UNITED
      STATES


SECURITIES
      AND EXCHANGE COMMISSION


Washington,
      D.C. 20549





**FORM
      10-Q**





QUARTERLY
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF


THE
      SECURITIES EXCHANGE ACT OF 1934





For
      the
      Quarterly Period Ended September 30, 2007







**LASERCARD
      CORPORATION**


(Exact
      name of registrant as specified in its charter)





**Delaware**
              
              (State
                or other jurisdiction of incorporation or organization)
            0-6377
              
              (Commission
                File Number)
            77-0176309
              
              (I.R.S.
                Employer Identification No.)





1875
      North Shoreline Boulevard, Mountain View, California 94043-1319


(Address
      of principal executive offices) (Zip Code)





(650)
      969-4428


(Registrant's
      telephone number, including area code)





Indicate
      by check mark whether the registrant (1) has filed all reports required to
      be
      filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
      the
      preceding 12 months (or for such shorter period that the registrant was required
      to file such reports) and (2) has been subject to such filing requirements
      for
      the past 90 days.   [x] Yes  [  ]
      No





Indicate
      by check mark whether the registrant is a large accelerated filer, an
      accelerated filer, or a non-accelerated filer.  See definition of
“accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange
      Act.  (Check one):





Large
                accelerated filer [  ]
            Accelerated
                filer [x]
            Non-accelerated
                filer [  ]








Indicate
      by check mark whether the registrant is a shell company (as defined in Rule
      12b-2 of the Exchange Act).   [  ] Yes  [x]
      No





Number
      of
      outstanding shares of common stock, $.01 par value, at November 5,
      2007:  11,965,435






Exhibit
      Index is on Page 42






Total
      number of pages is 47



















**TABLE
                OF CONTENTS**PART
                I.
            FINANCIAL
                INFORMATION
            Page
                NumberItem
                1.
            Condensed
                Consolidated Financial Statements (Unaudited)
            2Condensed
                Consolidated Balance Sheets (Unaudited)
            3Condensed
                Consolidated Statements of Operations (Unaudited)
            4Condensed
                Consolidated Statements of Cash Flows (Unaudited)
            5Notes
                to Condensed Consolidated Financial Statements (Unaudited)
            6Item
                2.
            Management’s
                Discussion and Analysis of Financial Condition and Results of
                Operations
            20Item
                3.
            Quantitative
                and Qualitative Disclosures about Market Risk
            30Item
                4.
            Controls
                and Procedures
            31PART
                II.
            OTHER
                INFORMATIONItem
                1.
            Legal
                Proceedings
            31Item
                1A.
            Risk
                Factors
            31Item
                2.
            Unregistered
                Sales of Equity Securities and Use of Proceeds
            39Item
                3.
            Defaults
                Upon Senior Securities
            39Item
                4.
            Submission
                of Matters to a Vote of Security Holders
            39Item
                5.
            Other
                Information
            39Item
                6.
            Exhibits
            39SIGNATURES
            
            41EXHIBIT
                INDEX
            
            42







PART
                I.
            FINANCIAL
                INFORMATIONITEM
                1.
            CONDENSED
                CONSOLIDATED FINANCIAL STATEMENTS
                (UNAUDITED)










2





**LASERCARD
      CORPORATION AND SUBSIDIARIES**


**CONDENSED
      CONSOLIDATED BALANCE SHEETS**


**(In
      thousands)**





September
                  30,2007
              
              
              March
                  31,(Unaudited)
              
              
              2007*ASSETSCurrent
                  assets:Cash
                  and cash equivalents
              
              $
              3,022
              
              
              $
              3,026Short-term
                  investments
              
              
              15,500
              
              
              
              17,500Accounts
                    receivable, net of allowance of $84 at September 30, 2007and $144
                    at March 31, 2007
              
              
              3,907
              
              
              
              3,489Inventories,
                    net of reserve of $828 at September 30, 2007and $837 at March 31,
                    2007
              
              
              11,824
              
              
              
              11,462Deferred
                  contract costs
              
              
              327
              
              
              
              233Prepaid
                  and other current assets
              
              
              1,047
              
              
              
              1,594Total
                  current assets
              
              
              35,627
              
              
              
              37,304Property
                  and equipment, net
              
              
              12,393
              
              
              
              12,988Deferred
                  long-term contract costs
              
              
              611
              
              
              
              721Equipment
                  held for resale
              
              
              6,502
              
              
              
              6,340Patents
                  and other intangibles, net
              
              
              390
              
              
              
              411Notes
                  receivable
              
              
              240
              
              
              
              227Other
                  non-current assets
              
              
              109
              
              
              
              109Total
                  assets
              
              $
              55,872
              
              
              $
              58,100LIABILITIES
                  AND STOCKHOLDERS' EQUITYCurrent
                  liabilities:Accounts
                  payable
              
              $
              2,320
              
              
              $
              2,284Accrued
                  liabilities
              
              
              2,442
              
              
              
              2,989Deferred
                  income tax
              
              
              283
              
              
              
              388Advance
                  payments from customers
              
              
              1,124
              
              
              
              1,838Deferred
                  revenue
              
              
              1,253
              
              
              
              1,584Capital
                  lease obligation
              
              
              27
              
              
              
              -Total
                  current liabilities
              
              
              7,449
              
              
              
              9,083Capital
                  lease obligation, net of current portion
              
              
              81
              
              
              
              -Advance
                  payments from customers
              
              
              23,554
              
              
              
              23,554Deferred
                  revenue
              
              
              2,462
              
              
              
              2,000Deferred
                  rent
              
              
              1,017
              
              
              
              864Total
                  liabilities
              
              
              34,563
              
              
              
              35,501Stockholders'
                  equity:Common
                  stock
              
              
              119
              
              
              
              119Additional
                  paid-in capital
              
              
              62,546
              
              
              
              61,068Accumulated
                  deficit
              
              
              (41,517
              )
              
              
              (38,722
              )Accumulated
                  other comprehensive income
              
              
              161
              
              
              
              134Total
                  stockholders' equity
              
              
              21,309
              
              
              
              22,599Total
                  liabilities and stockholders’ equity
              
              $
              55,872
              
              
              $
              58,100*Amounts
                  derived from audited financial statements at the date
                  indicated.The
                  accompanying notes are an integral part of these condensed consolidated
                  financial statements.
  3





**LASERCARD
      CORPORATION AND SUBSIDIARIES**


**CONDENSED
      CONSOLIDATED STATEMENTS OF OPERATIONS**


**(UNAUDITED)**


**(In
      thousands, except per share amounts)**





Three
                  Months Ended
              
              
              Six
                  Months EndedSeptember
                  30
              
              
              September
                  302007
              
              
              2006
              
              
              2007
              
              
              2006Revenues
              
              $
              10,739
              
              
              $
              6,294
              
              
              $
              18,594
              
              
              $
              16,848Cost
                  of sales (includes $72 and $138 stock-basedcompensation
                  in the three and six-month periodsended
                  September 30, 2007 and $81 and $168 in the threeand
                  six-month periods ended September 30, 2006, respectively)
              
              
              7,550
              
              
              
              5,466
              
              
              
              13,744
              
              
              
              11,855Gross
                  profit
              
              
              3,189
              
              
              
              828
              
              
              
              4,850
              
              
              
              4,993Operating
                  expenses:Selling,
                  general, and administrative expenses (includes$340
                  and $651 stock-based compensation in the threeand
                  six-month periods ended September 30, 2007 and$231
                  and $471 in the three and six-month periods endedSeptember
                  30, 2006, respectively)
              
              
              3,281
              
              
              
              2,998
              
              
              
              6,770
              
              
              
              6,418Research
                  and development expenses (includes $61 and $121stock-based
                  compensation in the three and six-monthperiods
                  ended September 30, 2007 and $102 and $208 in the threeand
                  six-month periods ended September 30, 2006, respectively)
              
              
              704
              
              
              
              800
              
              
              
              1,492
              
              
              
              1,545Total
                  operating expenses
              
              
              3,985
              
              
              
              3,798
              
              
              
              8,262
              
              
              
              7,963Operating
                  loss
              
              
              (796
              )
              
              
              (2,970
              )
              
              
              (3,412
              )
              
              
              (2,970
              )Other
                  income, net
              
              
              189
              
              
              
              233
              
              
              
              430
              
              
              
              439Loss
                  before income taxes
              
              
              (607
              )
              
              
              (2,737
              )
              
              
              (2,982
              )
              
              
              (2,531
              )Income
                  tax expense (benefit)
              
              
              (109
              )
              
              
              (65
              )
              
              
              (125
              )
              
              
              (71
              )Net
                  loss
              
              $
              (498
              )
              
              $
              (2,672
              )
              
              $
              (2,857
              )
              
              $
              (2,460
              )Net
                  loss per share:Basic
              
              $
              (0.04
              )
              
              $
              (0.23
              )
              
              $
              (0.24
              )
              
              $
              (0.21
              )Diluted
              
              $
              (0.04
              )
              
              $
              (0.23
              )
              
              $
              (0.24
              )
              
              $
              (0.21
              )Weighted-average
                  shares of common stockused
                  in computing net loss per share:Basic
              
              
              11,899
              
              
              
              11,816
              
              
              
              11,883
              
              
              
              11,792Diluted
              
              
              11,899
              
              
              
              11,816
              
              
              
              11,883
              
              
              
              11,792The
                  accompanying notes are an integral part of these condensed consolidated
                  financial statements.
  4
  **LASERCARD
      CORPORATION AND SUBSIDIARIES**


**CONDENSED
      CONSOLIDATED STATEMENTS OF CASH FLOWS**


**(UNAUDITED)**


**(In
      thousands)**


Six
                  Months EndedSeptember
                  30,2007
              
              
              2006Cash
                  flows from operating activities:Net
                  loss
              
              $
              (2,857
              )
              
              $
              (2,460
              )Adjustments
                  to reconcile net loss to net cash used in operating
                  activities:Depreciation
                  and amortization
              
              
              1,465
              
              
              
              1,323Loss
                  on disposal of equipment
              
              
              2
              
              
              
              -Provision
                  for doubtful accounts receivable
              
              
              13
              
              
              
              23Provision
                  for excess and obsolete inventory
              
              
              50
              
              
              
              120Provision
                  for warranty reserve
              
              
              90
              
              
              
              97Stock-based
                  compensation
              
              
              910
              
              
              
              847Changes
                  in operating assets and liabilities:Decrease
                  (increase) in accounts receivable
              
              
              (331
              )
              
              
              2,279Increase
                  in inventories
              
              
              (303
              )
              
              
              (574
              )Decrease
                  (increase) in deferred contract costs
              
              
              169
              
              
              
              (1,035
              )Decrease
                  (increase) in prepaid and other current assets
              
              
              566
              
              
              
              (633
              )Increase
                  in equipment held for resale
              
              
              (161
              )
              
              
              (267
              )Decrease
                  (increase)  in other non-current assets
              
              
              (152
              )
              
              
              50Decrease
                  in accounts payable and accrued
              
              
              (626
              )
              
              
              (2,272
              )Decrease
                  in deferred income tax
              
              
              (124
              )
              
              
              (41
              )Increase
                  in deferred revenue
              
              
              107
              
              
              
              47Increase
                  in long-term deferred rent
              
              
              153
              
              
              
              116Decrease
                  (increase) in advance payments from customers
              
              
              (720
              )
              
              
              1,371Net
                  cash used in operating activities
              
              
              (1,749
              )
              
              
              (1,009
              )Cash
                  flows from investing activities:Purchases
                  of property and equipment
              
              
              (581
              )
              
              
              (1,494
              )Acquisition
                  of patents and other intangibles
              
              
              (42
              )
              
              
              (58
              )Purchases
                  of short-term investments
              
              
              (6,000
              )
              
              
              (15,600
              )Proceeds
                  from maturities of short-term investments
              
              
              8,000
              
              
              
              17,150Net
                  cash provided by (used in) investing activities
              
              
              1,377
              
              
              
              (2
              )Cash
                  flows from financing activities:Proceeds
                  from sale of common stock through stock plans
              
              
              568
              
              
              
              748Principal
                  payments on capital lease obligation
              
              
              (2
              )
              
              
              -Net
                  cash provided by financing activities
              
              
              566
              
              
              
              748Effect
                  of exchange rate changes on cash and cash equivalents
              
              
              (198
              )
              
              
              (61
              )Net
                  decrease in cash and cash equivalents
              
              
              (4
              )
              
              
              (324
              )Cash
                  and cash equivalents:Beginning
                  of period
              
              
              3,026
              
              
              
              2,121End
                  of period
              
              $
              3,022
              
              
              $
              1,797Supplemental
                  schedule of non-cash investing activities:Equipment
                  acquired under capital lease
              
              $
              113
              
              
              $
              -The
                  accompanying notes are an integral part of these condensed consolidated
                  financial statements.
  5
  **LASERCARD
        CORPORATION AND SUBSIDIARIES**
 **NOTES
        TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **(UNAUDITED)**





**1.
      Basis of Presentation**





The
      unaudited condensed consolidated
      financial statements contained herein include the accounts of LaserCard
      Corporation (the “Company” and “we”) and its wholly owned subsidiaries. All
      significant intercompany accounts and transactions have been eliminated in
      consolidation. The consolidated balance sheet data as of March 31, 2007 was
      derived from audited financial statements, but does not include all disclosures
      required by U.S. generally accepted accounting principles.





The
      condensed consolidated financial
      statements included herein have been prepared by the Company, without audit,
      pursuant to the rules and regulations of the Securities and Exchange Commission
      (SEC).  Certain information and footnote disclosures normally included
      in financial statements prepared in accordance with U.S. generally accepted
      accounting principles have been condensed or omitted pursuant to such rules
      and
      regulations, although the Company believes the disclosures which are made herein
      are adequate to make the information presented not
      misleading.  Further, the condensed consolidated financial statements
      reflect, in the opinion of management, all adjustments (which include only
      normal recurring adjustments) necessary to present fairly the financial position
      and results of operations as of and for the periods indicated.





These
      condensed consolidated
      financial statements should be read in conjunction with the audited consolidated
      financial statements and the notes thereto for the fiscal year ended
      March 31, 2007, included in the Company's Annual Report on Form 10-K, filed
      with the SEC on June 12, 2007.





The
      results of operations for the
      three and six-month periods ended September 30, 2007 are not necessarily
      indicative of results to be expected for the entire fiscal year ending
      March 31, 2008 or future interim periods.




*Recently
      Adopted Accounting
      Pronouncements:*  In June 2006, the Financial Accounting Standards
      Board (“FASB”) issued Interpretation No. 48, “Accounting for Uncertainty in
      Income Taxes—an interpretation of FASB Statement No. 109” (“FIN 48”). This
      Interpretation clarifies the accounting for uncertainty in income taxes
      recognized in the Company’s financial statements in accordance with FASB
      Statement No. 109, Accounting for Income Taxes. FIN 48 prescribes a
      recognition threshold and measurement attribute for the financial statement
      recognition and measurement of a tax position taken or expected to be taken
      in a
      tax return. This Interpretation also provides guidance on derecognition,
      classification, interest and penalties, accounting in interim periods,
      disclosure, and transition. The evaluation of a tax position in accordance
      with
      FIN 48 is a two-step process. The first step is recognition: The Company
      determines whether it is “more-likely-than-not” that a tax position will be
      sustained upon examination, including resolution of any related appeals or
      litigation processes, based on the technical merits of the position. In
      evaluating whether a tax position has met the “more-likely-than-not” recognition
      threshold, the Company presumes that the position will be examined by the
      appropriate taxing authority that would have full knowledge of all relevant
      information. The second step is measurement: A tax position that meets the
      “more-likely-than-not” recognition threshold is measured to determine the amount
      of benefit to recognize in the financial statements. The tax position is
      measured at the largest amount of benefit that is greater than 50 percent likely
      to be realized upon ultimate settlement. FIN 48 is effective for fiscal years
      beginning after December 15, 2006.




Upon
      adoption of FIN 48 on April 1,
      2007, the Company recognized a cumulative effect adjustment of $62,000,
      decreasing its income tax liability for unrecognized tax benefits, and
      decreasing the March 31, 2007 accumulated deficit balance. At September 30,
      2007, the Company has recorded unrecognized tax benefits of
      $202,000.  The Company does not expect any material change in its
      unrecognized tax benefits over the next twelve months.





The
      Company recognizes interest and
      penalties accrued on any unrecognized tax benefits as a component of its
      provision for income taxes. As of September 30, 2007, the Company has accrued
      $48,000 for payment of interest and penalties related to unrecognized tax
      benefits.




6




**LASERCARD
        CORPORATION AND SUBSIDIARIES**
 **NOTES
        TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **(UNAUDITED)**




The
      table below shows the changes in
      the accumulated deficit as of September 30, 2007 (in thousands):




Balance
                  at March 31, 2007, as reported
              
              $
              (38,722
              )FIN
                  48 adjustments to beginning balance
              
              
              62Net
                  loss during the period
              
              
              (2,857
              )Balance
                  at September 30, 2007
              
              $
              (41,517
              )


Although
      the Company files U.S.
      federal, various state, and foreign tax returns, the Company’s only major tax
      jurisdictions are the United States, California and Germany.  Tax years
      1993 – 2007 remain subject to examination by the appropriate governmental
      agencies due to tax loss carryovers from those years.




*Recently
      Issued Accounting
      Pronouncements:*In June, 2007, the EITF reached a consensus, EITF Issue No.
      07-3 (EITF 07-3) “Accounting for Nonrefundable Advance Payments for Goods or
      Services to Be Used in Future Research and Development Activities,” that
      requires companies to defer and capitalize prepaid, nonrefundable research
      and
      development payments to third parties over the period that the research and
      development activities are performed or the services are provided, subject
      to an
      assessment of recoverability. The guidance is effective for new contracts
      entered into in fiscal years beginning after December 15, 2007, including
      interim periods within those fiscal years.  Earlier application is not
      permitted.  The company believes that application of this guidance
      would not have a material impact on its condensed consolidated financial
      statements.




In
      September 2006, the FASB issued
      Statement No. 157, “Fair Value Measurements” (“SFAS No. 157”). SFAS No. 157
      defines fair value, establishes a framework for measuring fair value in
      generally accepted accounting principles, and expands disclosures about fair
      value measurements. SFAS No. 157 is intended to be applied in conjunction with
      other accounting pronouncements that require or permit fair value measurements.
      Although SFAS No. 157 does not require any new fair value measurements, its
      application may change current practice for some entities. The definition of
      fair value contained in SFAS No. 157 retains the exchange price notion inherent
      in earlier definitions of fair value. SFAS No. 157 clarifies that the exchange
      price is the price in an orderly transaction between market participants to
      sell
      an asset or transfer a liability in the principal (or most advantageous) market
      for the asset or liability. Accordingly, the definition focuses on the price
      that would be received to sell the asset or paid to transfer the liability
      at
      the measurement date (an exit price), not the price that would be paid to
      acquire the asset or received to assume the liability at the measurement date
      (an entry price). SFAS No. 157 emphasizes that fair value is a market-based
      measurement, not an entity-specific measurement. Therefore, SFAS No. 157
      prescribes that a fair value measurement be determined based on the assumptions
      that market participants would use in pricing the asset or liability. The
      Company has not yet determined what impact this statement will have on its
      condensed consolidated financial statements.





In
      February 2007, the FASB issued
      SFAS No. 159, “The Fair Value Option for Financial Assets and Financial
      Liabilities” (“SFAS No. 159”). SFAS No. 159 provides entities with an option to
      report selected financial assets and liabilities at fair value, with the
      objective to reduce both the complexity in accounting for financial instruments
      and the volatility in earnings caused by measuring related assets and
      liabilities differently.  SFAS No. 159 is effective for fiscal years
      beginning after November 15, 2007.  The Company has not yet determined
      what impact this statement will have on its condensed consolidated financial
      statements.





**2.
      Summary of Significant Accounting Policies**





*(1.)
      Principles of Consolidation
      and Basis of Presentation.*  The accompanying condensed
      consolidated financial statements have been prepared in accordance with U.S.
      generally accepted accounting principles. The condensed consolidated financial
      statements include the accounts of LaserCard Corporation and its wholly owned
      subsidiaries. All significant intercompany accounts and transactions have been
      eliminated in consolidation.





*(2.)
      Use of
      Estimates*.  The preparation of condensed consolidated financial
      statements in conformity with U. S. generally accepted accounting
      principles requires management to make estimates and assumptions that affect
      the
      reported amounts of assets and liabilities and disclosure of contingent assets
      and liabilities at the date of the financial statements and the reported amounts
      of revenues and expenses during the reporting period. Actual results could
      differ from those estimates.




7




**LASERCARD
        CORPORATION AND SUBSIDIARIES**
 **NOTES
        TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **(UNAUDITED)**




*(3.)
      Fiscal
      Period*.  For purposes of presentation, the Company labels its
      annual accounting period end as March 31 and its quarterly accounting
      period ends as June 30, September 30 and December 31.  The Company, in
      fact, operates and reports based on quarterly periods ending on the Friday
      closest to month end.  The 13-week second quarter of fiscal year 2008
      ended on September 28, 2007, and the 13-week second quarter of fiscal year
      2007
      ended on September 29, 2006.





*(4.)**Foreign
      Currency
      Transactions*. The functional currency of the Company's foreign subsidiary
      is generally the local currency. The financial statements of this subsidiary
      are
      translated to United States dollars using period-end rates of exchange for
      assets and liabilities and average rates of exchange for the period for revenues
      and expenses. Translation gains (losses) are recorded in accumulated other
      comprehensive income as a component of stockholders' equity. Net gains and
      losses resulting from foreign exchange transactions are included in selling,
      general and administrative expenses and were not significant during the periods
      presented.





*(5.)
      Derivative Financial Instruments.*The Company uses short-term foreign
      exchange forward contracts to mitigate foreign currency risk associated
      primarily with inter-company receivables and payables, and loan receivables
      (denominated in Euros) with its German subsidiary. Our foreign exchange forward
      contracts are not designated for accounting purposes as hedging instruments
      under SFAS No. 133, “Accounting for Derivative Instruments and Hedging
      Activities,” as amended.  Accordingly, any gains or losses resulting
      from changes in the fair value of the forward contracts are reported in other
      income. The gains and losses on these forward contracts generally offset gains
      and losses associated with the underlying foreign currency denominated
      inter-company receivables and payables, and loans receivable.  At
      September 30, 2007, we had foreign exchange forward contracts with a maturity
      of
      less than 30 days to purchase 2.3 million euros.  The fair value of
      the forward contracts was not material at September 30, 2007 and March 31,
      2007.





*(6.)
      Concentrations of Risk.* Financial instruments that potentially subject the
      Company to significant concentrations of credit risk consist principally of
      cash, cash equivalents, short-term investments, long-term investments and
      accounts receivable. The Company places its cash, cash equivalents, and
      short-term and long-term investments in high-credit quality financial
      institutions. The Company is exposed to credit risk in the event of default
      by
      these institutions to the extent of the amount recorded on the condensed
      consolidated balance sheet. As of September 30, 2007, the Company’s short-term
      investments consist of auction rate securities and there were no long-term
      investments. Accounts receivable are derived from revenue earned from customers
      primarily located in the United States, Italy, Middle East and Germany. The
      Company performs ongoing credit evaluations of its customers’ financial
      condition and generally does not require collateral. The Company maintains
      reserves for potential credit losses and historically, such losses have been
      immaterial.





*(7.)
      Major Customers.*The
      following customers accounted for more than 10% of revenues for the periods
      shown below.  The revenue from these customers was attributable to
      both the optical memory card and the optical card drive segments.  No
      other customer accounted for more than 10% of revenues during these
      periods.




Three
                  Months Ended
              
              
              Six
                  Months EndedSeptember
                  30,
              
              
              September
                  30,2007
              
              
              2006
              
              
              2007
              
              
              2006Customer
                  A
              
              
              30%
              
              
              
              39%
              
              
              
              33%
              
              
              
              32%Customer
                  B
              
              
              30%
              
              
              
              ―
              
              
              
              23%
              
              
              
              ―Customer
                  C
              
              <10%
              
              
              <10%
              
              
              <10%
              
              
              
              14%Customer
                  D
              
              
              ―
              
              
              
              ―
              
              
              
              ―
              
              
              
              13%





Two
      customers accounted for 36% and
      19%, respectively, of accounts receivable at September 30, 2007.  Two
      customers accounted for 31% and 17%, respectively, of accounts receivable at
      March 31, 2007.




8




**LASERCARD
        CORPORATION AND SUBSIDIARIES**
 **NOTES
        TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **(UNAUDITED)**


*(8.)
      Cash and Cash Equivalents, Short-term Investments and Long-term
      Investments*.  The Company considers all highly liquid
      investments, consisting primarily of commercial paper, discount notes and U.S.
      government bonds, with maturities of three months or less at the date of
      purchase, to be cash equivalents.  Cash and cash equivalents were $3
      million at September 30, 2007 and March 31, 2007.  As of September 30,
      2007 and March 31, 2007, the Company held auction rate securities which had
      been
      accounted for as available-for-sale and classified as short-term
      investments.  The fair values of the auction rate securities, based on
      quoted market prices, were substantially equal to their carrying costs due
      to
      the frequency of the reset dates.  Short-term investments also include
      investments with maturities at date of purchase of more than three months and
      investments with remaining maturities of less than one year.  All
      investments with maturities at date of purchase greater than one year are
      classified as long-term investments.  Management determines the
      appropriate classification of debt securities at the time of purchase and
      re-evaluates the classification of investments as of each balance sheet
      date.





All
      short-term investments, except
      for auction rate securities which are recorded at fair value, and long-term
      investments are classified as held-to-maturity and are stated in the condensed
      consolidated balance sheet at amortized cost.  As such investments are
      classified as held-to-maturity, no unrealized gains or losses are
      recorded.  The carrying amounts of individual held to maturity
      securities are reviewed at the condensed consolidated balance sheet date for
      potential impairment.  As of September 30, 2007 and March 31, 2007,
      there are no short-term or long-term investments other than auction rate
      securities.





The
      carrying amounts of short-term
      investments in the form of auction rate securities as of September 30, 2007
      and
      March 31, 2007 are $15.5 million and $17.5 million, respectively.





*(9.)
      Fair Value of Financial
      Instruments*.  The carrying amounts of the Company’s financial
      instruments including cash and cash equivalents, short-term investments,
      accounts receivable, accounts payable and accrued liabilities, approximate
      their
      fair values due to their short maturities.





*(10.)
      Accounts Receivable.* We
      maintain allowances for doubtful accounts and product return reserves for
      anticipated losses resulting from the inability of our customers to make
      required payments and in-process product returns. We generally compute our
      allowances based on specifically identifying accounts that are past due and
      that
      are likely not collectible.  Interest receivable is accrued from
      investments in auction rate securities and other interest-bearing
      securities.  Other receivables are comprised of value added tax
      refunds and miscellaneous items.  The components of accounts
      receivable as of September 30, 2007 and March 31, 2007 are (in
      thousands):




September
                  30,
              
              
              March
                  31,2007
              
              
              2007Trade
                  receivables
              
              $
              3,765
              
              
              $
              3,383Allowance
                  for doubtful accounts
              
              
              (84
              )
              
              
              (66
              )Product
                  return reserves
              
              
              -
              
              
              
              (78
              )Interest
                  receivable
              
              
              29
              
              
              
              34Other
                  receivables
              
              
              197
              
              
              
              216Total
                  accounts receivable, net
              
              $
              3,907
              
              
              $
              3,489








9
 
  **LASERCARD
          CORPORATION AND SUBSIDIARIES**
 **NOTES
          TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **(UNAUDITED)**


*(11.)
      Inventories*.
      Inventories are stated at the lower of cost or market,
      with cost determined on a first-in, first-out basis and
      market based on replacement cost or estimated realizable value less cost to
      sell. The components of inventories as of September 30, 2007 and March 31,
      2007
      are (in thousands):




September
                  30,
              
              
              March
                  31,2007
              
              
              2007Raw
                  materials
              
              $
              7,937
              
              
              $
              7,763Work-in-process
              
              
              1,151
              
              
              
              860Finished
                  goods
              
              
              2,736
              
              
              
              2,839Total
                  inventory, net
              
              $
              11,824
              
              
              $
              11,462


The
        Company establishes lower of cost or market reserves, aged inventory reserves
        and obsolescence reserves. Inventory reserves are generally recorded when
        management determines that an item is not readily saleable. Inventory reserves
        are not relieved until the related inventory has been sold or
        scrapped.  There was no recorded inventory expense for the three-month
        period ended September 30, 2007 but for the six-month period ended September
        30,
        2007, the Company recorded inventory reserve expense of $50,000.  For
        the three and six-month periods ended September 30, 2006, the Company recorded
        inventory reserve expense of $30,000 and $120,000, respectively.  We
        did not record any lower of cost or market adjustment in our condensed
        consolidated statements of operations for the six-month periods ended September
        30, 2007 and 2006.




*(12.)
      Equipment Held for Resale.*Equipment held for resale primarily
      consists of parts, labor costs and other costs incurred to build equipment
      under
      a contract assigned to Prevent in March 2007.  Direct incremental
      costs associated with the purchase or construction of these items are deferred
      until revenue is recognized.  The components of equipment held for
      resale as of September 30, 2007 and March 31, 2007 are (in
      thousands):




September
                  30,
              
              
              March
                  31,2007
              
              
              2007Parts
              
              $
              5,316
              
              
              $
              5,297Labor
                  costs
              
              
              1,073
              
              
              
              931Other
              
              
              113
              
              
              
              112Total
                  equipment held for resale
              
              $
              6,502
              
              
              $
              6,340




*(13.)
      Property and Equipment, Net*.  The components of property and
      equipment as of September 30, 2007 and March 31, 2007 are (in
      thousands):




September
                  30,
              
              
              March
                  31,2007
              
              
              2007Building
                  and land
              
              $
              942
              
              
              $
              885Equipment
                  and furniture
              
              
              24,933
              
              
              
              24,334Construction
                  in progress, includingpurchased
                  equipment
              
              
              549
              
              
              
              774Leasehold
                  improvements
              
              
              5,114
              
              
              
              4,70131,538
              
              
              
              30,694Less:
                  accumulated depreciation and amortization
              
              
              (19,145
              )
              
              
              (17,706
              )Total
                  property and equipement, net
              
              $
              12,393
              
              
              $
              12,988




Property
      and equipment are recorded at cost. Depreciation is provided over the estimated
      useful lives which currently are four to seven years for equipment and furniture
      using the straight-line method and twenty-five years for the building using
      the
      straight-line method.  Leasehold improvements are amortized over the
      shorter of the life of the asset or the life of the lease using the
      straight-line method.  Depreciation and leasehold amortization expense
      for the three and six-month periods ended September 30, 2007 was $705,000 and
      $1,401,000, respectively. Depreciation and leasehold amortization expense for
      the three and six-month periods ended September 30, 2006 was $652,000 and
      $1,255,000, respectively.  Maintenance and minor repairs and
      replacements are expensed when incurred.  Disposition or retirement of
      property and equipment related gains and losses are charged to other income
      and
      expenses.




10




**LASERCARD
        CORPORATION AND SUBSIDIARIES**
 **NOTES
        TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **(UNAUDITED)**




Certain
      costs incurred in connection
      with acquisition of software for internal use are capitalized following
      Statement of Position (SOP) 98-1, “Accounting for the Costs of Computer Software
      Developed or Obtained for Internal Use” and EITF Issue No. 97-13, “Accounting
      for Costs Incurred in Connection with a Consulting Contract or an Internal
      Project That Combines Business Process Reengineering and Information Technology
      Transformation.”  Capitalized software costs are included in the
      equipment and furniture account and are amortized over four to seven
      years.  Software costs that do not meet capitalization criteria are
      expensed immediately.





*(14.)
      Goodwill and Other
      Intangible Assets.*Goodwill represents the excess of the
      purchase price over the fair value of identifiable net tangible and intangible
      assets acquired in a business combination.  In accordance with SFAS No.
      142, “Goodwill and Other Intangible Assets,” the Company does not amortize
      goodwill.  Instead, the Company evaluates goodwill for impairment annually
      in the fourth quarter and whenever events or changes in circumstances indicate
      that it is more likely than not that an impairment loss has been incurred. 
At March 31, 2007, the Company determined that estimated future cash flows
      were
      insufficient to justify the carrying value of goodwill and other intangible
      assets based on management’s decision to suspend optical memory card production
      in Germany. As such, in the fourth quarter of fiscal year 2007, the Company
      recorded a non-cash impairment charge of approximately $3.8 million for the
      full
      amount of remaining goodwill and other intangible assets related to the
      Company’s purchase of Challenge Card Design Plastikkarten GmbH of Rastede,
      Germany, and Cards & More GmbH of Ratingen, Germany on March 31,
      2004.  We intend to continue to use the facility and equipment to
      produce specialty cards although plans to use the facility to produce LaserCard®
optical memory cards in Germany have been suspended.





Definite
      life intangible assets
      capitalized and accumulated amortization as of September 30, 2007 and March
      31,
      2007 are as follows (in thousands):




September
                  30,
              
              
              March
                  31,2007
              
              
              2007Patent
                  expenditures
              
              $
              3,596
              
              
              $
              3,554Technology
                  transfer expenditures
              
              
              546
              
              
              
              545Total
                  patent and other intangible expenditures
              
              
              4,142
              
              
              
              4,099Patent
                  accumulated amortization
              
              
              (3,206
              )
              
              
              (3,149
              )Technology
                  transfer accumulated amortization
              
              
              (546
              )
              
              
              (539
              )(3,752
              )
              
              
              (3,688
              )Amortizable
                  patents and other intangible, net
              
              $
              390
              
              
              $
              411






Patent
      and technology transfer
      amortization expense for the three and six-month periods ended September 30,
      2007 was $29,000 and $64,000, respectively.  Patent and technology
      transfer amortization expense for the three and six-month periods ended
      September 30, 2006 was $35,000 and $68,000, respectively.





*(15.)
      Assessment of Impairment of
      Tangible and Intangible Long-Lived Assets*.  In accordance with
      SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived
      Assets,” the Company assesses the impairment of long-lived assets whenever
      events or changes in circumstances indicate that their carrying value may not
      be
      recoverable from the estimated future cash flows expected to result from their
      use and eventual disposition.  The Company’s long-lived assets subject
      to this evaluation include property and equipment and amortizable intangible
      assets.  If the Company’s estimate of future undiscounted net cash
      flows is insufficient to recover the carrying value of the assets, the Company
      will record an impairment loss in the amount by which the carrying value of
      the
      assets exceeds the fair value.  If assets are determined to be
      recoverable but the useful lives are shorter than originally estimated, the
      Company depreciates or amortizes the net book value of the asset over the newly
      determined remaining useful lives.  As of September 30, 2007 and March
      31, 2007, the fair value of long-lived assets exceeds their book
      value.  Therefore, no impairment loss has been
      recognized.




11




**LASERCARD
        CORPORATION AND SUBSIDIARIES**
 **NOTES
        TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **(UNAUDITED)**


*(16.)
      Accrued Liabilities.*  The components of accrued liabilities as of
      September 30, 2007 and March 31, 2007 are (in thousands):




September
                  30,
              
              
              March
                  31,2007
              
              
              2007Accrued
                  payroll and fringe benefits
              
              $
              435
              
              
              $
              497Accrued
                  compensated absences
              
              
              604
              
              
              
              855Warranty
                  reserves
              
              
              607
              
              
              
              743Other
                  accrued liabilities
              
              
              796
              
              
              
              894Total
                  accrued liabilities
              
              $
              2,442
              
              
              $
              2,989




Where
        appropriate, provision is made at the time of shipment for estimated warranty
        costs. We provide a limited warranty for the replacement of defective products.
        Our limited warranty requires us to repair or replace defective products
        at no
        cost to the customer within a specified time period after sale. We estimate
        the
        costs that may be incurred under our limited warranty and record a liability
        in
        the amount of such costs at the time product revenue is recognized. Factors
        that
        affect our estimate of warranty liability include the number of units sold,
        and
        historical and anticipated rates of warranty claims. We assess the adequacy
        of
        our recorded warranty liability and adjust the amount as necessary. We utilize
        historical trends and information received from our customers to assist in
        determining the appropriate estimated warranty accrual levels. The Company’s
        product warranty claims are settled through the return of defective products
        and
        the shipment of replacement products. The adequacy of the warranty reserve
        is
        reviewed quarterly to verify that it properly reflects the remaining obligations
        based on the anticipated warranty costs over the balance of the obligation
        period. Adjustments are made when actual return claim experience differs
        from
        estimates. Warranty activities for the three and six-month periods ended
        September 30, 2007 and 2006 are as follow (in thousands):
  Three
                    Months Ended
                
                
                Six
                    Months EndedSeptember
                    30,
                
                
                September
                    30,2007
                
                
                2006
                
                
                2007
                
                
                2006Beginning
                    balance
                
                $
                672
                
                
                $
                667
                
                
                $
                743
                
                
                $
                699Accruals
                    for products sold
                
                
                49
                
                
                
                20
                
                
                
                87
                
                
                
                97Costs
                    incurred
                
                
                (114
                )
                
                
                (8
                )
                
                
                (223
                )
                
                
                (117
                )Ending
                    balance
                
                $
                607
                
                
                $
                679
                
                
                $
                607
                
                
                $
                679





*(17.)
      Software Development
      Costs*.  Development costs incurred in the research and
      development of new software products are expensed as incurred until
      technological feasibility in the form of a working model has been
      established.  To date, the Company’s software development has been
      completed concurrent with the establishment of technological feasibility and,
      accordingly, all software development costs have been charged to research and
      development expenses in the accompanying condensed consolidated statements
      of
      operations.





*(18.)
      Advance Payments from
      Customers*.  The Company routinely receives advance payments on
      orders placed by its customers.  The advance payments are recorded as
      a liability in the condensed consolidated balance sheets until the related
      orders are shipped or services are performed or revenue would otherwise be
      recorded or deferred.





*(19.)
      Revenue
      Recognition*.  Product sales primarily consist of optical card
      sales, sales of optical card read/write drives and sales of specialty cards
      and
      card printers.  The Company recognizes revenue from product sales when
      the following criteria are met:  (1) persuasive evidence of an
      arrangement exists; (2) delivery has occurred; (3) the fee is fixed or
      determinable; and (4) collectibility is reasonably assured.  The
      Company recognizes revenue on product sales at the time of shipment when
      shipping terms are F.O.B. shipping point, orders are placed pursuant to a
      pre-existing sales arrangement and there are no post-shipment obligations other
      than customer acceptance criteria or, in the case of a U.S. government contract,
      warehousing.  Where appropriate, provision is made at the time of
      shipment for estimated warranty costs and estimated returns.




12




**LASERCARD
        CORPORATION AND SUBSIDIARIES**
 **NOTES
        TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **(UNAUDITED)**




Orders
      for Permanent Resident and
      Border Crossing Cards for the U.S. government require delivery into a secure
      Company-controlled vault.  Shipments are later made from the vault to
      a U.S. government site.  The bill and hold procedures also provide
      that at the end of any one-year contract term when a renewal option is not
      exercised, the U.S. government is to take final delivery of any and all of
      its
      remaining inventory within six months.  At the time the cards are
      delivered into the vault, title to the cards is transferred to the U.S.
      government and all risks of ownership are transferred as well.  The
      prime contractor
      is
      invoiced, with payment due within thirty days and the purchase orders do not
      contain any return (other than for warranty) or cancellation provisions.
      Pursuant to the provisions of SEC Staff Accounting Bulletin No. 104 ― “Revenue
      Recognition” (“SAB 104”), revenue is recognized on delivery into the
      vault as the Company has fulfilled its contractual obligations and the earnings
      process is complete.





The
      Company applies the provisions of
      the Emerging Issues Task Force Issue No. 00-21, "Revenue Arrangements with
      Multiple Deliverables," (“EITF 00-21”) to revenue arrangements with multiple
      deliverables.  EITF 00-21 provides criteria governing how to identify
      whether goods or services that are to be delivered separately in a bundled
      sales
      arrangement should be accounted for separately. Deliverables are accounted
      for
      separately if they meet all of the following criteria: a) the delivered items
      have stand-alone value to the customer; b) the fair value of any undelivered
      items can be reliably determined; and c) if the arrangement includes a general
      right of return, delivery of the undelivered items is probable and substantially
      controlled by the seller. In situations where the deliverables fall within
      higher-level literature as defined by EITF 00-21, the Company applies the
      guidance in that higher-level literature. Deliverables that do not meet these
      criteria are combined with one or more other deliverables.





The
      Company applies the provisions of
      Statement of Position 81-1, "Accounting for Performance of Construction-Type
      and
      Certain Production-Type Contracts" (“SOP 81-1”) in applicable contracts.
      Revenues on time and materials contracts are recognized as services are rendered
      at contract labor rates plus material and other direct costs
      incurred.  Revenues on fixed price contracts are recognized on the
      percentage of completion method based on the ratio of total costs incurred
      to
      date compared to estimated total costs to complete the
      contract.  Estimates of costs to complete include material, direct
      labor, overhead and allowable general and administrative expenses.  In
      circumstances where estimates of costs to complete a project cannot be
      reasonably estimated, but it is assured that a loss will not be incurred, the
      percentage-of-completion method based on a zero profit margin, rather than
      the
      completed-contract method, is used until more precise estimates can be made.
      The
      full amount of an estimated loss is charged to operations in the period it
      is
      determined that a loss will be realized from the performance of a
      contract.  The Company recognized approximately $33,000 and $46,000 of
      revenues for the three and six-month periods ended September 30, 2007,
      respectively and $9,000 and $10,000 for the three and six-month periods ended
      September 30, 2006, respectively, based on a zero profit margin related to
      a
      long-term contract.





In
      the fourth quarter of fiscal year
      2006, the Company entered into a subcontract covering product and services
      with
      a prime contractor for a Middle Eastern country to provide them with card
      personalization workstation integration for use in that country’s personalized
      national ID program which includes optical memory cards, hardware, and software.
      The contract called for multiple deliverables, installation, and certain client
      acceptance criteria, as defined in the agreement.  In applying the
      guidance within EITF 00-21, the Company determined the deliverables are not
      to
      be accounted for as separate units, but rather as a bundled arrangement as
      the
      fair value of the undelivered items cannot be readily determined. 
Therefore, revenue recognition on this contract and the associated contract
      costs were deferred until the predominant undelivered element, the card
      personalization, was delivered and accepted, commencing when the installation
      and acceptance of the card personalization system was complete. The Company
      determined that once the card personalization system was accepted, contract
      revenue would be recognized ratably based on actual cards personalized and
      accepted.  As the card personalization system was accepted during the
      quarter ended March 31, 2007, the Company began recognizing revenue under this
      contract during that period on cards that had been accepted by
      customer.  On June 23, 2007, the Company and the prime contractor
      entered into an amendment agreement whereby the Company will provide cards
      and
      supplies according to a delivery schedule for the balance of this fiscal
      year.  In addition, the Company no longer has obligations pertaining
      to the installation of equipment, card personalization workstation integration
      or card personalization.  As a result of this amendment, the Company
      will ratably recognize revenue upon receipt of the customer’s certificate of
      acceptance of cards delivered.  Also under the amendment and
      associated sales incentives, new prices per card have been established. The
      subcontract continued to allow for optional orders at customer request over
      a
      four-year period, valued at up to another approximately $37 million in cards
      based on the new agreed upon price per card under the
      amendment.  During the three and six-month periods ended September 30,
      2007, we recognized revenue of approximately $3.2 million and $4.3 million,
      respectively, and as of September 30, 2007, there remained $1.7 million of
      backlog.




13




**LASERCARD
        CORPORATION AND SUBSIDIARIES**
 **NOTES
        TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **(UNAUDITED)**




The
      Company applies the provisions of
      Statement of Position (“SOP”) No. 97-2, “Software Revenue Recognition,” as
      amended by Statement of Position 98-9, “Modification of SOP 97-2, Software
      Revenue Recognition, With Respect to Certain Transactions” to all transactions
      involving the sale of software products.  Revenue from the license of
      the Company’s software products is recognized when persuasive evidence of an
      arrangement exists, the software product has been delivered, the fee is fixed
      or
      determinable and collectibility is probable, and, if applicable, upon acceptance
      when acceptance criteria are specified or upon expiration of the acceptance
      period.  There was no software revenue recognized for the six-month
      period ended September 30, 2007. Software revenue was immaterial for the
      six-month period ended September 30, 2006.





License
      revenue, which may consist of
      up-front license fees and long-term royalty payments, is recognized as revenue
      when earned.  There were no license revenues recorded for the
      six-month periods ended September 30, 2007 and 2006.





The
      Company entered into license and
      optical memory card equipment purchase and support agreements, effective April
      3, 2004, with Global Investments Group (GIG), based in Auckland, New Zealand,
      for optical memory card manufacturing in Slovenia.  GIG transferred the
      license and other agreements, with our approval, to Prevent in March
      2007.  The agreements provide for payments (other than interest on
      late payments) to the Company of about $25.6 million which were fully paid
      as of March 31, 2007, for a 20-year license, the required manufacturing
      equipment for a targeted initial manufacturing capacity of 10 million optical
      cards annually and installation support, and a four-year training and support
      package.  Of the $25.6 million we received, $23.6 million was recorded
      as advance payments from customer and $2 million for the licensing fee was
      recorded as deferred revenue.  Both were classified as long term
      liabilities in the condensed consolidated balance sheets.  As of
      September 30, 2007, the Company had $6.5 million of acquired equipment, plus
      direct and incremental expenses, classified as equipment held for resale on
      our
      condensed consolidated balance sheets.  Beginning in the fourth year
      of the contract, Prevent is to pay $3 million for a three-year support package,
      and has options for thirteen additional years of support for payments of $1
      million annually.  In addition to the $41.6 million discussed above,
      Prevent is to pay royalties of $0.60 per card for each card produced under
      the
      license.  The territories covered by the license include most of the
      European Union and Eastern European regions.  Prevent has exclusive
      marketing rights in certain territories, with performance goals to maintain
      these rights.  The Company retains rights to utilize up to 20% of the
      new facility capacity as backup and a capacity buffer to augment our own card
      manufacturing facilities in Mountain View, California and possibly at the
      Company’s German subsidiary.  The granting of this license to Prevent
      establishes a potential second source supplier of optical memory cards for
      existing and prospective customers who may request multiple sources for
      cards.  The agreement contains various elements including a card
      manufacturing license, sale and installation of equipment, training and ongoing
      support, and contingent payments for support, materials, and royalty payments
      for cards manufactured.  In accordance with EITF 00-21 “Revenue
      Arrangements with Multiple Deliverables,” the card manufacturing license, sale
      and installation of equipment, training and support package, have been accounted
      for as one unit of accounting, since we were unable to determine evidence of
      the
      fair value for the undelivered items other than ongoing support.  The
      Company is able to determine evidence of fair value for the predominant
      undelivered item, which is the ongoing annual support of the manufacturing
      equipment.  Accordingly, revenues for the arrangement have been
      deferred and will be recognized when the equipment is installed and accepted,
      with the exception of the value of the ongoing annual support of the
      manufacturing equipment which will be recognized quarterly as earned, beginning
      when the equipment is accepted and training has been completed, which date
      is
      dependent on Prevent establishing a suitable facility in
      Slovenia.  Pursuant to FTB 90-1, “Accounting for Separately Priced
      Extended Warranty and Product Maintenance Contracts” the support revenue will be
      recognized ratably over the remaining term of the agreement.




14




**LASERCARD
        CORPORATION AND SUBSIDIARIES**
 **NOTES
        TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **(UNAUDITED)**




*(20.)
      Research and Development
      Expenses*.  Costs related to research, design and development of
      products are charged to research and development expense as
      incurred.  Research and development costs include salaries, contractor
      fees, building and utility costs, and depreciation.





*(21.)
      Shipping and Handling
      Costs*.Shipping
      and handling costs are recorded in cost of sales.





*(2**2**.)
        Advertising Costs.* Advertising costs consist of development and placement
        costs of the Company’s advertising campaigns and are charged to expense when
        incurred.  There was no recorded advertising expense for the
        three-month periods ended September 30, 2007, and 2006. Advertising expense
        was
        approximately $202,000 and $188,000 for the six-month periods ended September
        30, 2007, and 2006, respectively.




*(23.)
      Stock-based
      Compensation*.  Effective April 1, 2006, the Company adopted
      Statement of Financial Accounting Standard (“SFAS”) No. 123(R), *Share-Based
      Payment*, which requires share-based payment transactions to be accounted
      for using a fair value based method and the recognition of the related expense
      in the results of operations.




The
      Company adopted SFAS
      No. 123(R) using the modified prospective method of transition which
      requires compensation expense related to share based payments to be recognized
      beginning on the adoption date over the requisite service period, generally
      the
      vesting period, for awards granted after April 1, 2006, and over the
      remaining service period for the unvested portion of awards granted prior to
      April 1, 2006.  The condensed consolidated financial statements
      for prior fiscal years have not been restated to reflect the impact of adopting
      SFAS No. 123(R).




*2004
      Equity Incentive
      Compensation Plan (the “2004 Plan”):*The 2004 Plan provides for the grant
      of restricted share awards, options, stock units and stock appreciation rights,
      any of which may or may not require the satisfaction of performance objectives,
      with respect to shares of our common stock to directors, officers, employees
      and
      consultants of the Company and its subsidiaries.  The exercise price
      of stock options may not be less than 100% of the fair market value of the
      common stock as of the date of grant (110% of the fair market value if the
      grant
      is of an incentive stock option to an employee who owns more than 10% of the
      total combined voting power of all classes of the Company’s capital
      stock).  Options granted may not be exercised more than 10 years after
      the date of grant (five years after the date of grant if the grant is an
      incentive stock option to an employee who owns more than 10% of the total
      combined voting power of all classes of the Company’s capital stock). The Board
      of Directors specifies the term of options, typically 7 years, and the vesting
      schedule for exercise of options, generally 25% after one year and 6.25%
      quarterly for the next 3 years.




*Stock
      Options*: Under the
      provisions of SFAS No. 123(R), 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. The fair value of non-vested stock awards was
      determined by reference to the fair market value of the Company’s common stock
      on the date of grant. Consistent with the valuation method the Company used
      for
      disclosure-only purposes under the provisions of SFAS No. 123(R), the Company
      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 stock price volatility,
      forfeiture rates and expected terms. The following assumptions were utilized
      to
      estimate the fair value of the Company’s stock option awards during the
      six-month periods ended September 30, 2007 and 2006:




Six
                  Months EndedSeptember
                  30,2007
              
              
              2006Expected
                  stock price volatility
              
              55%
              
              
              55%Risk-free
                  interest rates
              
              4.23%
                  to 4.93%
              
              
              4.44%
                  to 4.96%Expected
                  life of options
              
              4.4
                  to 5 years
              
              
              4.4
                  to 5 yearsExpected
                  annual dividends
              
              ―
              
              
              ―




15
 
  **LASERCARD
          CORPORATION AND SUBSIDIARIES**
 **NOTES
          TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **(UNAUDITED)**


The
      expected volatility rate was
      based on the historical volatility of the Company’s common stock. The expected
      life represents the average time options that vest are expected to be
      outstanding based on the vesting provisions and the Company’s historical
      exercise, cancellation and expiration patterns. The Company estimated
      forfeitures based on historical rates when recognizing compensation
      expense.  Forfeitures were estimated based on voluntary termination
      behavior, as well as an analysis of actual option forfeitures.




The
      risk-free interest rate was based
      on U.S. Treasury zero-coupon issues with a maturity approximating the expected
      life as of the week of the grant date.  There was no annual dividend
      rate assumed as a cash dividend is not expected to be declared and paid in
      the
      foreseeable future.  The Company updates these assumptions at least on
      an annual basis and on an interim basis if significant changes to the
      assumptions are warranted.




The
      Company recognized the full
      amount of the stock-based employee compensation expense of its equity incentive
      plans in the condensed consolidated statements of operations for the three
      and
      six-month periods ended September 30, 2007 and 2006, and did not capitalize
      any
      such costs in the condensed consolidated balance sheets other than in the
      general overhead pool for inventory costs.




Stock-based
      compensation expense
      related to stock options was recorded in the Company’s condensed consolidated
      statements of operations was allocated as follows (in thousands):




Three
                  Months Ended
              
              
              Six
                  Months EndedSeptember
                  30,
              
              
              September
                  30,2007
              
              
              2006
              
              
              2007
              
              
              2006Cost
                  of sales
              
              $
              72
              
              
              $
              81
              
              
              $
              138
              
              
              $
              168Selling,
                  general and administrative expense (excludes ESPP)
              313
              
              
              
              202
              
              
              
              596
              
              
              
              423Research
                  and development expense
              
              
              61
              
              
              
              102
              
              
              
              121
              
              
              
              208Stock-based
                  compensation expense before income tax
              
              
              446
              
              
              
              385
              
              
              
              855
              
              
              
              799Less:
                  income tax benefit
              
              
              ―
              
              
              
              ―
              
              
              
              ―
              
              
              
              ―Net
                  stock-based compensation expense after income tax
              
              $
              446
              
              
              $
              385
              
              
              
              855
              
              
              $
              799




*Restricted
      Shares and Restricted
      Stock Units:*On September 21, 2007, restricted shares and restricted stock
      units were awarded to certain Company employees and directors under the
      provisions of the 2004 Plan. These shares and units are subject to time-based
      vesting provisions, and were awarded at no cost to the recipients, and cannot
      be
      sold, assigned, transferred, or pledged during the restriction period.
      Recipients of the restricted shares have the right to vote such shares and
      receive dividends, whereas the recipients of restricted stock units do not
      have
      these same benefits.





Restricted
      shares were awarded to
      officers and directors of the Company. The fair value of the shares at the
      time
      of the award is expensed on a straight-line basis, primarily in selling, general
      and administrative expenses over the vesting period.  For officers,
      these restricted shares shall vest subject to continuous common-law employment
      with the Company at 25% on each of the first, second, third, and fourth
      anniversaries of the date of grant of their award with no
      expiration.  For directors, the restricted shares will vest in full on
      the eleventh month after the date of their award.  For officers, as
      the shares vest, the Company will effect tax withholding by retaining that
      number of shares having a fair market value equal to the taxes being
      withheld.





Restricted
      stock units were awarded
      to certain employees of the Company. The fair value at the time of the award
      is
      expensed on a straight-line basis over the vesting period. These restricted
      units vest subject to the employee’s continuous common-law employment with the
      Company at 25% on each of the first, second, third, and fourth anniversaries
      of
      the date of their award.  As the units vest, shares will be issued in
      settlement, net of shares retained to satisfy withholding
      obligations.





As
      of September 30, 2007, about $5.9
      million of total unrecognized compensation cost related to unvested stock
      options, restricted share awards and restricted stock units is expected to
      be
      recognized over the remaining vesting period through September 30,
      2011.  As of September 30, 2006, there was approximately $4.8 million
      of total unrecognized compensation cost related to unvested share-based
      compensation arrangements granted under our stock incentive plans which was
      expected to be recognized over the remaining vesting period through September
      30, 2010.




16




**LASERCARD
        CORPORATION AND SUBSIDIARIES**
 **NOTES
        TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **(UNAUDITED)**




We
      recorded no income tax benefit on
      stock based compensation expense for the six-month periods ended September
      30,
      2007 and 2006, as we have cumulative operating loss carryovers, for which a
      full
      valuation allowance has been established.





The
      FASB Staff Position ("FSP") No.
      123R-3, "Transition Election Related to Accounting for the Tax Effects of
      Share-Based Payment Awards," requires an entity to follow either the transition
      guidance for the additional-paid-in-capital (APIC) pool as prescribed in SFAS
      No. 123(R) or the alternative transition method described in FSP
      No. 123R-3. An entity that adopts SFAS No. 123(R) using the modified
      prospective application may make a one-time election to adopt the transition
      method described in the FSP No. 123R-3, and may take up to one year from the
      latter of its initial adoption of SFAS No. 123(R) or the effective date of
      the
      FSP No. 123R-3 to evaluate the available transition alternatives and make its
      one-time election. We have elected to use the simplified method provided for
      in
      FSP FAS 123R-3 to calculate our APIC pool effective April 1, 2007. The adoption
      of the FSP did not have a material impact on our consolidated financial
      position, results of operations or cash flows.





*Employee
      Stock Purchase
      Plan*.  The Company has an Employee Stock Purchase Plan (ESPP),
      under which eligible employees may designate from 2% to 6% of their compensation
      to be withheld for the purchase of shares of common stock at 67% of the average
      price over the three-day period prior to the purchase date.  The
      differential between fair market value and the average price of the shares
      sold
      under the ESPP is charged to operations as a compensation expense and is taxed
      to the employee as income.  The Company had stock-based compensation
      expense of approximately $27,000 and $55,000 relating to the ESPP which was
      included in the Company’s condensed consolidated statements of operations in
      selling, general and administrative expenses for the three and six-month periods
      ended September 30, 2007, respectively, and $29,000, and $48,000 for the three
      and six-month periods ended September 30, 2006, respectively.





*(24)
      Comprehensive Income
      (Loss)*.  Under SFAS No. 130, “Reporting Comprehensive Income,”
comprehensive income (loss) is defined as the changes in equity of an
      enterprise
      except for those resulting from stockholders’ transactions. For the three and
      six-month periods ended September 30, 2007 and 2006, comprehensive loss is
      as
      follows (in thousands):




Three
                  Months Ended
              
              
              Six
                  Months EndedSeptember
                  30,
              
              
              September
                  30,2007
              
              
              2006
              
              
              2007
              
              
              2006Net
                  loss
              
              $
              (498
              )
              
              $
              (2,672
              )
              
              $
              (2,857
              )
              
              $
              (2,460
              )Net
                  change in cumulative foreigncurrency
                  transaction adjustments
              
              
              21
              
              
              
              26
              
              
              
              27
              
              
              
              97Comprehensive
                  loss
              
              $
              (477
              )
              
              $
              (2,646
              )
              
              $
              (2,830
              )
              
              $
              (2,363
              )





*(25)
      Indemnification*.  The Company’s major sales agreements provide
      remedies to customers, such as defense, settlement, or payment of judgment
      for
      intellectual property claims related to the use of the Company’s products. The
      Company also has indemnified various vendors for certain potential
      claims.  The Company has also entered into indemnification agreements
      with its directors and officers and the Company’s bylaws contain similar
      indemnification obligations.  To date, there have been no claims made
      under such indemnification provisions and as a result the associated estimated
      fair value of the liability is not material.





**3.      Net
      Loss per Share**





Basic
      net loss per share and diluted
      net loss per share are computed by dividing net loss by the weighted average
      number of shares of common stock outstanding during the three and six-month
      periods ended September 30, 2007.  Diluted net income per share is
      computed by dividing net income by the weighted average number of shares of
      common stock and common stock equivalents outstanding during the three and
      six-month periods ended September 30, 2007.  Common stock equivalents
      consist of stock options and warrants using the treasury stock
      method.




17




**LASERCARD
        CORPORATION AND SUBSIDIARIES**
 **NOTES
        TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **(UNAUDITED)**




The
      reconciliation of the denominators
      of the basic and diluted net loss per share computation for the three and
      six-month periods ended September 30, 2007 and 2006 is shown in the following
      table (in thousands, except per share data):




Three
                  Months Ended
              
              
              Six
                  Months EndedSeptember
                  30,
              
              
              September
                  30,2007
              
              
              2006
              
              
              2007
              
              
              2006Net
                  loss
              
              $
              (498
              )
              
              $
              (2,672
              )
              
              $
              (2,857
              )
              
              $
              (2,460
              )Basic
                  net loss per share:Weighted
                  average common shares outstanding
              
              
              11,899
              
              
              
              11,816
              
              
              
              11,883
              
              
              
              11,792Basic
                  net loss per share
              
              $
              (0.04
              )
              
              $
              (0.23
              )
              
              $
              (0.24
              )
              
              $
              (0.21
              )Diluted
                  net loss per share:Weighted
                  average common shares outstanding
              
              
              11,899
              
              
              
              11,816
              
              
              
              11,883
              
              
              
              11,792Weighted
                  average common stock equivalents outstanding
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —Weighted
                  average common shares and common stockequivalents
                  outstanding
              
              
              11,899
              
              
              
              11,816
              
              
              
              11,883
              
              
              
              11,792Diluted
                  net loss per share
              
              $
              (0.04
              )
              
              $
              (0.23
              )
              
              $
              (0.24
              )
              
              $
              (0.21
              )





All
      stock options and warrants were
      excluded from the calculation of diluted net loss per share since their effect
      would be anti-dilutive.





**4.      Segments**





*Segment
      Reporting.*





The
      Company operates in three
      reportable segments: (1) optical memory cards, (2) optical memory card drives,
      including read/write drives, maintenance, systems and enabling services
      (“optical card drives”) and (3) specialty cards and card
      printers.  The segments were determined based on the information used
      by the chief operating decision maker.  The optical memory cards and
      optical card drives reportable segments are not strategic business units which
      offer unrelated products and services; rather these reportable segments utilize
      compatible technology and are marketed jointly.  Specialty cards and
      printers is a strategic business unit offering at times unrelated products
      and
      at times related products with the other reportable segments.





The
      accounting policies used to
      derive reportable segment results are the same as those described in the
      "Summary of Significant Accounting Policies."  Resources are allocated
      to the optical memory card and optical card drive segments in a manner that
      optimizes optical memory card revenues and to the specialty card and printers
      segment in a manner that optimizes consolidated income as determined by the
      chief operating decision maker. Segment revenues are comprised of sales to
      external customers.  Segment gross profit (loss) includes all segment
      revenues less the related cost of sales.  Accounts receivable, cash,
      deferred income taxes, prepaid expenses, fixed assets and inventory are not
      separately reported by segment to the chief operating decision
      maker.  Therefore, the amount of assets by segment is not
      meaningful.  There are no inter-segment sales or
      transfers.  All of the Company’s long-lived assets are attributable to
      the United States except for $3.6 million at September 30, 2007 that are located
      in Germany.




18




**LASERCARD
        CORPORATION AND SUBSIDIARIES**
 **NOTES
        TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **(UNAUDITED)**




The
      Company's chief operating
      decision maker is currently the Company's Chief Executive
      Officer.  The chief operating decision maker reviews financial
      information presented on a consolidated basis that is accompanied by
      disaggregated information about revenues and gross profit (loss) by
      segment.





The
      table below presents information
      for optical memory cards, optical card drives and specialty cards and card
      printers and a reconciliation of segment results to amounts included in the
      Company’s condensed consolidated financial statements for the three and
      six-month periods ended September 30, 2007 and 2006 (in thousands):




T
                  h
                  r e e  M o n t h s  E n d e d  S e p t e m b e
                  r   3 0 , 2 0 0 7Optical
              
              
              Optical
              
              
              SpecialtyMemory
              
              
              Card
              
              
              Cards
                  &
              
              
              SegmentCards
              
              
              Drives
              
              
              Printers
              
              
              Total
              
              
              Other
                  (a)
              
              
              TotalRevenue
              
              $
              6,692
              
              
              $
              732
              
              
              $
              3,315
              
              
              $
              10,739
              
              
              $
              -
              
              
              $
              10,739Cost
                  of sales
              
              
              3,909
              
              
              
              983
              
              
              
              2,658
              
              
              
              7,550
              
              
              
              -
              
              
              
              7,550Gross
                  profit (loss)
              
              
              2,783
              
              
              
              (251
              )
              
              
              657
              
              
              
              3,189
              
              
              
              -
              
              
              
              3,189Depreciation
                  andamortization
                  expense
              
              
              450
              
              
              
              47
              
              
              
              77
              
              
              
              574
              
              
              
              161
              
              
              
              735T
                  h
                  r e e  M o n t h s  E n d e d  S e p t e m b e
                  r   3 0 , 2 0 0 6Optical
              
              
              Optical
              
              
              SpecialtyMemory
              
              
              Card
              
              
              Cards
                  &
              
              
              SegmentCards
              
              
              Drives
              
              
              Printers
              
              
              Total
              
              
              Other
              
              
              TotalRevenue
              
              $
              3,279
              
              
              $
              115
              
              
              $
              2,900
              
              
              $
              6,294
              
              
              $
              -
              
              
              $
              6,294Cost
                  of sales
              
              
              3,035
              
              
              
              241
              
              
              
              2,190
              
              
              
              5,466
              
              
              
              -
              
              
              
              5,466Gross
                  profit (loss)
              
              
              244
              
              
              
              (126
              )
              
              
              710
              
              
              
              828
              
              
              
              -
              
              
              
              828Depreciation
                  andamortization
                  expense
              
              
              423
              
              
              
              45
              
              
              
              83
              
              
              
              551
              
              
              
              135
              
              
              
              686S
                  i
                  x  M o n t h s  E n d e d  S e p t e m b e r   3
                  0 , 2 0 0 7Optical
              
              
              Optical
              
              
              SpecialtyMemory
              
              
              Card
              
              
              Cards
                  &
              
              
              SegmentCards
              
              
              Drives
              
              
              Printers
              
              
              Total
              
              
              Other
              
              
              TotalRevenue
              
              $
              11,254
              
              
              $
              1,087
              
              
              $
              6,253
              
              
              $
              18,594
              
              
              $
              -
              
              
              $
              18,594Cost
                  of sales
              
              
              7,431
              
              
              
              1,421
              
              
              
              4,892
              
              
              
              13,744
              
              
              
              -
              
              
              
              13,744Gross
                  profit (loss)
              
              
              3,823
              
              
              
              (334
              )
              
              
              1,361
              
              
              
              4,850
              
              
              
              -
              
              
              
              4,850Depreciation
                  andamortization
                  expense
              
              
              904
              
              
              
              92
              
              
              
              154
              
              
              
              1,150
              
              
              
              315
              
              
              
              1,465S
                  i
                  x  M o n t h s  E n d e d  S e p t e m b e r   3
                  0 , 2 0 0 6Optical
              
              
              Optical
              
              
              SpecialtyMemory
              
              
              Card
              
              
              Cards
                  &
              
              
              SegmentCards
              
              
              Drives
              
              
              Printers
              
              
              Total
              
              
              Other
              
              
              TotalRevenue
              
              $
              10,774
              
              
              $
              299
              
              
              $
              5,775
              
              
              $
              16,848
              
              
              $
              -
              
              
              $
              16,848Cost
                  of sales
              
              
              6,886
              
              
              
              603
              
              
              
              4,366
              
              
              
              11,855
              
              
              
              -
              
              
              
              11,855Gross
                  profit (loss)
              
              
              3,888
              
              
              
              (304
              )
              
              
              1,409
              
              
              
              4,993
              
              
              
              -
              
              
              
              4,993Depreciation
                  andamortization
                  expense
              
              
              817
              
              
              
              89
              
              
              
              164
              
              
              
              1,070
              
              
              
              253
              
              
              
              1,323





(a)
            Other
                depreciation and amortization expense represents amounts charged
                to
                selling, general and administrative expense and research and development
                expense.








19





**ITEM
                2.**
            **MANAGEMENT'S
                DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
                OPERATIONS**





The
      following discussion and analysis of the Company's financial condition, results
      of operations and critical accounting policies should be read in conjunction
      with the condensed consolidated financial statements and related notes included
      elsewhere in this Form 10-Q Report and the consolidated financial statements
      and
      notes thereto for the year ended March 31, 2007, included in the Company's
      fiscal 2007 Annual Report on Form 10-K.





***FORWARD-LOOKING
      STATEMENTS***





All
      statements contained in this
      report that are not historical facts are forward-looking statements.  The
      forward-looking statements in this report are made pursuant to the safe harbor
      provisions of the Private Securities Litigation Reform Act of
      1995.  They are not historical facts or guarantees of future
      performance or events. Rather, they are based on current expectations,
      estimates, beliefs, assumptions, and goals and objectives and are subject to
      uncertainties that are difficult to predict.  As a result, our actual
      results may differ materially from the statements made.  Often such
      statements can be identified by their use of words such as “may,” “will,”
“intends,” “plans,” “believes,” “anticipates,” “visualizes,” “expects,” and
“estimates.”  Forward-looking statements made in this report include
      statements as to our beliefs as to current and potential market segments,
      customers, and applications for and deployment of our products; the advantages
      of, potential income from, and duties to be performed under the sale of a
      second-source card manufacturing license to Prevent Global; our intent to retain
      the Prevent Global equipment until Prevent Global is ready to receive the
      equipment; future scheduled payments and contingent royalties under the Prevent
      Global contract, Prevent Global’s planned production capacity, and that we will
      sell equipment to Prevent Global and provide Prevent Global with installation
      support; production quantities, delivery rates and expected delivery schedule,
      backlog, and revenue recognition for our products for U.S. or foreign government
      ID card programs, potential annual revenues being $40 to $50 million at full
      implementation from the Italy programs with expected revenues unable to be
      determined until the prime contractor issues follow-on orders; our expectation
      for no future growth from the U.S. Green Card and Laser Visa BCC program, with
      steady state revenue to average $10 million if the option years are elected
      but
      with a short-term decrease followed by an increase in orders as the government
      transitions to a new card design; plans to increase card production capacity
      for
      anticipated increases in orders including possibly $8 million in capital
      equipment and leasehold improvements during the next twelve to eighteen months;
      and expecting growth of less than 10% in the specialty card and printer segment
      and expecting negative gross profit from the optical card drive market; our
      intent to update our SFAS No. 123(R), “Shared-Based Payments,” assumptions at
      least annually; that the prime contractor for a Middle Eastern country will
      accept future shipments of cards and supplies or the customer will exercise
      the
      optional orders over a four-year period of up-to another approximately $37
      million in cards under the amended contract; our intent to find another
      photographic film supplier should Kodak cease supplying such film and to take
      advantage of any last-buy opportunity which Kodak may choose to provide; our
      intent to pursue patent infringers by litigation, arbitration, or negotiation;
      the need for, expected success of, and potential benefits from our research
      and
      development efforts, including our attempts to develop other forms of optical
      recording media for use in optical memory cards and the potential benefits
      derived therefrom; expectations regarding revenues (overall and by segment
      and
      by customer, including an overall decline in revenues for the fiscal 2008 third
      quarter), margins, profit (including likely losses in the future if full
      implementation of the Italian program is further delayed), and our deferred
      income tax asset and related valuation allowance; our expectation that fiscal
      2008 SG&A expenses will be higher than those in fiscal 2007 and that R&D
      expenses will increase 15% from the previous quarter in each of the next two
      quarters; that we do not expect any material change in our unrecognized tax
      benefits over the next twelve months; our expectations that examination of
      open
      tax years by the appropriate governmental agencies due to the tax loss
      carryovers from those years will pose no material change in our tax position;
      our belief that our current five major programs, plus maybe one or two others,
      will be the basis for a  majority of our revenues in the near term;
      estimates of optical card production capacity, our ability to expand production
      capacity, and our plans and expectations regarding the growth and associated
      capital costs of such capacity; estimates that revenues and advance payments
      will be sufficient to generate cash from operating activities over the next
      twelve months and fund our actual capital expenditures despite expected
      quarterly fluctuations; expectations regarding market growth, product demand,
      and the continuation of current programs; and our long-term revenue growth
      objectives, and drive pricing strategy.




20




These
      forward-looking statements are
      based upon our assumptions about and assessment of the future, which may or
      may
      not prove true, and involve a number of risks and uncertainties including,
      but
      not limited to, whether there is a market for cards for homeland security in
      the
      U.S. and abroad, and if so whether such market will utilize optical memory
      cards
      as opposed to other technology; customer concentration and reliance on continued
      U.S. and Italian government business; risks associated with doing business
      in
      and with foreign countries; whether we will be successful in assisting Prevent
      Global with factory startup and training; whether Prevent Global will obtain
      the
      financial resources to make the balance of its required payments to us and
      to
      operate the facility; whether the facility will efficiently produce high quality
      optical memory cards in volume and that meet our standards; lengthy sales cycles
      and changes in and dependence on government policy-making; reliance on
      value-added resellers and system integrators to generate sales, perform customer
      system integration, develop application software, integrate optical card systems
      with other technologies, test products, and work with governments to implement
      card programs; risks and difficulties associated with development, manufacture,
      and deployment of optical cards, drives, and systems; our ability or our
      customers’ ability to initiate and develop new programs utilizing our card
      products; risks and difficulties associated with development, manufacture,
      and
      deployment of optical cards, drives, and systems; potential manufacturing
      difficulties and complications associated with increasing manufacturing capacity
      of cards and drives, implementing new manufacturing processes, and outsourcing
      manufacturing; our ability to produce and sell read/write drives in volume;
      the
      unpredictability of customer demand for products and customer issuance and
      release of corresponding orders; government rights to withhold order releases,
      reduce the quantities released, and extend shipment dates; the impact of
      technological advances, general economic trends, and competitive products;
      the
      impact of changes in the design of the cards; and the possibility that optical
      memory cards will not be purchased for the full implementation of card programs
      in Italy, a Middle Eastern country and India, or for Department of Homeland
      Security (DHS) programs in the U.S., or will not be selected for other
      government programs in the U.S. and abroad; whether we will be successful in
      developing alternative optical recording media; and  the risks set
      forth in the section entitled “Risks” and elsewhere in this report; and other
      risks detailed from time to time in our SEC filings.  These
      forward-looking statements speak only as to the date of this report, and, except
      as required by law, we undertake no obligation to publicly release updates
      or
      revisions to these statements whether as a result of new information, future
      events, or otherwise.





CRITICAL
      ACCOUNTING POLICIES





Except
      for the adoption of the
      Financial Accounting Standards Board (“FASB”) issued Interpretation No. 48,
“Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement
      No. 109” (“FIN 48”) as described in Note 1 of the notes to condensed
      consolidated financial statements, our critical accounting policies in our
      Annual Report on Form 10-K for the fiscal year ended March 31, 2007 have not
      changed materially.




**RESULTS
      OF OPERATIONS**





Overview





We
      are headquartered in Mountain
      View, California where we manufacture LaserCard® optical memory cards and card
      related products, including chip-ready Optical/SmartTM cards.  In
      addition, we operate a wholly owned German subsidiary, Challenge Card Design
      Plastikkarten GmbH (“CCD”), with offices in Rastede and Ratingen, Germany, which
      manufactures advanced-technology cards, can provide manufacturing capacity
      for
      certain steps of optical memory card production, and markets cards, system
      solutions, and thermal card printers.





We
      sell our products and services
      through partners such as value added resellers (VARs) and card distribution
      licensees, who generally have knowledge in specific markets, for the development
      of markets and applications for LaserCard products.  We have sales
      staff located in California, New York, the Washington D.C. area, and Germany,
      whose principal role is developing and supporting the reseller channel. Revenue
      consists primarily of optical memory cards, optical card read/write drives
      including systems and enabling services, specialty cards, and card
      printers.  Our VARs/licensees provide country-specific or
      market-specific services necessary for contract negotiation and also may add
      application software, personal computers, and other peripherals, and then resell
      these products as integrated solutions. We are continuing our efforts to recruit
      new VARs and eliminate nonproductive VARs.





Major
      near term growth potential for
      LaserCard® optical memory cards is in government-sponsored identification
      programs in several countries.  Since governmental card programs
      typically rely on policy-making, which in turn is subject to technical
      requirements, budget approvals, and political considerations, there is no
      assurance that these programs will be implemented as expected or that they
      will
      include optical cards.  Our objectives for long-term revenue growth
      include: (1) broadening the Optical Memory (OM) product range to address
      lower-end applications characterized by higher price sensitivity, (2)
      diversifying OM products into, and effectively penetrating, industrial and
      commercial markets, (3) expanding our hardware product offering to address
      new
      markets and add value to current offerings, and (4) increasing OM product
      revenues with customized application software and enabling
      services.




21




The
      table below presents condensed
      consolidated revenues, excluding inter-company transactions, recorded by our
      U.S. and German operations (in thousands):




Three
                  Months Ended
              
              
              Six
                  Months EndedSeptember
                  30,
              
              
              September
                  30,2007
              
              
              2006
              
              
              2007
              
              
              2006U.S.
                  operations
              
              $
              7,424
              
              
              $
              3,394
              
              
              $
              12,340
              
              
              $
              11,074German
                  operations
              
              
              3,315
              
              
              
              2,900
              
              
              
              6,254
              
              
              
              5,774$
              10,739
              
              
              $
              6,294
              
              
              $
              18,594
              
              
              $
              16,848





Revenues
      recorded by our U.S.
      operations are generally derived from a small number of government customers
      located throughout the world.  Revenues recorded by our German
      operations are for a relatively large number of commercial customers, including
      universities in Germany for student identification cards and organizers of
      sporting events for secure access cards.





Historically,
      the largest purchaser
      of LaserCard products has been a U.S. government contractor, General Dynamics
      Information Technology (GDIT), previously Anteon International
      Corporation.  GDIT is currently the government contractor for
      LaserCard product sales to the U.S. Department of Homeland Security (DHS),
      U.S.
      Department of State (DOS), U.S. Department of Defense (DOD), and the government
      of Canada.  Under government contracts with GDIT, the DHS purchases
      Green Cards and DOS Laser Visa Border Crossing Cards; the DOD purchases
      Automated Manifest System cards; and the Canadian government purchases Permanent
      Resident Cards.  Encompassing all of these programs, our product sales
      to GDIT represented 30% and 33% of the total revenues during the three and
      six-month periods ended September 30, 2007, respectively.  Sales to
      GDIT represented 39% and 32% during the three and six-month periods ended
      September 30, 2006, respectively.  Another customer, a prime
      contractor for a Middle Eastern country providing that country’s personalized ID
      program, represented 30% and 23% of the total revenues during the three and
      six-month periods ended September 30, 2007, respectively. Another unaffiliated
      company, Laser Memory Card S.p.A., of Italy, accounted for 14% of our total
      revenues during the six-month period ended September 30, 2006 mainly for secure
      government ID card programs in Italy.





Our
      major government programs are
      shown below as a percentage of total revenues:




Three
                  Months Ended
              
              
              Six
                  Months EndedSeptember
                  30,
              
              
              September
                  30,2007
              
              
              2006
              
              
              2007
              
              
              2006National
                  ID Cards in a Middle Eastern Country
              
              
              30%
              
              
              
              1%
              
              
              
              23%
              
              
              <1%U.S.
                  Green Cards & Laser Visas
              
              
              20%
              
              
              
              32%
              
              
              
              26%
              
              
              
              26%Canadian
                  Permanent Resident Cards
              
              
              10%
              
              
              
              6%
              
              
              
              7%
              
              
              
              5%Vehicle
                  Registration in India
              
              
              6%
              
              
              
              6%
              
              
              
              7%
              
              
              
              5%Italian
                  Carta d'Identita Elettonica (CIE) Cards
              
              
              3%
              
              
              
              6%
              
              
              
              2%
              
              
              
              2%Italian
                  Permesso di Soggiorno Elettronico (PSE) Cardsand
                  Carta di Soggiorno Elettronico (CSE) Cards
              
              
              ―
              
              
              
              ―
              
              
              
              ―
              
              
              
              12%






22


The
      national citizen ID (CIE)
      program has been largely stalled since January 2006 following a change of
      government and the instigation of a review designed to reduce cost and improve
      efficiency of the program.  In September, according to newspaper
      articles published in Italy, an important agreement was reached between the
      national and provincial governments to facilitate the CIE program’s movement
      forward.  If the CIE and foreign resident ID card (PSE) systems
      function as designed, CIE and PSE card orders could ramp toward their full
      implementation level which could potentially result in annual revenues of $40
      to
      $50 million.  We received and shipped a small order for foreign
      language versions of the CIE card during the six-month period ended September
      30, 2007. The issuance system for PSE cards is in place and operating with
      about
      1 million applications received and the government is in possession of a
      substantial card inventory for personalization.  There was no backlog
      for these programs at September 30, 2007.  We believe that during the
      second half of the fiscal year ending March 31, 2008, follow-on orders for
      both programs will be received and significant card revenue will be realized
      during fiscal 2009 although it remains unclear when the prime contractor
      will issue follow-on orders.





U.S.
      Laser Visa Border Crossing Cards
      (BCCs) and Green Cards for the U.S. Department of Homeland Security (DHS) are
      an
      important part of our revenue base.  For these programs, we recorded
      card revenues of $2.1 million and $4.8 million for the three and six-month
      periods ended September 30, 2007, respectively; and we recorded card revenues
      of
      $2 million and $4.3 million for the three and six-month periods ended September
      30, 2006, respectively.  We received a five-year follow-on U.S.
      government subcontract in March 2007 with an initial one-year term and four
      one-year extension options.  Backlog at September 30, 2007 for these
      programs, which is deliverable through February, 2008, totaled $1.2
      million.  DHS has tasked us to support the redesign of the Green
      Cards.  The transition to a redesigned card could cause delays in
      future orders as DHS reduces its inventory of current cards that were designed
      in 1997.  However, we anticipate that this decrease will be followed
      by an increase in orders of the newly designed cards to replenish the strategic
      reserve, although no assurance can be given.  We anticipate that the
      Border Crossing Card (BCC) design will be reconfigured to include an RFID chip
      in keeping with the requirements of the Western Hemisphere Travel Initiative
      as
      specified for Department of State’s proposed PASSport Card.  We have
      responded to the government solicitation for the PASSport Card with our proposed
      LaserPass Optical/RFID solution with emphasis on the digital security that
      optical memory features provide without compromise.  If successful, we
      anticipate that any future BCC will follow this hybrid model.





Under
      a subcontract for Canada’s
      Permanent Resident Cards, we recorded revenue of $1 million and $1.2 million
      for
      the three and six-month periods ended September 30, 2007, respectively. We
      recorded revenue of $0.4 million and $0.8 million for the three and six-month
      periods ended September 30, 2006, respectively. The backlog at September 30,
      2007, was $1.5 million originally scheduled for delivery through June
      2008.  This backlog will most likely be delivered earlier as
      two-thirds has been rescheduled for delivery through November 2007 based upon
      a
      recent customer request.  The delivery quantity is subject to
      fluctuation at customer request.





During
      the three and six-month
      periods ended September 30, 2007, we recorded revenue under purchase orders
      and
      a subcontract for the supply of secure national ID cards and supporting
      hardware, software, and integration services to a Middle Eastern government
      of
      approximately $3.2 million and $4.3 million, respectively, in addition to the
      $4
      million recognized in fiscal year 2007.  This followed earlier
      deliveries of cards and card encoders under previous contracts and purchase
      orders.  The cards are being issued to adult citizens for national
      identity purposes and feature the latest advancements in identity fraud
      protection provided by Optical IDLockTM, a combination of the highly-secure
      LaserCard® optical memory technology and Embedded HologramHDTM, the new
      high-definition “photographic quality” etched image security
      feature.  As of September 30, 2007, there was a backlog of $1.7
      million under this contract for distributed card issuance from multiple
      locations. The subcontract continues to allow for optional orders at customer
      request over a four-year period, potentially valued at up to another
      approximately $37 million in cards.  See Note 2, Item 19 of the notes
      to condensed consolidated financial statements for a further discussion of
      the
      subcontract.





Effective
      April 3, 2004, we sold a
      second-source card-manufacturing license, including equipment, training, and
      support, to Global Investments Group (GIG), based in Auckland, New Zealand,
      for
      card manufacturing in Slovenia and began receiving associated cash
      payments.  Recently, and with our approval, GIG transferred the
      license to Prevent Global of Slovenia.  We will begin to recognize
      revenue on this arrangement over the remaining term of the agreement starting
      when the equipment has been accepted and the training has been completed, which
      date is in turn dependent on Prevent establishing a suitable facility in
      Slovenia.  Refer to Note 2, Item 19 of the notes to condensed
      consolidated financial statements for further disclosure of the Prevent
      agreement.




23




We
      may invest up to $8 million in
      additional capital equipment and leasehold improvement expenditures at our
      facilities when orders and forecasts justify the investment.  These
      expenditures could occur throughout the next twelve to eighteen months, as
      more
      fully discussed under “Management’s Discussion and Analysis--Liquidity and
      Capital Resources,” of the Form 10-K for the fiscal year ended March 31,
      2007.





Revenues





*Product
      Revenues.*  Our total revenues consisted of sales in our three
      segments of (1) optical memory cards, (2) optical card drives, drive
      accessories, maintenance, systems and enabling services, and (3) specialty
      cards
      and card printers, as well as other miscellaneous items.  Product
      revenues for the three and six-month periods ended September 30, 2007 were
      $10.7
      million and $18.6 million, respectively. Product revenues for the three and
      six-month periods ended September 30, 2006 were $6.3 million and $16.8 million,
      respectively.





The
      following table presents our
      product revenue by segment (in thousands, except for percentages):




Three
                  Months Ended
              
              
              Six
                  Months EndedSeptember
                  30,
              
              
              September
                  30,2007
              
              
              2006
              
              
              2007
              
              
              2006Optical
                  memory cards
              
              $
              6,692
              
              
              $
              3,279
              
              
              $
              11,254
              
              
              $
              10,774%
                  of total revenues
              
              
              62
              %
              
              
              52
              %
              
              
              61
              %
              
              
              64
              %Optical
                  cards drives
              
              
              732
              
              
              
              115
              
              
              
              1,087
              
              
              
              299%
                  of total revenues
              
              
              7
              %
              
              
              2
              %
              
              
              6
              %
              
              
              2
              %Specialty
                  cards and card printers
              
              
              3,315
              
              
              
              2,900
              
              
              
              6,253
              
              
              
              5,775%
                  of total revenues
              
              
              31
              %
              
              
              46
              %
              
              
              34
              %
              
              
              34
              %Total
                  revenues
              
              $
              10,739
              
              
              $
              6,294
              
              
              $
              18,594
              
              
              $
              16,848




The
      following table presents our
      optical memory card revenue by major program (in thousands):


Three
                    Months Ended
                
                
                Six
                    Months EndedSeptember
                    30,
                
                
                September
                    30,2007
                
                
                2006
                
                
                2007
                
                
                2006U.S.
                    Green Cards & Laser Visas
                
                $
                2,100
                
                
                $
                1,994
                
                
                $
                4,830
                
                
                $
                4,337Italian
                    National ID Card Programs
                
                
                154
                
                
                
                345
                
                
                
                183
                
                
                
                2,408Canadian
                    Permanent Resident Cards
                
                
                1,028
                
                
                
                404
                
                
                
                1,210
                
                
                
                822National
                    ID Cards in a Middle Eastern Country
                
                
                2,680
                
                
                
                53
                
                
                
                3,545
                
                
                
                53Vehicle
                    Registration in India
                
                
                635
                
                
                
                386
                
                
                
                1,234
                
                
                
                774All
                    other programs
                
                
                95
                
                
                
                97
                
                
                
                252
                
                
                
                2,380Total
                    optical memory card revenues
                
                $
                6,692
                
                
                $
                3,279
                
                
                $
                11,254
                
                
                $
                10,774


Optical
      memory card revenue increased
      for the three-month period ended September 30, 2007 by 104% as compared with
      the
      three-month period ended September 30, 2006 due mainly to the increase in card
      unit volume for a Middle Eastern ID card program and the Canadian Permanent
      Resident card program. Optical memory card revenue increased for the six-month
      period ended September 30, 2007 by 4% as compared with the six-month period
      ended September 30, 2006 due mainly to the increase in card unit volume
      containing for a Middle Eastern ID program, partially offset by a decrease
      in
      both the Italian card program and sports logbook cards for
      Slovenia.





Revenue
      in the optical card drive
      segment, including systems and enabling services, grew about $0.6 million for
      the three-month period ended September 30, 2007 as compared with the three-month
      period ended September 30, 2006 due mainly to activity in the national ID card
      program for a Middle Eastern government.  Revenue in the optical card
      drive segment, including systems and enabling services, grew about $0.9 million
      for the six-month period ended September 30, 2007 as compared with the six-month
      period ended September 30, 2006 due mainly to activity in the national ID card
      program for a Middle Eastern government.  We do not anticipate that we
      will derive significant profits in the near term on drive sales as prices are
      set near the manufacturing cost in order to promote optical memory card
      sales.




24




Specialty
      cards and printers revenue
      was approximately $3.3 million for the three-month period ended September 30,
      2007 or an increase of 14% from the $2.9 million of the three-month period
      ended
      September 30, 2006; and $6.3 million for the six-month period ended September
      30, 2007 or an increase of 8% from the $5.8 million recorded in the six-month
      period ended September 30, 2006 primarily due to the 8% effect of the
      Euro-Dollar exchange rate.





*License
      Fees and Other
      Revenues*.  There were no license revenues for the three and
      six-month periods ended September 30, 2007, and 2006.  We entered into
      a license and optical memory card equipment purchase and support agreements,
      effective April 3, 2004, for optical memory card manufacturing in Slovenia
      which
      were transferred with our approval to Prevent Global in March
      2007.  Refer to Note 2, Item 19 of the notes to condensed consolidated
      financial statements for further disclosure of the Prevent
      agreement.





Backlog





As
      of September 30, 2007, the backlog
      for LaserCard® optical memory cards totaled $7.3 million, which is scheduled for
      delivery in fiscal year 2008, as compared with $5.7 million at March 31, 2007.
      We have only a few customers who generally place orders for a period of several
      months to a year or more so that variations in order placement from a single
      customer can materially affect backlog.  As a result, the relative
      size of our backlog has not been a reliable indicator of future sales revenue
      trends.





In
      addition, the backlog as of
      September 30, 2007, for specialty cards and printers totaled 0.5 million euros
      (approximately $0.7 million) compared with 0.6 million euros (approximately
      $0.8
      million) at March 31, 2007, in addition toa contract to develop a conventional
      non-optical card production facility totaled 0.6 million euros (approximately
      $0.9 million) at September 30, 2007 and 0.7 million euros (approximately $0.9
      million) at March 31, 2007.





We
      had no significant backlog for
      read/write drives at September 30, 2007 or March 31, 2007.





Gross
      Margin





The
      following table represents our
      gross margin in absolute amount and as a percentage of revenue by segment (in
      thousands, except for percentages):




Three
                  Months Ended
              
              
              Six
                  Months EndedSeptember
                  30,
              
              
              September
                  30,2007
              
              
              2006
              
              
              2007
              
              
              2006Optical
                  memory cards
              
              $
              2,783
              
              
              $
              244
              
              
              $
              3,823
              
              
              $
              3,888%
                  of optical memory card revenues
              
              
              42
              %
              
              
              7
              %
              
              
              34
              %
              
              
              36
              %Optical
                  cards drives
              
              
              (251
              )
              
              
              (126
              )
              
              
              (334
              )
              
              
              (304
              )%
                  of optical card drive revenues
              
              NM
              
              
              NM
              
              
              NM
              
              
              NMSpecialty
                  cards and card printers
              
              
              657
              
              
              
              710
              
              
              
              1,361
              
              
              
              1,409%
                  of specialty cards and card printers revenues
              
              
              20
              %
              
              
              24
              %
              
              
              22
              %
              
              
              24
              %Total
                  gross margin
              
              $
              3,189
              
              
              $
              828
              
              
              $
              4,850
              
              
              $
              4,993%
                  of total gross margin
              
              
              30
              %
              
              
              13
              %
              
              
              26
              %
              
              
              30
              %





*Optical
      Memory
      Cards.*  Optical memory card gross margin can vary significantly
      based upon changes in average selling price, production and sales volumes,
      mix
      of card types, production efficiency and yields, and changes in fixed
      costs.  Unit volume greatly affects gross margin due to the absorption
      of fixed manufacturing costs.  The increase in optical memory card
      gross margin to 42% of revenue for the three-month period ended September 30,
      2007, as compared with 7% of revenue for the three-month period ended September
      30 2006, is mainly due to the 50% increase in sales unit volume and the
      resultant gain of production efficiencies. The slight decrease in optical memory
      card gross margin to 34% of revenue for the six-month period ended September
      30,
      2007, as compared with 36% of revenue for the six-month period ended September
      30 2006, is due to the 8% decrease in sales unit volume.




25




*Optical
      Card
      Drives.*  Read/write drive gross margin has been negative over the
      past three years, inclusive of fixed overhead costs, due to low sales volume
      and
      our policy to price drives close to manufacturing cost to promote card
      sales.  This segment also includes enabling services, also with lower
      margins than optical memory cards.  We anticipate that read/write
      drive negative gross margins will continue in the future unless sales volume
      is
      sufficient to cover fixed costs.





*Specialty
      Cards and Card
      Printers.*  The gross margin on specialty cards and card printers
      was 20% and 24% in the three-month periods ended September 30, 2007, and 2006,
      respectively.  Over the past three years, the quarterly gross margins
      have generally been in the low to mid 20% range.





Operating
      Expenses





The
      following table presents
      operating expenses for the three-month periods ended September 30, 2007 and
      2006
      (in thousands, except for percentage):




Three
                  Months Ended
              
              
              Six
                  Months EndedSeptember
                  30,
              
              
              September
                  30,2007
              
              
              2006Selling,
                  general and administrative expenses
              
              $
              3,281
              
              
              $
              2,998
              
              
              $
              6,770
              
              
              $
              6,418Percent
                  of change from prior year
              
              
              9
              %
              
              
              
              
              
              
              5
              %Research
                  and development expenses
              
              $
              704
              
              
              $
              800
              
              
              $
              1,492
              
              
              $
              1,545Percent
                  of change from prior year
              
              
              (12
              %)
              
              
              
              
              
              
              (3
              %)




*Selling,
      General, and
      Administrative Expenses (SG&A).*  The $283,000 increase in
      SG&A expenses for the three-month period ended September 30, 2007 as
      compared with the three-month period ended September 30, 2006 was mainly due
      to
      the increase of $109,000 in stock-based compensation expenses, $33,000 of
      depreciation expenses related to the ERP implementation, and the increase of
      $141,000 in sales and marketing initiatives including filling the newly created
      position of Vice President of Sales.  The $352,000 increase in
      SG&A expenses for the six-month period ended September 30, 2007 as compared
      with the six-month period ended September 30, 2006 was mainly due to the
      increase of $180,000 in stock-based compensation expenses, $65,000 of
      depreciation expenses related to the ERP implementation, and the increase of
      $107,000 in sales and marketing initiatives including filling the newly created
      positions of Vice President of Sales and Director of Marketing.  We
      believe that SG&A expenses for fiscal year 2008 will be higher than fiscal
      year 2007 levels, mainly due to expected increases in stock-based compensation
      and marketing and selling expenses.





*Research
      and Development Expenses
      (R&D)*.  The decrease in R&D expenses during the three and
      six-month periods ended September 30, 2007 as compared with the three and
      six-month periods ended September 30, 2006 was mainly due to share-based
      expenses and the closure of some R&D projects such as the employee badging
      system and the optical chip project. We are continuing our efforts to develop
      new optical memory card features and structures, including various composite
      card structures to allow the insertion of contactless chips with radio frequency
      (RF) capability, dual-interface (contact-contactless) with optical memory,
      OVD
      (optically variable device) products, and other market-driven
      requirements.  We are also performing optical media development to
      allow new form factors for more flexibility in card layouts and integrated
      security features; enhanced optical memory card read/write drives for both
      increased reliability and ease of use and integration; new versions of read-only
      drives (readers) to meet various operational requirements such as office desktop
      units or handheld field units with integrated displays, biometrics, and RFID
      capability; and new software products in an effort to provide new products
      that
      can stimulate optical memory card sales growth. For example, we recently have
      developed a new Green Card Authenticator application based on the LaserCard®
reader that is currently being evaluated in the market, which allows employers
      to quickly validate potential employees’ Green Cards in real time during the
      hiring process. Additionally, after a year of in-house evaluation of our
      OpticalProximity system for building access control, we have completed
      installation at our first customer location, as a test and evaluation
      site.  In our German subsidiary, we recently completed the development of a
      new integrated card personalization system and have shipped several systems
      to
      customers in the past year. We anticipate that these ongoing research and
      development efforts should result in enhanced card features and capabilities,
      new versions of read-only drives, and drives with advanced security features
      and/or lower manufacturing costs; however, there is no assurance that such
      product development efforts will be successful.  These features are
      important for our existing and future optical memory card markets.  We
      anticipate the R&D expenditures will increase about 15% from the previous
      quarter in each of the next two quarters.




26





*Other
      Income,
      Net*.  The decrease in interest income was mainly due to a lower
      amount of invested funds.  The decrease in interest expense was due to
      improved management of the forward contracts.





The
      following table presents other
      income, net for the three and six-month periods ended September 30, 2007 and
      2006 (in thousands):




Three
                  Months Ended
              
              
              Six
                  Months EndedSeptember
                  30,
              
              
              September
                  30,2007
              
              
              2006
              
              
              2007
              
              
              2006Interest
                  income
              
              $
              207
              
              
              $
              268
              
              
              $
              446
              
              
              $
              516Other
                  income
              
              
              1
              
              
              
              10
              
              
              
              18
              
              
              
              14Interest
                  expense
              
              
              (18
              )
              
              
              (36
              )
              
              
              (34
              )
              
              
              (82
              )Other
                  expense
              
              
              (1
              )
              
              
              (9
              )
              
              
              -
              
              
              
              (9
              )$
              189
              
              
              $
              233
              
              
              $
              430
              
              
              $
              439





*Income
      Taxes*.  The
      tax benefit in the six-month period ended September 30, 2007 included about
      $99,000 credit for our foreign subsidiary’s assimilation of the new reduction in
      tax rate and $26,000 for the subsidiary’s loss that is expected to be refunded
      in its jurisdiction.





The
      following table presents income
      taxes for the three and six-month periods ended September 30, 2007 and 2006
      (in
      thousands):




Three
                  Months Ended
              
              
              Six
                  Months EndedSeptember
                  30,
              
              
              September
                  30,2007
              
              
              2006
              
              
              2007
              
              
              2006U.S.
                  income taxes
              
              $
              -
              
              
              $
              (46
              )
              
              $
              -
              
              
              $
              -Foreign
                  income tax
              
              
              (109
              )
              
              
              (19
              )
              
              
              (125
              )
              
              
              (71
              )$
              (109
              )
              
              $
              (65
              )
              
              $
              (125
              )
              
              $
              (71
              )





LIQUIDITY
      AND CAPITAL RESOURCES





The
      following table summarizes cash,
      cash equivalents and investments as of September 30, 2007 and March 31, 2007
      (in
      thousands):




September
                  30,
              
              
              March
                  31,2007
              
              
              2007Cash
                  and cash equivalents
              
              $
              3,022
              
              
              $
              3,026Cash,
                  cash equivalents and short-term investments
              
              $
              18,522
              
              
              $
              20,526




27


The
      following table displays the
      sources and uses of cash by activity (in thousands):




Six
                  Months EndedSeptember
                  30,2007
              
              
              2006Net
                  cash used in operating activities
              
              $
              (1,749
              )
              
              $
              (1,009
              )Net
                  cash provided by (used in) investing activities
              
              $
              1,377
              
              
              $
              (2
              )Net
                  cash provided by financing activities
              
              $
              566
              
              
              $
              748




Cash
      used in operations of $1.7
      million for the six-month period ended September 30, 2007 consists mainly of
      of
      the $0.5 million used due to the net loss, net of non-cash items, and the
      decrease of $1.2 million in liabilities.  Cash used by operations of
      $1 million for the six-month period ended September 30, 2006 consists mainly
      of
      $0.2 million used due to the net loss, net of non-cash items, and the $0.8
      million decrease in liabilities.





Net
      cash provided by investing
      activities of $1.4 million for the six-month period ended September 30, 2007,
      was due to $2 million from net proceeds provided from investments, and capital
      and patent expenditures of approximately $0.6 million.  Net cash used
      by investing activities was immaterial for the six-month period ended September
      30, 2006. It consisted of a net proceeds provided from investments of $1.6
      million offset by about an equal amount of capital equipment
      expenditures.





Net
      cash provided by financing
      activities for the six-month period ended September 30, 2007 was $0.6 million,
      which primarily consisted of  net proceeds from the sale of common
      stock under our employee stock plans.  Net cash provided by financing
      activities for the six-month period ended September 30, 2006 was $0.7 million,
      which primarily consisted of net proceeds from the sale of common stock under
      our employee stock plans.





We
      believe that the estimated level
      of revenues and customer advance payments over the next twelve months will
      be
      sufficient to generate cash from operating activities over the same
      period.  However, quarterly fluctuations are expected, especially in
      the December 2007 quarter where we expect to have a decrease in
      revenue.  Operating cash flows could be negatively impacted to a
      significant degree if either of our largest U.S. government programs were to
      be
      delayed, reduced, canceled, or not extended, or if the Italian CIE card program
      does not grow as planned, and if these programs are not replaced by other card
      orders or other sources of income, or if increases in product revenues or
      licenses do not keep pace with anticipated increases in marketing and R&D
      expenditures.





We
      have not established a line of
      credit.  We may negotiate a line of credit, although no assurance can
      be made that such financing would be available on favorable terms or at all,
      if
      needed.





As
      a result of our net loss for the
      six-month period ended September 30, 2007, our accumulated deficit increased
      from $38.7 million to $41.5 million.  Upon adoption of FIN 48, the
      Company recognized a cumulative effect adjustment of $62,000, decreasing its
      income tax liability for unrecognized tax benefits, and decreasing the March
      31,
      2007 accumulated deficit balance. Stockholders’ equity at September 30, 2007
      decreased to $21.3 million from $22.6 million at March 31, 2007 as a result
      of
      the net loss partially offset by the cumulative effect upon adoption of FIN
      48
      and issuance of common stock under our employee stock plans.





We
      consider all highly liquid
      investments, consisting primarily of commercial paper, discount notes, and
      U.S.
      government bonds, with original or remaining maturities of three months or
      less
      at the date of purchase, to be cash equivalents.  All investments with
      original or remaining maturities of more than three months but not more than
      one
      year at the date of purchase are classified as
      short-term.  Investments with original or remaining maturities of more
      than one year at the date of purchase are classified as long-term.  We
      determine the length of our investments after considering our cash requirements
      and yields available for the type of investment considered by our
      Company.  We determine the appropriate classification of debt and
      equity securities at the time of purchase and reevaluate the classification
      of
      investments as of each balance sheet date.  As of September 30, 2007,
      we had $15.5 million of short-term investments, compared with $17.5 million
      of
      short-term investments at March 31, 2007.  These investments were in
      the form of auction rate securities.  All auction rate securities are
      accounted for as available-for-sale and all other interest-bearing securities
      are accounted for as held-to-maturity.




28




We
      made capital equipment and
      leasehold improvement purchases of approximately $0.6 million for the six-month
      period ended September 30, 2007 compared with approximately $1.5 million for
      the
      six-month period ended September 30, 2006.  We have an annual
      production capacity of 10 million roll-process cards in conjunction with
      approximately 9 million sheet-process cards depending upon the optimum mix
      of
      features.  We plan to purchase additional production equipment in a
      series of steps when we deem appropriate based in part upon orders and
      forecasts.  We may use cash on hand and cash generated from operations
      or debt financing to fund possible capital expenditures of possibly $8 million
      for equipment and leasehold improvements for card production, read/write drive
      tooling and assembly, and general support items as customer orders justify
      the
      investment.  These expenditures could occur throughout the next twelve
      to eighteen months.





During
      the three-month period ended
      September 30, 2007, we entered into a lease agreement with a four-year term
      to
      acquire equipment.  This was recorded as a capitalized lease in
      the amount of about $113,000 (80,000 euros) in accordance with SFAS 13,
      Accounting for Leases.  The Company had no other debt financing
      activities.





OFF-BALANCE
      SHEET ARRANGEMENTS





We
      have no off-balance sheet
      arrangement as of September 30, 2007 and March 31, 2007, that has or is
      reasonably likely to have a current or future effect on our financial condition,
      changes in financial condition, revenues or expenses, results of operations,
      liquidity, capital expenditures, or capital resources that is material to
      investors.





RECENT
      ACCOUNTING PRONOUNCEMENTS





Recent
      accounting pronouncements are
      disclosed in Note 1 of the notes to condensed consolidated financial
      statements.








29





**ITEM
                3.**
            **QUANTITATIVE
                AND QUALITATIVE DISCLOSURES ABOUT MARKET
                RISKS**





*Interest
      Rate Risk.*  We invest our cash, beyond that needed for daily
      operations, in high quality debt securities.  In doing so, we seek
      primarily to preserve the value and liquidity of our capital and, secondarily,
      to safely earn income from these investments.  To accomplish these
      goals, we invest only in debt securities issued by (a) the U.S. Treasury and
      U.S. government agencies, state agencies and corporations and (b) debt
      instruments that meet the following criteria:





●
            Commercial
                paper rated A1/P1 or debt instruments rated AAA, as rated by the
                major
                rating services●
            Can
                readily be sold for cash





Investments
      in both fixed rate and
      floating rate interest earning instruments carry a degree of interest rate
      risk.  Fixed rate securities may have their fair market value adversely
      impacted because of a rise in interest rates, while floating rate securities
      may
      produce less income than expected if interest rates fall. Due in part to these
      factors, our future investment income may fall short of expectations because
      of
      changes in interest rates or we may suffer losses in principal if forced to
      sell
      securities that have seen a decline in market value because of changes in
      interest rates.





There
      were no material changes for
      the six-month period ended September 30, 2007 in our exposure to market risk
      for
      changes in interest rates.





The
      following summarizes short-term
      investments at fair value (in thousands), weighted average yields and maturity
      dates:




September
                  30, 2007Auction
                  rate securities
              
              $
              15,500Weighted
                  average yield
              
              
              6.27%Total
                  investments
              
              $
              15,500Maturity
                  dates
              
              October
                  1 - 25, 2007





There
      were no long-term investments
      as of September 30, 2007.





*Foreign
      Currency Exchange Rate
      Risk*.  Our U.S. operations sell products in various international
      markets.  For the six-month period ended September 30, 2007, revenue
      by our German subsidiary of approximately $6.3 million was denominated in
      foreign currency.  In addition, some raw material purchases and
      purchased services are denominated in foreign currency.  Cash provided
      by/used in CCD operating activities has been immaterial.





We
      use short-term foreign exchange
      forward contracts to mitigate foreign currency risk associated primarily with
      inter-company receivables and payables, and loans receivable (denominated in
      Euros) to our German subsidiary.  Our foreign exchange forward
      contracts are not designated for accounting purposes as hedging instruments
      under SFAS No. 133, “Accounting for Derivative Instruments and Hedging
      Activities,” as amended.  Accordingly, any gains or losses resulting
      from changes in the fair value of the forward contract are reported in other
      income, net of expenses.  The gains and losses on these forward
      contracts generally offset gains and losses associated with the underlying
      foreign currency denominated inter-company receivables and payables, and loans
      receivable.  At September 30, 2007, we had a foreign exchange forward
      contract with a maturity of less than 30 days to purchase 2.3 million euros.
      The
      fair value of the forward contract was not material at September 30,
      2007.








30





**ITEM
                4.**
            **CONTROLS
                AND PROCEDURES**





(a)       *Evaluation
      of Disclosure Controls and Procedures*.  We maintain disclosure
      controls and procedures that are designed to ensure that information required
      to
      be disclosed by us in reports that we file or submit under the Securities
      Exchange Act of 1934 is recorded, processed, summarized, and reported within
      the
      time periods specified in Securities and Exchange Commission rules and forms,
      and that such information is accumulated and communicated to our management,
      including our Chief Executive Officer and Chief Financial Officer, as
      appropriate, to allow timely decisions regarding required disclosure. In
      designing and evaluating our disclosure controls and procedures, management
      recognized that disclosure controls and procedures, no matter how well conceived
      and operated, can provide only reasonable, not absolute, assurance that the
      objectives of the disclosure controls and procedures are met.  Our
      disclosure controls and procedures have been designed to meet, and management
      believes that they meet, reasonable assurance standards.  Additionally, in
      designing disclosure controls and procedures, our management necessarily was
      required to apply its judgment in evaluating the cost-benefit relationship
      of
      possible disclosure controls and procedures. The design of any disclosure
      controls and procedures also is based in part upon certain assumptions about
      the
      likelihood of future events, and there can be no assurance that any design
      will
      succeed in achieving its stated goals under all potential future
      conditions.





Based
      on their evaluation as of the
      end of the period covered by this Form 10-Q, our Chief Executive Officer and
      Chief Financial Officer have concluded that, subject to the limitations noted
      above, as of such date, our disclosure controls and procedures were effective
      at
      the reasonable assurance level.





(b)           *Changes
      in Internal Control over Financial Reporting.*  There were no
      significant changes in our internal control over financial reporting that
      occurred during the three-month period ended September 30,
      2007**that have materially affected, or are reasonably likely to
      materially affect, our internal control over financial reporting.





**PART
      II.  OTHER INFORMATION**





**Item
      1. - Legal Proceedings**





From
      time to time we are a party to
      litigation matters and pending or threatened claims and assessments that are
      normal in the course of our operations. While we believe that the ultimate
      outcome of these matters will not have a material adverse effect on our
      financial position, results of operations or cash flows, the outcome of these
      matters is not determinable and negative outcomes may adversely affect our
      financial position, liquidity, or results of operations.





**Item
      1A. – Risk Factors**





A
      revised description of the risk
      factors associated with our business is set forth below. This description
      includes any material changes to and supersedes the description of the risk
      factors associated with our business previously disclosed in Part II, Item
      1A of
      our Quarterly Report on Form 10-Q for the fiscal quarter ended June 30,
      2007.  Because of these risk factors, as well as other factors
      affecting the Company’s business and operating results and financial condition,
      including those set forth elsewhere in this report, our actual future results
      could differ materially from the results contemplated by the forward-looking
      statements contained in this report and our past financial performance should
      not be considered to be a reliable indicator of future performance, so that
      investors should not use historical trends to anticipate results or trends
      in
      future periods.





**RISK
      FACTORS**





OUR
      CURRENT AND FUTURE EXPECTED
      REVENUES ARE DERIVED FROM A SMALL NUMBER OF ULTIMATE CUSTOMERS SO THAT THE
      LOSS
      OF OR REDUCTIONS IN PURCHASES BY ANY ONE ULTIMATE CUSTOMER COULD MATERIALLY
      REDUCE OUR REVENUES AND LEAD TO LOSSES.  During our six-month period
      ended September 30, 2007 and each of the previous three fiscal years, we derived
      more than 64%of our
      optical memory card and drive-related revenues from five programs ― two U.S.
      government programs and three foreign government programs.  Due
      to the lengthy sales cycles, we believe that these programs, with perhaps the
      addition of a few other foreign programs, will be the basis for a majority
      of
      our revenues in the near-term.  The loss of or reductions in purchases
      by any one customer due to program cutbacks, competition, or other reasons
      would
      materially reduce our revenue base. Annual or quarterly losses occur when there
      are material reductions, gaps or delays in card orders from our largest U.S.
      or
      foreign government programs or if such programs were to be reduced in scope,
      delayed, canceled, or not extended and not replaced by other card orders or
      other sources of income.




31




WE
      INCURRED NET LOSSES DURING FIFTEEN
      OF THE PREVIOUS EIGHTEEN QUARTERS AND MAY NOT BE ABLE TO GENERATE SUFFICIENT
      REVENUE IN THE FUTURE TO REGAIN PROFITABILITY. Although we generated $3.3
      million of profit during the three quarters from October 1, 2005 through June
      30, 2006, we incurred a loss for our last five quarters and we had incurred
      losses as well for the ten quarters preceeding the quarter ended October 1,
      2005.  Our loss for the six-month period ended September 30, 2007, was
      $2.9 million and for our fiscal year 2007 our loss was $12.4 million, and we
      had
      an accumulated deficit of $41.5 million at September 30, 2007.  There
      can be no assurance that we will generate enough revenues in the near term
      to
      achieve profitability.  We are relying upon our optical memory card
      technology to generate future product revenues, earnings, and cash
      flows.  If alternative technologies emerge or if we are otherwise
      unable to compete, we may not be able to achieve or sustain profitability on
      a
      quarterly or annual basis.  Annual or quarterly losses would also
      continue if increases in product revenues or license revenues do not keep pace
      with increased selling, general, administrative, research and development
      expenses and the depreciation and amortization expenses associated with capital
      expenditures.





OUR
      PROGRAM WITH ITALY, WHICH WE
      BELIEVE WILL BE ONE OF OUR LARGEST CUSTOMERS ONCE FULLY IMPLEMENTED, MAY BE
      DELAYED OR CANCELLED FOR REASONS OUTSIDE OUR CONTROL WHICH WOULD CAUSE US TO
      HAVE LESS REVENUE THAN PLANNED AND WOULD LIKELY LEAD US TO CONTINUED OPERATING
      LOSSES IF OTHER EXPECTED BUSINESS DOES NOT MATERIALIZE.  We believe
      that the Italian government will be our largest customer when the CIE program
      is
      fully implemented.  The CIE and PSE card programs may comprise a
      significant portion of future revenues.  Sales of cards and drives for
      the Italian government’s CIE and PSE card programs have been a small portion of
      our total revenue for the past year.  However, during fiscal year
      2007, we increased card manufacturing capacity to meet anticipated demand and
      we
      have expected a large order since the first quarter of fiscal year
      2007.  This order has not yet been placed and there can be no
      assurance that the order will be placed in the near-term or that demand will
      increase or be sustained as we anticipate.  We would most likely
      continue to incur losses if orders are further delayed, or if full
      implementation is canceled, not extended, or if the program is not implemented
      at the level foreseen or if the government was to change its technology decision
      and no longer use optical memory cards and other new programs do not materialize
      as expected.  While selected Italian cities have issued cards and
      tested the distributed card issuing process, full implementation is dependent
      upon regionalized and further decentralized card issuance infrastructure
      developments being successfully undertaken and the national ID card system
      functioning as designed, of which there can be no assurance. Also, if Laser
      Memory Card SpA of Italy, our VAR customer for this program, were to discontinue
      participation in this program or discontinue operations, interruptions could
      occur in orders or shipments for this program until a replacement could be
      found.  Overcoming some of these issues may be difficult and complex
      and involve third parties, which could be time consuming and expensive and
      lead
      to further delays for implementation.





THE
      U.S. GOVERNMENT, ONE OF OUR TWO
      LARGEST ULTIMATE CUSTOMERS, HAS THE RIGHT TO DELAY ITS ORDERS OR COULD CHANGE
      ITS TECHNOLOGY DECISIONS, WHICH WOULD RESULT IN ORDER DELAYS AND POSSIBLY IN
      OPERATING LOSSES. For the six-month period ended September 30, 2007 revenues
      included sales of approximately $4.8 million of Green Cards and Laser Visa
      BCCs,
      and comprised 26% of our total revenue. For the six-month period ended September
      30, 2006, revenues included sales of approximately $4.3 million of Green Cards
      and Laser Visa BCCs, and comprised 26% of our total revenue.  These
      revenues could average approximately $10 million annually ($8 million for Green
      Cards and $2 million for Laser Visa BCCs) if the U.S. government continues
      to
      use our cards in these programs, continues to personalize cards at that rate
      and
      continues to maintain an inventory level equal to six-months of
      usage.  On April 2, 2007, we announced a subcontract with General
      Dynamics Information Technology (GDIT) for the manufacture and supply of Green
      Cards and Laser Visas.  The subcontract is for an initial 12-month
      period with optional extensions up to a total of five years.  Under
      the first purchase order received under the subcontract, we recorded revenue
      of
      $5.9 million in Green Cards and Laser Visas over the period from March through
      September 2007.  At September 30, 2007 we had backlog, due to a
      subsequent order, of $1.2 million for these programs.  The Green Card
      is currently undergoing a redesign process.  It is possible that our
      revenue will be reduced during the period of transition from the current card
      to
      the new design after which we would expect orders to increase as their inventory
      is rebuilt to their desired safety-stock level.  Under U.S. government
      procurement regulations, even with a contract in place, the government reserves
      certain rights, such as the right to withhold releases, to reduce the quantities
      released, extend delivery dates, reduce the rate at which cards are issued,
      and
      cancel all or part of its unfulfilled purchase orders.  We would most
      likely have reduced operating results if one or both of these U.S. government
      programs were to be delayed, canceled, or not extended or if the government
      were
      to change its technology decision and no longer use optical memory
      cards.  We have been advised by the program prime contractor that the
      U.S. State Department, who is the customer for Laser Visa Border Crossing Cards,
      intends to introduce Radio Frequency Identification (RFID) technology into
      this
      program starting in calendar year 2008.  We intend to offer a hybrid
      version of our optical memory card including such RFID capability.  There
      is no assurance we will be able to successfully win new Laser Visa orders if
      this technology change occurs as projected.  Our U.S. government card
      deliveries depend upon the issuance of corresponding order releases by the
      government to its prime contractor and then to us.  If GDIT, our VAR
      customer, and the U.S. government prime contractor for this program, were to
      discontinue participation in this program or discontinue operations,
      interruptions could occur in orders or shipments for this program until a
      replacement could be found.




32


OUR
      OPTICAL MEMORY CARD PRODUCT
      REVENUES WILL NOT GROW IF WE DO NOT WIN NEW BUSINESS IN THE U.S. OR ABROAD
      OR IF
      THE ITALIAN NATIONAL ID PROGRAM IS NOT IMPLEMENTED AS
      ANTICIPATED.  Quarterly OMC revenues from April 1, 2006 through
      September 30, 2007 from our core programs have been $5.3 million, $3.2 million,
      $2.9 million, $4.9 million, $4.4 million, and $6.6 million, respectively. 
These programs include the U.S. Green Card, the Laser Visa BCC, the Canadian
      Permanent Resident Card, the vehicle registration card used in India, and a
      national ID card used in a Middle Eastern country.  During full
      implementation, we expect our revenues from programs in Italy will reach
      approximately $40 to $50 million per year.  We also are working on
      potential secure ID card business in ten countries around the
      world.  In order for us to achieve our overall revenue growth goal, we
      will need the Italian programs to continue and reach their anticipated levels,
      of which there can be no assurance, and we will also need to win some of the
      new
      business opportunities we see in the U.S. and abroad.  Emerging
      optical memory card programs or prospective applications include permanent
      resident cards and national identification cards in several countries as well
      as
      secure identification cards for governmental agencies.  There can be
      no assurance that we will receive sizable future orders for any of these
      programs, nor any assurance that we will be able to win any other new business
      in the U.S. or abroad which is necessary to grow our business to the level
      we
      desire.





SINCE
      THE SALES CYCLE FOR OUR
      PRODUCTS IS TYPICALLY LONG AND UNPREDICTABLE, WE HAVE DIFFICULTY PREDICTING
      WHEN
      NEW BUSINESS WILL CONTRIBUTE TO REVENUE GROWTH.  Obtaining substantial
      orders usually involves a lengthy sales cycle, requiring marketing and technical
      time and expense with no guarantee that substantial orders will result. This
      long sales cycle results in uncertainties in predicting operating results,
      particularly on a quarterly basis. In addition, since our major marketing
      programs involve the U.S. and various foreign governments and quasi-governmental
      organizations, additional uncertainties and extended sales cycles can result.
      Factors which increase the length of the sales cycle include government
      regulations, bidding procedures, budget cycles, and other government procurement
      procedures, as well as changes in governmental policy.





WE
      COULD EXPERIENCE EQUIPMENT, RAW
      MATERIAL, QUALITY CONTROL, OR OTHER PRODUCTION PROBLEMS ESPECIALLY IN PERIODS
      OF
      INCREASING VOLUME.  There can be no assurance that we will be able to
      meet our projected card manufacturing capacity if and when customer orders
      reach
      higher levels. We have made and intend to continue to make significant capital
      expenditures to expand our card manufacturing capacity. For example, we may
      invest up to $8 million of capital expenditures during the next twelve to
      eighteen months assuming certain business developments. However, since customer
      demand is difficult to predict, and we generally wait for such demand to
      materialize prior to making capital expenditure commitments, we may be unable
      to
      ramp up our production quickly enough to fill new customer orders in a timely
      fashion. This could cause us to lose new business and possibly existing
      business. In addition, if we overestimate customer demand, we could incur
      significant costs from creating excess capacity which was the case during fiscal
      year 2005 and 2007.  We may experience manufacturing complications
      associated with increasing our manufacturing capacity of cards and drives,
      including the adequate production capacity for sheet-lamination process cards
      to
      meet order requirements and delivery schedules. We may also experience
      difficulties implementing new manufacturing processes, meeting customers’
quality or standards requirements, or outsourcing some of our manufacturing.
      The
      addition of fixed overhead costs increases our breakeven point and results
      in
      lower profit margins unless compensated for by increased product sales. When
      purchasing raw materials for our anticipated optical card demand, we take into
      consideration the order-to-delivery lead times of vendors and the economic
      purchase order quantity for such raw materials. If we over-estimate customer
      demand, excess raw material inventory can result.




33




WE
      ARE CURRENTLY OUR OWN SOLE SOURCE
      OF OPTICAL MEMORY CARDS AND SEVERAL OF THE STEPS IN OUR CARD MANUFACTURING
      PROCESS HAVE NO BUILT-IN REDUNDANCY.  THEREFORE, WE ARE SUSCEPTIBLE TO
      SUPPLY INTERRUPTIONS, INCLUDING IF CERTAIN MACHINERY WERE TO BREAK
      DOWN.  MUCH OF OUR MACHINERY IS COMPRISED OF CUSTOM VERSIONS OF
      MACHINERY SOME OF WHICH IS MORE THAN 20 YEARS OLD.  Unless and until
      Prevent Global comes on line as a second source, of which there can be no
      assurance, we are the only source of our optical memory cards, making them
      in
      our Mountain View facility using a proprietary manufacturing process, with
      our
      German subsidiary capable of performing a few key steps in certain
      instances.  There is no assurance that the Prevent facility, if and
      when operational, will be an acceptable second source to some of our key
      government accounts.  We are susceptible to supply interruptions or
      yield decreases when our line goes down or malfunctions.  Much of our
      machinery is comprised of customized versions of machinery which has long lead
      times to replace and may be difficult to maintain or repair, requiring us to
      be
      self-reliant.  Some of the machinery we use is more than 20 years old
      and is no longer manufactured for others, which would require us to adapt a
      newer version to our needs, which would involve additional effort on our
      part.





IF
      WE ARE UNABLE TO BUY RAW MATERIALS
      IN SUFFICIENT QUANTITIES AND ON A TIMELY BASIS, WE WILL NOT BE ABLE TO DELIVER
      PRODUCTS TO CUSTOMERS ON TIME WHICH COULD CAUSE US TO LOSE CUSTOMERS, AND OUR
      REVENUES COULD DECLINE.  We depend on sole source and limited source
      suppliers for optical card raw materials. Such materials include plastic films
      used in optical memory card production, which are available from one supplier
      in
      the U.S. and from multiple foreign suppliers. Processing chemicals, inks, and
      bonding adhesives are obtained from various U.S. and foreign suppliers. Certain
      photographic films are commercially available solely from Eastman Kodak Company,
      of the United States. We currently have on hand and on order enough inventory
      of such films to produce cards for orders projected over the next nine to
      fifteen months.  No assurance can be given that Kodak will continue to
      supply such photographic films on a satisfactory basis and in sufficient
      quantities although we believe Kodak will continue to supply such films for
      several years.  If Kodak were to announce that it was no longer going to
      sell film, we would request that Kodak provide us with a last-buy opportunity
      which we would plan to take maximum advantage of in order to purchase from
      Kodak
      sufficient supply of films to continue our card production until an appropriate
      substitute can be found or developed, although no assurance can be given that
      Kodak would provide us with such an opportunity. Also we have ongoing
      R&D efforts in the area of alternate media, designed to develop an alternate
      to the current Kodak film-based media, though there is no assurance that those
      efforts will be successful.





AN
      INTERRUPTION IN THE SUPPLY OF
      READ/WRITE DRIVE PARTS OR DIFFICULTIES ENCOUNTERED IN READ/WRITE DRIVE ASSEMBLY
      COULD CAUSE A DELAY IN DELIVERIES OF DRIVES AND OPTICAL MEMORY CARDS AND A
      POSSIBLE LOSS OF SALES, WHICH WOULD ADVERSELY AFFECT OUR OPERATING
      RESULTS.  Several major components of our read/write drives are
      designed specifically for our read/write drive. For example, the optical
      recording head for the current drive is a part obtained from one supplier;
      and
      at current production volumes, it is not economical to have more than one
      supplier for this custom component. The ability to produce read/write drives
      in
      high-volume production, if required, will be dependent upon maintaining or
      developing sources of supply of components that meet our requirements for high
      volume, quality, and cost. In addition, we could encounter quality control
      or
      other production problems at high-volume production of read/write drives. We
      are
      also investing in research and development in an effort to develop new drive
      products.





IF
      WE ARE UNABLE TO DEVELOP UPGRADED
      READ/WRITE DRIVES THAT COST LESS TO MANUFACTURE AND ALSO A READ-ONLY DRIVE,
      WE
      COULD LOSE POTENTIAL NEW BUSINESS.  The price of our read/write drive
      product line ranges from $1,800 to approximately $2,500 depending on features
      and quantity purchased.  We believe the price of our drives is
      competitive in applications requiring a large number of cards per drive, because
      the relatively low cost for our cards offsets the high cost per drive when
      compared with our major competition, IC card systems. In addition, we have
      undertaken a product development program for a portable read-only drive that
      has
      been sampled in limited quantities at prices less than $1,000, which we believe
      would increase our prospects for winning future business.  However,
      there can be no assurance that our development program will be successful,
      that
      volume production of any new design will occur in the near term, or that
      significantly lower manufacturing costs or increased sales will
      result.




34




WE
      MAY NOT BE ABLE TO ADAPT OUR
      TECHNOLOGY AND PRODUCTS TO COMMERCIAL APPLICATIONS WHICH GENERATE MATERIAL
      AMOUNTS OF REVENUE AND PROFIT.  THIS WOULD LIMIT THE FUTURE GROWTH OF
      OUR BUSINESS TO THE GOVERNMENT SECTOR AND THE LACK OF DIVERSIFICATION EXPOSES
      US
      TO ENHANCED RISK OF COMPETITION.  We are seeking commercial
      applications for our optical memory products in order to lessen our dependence
      upon the government sector.  Our efforts to develop OpticalProximityTM
access cards are one example.  We may be unsuccessful in these efforts
      in which case we would not obtain the diversity of revenues we are seeking
      for
      the future.  If the use of our technology remains limited to secure ID
      card applications for government use, then we are more susceptible to other
      technologies and products making in-roads or to political pressures or changing
      laws.





IF
      WE ARE UNABLE TO ADAPT TO
      TECHNOLOGICAL CHANGES IN THE SECURE ID CARD INDUSTRY AND IN THE INFORMATION
      TECHNOLOGY INDUSTRY GENERALLY, WE MAY NOT BE ABLE TO EFFECTIVELY COMPETE FOR
      FUTURE BUSINESS.  The secure ID technology industry is characterized
      by rapidly changing technology and continuing product evolution. The future
      success and growth of our business will require the ability to maintain and
      enhance the technological capabilities of the LaserCard® product line. There can
      be no assurance that our products currently sold or under development will
      remain competitive or provide sustained revenue growth.





SEVERAL
      OF OUR FOREIGN PROGRAMS
      INVOLVE OUR CARDS AS PART OF A SOLUTION WHICH INCLUDES TECHNOLOGIES OF THIRD
      PARTIES.  SOMETIMES THESE THIRD PARTY TECHNOLOGIES ARE INTEGRATED WITH
      OUR CARDS BY OUR SYSTEMS INTEGRATOR CUSTOMER OR SUBCONTRACTOR.  WE
      THEREFORE HAVE VARYING DEGREES OF CONTROL OVER THE OVERALL SYSTEM WHICH COULD
      LEAD TO TECHNICAL, QUALITY, AND SYSTEM COMPATIBILITY ISSUES WHICH ARE DIFFICULT,
      EXPENSIVE, AND TIME CONSUMING TO SOLVE. THIS COULD CAUSE OUR ULTIMATE CUSTOMERS,
      GENERALLY GOVERNMENTS, TO FIND FAULT IN OPTICAL CARDS AND SWITCH TO OTHER
      SOLUTIONS EVEN THOUGH OUR OPTICAL TECHNOLOGY IS NOT THE ROOT
      CAUSE.  In certain of our current foreign programs such as Italy,
      India, and a Middle Eastern country, and possibly in future other programs,
      various third party technologies such as contact or contactless chips will
      be
      added to our cards.  The embedding or addition of other technologies
      to the LaserCard® optical memory card, especially when contracted to independent
      third parties, could potentially lead to technical, compatibility and other
      issues.  In such circumstances, it may be difficult to determine
      whether a fault originated with our technology or that of a co-supplier or
      the
      person embedding or adding the third party technology to our
      cards.  If such faults occur, they could be difficult, expensive, and
      time-consuming to resolve.  Such difficulties could lead to our
      ultimate customers, the foreign governments, switching to other technologies
      even though optical technology is not the root cause of the
      fault(s).  The resulting loss of customers would adversely affect our
      revenues.





WE
      ARE DEPENDENT ON SYSTEMS
      INTEGRATORS FOR IMPLEMENTATION OF CARD PROGRAMS AND THEIR METHOD OF
      IMPLEMENTATION MAY NOT BE SUCCESSFUL DUE TO QUALITY OR COST.  We sell
      to VARs and system integrators who in turn sell solutions to the end
      customer.  The integrators may not follow the recommendations we
      provide for the handling, possible incorporation of smart or RFID chips,
      processing, and/or printing on our cards and working with the end-user in the
      card issuing process.  This could lead to low quality or high costs or
      both resulting in damage to our reputation and/or loss of the
      contract.  We work to train the integrators to avoid such situations,
      but cannot control their work.  Also, we can step in to demonstrate
      how to successfully implement an optical memory card issuing
      system.  We plan to continue to offer this support then transition the
      card issuing process to local resources once the program is running
      successfully.




35




OUR
      OPTICAL MEMORY CARDS HAVE A
      COMPLEX STRUCTURE THAT REQUIRES A HIGH DEGREE OF TECHNICAL KNOWLEDGE AND
      EXPERIENCE TO MEET INCREASINGLY STRINGENT PERFORMANCE REQUIREMENTS.  WE
      HAVE AND COULD IN THE FUTURE AGREE TO CERTAIN CHARACTERISTICS BEYOND THOSE
      REQUIRED IN INDEPENDENTLY PUBLISHED STANDARDS.  THIS COULD INCREASE OUR
      COST OF MANUFACTURING CARDS OR RESULT IN ACCEPTING RETURNS OR GIVING CREDITS
      TO
      THE CUSTOMER.  MANY CUSTOMERS MAINTAIN SIGNIFICANT ADVANCE INVENTORY WHICH
      INCREASES THIS RISK.  There can be no assurance that we will be able
      to meet customers’ quality or standards requirements consistently.  This
      could lead to high manufacturing costs due to low product yields or unexpected
      product returns.  We employ a rigorous quality control procedure, are ISO
      9000 certified and we strive to deliver product that meets published standards
      and customer expectations.  Even so, we can not give assurance that our
      products will meet customer expectations in all cases.  We have in the
      past, and may in the future, replace product held by the customer or give credit
      for products previously delivered.





IF
      WE FAIL TO PROTECT OUR
      INTELLECTUAL PROPERTY RIGHTS, COMPETITORS MAY BE ABLE TO USE OUR TECHNOLOGIES,
      WHICH COULD WEAKEN OUR COMPETITIVE POSITION, REDUCE REVENUES, OR INCREASE
      COSTS.  We use a combination of patent, trademark, and trade secret
      laws, confidentiality procedures, and licensing arrangements to establish and
      protect our proprietary rights. Our existing and future patents may not be
      sufficiently broad to protect our proprietary technologies. Despite our efforts
      to protect proprietary rights, we cannot be certain that the steps we have
      taken
      will prevent the misappropriation or unauthorized use of our technologies,
      particularly in foreign countries where the laws may not protect proprietary
      rights as fully as U.S. law. Any patents we may obtain may not be adequate
      to
      protect our proprietary rights. Our competitors may independently develop
      similar technology, duplicate our products, or design around any of our issued
      patents or other intellectual property rights. Litigation may be necessary
      to
      enforce our intellectual property rights or to determine the validity or scope
      of the proprietary rights of others. This litigation could result in substantial
      costs and diversion of resources and may not ultimately be successful. We cannot
      predict whether the expiration or invalidation of our patents would result
      in
      the introduction of competitive products that would affect our future revenues
      adversely. However, since our technology is now in the commercial stage, our
      know-how and experience in volume card production, system development and
      software capabilities, brand-name recognition within our card markets, and
      dominant-supplier status for optical memory cards are of far greater importance
      than our patents. At this time, we believe that our existing patent portfolio
      is
      helpful but is no longer essential for maintaining the LaserCard®'s market
      position.





THE
      MARKETS FOR OUR PRODUCTS ARE
      COMPETITIVE, AND IF WE ARE UNABLE TO COMPETE SUCCESSFULLY, REVENUES COULD
      DECLINE OR FAIL TO GROW.  Our optical memory cards may compete with
      optical memory cards that can be manufactured and sold by three of our licensees
      (although none is currently doing so) and with other types of portable data
      storage cards and technologies used for the storage and transfer of digital
      information.  These may include contact or contactless integrated
      circuit (IC) chip cards; holographic optical storage cards, 2-dimensional bar
      code cards and symbology cards; thick, rigid CD or DVD-read only cards or
      recordable cards; radio frequency, or RFID cards; and small, digital devices
      such as data-storage keys, tokens, and small cards and tags.  The
      financial and marketing resources of some of the competing companies are greater
      than our resources.  Competitive product factors include system/card
      portability, interoperability, price-performance ratio of cards and associated
      equipment, durability, environmental tolerance, and card security. Although
      we
      believe our cards offer key technological and security advantages for certain
      applications, the current price of optical card read/write drives is a
      competitive disadvantage in some of our targeted markets.  However, we
      believe the price of our drives is competitive in applications requiring a
      large
      number of cards per drive, because the relatively low cost for our cards offsets
      the high cost per drive when compared with our major competition, IC card
      systems.  In countries where the telecommunications infrastructure is
      extensive and low cost, centralized databases and wide-area networks may limit
      the penetration of optical memory cards.  These trends toward
      Internet, intranet, and remote wireless networks will in some cases preclude
      potential applications for our cards.




36




THE
      PRICE OF OUR COMMON STOCK IS
      SUBJECT TO SIGNIFICANT VOLATILITY.  The price of our common stock is
      subject to significant volatility, which may be due to fluctuations in revenues,
      earnings, liquidity, press coverage, financial market interest, trading volume,
      and stock market conditions, as well as changes in technology and customer
      demand and preferences.  As a result, our stock price might be low at
      the time a stockholder wants to sell the stock. Also, since we have a relatively
      low number of shares outstanding (approximately 12 million shares) there will
      be
      more volatility in our stock if one or two major holders, for example, large
      institutional holders, attempt to sell a large number of shares in the open
      market.  Furthermore, our trading volume is often small, meaning that
      a few trades may have disproportionate influence on our stock
      price.  In addition, someone seeking to liquidate a sizeable position
      in our stock may have difficulty doing so except over an extended period or
      privately at a discount.  Thus, if one or more stockholders were to
      sell or attempt to sell a large number of its shares within a short period
      of
      time, such sale or attempt could cause our stock price to
      decline.  There can be no guarantee that stockholders will be able to
      sell the shares that they acquired at a price per share equal to the price
      they
      paid for the stock.





WE
      ARE SUBJECT TO RISKS ASSOCIATED
      WITH CHANGES IN FOREIGN CURRENCY EXCHANGE RATES.  Part of the
      manufacturing process of certain LaserCard products that we sell outside the
      U.S.A. takes place in our operations in Germany.  Also, some of the
      raw materials we use to manufacture optical memory cards are sourced in
      Europe.  These costs are denominated in euros, the currency used in
      much of Europe.  However, when we sell our finished products, the
      prices that we charge are denominated in United States
      dollars.  Accordingly, we are subject to exposure when the exchange
      rate for euros increases in relation to the United States
      dollar.  Recent declines in the U.S. dollar/euroexchange rate, if not
      reversed, will eventually result in increases in raw material
      costs.  The losses on foreign currency exchange for both fiscal year
      2007 and the six-month period ended September 30, 2007 were immaterial. As
      of
      September 30, 2007, we had not entered into a forward exchange contract to
      hedge
      against or potentially minimize the foreign currency exchange risk related
      to
      transactions other than those related to inter-company payables and
      receivables.





WE
      SOLD A SECOND-SOURCE CARD
      MANUFACTURING LICENSE THAT WAS SUBSEQUENTLY TRANSFERRED TO PREVENT GLOBAL
      (PREVENT), UNDER WHICH WE WILL PROVIDE CERTAIN FACTORY SET-UP AND TRAINING
      SERVICES.  IF WE ARE NOT SUCCESSFUL OR IF PREVENT GLOBAL IS UNABLE TO
      FINANCE THIS OPERATION, THE SECOND-SOURCE SUPPLY OF OPTICAL CARDS WILL NOT
      MATERIALIZE.  IF WE AND PREVENT GLOBAL ARE SUCCESSFUL, THE
      SECOND-SOURCE WILL COMPETE WITH US FOR BUSINESS.  We will be obligated
      to deliver the required manufacturing equipment and installation support to
      Prevent Global for its to-be-built new card manufacturing facility in Slovenia,
      to provide a targeted initial manufacturing capacity of 10 million optical
      cards
      annually.  If Prevent Global is successful, Prevent Global would
      become a second source for optical memory cards.  We will also be
      assigning personnel to be on site during the license term, if such option is
      elected by Prevent Global, to assist with quality, security, and operational
      procedures, with a mutual goal that the facility and the cards made in Slovenia
      conform to our standards.  If cards are not produced in conformance
      with our quality standards, the reputation and marketability of optical memory
      card technology could be damaged.  If the factory does not become
      operational and produce quality cards in high volume, or if Prevent Global
      is
      unable to raise sufficient capital to build, equip and operate this facility,
      we
      would not obtain the hoped-for benefits--including ongoing royalties, sales
      of
      raw materials to Prevent Global, expansion of the European market, and a bona
      fide second source for optical memory cards.  On the other hand, if
      and when the factory is successfully manufacturing the cards in high volume,
      it
      will compete against us for business in certain territories, which could reduce
      our potential card revenues if the market does not expand.  Revenue
      will be recognized over the remaining term of the agreement beginning when
      the
      equipment has been accepted and training completed, which date is dependent
      on
      Prevent Global providing a facility in Slovenia.  We could incur
      greater expenses than we anticipate for the purchase and installation of the
      required manufacturing equipment, thereby reducing cash and anticipated
      profits.  If Prevent Global is not successful, but current and
      potential customers require a second source of optical memory cards (which
      is a
      common business practice), they could decide to use alternate technology cards,
      such as chip cards, that have multiple-source suppliers.





WE
      MAY NOT BE ABLE TO ATTRACT, RETAIN
      OR INTEGRATE KEY PERSONNEL, WHICH MAY PREVENT US FROM SUCCEEDING.  We
      may not be able to retain our key personnel or attract other qualified personnel
      in the future. Our success will depend upon the continued service of key
      management personnel.  The loss of services of any of the key members
      of our management team, including our chief executive officer, chief operating
      officer, the managing directors of our German operations, vice president of
      business development or our vice president of finance and CFO, or our failure
      to
      attract and retain other key personnel could disrupt operations and have a
      negative effect on employee productivity and morale, thus decreasing production
      and harming our financial results.  In addition, the competition to
      attract, retain and motivate qualified personnel is intense.




37




OUR
      CALIFORNIA FACILITIES ARE LOCATED
      IN AN EARTHQUAKE ZONE AND THESE OPERATIONS COULD BE INTERRUPTED IN THE EVENT
      OF
      AN EARTHQUAKE, FIRE, OR OTHER DISASTER.  Our card manufacturing,
      corporate headquarters, and drive assembly operations, administrative, and
      product development activities are located near major earthquake fault
      lines.  In the event of a major earthquake, we could experience
      business interruptions, destruction of facilities and/or loss of life, all
      of
      which could materially adversely affect us.  Likewise, fires, floods,
      or other events could similarly disrupt our operations and interrupt our
      business.





FOREIGN
      GOVERNMENT INTERVENTION COULD
      ADVERSELY AFFECT RESULTS OF OPERATIONS.  Economic, political and other
      risks associated with foreign operations could adversely affect our
      international sales.  We sell our products worldwide and therefore,
      our business could be subject to risks due to changes in a country’s or region’s
      political or economic conditions.  Differing tax laws and changes in
      those laws may also affect future results of our operations.





PANDEMICS
      THROUGHOUT THE WORLD COULD
      ADVERSELY AFFECT OUR BUSINESS.  The occurrence of a pandemic such as
      the Bird Flu coupled with the lack of government readiness and support in those
      countries where we do business could temporarily impede our revenue
      growth.





ACTS
      OF TERRORISM OR WAR MAY
      ADVERSELY AFFECT OUR BUSINESS.  Acts of terrorism, acts of war, and
      other events may cause damage or disruption to our properties, business,
      employees, suppliers, distributors, resellers, and customers, which could have
      an adverse effect on our business, financial condition, and operating results.
      Such events may also result in an economic slowdown in the United States or
      elsewhere, which could adversely affect our business, financial condition,
      and
      operating results.





AS
      A RESULT OF OUR REQUIRED ANNUAL
      EVALUATION OF OUR INTERNAL CONTROLS OVER FINANCIAL REPORTING, WE MAY IDENTIFY
      INTERNAL CONTROL WEAKNESSES NEEDING REMEDIATION, WHICH COULD HARM OUR
      REPUTATION.  We have completed the evaluation of our internal controls
      over financial reporting as required by Section 404 of the Sarbanes-Oxley Act
      of
      2002 for the fiscal years ended March 31, 2007 and 2006. Although our
      assessment, testing and evaluation resulted in our conclusion that as of March
      31, 2007 and 2006, our internal controls over financial reporting were
      effective, we cannot predict the outcome of our testing in future periods.
      Because of the inherent limitation of disclosure controls, no evaluation of
      such
      controls can provide absolute assurance that all control issues and instances
      of
      fraud, if any, within our Company have been detected.  If our internal
      controls are found to be ineffective in future periods, our reputation could
      be
      harmed. We may incur additional expenses and commitment of management’s time in
      connection with further evaluations, both of which could materially increase
      our
      operating expenses and accordingly reduce our net income.





BEGINNING
      WITH OUR FISCAL YEAR 2007,
      WE WERE REQUIRED TO RECORD COMPENSATION EXPENSE FOR STOCK OPTIONS, THEREBY
      REDUCING OUR EARNINGS.  THIS COULD LEAD TO REDUCED ENTERPRISE VALUE
      AND TO OUR GRANTING FEWER OPTIONS WHICH HURTS OUR ABILITY TO RECRUIT AND RETAIN
      EMPLOYEES.  In December 2004, the Financial Accounting Standards Board
      (“FASB”) issued Financial Accounting Standard 123(R) (SFAS No. 123(R)) that
      requires the fair value of all equity-based awards granted to employees be
      recognized in the statement of operations as compensation expense, for fiscal
      years beginning after December 15, 2005, rather than just to disclose such
      expense in a footnote as we have done in the previous years.  The
      adoption of this accounting standard reduced our profitability as measured
      by
      generally accepted accounting principles (GAAP) due to our outstanding options
      and our current intention to continue to grant options in the future as an
      incentive and retention tool for our employees.  This may adversely
      affect our stock price.  For example, for the six-month periods ended
      September 30, 2007 and 2006, we recognized approximately $0.9 million and $0.8
      million, respectively, of additional expenses due to SFAS No. 123(R) which
      we would not otherwise have recognized.  Such adoption has also lead
      us to reduce our use of stock options and to award restricted shares and
      restricted stock units.  While all of these equity awards help align
      our employees’ long-term interests with increasing our enterprise value, options
      provide more of a reward if enterprise value substantially
      increases.  Our reduced use of options could hurt our ability to
      recruit employees and retain existing employees and directors.








38





**Item
      2. – Unregistered Sales of Equity Securities and Use of
      Proceeds**





None





**Item
      3. – Defaults Upon Senior Securities**





None





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





At
                the Company's September 21, 2007 Annual Meeting of Stockholders,
                the
                Company's stockholders(i)
            elected
                the Board of Directors.(ii)
            ratified
                the selection of Odenberg, Ullakko, Muranishi & Co., LLP as
                independent registered public accounting firm.(iii)
            approved
                an amendment to the Employee Stock Purchase Plan to increase the
                number of
                shares reserved for issuance thereunder by
                100,000.





Of
      the 11,877,940 shares of common
      stock outstanding as of the record date of July 23, 2007, a total of 10,540,221
      shares were voted in person or by proxy, representing 88.74% of the total votes
      eligible to be cast, constituting a majority and more than a quorum of the
      outstanding shares entitled to vote.  Votes cast in connection with
      the election of directors were: Bernard C. Bailey (10,408,571 votes for
      re-election, 131,650 votes withheld), Richard M. Haddock (10,420,391 votes
      for
      re-election, 119,830 votes withheld), Arthur H. Hausman (10,324,960 votes for
      re-election, 215,261 votes withheld), Donald E. Mattson (10,418,291 votes for
      re-election, 121,930 votes withheld), Dan Maydan (10,315,940 votes for
      re-election, 224,281 votes withheld), Albert J. Moyer (10,317,340 votes for
      re-election, 222,881 votes withheld) and Walter F. Walker (10,279,183 votes
      for
      re-election, 261,038 votes withheld).





For
      Proposal 2 Ratification of the
      Company’s independent registered public accounting firm, 10,504,934 shares were
      voted in favor, and there were 21,339 negative votes, 13,949 abstentions, and
      no
      broker non-votes.





For
      Proposal 3 Approval of an
      amendment to the Employee Stock Purchase Plan, 3,028,040 shares were voted
      in
      favor, and there were 1,184,632 negative votes, 20,081 abstentions, and
      6,307,469 broker non-votes.





There
      were no other matters submitted
      to a vote of security holders during the period for which this report is
      filed.





**Item
      5. – Other Information**





None.





**Item
      6. – Exhibits**





Exhibit
                No.
            Exhibit
                Description3(I)
            Certificate
                of Incorporation; previously filed as Exhibit 3.1 to Annual Report
                on Form
                10-K for the fiscal year ended March 31, 2005, filed with the SEC
                on June
                15, 2005, and incorporated herein by reference3(II)
            Amended
                Bylaws; previously filed as Exhibit 3(II) to Report on Form 10-Q
                for
                period ended September 30, 2006 and incorporated herein by
                reference10.1
            Building
                lease agreement with Renault & Handley Employees Investment Co. for
                2644-2648 Bayshore Parkway, Mountain View, CA; previously filed as
                Exhibit
                10.1 to Report on Form 10-Q for period ended December 31, 2003 and
                incorporated herein by reference




39




10.2
            Building
                lease agreement with Shoreline Park LLC for 1395 Charleston Road,
                Mountain
                View, CA (mailing address 1875 North Shoreline Boulevard, Mountain
                View,
                CA); previously filed as Exhibit 10.2 to Report on Form 10-K for
                fiscal
                year ended March 31, 2004 and incorporated herein by
                reference10.3*
            Amended
                and Restated Stock Option Plan; previously filed as Exhibit 10.4.1
                to
                Report on Form 10-Q for period ended September 30, 2002 and
                incorporated herein by reference10.7
            Stock
                and Warrant Purchase Agreement (as amended); previously filed as
                Exhibit
                99.2 to Report on Form 10-Q for period ended December 31, 2003 and
                incorporated herein by reference10.8
            Optical
                Card Manufacturing License Agreement with Global Investments Group;
                previously filed as Exhibit 10.8 to Report on Form 10-K for fiscal
                year
                ended March 31, 2004 and incorporated herein by
                reference**10.9*
            2004
                Equity Incentive Compensation Plan, as Amended; previously filed
                as
                Appendix C to Schedule 14A Proxy Statement for 2006 Annual Stockholders
                Meeting filed with the SEC on August 11, 2006, and incorporated herein
                by
                reference10.10
            June
                29, 2006 Amendment to License and Equipment Agreement with Global
                Investments Group and Prevent LOK; previously filed as Exhibit 10.10
                to
                Report on Form 10-Q for period ending June 30, 2006, and incorporated
                herein by reference**10.11
            October
                27, 2006 Modified Third Amendment to License and Equipment Agreements
                with
                Global Investments Group and Prevent LOK; previously filed as Exhibit
                10.11 to Form 8-K dated October 30, 2006, which was filed with the
                SEC on
                November 1, 2006, and incorporated herein by reference10.12*
            Employee
                Stock Purchase Plan, as Amended; previously filed as Appendix A to
                amended
                Schedule 14A Proxy Statement for 2007 Annual Stockholders Meeting
                filed
                with the SEC on August 3, 2007, and incorporated herein by
                reference31.1
            Rule
                13a-14(a) Certification of Richard M. Haddock, chief executive officer
                is
                filed herewith31.2
            Rule
                13a-14(a) Certification of Steven G. Larson, chief financial officer
                is
                filed herewith32.1
            Section
                1350 Certification of Richard M. Haddock, chief executive officer
                is filed
                herewith32.2
            Section
                1350 Certification of Steven G. Larson, chief financial officer is
                filed
                herewith







Exhibits
      31.1, 31.2, 32.1, and 32.2 are
      filed herewith while the other exhibits are incorporated by
      reference.  No other exhibits are included in this report as the
      contents of the required exhibits are either not applicable to Registrant,
      to be
      provided only if Registrant desires, or contained elsewhere in this
      report.





*
      Indicates management contract or compensatory plan or arrangement


**
      Portions were omitted pursuant to a request for confidential
      treatment





40








SIGNATURES





Pursuant
      to the requirements of
      Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant
      has
      duly caused this report to be signed on its behalf by the undersigned, thereunto
      duly authorized:





LASERCARD
      CORPORATION


(Registrant)








Signature
            Title
            Date/s/Richard
                M. Haddock
            Chief
                Executive Officer
            November
                5, 2007Richard
                M. Haddock/s/Steven
                G. Larson
            Chief
                Financial Officer
            November
                5, 2007Steven
                G. Larson








41





INDEX
      TO EXHIBITS





[ITEM
      14(c)]





ExhibitNumber
            Description3(I)
            Certificate
                of Incorporation; previously filed as Exhibit 3.1 to Annual Report
                on Form
                10-K for the fiscal year ended March 31, 2005, filed with the SEC
                on June
                15, 2005, and incorporated herein by reference3(II)
            Amended
                Bylaws; previously filed as Exhibit 3(II) to Report on Form 10-Q
                for
                period ended September 30, 2006 and incorporated herein by
                reference10.1
            Building
                lease agreement with Renault & Handley Employees Investment Co. for
                2644-2648 Bayshore Parkway, Mountain View, CA; previously filed as
                Exhibit
                10.1 to Report on Form 10-Q for period ended December 31, 2003 and
                incorporated herein by reference10.2
            Building
                lease agreement with Shoreline Park LLC for 1395 Charleston Road,
                Mountain
                View, CA (mailing address 1875 North Shoreline Boulevard, Mountain
                View,
                CA); previously filed as Exhibit 10.2 to Report on Form 10-K for
                fiscal
                year ended March 31, 2004 and incorporated herein by
                reference10.3*
            Amended
                and Restated Stock Option Plan; previously filed as Exhibit 10.4.1
                to
                Report on Form 10-Q for period ended September 30, 2002 and
                incorporated herein by reference10.7
            Stock
                and Warrant Purchase Agreement (as amended); previously filed as
                Exhibit
                99.2 to Report on Form 10-Q for period ended December 31, 2003 and
                incorporated herein by reference10.8
            Optical
                Card Manufacturing License Agreement with Global Investments Group;
                previously filed as Exhibit 10.8 to Report on Form 10-K for fiscal
                year
                ended March 31, 2004 and incorporated herein by
                reference**10.9*
            2004
                Equity Incentive Compensation Plan, as Amended; previously filed
                as
                Appendix C to Schedule 14A Proxy Statement for 2005 Annual Stockholders
                Meeting filed with the SEC on August 11, 2006, and incorporated herein
                by
                reference10.10
            June
                29, 2006 Amendment to License and Equipment Agreement with Global
                Investments Group and Prevent LOK; previously filed as Exhibit 10.10
                to
                Report on Form 10-Q for period ending June 30, 2006, and incorporated
                herein by reference**10.11
            October
                27, 2006 Modified Third Amendment to License and Equipment Agreements
                with
                Global Investments Group and Prevent LOK; previously filed as Exhibit
                10.11 to Form 8-K dated October 30, 2006, which was filed with the
                SEC on
                November 1, 2006, and incorporated herein by reference10.12*
            Employee
                Stock Purchase, as Amended; previously filed as Appendix A to Schedule
                14A
                Proxy Statement for 2007 Annual Stockholders Meeting filed with the
                SEC on
                August 3, 2007, and incorporated herein by reference31.1
            Rule
                13a-14(a) Certification of Richard M. Haddock, chief executive officer
                is
                filed herewith31.2
            Rule
                13a-14(a) Certification of Steven G. Larson, chief financial officer
                is
                filed herewith32.1
            Section
                1350 Certification of Richard M. Haddock, chief executive officer
                is filed
                herewith




42







32.2
            Section
                1350 Certification of Steven G. Larson, chief financial officer is
                filed
                herewith*
            Indicates
                management contract or compensatory plan or arrangement**
            Portions
                were omitted pursuant to a request for confidential
                treatment




43