EXHIBIT 99.3

PART II, ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The Company’s consolidated financial statements are included in pages F-1 to F-47 of this Item 8.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

			Page
Report of Independent Registered Public Accounting Firm			F-2
Consolidated Statements of Operations for the years ended December 31, 2009, 2008 and 2007			F-3
Consolidated Balance Sheets as of December 31, 2009 and 2008			F-4
Consolidated Statements of Changes in Equity and Comprehensive Income (Loss) for the years ended December 31, 2009, 2008 and 2007			F-5
Consolidated Statements of Cash Flows for the years ended December 31, 2009, 2008 and 2007			F-6
Notes to Consolidated Financial Statements			F-7

L-1 Identity Solutions 2009 Annual Report | F-1

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of
L-1 Identity Solutions, Inc.
Stamford, Connecticut

We have audited the accompanying consolidated balance sheets of L-1 Identity Solutions, Inc. and subsidiaries (the “Company”) as of December 31, 2009 and 2008, and the related consolidated statements of operations, changes in equity and comprehensive income (loss), and cash flows for each of the three years ended December 31, 2009. 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 the standards of the Public Company Accounting Oversight Board (United States). 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, such consolidated financial statements present fairly, in all material respects, the financial position of L-1 Identity Solutions, Inc. and subsidiaries as of December 31, 2009 and 2008, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2009, in conformity with accounting principles generally accepted in the United States of America.

As discussed in Notes 1, 12 and 15 to the consolidated financial statements, the accompanying financial statements have been retrospectively adjusted for discontinued operations and a change in the composition of reportable segments.

/s/ Deloitte & Touche LLP
Stamford, Connecticut
February 25, 2010
(November 17, 2010 as to Notes 1, 12 and 15)

L-1 Identity Solutions 2009 Annual Report | F-2

L-1 IDENTITY SOLUTIONS, INC.

Consolidated Statements of Operations
(In thousands, except per share data)

		For the Years Ended December 31,
		2009				2008				2007
Revenues:
Services		$	113,445			$	77,428			$	61,000
Solutions			323,684				280,711				211,533
Total revenues			437,129				358,139				272,533
Cost of revenues:
Services			102,716				66,351				52,599
Solutions			201,518				163,184				110,820
Amortization of acquired intangible assets			5,349				21,564				25,025
Total cost of revenues			309,583				251,099				188,444
Gross profit			127,546				107,040				84,089
Operating expenses:
Sales and marketing			38,651				36,425				27,719
Research and development			20,730				25,244				18,482
General and administrative			54,953				49,185				39,667
Asset impairments and merger related expenses			—				529,683				5,000
Acquisition related expenses and amortization of acquired intangible assets			662				900				1,266
Total operating expenses			114,996				641,437				92,134
Operating income (loss)			12,550				(534,397	)			(8,045	)
Interest income			97				252				376
Interest expense:
Contractual interest			(7,809	)			(7,300	)			(4,923	)
Other financing costs			(6,857	)			(5,981	)			(3,003	)
Other expense, net			(421	)			(240	)			(519	)
Loss before income taxes and discontinued operations			(2,440	)			(547,666	)			(16,114	)
Benefit (provision) for income taxes			1,325				(7,643	)			27,758
Net income (loss) from continuing operations			(1,115	)			(555,309	)			11,644
Net income (loss) from discontinued operations, net of income taxes			(2,888	)			3,715				4,163
Net income (loss)			(4,003	)			(551,594	)			15,807
Net income attributable to noncontrolling interest			(195	)			—				—
Net income (loss) attributable to L-1 shareholders		$	(4,198	)		$	(551,594	)		$	15,807
Basic net income (loss) per share:
Continuing operations		$	(0.01	)		$	(7.16	)		$	0.16
Discontinued operations		$	(0.03	)		$	0.05			$	0.06
Attributable to L-1’s shareholders		$	(0.05	)		$	(7.12	)		$	0.22
Diluted net income (loss) per share:
Continuing operations		$	(0.01	)		$	(7.16	)		$	0.16
Discontinued operations		$	(0.03	)		$	0.05			$	0.06
Attributable to L-1’s shareholders		$	(0.05	)		$	(7.12	)		$	0.22
Weighted average common shares outstanding:
Basic			85,516				77,518				71,663
Diluted			85,516				77,518				72,385

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

L-1 Identity Solutions 2009 Annual Report | F-3

L-1 IDENTITY SOLUTIONS, INC.

Consolidated Balance Sheets
(In thousands, except numbers of shares)

		December 31,
		2009				2008
Assets
Current assets:
Cash and cash equivalents		$	6,624			$	20,449
Accounts receivable, net			116,353				105,606
Inventory, net			29,384				34,509
Deferred tax asset, net			11,514				11,101
Other current assets			9,249				9,628
Total current assets			173,124				181,293
Property and equipment, net			115,500				81,268
Goodwill			889,814				890,977
Intangible assets, net			102,375				108,282
Deferred tax asset, net			26,733				23,609
Other assets, net			16,279				24,392
Total assets		$	1,323,825			$	1,309,821
Liabilities and Equity
Current liabilities:
Accounts payable and accrued expenses		$	110,089			$	118,109
Current portion of deferred revenue			19,890				16,998
Current maturities of long-term debt			27,062				19,256
Other current liabilities			6,680				2,559
Total current liabilities			163,721				156,922
Deferred revenue, net of current portion			6,676				13,323
Long-term debt, net of current maturities			419,304				429,235
Other long-term liabilities			3,663				1,861
Total liabilities			593,364				601,341
Commitments and contingencies Equity:
Common stock, $0.001 par value; 125,000,000 shares authorized; 91,745,135 and 86,615,859 shares issued at December 31, 2009 and 2008, respectively			92				87
Series A preferred convertible stock, $0.01 par value, 15,107 shares issued and outstanding at December 31, 2008			—				15,107
Additional paid-in capital			1,432,898				1,393,763
Accumulated deficit			(627,449	)			(623,251	)
Pre-paid forward contract			(69,808	)			(69,808	)
Treasury stock, 368,843 shares of common stock, at cost			(6,173	)			(6,161	)
Accumulated other comprehensive (loss) income			622				(1,257	)
Noncontrolling interest			279				—
Total equity			730,461				708,480
Total liabilities and equity		$	1,323,825			$	1,309,821

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

L-1 Identity Solutions 2009 Annual Report | F-4

L-1 IDENTITY SOLUTIONS, INC.

Consolidated Statements of Changes in Equity and Comprehensive Income (Loss)
(In thousands)

																		Pre-paid
																		Forward
						Series A												Contract To								Accumulated
						Convertible				Additional								Purchase								Other				Non-
		Common				Preferred				Paid-in				Accumulated				Common				Treasury				Comprehensive				Controlling								Comprehensive
		Stock				Stock				Capital				Deficit				Stock				Stock				Income (Loss)				Interest				Total				Income (Loss)
Balance, January 1, 2007			73				—				1,153,791				(87,464	)			—				—				685				—				1,067,085
Exercise of employee stock options			1				—				10,037				—				—				—				—				—				10,038
Adjustment to fair value of stock options assumed in merger with Identix			—				—				8,520				—				—				—				—				—				8,520
Common stock issued for acquisition of McClendon			2				—				32,998				—				—				—				—				—				33,000
Common stock issued for directors’ fees			—				—				545				—				—				—				—				—				545
Common stock issued under employee stock purchase plan			—				—				2,315				—				—				—				—				—				2,315
Deferred tax benefit of stock options exercised			—				—				130				—				—				—				—				—				130
Retirement plan contributions paid in common stock			—				—				261				—				—				—				—				—				261
Pre-paid forward contract			—				—				—				—				(69,808	)							—								(69,808	)
Stock-based compensation expense			—				—				9,243				—				—				—				—				—				9,243
Issuance of convertible notes			—				—				15,891				—				—				—				—				—				15,891
Foreign currency translation gain			—				—				—				—				—				—				5,722				—				5,722			$	5,722
Net income			—				—				—				15,807				—				—				—				—				15,807				15,807
Comprehensive income			—				—				—				—				—				—				—				—				—			$	21,529
Balance, December 31, 2007			76				—				1,233,731				(71,657	)			(69,808	)			—				6,407				—				1,098,749
Exercise of employee stock options			—				—				2,860				—				—				—				—				—				2,860
Common stock and stock options issued for acquisition of Bioscrypt			2				—				36,568				—				—				—				—				—				36,570
Common stock issued to investors			8				—				103,857				—				—				—				—				—				103,865
Preferred stock issued to investor			—				15,107				—				—				—				—				—				—				15,107
Common stock issued for directors’ fees			—				—				582				—				—				—				—				—				582
Common stock issued under employee stock purchase plan			1				—				3,313				—				—				—				—				—				3,314
Stock options issued for officers’ bonus			—				—				125				—				—				—				—				—				125
Deferred tax charge of stock options exercised			—				—				(331	)			—				—				—				—				—				(331	)
Retirement plan contributions paid in common stock			—				—				1,294				—				—				—				—				—				1,294
Warrants issued & exercised			—				—				1,481				—				—				—				—				—				1,481
Repurchase of common stock			—				—				—				—				—				(6,161	)			—				—				(6,161	)
Stock-based compensation expense			—				—				10,283				—				—				—				—				—				10,283
Foreign currency translation loss			—				—				—				—				—				—				(6,582	)			—				(6,582	)		$	(6,582	)
Unrealized loss of financial instruments, net of tax, net of tax			—				—				—				—				—				—				(1,082	)			—				(1,082	)			(1,082	)
Net loss			—				—				—				(551,594	)			—				—				—				—				(551,594	)			(551,594	)
																																						$	(559,258	)
Comprehensive loss			—				—				—				—				—				—				—				—				—
Balance, December 31, 2008		$	87			$	15,107			$	1,393,763			$	(623,251	)		$	(69,808	)		$	(6,161	)		$	(1,257	)		$	—			$	708,480
Reclassification of noncontrolling interest			—				—				—				—				—				—				—				84				84
Exercise of employee stock options			—				—				87				—				—				—				—				—				87
Common stock issued for directors’ fees			—				—				208				—				—				—				—				—				208
Common stock issued under employee stock purchase plan			1				—				3,351				—				—				—				—				—				3,352
Deferred tax charge of stock options exercised			—				—				(845	)			—				—				—				—				—				(845	)
Retirement plan contributions paid in common stock			2				—				8,468				—				—				—				—				—				8,470
Stock-based compensation expense			1				—				12,941				—				—				—				—				—				12,942
Conversion of Series A convertible preferred stock			1				(15,107	)			15,106				—				—				—				—				—				—
Foreign currency translation gain			—				—				—				—				—				—				1,391				—				1,391			$	1,391
Unrealized gain of financial instruments, net of tax			—				—				—				—				—				—				488				—				488				488
Net loss			—				—				—				(4,198	)			—				—				—				195				(4,003	)			(4,003	)
Comprehensive loss			—				—				—				—				—				—				—				—				—			$	(2,124	)
Other			—				—				(181	)			—				—				(12	)			—				—				(193	)
Balance, December 31, 2009		$	92			$	—			$	1,432,898			$	(627,449	)		$	(69,808	)		$	(6,173	)		$	622			$	279			$	730,461

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

L-1 Identity Solutions 2009 Annual Report | F-5

L-1 IDENTITY SOLUTIONS, INC.

Consolidated Statements of Cash Flows
(In thousands)

		For the Years Ended December 31,
		2009				2008				2007
Cash Flow from Operating Activities:
Net income (loss)		$	(4,003	)		$	(551,594	)		$	15,807
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization			37,129				49,412				39,237
Stock-based compensation costs			23,665				18,064				11,291
Asset impairments			—				528,577				5,000
(Benefit) provision for non-cash income taxes			(2,764	)			7,548				(25,872	)
Tax effect of stock option exercises			(110	)			(651	)			(2,676	)
Amortization of deferred financing costs and debt discount			12,145				8,726				4,299
Other non cash items			(68	)			349				119
Change in operating assets and liabilities, net of effects of acquisitions:
Accounts receivable			(9,980	)			179				(9,331	)
Inventory			4,888				(7,872	)			(9,548	)
Other assets			4,366				(6,418	)			655
Accounts payable, accrued expenses and other liabilities			(786	)			4,762				11,574
Deferred revenue			(3,880	)			1,686				403
Net cash provided by operating activities			60,602				52,768				40,958
Cash Flow from Investing Activities:
Acquisitions and related costs, net of cash acquired			(3,749	)			(320,480	)			(132,839	)
Capital expenditures			(54,992	)			(22,523	)			(12,995	)
Additions to intangible assets			(7,545	)			(7,963	)			(6,304	)
Decrease in restricted cash			40				47				219
Net cash used in investing activities			(66,246	)			(350,919	)			(151,919	)
Cash Flow from Financing Activities:
Net (repayments) borrowings under revolving credit agreement			—				(84,000	)			4,000
Proceeds from long term debt			—				295,000				175,000
Principal payments of term loan			(14,194	)			(3,750	)			—
Debt and equity issuance costs			(808	)			(14,033	)			(6,393	)
Borrowings under revolving credit agreement			24,868				—				—
Principal payments on borrowings under revolving credit agreement and other debt			(20,895	)			(1,062	)			(766	)
Proceeds from issuance of common stock to investors, net of issuance costs			—				103,865				—
Proceeds from issuance of preferred stock to investor			—				15,107				—
Proceeds from issuance of common stock to employees			2,474				2,669				1,838
Proceeds from exercise of stock options by employees			87				2,860				10,038
Repurchase of common stock			—				(6,161	)			—
Payment for pre-paid forward contract			—				—				(69,808	)
Other			(53	)			325				146
Net cash provided by financing activities			(8,521	)			310,820				114,055
Effect of exchange rate changes on cash and cash equivalents			340				(423	)			116
Net increase (decrease) in cash and cash equivalents			(13,825	)			12,246				3,210
Cash and cash equivalents, beginning of year			20,449				8,203				4,993
Cash and cash equivalents, end of year		$	6,624			$	20,449			$	8,203
Supplemental Cash Flow Information:
Cash paid for interest		$	28,943			$	15,599			$	8,934
Cash paid for income taxes		$	849			$	1,163			$	465
Non-cash Transactions:
Common stock issued and options assumed in connection with acquisitions		$	—			$	36,570			$	41,520
Warrants issued for patents		$	—			$	1,305			$	—
Common stock issued in exchange for preferred stock		$	15,107			$	—			$	—
Capital leases and other long term debt issued for purchase of equipment		$	1,205			$	—			$	—

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

L-1 Identity Solutions 2009 Annual Report | F-6

L-1 IDENTITY SOLUTIONS, INC.

Notes To Consolidated Financial Statements

1. DESCRIPTION OF BUSINESS

L-1 Identity Solutions, Inc. and its subsidiaries (“L-1” or the “Company”) provide solutions and services that protect and secure personal identities and assets and allow international governments, federal and state agencies, law enforcement and commercial businesses to guard the public against terrorism, crime and identity theft.

Pending Transactions

In January 2010, L-1 announced that one of its strategic goals and objectives for 2010 was to explore strategic alternatives to enhance shareholder value. Subsequently, on September 19, 2010, the Company entered into an agreement (the “Merger Agreement”) with Safran SA (“Safran”) and Laser Acquisition Sub Inc. (“Merger Sub”), a wholly owned subsidiary of Safran, pursuant to which, subject to the terms and conditions set forth in the Merger Agreement, the Company is to be acquired by Safran in a merger transaction providing for shareholders to receive $12.00 per share in cash, for an aggregate enterprise value of approximately $1.6 billion, inclusive of outstanding debt. Completion of the merger remains subject to certain conditions, including, among others, (i) the disposition of our SpecTal/McClendon and Advanced Concepts businesses as described below; (ii) approval of the merger transaction by our shareholders; (iii) the expiration or termination of the applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the “HSR Act”); (iv) termination or expiration of the Committee on Foreign Investment in the United States (“CFIUS”) review period pursuant to the Exon-Florio Provision of the Defense Production Act of 1950; (v) completion of the novation, termination or expiration of certain contracts; (vi) no Company Material Adverse Effect (as defined in the Merger Agreement) having occurred since the date of the Merger Agreement; (vii) subject to certain materiality exceptions, the accuracy of the representations and warranties made by the Company and Safran and compliance by the Company and Safran with their respective obligations under the Merger Agreement; (viii) no law or government order prohibiting the merger; and (ix) other customary conditions.

Also on September 19, 2010, the Company entered in a definitive agreement (the “BAE Purchase Agreement”) to sell SpecTal/McClendon and Advanced Concepts (the “Intel Business”) to BAE Systems Information Solutions, Inc. (“BAE”) (a subsidiary of BAE Systems, Inc., the U.S. affiliate of BAE Systems plc) for a purchase price of $295.8 million in cash (and approximately $7.2 million in assumed obligations), the net proceeds of which (as defined in the credit agreement) will be used to repay outstanding debt under the Company’s credit agreement. Completion of the sale remains subject to certain conditions, including, among others, (i) termination or expiration of the CFIUS review period; (ii) no Business Material Adverse Effect (as defined in the BAE Purchase Agreement) having occurred since the date of the BAE Purchase Agreement; (iii) subject to certain materiality exceptions, the accuracy of the representations and warranties made by the Company and BAE and compliance by the Company and BAE with their respective obligations under the BAE Purchase Agreement; (iv) the completion of certain actions in respect of organizational conflict of interest provisions under certain contracts of the Intel Business; (v) no law or judgment prohibiting the sale and (vi) other customary conditions. See Note 15 to our consolidated financial statements for additional information.

The accompanying financial statements reflect the impact of the sale of the Intel Business whose operating results have been reflected as discontinued operations for all periods presented. Unless otherwise noted, revenues and expenses in these notes to consolidated financial statements exclude amounts attributable to discontinued operations. The consolidated financial statements do not reflect the pro forma effect of the sale of the Intel Business or the repayment of the long-term debt under the terms of the Credit Agreement.

Overview

The Company operates in two reportable segments: Solutions and Services. The Solutions segment includes Secure Credentialing and Biometrics/Enterprise Access. Secure Credentialing solutions span the entire secure credentialing lifecycle, from testing through issuance and inspection. This includes driver’s licenses, national IDs, ePassports and other forms of government-issued proof of identity credentials. Biometric solutions capture, manage and move biometric data for positive, rapid ID and tracking of persons of interest. Biometrics solutions also encompass access control readers that enable

L-1 Identity Solutions 2009 Annual Report | F-7

businesses and governments to secure facilities and restricted areas by preventing unauthorized entry.

Prior to September 19, 2010, the Services segment included Enrollment Services, SpecTal/McClendon and Advanced Concepts. Enrollment Services performs fingerprint-based background checks necessary for federal and state licensed employment in the banking, finance, insurance, healthcare, legal, real estate, education and other industries. SpecTal/McClendon and Advanced Concepts provide services to the national security and intelligence community, including information technology, engineering and analytics, and intelligence. As a result of accounting for SpecTal/McClendon and Advanced Concepts as discontinued operations, subsequent to September 19, 2010, the Services segment consists of the Enrollment Services operating segment and all prior period segment data have been revised accordingly.

Customers, depending on their needs, may order solutions that include hardware, equipment, consumables, software products or services or combine hardware products, consumables, equipment, software products and services to create multiple element arrangements.

Reorganization

On May 16, 2007, the Company adopted a new holding company organizational structure to facilitate the issuance of its convertible senior notes (the “Convertible Notes” or “Notes”) and the structuring of acquisitions. Pursuant to the reorganization, L-1 Identity Solutions, Inc. became the sole shareholder of its predecessor, L-1 Identity Solutions Operating Company (“L-1 Operating”, previously also known as L-1 Identity Solutions, Inc.). The reorganization has been accounted for as a reorganization of entities under common control and the historical consolidated financial statements of the predecessor entity, L-1 Operating, comprise the consolidated financial statements of the Company. The reorganization did not impact the historical carrying amounts of the assets and liabilities of the Company or its historical results of operations and cash flows.

The Company has no operations other than those carried through its investment in L-1 Operating and the financing operations related to the issuance of the Convertible Notes. A summary balance sheet of the Company (Parent Company only) is set forth below (in thousands):

		December 31,				December 31,
		2009				2008
Assets:
Deferred financing costs		$	2,506			$	3,454
Investment in L-1 Operating			894,988				868,925
		$	897,494			$	872,379
Liabilities and equity:
Accrued interest		$	825			$	825
Deferred tax liability			5,200				7,297
Convertible debt			161,008				155,777
			167,033				163,899
Equity			730,461				708,480
		$	897,494			$	872,379

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation

The consolidated financial statements include the accounts of L-1 and its wholly-owned subsidiaries and controlled entities, after elimination of material inter-company transactions and balances.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts 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. The most significant assumptions and estimates relate to the allocation of the purchase price of the acquired businesses, assessing the impairment of goodwill, other intangible assets and property and equipment, revenue recognition, estimating the useful life of long-lived assets, inventory valuation allowance, provision for bad debts, income taxes, litigation and valuation of and accounting for financial instruments, including convertible notes, interest rate protection agreements, foreign currency contracts, warrants and stock options. Actual results could differ materially from those estimates.

L-1 Identity Solutions 2009 Annual Report | F-8

Computation of Net Income (Loss) per Share

Basic net income (loss) per share is calculated by dividing net income (loss) by the weighted average number of common shares outstanding during the year. Diluted net income (loss) per share is based upon the weighted average number of dilutive common and common equivalent shares outstanding during the year.

The per share amounts do not reflect the impact of outstanding in the money stock options, warrants and restricted share awards of 0.3 million, 0.7 million, and 2.2 million shares during the years ended December 31, 2009, 2008 and 2007, respectively, as their effect would have been anti-dilutive.

The Company calculates the effect of the Convertible Notes on diluted net income per share utilizing the “if converted” method since the Company has the right to issue shares of common stock to settle the entire obligation upon conversion. For the years ended December 31, 2009, 2008 and 2007, the effect was anti-dilutive. Accordingly, approximately 5.5 million shares of common stock issuable at conversion have been excluded from the determination of weighted average diluted shares outstanding.

In connection with the issuance of the Convertible Notes, the Company entered into a pre-paid forward contract with Bear Stearns (now JP Morgan Chase) for a payment of $69.8 million to purchase 3.5 million shares of the Company’s common stock at a price of $20.00 per share for delivery in 2012. The number of shares to be delivered under the contract is used to reduce weighted average basic and diluted shares outstanding for income (loss) per share purposes.

Basic and diluted net income (loss) per share calculations for the years ended December 31, 2009, 2008 and 2007 are as follows (in thousands, except per share data):

		2009				2008				2007
Net income (loss) of continuing operations, net of income taxes		$	(1,115	)		$	(555,309	)		$	11,644
Net income (loss) from discontinued operations, net of income taxes		$	(2,888	)		$	3,715			$	4,163
Net income (loss) attributable to L-1’s shareholders		$	(4,198	)		$	(551,594	)		$	15,807
Weighted Average common shares outstanding:
Basic			85,516				77,518				71,663
Effect of dilutive stock options, warrants and restricted stock awards			—				—				722
Diluted			85,516				77,518				72,385
Basic net income (loss) per share:
Continuing operations		$	(0.01	)		$	(7.16	)		$	0.16
Discontinued operations		$	(0.03	)		$	0.05			$	0.06
Attributable to L-1’s shareholders		$	(0.05	)		$	(7.12	)		$	0.22
Diluted net income (loss) per share:
Continuing operations		$	(0.01	)		$	(7.16	)		$	0.16
Discontinued operations		$	(0.03	)		$	0.05	)		$	0.06
Attributable to L-1’s shareholders		$	(0.05	)		$	(7.12	)		$	0.22

Revenue Recognition

The Company derives its revenue from sales of solutions that include hardware, components, consumables and software components and related maintenance, technical support, training and installation services integral to sales of hardware and software. The Company also derives revenues from sales of fingerprinting enrollment services and government security and information technologies services. A customer, depending on its needs, may order solutions that include hardware, equipment, consumables, software products or services or combine these products and services to create a multiple element arrangement.

When a customer arrangement does not require significant production, modification or customization of software and does not include certain services considered to be essential to the functionality of the software or is not otherwise within the scope of standards applicable to long term contracts, revenue is recognized when persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable, and collection is probable.

Transactions which typically do not involve significant production, modification or customization of software, or do not otherwise include services considered to be essential to the functionality of the software include:

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•		Secure Credentialing solutions, primarily to federal and state government customers.
•		Sales of hardware products and related maintenance and services.
•		Sales of printing system components and consumables including printers, secure coating ribbon, film, and other parts, primarily to federal government customers.
•		Sales of portable devices that provide iris and face and fingerprint identification and recognition and related maintenance and services.
•		Licenses of off-the-shelf versions of fingerprint, face and iris recognition software and related maintenance and services.
•		Sales of software and software developer kits and related maintenance and services.
•		Services and software to scan, collect, and transmit fingerprints for identity and background verification.
•		Document authentication solutions, which typically include sales of hardware, software, maintenance and support.
•		Information technology and security services provided to U.S. intelligence community.

Many of the Company’s arrangements include multiple elements. Such arrangements may include one or more of the following elements: consumables, equipment, hardware, software, rights to additional software, when and if available software, software maintenance, hardware maintenance, hardware replacement, technical support services, training, installation and consulting services. For arrangements that include multiple elements that are not within the scope of standards applicable to software revenue recognition, the Company allocates value to each element based on the relative estimated fair value of each element, if fair value exists for each element. For arrangements within the scope of standards applicable to software revenue recognition, which do not involve significant modification or customization of the software or otherwise include services that are considered essential to the functionality of the software, the Company allocates value to each element based on its relative fair value, based on vendor specific objective evidence (“VSOE”) of fair value, which is determined based on the prices charged when each element is sold separately, considering renewals and other evidence of fair value, as appropriate. If fair value or VSOE of fair value, if applicable, exists for all undelivered elements, but does not exist for the delivered element, then the residual method is used to allocate value for each element. Under the residual method, each undelivered element is allocated value based on fair value or VSOE of fair value, if applicable, for that element and the remainder of the total arrangement consideration is allocated to the delivered element. If fair value or VSOE of fair value, if applicable, does not exist for all undelivered elements, revenue is deferred until such time as fair value of undelivered elements is established, at which time revenue is recognized for all delivered elements. Revenue for maintenance and support is recognized ratably over the remaining term of any maintenance support period.

For transactions not within the scope of standards applicable to revenue recognition for long term contracts or software sales, revenue is generally recognized upon passage of title for product sales, and performance for services, provided the four revenue recognition criteria listed above are met. In certain cases, customer acceptance is required, in which case revenue is deferred until customer acceptance is obtained. If the fee due from the customer is not fixed or determinable, revenue is recognized as payments become due from the customer. If collection is not considered probable, revenue is recognized when the revenue is collected. Maintenance, hardware replacement, and technical support revenues are typically recognized ratably over the contract term, which approximates the timing of services rendered. Revenues from security, technology, training and similar services, including in revenue earned under time and material, fixed price level of effort and cost reimbursable contracts, is recognized as the services are rendered. Revenue from the collection and transmission of fingerprints for identity and background verification is recognized when the fingerprint is transmitted to applicable background vetting agency. L-1’s arrangements generally do not include a right to return. Expenses on all services are recognized when the costs are incurred.

Revenue related to consumables, equipment and hardware sales that require no installation is recognized in accordance with the terms of the sale, generally when the product is shipped, provided no significant obligations remain and collection of the receivable is deemed reasonably assured. Certain hardware sales to end users

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require installation subsequent to shipment and transfer of title. Recognition of revenue related to hardware sales that are contingent on installation is deferred until installation is complete, title has transferred and customer acceptance has been obtained. When hardware products are sold through authorized representatives, dealers, distributors or other third party sales channels the obligation to install the hardware generally does not remain the Company’s responsibility, but is rather an obligation of the authorized representative, dealer, distributor or other third party and to its ultimate customer. Consequently, for sales to third party distributors, revenue is recognized at the time title is transferred, which is generally upon shipment. On rare occasions, the Company is required to install products on behalf of third party distributors. In these cases, revenue is recorded in the same manner as products sold to end users where acceptance of the product by the third party distributor is contingent upon successful installation of the product.

Revenue from software sales and licenses is recognized in accordance with standards applicable to software sales. The Company recognizes revenue of software products when persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed and determinable, and the collection is probable and VSOE exists for the undelivered element.

In the event that a multiple element arrangement includes hardware, software and services and the software is more-than-incidental to the arrangement, but not essential to the functionality of the hardware, the company recognizes revenues on software and non software elements pursuant to the respective standards applicable to software and non software elements.

When multiple-element arrangements include software deliverables and involve significant production, modification or customization of the software, or otherwise involve services that are considered to be essential to the functionality of the software, L-1 applies the accounting standards applicable to long term contracts. When VSOE of fair value exists for software maintenance, technical support or other services in arrangements requiring contract accounting, revenue for software maintenance, technical support and other services is recognized as the services are performed and the rest of the arrangement is accounted for under standards applicable to long term contracts. When VSOE of fair value is not available for such services the entire arrangement is accounted for under standards applicable to long term contracts and the related revenue is recognized with the rest of the contract deliverables under the percentage of completion method.

In general, transactions that involve significant production, modification or customization of software, or otherwise include services considered to be essential to the functionality of the software and which are accounted in accordance with standards applicable to long term contracts, include:

•		Contracts or elements of contracts for the production of drivers’ licenses and other identification credentials that require delivery and installation of customized software.
•		Identity solutions contracts, typically providing for the development, customization and installation of fingerprinting, face and iris recognition solutions for government agencies, law enforcement agencies and businesses. These contracts are generally for a fixed price, and include milestones and acceptance criteria for the various deliverables under the contract.

In addition, the Company uses contract accounting for certain federal government contracts.

Revenue from long term contracts is recognized under the percentage of completion method. The Company measures the percentage of completion using either input measures (e.g., costs incurred) or output measures (e.g., contract milestones), whichever provides the most reliable and meaningful measure of performance in the circumstances. Milestones are specific events or deliverables clearly identified in the contract and can include delivering customized systems, installation and services. When milestone measures are used, revenue is recognized when performance of milestones is achieved. The Company recognizes revenue based on the total milestones billable to the customer less revenue related to any future maintenance service requirements. On contracts where milestones are not used, the Company generally recognizes revenue on a cost-to-cost basis or as the units are delivered, whichever is most appropriate in the circumstances. The cumulative impact of any revision in estimates to complete or recognition of

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losses on contracts is reflected in the period in which the changes or losses become known. The excess of billings under these contracts as current assets.

Driver’s license contracts or credentialing contracts or contract elements within such contracts, generally require that L-1 incur upfront costs related to software, hardware and other equipment. Such costs are capitalized and are depreciated over the of the contract term life, beginning when the system goes into service. The delivery of credentials or licenses typically requires us to customize, design, and install equipment and software at customer locations, as well as perform training, supply consumables, maintain equipment and provide support services. Costs related to customized software are capitalized during the period L-1 is designing and installing the system and are amortized over the estimated useful life beginning when the system goes into service. Revenue on these contracts is Company records costs and estimated earnings in earned based on, and is contingent upon, the production of licenses or credentials utilizing the deployed system and is therefore recognized when the credentials are produced. If contractual arrangements include the sale of consumables on equipment whose title is transferred to the customer, the Company recognizes revenue when title is transferred.

Cash and Cash Equivalents

The Company considers highly liquid investments with original maturities of three months or less at the time of acquisition to be cash equivalents. At December 31, 2009 and 2008, the Company’s cash equivalents consisted of money market accounts and overnight investments with banks.

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Financial Instruments

The carrying amounts of accounts receivable, net, accounts payable and accrued expenses and other current liabilities approximate their fair values due to the short term maturities. The carrying amount of borrowings under the revolving credit agreement approximates fair value since the long-term debt bears interest at variable rates. The fair value of the Convertible Notes and Term Loan is based on transaction prices. The fair value of interest rate protection agreements and foreign currency forward contracts are determined based on the estimated amounts that such contracts could be settled with the counterparty at the balance sheet date, taking into account current interest rates, future expectations of interest rates, and L-1’s current credit worthiness. The recorded and estimated fair values are as follows at December 2009 and 2008:

		Assets (Liabilities)
		Recorded amount at				Fair Value at
		December 31,				December 31,
		2009				2009
Accounts Receivable		$	116,353			$	116,353
Accounts Payable and Accrued Expenses, Excluding Interest Rate Protection Agreements			(108,193	)			(108,193	)
Other Current Liabilities			(6,680	)			(6,680	)
Revolving Credit Facility			(4,868	)			(4,868	)
Term Loan			(278,878	)			(283,833	)
Convertible Notes			(161,008	)			(160,388	)
Other Debt			(1,611	)			(1,611	)
Derivatives:
Foreign Currency Forward Contracts (included in accounts payable and accrued expenses)			(9	)			(9	)
Interest Rate Protection Agreements (included in accounts payable and accrued expenses)			(1,896	)			(1,896	)

		Recorded amount at				Fair Value at
		December 31,				December 31,
		2008				2008
Accounts Receivable		$	105,606			$	105,606
Accounts Payable and Accrued Expenses, Excluding Interest Rate Protection Agreement			(116,327	)			(116,327	)
Other Current Liabilities			(2,559	)			(2,559	)
Revolving Credit Facility			—				—
Term Loan			(291,778	)			(256,256	)
Convertible Notes			(155,777	)			(83,895	)
Other Debt			(936	)			(936	)
Derivatives:
Foreign Currency Forward Contracts (included in accounts payable and accrued expenses)			435				435
Interest Rate Protection Agreements (included in accounts payable and accrued expenses)			(1,782	)			(1,782	)

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Concentrations of Credit Risk

Financial instruments that subject the Company to credit risk primarily consist of cash equivalents and accounts receivable. The Company’s credit risk is managed by investing cash and cash equivalents primarily in high-quality money market instruments.

Accounts receivable are principally due from government agencies and contractors to government agencies. No collateral is required. Accounts receivable are not sold or factored. Billings rendered in connection with work performed are in accordance with the terms of the contract and collateral is not required. 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.

Including discontinued operations, as of December 31, 2009, U.S. Federal government agencies, directly or indirectly, accounted for 41 percent of consolidated accounts receivable. As of December 31, 2008, U.S. Federal government agencies, directly or indirectly accounted for 51 percent of consolidated accounts receivable.

Inventory and Suppliers

Inventory is stated at the lower of cost or market. L-1 uses the first-in, first-out method to determine costs of inventory. The Company evaluates inventory on a quarterly basis for obsolete or slow-moving items and records the resulting write-downs to cost of revenues. L-1 obtains certain products and services from a limited group of suppliers and contract manufacturers. While a loss of a supplier could delay sales and increase the Company’s costs, alternative sources of suppliers are available.

Property and Equipment

Property and equipment are recorded at cost or at fair value for items acquired under capital leases or in acquisitions. Cost includes capitalized interest for self constructed assets. Depreciation and amortization are calculated using the straight-line methods over the estimated useful lives of the related assets.

System assets acquired and developed in connection with drivers’ license contracts are depreciated over the estimated useful life of the related contract, ranging from one to seven years, using the straight-line method beginning when the system goes into service. The straight line method approximates the pattern of recognition of the gross revenues over the estimated useful life of the contracts, which take into account contract options that the Company believes will be exercised. In connection with the acquisition of Digimarc Corporation (“Old Digimarc”), the Company evaluated the useful lives of the system assets of the acquired business, and based on the historical experience of both the Company and Old Digimarc determined that the useful lives of system assets are usually extended beyond the initial term of the contract as the customers routinely exercise their options to extend the contract. Accordingly the Company changed its depreciable lives to take into account renewal options that the Company believes will be exercised. The change in depreciable lives reduced depreciation expense by approximately $1.5 million in 2008 and is related primarily to the assets acquired in connection with the acquisition of Old Digimarc.

Intangible Assets

Intangible assets primarily consist of completed technology, trade names, customer contracts and relationships and other assets primarily arising from the acquisition of businesses or business assets. These intangible assets are primarily amortized on a basis consistent with the timing and pattern of expected cash flows used to value the intangibles, generally on a straight line basis over useful lives ranging from 3 to 25 years.

Goodwill

The Company tests goodwill for impairment on an annual basis, or between annual tests, in certain circumstances, such as the incurrence of operating losses or a significant decline in earnings associated with the asset. The Company evaluates goodwill for impairment using the two-step approach as prescribed in the relevant guidance. The first step is to compare the fair value of the reporting unit to the carrying amount of the reporting unit. If the carrying amount exceeds the fair value, a second step must be followed to calculate impairment. The Company performs the initial step by comparing the carrying value to the estimated fair value of the reporting units, which is determined primarily by using the discounted cash flows method, but considers

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comparable market multiples and market transactions when available and suitable, as well as other factors. Based upon these tests, L-1 determined that no goodwill impairment resulted at October 31, 2009, the date of the annual goodwill impairment test. In 2008, L-1 determined the fair value of the biometrics business units were less than their carrying amounts resulting in a goodwill impairment. See Note 14.

Long-Lived Assets

The Company evaluates long-lived assets with finite lives, such as intangible assets, property and equipment and certain other assets, for impairment in accordance with the standard, Accounting for the Impairment or Disposal of Long-Lived Assets. L-1 records an impairment charge whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable from estimated undiscounted future cash flows from the use of these assets. When such impairment is indicated, the related assets are written down to estimated fair value.

Research and Development Costs

Research and development costs are charged to expense as incurred. For the years ended December 31, 2009, 2008 and 2007, the Company received funding under time and materials contracts to perform services for conceptual formulation, design or testing of possible product or process alternatives, which it recorded as an operating expense offset under the requirements of the standard, Research and Development Arrangements. The Company received funding of $0.4 million, $0.5 million, and $0.7 million during the years ended December 31, 2009, 2008 and 2007, respectively. In certain circumstances the government obtains a royalty free right to use the technology developed under these contracts. The Company generally retains the right to the data and ownership of the results of its own research and development efforts.

In addition, the Company has research and development contracts which are accounted for pursuant to the standards applicable to long term contracts. The Company recognized revenues of $4.9 million, $6.7 million and $5.9 million related to these contracts during the years ended December 31, 2009, 2008 and 2007, respectively.

Financing Costs

Costs incurred in obtaining financing are capitalized and amortized over the term of the related debt using the effective interest method. Amortization of deferred financing costs was $4.6 million, $4.2 million and $1.3 million during the years ended December 31, 2009, 2008, and 2007, respectively, of which $1.3 million, $1.4 million, and $0.0 million, is included in continuing operations. Accretion of debt discount, also using the effective interest method, was $6.5 million, $4.5 million and $3.0 million during the years ended December 31, 2009, 2008, and 2007, respectively. Costs related to modifications of financing arrangements that do not qualify as extinguishment of debt are expensed as incurred.

Software Costs

The Company capitalizes certain costs incurred in the development of computer software to be sold or leased once technological feasibility is reached. During the years ended December 31, 2009, 2008 and 2007, the Company capitalized $4.6 million, $6.9 million and $3.5 million, respectively, which are being amortized over three to five years. L-1 recorded amortization expense of $2.2 million, $2.4 million and $0.4 million related to these assets during the years ended December 31, 2009, 2008 and 2007, respectively.

Costs related to software developed for internal use are expensed as incurred until the application development stage has been reached. Costs for externally purchased software are capitalized and depreciated over their estimated useful life not to exceed five years. Costs for self constructed assets includes capitalized interest.

Warranty

The Company provides a warranty for manufacturing and material defects on hardware sold. A reserve for warranty costs, based on estimates utilizing projected costs to repair units, is recorded and periodically adjusted to reflect actual experience. See Note 3.

Income Taxes

Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of assets and liabilities and their respective tax bases. Deferred

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income tax assets and liabilities are measured using currently enacted tax rates and changes in tax rates are recognized in income in the period that includes the enactment date. The deferred tax asset valuation allowance is increased or reduced when the Company, based on estimated income of the appropriate character and in the appropriate jurisdiction, determines it is more likely than not that the amounts of the deferred tax benefits that will not be realized differ from the recorded amounts. Prior to January 1, 2009 a reduction of the valuation allowance was recorded either as a benefit in the income statement or as a reduction of goodwill if the reduction was related to pre-acquisition net operating loss carry-forwards. After December 31, 2008, all changes in the valuation allowance is reflected in the income statement.

During the fourth quarter of 2008, management evaluated the adequacy of the valuation allowance in light of the results for the year and determined that, based on the cumulative results of operations for the three years ended December 31, 2008, after considering items that do not enter in the determination of taxable income, and the likely future operating results, it was more likely than not that the portion of the tax benefits of net operating loss carry-forwards that would not be realized would be higher than previously recorded. As a result, the Company increased the deferred tax asset valuation allowance to reflect the estimated tax benefits it expected to realize. During 2009, the Company reevaluated the adequacy of the valuation allowance based upon the same methodology used in 2008 and 2007 and determined that the valuation allowance is adequate.

It is possible that, depending on the cumulative results of operations for the three year period ending on December 31, 2010, after considering items that do not enter in the determination of taxable income, and the then likely operating results, the valuation allowance may be increased or decreased.

In July 2006, the Financial Accounting Standards Board (“FASB”) issued an interpretation, which provides that the tax benefits of a tax position is recognized if the enterprise determines that it is more likely than not that a tax position will be sustained based on the technical merits of the position, on the presumption that the position will be examined by the appropriate taxing authority that would have full knowledge of all relevant information. The tax position is measured at the largest amount of benefit that is greater than 50 percent likely of being realized upon ultimate settlement. The interpretation also provides guidance on de-recognition, classification, interest and penalties, accounting for interim periods and transition. The adoption of the interpretation on January 1, 2007 did not have a material impact on the consolidated financial statements.

Foreign Currency Translation and Transactions

Assets and liabilities of L-1’s operations in Germany and Canada are denominated in Euros and Canadian dollars, respectively, which are also the functional currency and are translated into U.S. dollars at exchange rates as of each balance sheet date. Income and expense accounts are translated into U.S. dollars at the average rates of exchange prevailing during the periods presented. Adjustments resulting from translating foreign currency financial statements into U.S. dollars of operations whose functional currencies are the local currency are included in accumulated other comprehensive income or loss as a separate component in equity. The functional currency of the Company’s Mexican operations is the U.S. dollar. Accordingly, monetary assets and liabilities are re-measured to U.S. dollars at the balance sheet date with the gain or loss reflected in income. Non-monetary assets and liabilities are re-measured in U.S. dollars at historical rates.

From time to time, the Company utilizes foreign currency forward contracts to mitigate the exchange rate impact of specific purchase obligations denominated in foreign currencies. All gains and losses resulting from the change in fair value of the contracts are recorded in operations. For the years ended December 31, 2009 and 2008, other expense, net, included a loss of approximately $0.4 million and $0.2 million, respectively, consisting of realized and unrealized gains and losses related to foreign currency transactions and balances. During the year ended December 31, 2007, the Company did not have any foreign currency forward contracts. None of the foreign currency forward contracts were terminated prior to settlement. The fair value of forward currency contracts at December 31, 2009 and 2008 resulted in an unrealized loss of $0.1 million and an unrealized gain of $0.4 million, respectively.

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Stock-Based Compensation

Stock-based compensation cost is estimated at the grant date based on the fair value of the award and compensation cost is recognized as an expense over the requisite service period of the award, generally the vesting period based on the awards expected to vest. The estimated fair value of restricted stock and stock option awards is determined on the date of the grant.

L-1 uses the Black-Scholes valuation model to estimate the fair value of option awards. Determining the appropriate fair value model and related assumptions requires judgment, including estimating common stock price volatility, forfeiture rates and expected terms. The expected volatility rate is based on the historical volatility of the Company’s common stock. The expected life of options is based on the average life of 6.3 years. The Company estimated forfeitures when recognizing compensation expense based on historical rates. The risk free interest rate is based on the 7 year treasury security as it approximates the estimated 6.3 year expected life of the options. The Company updates these assumptions on at least an annual basis and on an interim basis if significant changes to the assumptions are warranted. In 2009 and 2008, the Company updated its forfeiture rate assumption, which resulted in an increase of expense of $1.7 million in 2009 and a decrease in expense of $0.3 million in 2008. Restricted stock awards are valued at the market price at the date of grant.

Stock-based compensation from both continuing and discontinued operations for 2009, 2008 and 2007 was $23.7 million, $18.1 million and $11.3 million, respectively, and includes $1.6 million in 2009, $0.7 million in 2008 and $0.6 million in 2007 related to restricted stock issuances. Stock-based compensation also includes $0.2 million, $0.3 million and $0.6 million for 2009, 2008 and 2007, respectively, for incentive compensation settled or to be settled in common stock and fully vested stock options, as well as stock-based compensation related to the Company’s retirement plan contributions, settled or to be settled in, common stock of $9.4 million, $6.5 million, and $0.3 million for 2009, 2008, 2007, respectively. The Company has recognized all compensation expense in the consolidated statements of operations for 2009, 2008 and 2007 and did not capitalize any such costs.

Stock based compensation attributable to discontinued operations was $8.7 million, $6.3 million and $0.7 million for the 2009, 2008 and 2007, respectively. The following table presents stock-based compensation expense included in continuing operations (in thousands):

		Year Ended				Year Ended				Year Ended
		December 31,				December 31,				December 31,
		2009				2008				2007
Cost of revenues		$	873			$	987			$	609
Research and development			1,785				1,814				1,167
Sales and marketing			1,944				1,818				1,806
General and administrative			10,398				7,227				7,034
Total Stock-based compensation		$	15,000			$	11,846			$	10,616

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Advertising Costs

Advertising costs are charged to expense as incurred. Advertising expense for the years ended December 31, 2009, 2008 and 2007 was $0.2 million, $0.3 million and $1.4 million, respectively.

Recent Accounting Pronouncements

During 2009, the Company adopted the following accounting standards:

In September 2006, the Financial Accounting Standards Board (FASB) issued the accounting standard, “Fair Value Measurements and Disclosures”. With respect to financial assets and liabilities, this was effective for financial statements issued for fiscal years beginning after November 15, 2007. With respect to non-financial assets and liabilities, the standard was effective on January 1, 2009. The adoption of this standard did not have a material effect on the consolidated financial statements of any period presented.

In March 2008, the FASB issued the accounting standard, “Disclosures about Derivative Instruments and Hedging Activities”. The adoption of this standard, effective January 1, 2009, did not have a material impact on the condensed consolidated financial statements. See Note 3.

In December 2007, the FASB issued the accounting standard, “Business Combinations”, which establishes standards for how the acquirer of a business recognizes and measures the identifiable assets acquired, the liabilities assumed, and any non-controlling interest in the acquiree in its financial statements. The standard also provides guidance for recognizing and measuring the goodwill acquired in the business combination and for information to disclose. Among other things, the standard requires securities issued in a business combination to be valued as of the acquisition date, transaction costs incurred in connection with an acquisition be expensed, except acquiree costs that meet the accounting standard, “Accounting for Costs Associated with Exit or Disposal Activities”, contingent consideration be recognized at fair value as of the date of acquisition with subsequent changes reflected in income, and in-process research and development be capitalized as an intangible asset. The Company adopted the provisions of the standard effective January 1, 2009. As a result of the adoption of the standard, the Company expensed transaction costs of $0.7 million for the year ended December 31, 2009 and retroactively expensed previously deferred transaction costs of $0.1 million in prior periods. L-1 expects that the adoption of the standard will have a continuing material impact in accounting for future acquisitions.

In December 2007, the FASB issued the standard “Noncontrolling Interests in Consolidated Financial Statements” adopted as of January 1, 2009. The Company did not retroactively revise the financial statements for prior periods because the impact was immaterial.

In May 2008, the FASB issued the standard “Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion” (Including Partial Cash Settlement). This guidance required the Company to separately account for the liability and equity components of the Company’s 3.75 percent Convertible Notes in a manner that results in recording interest expense using the Company’s nonconvertible debt borrowing rate for such debt. The associated discount is amortized using the effective interest rate method over five years from the date of the debt issuance. The Company adopted the standard on January 1, 2009, and applied its provisions retrospectively to all periods presented.

In April 2009, the FASB issued the standard, “Interim Disclosures about Financial Instruments”. The standard amends previous guidance to require disclosures about fair value of financial instruments not measured on the balance sheet at fair value in interim and in annual financial statements and requires all entities to disclose the method(s) and significant assumptions used to estimate the fair value of financial instruments. This guidance was effective for interim periods ending after June 15, 2009. The adoption of this standard did not have a material effect on the consolidated financial statements of any period presented.

In April 2009, the FASB issued the standard, “Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arise from Contingencies” which amends and clarifies previous guidance to address application issues related to the initial recognition and measurement, subsequent measurement and accounting, and disclosure of assets and liabilities arising from contingencies in a business combination. The standard was effective for assets or liabilities arising from contingencies in business

L-1 Identity Solutions 2009 Annual Report | F-18

combinations consummated after December 15, 2008. L-1 expects that the adoption of this guidance will likely have a continuing material impact in accounting for future acquisitions.

In May 2009, the FASB issued the standard, “Subsequent Events”, which establishes general accounting standards for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. This standard was effective for interim or annual financial periods ending after June 15, 2009. The adoption of this standard did not have a material impact on the financial statements for any of the periods presented.

In August 2009, the FASB issued the standard “Fair Value Measurements and Disclosures”. This accounting update was effective for interim financial periods ending after August 2009. The adoption of this standard did not have a material impact on the financial statements for any of the periods presented.

Recently Issued Accounting Standards

In June 2009, the FASB issued the standard, “Amendments to FASB Interpretation No. 46(R)”. The standard changes the criteria to determine how an investee for a company is insufficiently capitalized or is not controlled through voting (or similar rights) and therefore should be consolidated. The standard is to become effective for transactions consummated after January 1, 2010. L-1 expects that if it enters into transactions that are within the scope of this standard, its adoption of this standard could have a material impact on L-1’s financial statements.

In October 2009, the FASB issued the standard, “Multiple Element Arrangements”, which modifies accounting for multiple element arrangements by requiring that the separation of the arrangements be based on estimated selling prices based on entity specific assumptions rather than fair value, eliminating the residual method of allocation and requiring additional disclosures related to such arrangements. The standard is effective prospectively for arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. The Company has not yet evaluated the impact the adoption of the standard will have on its consolidated financial statements.

Also in October 2009, the FASB issued the standard, “Certain Revenue Arrangements That Include Software Elements”, which amends software revenue recognition guidance to eliminate from its scope tangible products containing software components that function together to deliver the tangible product’s essential functionality and to provide guidance on how to allocate arrangement consideration to deliverables in an arrangement that contain both tangible products and software. The standard is effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. The Company has not yet evaluated the impact the adoption of the standard will have on its consolidated financial statements.

In January 2010, the FASB issued the standard, “Fair Value Measurements and Disclosures — Improving Disclosures about Fair Value Measurements”. This accounting update was effective for the first interim or annual financial reporting period beginning after December 15, 2009. The adoption of this standard is not expected to have a material impact on the financial statements.

L-1 Identity Solutions 2009 Annual Report | F-19

3. ADDITIONAL FINANCIAL INFORMATION

Property and Equipment

Property and equipment comprised the following as of December 31, 2009 and 2008 (in thousands):

										Weighted
		December 31,								Average
		2009				2008				Useful Life
System assets		$	92,753			$	81,394			3-7 years
Computer and office equipment			9,147				7,046			3-5 years
Machinery and equipment			23,107				18,029			2 years
Construction in progress			53,436				23,970				—
Leasehold improvements			7,652				1,217			5 years
Other- including tooling and demo equipment			4,234				1,880			2-5 years
			190,329				133,536
Less, accumulated depreciation			74,829				52,268
		$	115,500			$	81,268

At December 31, 2009 property and equipment includes approximately $4.0 million related to the suspended Registered Traveler program, which is expected to be recovered from future cash flows upon restart of the program. Included in the asset impairment charges for 2008 is $3.4 million related to certain biometrics property and equipment. See Note 14 to the consolidated financial statements.

Capital expenditures in 2009 aggregated $55.0 million, principally related to the Solutions segment.

Depreciation expense on property and equipment for the years ended December 31, 2009, 2008 and 2007 was $23.5 million, $18.1 million and $9.1 million, respectively, of which $0.2 million, $0.3 million, and $0.2 million is included in discontinued operations. For the year ended December 31, 2009, the Company capitalized interest of $1.8 million.

The following table presents depreciation and amortization expense, excluding amortization of acquisition related intangible assets, but includes amortization of other intangible assets as reflected in continuing operations (in thousands):

Depreciation and Amortization

		Twelve Months Ended
		December 31,				December 31,				December 31,
		2009				2008				2007
Cost of revenues		$	23,021			$	17,098			$	6,671
Sales and marketing			294				318				231
Research and development			437				820				610
General and administrative			3,419				3,174				1,952
		$	27,171			$	21,410			$	9,464

L-1 Identity Solutions 2009 Annual Report | F-20

Inventory, net

Inventory comprised the following as of December 31, 2009 and 2008, net of write downs of $3.2 million and $4.1 million, respectively (in thousands):

		December 31,
		2009				2008
Purchased parts and materials		$	23,107			$	27,218
Work in progress			615				1,171
Inventoried contract costs			3,193				2,629
Finished goods			2,469				3,491
		$	29,384			$	34,509

Approximately $2.1 million and $6.4 million of inventory at December 31, 2009 and 2008, respectively, were held at customer sites.

Goodwill

Goodwill comprises the following for the years ended December 31, 2009, 2008 and 2007 (in thousands):

										Discontinued
		Solutions				Services				Operations				Total
Balance, January 1, 2007		$	813,435			$	59,014			$	78,994			$	951,443
ComnetiX acquisition			—				15,046				—				15,046
ACI acquisition			—				—				49,761				49,761
McClendon acquisition			—				—				54,723				54,723
Additions (reductions) of deferred tax asset valuation allowance			(35,951	)			560				—				(35,391	)
Other, net			7,111				10,017				1,560				18,688
Balance, December 31, 2007			784,595				84,637				185,038				1,054,270
Reclassification of ComnetiX products business			9,780				(9,780	)			—				—
Bioscrypt acquisition			39,440				—				—				39,440
Old Digimarc acquisition			228,967				—				—				228,967
Impairment charges			(430,000	)			—				—				(430,000	)
Other, net			(3,655	)			(1,069	)			3,024				(1,700	)
Balance, December 31, 2008			629,127				73,788				188,062				890,977
Old Digimarc final acquisition adjustments			(3,379	)			—				—				(3,379	)
Currency translation adjustments			192				938				—				1,130
Other, net			559				—				527				1,086
Balance, December 31, 2009		$	626,499			$	74,726			$	188,589			$	889,814

As of December 31, 2009, approximately $159.5 million of goodwill was deductible for income tax purposes, of which $51.8 million relates to continuing operations.

The impairment charge recorded in 2008 is the only goodwill impairment recorded since 2007. See Note 14 to the consolidated financial statements for additional information.

L-1 Identity Solutions 2009 Annual Report | F-21

Intangible Assets

Intangible assets comprise the following as of December 31, 2009 and 2008 (in thousands):

		December 31, 2009								December 31, 2008
						Accumulated								Accumulated
		Cost				Amortization				Cost				Amortization
Acquisition related intangibles:
Completed technology		$	14,425			$	(4,853	)		$	14,606			$	(2,187	)
Core technology			340				(79	)			340				(11	)
Trade names and trademarks			7,263				(2,269	)			7,168				(1,463	)
Customer contracts and relationships			104,063				(31,382	)			103,852				(22,509	)
			126,091				(38,583	)			125,966				(26,170	)
Non-acquisition related intangibles			23,591				(8,724	)			16,029				(7,543	)
		$	149,682			$	(47,307	)		$	141,995			$	(33,713	)

In 2008, the Company recorded an impairment of $95.2 million for intangible assets, substantially all of which is related to its biometrics business. In 2007, the Company recorded an impairment of $5.0 million for intangible assets related to certain acquired product lines, also related to the biometrics business. See Note 14 for additional information.

Amortization of acquisition related intangible assets for the years ended December 31, 2009, 2008 and 2007, was $9.7 million, $27.7 million and $29.6 million, respectively, of which $4.3 million, $5.3 million and $3.4 million, respectively is included in discontinued operations. Other intangible asset amortization excluding acquisition related amortization was $4.0 million, $3.7 million and $0.5 million for the years ended December 31, 2009, 2008 and 2007, respectively, all of which is included in continuing operations. The following summarizes amortization of acquisition related intangible assets included in continuing operations (in thousands):

		Twelve Months Ended
		December 31,				December 31,				December 31,
		2009				2008				2007
Cost of revenues		$	5,349			$	21,564			$	25,025
General and administrative			—				828				1,227
		$	5,349			$	22,392			$	26,252

Amortization of acquisition related intangible assets for the subsequent five years and thereafter is as follows: $8.8 million, $8.0 million, $7.2 million, $6.6 million, $4.7 million and thereafter is $52.2 million, respectively, of which $4.8 million, $4.4 million, $3.7 million, $3.4 million, $1.6 million and $28.9 million relate to continuing operations, respectively.

L-1 Identity Solutions 2009 Annual Report | F-22

Accounts Payable and Accrued Expenses

Accounts payable and accrued expenses comprise the following as of December 31, 2009 and 2008 (in thousands):

		December 31,
		2009				2008
Accounts payable		$	48,852			$	48,601
Accrued compensation			12,027				16,123
Accrued vacation			8,373				7,874
Accrued subcontractor costs			5,398				7,668
Accrued professional services			4,836				8,196
Accrued retirement plan contributions			6,027				5,701
Other			24,576				23,946
		$	110,089			$	118,109