, 2001 and 2000, respectively. Facial recognition revenues were approximately 15.3%, 9.6% and 2.1% of total revenues in 2002, 2001 and 2000 respectively.

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We did not report business segments prior to 2002. We have not restated our results, outside of revenue, from 2001 or 2000 to provide segment information because it would be impracticable to do so and would not provide useful information. Due to the integration of three acquisitions in 2002, the net loss in the facial recognition segment includes an $824,000 restructuring charge. The table below sets forth a comparison of revenues, total assets and profit (loss) attributable to each of our business segments for the year ended December 31, 2002, as well as a restatement of revenues by segment for the years ended December 31, 2001 and 2000. Revenues are reported within the segments by customer contracts. Within the secure identification segment there is a component of the contract that utilizes our facial recognition technology. The following table identifies the value of facial recognition revenue that is included in the secure identification segment.

Unaudited

Industry Background

The need for proper identification affects most people every day. The desire for personal convenience, the significant and increasing costs of fraud and the growing concern over declining personal security have become driving forces behind the global need for effective identification solutions. Starting with only a fraudulent driver’s license, an individual is able to create multiple identities, commit fraud, evade law enforcement and engage in other criminal activities that have significant financial and societal implications. Password security and identity card systems can also be compromised if someone obtains a password or identity card and uses this information to gain unauthorized access to facilities, networks or information.

In an effort to combat fraud and tampering, photographic identification cards encapsulated within laminated pouches were developed. However, photographic identification cards can be replicated using widely available advanced color copiers and printers, and laminated pouches have proven easy to delaminate. Advances in and the acceptance of digital technology have led to an increasing demand for digital identification systems to replace existing systems. Digital systems enable information and images to be captured and embedded within the fabric of the card through the use of dye-sublimation techniques, making digital cards more resistant to tampering than laminated pouches. Information can be stored in and later accessed from the card itself using bar codes, magnetic stripes and “smart” cards (cards which contain computer chips). Digital systems also facilitate the storage of information in computer databases, thereby reducing the need for manual record keeping, file cabinets, and cumbersome indexing systems. Finally, digital systems can be networked to enable up-to-date information to be shared and distributed across geographic and organizational boundaries. This ability to move and manage information helps to increase personal convenience and security for system users.

As an additional means of improving personal convenience and security and deterring fraud, identification systems have increasingly used biometrics (unique biological characteristics) to verify personal identities. Biometric identifiers include facial images, fingerprints, iris scans, retinal scans,

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voice data, hand geometry and others, with fingerprints enjoying wide usage in law enforcement. However, unlike other biometrics, a facial image can be easily verified visually and can be captured in an unobtrusive manner via a photograph, making it a practical means of identification.

Applications for digital identification systems and biometrics are increasing, as they become more sophisticated and easier to use. For example, the typical U.S. state has multiple licensing or other agencies, including its department of motor vehicles, which require the verification of personal identity. The public sector is also focusing on the value of sharing databases to avoid redundant data gathering efforts, distribute information in a timely manner, increase efficiency and deter fraud. We believe public and commercial sector applications for digital identification systems and biometrics will include national identifications, driver’s licenses, law enforcement, voter registration, social services, access control, PC network and internet access security, ATMs, retail point-of-sale transaction processing, and administration of health care benefits.

The emergence of digital identification systems and biometrics present significant challenges for integrating these systems with customers’ existing software, hardware and computing environments. Consequently, customers are seeking complete, integrated solutions to overcome these issues.

Secure Identification Segment

Our secure identification business develops and implements digital identification systems and solutions. Our systems can produce identification cards that are virtually tamper proof, and utilize facial recognition and other biometrics with or without cards for the real-time identification (one-to-many) and verification (one-to-one) of individuals.

Depending on the customer’s needs, we offer two types of identification systems. The first is an instant issue system that produces identification cards on location in minutes. The second is a central production system that receives the information electronically from the point of capture, and produces cards from a secure off-site processing location which are later mailed to recipients in several days. The facial images captured by the card systems can provide the content, or face bases, for identification and verification applications.

In a Viisage card system, the facial images and other information are captured in digital format at a PC-based Image Capture Workstation, which usually incorporates our proprietary SensorMast^™ unit. Compact and self-contained, our workstations can easily be linked to a central image storage device, central card production unit and other remote devices using an existing network, custom designed data communications or the World Wide Web. This flexibility makes the Image Capture Workstation ideal for instant issue, central production, mobile use and multiple site systems. The Viisage Quality Advisor can be used to assess image quality at the point of capture. With an instant issue system, a commercially available dye-sublimation printer produces single-piece, tamper-resistant identification cards. Alternatively, with a central production system, a high speed-manufacturing unit produces the cards, and an integrated card delivery unit prepares the cards for mailing. When central production is selected, such systems incorporate our proprietary Visual Inspection System for quality control of all cards produced. Every system delivers top quality, tamper-resistant identification cards customized to meet the customer’s information, delivery and security needs. A wide range of optional features are available, including bar codes, holographic overlays, ghost imaging, ultraviolet or micro preprinting, smart cards and a number of other features.

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Systems Integration and Software Design Capabilities

In addition to our systems integration capabilities, an important aspect of our services and ability to deliver turnkey solutions to our customers involves the design of customized software. Our secure identification proprietary software controls the system and integrates the system components, including the SensorMast and Visual Inspection System and a variety of third party components and technologies used by our customers. Our secure identification segment has designed software to support all current industry standard operating systems (e.g., Windows NT, Windows 2000, Unix and OS/2), network protocols (e.g., Novell Netware, TCP/IP and SNA), database products (e.g., Sybase or Oracle) and client/server architectures. Our software design and systems integration capabilities enable us to accommodate most computing environments and customers with special requirements.

Proprietary Products

Our proprietary products and related software are described below:

Customer Service and Support

Following the installation of its digital identification systems, our systems integration segment offers extensive customer training and help desk telephone support as well as ongoing maintenance services. Our systems integration segment’s service and support teams, which vary in size depending on the customer and contract, are able to draw extensively upon the expertise of our software and hardware engineers. For some contracts, our systems integration segment has contracted with third party service organizations for maintenance support.

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Facial Recognition Segment

In developing facial recognition technologies, we have focused on the face image as the key biometric because the human face is a unique and prominent feature that can be easily captured by a digital camera and verified visually in most cases by an individual with little special training. We are concentrating on four principal areas: physical keyless entry and access control; real-time large database applications; point-of-sale applications; and surveillance applications. We have several on-going facial recognition identification projects, including projects with the Massachusetts Department of Transitional Assistance, the Illinois Secretary of State, Illinois State Police, the Centers for Medicare and Medicaid Services, Global Cash Access/Infonox and a number of other installations, including more than 110 surveillance applications in casinos.

We have advanced the facial recognition technology, initially developed by Professor Alex Pentland of the Massachusetts Institute of Technology, or MIT. We have further developed products for access control, surveillance, and real-time large database identification and verification of individuals. We license the underlying MIT technology through Facia Reco Associates Limited Partnership, or Facia Reco, an entity formed by Dr. Pentland. While Dr. Pentland’s software forms the basis of our facial recognition technologies, we believe that our proprietary software, developed over the last six years, is integral to making these technologies more robust and commercially viable.

Our patented facial recognition software offers organizations the ability to create unique identification solutions and enhances both existing identification solutions and offers opportunities for new applications. Using a sophisticated algorithm, the software translates the characteristics of a face into a unique number, or eigenface. The eigenface is used by the system for identification, a one-to-many search of a database, and verification, a one-to-one match to a specific stored image. Our facial recognition products are unique because they are scalable to databases of millions of faces.

We offer several facial recognition software systems that can be utilized in virtually any solution requiring identification or verification of an individual. Our identification software instantly calculates an individual’s eigenface identifier and can search an existing database of millions of records in less than 10 seconds for images similar to the image being searched.

Proprietary Products

Below is a list of our facial recognition segment’s proprietary products and related software:

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Sales and Marketing

We market our products directly through our internal sales force, and we continue to develop strategic partnerships and distribution channels with vendors, systems integrators and service organizations, particularly in international markets, in order to gain access to such organizations’ existing relationships, marketing resources and credibility in new markets. Our engineering department supports the direct sales staff by providing pre- and post-sale technical support. This support includes traveling with sales representatives to help explain the systems, defining solutions for customers, designing systems for public procurement activity, supporting the implementation process and providing post-implementation support. We also use our program management group to identify opportunities with existing customers and coordinate related selling efforts.

Our secure identification segment’s systems and solutions are generally provided to public sector customers through a formal bidding process. Our sales and marketing personnel regularly conduct visits and attend industry trade shows to identify bid opportunities and particular customer preferences and to establish and cultivate relationships in advance of any bid. Once a request for proposal is issued, a comprehensive proposal is developed and usually followed by an on-site customer demonstration. The process from the issuance of an RFP to the ultimate award can take up to six months. Following the bid award a six-to-twelve month implementation and installation process usually ensues. We believe that long sales cycles in our public sector markets are endemic to the market and will continue. Further, customers may seek to modify the system either during or after the implementation of the system. While our long sales and implementation cycle requires the commitment of marketing resources and investments of working capital, we believe that it also serves as a barrier to entry for smaller companies and as an early indicator of potential competitors for particular projects. For existing customers, a considerably shorter sales and implementation cycle may be involved.

Our facial recognition applications consist primarily of software content. Our marketing efforts and business development activities are focused on establishing OEM and other distribution arrangements with vendors, systems integrators and service organizations serving our principal market areas.

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Product Development

We have developed proprietary software that supports all current industry standard operating systems and networking environments, and proprietary image capture and inspection products for our card-based identification systems. We believe these products will support our card-based identification system offerings for the foreseeable future. Development costs that benefited specific projects were recorded as cost of revenues and costs that did not benefit specific projects were recorded as research and development expenses. Software development costs we have capitalized subsequent to achieving technological feasibility have not been material. Our current development activities are focused on our facial recognition products and the further commercialization of our facial recognition technology. We also benefit from research and development activities conducted by the manufacturers of the components integrated into our systems such as cameras, database software, computers, etc.

For the years ended December 31, 2002, 2001 and 2000, research and development expense was $4,457,000, $2,054,000 and $688,000, respectively. Such amounts do not include amounts for specific projects that are reported as cost of revenues, and are material expenditures, or the benefits from the other research and development activities referred to above.

Manufacturing and Sources of Supply

Contract manufacturers make proprietary subsystems and assemblies, to our specifications. Other non-proprietary system components, such as certain software, cameras, personal computers, printers and related components are purchased from third-party vendors. We purchase some of the major contracted assemblies from single vendors to help ensure high quality, prompt delivery and low cost. We do, however, qualify second sources for most components, contracted assemblies and purchased subsystems, or at least identify alternative sources of supply. We believe that the open architecture of our systems facilitates substitution of components or software when this becomes necessary or desirable. We may from time to time experience delays due to a lack of the availability of component parts and assemblies.

Patents, Trademarks and Licenses

Secure Identification Segment

Our secure identification segment uses patented technology and trade secrets owned or controlled by Facia Reco. This technology relates to de-duplicating or querying databases utilizing information contained in personal identification cards. Our license extends until the expiration of the final patent included in the license. Our license includes Facia Reco’s rights to use patented facial recognition technology of MIT. Facia Reco’s rights in MIT’s technology became non-exclusive in June 2001. MIT has applied to extend its patent rights to jurisdictions in Europe and in Singapore. The U.S. Patent and Trademark Office has allowed further broadened claims for the MIT patent. Our license agreement with Facia Reco provides for a royalty payment on a per machine copy basis incorporating the licensed technology.

Facial Recognition Segment

We have a number of U.S. patent applications in process for facial recognition technologies.

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Trademarks

We have registered our “Viisage Technology” trademark, as well as trademarks for “Sensormast”, “Hunter”, “Face Off”, “Face in The Crowd” and “Portal” with the U.S. Patent and Trademark Office.

Copyrights

We have filed a copyright application for our SensorMast software and have made a copyright filing for our Visual Inspection System and related proprietary software.

Acquired Technology

On January 10, 2002, we acquired the assets of Lau Security Systems, a division of Lau Technologies, including all of its intellectual property, contracts and distribution channels. The intellectual property acquired from Lau included, among other things:

In the transaction we also acquired an exclusive license in Lau’s rights to use the patented facial recognition technology it licensed from MIT for use in the federal access control field. As a result of this transaction, Lau terminated our obligations to license intellectual property to Lau.

On March 18, 2002, we acquired the capital stock of Biometrica Systems, Inc, or Biometrica, for approximately $2.5 million in cash. Biometrica is a former licensee and distributor of our facial recognition technologies in the casino market. Biometrica’s assets included, among other things, intellectual property relating to the BiometriCam, a compact camera with built-in facial recognition software.

On June 3, 2002, we acquired all of the intellectual property and related assets of the Miros division of eTrue.com, a major face recognition firm with customer installations across the globe, for approximately $275,000 in cash. In the acquisition, we acquired the patented TrueFace^® software.

We can not assure you that our efforts to prevent the misappropriation of the intellectual property used in our business will be successful. Further, we can not assure you that any of the additional U.S. or foreign patents applied for by Lau or the foreign patents applied for by MIT will be issued or that, if issued, they will provide protection against competitive technologies or will be held valid and enforceable if challenged. Finally, we can not assure you that competitors would not be able to design around any such proprietary right or obtain rights that we would need to license or design around in order to practice under these patent and copyrights.

We believe that our patents are important to both our secure identification and our facial recognition segment. Our U.S. patents typically have a duration of 17 to 20 years.

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Seasonality

Our operations are not seasonal since contracts are awarded and performed throughout the year. However, we believe our public sector business could be subject to cyclical procurement delays that may be related to state election cycles.

Working Capital Requirements

In our secure identification business we are generally required to fund the development and implementation of large digital identification system projects for public sector customers. Historically, we have utilized bank borrowings and project lease financing to meet these needs. There are no special requirements or customer terms that are expected to have a material adverse effect on our working capital. As discussed more fully in “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, we may raise capital, as needed, to fund working capital needs or growth activities.

Customers and End Users

The following lists and categorizes our customers and end users for our secure identification products as of December 31, 2002:

State Departments of Motor Vehicles, Other State and Local Agencies

Arizona Department of Transportation

Arkansas Department of Human Services

Arkansas Office of Driver Services

Connecticut Department of Social Services

Connecticut Department of Motor Vehicles

Florida Department of Highway Safety and Motor Vehicles*

Illinois Secretary of State

Kentucky Transportation Cabinet

Maryland Department of Transportation and Motor Vehicle Administration*

Massachusetts Department of Transitional Assistance

Mississippi Department of Information Technology Services

New Mexico Department of Taxation and Revenue

New York Department of Social Services*

North Carolina Department of Transportation

Ohio Bureau of Motor Vehicles

Ohio Department of Public Safety

Pennsylvania Department of Transportation

South Carolina Department of Public Safety*

State of Rhode Island, Department of Administration, Division of Motor Vehicles

State of Delaware Department of Public Safety

State of Georgia Department of Motor Vehicle Safety

Wisconsin Department of Corrections

Wisconsin Department of Transportation

Federal Agencies Foreign Contracts

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U.S. Immigration and Naturalization Services *

Commission on Elections of the Republic of the Philippines *

Electoral Commission of Jamaica *

Electoral Commission of Uganda

The following lists and categorizes our customers and end users for our facial recognition products as of December 31, 2002:

State Departments of Motor Vehicles, Other State and Local Agencies

Pinellas County Sheriff’s Office

City of New Bedford Massachusetts Department of Police

Illinois State Police

Middlesex County Sheriff’s Office

Kentucky State Police of the Commonwealth of Kentucky

University of Maryland Office of Research Administration

Federal Agencies Foreign Contracts

Federal Bureau of Investigation

U.S. Department of State

U.S. Technology Support Office, Technical Support Working Group

Airports

St. Petersburg – Clearwater International Airport

Commercial Customers and Distribution Partners

Booz-Allen & Hamilton, Inc.

Control Monitor Systems

Curtiss-Wright Corporation

Global Cash Access/Infonox

HummingBird Defense Systems, Inc.

Insurance Corp of British Columbia

Logicon

Rapor

Vision Interactive

Over 110 Casinos in North America

In addition, most new contracts in our secure identification segment now include a facial recognition component.

For 2002, two customers, Connecticut Department of Information Technology and Mississippi Department of ITS each accounted for over 10% of our total revenues and an aggregate of 22% of our revenues for the year. For 2001, four customers, Illinois Secretary of State, Unisys Corporation (Florida Department of Safety and Motor Vehicles), Kentucky Transportation Cabinet and

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Pennsylvania Department of Transportation each accounted for over 10% of our total revenues and an aggregate of 49% of our revenues for the year. For 2000, four customers, Ohio Bureau of Motor Vehicles, Unisys Corporation (Florida Department of Safety and Motor Vehicles), Pennsylvania Department of Transportation, and Maryland Department of Transportation each accounted for over 10% of our total revenues and an aggregate of 58% of our revenues for the year. The loss of any such customers could have a material adverse impact on our business, operating results and financial condition.

Virtually all of our direct revenue has been derived within the United States and account for approximately 100.0%, 95.4%, and 100.0% of total revenues for the years 2002, 2001 and 2000 respectively. In 2001 approximately 4.6% of our total revenue was derived from foreign sales, all material foreign sales in 2001 took place in the country of Uganda.

Backlog

We measure backlog based on signed contracts, subcontracts and customer commitments for which revenue has not yet been recognized. Backlog does not include amounts for phase-outs or other extension opportunities included in such contracts. Accordingly, backlog is only somewhat indicative of future revenue because contracts may be changed positively or negatively. Backlog could be cancelled at any time for lack of performance, without penalty. However, cancellations not caused by the our lack of performance will be subject to recovery of all actual committed costs and profit on work performed through the date of cancellation. Any failure by us to meet an agreed-upon schedule could lead to the cancellation of the related order. The timing of award and performance on contracts as well as variations in size, complexity and requirements of the customer and modifications to contract awards may result in substantial fluctuations in backlog from period to period. Further, backlog typically represents a limited portion of our annual plan. Therefore, we believe that backlog cannot be considered a meaningful indicator of future financial performance.

At December 31, 2002, our backlog was approximately $78 million, compared to approximately $68 million at December 31, 2001. Of the $78 million in backlog as of December 31, 2002, we expect to recognize revenue of approximately $29 million in 2003.

Government Contacts

Both of our segments involve government contracts. Government contracts are generally subject to termination for convenience or lack of appropriation at the determination of the subject agency. While termination is a significant financial risk, we have never experienced a government contract termination.

Competition

The market for our products and services is extremely competitive and management expects this competitive environment to intensify as the market for our products continues to grow.

Secure Identification Segment

We face competition in the secure identification systems market from companies, including Digimarc, formerly Polaroid Corporation, and Unisys Corporation, which, in some cases, have

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greater financial and marketing resources than us. In some cases, we may be competing with an entity that has a pre-existing relationship with a potential customer, which could put us at a significant competitive disadvantage. As the secure identification market expands, additional competitors may seek to enter the market.

We believe that competition in the secure identification systems market is based primarily upon the following factors:

The relative importance of each of these and other factors depends upon the specific customer and situation involved. Substantially all of our sales to new customers have been the result of competitive bidding for contracts pursuant to public sector procurement rules. We believe that our competitive strength is our systems integration and software design capabilities, system performance and architecture technologies, operating flexibility, price, and robust service and project management.

Facial Recognition Segment

In the field of facial recognition technology, we compete with several facial recognition providers, none of whom have any market dominance, as well as providers of other biometric solutions, such as fingerprint recognition, which has a long history of use, particularly in law enforcement applications. We expect that as the market for biometric solutions develops new companies and companies with significant resources and capabilities may enter the market and competition will intensify.

Environmental Protection Regulations

We believe that our compliance with federal, state and local environmental regulations will not have a material adverse effect on our financial position or results of operations.

Employees

As of December 31, 2002, we had 106 full time and 9 supplemental employees. We significantly supplement our employee resources with independent contractors. None of our employees are represented by a labor union, and we consider our relationship with our employees and contractors to be very good.

Officers

Our executive officers are elected by our Board of Directors annually and serve until their successors have been duly elected and qualified.

Bernard Bailey, 49, joined Viisage in August 2002 as Chief Executive Officer. From January 2001 through August 2002, Mr. Bailey served as the Chief Operating Officer of Art Technology Group.

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Between April 1984 and January 2001, Mr. Bailey served in various capacities at IBM Corporation, including several executive positions. A graduate of the US Naval Academy, Mr. Bailey served for eight years as an officer in the US Navy.

Iftikhar A. Ahmad, 51, was elected as an officer in March 1999 with the title of Vice President of Engineering and Program Management of the Company. From November 1996 until March 1999, Mr. Ahmad served as a Director in the Company’s Software Engineering Department. From January 1995 to November 1996, he was a senior consultant in Lau’s Systems Engineering Department, and prior to that, he held various senior engineering positions at Digital Equipment Corporation.

Bill Aulet, 45, joined Viisage Technology in February 2003 as Chief Financial Officer. Between August 1996 and February 2003 he served as the President of SensAble Technologies. Mr. Aulet was one of the founders of Cambridge Decision Dynamics, where he served as President from April of 1995 to August of 1996. Prior to Cambridge Decision Dynamics he spent twelve years at IBM Corporation, where he held various management positions. He is a Senior Lecturer at MIT’s Sloan School of Management.

Robert Schmitt, 59, joined Viisage in March 2002 as Senior Vice President and General Manager of the Facial Recognition business unit. He was president and founder of Biometrica Systems from January 1998 to March 2002. Prior to his employment at Viisage and Biometrica, he held various positions at Digital Equipment Corp., including Vice President of Marketing, Vice President of Marketing for the Far East, and Vice President of field technical support. He spent ten years at IBM prior to Digital.

James Ebzery, 43, joined Viisage Technology in November 2002 as Senior Vice President of Sales and Marketing. Mr. Ebzery served as Vice President of Operations for Internet Capital Group from April 2000 to February 2002. Prior to joining ICG, he held senior sales and marketing positions at IBM Corporation from December 1983 to April 2000. He also served as the Worldwide Solutions Executive for the IBM Supply Chain Software Business.

Jack Dillon, 66, joined Viisage in February 2003 as Senior Vice President of Government Solutions. Since 1988, he has served as a Vice President with Unisys Defense Systems, which became part of Loral Corporation, later purchased by Lockheed Martin. During this time, Mr. Dillon was Vice President of Business Development, Vice President of Software and Technical Services and Vice President of Command and Control and Security Systems. Most recently, he served as Vice President of Central and Eastern Europe for Lockheed Martin, focusing on command and control and security systems.

Financial Information about Foreign and Domestic Operations and Export Sales

The Company’s foreign operations and export sales are currently not material.

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Company’s Internet Website

We maintain a website with the address www.viisage.com. We are not including the information contained in our website, or incorporating it by reference into, this Annual Report on Form 10-K. We make available, free of charge through our website, our Annual Reports on Form10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K, and any amendments to these reports as soon as reasonably practicable after they are filed with the Securities and Exchange Commission.

Item 2. Properties

We currently use approximately 37,700 square feet of space in facilities located in Littleton, Massachusetts. The area is subleased to us from Lau Technologies and Inforonics through January 31, 2004 and October 31, 2004 respectively. We believe that our facilities are in good condition and are suitable and adequate for our present operations and that suitable space is available if such lease is not extended.

Item 3. Legal Proceedings

We do not believe that there are any legal matters that would have a material adverse effect on our business, financial condition or results of operations.

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

There were no matters submitted to a vote of security holders in the fourth quarter of 2002.

PART II

Item 5. Market for Registrant’s Common Equity and Related Stockholder Matters

Our common stock is traded on the Nasdaq National Market under the symbol VISG. On March 26, 2003, the closing price of our common stock was $4.25 per share and there were approximately 220 holders of record of our common stock. The quarterly high and low closing prices, as reported by NASDAQ, of our common stock in 2002 and 2001 were as follows:

Dividend Policy

We presently intend to retain our cash for use in the operation and expansion of our business and, therefore, do not anticipate paying any cash dividends in the foreseeable future. In addition, we are prohibited from paying dividends pursuant to our lending arrangements.

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Item 6. 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 our audited financial statements and the related notes included elsewhere in this Form 10-K.

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

The following discussion and analysis contains forward-looking statements and information that are based on the beliefs of management as well as assumptions made by and information currently available to us. Such statements reflect our current views with respect to future events and are subject to certain risks, uncertainties and assumptions. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary 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 “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 Form 10-K.

Overview

We are the leading provider of advanced technology solutions for identity verification. We began operations in 1996, providing integrated solutions to capture facial images, demographic information and other biological identifiers, produce identification cards and create relational databases containing this information. Since our inception, we have also been acquiring and developing proprietary facial recognition technologies for a variety of applications. Applications can include driver’s licenses, voter registration, national identification cards, law enforcement, social services, access control and PC network and Internet access security. Our primary customers have been government agencies with particular penetration in Departments of Motor Vehicles. We have captured approximately 32% of the domestic driver’s license market. Our products annually produce more than 28 million identification documents at more than 1,800 locations in 19 states. We have also provided services under subcontracts for projects in Jamaica, the Philippines and for the U.S. Immigration and Naturalization Service. Originally developed at MIT, face-recognition technology is widely recognized as the most convenient, non-intrusive and cost-effective biometric available. In 2002, we completed three acquisitions through which we enhanced our portfolio of facial recognition technologies and acquired customers and distribution channels. Our patented face-recognition technology is focused on three major product application areas.

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Segments

Our business involves two related segments: secure identification and facial recognition. Substantially all of our revenues have been derived within the United States of America.

Secure Identification Segment

Our secure identification segment accounted for approximately 84.7%, 90.4% and 97.9% of our revenues in 2002, 2001 and 2000, respectively. Secure identification involves the development, marketing and sale of integrated software and hardware solutions that produce identification cards utilizing facial recognition and other biometrics.

We provide systems and services principally under contracts that have five to seven year terms and several optional annual renewals after the initial contract term. Contracts generally provide for a fixed price for the system and/or for each identification 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 size of the database, the level of post-installation support and the competitive environment.

Facial Recognition Segment

Our facial recognition segment accounted for approximately 15.3%, 9.6% and 2.1% of total revenues in 2002, 2001 and 2000 respectively. Approximately 12% of our facial recognition revenues in 2002 were derived from casino surveillance applications, the remaining 88% were derived from applications designed to deter criminal and terrorist activities, including government research and development contracts.

Acquisitions

On January 10, 2002, we acquired the assets of Lau Security Systems, a division of Lau Technologies, including all of its intellectual property, contracts and distribution channels. The intellectual property acquired from Lau included, among other things:

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The transaction also included an exclusive license of Lau’s rights to use the patented facial recognition technology it licensed from MIT for use in the federal access control field. As a result of this transaction, certain obligations on the part of Viisage to license intellectual property to Lau were terminated. We agreed to pay Lau a royalty of 3.1% of the facial recognition revenues over twelve and a half years, up to a maximum of $27.5 million and assume certain liabilities related to the acquired business. As the transaction was between related parties, the assets have been recorded based on a historical cost basis. The estimated excess of the assets acquired over liabilities assumed has been recorded as additional paid in capital. The royalty payments are recorded as an expense as they are incurred and not added to the purchase price, as the royalty contains no minimum amount.

On March 18, 2002, we acquired the capital stock of Biometrica Systems, Inc., or Biometrica, a former licensee and distributor of Viisage’s facial recognition technologies in the casino market for approximately $2.5 million in cash and additional earn-out payments equal to 5% of revenues (as defined) through 2006. Biometrica’s assets included, among other things, intellectual property relating to the BiometriCam, a compact camera with built-in facial recognition software. The acquisition was accounted for as a purchase, and accordingly, the operations of Biometrica are included in the financial statements since the effective date, the close of business on March 18, 2002. The purchase price has been allocated to net assets acquired based on their estimated fair values. We have recorded approximately $240,000 in amortization related to the acquired intangible assets from the date of the acquisition through December 31, 2002.

On June 3, 2002, we acquired all of the intellectual property and related assets of the Miros division of eTrue.com, a face recognition firm with customer installations across the globe, for approximately $275,000 in cash. In addition to acquiring patented technology, including Miros’ TrueFace^® software, we also gained access to an established customer base and new distribution channels.

Potential Acquisition

On March 28, 2003, we entered into a securities purchase agreement with ZN Vision Technologies AG, a German provider of facial recognition and computer vision technologies, and all of the shareholders of ZN. Pursuant to the securities purchase agreement, the ZN shareholders agreed to sell, and we agreed to purchase, all of the capital stock of ZN. As consideration for the shares of ZN, we will pay approximately $13,000 in cash and an aggregate of 6,360,000 shares of our common stock, of which 5,221,454 shares will be issued directly to the ZN shareholders and 1,138,546 shares will be reserved for issuance under ZN’s option plan, which we will assume upon the closing of the acquisition.

Following the closing of the acquisition, ZN will become a wholly owned subsidiary of Viisage and serve as the base of our European operations. The acquisition is expected to be completed in July 2003. In accordance with Nasdaq rules, the issuance of shares of our common stock in connection with the acquisition must be approved by our stockholders. We expect to file with the Securities and Exchange Commission, or the SEC, during the month of April a preliminary proxy statement seeking such stockholder approval. Following review by the SEC, we will mail the proxy statement to our stockholders and convene a special meeting of stockholders to obtain such stockholder approval.

Impact of Timing of Contract Awards and Contract Performance in Our Secure Identification Segment

Our results of operations are significantly affected by, among other things, the timing of awards and performance on contracts. As a result, our revenues and income may fluctuate from quarter to quarter, and comparisons over longer periods may be more meaningful. Our results of operations are not seasonal since contracts are awarded and performed throughout the year. However, we believe our public sector business is subject to cyclical procurement delays that may be related to election cycles.

Dependence on Significant Customers

We believe for the near future that we will continue to derive a significant portion of our revenues from a limited number of large contracts. For the years ended December 31, secure identification segment customers who accounted for more than 10% of revenues in a given years are as follows:

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No single facial recognition customer accounted for over 10% of total revenue in any one year.

Critical Accounting Policies

We prepare our financial statements in accordance with generally accepted accounting principles in the United States. Consistent with generally accepted accounting principles, we have adopted accounting policies that we believe are most appropriate given the facts and circumstances of our business. The application of these policies has a significant impact on our reported results. In addition, some of these policies require management to make estimates. These estimates, which are based on historical experience and analysis of current conditions, have a significant impact on our reported results and the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements. If actual results differ significantly from these estimates, there could be a material effect on our financial statements.

Secure Identification Contract Revenue and Cost Recognition

Our most significant contracts are our driver’s license contracts, which are within our secure identification segment. These contracts typically provide that the state department of transportation, or similar agency, will pay us a fixed price for each system we install and for each identification card produced under the system. Prices under these contracts vary depending on, among other things:

We recognize revenue under these contracts using the percentage-of-completion method. We use the percentage-of-completion method to account for revenue under these contracts because:

Using the percentage-of-completion method, we recognize a percentage of the revenue we expect to receive under the contract based on the percentage of labor costs we incur and cards we produce. Although these contracts typically have a term of 5 years or longer and include possible renewal terms, we incur most of the labor costs under these contracts within the first 12 months of the contract. Accordingly, we recognize a substantial portion of the revenue under these contracts within the first 12 months of the contract.

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Generally, we bill under these contracts when contract milestones, such as installation, are met and as cards are produced. We recognize losses, if any, under these contracts in the period in which they become determinable.

We record costs and estimated earnings in excess of billings under these contracts as current assets. We record billings in excess of costs and estimated earnings and accrued contract costs as current liabilities.

Estimates of Revenues under Secure Identification Contracts

We account for revenue from our driver’s license contracts using the percentage-of-completion method. Revenues under these contracts are based on completion of installation and the number of cards produced. We estimate the amount of time it will take to install the systems and the number of cards that will be produced. In arriving at these estimates, we undertake a quarterly review of historical trends as to the volume of cards produced. In addition, we consider factors that could impact the volume of production, such as:

We also take into consideration the fact that, although it has never occurred, one of our contracts could be terminated for reasons such as lack of performance. If our estimates as to labor costs, consumable inventory levels, maintenance costs or the volume of cards that will be produced are materially incorrect, it could have a material adverse effect on our financial results.

Management has discussed the use and impact of these estimates with the audit committee of our Board of Directors.

Results of Operations

Year ended December 31, 2002 and 2001

Revenues are derived principally from multi-year contracts for system implementation, card production and related services. Revenue increased to $32.3 million in 2002 from $26.3 million in 2001. Revenues in the secure identification segment increased by $4.6 million, or 20.2%, primarily as a result of winning new drivers license contracts. Revenues in the facial recognition segment increased by $1.4 million, or 40%, due to revenues generated from acquisitions and the continued growth of the facial recognition business. The combined facial recognition revenue from the two segments increased by $2.4 million, or 58.7% from $4.0 million in 2001 to $6.4 million in 2002.

Gross margins decreased to 21.9% in 2002 from 25.4% in 2001. The decline in gross margin primarily reflects a change in product mix and contracts that included product development as well as delays in contract awards. This is evident by the improvement in gross margins from the 1^st quarter of 2002 of 20.5% to 29.3% in the 4^th quarter of 2002.

Sales and marketing expenses increased by approximately $4.6 million in 2002 from 2001. This represents an increase to 16.6% from 3.1% of revenue. The increase is primarily due to our investment in pursuing facial recognition opportunities as a result of September 11, 2001 and the

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pursuit of significant opportunities in the secure identification marketplace. The result of this investment can be seen in the increase to our revenue, backlog, and customer base. We expect to continue this investment in sales and marketing.

Research and development expenses increased by approximately $2.4 million in 2002 from 2001. This represents an increase to 13.8% from 7.8% of revenue. The increase is due principally to our continued investment in facial recognition technologies and new product development. This included enhancing existing products with the intellectual property that was acquired through the recent acquisitions. We expect to continue to invest in product development as the market for our products continues to expand in fiscal 2003.

General and administrative expenses increased by approximately $2.6 million in 2002 from 2001. This represents an increase to 15.7% from 9.5% of revenue. This increase was largely due to additional rental costs of approximately $930,000, due to additional leased space and an increased rental rate on previously occupied space, and a write-down of a contract receivable of $440,000. As a result of the acquisitions in 2002, and to facilitate the growth of the business, we also increased investment in infrastructure and personnel.

We incurred a one time restructuring charge of $824,000 in the fourth quarter of 2002. This consisted of approximately $248,000 associated with a workforce reduction of 21 individuals or approximately 16% of the employee base. In addition, we took a charge for non-cancelable lease costs and capital equipment of approximately $420,000 and $156,000 respectively. Annualized savings associated with the workforce reduction are expected to total approximately $2.2 million.

Interest expense decreased approximately $335,000 in 2002 from 2001. This represents a decrease to 2.7% from 4.6% of revenue. This decrease reflects the impact of our continuing efforts to reduce our overall debt and related interest expense, as well as the ability to pay down a $4,000,000 operating line of credit with the proceeds of the $25 million private placement of common stock in December 2001.

We did not record any tax for fiscal years 2002 and 2001 due to the net loss in each year.

Year ended December 31, 2001 and 2000

Revenues are derived principally from multi-year contracts for system implementation, card production and related services. Revenue decreased to $26.3 million in 2001 from $27.5 million in 2000. The 4.4% decrease in revenue between the two years was primarily the result of customer delays in the State of Pennsylvania and Maryland.

Gross margins increased to 25.4% in 2001 from 23.3% in 2000. The increase in gross margins between the two years is due principally to the positive impact of new business with higher margins and the positive effect of contract extensions on the overall revenue mix in 2001.

Sales and marketing expenses increased by 2.8% or $0.02 million in 2001 from 2000. This represents an increase to 3.1% from 2.9% of revenue. The increase is due principally to our continuing efforts in marketing our patented biometric solutions as we continue to increase our distribution and marketing capabilities for our facial recognition solutions by adding and certifying

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new system integrators and reseller partners. This allows us to control our costs while increasing our marketing capabilities.

Research and development expenses increased by 198.5% or $1.4 million in 2001 from 2000. This represents an increase to 7.8% from 2.5% of revenue. The increase is due principally to our continued investment in biometrics. Research and development costs do not include amounts for specific projects that are allocated to cost of revenues, and do not reflect the benefits to us 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 us.

General and administrative expenses remained relatively unchanged between 2001 and 2000. This represents an increase to 9.5% from 9.0% of revenue. The increase as a percentage of revenue is due to the slight decrease in business volume and resulting revenues from 2000 to 2001.

We incurred fourth quarter one-time expenses of $1.6 million related to costs incurred in our attempt to purchase Polaroid Corporation’s Identification Systems Business in the fourth quarter of 2001. These expenses related to legal and professional activities for due diligence as well as financing break up fees associated with this unsuccessful acquisition.

Interest expense decreased $0.4 million in 2001 from 2000. This represents a decrease to 4.6% from 5.9% of revenue. This decrease reflects a reduction in borrowings during 2001.

We did not record any tax for the fiscal year 2001 due to the net loss for the year. For the fiscal year 2000, no tax was incurred due to the availability of tax loss carry forwards.

Liquidity and Capital Resources

Cash and cash equivalents were $2.2 million at December 31, 2002, which consisted entirely of cash. This number excludes approximately $7.4 million which is restricted under our term loan agreements and project financing.

In the current year we had an operating cash loss of approximately $3.1 million, which stems primarily from our net loss of approximately $9.5 million, offset by non cash charges for depreciation and amortization of $7.2 million and non cash expenses for services paid in common stock of $380,000.

Accounts receivable increased approximately 52.7% from December 31, 2001 to December 31, 2002. This was the result of the increase to revenue and accounts receivable related to acquisitions, as well as the timing of billings, which liquidated a portion of the costs and estimated earnings in excess of billings.

Costs and estimated earnings in excess of billings increased approximately 0.2% from December 31, 2001 to December 31, 2002, which reflects the billing of accumulated contract costs incurred in prior periods.

Accounts payable and accrued expenses increased approximately 3.2% from December 31, 2001 to December 31, 2002. This was the result of the increase to revenue, accounts payable related to acquisitions, as well as the timing of payables.

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Our investing activities used cash of approximately $16.8 million primarily due to the reclassification of cash to restricted cash of $7.4 million and the purchase of property and equipment of $5.7 million for system assets. Additionally, $2.7 million was used for facial recognition business acquisitions.

In December 2002, we entered into a new loan agreement with a bank that supercedes the original loan agreement for the term loans. The new loan agreement includes the prior term loans and provided for three new term notes aggregating $4.5 million related to three new state contracts. The new term notes in the amounts of $1.8 million, $1.5 million, and $1.2 million bear interest at the rate of 5.25%. The following table lists the approximate term note information as of December 31, 2002 (in thousands):

In accordance with the new loan agreement the term notes are collateralized by certain of our assets and the related contract assets. We are required to maintain various financial covenants, including profitability by quarter (as defined), tangible net worth, debt to worth ratio, debt service coverage and limits on capital expenditures. Additionally, in accordance with the new agreement we must maintain $5.0 million of cash on deposit with the lender. This amount is recorded as restricted cash in long term assets.

In December 2002, we amended the two system project lease financing arrangements with commercial leasing organizations. Pursuant to these arrangements, the lessor purchases certain of our digital identification systems and leases them back to us for deployment with identified and contracted customers approved by the lessor. The lessor retains title to systems and has an assignment of our rights under the related customer contracts, including rights to use the software and technology underlying the related systems. Under these arrangements, the lessor bears the credit risk associated with payments by our customers, but we bear performance and appropriation risk and are generally required to repurchase a system in the event of a termination by a customer for any reason except credit default. In accordance with one project financing arrangement we are also required to maintain certain financial ratios and minimum levels of tangible capital funds, as defined. These project lease arrangements are accounted for as capital leases. At December 31, 2002 and 2001, we had approximately $5.0 million and $7.7 million outstanding under these lease-financing arrangements respectively. There are no financial covenant requirements under one of the project financing arrangements as we were required to pledge cash as collateral security to be maintained at the bank equal to the outstanding debt balance. The collateral shall remain in control of the lender, and these funds can be used to satisfy the outstanding obligation of approximately $2.4 million at December 31, 2002. Accordingly, we had cash at the bank of approximately $2.4 million at

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December 31, 2002, of which $1.2 million is recorded as restricted cash in current assets (equal to current obligations) and $1.2 million is included in restricted cash in long term assets.

At December 31 of each year, approximate future minimum lease payments under project financing capital leases, operating leases and principal maturities of term notes are as follows (in thousands):

We were in compliance with all debt covenants as of December 31, 2002. We believe that we will remain in compliance with the amended debt covenants. However, this expectation is dependent on achieving our business plan. If we do not meet such covenants, the bank and the lessors could require immediate repayment of outstanding amounts.

During 2002, our Board of Directors received an aggregate of 61,686 shares of common stock in addition to $40,000 in cash compensation. The fair market value of the common stock on the grant date was approximately $380,000 and was expensed during the year ended December 31, 2002.

In February 2002, Lau Technologies exercised a warrant to purchase 60,000 shares of common stock at $1.90 per share, which resulted in cash proceeds of $114,000, pursuant to an agreement entered into with us in 1999 under which Lau guaranteed a contract indemnification obligation of ours.

In January 2002, 40,000 shares of common stock with a total value of approximately $319,000 were issued to an investment bank, in association with a common stock placement on December 14, 2001.

During 2002, approximately 415,000 shares were issued as a result of the exercise of stock options resulting in cash proceeds of approximately $860,000.

We believe that if we meet our business forecast for 2003, cash flows from available borrowings, project leasing, operations and capital raised will be sufficient to meet our working capital and capital expenditure needs for the foreseeable future. New contract awards may require us to seek additional financing. Our ability to meet our business forecast is dependent on a number of factors, including those described below under “Factors That May Affect Future Results.” Our cash liquidity is not immediately impacted, either positively or negatively, by changes to net income (loss) due to timing difference between revenue recognition and cash payments on long term contracts.

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Contingent Obligations

Our principal contractual commitments involve payments under capital leases, term notes and operating leases.

Inflation

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

Recent Accounting Pronouncements

In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections. SFAS 145 requires that gains and losses from extinguishment of debt be classified as extraordinary items only if they meet the criteria in Accounting Principles Board Opinion No. 30. Applying the provisions of Opinion No. 30 will distinguish transactions that are part of an entity’s recurring operations from those that are unusual and infrequent and meet the criteria for classification as an extraordinary item. SFAS No. 145 is effective beginning January 1, 2003. We do not believe the adoption of SFAS No. 145 will have a significant impact on our consolidated financial statements.

In July 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities. This standard requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. Examples of costs covered by the standard include lease termination costs and certain employee severance costs that are associated with a restructuring, discontinued operation, plant closing, or other exit or disposal activity. This standard will be applied prospectively to exit or disposal activities initiated after December 31, 2002. We do not believe the adoption of SFAS No. 146 will have a significant impact on our consolidated financial statements. We initiated and executed a restructuring plan in the fourth quarter of 2002 and, accordingly, recorded a restructuring charge in the fourth quarter of 2002 (see Note 12).

In December 2002, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 148, Accounting for Stock-Based Compensation – Transition and Disclosure (“FAS 148”), which (i) amends FAS Statement No. 123, Accounting for Stock-Based Compensation, to provide alternative methods of transition for an entity that voluntarily changes to the fair value based method of accounting for stock-based employee compensation (ii) amends the disclosure provisions of FAS 123 to require prominent disclosure about the effects on reported net income of an entity’s accounting policy decisions with respect to stock-based employee compensation and (iii) amends APB Opinion No. 28, Interim Financial Reporting, to require disclosure about those effects in interim financial information. Items (ii) and (iii) of the new requirements in FAS 148 are effective for financial statements for fiscal years ending after December 15, 2002. We have adopted the increased disclosure requirements of FAS 148(ii) for the fiscal year ended December 31, 2002. We will continue to use the intrinsic value method of accounting for stock-based employee compensation.

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Factors That May Affect Future Results

The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties, including those not presently known to us or that we currently deem immaterial, may also impair our business.

We may be unable to obtain additional capital required to fund our operations and finance our growth.

The installation of our digital identification systems requires significant capital expenditures. In addition, the further development of our biometric and other advanced technologies is expected to require additional capital. Although we completed a $25 million private placement of our common stock at the end of 2001 and have been successful in the past in obtaining project financing, we will have ongoing capital needs as we expand our business. If we are unable to obtain additional funds in a timely manner or on acceptable terms, we may not be able to fund our operations or expand our business to meet our plans. If we are unable to obtain capital when we need it, we may have to restructure our business or delay or abandon our development and expansion plans. That could have a material adverse effect on our business and financial condition.

Our leverage creates financial and operating risk that could limit the growth of our business.

We have a significant amount of indebtedness. As of December 31, 2002, we had approximately $15.1 million in short and long-term debt and lease financing. Our leverage could have important consequences to us including:

Further, our ability to make principal and interest payments under long-term indebtedness and bank loans will be dependent upon our future performance, which is subject to financial, economic and other factors affecting us, some of which are beyond our control.

Our business depends on large public sector contracts, which can involve delays.

Our business depends on a limited number of large public sector contracts. These contracts result from purchasing decisions made by public sector agencies that are often subject to political influence, onerous procurement procedures, budget changes and award protests. These factors can cause delays, which make our quarterly results difficult to predict. This can also make our ability to meet analysts’ expectations equally uncertain and adversely affect the price of our common stock.

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Our quarterly results could be volatile and may cause our stock price to fluctuate.

We have experienced fluctuations in our quarterly operating results and expect those fluctuations to continue. Our quarterly results are affected by, among other things, factors such as:

The loss of any significant customer could cause our revenue to decline.

For the year ended December 31, 2002, two customers each accounted for over 10% of our revenues and an aggregate of approximately 22% of revenues. For 2001, four customers each accounted for over 10% of our revenues and a total of approximately 49% of our revenues for the year. For 2000, four customers each accounted for over 10% of our revenues and a total of approximately 58% of our revenues for the year. The loss of any significant customer could cause our revenue to decline and thus have an adverse material effect on our business and financial condition.

We have a history of operating losses.

Our business operations began in 1993 and, except for fiscal years 1996 and 2000, have resulted in net losses in each fiscal year. At December 31, 2002, we had an accumulated deficit of approximately $24.4 million. We intend to continue to invest in the development of our biometrics technologies and thus we cannot predict when or if we will ever achieve overall profitability.

The market for our common stock has been volatile.

The market for stock of many security-related businesses, including ours, has been highly volatile, especially since the terrorist attacks of September 11, 2001. It is likely that the market price of our common stock will fluctuate widely in the future. Factors affecting the trading price of our common stock are likely to include:

Our reliance on sole and single-source suppliers could cause delays or increases in cost of revenues.

We rely on outside vendors to manufacture or develop components, software and consumables, which are used for our systems and services. Some of these items are obtained from a single supplier or a limited group of suppliers. Our inability to obtain adequate deliveries or alternative sources of supply could cause delays or increases in cost of revenues.

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If we do not successfully expand our direct sales and services organizations and partnering arrangements, we may not be able to increase our sales or support our customers.

In the fiscal years ended December 31, 2001 and 2002, we licensed substantially all of our products through our direct sales organization. Our future success depends on substantially increasing the size and scope of our direct sales force and partnering arrangements, both domestically and internationally. There is intense competition for personnel, and we cannot guarantee that we will be able to attract, assimilate or retain additional qualified sales personnel on a timely basis. Moreover, we believe that as our sales increase, and given the large-scale deployment required by our customers, we will need to hire and retain a number of highly trained customer service and support personnel. We cannot guarantee that we will be able to increase the size of our customer service and support organization on a timely basis to provide the high quality of support required by our customers. Failure to add additional sales and customer service representatives would have a material adverse effect on our business, operating results and financial condition.

If we lose any key personnel, or fail to attract and retain additional personnel, we may be unable to continue expanding our business and product line.

The loss of the services of one or more of our key personnel could have a material adverse effect on our business, operating results and financial condition. We cannot guarantee that we will be able to retain our key personnel. Our future success also depends on our continuing ability to attract, assimilate and retain highly qualified sales, technical and managerial personnel. Competition for these individuals is intense, and there can be no assurance that we can attract, assimilate or retain necessary personnel in the future.

If our target customers do not accept our biometric technologies, our growth may be restricted.

Our growth plan assumes, in part, that biometric technologies will gain widespread market acceptance. Although we have had success with several recent biometric projects, the widespread market acceptance of biometric technologies remains uncertain.

If we fail to keep pace with changing technologies, we may not win new customers.

Rapidly changing customer requirements and evolving industry standards characterize our market. If we cannot keep pace with these changes, our business could suffer. To achieve our goals, we need to develop cost-effective business solutions and methodologies to keep pace with continuing changes in industry standards and customer preferences.

System failures could seriously damage our business.

We depend on our ability to provide customers with complex systems, which can operate on an “as needed” basis. Although we deploy back up systems, system failures could result in increased costs, lower margins, liquidated damage payment obligations and harm to our reputation. This could result in contract terminations and have a material adverse effect on our business and financial results.

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We are controlled by a single stockholder, which could result in it taking actions, which other stockholders do not approve.

Lau Technologies, or Lau, beneficially owns approximately 31% of our outstanding common stock. As a result, Lau has a strong influence on matters requiring approval by our stockholders, including the election of all of the directors and most corporate actions. We have certain contractual relations with Lau that could give rise to conflicts of interest.

Competition from new entrants and bigger, more established competitors with greater financial resources could diminish our business opportunities and limit our growth.

The business areas in which we compete are intensely competitive and subject to rapid technological change. We expect competition to continue. In particular, the events of September 11, 2001 have heightened interest in the use of biometric technologies and competition in this field is expected to intensify. There is no assurance that companies with greater financial resources and name recognition will not enter our business sectors. Our competitors may be able to respond more quickly to technological developments and changes in customers’ needs.

Misappropriation of our intellectual property could harm our reputation, affect our competitive position and cost us money.

We believe our intellectual property, including our proprietary methodologies, is important to our success and competitive position. If we are unable to protect our intellectual property against others’ unauthorized use, our reputation among existing and potential customers could be damaged and our competitive position adversely affected.

Our strategies to deter misappropriation could be undermined in light of the following risks:

The materialization of any of these risks could require us to spend significant amounts to defend our rights and could divert our managerial resources. In addition, our proprietary methodologies may decline in value or our rights to them may be unenforceable.

Others could claim that we infringe on their intellectual property rights, which may result in substantial costs, diversion of resources and management attention, and harm to our reputation.

Although we believe that our products and services do not infringe the intellectual property rights of others, we cannot give any assurances that we can successfully defend an infringement claim. A successful infringement claim against us could materially and adversely affect us in the following ways:

Regardless of the outcome, an infringement claim could result in substantial costs, diversion of resources and management attention, termination of customer contracts and harm to our reputation.

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You may be subject to dilution.

We have outstanding stock purchase warrants and stock options that could result in dilution for our common stockholders, depending upon the market price of the Company’s common stock from time to time. We may issue additional stock, warrants and options as part of an acquisition or financing transaction.

You should not expect dividends from us.

We do not expect to declare or pay any cash dividends in the near future.

Item 7A. Quantitative and Qualitative Disclosures about Market Risk

We have no material exposure to market risk that could affect our future results of operations and financial condition. Refer to the “Liquidity and Capital Resources” section of “Management’s Discussion and Analysis of Financial Condition and Results of Operations”.

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Item 8. Financial Statements and Supplementary Data

INDEX

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REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

To Viisage Technology, Inc.:

We have audited the accompanying consolidated balance sheets of Viisage Technology, Inc. and subsidiary as of December 31, 2002 and 2001, and the related consolidated statements of operations, changes in shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2002. 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 auditing standards generally accepted in the United States of America. 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 consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Viisage Technology, Inc. and subsidiary as of December 31, 2002 and 2001, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2002, in conformity with accounting principles generally accepted in the United States of America.

/s/    BDO SEIDMAN, LLP

Boston, Massachusetts

February 13, 2003,

except for Note 15,

which is as of March 28, 2003

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VIISAGE TECHNOLOGY, INC.

Consolidated Balance Sheets

(in thousands, except share information)