<PAGE>

                                  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, 2004


                        Commission File Number: 000-06377


                              LASERCARD CORPORATION
                    (FORMERLY DREXLER TECHNOLOGY CORPORATION)
             (Exact name of registrant as specified in its charter)


           Delaware                                              77-0176309
--------------------------------                            --------------------
(State or other jurisdiction of                               (I.R.S. Employer
 incorporation or organization)                              Identification No.)


1875 North Shoreline Boulevard, Mountain View, California            94043-1319
---------------------------------------------------------            ----------
(Address of principal executive offices)                             (Zip Code)


(650) 969-7277
---------------
(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 an accelerated filer (as
defined in Exchange Act Rule 12b-2). [x] Yes [ ] No

Number of outstanding shares of common stock, $.01 par value, at October 31,
2004: 11,425,389

                                       1
<PAGE>

<TABLE>
<CAPTION>
<S>                                                                           <C>

TABLE OF CONTENTS

PART I.  FINANCIAL INFORMATION                                                           Page Number

         Item 1.   Condensed Consolidated Financial Statements (Unaudited)                    2
                     Condensed Consolidated Balance Sheets                                    3
                     Condensed Consolidated Statements of Operations                          4
                     Condensed Consolidated Statements of Cash Flows                          5
                     Notes to Condensed Consolidated Financial Statements                     6

         Item 2.   Management's Discussion and Analysis of Financial
                   Condition and Results of Operations                                       13

         Item 3.   Quantitative and Qualitative Disclosures about Market Rate Risks          32

         Item 4.   Controls and Procedures                                                   32

PART II. OTHER INFORMATION

         Item 1.   Legal Proceedings                                                         32

         Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds               32

         Item 3.   Defaults Upon Senior Securities                                           33

         Item 4.   Submission of Matters to a Vote of Security Holders                       33

         Item 5.   Other Information                                                         34

         Item 6.   Exhibits                                                                  34

SIGNATURES                                                                                   35


--------------------------------------------------------------------------------------------------------


PART I.  FINANCIAL INFORMATION

ITEM 1.  CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)



                                                     2
</TABLE>

<PAGE>

<TABLE>
<CAPTION>

                                             LASERCARD CORPORATION AND SUBSIDIARIES
                                            (FORMERLY DREXLER TECHNOLOGY CORPORATION)
                                         CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
                                        (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)


                                                                                                 SEPTEMBER 30,       MARCH 31,
                                                                                                     2004              2004 *
                                                                                                     -----             ----
<S>                                                                                               <C>               <C>
                                                                ASSETS
Current assets:
   Cash and cash equivalents                                                                      $   13,215        $   11,688
   Short-term investments                                                                                 --               981
   Accounts receivable, net of allowances of $231 at September 30, 2004
      And $296 at March 31, 2004                                                                       2,528             2,550
   Inventories                                                                                         6,872             6,799
   Prepaid and other current assets                                                                    1,111             1,276
                                                                                                  ----------        ----------
      Total current assets                                                                            23,726            23,294
                                                                                                  ----------        ----------

Property and equipment, at cost                                                                       28,875            27,609
   Less--accumulated depreciation and amortization                                                   (16,289)          (16,079)
                                                                                                  ----------        ----------
      Property and equipment, net                                                                     12,586            11,530

Long-term investments                                                                                  7,300             8,246
Equipment held for resale                                                                              3,280             2,419
Patents and other intangibles, net of accumulated amortization of $3,338 at September 30, 2004
      And $3,268 at March 31, 2004                                                                       948               978
Goodwill                                                                                               3,321             3,321
Other non-current assets                                                                                  --                47
                                                                                                  ----------        ----------
           Total assets                                                                           $   51,161        $   49,835
                                                                                                  ==========        ==========

                                                 LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
   Accounts payable                                                                               $    2,135        $    4,249
   Accrued liabilities                                                                                 1,960             2,035
   Deferred tax liability                                                                                582               608
   Advance payments from customers                                                                     2,774             3,102
   Deferred revenue                                                                                      191               111
   Bank borrowings                                                                                        --               726
   Current portion of long-term debt                                                                     125               440
                                                                                                  ----------        ----------
      Total current liabilities                                                                        7,767            11,271
                                                                                                  ----------        ----------

Long-term debt, net of current portion                                                                 2,080             2,378
Deferred revenue, net of current portion                                                               2,000                --
Advance payments from customers                                                                        7,000               500
                                                                                                  ----------        ----------
           Total liabilities                                                                      $   18,847        $   14,149
                                                                                                  ----------        ----------

Commitments and contingencies

Stockholders' equity:
     Preferred stock, $.01 par value:
      Authorized--2,000,000 shares
      Issued--none                                                                                        --                --
   Common stock, $.01 par value:
      Authorized--30,000,000 shares
      Issued and outstanding-- 11,425,389 shares
           at September 30, 2004 and 11,399,764 shares at March 31, 2004                                 114               114
   Additional paid-in capital                                                                         54,071            53,816
   Accumulated deficit                                                                               (21,309)          (18,244)
   Accumulated other comprehensive income                                                                 94                --
   Treasury stock                                                                                       (656)               --
                                                                                                  ----------        ----------
           Total stockholders' equity                                                                 32,314            35,686
                                                                                                  ----------        ----------

               Total liabilities and stockholders' equity                                         $   51,161        $   49,835
                                                                                                  ==========        ==========


                              * Amounts derived from audited financial statements at the date indicated
                The accompanying notes are an integral part of these condensed consolidated financial statements.

                                                                 3
</TABLE>

<PAGE>

<TABLE>
<CAPTION>

                                          LASERCARD CORPORATION AND SUBSIDIARIES
                                         (FORMERLY DREXLER TECHNOLOGY CORPORATION)
                                      CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                                                        (UNAUDITED)
                                         (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)


                                                                Three Months Ended               Six Months Ended
                                                                   September 30,                    September 30,
                                                                2004           2003             2004           2003
                                                                ----           ----             ----           ----
<S>                                                           <C>            <C>              <C>           <C>
Revenues
       Total revenues.......................................  $   7,773      $   2,708        $  16,483     $   5,154
                                                              ---------      ---------        ---------     ---------

Cost of product sales.......................................      5,842          2,526           12,208         5,082
                                                              ---------      ---------        ---------     ---------

       Gross profit ........................................      1,931            182            4,275            72
                                                              ---------      ---------        ---------     ---------

Operating expenses:
    Selling, general, and administrative expenses...........      2,809          1,642            5,843         3,411
    Research and engineering expenses.......................        723            741            1,574         1,353
                                                              ---------      ---------        ---------     ---------
       Total operating expenses.............................      3,532          2,383            7,417         4,764
                                                              ---------      ---------        ---------     ---------

          Operating loss....................................     (1,601)        (2,201)          (3,142)       (4,692)
                                                              ---------      ---------        ---------     ---------

Other income, net...........................................         62             68               85           132
                                                              ---------      ---------        ---------     ---------

          Loss before income taxes..........................     (1,539)        (2,133)          (3,057)       (4,560)

Income tax expense (benefit)................................        (18)          (389)               8        (1,360)
                                                              ---------      ---------        ---------     ---------

          Net loss..........................................  $  (1,521)     $  (1,744)       $  (3,065)    $  (3,200)
                                                              =========      =========        =========     =========

Net loss per share:
          Basic and diluted net loss per share..............  $    (.13)     $    (.17)       $    (.27)    $    (.30)
                                                              =========      =========        =========     =========

Weighted-average shares of common stock used in
    computing basic and diluted, net loss per share.........     11,368         10,553           11,388        10,516



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

                                                          4
</TABLE>
<PAGE>

<TABLE>
<CAPTION>
                                 LASERCARD CORPORATION AND SUBSIDIARIES
                                (FORMERLY DREXLER TECHNOLOGY CORPORATION)
                             CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                               (UNAUDITED)
                                             (IN THOUSANDS)

                                                                                     SIX MONTHS ENDED
                                                                                       SEPTEMBER 30,
                                                                                  2004                2003
                                                                                  ----                ----
<S>                                                                            <C>                 <C>
Cash flows from operating activities:
   Net loss .................................................................  $  (3,065)          $  (3,200)
   Adjustments to reconcile net loss to net cash provided by
      (used in) operating activities:
       Depreciation and amortization.........................................      1,352                 945
       Provision for doubtful accounts receivable............................          2                   2
       Provision for excess and obsolete inventory...........................          5                  --
       Provision for product return reserve..................................        209                  --
       Stock-based compensation..............................................         54                  49
       Loss on disposal of equipment.........................................          7                  --
       Deferred tax benefit..................................................         --              (1,360)

   Changes in operating assets and liabilities:
       (Increase) decrease in accounts receivable............................       (180)                621
       (Increase) decrease in inventories....................................        (50)                529
       Increase equipment held for resale....................................       (861)                 --
       Decrease in other assets..............................................        169                 428
       Decrease in accounts payable and accrued liabilities..................     (2,253)               (266)
       Increase in deferred revenue..........................................      2,077                 462
       Decrease in deferred income tax liabilities...........................        (33)                 --
       Increase in advance payments from customers...........................      6,164               1,174
                                                                               ---------           ---------

            Net cash provided by (used in) operating activities..............      3,597                (616)
                                                                               ---------           ---------

Cash flows from investing activities:
   Purchases of property and equipment.......................................     (2,250)             (1,494)
   Proceeds from sale of equipment...........................................          2                  --
   Investment in patents and other intangibles...............................        (64)                (54)
   Purchases of investments..................................................         --              (2,713)
   Proceeds from maturities of investments...................................      1,927               8,081
                                                                               ---------           ---------

            Net cash (used in) provided by investing activities..............       (385)              3,820
                                                                               ---------           ---------

Cash flows from financing activities:
   Proceeds from sale of common stock through stock plans....................        255               1,326
   Repayment of bank loan....................................................       (718)                 --
   Decrease in short-term and long-term debts................................       (606)                 --
   Stock repurchases.........................................................       (656)                 --
                                                                               ---------           ---------

            Net cash (used in) provided by financing activities..............     (1,725)              1,326
                                                                               ---------           ---------

            Effect of exchange rate changes on cash..........................         40                  --
                                                                               ---------           ---------

Net increase in cash and cash equivalents....................................      1,527               4,530

Cash and cash equivalents:
   Beginning of period.......................................................     11,688               5,754
                                                                               ---------           ---------
   End of period.............................................................  $  13,215           $  10,284
                                                                               =========           =========


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


                                                     5
</TABLE>

<PAGE>

                     LASERCARD CORPORATION AND SUBSIDIARIES
                    (FORMERLY DREXLER TECHNOLOGY CORPORATION)
        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

        BASIS OF PRESENTATION. The condensed consolidated financial statements
contained herein include the accounts of LaserCard Corporation and its wholly
owned subsidiaries. All significant intercompany accounts and transactions have
been eliminated in consolidation.

        The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.

        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. Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with accounting principles generally accepted in the United States of
America have been condensed or omitted pursuant to such rules and regulations,
although the Company believes the disclosures which are made 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 consolidated financial statements and the notes thereto for
the year ended March 31, 2004, included in the Company's Annual Report on Form
10-K.

        The results of operations for the three and six-month periods ended
September 30, 2004 are not necessarily indicative of results to be expected for
the entire fiscal year ending March 31, 2005.

        FISCAL PERIOD: For purposes of presentation, the Company labels its
annual accounting period end as March 31 and its interim quarterly periods as
ending on the last day of the corresponding month. The Company, in fact,
operates and reports based on quarterly periods ending on the Friday closest to
month end. The 14-week second quarter of fiscal 2004 ended on October 3, 2003,
and the 13-week second quarter of fiscal 2005 ended on October 1, 2004.

        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 the lower of
replacement cost or estimated realizable value. The components of inventories
are (in thousands):

                                         SEPTEMBER 30,        MARCH 31,
                                             2004               2004
                                             ----               -----

              Raw materials               $    3,424         $    3,243
              Work-in-process                  1,765              1,651
              Finished goods                   1,683              1,905
                                          ----------         ----------
                                          $    6,872         $    6,799
                                          ==========         ==========

        NET LOSS PER SHARE: Basic and diluted net loss per share is computed by
dividing net loss by the weighted average number of shares of common stock
outstanding. As the effect of common stock equivalents would be antidilutive,
stock equivalents (primarily stock options) were excluded from the calculation
of diluted net loss per share for the three and six-months ended September 30,
2004 and 2003. Accordingly, basic and diluted net loss per share were the same
for the three and six-months ended September 30, 2004 and 2003.

        REVENUE RECOGNITION. Product sales primarily consist of optical card
sales, sales of optical card read/write drives, and sales of specialty cards and
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

                                       6
<PAGE>

arrangement, and there are no post-shipment obligations or customer acceptance
criteria. Where appropriate, provision is made at the time of shipment for
estimated warranty costs and estimated returns.

        The Company's U.S. government subcontract requires delivery into a
secure vault located on Company premises. Shipments are made from the vault on a
shipment schedule provided by the prime contractor, which is subject to
revision, but not cancellation, at the option of the prime contractor. At the
time the cards are delivered into the vault, title to the cards is transferred
to the government and all risks of ownership are transferred as well. The prime
contractor is invoiced, with payment due within thirty days, and the contract
does not contain any return (other than for warranty) or cancellation
provisions. Pursuant to the provisions of Staff Accounting Bulletin No. 104 (SAB
104), revenue is recognized on delivery into the vault as the Company has
fulfilled its contractual obligations and the earnings process is complete. If
the Company does not receive a shipment schedule, revenue is deferred and
recognized upon shipment from the vault. In addition, revenue recognition for
future deliveries into the vault would be affected if the U.S. government
cancels the shipment schedule. As a result, the Company's revenues may fluctuate
from period to period if the Company does not continue to obtain shipment
schedules under this subcontract or if the shipment schedules are cancelled.

        In May 2003, the Emerging Issues Task Force ("EITF") finalized the terms
of EITF Issue No. 00-21, "Revenue Arrangements with Multiple Deliverables,"
(EITF 00-21) which 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 adopted
EITF 00-21 for any new arrangements entered into after July 1, 2003 and now
assesses all revenue arrangements against the criteria set forth in EITF 00-21.

        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. During the three and
six-months ended September 30, 2004, the Company recognized approximately
$21,000 and $86,000 of revenues based on a zero profit margin related to a
long-term contract.

        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 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 for the three and six-months
ended September 30, 2004 and 2003.

        License revenue, which may consist of up-front license fees and
long-term royalty payments, is recognized as revenue when earned. The cost of
license revenue is not material and is included in selling, general and
administrative expenses. There was no license revenue for the three and
six-months ended September 30, 2004 and 2003.

        In the fiscal 2005 first quarter, the Company sold a card-manufacturing
license, effective April 3, 2004, to the Global Investments Group (GIG), based
in Auckland, New Zealand, for card manufacturing in Slovenia. This agreement
provides for payments to the Company of $29.0 million for the license over the
20-year term of the license (including a five-year training support package,
followed by an ongoing support phase for an additional 15 years).

                                       7
<PAGE>

        Additionally, the Company is to sell approximately $12.0 million worth
of manufacturing equipment and installation support for the to-be-built new
facility to provide a targeted initial manufacturing capacity of 10 million
optical cards annually. As of September 30, 2004 the Company had $3.3 million of
this equipment classified as equipment held for resale on its balance sheet.
Options to increase capacity to 30 million cards per year are provided in the
agreement. The Company has received the initial $9.0 million of payments called
for in the agreements as of September 30, 2004, consisting of a partial payment
for the equipment and installation support of $7.0 million which is classified
as advance payments from customers and $2.0 million for the licensing fee which
is classified as deferred revenue, respectively, within the consolidated balance
sheets. In addition to the $41.0 million discussed above, GIG is to pay the
Company royalties for each card produced under the license. The territories
covered by the license include most of the European Union and eastern European
regions. The GIG has exclusive marketing rights in certain territories, with
performance goals to maintain these rights. The Company will assign personnel on
site during the license term to assist with quality, security, and operational
procedures, with a mutual goal that the facility and the cards made there
conform to the Company's standards. GIG anticipates start up of the new facility
will be late in calendar 2005. Revenue under the license will be allocated over
the remaining term of the agreement beginning when operation of the factory
commences. The Company also retains rights to utilize up to 20% of the new
facility capacity as a backup and capacity buffer to augment its own card
manufacturing facilities in Mountain View, California. The granting of this
license to GIG establishes a potential second source supplier of optical memory
cards for existing and prospective customers who may request multiple sources
for cards. The Company does not expect to record material license revenues under
this agreement prior to fiscal 2006, after which revenue will be recorded over
the remainder of the 20-year license term.

        ACCOUNTING FOR INCOME TAXES. As part of the process of preparing its
consolidated financial statements, the Company is required to estimate income
taxes in each of the jurisdictions in which it operates. This process involves
estimating the actual current tax exposure together with assessing temporary
differences resulting from differing treatment of items, such as deferred
revenue, for tax and accounting purposes. These differences result in deferred
tax assets and liabilities, which are included within the consolidated balance
sheets. The Company must then assess the likelihood that the deferred tax assets
will be recovered from future taxable income and to the extent that management
believes recovery is not likely, the Company must establish a valuation
allowance. To the extent that a valuation allowance is established or increased
in a period, the Company includes an expense within the tax provision in the
statements of operations.

        Significant management judgment is required in determining the provision
for income taxes and, in particular, any valuation allowance recorded against
the Company's deferred tax assets. The Company recorded a tax benefit of $18,000
for the second quarter and an income tax expense of $8,000 for the first six
months of fiscal 2005. The amount of the tax benefit recorded in the second
quarter of fiscal 2005 was due primarily to the operating loss incurred in the
Company's German operation and the year-to-date expense is due to the operating
net income of the German operations for the first six months of fiscal 2005. Due
to the Company's recent cumulative tax loss history for the three-year period
ending March 31, 2004, income statement loss history over the past five
quarters, and the continuing difficulty in forecasting the timing of future
revenue as evidenced by the deviations in achieved revenues from expected
revenues during the past few quarters and taking into account the newness of
certain customer relationships, the Company determined on December 31, 2004 that
it was necessary to provide a full valuation allowance under SFAS No.109 of the
deferred tax asset. As a result, the Company increased its valuation allowance.
This resulted in a $14.8 million valuation allowance balance as of March 31,
2004, including a charge to increase the valuation allowance against the
beginning of the year net deferred tax asset balance of $7.1 million and a
charge against its net deferred tax asset generated during fiscal 2004 in the
amount of $2.4 million. As of September 30, 2004, the Company provided for a
full valuation allowance of $18.0 million relating to its U.S. operations
consistent of $14.8 million as of March 31, 2004 and $3.2 million resulting from
net operating losses for the six months ended September 30, 2004.

        Based upon first half taxable loss and booked orders, the Company cannot
determine that any net operating loss carryforward will be utilized this year,
and therefore, has not adjusted its valuation allowance against the deferred tax
asset.

        STOCK-BASED COMPENSATION. The Company accounts for its stock-based
compensation plans using the intrinsic value method prescribed in Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees."
Compensation cost for stock options, if any, is measured by the excess of the
quoted market price of the Company's stock at the date of grant over the amount
an employee must pay to acquire the stock. SFAS No. 123,

                                       8
<PAGE>

"Accounting for Stock-Based Compensation," established accounting and disclosure
requirements  using a fair-value  based  method of  accounting  for  stock-based
employee  compensation  plans. The following table illustrates the effect on net
loss and loss per share as if the Company had applied the fair value recognition
provisions of SFAS No. 123 (in thousands except per share amounts):

<TABLE>
<CAPTION>
                                                                   Three Months Ended                 Six Months Ended
                                                                      September 30,                     September 30,
                                                                  2004            2003              2004            2003
                                                                  ----            ----              ----            ----
<S>                                                            <C>             <C>               <C>              <C>
Net loss, as reported.......................................   $   (1,521)     $   (1,744)       $   (3,065)      $   (3,200)
                                                               ==========      ==========        ==========       ==========

Add: Stock-based employee compensation expense
    included in reported net loss, net of related
    tax effects in 2003.....................................           21                9               54               29

Deduct: total stock-based employee compensation
    determined under fair value based method for all
    awards, net of related tax effects in 2003..............         (534)           (328)             (966)            (664)
                                                               ----------      ----------        ----------       ----------
Pro forma net loss..........................................   $   (2,034)     $   (2,063)       $   (3,977)      $   (3,835)
                                                               ==========      ==========        ==========       ==========

 Loss per common share:
    Basic and diluted - as reported.........................   $     (.13)     $     (.17)       $     (.27)      $     (.30)
                                                               ==========      ==========        ==========       ==========
    Basic and diluted - pro forma...........................   $     (.18)     $     (.20)       $     (.35)      $     (.36)
                                                               ==========      ==========        ==========       ==========

Shares used in computing basic and diluted pro forma
    loss per share:
    Basic and diluted.......................................       11,368          10,553            11,388           10,516
</TABLE>

        The Company computed the fair value of each option grant on the date of
grant using the Black-Scholes option valuation model with the following
assumptions:

<TABLE>
<CAPTION>
                                                            Three Months Ended            Six Months Ended
                                                               September 30,                September 30,
                                                          2004              2003        2004              2003
                                                          ----              ----        ----              ----
<S>                                                     <C>                 <C>       <C>               <C>
Risk-free interest rate............................     4.79%               N/A       4.79%             2.74%
Average expected life of option....................     5 years             N/A       5 years           5 years
Dividend yield.....................................     0%                  N/A       0%                0%
Volatility of common stock.........................     50%                 N/A       50%               50%
Weighted average fair value of option grants.......     $4.75               N/A       $4.75             $10.06
</TABLE>

        There were 39,000 options granted during the three and six-month periods
ended September 30, 2004, respectively. There were no options and 11,000 options
granted during the three and six-month periods ended September 30, 2003,
respectively.

        ISSUANCE OF STOCK, OPTIONS, AND WARRANTS. In December 2003, the Company
issued and sold 791,172 shares of common stock, options to purchase 122,292
shares of common stock, and warrants to purchase 174,057 shares of common stock
for an aggregate purchase price of $10.0 million in a private placement. The
Company received net proceeds of $9.4 million (net of fees and expenses). The
purchase price of the common stock was $12.76 per share, which was at a 15%
discount from the five-day average price as of December 23, 2003. The options
have an exercise price of $16.51 per share and a nine-month life. The warrants
have an exercise price of $17.26 per share and a life of five years. The options
and warrants were valued at $245,000 and $984,000, respectively, based on a
Black-Scholes calculation as of December 23, 2003 and pursuant to the provisions
of EITF Issue No. 00-19, "Accounting for Derivative Financial Instruments
Indexed to, and Potentially Settled in, a Company's Own Stock," and were
recorded at those values in short-term and long-term liabilities. The balance of
the net proceeds was accounted for as additional paid-in capital. Under EITF
00-19, the Company marks-to-market the fair value of the options and warrants at
the end of each accounting period. At March 31, 2004, this resulted in options
and warrants valued at $195,000 and $916,000, respectively. The decrease in the
valuation of the options and warrants, between December 23, 2003 and March 31,
2004, of $118,000 was recorded as other income in the accompanying consolidated
statements of operations and

                                        9
<PAGE>

resulted from a decrease in the Company's stock price. On February 6, 2004, the
Company and the investors entered into an amendment to their original agreement
that resulted in the reclassification of the options and warrants to equity. The
amendment clarified that the options and warrants granted in the financing may
be exercised at a time when a registration statement covering the resale of the
underlying shares is not effective or available and that in such instance the
Company would deliver to the investors shares of common stock whose resale is
not currently registered. On the effective date of the amendment, the options
and warrants were reclassified to equity as additional paid-in capital. As a
result of the increase in the value of the options and warrants from the closing
date to the amendment date due to increases in the Company's stock price, the
Company recognized an expense of $211,000 which is included in other expense in
the consolidated statements of operations for the fourth quarter of fiscal 2004.
The Company is subject to certain indemnity provisions included in the stock
purchase agreement entered into as part of the financing in connection with its
registration of the resale of the common stock issued and issuable in the
financing. Morgan Keegan & Company, Inc. acted as the Company's placement agent
for this transaction and was granted warrants to purchase 15,824 shares of
common stock. Options to purchase 122,292 shares of common stock expired on
September 30, 2004.

        STOCK REPURCHASES. On August 2, 2004, the Company's Board of Directors
approved a 350,000 shares repurchase program pursuant to which we can make open
market or privately negotiated repurchase transactions for up to an aggregate of
$3.0 million for a four-month period beginning August 2, 2004. As of September
30, 2004, the Company has repurchased 91,630 shares of common stock in open
market amounting to $656,000 at an average price of $7.15.

        CONCENTRATION OF CREDIT RISK. Two customers comprised 23% and 19% of
accounts receivable as of September 30, 2004 and two customers comprised 26% and
23%, respectively, of accounts receivable as of March 31, 2004.

        SEGMENT REPORTING. The Company's three reportable segments are: (1)
optical memory cards, (2) optical memory card drives, maintenance, and related
accessories ("optical card drives"), and (3) specialty cards & printers. The
segments were determined based on the information used by the chief operating
decision makers. 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.

        The accounting policies used to derive reportable segment results is 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 makers. 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
makers. 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 $3.3 million that are attributable
to Germany.

        The Company's chief operating decision makers are the Company's Co-Chief
Executive Officers. The chief operating decision makers review financial
information presented on a consolidated basis that is accompanied by
disaggregated information about revenues and gross profit (loss) by segment.

        The tables below present information for optical memory cards, optical
card drives and specialty cards and printers for the three and six-month periods
ended September 30, 2004 and 2003 (in thousands):


                                       10
<PAGE>

<TABLE>
<CAPTION>
                                           THREE MONTHS ENDED                             THREE MONTHS ENDED
                                           SEPTEMBER 30, 2004                             SEPTEMBER 30, 2003

                            OPTICAL                    SPECIALTY                 OPTICAL
                            MEMORY       OPTICAL        CARDS &     SEGMENT      MEMORY       OPTICAL      SEGMENT
                            CARDS      CARD DRIVES     PRINTERS      TOTAL       CARDS      CARD DRIVES     TOTAL
                            -----      -----------     --------      -----       -----      -----------     -----
<S>                        <C>           <C>            <C>         <C>        <C>             <C>         <C>
Revenue                    $  5,116      $ 155          $ 2,498     $ 7,769    $   2,191       $  471      $  2,662
Cost of sales                 3,466        387            1,981       5,834        1,851          652         2,503
Gross profit (loss)           1,650       (232)             517       1,935          340         (181)          159
Depreciation and
  amortization expense          374         91               66         465          277           31           308

                                            SIX MONTHS ENDED                                SIX MONTHS ENDED
                                           SEPTEMBER 30, 2004                              SEPTEMBER 30, 2003

                            MEMORY       OPTICAL        CARDS &     SEGMENT      MEMORY       OPTICAL      SEGMENT
                            CARDS      CARD DRIVES     PRINTERS      TOTAL       CARDS      CARD DRIVES     TOTAL
                            -----      -----------     --------      -----       -----      -----------     -----

Revenue                    $ 10,750      $ 444          $ 5,278     $16,472    $   4,480       $  586      $  5,066
Cost of sales                 7,346        914            3,924      12,184        4,052          978         5,030
Gross profit (loss)           3,404       (470)           1,354       4,288          428         (392)           36
Depreciation and
  amortization expense          734         78              128         940          548           56           604
</TABLE>

The following is a reconciliation of segment results to amounts included in the
Company's condensed consolidated financial statements:

<TABLE>
<CAPTION>
                                      THREE MONTHS ENDED                       THREE MONTHS ENDED
                                      SEPTEMBER 30, 2004                        SEPTEMBER 30, 2003

                            SEGMENT                                     SEGMENT
                             TOTAL        OTHER (a)     TOTAL            TOTAL        OTHER (a)(b)  TOTAL
                             -----        -----         -----            -----        -----         -----
<S>                         <C>            <C>         <C>              <C>           <C>          <C>
Revenue                     $ 7,769        $ 4         $ 7,773          $ 2,662       $ 46         $ 2,708
Cost of sales                 5,834          8           5,842            2,503         23           2,526
Gross profit (loss)           1,935         (4)          1,931              159         23             182
Depreciation and
  amortization expense          465        178             643              308        171             479

                                       SIX MONTHS ENDED                          SIX MONTHS ENDED
                                      SEPTEMBER 30, 2004                        SEPTEMBER 30, 2003

                            SEGMENT                                     SEGMENT
                             TOTAL        OTHER (a)     TOTAL            TOTAL        OTHER (a)(b)  TOTAL
                             -----        -----         -----            -----        -----         -----

Revenue                     $16,472        $11         $16,483          $ 5,066       $ 88         $ 5,154
Cost of sales                12,184         24          12,208            5,030         52           5,082
Gross profit (loss)           4,288        (13)          4,275               36         36              72
Depreciation and
  amortization expense          940        412           1,352              604        341             945
</TABLE>

(a)     Other revenue consists miscellaneous items not associated with segment
        activities. Other cost of sales, depreciation and amortization expense
        represents corporate and other costs not directly associated with
        segment activities.

(b)     The Company did not operate in the specialty card and printers segment
        for the three and six-month periods ended September 30, 2003.

                                       11
<PAGE>

OTHER COMPREHENSIVE LOSS. The following are the components of other
comprehensive loss (in thousands):

<TABLE>
<CAPTION>

                                         THREE MONTHS ENDED               SIX MONTHS ENDED
                                            SEPTEMBER 30,                   SEPTEMBER 30,

                                         2004          2003              2004           2003
                                         ----          ----              ----           ----
<S>                                    <C>            <C>              <C>            <C>
     Net loss                          $ (1,521)      $ (1,744)        $ (3,065)      $ (3,200)
     Net change in cumulative
     foreign currency translation           129            --                94             --
                                      ----------     ----------       ----------     ----------
     adjustments
     Other comprehensive loss          $ (1,392)      $ (1,744)        $ (2,971)      $ (3,200)
                                      ==========     ==========       ==========     ==========
</TABLE>

        The components of accumulated other comprehensive gain mainly consist of
cumulative foreign currency translation adjustments of approximately $94,000 as
of September 30, 2004.

     RECENT ACCOUNTING PRONOUNCEMENTS.

        In March 2004, the Financial Accounting Standards Board (FASB) approved
the consensus reached by the Emerging Issues Task Force (EITF) Issue No. 03-1,
"The Meaning of Other-Than-Temporary Impairment and Its Application to Certain
Investments" ("EITF 03-1"). The objective of this Issue was to provide guidance
for identifying impaired investments. EITF 03-1 also provided new disclosure
requirements for investments that are deemed to be temporarily impaired. The
accounting provisions of EITF 03-1 were effective for all reporting periods
beginning after June 15, 2004, while the disclosure requirements were effective
only for annual periods ending after June 15, 2004. In September 2004, the FASB
deferred the requirement to record impairment losses caused by the effect of
increases in "risk-free" interest rates and "sector spreads" on debt securities
subject to paragraph 16 of EITF 03-1 and excludes minor impairments from the
requirement until new guidance becomes effective. The Company has evaluated the
impact of the adoption of EITF 03-1 and does not believe the impact is
significant to the Company's overall results of operations or financial
position.




                                       12
<PAGE>

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

        The following discussion and analysis of the Company's financial
condition and results of operations 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, 2004, included in the Company's fiscal 2004
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, the Company's 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 the
Company's plan to merge LaserCard Systems Corporation into LaserCard Corporation
prior to calendar year end; the Company's belief that its U.S. government
contract will be extended and as to card personalization rates to current and
potential market segments, customers, and applications for and deployment of the
products of the Company; statements as to the business benefits to the Company
as a result of the March 2004 acquisition of two German companies--including
increased revenue potential, card production capacity and product flexibility;
statements as to the advantages of, potential income from, and duties to be
performed under the sale of a second-source card manufacturing license;
statements as to the Global Investments Group (GIG) license for second-source
card production in Slovenia, including future scheduled payments and royalties,
targeted startup date and production capacity, and that the Company will sell
equipment to GIG, provide GIG with installation support, and have on-site
personnel; production quantities, delivery rates and expected delivery schedule,
backlog, and revenue recognition for Company products for U.S. or foreign
government programs; statements as to potential deployment and use of the
Company's products in the Department of Homeland Security (DHS) U.S. Visitor and
Immigration Status Indication Technology (US-VISIT) program; expectations as to
the new sheet-lamination production facilities and the short-term effect on
gross margins; uncertainties associated with achieving adequate production
capacity for sheet-lamination process cards to meet order requirements and
delivery schedules; anticipated continued use of the Company's products by the
governments of the United States, Canada, and Italy; reliance on value-added
resellers and system integrators to generate sales, perform customer system
integration, develop application software, test products, and work with
governments to implement card programs; the Company's efforts to recruit new
value-added resellers (VARs); the need for, expected success of, and potential
benefits from the Company's research and engineering efforts, including
developing new or enhanced card capabilities, software products,
production-model read-only drives, or drives with advanced security features or
lower manufacturing costs; whether introduction of new drives will increase
sales, and the effects of read/write drive prices and sales volume on gross
profits or gross margins from read/write drive sales; the Company's belief that
the read/write drive inventory is reflected at its net realizable value; belief
that there is a market for both designs of its read/write drives to support and
expand optical card sales and that the read/write drive inventory on hand will
be ordered by customers; expectations regarding revenues, margins, capital
resources, and capital expenditures and investments, and the Company's deferred
tax asset and related valuation allowance; anticipated reductions of federal tax
cash payments due to current Company tax benefits; statements as to expected
card delivery volumes, estimates of optical card production capacity, expected
card yields there from, the Company's ability to expand production capacity, and
the Company's plans and expectations regarding the growth and associated capital
costs of such capacity; estimates that revenues will be sufficient to generate
cash from operating activities over the next 12 months despite expected
quarterly fluctuations; expectations regarding market growth, product demand,
and the continuation of current programs; potential expansion or implementation
of government programs utilizing optical memory cards, including without
limitation, those in Senegal, India, an Saudi Arabia, and the timing of the
award of any prime contracts for such programs; and the Company's plans,
objectives, and expected future economic performance.

        These forward-looking statements are based upon the Company's
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 the

                                       13
<PAGE>

Company can successfully integrate and operate its recently acquired German
subsidiaries; whether the Company will be successful in assisting GIG with
factory startup and training; whether GIG will have the financial wherewithal to
make its required payments to the Company and to operate the facility; whether
the facility will efficiently produce high quality optical memory cards in
volume; whether GIG will be able to procure and satisfy customers so that it
owes and pays royalties; and whether GIG will encounter unexpected delays in
constructing and staffing the facility; 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; the impact of litigation or
governmental or regulatory proceedings; the ability of the Company or its
customers to initiate and develop new programs utilizing the Company's 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; the Company's 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;
whether the Company receives a fixed shipment schedule, enabling the Company to
recognize revenues on cards delivered to the vault instead of when cards later
are shipped from the vault; the impact of technological advances, general
economic trends, and competitive products; and the possibility that optical
memory cards will not be purchased for the full implementation of card programs
in Italy, Saudi Arabia, India, and Senegal or for DHS programs in the U.S., or
will not be selected for other government programs in the U.S. and abroad,
including the US-VISIT program; the risks set forth in the section entitled
"Risks and Other Factors That May Affect Future Operating Results" and elsewhere
in this report; and other risks detailed from time to time in the Company's SEC
filings. These forward-looking statements speak only as to the date of this
report, and, except as required by law, the Company undertakes 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

        REVENUE RECOGNITION. Product sales primarily consist of optical card
sales, sales of optical card read/write drives and sales of specialty cards and
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 or customer acceptance criteria. Where appropriate, provision is
made at the time of shipment for estimated warranty costs and estimated returns.
To date, actual warranty costs and returns activity have not been material.

        The Company's U.S. government subcontract requires delivery into a
secure vault located on the Company's premises. Shipments are made from the
vault on a shipment schedule provided by the prime contractor, which is subject
to revision, but not cancellation, at the option of the prime contractor. At the
time the cards are delivered into the vault, title to the cards is transferred
to the government and all risks of ownership are transferred as well. The prime
contractor is invoiced, with payment due within thirty days, and the contract
does not contain any return (other than for warranty) or cancellation
provisions. Pursuant to the provisions of SEC Staff Accounting Bulletin (SAB)
No. 104, revenue is recognized on delivery into the vault as the Company has
fulfilled its contractual obligations and the earnings process is complete. If
the Company does not receive a shipment schedule for shipment of cards from the
vault, revenue is recognized upon shipment from the vault. In addition, revenue
recognition for future deliveries into the vault would be affected if the U.S.
government cancels the shipment schedule. As a result, the Company's revenues
may fluctuate from period to period if the Company does not continue to obtain
shipment schedules under this subcontract or if the shipment schedules are
cancelled.

        In May 2003, the Emerging Issues Task Force ("EITF") finalized the terms
of EITF Issue No. 00-21, "Revenue Arrangements with Multiple Deliverables,"
(EITF 00-21) which 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

                                       14
<PAGE>

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 adopted
EITF 00-21 for any new arrangements entered into after July 1, 2003 and now
assesses all revenue arrangements against the criteria set forth in EITF 00-21.

        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 the 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. During the three and
six-month periods ended September 30, 2004, the Company recognized approximately
$21,000 and $86,000 of revenues based on a zero profit margin related to a
long-term contract.

        License revenue, which may consist of up-front license fees and
long-term royalty payments, is recognized as revenue when earned. The
second-source card-manufacturing license sold in April 2004 to GIG provides for
license fees, training charges, and royalty payments to the Company for each
card produced during the 20-year term of the license agreement. This is a
multi-element arrangement as described in Emerging Issues Task Force (EITF)
Issue No. 00-21; revenue derived from the up-front payments will be recognized
ratably over the remainder of the 20-year license term once the plant has begun
production.

        The Company applies the provisions of Statement of Position (SOP) No.
97-2, "Software Revenue Recognition," as amended by SOP No. 98-9, "Modification
of SOP 97-2, Software Revenue Recognition, With Respect to Certain Transactions"
to 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 for the three and six-months
ended September 30, 2004 and 2003.

        ACCOUNTING FOR INCOME TAXES. As part of the process of preparing its
consolidated financial statements, the Company is required to estimate income
taxes in each of the jurisdictions in which it operates. This process involves
estimating the actual current tax exposure together with assessing temporary
differences resulting from differing treatment of items, such as deferred
revenue, for tax and accounting purposes. These differences result in deferred
tax assets and liabilities, which are included within the consolidated balance
sheets. The Company must then assess the likelihood that the deferred tax assets
will be recovered from future taxable income and to the extent that management
believes recovery is not likely, the Company must establish a valuation
allowance. To the extent that a valuation allowance is established or increased
in a period, the Company includes an expense within the tax provision in the
statements of operations.

        Significant management judgment is required in determining the provision
for income taxes and, in particular, any valuation allowance recorded against
the Company's deferred tax assets. The Company recorded a tax benefit of $18,000
for the second quarter and an income tax expense of $8,000 for the first six
months of fiscal 2005. The amount of the tax benefit recorded in the second
quarter of fiscal 2005 was due primarily to the operating loss incurred in the
Company's German operation and the year-to-date expense is due to the operating
net income of the German operations for the first six months of fiscal 2005. Due
to the Company's recent cumulative tax loss history for the three-year period
ending March 31, 2004, income statement loss history over the past five
quarters, and the continuing difficulty in forecasting the timing of future
revenue as evidenced by the deviations in achieved revenues from expected
revenues during the past few quarters and taking into account the newness of
certain customer relationships, the Company determined on December 31, 2004 that
it was necessary to provide a full valuation allowance under

                                       15
<PAGE>

SFAS No. 109 of the deferred tax asset. As a result, the Company increased its a
valuation allowance. This resulted in a $14.8 million valuation allowance
balance as of March 31, 2004, including a charge to increase the valuation
allowance against the beginning of the year net deferred tax asset balance of
$7.1 million and a charge against its net deferred tax asset generated during
fiscal 2004 in the amount of $2.4 million. As of September 30, 2004, the Company
provided for a full valuation allowance of $18.0 million relating to its U.S.
operations consistent of $14.8 million as of March 31, 2004 and $3.2 million
resulting from net operating loss for the six months ended September 30, 2004.

        The Company's methodology for determining the realizability of its
deferred tax assets involves estimates of future taxable income; the estimated
impact of future stock option deductions; and the expiration dates and amounts
of net operating loss carryforwards. These estimates are based on near-term
projections and assumptions which management believes to be reasonable. For
recent prior periods, the Company had been estimating future taxable income from
its core business, which assumed on-going business under the U.S. government
subcontract for Permanent Resident Cards and Laser Visa Border Crossing Cards
and the Canadian government's Permanent Resident Card program, as well as
estimated operating expenses to support that level of business, as offset by the
estimated impact of future stock option deductions. The Company went back to
estimating future taxable income based upon its expectations for the current and
next three years because this past core business has not proven to be as stable
as the Company had believed it to be and because this past core business is
expected to represent an increasingly smaller part of the business. This is
because the Company expects revenues from these U.S. programs to stabilize at
revenue levels lower than had been expected in the past and because the Company
expects new foreign business, which has fluctuated considerably quarter to
quarter, to comprise a larger portion of the core business. The Company has had
difficulty in the past, and expects to have continued difficulty in the future,
in reliably forecasting its foreign business and the revenue to be received from
it. This, in combination with the three-year cumulative tax loss for the period
ended September 30, 2004, has resulted in the Company basing its estimates of
future income for these purposes to booked orders only. As circumstances change,
the Company may in the future be able to revert back to estimating future
revenue based upon its forecast revenues rather than only using booked orders,
although the Company cannot say when this will occur.

        In concluding that a valuation allowance was required, the Company
considered both the positive and negative evidence regarding its ability to
generate sufficient future taxable income to realize its deferred tax assets.
Positive evidence included having achieved profitability for financial reporting
purposes from fiscal 1999 through fiscal year 2003. Other positive evidence
included (1) the level of sales and business experienced under the contract with
the Canadian government's Permanent Resident Card program; (2) prospects in
Italy and Saudi Arabia for national identification card programs; (3) the
heightened interest in border security initiatives following the events of
September 11, 2001; and (4) expected future orders. Negative evidence included
(1) the Company's reliance on a limited number of customers for a substantial
portion of its business; (2) the uncertainty in timing of anticipated orders
from customers; (3) the impact of future stock option deductions on taxable
income; and (4) recent experience of net operating loss carryforwards expiring
unused; (5) the loss for the first and second quarters of fiscal 2005 and the
losses in fiscal 2004; and (6) the prospect of three years' cumulative tax net
operating losses. In weighing the positive and negative evidence above, the
Company considered the "more likely than not" criteria pursuant to SFAS No. 109
as well as the risk factors related to its future business described under the
subheadings: "Dependence on VARs and on a Limited Number of Customers," "Lengthy
Sales Cycles," "Technological Change," and "Competition" as noted in the section
entitled "Factors That May Affect Future Operating Results." As described above,
the Company concluded that the negative evidence outweighed the positive
evidence and has continued to record a valuation allowance to be equal to the
full amount of the deferred tax asset as of September 30, 2004 relating to its
U.S. operations.

        In the event that actual results differ from these estimates or that
these estimates are adjusted in future periods, the Company may need to adjust
the amount of the valuation allowance based on future determinations of whether
it is more likely than not that some or all of its deferred tax assets will be
realized. A decrease in the valuation allowance would be recorded as an income
tax benefit or a reduction of income tax expense or a credit to stockholders'
equity. The Company's net operating losses available to reduce future taxable
income expire on various dates from fiscal 2005 through fiscal 2024. To the
extent that the Company generates taxable income in jurisdictions where the
deferred tax asset relates to net operating losses that have been offset by a
full valuation allowance, the utilization of these net operating losses would
result in the reversal of the related valuation allowance in the Company's
results of operations. The Company would need $8.2 million of income on its
federal income tax return to avoid the expiration of $2.8 million of the
deferred tax asset now set to expire in fiscal 2005. In these regards, it should
be noted that certain

                                       16
<PAGE>

payments from GIG might be treated as income on the Company's tax return even
though they are being deferred for financial reporting purposes. This could
result in the utilization of net operating losses that otherwise might have
expired which would result in a tax benefit for financial reporting purposes as
the valuation allowance would be correspondingly reduced. However, based upon
first half taxable income taking into account these payments and booked order,
the Company cannot determine that any net operating loss will be utilized this
year, and therefore, has not adjusted its valuation allowance against the
deferred tax asset.

        INVENTORIES. The Company values its inventory at the lower of the actual
cost to purchase and/or manufacture the inventory or the current estimated
market value of the inventory. Management regularly reviews inventory quantities
on hand and records a provision for excess and obsolete inventory based
primarily on forecasts of product demand. Demand for read/write drives can
fluctuate significantly. In order to obtain favorable pricing, purchases of
certain read/write drive parts are made in quantities that exceed the historical
annual sales rate of drives. The Company purchases read/write drive parts for
its anticipated read/write drive demand and takes into consideration the
order-to-delivery lead times of vendors and the economic purchase order quantity
for such parts. In addition, the Company keeps a supply of card raw materials it
deems necessary for anticipated demand. Therefore, the calculation of inventory
turnover will vary when actual demand differs from anticipated demand.

        Management's analysis of the carrying value of inventory is performed on
a quarterly basis. With respect to inventory carrying values, the Company
follows the principles articulated in Accounting Research Bulletin 43, Chapter
4, "Inventory Pricing," paragraphs 5 through 7 and 10 and other authoritative
guidance (SAB 100) as it relates to determining the appropriate cost basis of
inventory and determining whether firm, noncancelable purchase commitments
should be accrued as a loss if forecasted demand is not sufficient to utilize
all such committed inventory purchases. As part of the Company's quarterly
excess/obsolete analysis, management also determines whether lower of cost or
market adjustments (i.e., where selling prices less certain costs are not
sufficient to recover inventory carrying values) are warranted; during the first
six months of fiscal 2005, the Company has not recorded any significant lower of
cost or market adjustments. In those instances where the Company has recorded
charges for excess and obsolete inventory, management ensures that such new cost
basis is reflected in the statement of operations if that inventory is
subsequently sold. The Company's inventory reserves are based upon the lower of
cost or market for slow moving or obsolete items. As a result, the Company
believes a 10% increase or decrease of sales would not have a material impact on
such reserves.

RESULTS OF OPERATIONS--FISCAL 2005 SECOND QUARTER AND FIRST SIX MONTHS
COMPARED WITH FISCAL 2004 SECOND QUARTER AND FIRST SIX MONTHS

Overview

        Headquartered in Mountain View, California, LaserCard Corporation
(formerly known as Drexler Technology Corporation, until October 1, 2004)
manufactures LaserCard(R) optical memory cards, chip-ready OpticalSmart(TM)
cards, and other advanced-technology cards. In addition, the Company operates
three wholly owned subsidiaries. LaserCard Systems Corporation, of Mountain
View, manufactures optical card read/write drives; develops optical card system
software; and markets cards, card-related data systems, and peripherals. The
Company plans to merge LaserCard Systems Corporations into LaserCard Corporation
during this fiscal quarter. Challenge Card Design Plastikkarten GmbH, of
Rastede, Germany, manufactures advanced-technology cards; and cards & more GmbH,
of Ratingen, Germany, markets cards, system solutions, and thermal card
printers.

        During six-month period ended September 30, 2004, the Company was in
process of the integration of the two related German card companies acquired on
March 31, 2004, Challenge Card Design Plastikkarten GmbH of Rastede, Germany,
and cards & more GmbH of Ratingen, Germany. These acquisitions provide the
Company with a card manufacturing base to serve the European, Middle Eastern,
African, and Asian markets, supplementing the Company's newly expanded
manufacturing operations in California. The German operations accounted for 31%
of total Company revenues for both three and six-month periods ended September
30, 2004. This is the second quarter that the German operations are included in
the Company's Statement of Operations. The German operations had net income of
$161,000 for the first quarter of fiscal 2005 and a net loss of $38,000 for the
second quarter of fiscal 2005. The second quarter loss was due to a decrease in
revenues and gross margins partially offset by decreased SG&A expense.

                                       17
<PAGE>

        Prior to fiscal 2005, the largest purchaser of LaserCard products was
Anteon International Corporation (Anteon), a value-added reseller (VAR) of the
Company. Anteon is 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 Anteon, the DHS purchases U.S. Permanent Resident Cards (Green
Cards) and DOS "Laser Visa" Border Crossing Cards (BCCs); the DOD purchases
Automated Manifest System cards; and the Canadian government purchases Permanent
Resident Cards. Encompassing all of these programs, the Company's product sales
to Anteon represented 18% and 20% for the three and six-month periods ended
September 30, 2004 and 75% and 83% for the same periods a year ago. Another
unaffiliated Company VAR, Laser Memory Card srl of Italy, accounted for 47% and
44% of the Company's total revenues for the three and six-month periods ended
September 30, 2004 for programs in Italy and Senegal.

        Revenues for the major programs are shown below as a percentage of total
Company revenues

<TABLE>
<CAPTION>
                                                               Three Months Ended          Six Months Ended
                                                                  September 30,              September 30,
                                                              2004            2003       2004             2003
                                                              ----            ----       ----             ----
<S>                                                           <C>              <C>       <C>               <C>
United States Green Cards and Laser Visa BCCs.............     6%              47%        9%               45%
Canadian Permanent Resident Cards.........................     9%              20%        8%               31%
Italian Carta d'Identica Elettronica (CIE) Cards..........    47%               0%       43%                0%
</TABLE>

        For the government of Italy, the Company has received orders for CIE
cards (Carta d'Identita Elettronica) and anticipates orders for a new program
for the PSE cards (Permesso di Soggiorno Elettronico). As of September 30, 2004,
the Company has a backlog, in the amount of $0.2 million for CIE cards scheduled
for delivery in the December fiscal 2005 quarter for Phase 2 of this program.
According to program descriptions released by the Italian government, CIE card
orders could potentially reach more than $32.0 million per year if Phase 2 is
successful and Phase 3 is fully funded and implemented. The Company anticipates
additional orders this fiscal year.

        Optical memory card revenues for the three and six-month periods ended
September 30, 2004 mainly included sales of CIE cards for the Italian government
for its national ID card program; U.S. Permanent Resident Cards (Green Cards),
DOS "Laser Visa" Border Crossing Cards (BCCs), Automated Manifest System cards
for the U.S. government; and sales of Permanent Resident Cards made for the
Canadian government. Optical memory card revenues for the three and six month
periods ended September 30, 2003 mainly included sales of U.S. Permanent
Resident Cards (Green Cards), DOS "Laser Visa" Border Crossing Cards (BCCs),
Automated Manifest System cards for the U.S. government; and sales of Permanent
Resident Cards made for the Canadian government.

        The Company delivered $495,000 in the three-month period and $1.5
million in the six-month period ended September 30, 2004 of U.S. Permanent
Resident Cards (Green Cards) for the U.S. Department of Homeland Security (DHS).
As of September 30, 2004, between its own on-site inventory and the inventory it
owns and maintains in its vault on Company premises, the U.S. government has
inventories of Laser Visa BCCs and Green Cards which would last approximately 12
and 6 months, respectively, at the U.S. government's card-personalization rates.
The Company believes that the U.S. government wants to maintain an inventory
which would last approximately 6 months at the U.S. government's card
personalization rates. During the second quarter ended September 30, 2004, the
Company received a new order of Green Cards for delivery through March 2005 in
the amount of $4.9 million which approximately matches their personalization
rate experienced in the six-month period ended June 30, 2004. The Company
delivered $495,000 of this order during the three-month period ended September
30, 2004. This order calls for delivery to the DHS vault on Company premises and
included a schedule for shipment of the cards from the vault. Revenue
recognition for future deliveries into the vault would be affected if the U.S.
government cancels the shipment schedule. As a result, the Company's revenues
may fluctuate from period to period if the Company does not continue to obtain
shipment schedules under this subcontract or if the shipment schedules are
cancelled.

        During the September quarter, the U.S. government personalized Green
cards and Laser Visa at a $11.5 million annualized run rate. This is an increase
from the $9.2 million run rate experienced in the twelve-month period ended June
30, 2004. The value is based upon the Company's selling price of cards to
Anteon. The Company believes that annual revenues under these two programs will
approximate the U.S. government personalization rate over time, subject to
fluctuations in the level of inventory deemed appropriate by the U.S.
government. The Company currently has an order to deliver cards valued at $4.4
million over the next six months, at a $8.8 million annualized rate and does not
have any orders for Laser Visa BCCs.

        The Company has established sheet-lamination production facilities to
make Canadian Permanent Resident

                                       18
<PAGE>

Cards, Italian National ID cards, and cards for other potential programs. This
process is currently more labor intensive than its roll-lamination process but
allows the use of high security offset printing and other special features,
resulting in a premium card. To date, gross margins on the sheet-process cards
have been less than 40%. In particular, largely due to a card production problem
that has since been rectified, the gross margin on sheet-process cards was less
than 25% during the first quarter of fiscal 2005. The Company believes that over
time it will be able to improve margins to above the 40% level on cards made by
the sheet-lamination process, through automation and yield improvements combined
with higher volumes of roll-process cards. In addition, roll-lamination card
gross margins have been hampered by low sales and production volume and could
return to 50% at higher volumes; however, there is no assurance that such
margins will be achieved or sustained by the Company.

        Application areas with major growth potential for LaserCard optical
memory cards include government-sponsored identification programs in several
countries, motor vehicle registration in India, and the possible expansion of
U.S. government ID programs due to the need for enhanced border security. 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.

        In addition to using its own marketing staff in California, New York,
and Germany, the Company utilizes VAR companies and card distribution licensees
for the development of markets and applications for LaserCard products. Product
sales to VARs and licensees consist primarily of the Company's optical memory
cards and optical card read/write drives. The Company also offers for sale, its
customized software applications and add-on peripherals made by other companies
(such as equipment for adding a digitized photo, fingerprint, hand template, or
signature to the cards). The VARs/licensees may add application software,
personal computers, and other peripherals, and then resell these products
integrated into data systems. The Company is continuing its efforts to recruit
new VARs and eliminate nonproductive VARs.

        The Company's current five-year U.S. government subcontract for Green
Cards and Laser Visa BCCs was announced in June 2000 and will expire on May 25,
2005. When the contract expires, the government could issue a new competitively
bid contract or issue sole-source purchase orders. The Company believes this
contract will be extended prior to expiration. There is no assurance that a
follow-on contract or sole-source purchase orders will be issued by the DHS upon
expiration of the current contract. This subcontract was received by the Company
through Anteon, a LaserCard VAR that is a U.S. government prime contractor,
under a competitively bid, government procurement contract.

        In 2002, the Company was awarded a subcontract for production of
Canada's new Permanent Resident Cards. Shipments began in fiscal 2003 and have
totaled $8.0 million as of September 30, 2004. The Company's non-cancelable
backlog at September 30, 2004 relating to this contract of $0.8 million calls
for deliveries through January 2005.

        In March 2004, the Company quoted on a Phase 2 tender issued by the
Kingdom of Saudi Arabia for three million optical memory cards, one million
secure non-optical polycarbonate ID cards, and 220 read/write drives for a
secure personal identification card program. Since that time, according to Saudi
officials, the quantity of optical cards has been reduced to two million, while
non-optical cards have been reduced to 100,000, due to budget shortfalls. The
products would be delivered over an eighteen-month period after contract
issuance. Currently, responses to the tender are under evaluation by the Saudi
Arabia government and the final selection of the prime contractor for this
tender is expected later this year. However, there is no assurance that the
contract will be issued, that the Company would be the selected vendor, or that
the Company will receive additional orders for this program under any contract
that may ultimately be issued by the Saudi Arabian government. The Company
previously sold 120 read/write drives for this program, most of which were
shipped in the fiscal 2004 second quarter, for installation of the
infrastructure required for card issuance. The Company shipped $93,000 of Phase
1 optical memory cards in the second quarter of fiscal 2005 and $174,000 for the
first half of fiscal 2005. At September 30, 2004, the Company had backlog of
$967,000 Phase 1 optical memory cards for delivery this fiscal year. In
addition, the Company received a separate purchase order of $288,400 to ship
secure non-optical polycarbonate ID cards for use in Saudi Arabia government
family identity program. The non-optical polycarbonate ID cards will be
manufactured by the Company's wholly owned subsidiary, Challenge Card Design of
Rastede, Germany.

                                       19
<PAGE>

        Effective April 3, 2004, the Company sold a second-source
card-manufacturing license to the Global Investments Group (GIG), based in
Auckland, New Zealand, for card manufacturing in Slovenia. This agreement
provides for payments to the Company of $29.0 million for the license over the
20-year term of the license (including a five-year training support package,
followed by an ongoing support phase for an additional 15 years). Additionally,
the Company is to sell approximately $12.0 million worth of the required
manufacturing equipment and installation support for the to-be-built new
facility to provide a targeted initial manufacturing capacity of 10 million
optical cards annually. The Company has received $9.0 million of payments called
for in the agreements as of September 30, 2004, consisting of a partial payment
for the equipment and installation support of $7.0 million, recorded as advance
payments, and $2.0 million toward the license fee, recorded as deferred revenue,
which are classified as long-term liabilities within the consolidated balance
sheets. GIG is to pay the Company royalties for each card produced during the
20-year term of the license agreement. GIG anticipates that start up of the GIG
facility will be late in calendar 2005. Revenue will be recognized over the
remaining term of the agreement beginning when operation of the factory
commences.

        Kodak is the Company's sole-source supplier of raw material for its
optical memory card media. The Company currently has an order which Kodak has
accepted with deliveries scheduled through December 2004. Kodak announced in the
Company's prior fiscal year that it is reducing its emphasis on emulsion based
films in general. Subsequently, however, Kodak has reassured us that it has no
plans to discontinue the fine-grained monochrome emulsion used in our optical
memory card since it is similar to those used in military and commercial
high-resolution products for which Kodak continues to maintain production. If
Kodak were nonetheless to discontinue manufacturing the raw material from which
the Company's optical memory card media is made, the Company would order the
maximum amount of final-run stock for use while endeavoring to establish an
alternate supplier for such raw material, although the purchase price could
increase from a new supplier.

        The Company uses a second photographic emulsion for the preparation of
mastering loops. The Company has purchased a long-term supply of this emulsion
and believes it has on hand an adequate supply to meet anticipated demand.

        The Company plans to invest approximately $8.5 million in additional
capital equipment and leasehold improvement expenditures in the next twelve
months, as more fully discussed under "Liquidity and Capital Resources."

Revenues

        PRODUCT REVENUES. The Company's total revenues for the fiscal 2005
second quarter ended September 30, 2004 consisted of sales of optical memory
cards, optical card read/write drives, drive accessories, specialty cards and
printers, maintenance, and other miscellaneous items. The Company's total
revenues were $7.8 million for the fiscal 2005 second quarter and $16.5 million
for the fiscal 2005 first six months, compared with $2.7 million for the fiscal
2004 second quarter and $5.2 million for the fiscal 2004 first six months. The
$5.0 million and $11.2 million increase in revenues for the three and six-month
periods ended September 30, 2004 versus the same periods in fiscal 2004 was due
in part to $2.4 million and $5.2 million, respectively, in revenues from net
sales to external customers from the newly-acquired German companies and in part
to increases in optical memory card product sales described below.

        Revenue on optical memory cards totaled $5.1 million for the fiscal 2005
second quarter compared with $2.2 million for the fiscal 2004 second quarter.
Revenue on optical memory cards totaled $10.7 million for the first six months
of fiscal 2005 compared with $4.5 million for the first six months of fiscal
2004. The increase in optical memory card revenue was mainly due to the sale of
optical memory cards for the Italian National ID card program of $6.9 million
for the fiscal 2005 first half versus $29,000 in last year's first half.

        Revenue on read/write drives, drive service, and related accessories
totaled $155,000 for the fiscal 2005 second quarter compared with $471,000 for
the fiscal 2004 second quarter. Revenue on read/write drives, drive service, and
related accessories totaled $444,000 for the fiscal 2005 first six months
compared with $586,000 for the fiscal 2004 first six months. The decrease was
due to a decrease in unit sales volume for read/write drives.

                                       20
<PAGE>

        LICENSE FEES AND OTHER REVENUES. There were no license revenues for the
three and six-month periods ended September 30, 2005 and 2004. However, in the
fiscal 2005 first quarter, the Company announced the sale of a royalty-bearing,
optical memory card manufacturing license to GIG for card manufacturing in
Slovenia. The license agreement provides for payments to the Company of $29.0
million for the license (including a five-year training support package,
followed by an ongoing support phase for an additional 15 years). Additionally,
the Company agreed to sell approximately $12.0 million worth of manufacturing
equipment and installation support for the new facility to provide a targeted
initial manufacturing capacity of 10 million optical cards annually, with
options to increase capacity to 30 million cards per year. As of September 30,
2004, the Company has received the initial $9.0 million of payments called for
in the agreements, consisting of a partial payment for the equipment and support
of $7.0 million, recorded as advance payments, and $2.0 million toward the
license fee, recorded as deferred revenue. The payments of $41.0 million called
for in the agreements will be recognized as revenue over the remaining term of
the arrangement beginning when operation of the factory commences, presently
targeted by GIG for late in 2005. Direct and incremental costs will also be
deferred and recorded as cost of sales along with the revenue.

Backlog

        As of September 30, 2004, the backlog for LaserCard optical memory cards
totaled $6.4 million scheduled for delivery this fiscal year, of which $3.9
million is scheduled for delivery during the quarter ended December 31, 2004.
Order backlog as of September 30, 2004 mainly includes orders for the U.S.
Permanent Resident cards (Green cards), and Canadian government Permanent
Resident Cards. As of September 30, 2003, the backlog for LaserCard optical
memory cards totaled approximately $5.7 million in firm card orders.

        The Company has no significant backlog for read/write drives.

        In addition, the backlog for Challenge Card Design Plastikkarten GmbH
and cards & more GmbH as of September 30, 2004 for specialty cards and printers
totaled 330,000 euros (approximately $410,000); for a contract to develop a
conventional non-optical card production facility totaled 789,000 euros
($980,000); and for a partially completed contract for an amusement park gate
system totaled 888,000 euros ($1.1 million). The Company does not anticipate
that it will record any gross profit or loss from the amusement park gate system
contract when completed because the contract was substantially completed prior
to the March 31, 2004 acquisition and all profit accrued to the prior entity.
Revenue on the contract for a conventional non-optical card production facility
contract is being booked on a zero profit margin basis. Therefore, the total
profit under this contract will be booked at completion on or about December
2006

Gross Margin

        Gross margin on product sales was 25% for the fiscal 2005 second quarter
and 26% for the fiscal 2005 first six months compared with 7% for the fiscal
2004 second quarter and 1% for the fiscal 2004 first six months. The increase
from fiscal 2005 to fiscal 2005 was mainly due to increased volume of optical
memory card production and sales.

        OPTICAL MEMORY CARDS. Optical memory card gross profit and margins can
vary significantly based on yields, average selling price, sales and production
volume, mix of card types, production efficiency, and changes in fixed costs.
The gross margin on optical memory cards increased to 32% for the second quarter
and for the first six months of fiscal 2005 versus 16% for the second quarter of
fiscal 2004 and 10% for the first six months of fiscal 2004. The increase was
primarily due to the increase in sales and production volume and the
corresponding increased absorption of fixed costs.

        READ/WRITE DRIVES. Read/write drive gross profit and margins can vary
significantly based upon sales and production volume, changes in fixed costs,
and the inclusion of optional features and software licenses on a per-drive
basis. Read/write drive gross profits are generally negative, inclusive of fixed
overhead costs, due to low sales volume. For the fiscal 2005 second quarter, the
Company had a negative gross profit on read/write drive sales of approximately
$230,000 compared with a negative gross profit of approximately $180,000 for the
fiscal 2004 second quarter. For the fiscal 2005 first six months, gross profit
on read/write drive sales was a negative gross profit of approximately $470,000
compared with a negative gross profit of approximately $390,000 for the fiscal
2004 first six months. The Company believes that margins will remain below 10%
when sales volume is sufficient to generate positive gross profit.

                                       21
<PAGE>

        SPECIALTY CARDS AND PRINTERS. Gross margin on specialty cards and
printers was 21% and 26% for the three and six-months periods ended September
30, 2004. The operation of this segment was started in the first quarter of
fiscal 2005.

Expenses

        SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES (SG&A). SG&A expenses were
$2.8 million and $5.8 million for the three and six-month periods ended
September 30, 2004, compared with $1.6 million and $3.4 million the same periods
a year ago. For the three-month period end September 30, 2004, the increase of
$1.2 million was due primarily to $638,000 in SG&A expenses recorded by the
acquired German entities, $41,000 for U.S. operation marketing expense, $330,000
for salaries, legal and consulting mainly related to the integration of the
acquired German companies and Sarbanes-Oxley Act compliance, $80,000 for proxy
solicitation and annual meeting, and $72,000 in occupancy costs. For the
six-month period ended September 30, 2004, the increase of $2.4 million was due
primarily to $1.4 million in SG&A expenses recorded by the acquired German
entities, $192,000 for marketing expense, $550,000 for salaries, legal,
accounting and consulting expenses mainly related to the integration of the
acquired German companies and Sarbanes-Oxley Act compliance, $80,000 for proxy
solicitation and annual meeting, and $127,000 for occupancy costs. The Company
believes that SG&A expenses for fiscal 2005 will be higher than fiscal 2004
levels, as represented by the quarter ended September 30, 2004, mainly due to
the inclusion of SG&A of the acquired German companies, integration of the
acquired companies, increases in marketing and selling expenses, and the cost of
compliance with internal control auditing mandated by Section 404 of the
Sarbanes-Oxley Act.

        RESEARCH AND ENGINEERING EXPENSES (R&E). The Company is continuing its
efforts to develop new optical memory card features and structures, including
various sheet-lamination card structures, the insertion of contactless chips
with radio frequency (RF) capability, Optichip(TM), OVD (optically variable
device) products, and associated media development; enhanced optical memory card
read/write drives and read-only drives (readers); and new software products in
an effort to provide new products that can stimulate optical memory card sales
growth. For example, the Company has developed a prototype of a LaserCard
handheld reader. The Company anticipates that these ongoing research and
engineering efforts will result in new or enhanced card capabilities,
production-model read-only drives, or drives with advanced security features and
lower manufacturing costs; however, there is no assurance that such product
development efforts will be successful. These features are important for the
Company's existing and future optical memory card markets. Total R&E expenses
were $723,000 and $1.6 million for the three and six-month periods ended
September 30, 2004, compared with $741,000 and $1.4 million the same periods a
year ago. R&E expenses of $60,000 and $124,000 were recorded by the acquired
German entities for the three and six-month periods ended September 30, 2004.
The Company believes that R&E expenses will increase in fiscal 2005 for
development of production-model read-only drives, for prototypes of a hand-held
read-only drive, optical memory card media development, and other card and
hardware related programs.

        OTHER INCOME AND EXPENSE. The net other income for the second quarter of
fiscal 2005 was $62,000 consisting of mainly $96,000 in interest income offset
by $34,000 in interest expense, compared with $68,000 of interest income for the
second quarter of fiscal 2004. Total net other income for the first six months
of fiscal 2005 was $85,000 mainly consisting of $186,000 of interest income
partially offset by $96,000 in interest expenses, compared with $132,000 of
interest income for the first six months of fiscal 2004. The increase in
interest income was mainly due to the increase in invested funds. Interest
expense of about $32,000 recorded in the September fiscal 2005 quarter on
long-term debt will continue at this approximate amount through fiscal 2005 and
decline over time as annual payments are made on the debt. There may be minimal
interest expense on an ongoing basis if the German companies use their credit
lines for current working capital requirements.

        INCOME TAXES. The Company recorded an income tax benefit of $18,000 for
the second quarter of fiscal 2005 compared with an income tax benefit of
$389,000 for the second quarter of fiscal 2004. For the first six months of
fiscal 2005, the Company recorded an income tax expense of $8,000 compared with
an income tax benefit of $1.4 million for the first six months of fiscal 2004.
The amount of the tax benefit recorded for the fiscal 2005 second quarter was
due to the operating loss incurred in the Company's German operation that
quarter. The amount of income tax benefit recorded for the fiscal 2004 second
quarter was based upon the Company's anticipated tax rate for the full

                                       22
<PAGE>

fiscal year, partially offset by an increase in the deferred tax asset valuation
allowance as the analysis performed by management indicated a reduction in the
anticipated realization of the deferred tax asset.

LIQUIDITY AND CAPITAL RESOURCES

        As of September 30, 2004, the Company had cash and cash equivalents of
$13.2 million and a current ratio of 3.1 to 1. The Company also had $7.3 million
in long-term investments with original maturities from one year to two and
one-half years. Cash, short-term investments, and long-term investments were
$20.5 million at September 30, 2004 and $20.9 million at March 31, 2004.

        Net cash provided by operating activities was $3.6 million for the first
six months of fiscal 2005 compared with $616,000 used in operating activities
for the first six months of fiscal 2004. The increase of $4.2 million is due
primarily to increases in advance payments from customers and deferred revenue
offset by the decrease in accounts payable and accrued liabilities. During the
six months period ended September 30, 2004, $7.0 million in advance payments and
$2.0 million in deferred revenue were received from GIG related to the contract
of card-manufacturing license, sales of required equipment and support services.
The decrease in accounts payable and accrued liabilities was due mainly to $1.0
million of leasehold improvements accrued in the fourth quarter of fiscal 2004
but paid in the first quarter of fiscal 2005 and $568,000 of accounts payable
paid down by the Company's subsidiaries in Germany.

        Cash and investments were consistent in the fiscal 2005 second quarter
compared with the year end of fiscal 2004. Cash and investments will fluctuate
based upon the timing of advance payments from customers relative to shipments
and the timing of inventory purchases and subsequent manufacture and sale of
products.

        The Company believes that the estimated level of revenues and advance
payments over the next 12 months will be sufficient to generate cash from
operating activities, including payments due from GIG over the same period.
However, quarterly fluctuations are expected. Operating cash flow could be
negatively impacted to a significant degree if GIG does not make the required
payments as scheduled, or if either of the Company's largest U.S. government
programs were to be further delayed, reduced, canceled, or not extended, if the
Italian CIE card program does not grow as planned internally, and if these
programs are not replaced by other card orders or other sources of income.

        The Company has not established a line of credit and has no current
plans to do so. The Company may negotiate a line of credit if and when it
becomes appropriate, although no assurance can be made that such financing would
be available on favorable terms or at all, if needed.

        As a result of the $1.5 million net loss recorded for the fiscal 2005
second quarter, the Company's accumulated deficit increased to $21.3 million.
Stockholders' equity decreased to $32.3 million mainly due to the net loss
recorded and $656,000 of treasury stock resulting from stock repurchases in open
market or privately negotiated transactions.

        Net cash used in investing activities was $385,000 for the first six
months of fiscal 2005 compared with $3.8 million provided by investing
activities in the first six months of fiscal 2004. These amounts include
maturities of liquid investments; purchases of property and equipment of $2.3
million in the first six months of fiscal 2005 versus $1.5 million in the first
six months of fiscal 2004; and acquisitions of patents and other intangibles of
$64,000 in the second quarter of fiscal 2005 and $54,000 in the second quarter
of fiscal 2004.

        The Company considers all highly liquid investments, consisting
primarily of commercial paper, taxable 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. The Company determines the length of its investments after
considering its cash requirements and yields available for the type of
investment considered by the Company. Management also determines the appropriate
classification of debt and equity securities at the time of purchase and
reevaluates the classification of investments as of each balance sheet date. As
of September 30, 2004 the Company had $7.3 million classified as short-term and
long-term investments, compared with $9.2 million at March 31, 2004. All
marketable securities are accounted for as held-to-maturity.

                                       23
<PAGE>

        The Company made capital equipment and leasehold improvement purchases
of approximately $2.3 million during first six months of fiscal 2005 compared
with approximately $1.5 million during the first six months of fiscal 2004. As
of September 30, 2004, the Company has non-cancelable purchase orders of $2.8
million for equipment and $2.0 million for raw materials. The Company's current
card capacity, assuming optimal card type mix, is estimated at approximately 16
million cards per year. The Company plans to purchase additional production
equipment in a series of steps when deemed appropriate by the Company. The
Company is also increasing production capacity for cards with new structures
used by the Canadian and Italian programs. In addition to investment used for
expansion, the Company expects to make additional capital expenditures for cost
savings, quality improvements, and other purposes. The Company plans to use cash
on hand and cash generated from operations to fund additional capital
expenditures of approximately $8.5 million over the next twelve months for
equipment and leasehold improvements for card production, read/write drive
tooling and assembly, and general support items. The Company plans to increase
card production capacity for anticipated increases in order for Italian National
ID Cards and other potential programs.

        Net cash used in financing activities was $1.7 million for the first six
months of fiscal 2005 compared with net cash provided by financing activities of
$1.3 million for the first six months of fiscal 2004. Financing activities
consisted of repayments of bank loans and long-term debt in the amount of $1.3
million in the first six months of fiscal 2005, proceeds on sales of common
stock through the Company's stock-option and stock-purchase plans of $255,000
for the first six months of fiscal 2005 compared with $1.3 million for the first
six months of fiscal 2004. In addition, the Company used $656,000 of cash to
repurchase its common stock in open market or privately negotiated transactions.

        On August 2, 2004, the Company's Board of Directors approved a 350,000
shares repurchase program pursuant to which we can make open market or privately
negotiated repurchase transactions for up to an aggregate of $3.0 million for a
four-month period beginning August 2, 2004. As of September 30, 2004, the
Company has repurchased 91,630 shares of common stock in open market amounting
to $656,000 at an average price of $7.15.

        There were no new debt financing activities for the fiscal 2005 second
quarter ended September 30, 2004.

RISK FACTORS AND FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS

        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 fiscal 2004 and each of the previous two fiscal years, we have derived
more than 90% of our revenues from four programs-two U.S. government programs
and two foreign government programs. Due to the lengthy sales cycles, we believe
that these programs, with perhaps the addition of one or two other foreign
programs, will be the basis for a substantial 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. Our U.S. government subcontract expires on May 25, 2005. The
Company believes this contract will be extended prior to expiration. There is no
assurance that a follow-on contract will be issued by the U.S. government upon
expiration of the current contract. Annual or quarterly losses would occur if
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.

        WE HAVE INCURRED NET LOSSES DURING THE PAST SEVEN QUARTERS AND MAY NOT
BE ABLE TO GENERATE SUFFICIENT REVENUE IN THE FUTURE TO ACHIEVE OR SUSTAIN
PROFITABILITY. As of September 30, 2004, we had an accumulated deficit of $21.3
million and we incurred losses of $1.5 million during both the first and second
quarters of fiscal 2005. Although we operated profitably for fiscal 1999 through
fiscal 2003, we have incurred significant losses in the past, including in
fiscal 1997 and 1998, and we incurred losses in fiscal 2004 and in the first and
second quarters of fiscal 2005 due primarily to delays in orders for our cards,
and in the third fiscal quarter of fiscal 2004, by the increase in the valuation
allowance we recorded against our deferred tax assets. There can be no assurance
that we will generate enough card revenues in the near term or ever to become
profitable. 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 occur if increases in product revenues or license revenues do
not keep pace with increased marketing, research and engineering expenses and
the depreciation and amortization associated with capital expenditures.

                                       24
<PAGE>

        OUR PRODUCT REVENUES WILL NOT GROW IF WE DO NOT WIN NEW BUSINESS IN THE
U.S. AND ABROAD. Revenues during fiscal 2003 included sales of approximately
$21.5 million of U.S. government Green Cards and Laser Visa BCCs. Fiscal 2004
revenues included sales of approximately $5.0 million of cards for these
government programs, and we expect revenues of $6.0 million for these programs
in fiscal 2005. The Company expects these revenues could grow to more than $9.0
million annually thereafter once the government works down its inventory to the
six-month level if the government continues to personalize cards at that rate.
Optical memory card digital governance programs that are emerging programs or
prospective applications in various countries include identification cards for
Italy and Saudi Arabia; motor vehicle registration cards in India; and several
new U.S. government ID card programs due to the increasing need for enhanced
U.S. border security. In the United States, the US-VISIT program, the TWIC
(Transportation Worker Identification Credential) program, and the proposed
Registered Flier program are possible market opportunities for secure
identification using optical memory cards. However, there is no assurance that
our products will be selected for any of these programs. In particular, we are
uncertain whether we will be chosen as a US-VISIT subcontractor directly or
through a VAR teaming partner with Accenture, which was announced as the prime
contractor for the full implementation of this program on June 1, 2004. Since
governmental card programs typically rely on government policy-making, which in
turn is subject to technical requirements, budget approvals, and political
considerations, there is no assurance that the US-VISIT program will be
implemented as expected or that it will include optical cards in its solution.

        From Italy, we delivered cards valued at $3.5 million in the first
quarter of fiscal 2005 and $3.4 million in the second quarter of fiscal 2005 for
Phase 2 of the Italian CIE card program. We anticipate receiving orders during
fiscal 2005 for one of Italy's new programs, the Permesso di Soggiorno
Elettronico (PSE) card and further orders for the CIE card program. We did not
receive orders for delivery after September 30, 2005 for either of these
programs and we understand that there is currently an inventory of CIE cards in
Italy waiting to be issued. There is no assurance that the foregoing government
programs will be continued or implemented as anticipated or that the U.S.
government will select our cards for its new homeland security programs.

        OUR PROGRAM WITH ITALY, WHICH WE BELIEVE WILL BE OUR LARGEST ULTIMATE
CUSTOMER FOR THE NEXT FEW YEARS, IS IN AN EXPERIMENTAL STAGE AND MAY BE DELAYED
OR CANCELLED FOR REASONS OUTSIDE OUR CONTROL. THIS WOULD CAUSE US TO HAVE LESS
REVENUE THAN PLANNED AND WOULD LEAD TO CONTINUED LOSSES. The Company believes
that the Italian CIE card program will be our largest ultimate customer for the
next few years, comprising a significant portion of future revenues. We are
increasing capacity to meet the anticipated demand. However, since the program
is in Phase 2, which is its second experimental phase, there can be no assurance
that demand will increase as anticipated by the Company. Losses would occur if
Phase 3 of this program, which is full implementation, was to be delayed,
canceled, or not extended and not be replaced by other card orders or other
sources of income, or if the government were to change its technology decisions.

        ONE VALUE ADDED RESELLER IS THE CONTRACTOR FOR OUR U.S. AND CANADIAN
GOVERNMENT CUSTOMERS AND ANOTHER VAR PURCHASES CARDS FROM US FOR THE ITALIAN
NATIONAL ID CARD PROGRAM. HAVING TO REPLACE EITHER OF THESE VARS COULD INTERRUPT
OUR U.S., CANADIAN, OR ITALIAN GOVERNMENT BUSINESS. AND, IF OUR VARS LOSE THEIR
GOVERNMENT BUSINESS, OUR REVENUES WOULD LIKEWISE DECLINE MATERIALLY. The largest
purchaser of LaserCard products is Anteon International Corporation, one of our
value-added resellers (VARs). Anteon is the government contractor for LaserCard
product sales to the U.S. Department of Homeland Security, U.S. Department of
State, U.S. Department of Defense, and the government of Canada. Under
government contracts with Anteon, the DHS purchases U.S. Green Cards and DOS
Laser Visa BCCs; the DOD purchases Automated Manifest System cards; and the
Canadian government purchases Permanent Resident Cards. Encompassing all of
these programs, our product sales to Anteon represented 20% of total revenues
for the six-month period ended September 30, 2004, 72% of total revenues for
fiscal 2004 ended March 31, 2004; 94% of total revenues for fiscal 2003 ended
March 31, 2003; and 81% of total revenues for fiscal 2002 ended March 31, 2002.
However, since the ultimate customers are national governments, we are not
dependent upon any one specific contractor for continued revenues from these
programs. Although not anticipated, if Anteon were to discontinue its
participation as contractor, other qualified contractors could be utilized by
those governments for purchasing our products, although the process of

                                       25
<PAGE>

doing so could cause program delays. Concerning Italy, during fiscal 2004, 22%
of the Company's revenues were derived from sales of cards and read/write drives
for the government of Italy for its CIE card program. Card orders under this
program are channeled to the Company through a value-added reseller, Laser
Memory Card SRL, of Rome, Italy. According to Italian government sources, the
distribution of this new national ID card has started in a number of the 56
Italian communities scheduled to be activated under the program during 2004. The
government's publicly stated plan is to issue up to two million CIE cards this
calendar year, although the program is significantly behind schedule in issuing
cards. However, if this program were to be discontinued or interrupted by the
Italian government, the Company would lose one of its significant sources of
optical memory card revenues.

        ONE OF OUR LARGER ULTIMATE CUSTOMERS, THE U.S. GOVERNMENT, HAS THE RIGHT
TO DELAY ITS ORDERS OR COULD CHANGE ITS TECHNOLOGY DECISIONS, WHICH WOULD RESULT
IN ORDER DELAYS OR LOSSES. Under U.S. government procurement regulations, 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. Our
U.S. government card deliveries depend upon the issuance of corresponding order
releases by the government to its prime contractor and, in turn, to us, and we
believe that these orders will continue in accordance with our government
subcontract. Losses would occur if either of our largest U.S. government
programs were to be delayed, canceled, or not extended and not be replaced by
other card orders or other sources of income, or if the government were to
change its technology decisions, or if increases in product revenues or licenses
do not keep pace with increased marketing, research and engineering, and
depreciation on capital equipment. For example, the U.S. government acting
through its prime contractor delayed shipments on its order of Green Cards
earlier this year because of excess inventory, which resulted in a gap in
production of several months, and which in turn significantly affected our
operating results for the first half of fiscal 2005. Any future excess inventory
held by the U.S. government for example due to delayed funding or a slower than
anticipated program rollout, or any future changes to the design of the cards
may result in future gaps in orders or production which may negatively impact
our operating results.

        U.S. government subcontract release orders for DHS Green Cards and DOS
Laser Visa BCCs represented approximately 9% of the Company's revenue during the
first half of fiscal 2005; 44% of the Company's revenue for the entire fiscal
2004; 82% of revenues for fiscal year 2003; and 75% of revenues for fiscal 2002
The percentage declined during the first half of fiscal 2005 as U.S. government
orders decreased due to the U.S. governments' desire to reduce inventory levels,
while at the same time orders of cards from foreign governments increased as
planned over prior years' levels and the Company received revenue from its new
German operations. The U.S. government's agreement with our VAR expires on May
25, 2005. There can be no assurance that the U.S. government will enter into a
new contract with our VAR or renew its current contract to purchase our cards,
in which case one of our major sources of revenues would be eliminated.

        There is no assurance of continuing read/write drive orders from the
U.S. government. The fiscal 2004 sale of 1,000 drive units for use by the U.S.
government with our Biometric Verification System application software may not
result in similar sales in the future. The system performance, including
biometric verification speed, accuracy, and card reading performance may not
meet government objectives for further system expansion. There is no assurance
that the government will have budgeted sufficient funds to expand the system to
its full potential or that the Company will be successful in winning any new
U.S. government procurements for similar systems or application software.

        SINCE THE SALES CYCLE FOR OUR PRODUCTS IS TYPICALLY LONG AND
UNPREDICTABLE, WE HAVE DIFFICULTY PREDICTING FUTURE REVENUE GROWTH. Initial
product sales to VARs for their use or use by their ultimate customers are
generally in small quantities, for evaluation purposes and trial programs.
Obtaining substantial, follow-on orders from these customers 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.
government 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-making.

        THE TIMING OF OUR U.S. GOVERNMENT REVENUES IS NOT UNDER OUR CONTROL AND

                                       26
<PAGE>

CANNOT BE PREDICTED BECAUSE WE DO NOT RECOGNIZE REVENUE UNTIL CARDS ARE SHIPPED
OUT OF A VAULT OR WE RECEIVE A FIXED SHIPMENT SCHEDULE FROM THE GOVERNMENT. We
recognize revenue from product sales when the following criteria are met: (a)
persuasive evidence of an arrangement exists; (b) delivery has occurred; (c) the
fee is fixed or determinable; and (d) collectibility is reasonably assured.

        Our U.S. government subcontract requires delivery of cards to a secure
vault built on our premises. Deliveries are made into the vault on a fixed
schedule specified by the government or one of its specified agents. When the
cards are delivered to the vault, all title and risk of ownership are
transferred to the government. At the time of delivery, the prime contractor is
invoiced, with payment due within thirty days. The contract does not provide for
any return provisions other than for warranty. We recognize revenue when the
cards are delivered into the vault because we have fulfilled our contractual
obligations and the earnings process is complete. However, if we do not receive
such a shipment schedule, revenue is not recognized until the cards are shipped
from the vault. In addition, revenue recognition for future deliveries into the
vault would be affected if the U.S. government cancels the shipment schedule. As
a result, our revenues may fluctuate from period to period if we do not continue
to obtain shipment schedules under this subcontract or if the shipment schedules
are cancelled. We would no longer recognize revenue when cards are delivered to
the vault, but instead such revenue recognition would be delayed until the cards
are shipped from the vault to the U.S. government.

        WE COULD EXPERIENCE EQUIPMENT, RAW MATERIAL, QUALITY CONTROL, OR OTHER
PRODUCTION PROBLEMS UNDER VERY HIGH-VOLUME PRODUCTION. 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.
However, since customer demand is difficult to predict, we may be unable to ramp
up our production quickly enough to timely fill new customer orders. 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. 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 or outsourcing some of our
manufacturing. The addition of fixed overhead costs 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.

        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. AS A
RESULT, WE COULD LOSE CUSTOMERS, AND 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. No assurance can be
given that Kodak will continue to supply such photographic films on a
satisfactory basis and in sufficient quantities. If Kodak were to discontinue
manufacturing the film from which the Drexon optical stripe is made, we would
endeavor to establish an alternate supplier for such film, although the purchase
price could increase and reliability and quality could decrease from a new
supplier. Considering that the U.S. government is a major end-user of our
optical memory cards, we anticipate that an alternate supplier of these films
could be established and qualified; however, no assurance can be given that
there will be adequate demand to attract a second source. In addition, an
alternate supplier could encounter technical issues in producing the film as
there may be know-how and manufacturing expertise which Kodak has developed over
the years which an alternate supplier may have difficulty to replicate. We have
pre-purchased a long-term supply of the film used to produce mastering loops for
prerecording cards. With regard to the film from which the Drexon optical stripe
is made, we currently have an order which Kodak has accepted with deliveries
scheduled through December, 2004. If Kodak announced 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, although no assurance can be
given that Kodak would provide us with such an opportunity. We have film on hand
plus on order that we believe would provide us with an adequate supply to meet
anticipated demand until we could locate and begin volume purchases from a
second source.

                                       27
<PAGE>

        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 engineering 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.
Prior to fiscal 2002, we had been selling read/write drives for less than three
thousand dollars per unit in quantities of six or more, and these units
generally include our interface software/device drivers. In fiscal 2002, we
reduced the selling price by 20% for these read/write drives for typical
purchase quantities in an effort to develop a broader market and customer base
for LaserCard optical memory cards. Since fiscal 2002, there has not been a
further reduced selling price for these read/write drives. However, in fiscal
2004, we introduced a new drive with a 25% reduction in price for typical
quantities as compared with the previous model. We believe the price of our
drives is competitive in applications requiring a large number of cards per each
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 hand-held read-only drive,
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 production of any new design will occur in the near term, or
that significantly lower manufacturing costs or increased sales will result.

        IF WE ARE UNABLE TO ADAPT TO TECHNOLOGICAL CHANGES IN THE DATA CARD
INDUSTRY AND IN THE INFORMATION TECHNOLOGY INDUSTRY GENERALLY, WE MAY NOT BE
ABLE TO EFFECTIVELY COMPETE FOR FUTURE BUSINESS. The information 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 the Company's products currently
sold or under development will remain competitive or provide sustained revenue
growth.

        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

                                       28
<PAGE>

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 integrated circuit/chip
cards; 2-dimensional bar code cards and symbology cards; magnetic-stripe cards;
thick, rigid CD-read only cards or recordable cards; PC cards; radio frequency,
or RF, chip cards; and small, digital devices such as data-storage keys, tokens,
finger rings, 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 each 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.

        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, low 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
11 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. There also is a large short position in our
stock, which can create volatility when borrowed shares are sold short and later
if shares are purchased to cover the short position. 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. Most of the manufacturing process of the LaserCard products that
we sell in Italy takes place in Europe. The prices charged to us by the European
manufacturer for products are denominated in euros, the currency used in much of
Europe. However, when we sell our finished products to the Italian government,
the prices that we charge are denominated in United States dollars. Also, as of
September 30, 2004, the Company had debt relating to the acquisition of
Challenge Card Design Plastikkarten GmbH and cards & more GmbH, of Germany, in
the amount of 1.8 million euros. Accordingly, we are subject to exposure if the
exchange rate for euros increases in relation to the United States dollar. As of
September 30, 2004, we had not entered into a forward exchange contract to hedge
against or potentially minimize the foreign currency exchange risk.

        WE HAVE RECENTLY ACQUIRED TWO CARD COMPANIES LOCATED IN GERMANY AND MAY
ENCOUNTER DIFFICULTIES IN INTEGRATING THEM INTO OUR BUSINESS. We may encounter
unforeseen difficulties in managing Challenge Card Design GmbH and cards & more
GmbH, in which case we may not obtain some of the hoped-for benefits of these
acquisitions, such as expanded manufacturing capacity and establishment of a
significant European presence. Integration of these acquired companies may
result in problems related to integration of technology, management, personnel,
or products. If we fail to successfully integrate these acquisitions or if they
fail to perform as we anticipated, our operations and business could be harmed.
Likewise, if the due diligence and audit of these operations performed by third
parties on our behalf was inadequate or flawed, we could later discover
unforeseen financial or business liabilities. Additionally, in the future we may
evaluate other acquisition opportunities that could provide additional product
or services offerings or technologies. Any recent or future acquisition could
result in difficulties assimilating acquired operations and products, diversion
of capital and management's attention away from other business issues and
opportunities and may result in an expense if goodwill is impaired or other
intangible assets acquired are subsequently determined to be impaired.

                                       29
<PAGE>

        WE ARE CONTINUING TO IMPLEMENT DISCLOSURE CONTROLS AND PROCEDURES AND TO
EXTEND OUR INTERNAL CONTROL OVER FINANCIAL REPORTING TO OUR NEWLY ACQUIRED
GERMAN OPERATIONS. IN ADDITION, WE ARE BEGINNING TO PREPARE FOR OUR ASSESSMENT
OF OUR INTERNAL CONTROL OVER FINANCIAL REPORTING AS OF MARCH 31, 2005, AND THAT
OF OUR INDEPENDENT AUDITORS, BOTH OF WHICH WILL BE CONTAINED IN OUR FISCAL 2005
REPORT ON FORM 10-K. THESE ASSESSMENTS MAY INDICATE SIGNIFICANT DEFICIENCIES OR
A MATERIAL WEAKNESS IN SUCH INTERNAL CONTROL. SIGNIFICANT DEFICIENCIES OR
MATERIAL WEAKNESSES, IF ANY, IDENTIFIED THROUGH THIS PROCESS WOULD NEED TO BE
CORRECTED BY MANAGEMENT AND WOULD IMPACT THE AUDIT REPORT OF OUR INDEPENDENT
AUDITORS. We are continuing to implement disclosure controls and procedures and
to extend our internal control over financial reporting to our newly acquired
German operations. These two private German companies previously had accounted
only to their six shareholders who were also Managing Directors and to German
tax authorities. Other than in connection with their acquisition by the Company,
these companies had not previously prepared financial statements in accordance
with accounting principles generally accepted in the United States of America.
As a result, we have added an experienced Controller, and are continuing the
process of implementing disclosure controls and internal control procedures. The
disclosure controls and internal control procedures used in our German
operations are tailored to their business circumstances and we anticipate that
it will take several months until they are strengthened and made more robust in
order to be comparable to those used in our U.S. operations. We are currently
preparing for our and our auditor's assessment of our internal controls over
financial reporting. This continued implementation in Germany, any changes
required in the U.S., and the overall assessment is a costly and complex task
requiring large amounts of internal personnel resources as well as consultants,
significant management time and attention, and material amounts of training.
Ultimately, we or our outside independent auditors may assess our internal
control over financial reporting as having significant deficiencies, especially
relative to our German operations, which could lead to a determination that our
internal control over financial reporting has a material weakness. Any such
significant deficiency or material weakness, if any, would need to be corrected
by management and would impact the audit report of our independent auditors.

        WE RECENTLY SOLD A SECOND-SOURCE CARD MANUFACTURING LICENSE TO GLOBAL
INVESTMENTS GROUP (GIG), UNDER WHICH WE WILL PROVIDE CERTAIN FACTORY SET-UP AND
TRAINING SERVICES. IF WE ARE NOT SUCCESSFUL OR IF GIG IS UNABLE TO FINANCE THIS
OPERATION, THE SECOND-SOURCE SUPPLY OF OPTICAL CARDS WILL NOT MATERIALIZE. IF WE
AND GIG ARE SUCCESSFUL, THE SECOND-SOURCE WILL COMPETE WITH US FOR BUSINESS. If
GIG 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 are planning to sell to GIG approximately $12.0
million worth of the required manufacturing equipment and installation support
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
successful, this will supply a second source for optical memory cards. We will
also be assigning personnel to be on site during the license term 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 GIG
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 GIG, 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.

        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 either of our co-chief
executive officers, the managing directors of our German operations, or our vice
president of finance and treasurer, 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.

                                       30
<PAGE>

        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.

        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.










                                       31
<PAGE>

ITEM 3. QUANTITATIVE  AND QUALITATIVE DISCLOSURES ABOUT MARKET RATE RISKS

        INTEREST RATE RISK. The Company invests its cash, beyond that needed for
daily operations, in high quality debt securities. In doing so, the Company
seeks primarily to preserve the value and liquidity of its capital and,
secondarily, to safely earn income from these investments. To accomplish these
goals, the Company invests only in debt securities issued by (a) the U.S.
Treasury and U.S. government 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

        There were no material changes during the second quarter of fiscal 2005
to the Company's exposure to market risk for changes in interest rates.

        FOREIGN CURRENCY EXCHANGE RATE RISK. The Company sells products in
various international markets. All of these sales are denominated in U.S.
dollars. However, some raw material and purchased services are denominated in
euros. Also, as of September 30, 2004, the Company had debt relating to the
acquisition of Challenge Card Design Plastikkarten GmbH and cards & more GmbH,
of Germany, in the amount of approximately 1.8 million euros. Accordingly, the
Company is subject to exposure if the exchange rate for euros increases in
relation to U.S. dollars. As of September 30, 2004, the Company had not entered
into a forward exchange contract to hedge against or potentially minimize the
foreign currency exchange risk. We will continue to evaluate our exposure to
foreign currency exchange rate risk on a regular basis.

ITEM 4. CONTROLS AND PROCEDURES

        EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES. We are continuing to
implement disclosure controls and procedures and to extend our internal control
over financial reporting to our newly acquired German operations. These two
private German companies previously had accounted only to their six shareholders
who were also Managing Directors and to German tax authorities. Other than in
connection with their acquisition by the Company, these companies had not
previously prepared financial statements in accordance with accounting
principles generally accepted in the United States of America. As a result, we
have added an experienced Controller and we have instituted disclosure controls
and internal control procedures in an environment where few existed previously
and in which the existing personnel have no experience in operating a business
using the newly instituted controls and procedures. Therefore, the disclosure
controls and procedures used in our German operations are tailored to their
business circumstances and we anticipate that it will take several months until
they are strengthened and made more robust in order to be comparable to those
used in our U. S. operations. The Company's principal executive officers and
principal financial officer have evaluated the Company's disclosure controls and
procedures (as defined in Exchange Act Rules 13a-14(c) and 15d-14(c)) as of the
end of the period covered by this Form 10-Q and have determined that they are
reasonably effective taking into account the totality of the circumstances,
including those described as to our German operations.

        CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING. As described
above, the Company is in the process of extending its internal controls from the
U.S. to its newly acquired German operations. Otherwise, there were no
significant changes in the Company's internal control over financial reporting
that occurred during the period covered by this Form 10-Q that have materially
affected, or are reasonably likely to materially affect, such control.

PART II.  OTHER INFORMATION

Item 1. - Legal Proceedings

None

Item 2. - Unregistered Sales of Equity Securities and Use of Proceeds

        Purchases of Equity Securities by the Issuer and Affiliated Purchasers

                                       32
<PAGE>

        The following is a summary of share repurchase activity by the issuer
and "affiliated purchasers", as defined in Rule 10b-18(a)(3) during the second
quarter ended September 30, 2004:

<TABLE>
<CAPTION>
                                                                            TOTAL NUMBER OF
                                                                                 SHARES
                                                                              PURCHASED AS      MAXIMUM NUMBER OF
                                                                                PART OF          SHARES THAT MAY
                                      TOTAL NUMBER                              PUBLICLY       YET BE PURCHASED
                                    SHARES PURCHASED      AVERAGE PRICE      ANNOUNCED PLANS    UNDER THE PLANS
PERIOD                                     (1)           PAID PER SHARE     OR PROGRAMS (2)       OR PROGRAMS
-------                            ------------------    --------------     ---------------       -----------
<S>                                      <C>              <C>                    <C>                <C>
07/03/04 - 07/30/04                        --             $       --               --                  --
07/31/04 - 08/27/04                      91,630           $     7.15             91,630             258,370
08/28/04 - 10/01/04                        --             $       --               --                  --
                                   ------------------    --------------     ---------------       -----------

Total                                    91,630           $     7.15             91,630             258,370
                                   ==================    ==============     ===============       ===========
</TABLE>

(1) On August 2, 2004, our board of directors approved a 350,000 shares
repurchase program over the next four months pursuant to which we can make open
market or privately negotiated repurchase transactions for up to an aggregate of
$3.0 million.

(2) Neither this program nor any other repurchase program or plan has expired
during our first quarter ended September 30, 2004, nor has the Company decided
to terminate any repurchase plan or program prior to its expiration. There are
no existing repurchase plans or programs under which the Company does not intend
to make further purchases.

Item 3. - Defaults Upon Senior Securities

        None

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

        At the Company's October 1, 2004 Annual Meeting of Stockholders, the
Company's stockholders

        (i)     re-elected the existing Board of Directors.
        (ii)    ratified the selection of KPMG LLP as independent auditors.
        (iii)   approved the adoption of the 2004 Equity Incentive Compensation
                Plan.
        (iv)    approved an amendment of the Company's Employee Stock Purchase
                Plan.
        (v)     approved an amendment of the Certificate of Incorporation to
                Change the Company's name to LaserCard Corporation.

        Of the 11,410,064 shares of common stock outstanding as of the record
date of August 6, 2004, a total of 9,932,034 shares were voted in person or by
proxy, representing 87% 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: Jerome Drexler
(8,656,128 votes for re-election, 1,275,906 votes withheld), Christopher J.
Dyball (8,661,700 votes for election, 1,270,334 votes withheld), Richard M.
Haddock (8,687,129 votes for election, 1,244,905 votes withheld), Arthur H.
Hausman (8,636,350 votes for re-election, 1,295,684 votes withheld), Dan Maydan
(8,659,570 votes for re-election, 1,272,464 votes withheld), William E. McKenna
(8,635,980 votes for re-election, 1,296,054 votes withheld), and Walter F.
Walker (8,666,480 votes for re-election, 1,265,554 votes withheld).

        For Proposal 2 Ratification of the Company's Independent Auditors,
9,839,645 shares were voted in favor, and there were 58,380 negative votes,
34,009 abstentions, and no broker non-votes.

                                       33
<PAGE>

        For Proposal 3 Adoption of the 2004 Equity Incentive Compensation Plan,
3,407,573 shares were voted in favor, and there were 1,244,733 negative votes,
63,285 abstentions, and 5,216,443 broker non-votes.

        For Proposal 4 Approval of an amendment to the Employee Stock Purchase
Plan to increase the number of shares reserved thereunder by 50,000, 4,054,726
shares were voted in favor, and there were 605,525 negative votes, 55,340
abstentions, and 5,216,443 broker non-votes.

        For Proposal 5 Approval of an amendment to the Certificate of
Incorporation to change the Company's name to LaserCard Corporation, 9,283,962
shares were voted in favor, and there were 606,208 negative votes, 41,864
abstentions, and no 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

        The Company's Audit Committee has approved certain non-audit services
provided or to be provided by KPMG LLP, the Company's independent accountants.
These services relate to consultation, advice, and other services in connection
with tax planning and compliance.

Item 6. - Exhibits

                EXHIBIT NO.      EXHIBIT DESCRIPTION

                31.1             Rule 13a-14(a) Certification of Christopher J.
                                 Dyball, co-chief executive officer

                31.2             Rule 13a-14(a) Certification of Richard M.
                                 Haddock, co-chief executive officer

                31.3             Rule 13a-14(a) Certification of Steven G.
                                 Larson, chief financial officer

                32.1             Section 1350 Certification of Christopher  J.
                                 Dyball and Richard M. Haddock, co-chief
                                 executive officers

                32.2             Section 1350 Certification of Steven G. Larson,
                                 chief financial officer

        The above-listed exhibits are filed herewith. 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.


                                       34
<PAGE>

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)

<TABLE>
<CAPTION>
<S>                                                                           <C>

             Signature                                 Title                               Date
             ---------                                 -----                               ----

/s/ Christopher J. Dyball                 Co-Chief Executive Officer                  November 8, 2004
-----------------------------------
Christopher J. Dyball

/s/ Richard M. Haddock                    Co-Chief Executive Officer                  November 8, 2004
-----------------------------------
Richard M. Haddock

/s/ Steven G. Larson                      Chief Financial Officer                     November 8, 2004
-----------------------------------
Steven G. Larson
</TABLE>








                                       35
<PAGE>

                                INDEX TO EXHIBITS

                                  [ITEM 14(c)]
Exhibit
Number        Description
------        -----------

 31.1         Rule 13a-14(a) Certification of Christopher J. Dyball,
              co-chief executive officer

 31.2         Rule 13a-14(a) Certification of Richard M. Haddock, co-chief
              executive officer

 31.3         Rule 13a-14(a) Certification of Steven G. Larson, chief
              financial officer

 32.1         Section 1350 Certification of Christopher J. Dyball and Richard M.
              Haddock, co-chief executive officers

 32.2         Section 1350 Certification of Steven G. Larson, chief financial
              officer









                                       36