Introduction

The following discussion and analysis should be read in conjunction with the consolidated financial statements and the accompanying notes contained in our 2007 Annual Report on Form 10-K and the condensed consolidated financial statements and the accompanying notes contained in this Quarterly Report on Form 10-Q.

Business Overview

L-1 Identity Solutions, Inc. and its subsidiaries provide identity solutions and services that enable governments, law enforcement agencies and businesses to enhance security, reduce identity theft and protect personal privacy. L-1's identity solutions are specifically designed for the identification of people and include secure credentialing, biometrics capture and access devices, automated document authentication, automated biometric identification systems, and biometrically-enabled background checks, as well as systems design, development, integration and support services. These identity solutions enable L-1's customers to manage the entire life cycle of an individual's identity for a variety of applications including civil identification, criminal identification, commercial, border management, military, antiterrorism and national security. L-1 also provides comprehensive consulting, training, security, technology development, and information technology solutions to the U.S. intelligence community.

The Company's identity solutions combine products and related services, consisting of hardware, components, consumables and software, as well as maintenance, consulting and training services integral to sales of hardware and software. The Company also provides fingerprinting enrollment services and government consulting, training, security, technology development and information technology services. 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.

Consumers of identity protection solutions are demanding end-to-end solutions with increased functionality that can solve their spectrum of needs across the identity life cycle. Our objective is to meet those growing needs by continuing to broaden our product and solution offerings to meet our customer needs, leveraging our existing customer base to provide additional products and services, expanding our customer base both domestically and abroad, and augmenting our competitive position through strategic acquisitions. We evaluate our business primarily through financial metrics such as revenues, operating income (loss) and earnings before interest, income taxes, depreciation and amortization, asset impairments and in-process research and development charges, and stock-based compensation expense ("Adjusted EBITDA"), as well as free cash flow.

Our revenues increased to $154.5 million and $415.4 for the three and nine months ended September 30, 2008, respectively, from $115.5 million and $275.6 million for the three and nine months ended September 30, 2007. Our net income (loss) for the three months and nine months ended September 30, 2008 was ($1.2) million and $0.1 million, respectively, compared to net income (loss) of $1.5 million and ($8.6) million for the three months and nine months ended September 30, 2007, respectively.

Sources of Revenues

Our Secure Credentialing Division generates revenues from the sales of biometric solutions consisting of bundled proprietary software with commercial off-the-shelf equipment and related maintenance and services, the sale of secure printing solutions and related consumables, and the design, customization and installation of secure credential issuance systems which generate revenues as the credentials are issued by the customer. The division also generates revenues from solutions using biometric technologies of other divisions. The division is included in our Identity Solutions segment.

Our Biometrics Division, also included in our Identity Solutions segment, generates revenues from the sale of biometric solutions incorporating fingerprint, facial, skin and iris biometrics and system components necessary for the biometric capture and knowledge discovery. The Biometric Division's offerings include Live Scan and mobile systems and services for biometric capture and identification, systems and biometric solutions that include modules and software for biometric matching and verification. Revenues are generated by sales of hardware, software and maintenance and other services. The division also generates revenues through the development, customization and sale of biometrics solutions using iris technology which typically consists of proprietary multi-biometric capture devices bundled together with our proprietary software and other biometric technologies, sales of licenses and software and fingerprinting authentication and identification solutions to state and local governments.

Our Enterprise Access Division generates revenues from the sales of biometric access control units and technologies. Its VeriSoft software application is included on personal computers and its 3D facial recognition technology is used by the largest casino in the world. The division is included in the Identity Solutions segment.

Our Enrollment Services Division, included in our Services segment, generates revenues through the sales of enrollment and background screening products and services.

Our government services division consists of SpecTal, LLC ("SpecTal"), which generates revenues primarily from government contracts to provide comprehensive security consulting services to U.S. government intelligence agencies, McClendon LLC ("McClendon"), which generates revenues primarily from government contracts to provide technical and professional services to the U.S. intelligence and military communities and Advanced Concepts, Inc. ("ACI"), which generates revenues primarily from government contracts to provide information technology and network security solutions, and system engineering and development services for the U.S. intelligence and military communities.

We market our solutions and services primarily to U.S. and foreign, federal, state and local government agencies and law enforcement agencies. We also are working to expand the use of our solutions in commercial markets, particularly financial services, transportation and healthcare. In a typical contract with a government entity for an identity solution, we design the system, supply and install equipment and software and integrate the solution within the entity's existing network infrastructure and provide maintenance services. These contracts may be structured as fixed price contracts with payments made upon completion of agreed milestones or deliveries and with each milestone or delivery typically having a value specified in the contract. Alternatively, these contracts may be paid at a fixed price per credential issued as is typical in the drivers' license market, per fingerprint delivered in the case of our fingerprinting services or on a time and material and fixed price level of effort basis for our government services.

Growth in our revenues is dependent on among other things the success of certain acquisitions we have consummated, as well as increasing demand for our identity solutions related to heightened emphasis on security, secure credentials, document authentication and biometrics. We anticipate that the U.S. government agencies will continue to be major customers for the foreseeable future. Any delay or decrease in funding in major government programs or in the rollout of these programs could cause our revenues to fall short of expectations. We also expect to experience increased demand from a number of other government entities as they deploy identity solutions, particularly document authentication, at points of entry and exit, including borders, seaports and airports and in connection with national identification programs. Notwithstanding our expectations regarding demand for these solutions, the quantity and timing of orders from both U.S. and foreign government entities depends on a number of factors outside of our control, such as the level and timing of budget appropriations.

Acquisitions

We have pursued strategic acquisitions to complement and expand our existing solutions and services. Our acquisitions since January 1, 2007 include:

• Our August 2008 acquisition of the Secure ID business of Digimarc Corporation ("Old Digimarc"), which provides secure credentialing systems to state and local government agencies;

• Our March 2008 acquisition of Bioscrypt, which provides enterprise access control to over 400 global customers and its VeriSoft software application is now included on personal computers. In addition, its 3D facial recognition is used by the largest casino in the world to provide access control;

• Our July 2007 acquisitions of McClendon and ACI, which provide technical, network security and professional services to the U.S. intelligence military communities;

• Our February 2007 acquisition of ComnetiX, which creates an important presence for us in the Canadian market by adding a complementary base of customers to our portfolio, particularly within the law enforcement community;

The acquisitions have resulted in the consolidation of certain marketing resources, corporate functions of the separate entities and are expected to have a continuing material effect on our operations resulting from, but not limited to:

• Expected synergies resulting from providing a comprehensive product line to current and future customers.

• Expected future growth in revenues and profits from expanded markets for identity solutions.

• Enhancement of technical capabilities resulting from combining the intellectual capital of the acquired businesses.

• Rationalization of technology costs and research and development activities.

• Realignment of the businesses to complement each business' unique capabilities and rationalizing costs.

• Leveraging the Company's infrastructure to achieve higher revenues and profitability.

Reportable Segments and Geographic Information

We operate in two reportable segments, the Identity Solutions segment and the Services segment. During the first quarter of 2008, we integrated the authentication and identification business of ComnetiX in the Identity Solutions segment and the fingerprinting services business in the Services segment. Accordingly, the segment data for the three and nine months ended September 30, 2007 has been reclassified to conform to the current presentation. The effects of the reclassification were not material to the segment information. We measure segment performance based on revenues, operating income (loss), Adjusted EBITDA and free cash flow. Operating results by segment, including allocation of corporate expenses, for the three months ended September 30, 2008 and 2007 were as follows (in thousands):

                                                Three months ended                       Nine months ended
                                         September 30,       September 30,       September 30,       September 30,
                                             2008                2007                2008                2007

Identity Solutions:
Revenues                                $        82,024     $        62,006     $       203,869     $       155,316
Gross Profit                                     29,459              24,632              73,420              55,894
Operating Income (Loss)                           2,179               4,743               2,910                (635 )
Adjusted EBITDA                                  16,811              14,503              37,556              29,209
Depreciation and Amortization Expense            12,338               8,070              27,911              24,320
Services:
Revenues                                         72,440              53,533             211,543             120,329
Gross Profit                                     17,815              12,980              52,834              27,642
Operating Income                                  4,187               1,910              12,426               3,387
Adjusted EBITDA                                   7,322               4,616              21,769               9,716
Depreciation and Amortization Expense             2,140               1,896               6,461               4,065
Consolidated:
Revenues                                        154,464             115,539             415,412             275,645
Gross Profit                                     47,274              37,612             126,254              83,536
Operating Income                                  6,366               6,653              15,336               2,752
Adjusted EBITDA                                  24,133              19,119              59,325              38,925
Depreciation and Amortization Expense            14,478               9,966              34,372              28,385

Revenues by market for the three and nine months ended September 30, 2008 and September 30, 2007 were as follows (in thousands):

                          Three months ended                       Nine months ended
                   September 30,       September 30,       September 30,       September 30,
                       2008                2007                2008                2007

State and local   $        57,332     $        29,923     $       122,259     $        87,141
Federal                    88,153              82,646             273,574             180,834
Commercial                  8,979               2,970              19,579               7,670

                  $       154,464     $       115,539     $       415,412     $       275,645

Revenues are attributed to each region based on the location of the customer. The following is a summary of revenues by geographic region (in thousands):

                                            Three months ended                        Nine months ended
                                    September 30,        September 30,        September 30,        September 30,
                                        2008                 2007                 2008                 2007

United States                      $       140,968      $       109,935      $       381,165      $       253,953
Rest of the World                           13,496                5,604               34,247               21,692

                                   $       154,464      $       115,539      $       415,412      $       275,645

We use Adjusted EBITDA as a non-GAAP financial performance measurement for segments. Adjusted EBITDA is calculated by adding back to net income (loss):
interest-net, income taxes, depreciation and amortization, intangible asset impairments, in-process research and development charges, and stock-based compensation expense. Adjusted EBITDA is provided to investors to supplement the results of operations reported in accordance with GAAP. Management believes Adjusted EBITDA is useful to help investors analyze the operating trends of the business before and after the adoption of SFAS No. 123 (R) and to assess the relative underlying performance of businesses with different capital and tax structures. Management believes that Adjusted EBITDA provides an additional tool for investors to use in comparing our financial results with other companies in the industry, many of which also use Adjusted EBITDA in their communications to investors. By excluding non-cash charges such as amortization and depreciation, stock-based compensation expense, intangible asset impairments and in-process research and development charges, as well as non-operating charges for interest-net and income taxes, investors can evaluate our operations and can compare our results on a more consistent basis to the results of other companies in the industry. Management also uses Adjusted EBITDA to evaluate potential acquisitions, establish internal budgets and goals, and evaluate performance of our business units and management.

We consider Adjusted EBITDA to be an important indicator of our operational strength and performance of our business and a useful measure of our historical and prospective operating trends. However, there are significant limitations to the use of Adjusted EBITDA since it excludes interest income and expense and income taxes, all of which impact our profitability as well as depreciation and amortization related to the use of long-term assets which benefit multiple periods. We believe that these limitations are compensated for by providing Adjusted EBITDA only with GAAP performance measures and clearly identifying the difference between the two measures. Consequently, Adjusted EBITDA should not be considered in isolation or as a substitute for net income (loss), or operating income (loss) presented in accordance with GAAP. Adjusted EBITDA as defined by the Company may not be comparable with similarly named measures provided by other entities.

A reconciliation of GAAP net income (loss) to Adjusted EBITDA is as follows (in thousands):

                                                  Three months ended                        Nine months ended
                                          September 30,        September 30,        September 30,        September 30,
                                               2008                2007                 2008                 2007

Net income (loss)                        $         (1,186 )   $         1,470     $             111     $        (8,557 )
Reconciling items:
Provision (benefit) for income taxes                 (435 )             1,486                   544               3,781
Interest - net                                      7,693               3,508                14,152               7,386
Stock-based compensation                            3,583               2,689                10,146               7,930
Depreciation and amortization                      14,478               9,966                34,372              28,385

Adjusted EBITDA                          $         24,133     $        19,119     $          59,325     $        38,925

For the three month and nine month periods ended September 30, 2008, U.S. Federal Government agencies, directly or indirectly, accounted for 57% and 66% of consolidated revenues, respectively, of

which the largest five agencies represented 46% and 50% of consolidated revenues, respectively. For the three month and nine month periods ended September 30, 2007, U.S. Federal Government agencies, directly or indirectly, accounted for 72% and 66% of consolidated revenues, respectively of which the largest five agencies represent 45% and 44%, respecitvely. As of September 30, 2008 and 2007, the Company had an accounts receivable balance of approximately $42.8 million and $41.4 million directly from the largest five U.S. Federal Government agencies, respectively.

RESULTS OF OPERATIONS

Consolidated Results of Operations

The comparative results of operations for 2008 and 2007 have been affected by the July 2007 acquisitions of ACI and McClendon, the March 2008 acquisition of Bioscrypt and the August 2008 acquisition of Old Digimarc (collectively the "Acquisitions").