BIO-key, The leader in biometric security

BIO-key International Newsletter

August 2008

onth, Year - Vol 1, Issue 1

It is my pleasure to issue this corporate status report on the significant progress BIO-key has made in the first half of 2008. This was a period of solid growth for BIO-key International as we achieved profitability on strong revenue growth for our second quarter ending June 30, 2008.

We also announced a major technology partnership with Sagem, the largest biometric company in the world, to market a new and innovative 'fused finger' biometric solution on a world wide basis. This partnership resulted in an initial $2M license order that was announced back in June. The combined Sagem/BIO-key solution will be one of the most accurate and highest performing single and multi-finger matching systems for global civil and commercial biometrics projects. This solution will also be used as we compete for the upcoming FBI next generation IAFIS system. Sagem is the incumbent vendor supporting the current FBI AFIS and we believe our new combined offering will put us in a very competitive position for that program.

Specific details on our second quarter follow. Additional detail can be found in our recently filed Form 10QSB and our second quarter 2008 earnings release. Both documents can be found in the investor relations section on our website at www.bio-key.com .

Total revenue from continuing operations for the quarter ended June 30, 2008 was $3.6 million, an increase of 40.9% from the $2.5 million reported for the quarter ended March 31, 2008. The increase in revenues during the second quarter of 2008 was primarily driven by strong and record growth in our Biometric business. For the quarter ended June 30, 2008, our Biometric revenues were $1.2 million compared to $353,000 in the previous quarter. Revenues from our Law Enforcement business also show solid growth, increasing by 7.8% in the second quarter of 2008 to $2.4 million compared to $2.2 million in the previous quarter.

Our Chairman Tom Colatosti commented on our recent quarter's performance as follows, "These financial results are a milestone event for the company. Indeed, within our emerging industry, few of our peers can match our achievement of GAAP profitability. Our results reflect the efficacy of our strategy, the superiority of our technology, the rising market interest in biometrics and mobile solutions and the commitment of our people."

Along with Tom and the rest of our BIO-key team, I am very pleased to report our first quarter of corporate profitability as well as record quarterly revenues generated by our Biometric business. Many of the initiatives that we deployed over the last few quarters, from partnership agreements with leading technology suppliers and wireless carriers to expense management, have enabled us to achieve our major operating objective - profitable growth. With the achievement of this objective, our management team is now focused on capitalizing on this momentum to achieve sustainable and growing profitability and revenue. We believe the marketing and technology strategies we have developed and our growing pipeline of business have us on the right track to deliver continued operating growth.

Our gross margin for the second quarter of 2008 was 88.2% compared to 82.6% for the previous quarter. The increase in gross margin was primarily attributable to an increase in the mix of biometric revenues reflecting the software license model of the biometrics business. Our operating expenses from continuing operations for the second quarter of 2008 decreased by 5.8% to $2.9 million compared to the quarter ended March 31, 2008, reflecting a continued emphasis on cost containment as the company grows.

Additionally, our net income for the quarter ended June 30, 2008 was $168,000 compared to a net loss of ($915,000) for the quarter ended March 31, 2008.

Highlights for Q2 2008 Include:

$2 Million contract for biometric software from Sagem Morpho, a global technology company (see news block below for more details on this partnership).
$335,000 contract with the Baltimore Police Department (an existing customer), for additional MobileCop software
Contracts with the City of Erlanger, Kentucky Police Department for MobileCop® software and the Kettering Ohio Police Department for MobileOffice™ software
RIM, Sprint and BIO-key sponsored webinar conducted by Government Technology Publications on "Mobile Data Solutions For Today's Police Force," breaking prior attendance records
U.S. Patent & Trademark Office patent issued (No. 7,359,553) covering BIO-key's image enhancement and data extraction core algorithm components
Successful completion of the Bangladesh voter list, registering over 80 million voters in preparation for the upcoming national election

In closing, achieving profitability is only the first of several operating objectives that our management team is focused on delivering to shareholders. We also remain focused on strengthening our balance sheet through non-dilutive strategies. We believe that BIO-key is better positioned than ever to grow, gain market share and create long-term shareholder value. We also believe that we are operating in an increasingly visible and emerging market in biometrics -- as evidenced by global trends -- and we are equally excited about the ongoing development of new solutions in the Law Enforcement sector. Our team will remain focused on achieving near-term and sustained profitability as we believe that BIO-key is better positioned than ever before. Our intention is to manage the Company to create shareholder value in a principled and straightforward fashion. We appreciate our shareholders' continued support and belief in the Company and look forward to updating you further on the Company's financial performance on our next quarterly earnings call.

These accomplishments put us in an enviable position and we look forward to building on the momentum we have established and a great 2008!

Best Regards,

Mike DePasquale

Recent Successes

Sagem Morpho and BIO-key Announce Biometric Partnership Agreement
Fused Biometric Technology to be Marketed Worldwide
Click here to read more

BIO-key Awarded $2 Million Biometric Contract by Multi-National Company
   Click here to read more

Successful Completion of Bangladesh Votor List Celebrated
"80 Million Voters Registered in 11 Months, a milestone towards fair polls and the upcoming national election!"   BIO-key International and Tiger IT deliver largest biometric-based voter credentialing & national ID card solution in the world.  Click here to read more

                          BIO-key Receives $335,000 Contract Award from Baltimore Police
Officers on the Street Have Access to Critical Data with MobileCop® Software.
  Click here to read more