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 June 30, 2008
 
  LASERCARD
CORPORATION
 (Exact
name of registrant as specified in its charter)
 
 Delaware
              0-6377
              77-0176309(State
      or other jurisdiction of incorporation or organization)
              (Commission
      File Number)
              (I.R.S.
      Employer Identification No.)
 
 1875 North Shoreline
Boulevard, Mountain View, California 94043-1319
 (Address
of principal executive offices) (Zip Code)
 
 (650)
969-4428
 (Registrant's
telephone number, including area code)
 
 Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports) and (2) has been subject to such filing requirements for
the past 90 days.   [x] Yes  [  ]
No
 
 Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer.  See definition of
“accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange
Act.  (Check one):
 
 Large
      accelerated filer o
              Accelerated
      filer xNon-accelerated
      filer o
              Smaller
      Reporting Company o
 
 Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).   o Yes  x No
 
 Number of
outstanding shares of common stock, $.01 par value, at August 5,
2008:  12,012,376
  Exhibit
Index is on Page 51
  Total
number of pages is 90
  
  TABLE
OF CONTENTS
 
 PART
      I.
              FINANCIAL
      INFORMATION
              Page
      NumberItem
      1.
              Condensed
      Consolidated Financial Statements (Unaudited)
              2Condensed
      Consolidated Balance Sheets (Unaudited)
              3Condensed
      Consolidated Statements of Operations (Unaudited)
              4Condensed
      Consolidated Statements of Cash Flows (Unaudited)
              5Notes
      to Condensed Consolidated Financial Statements (Unaudited)
              6Item
      2.
              Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
              26Item
      3.
              Quantitative
      and Qualitative Disclosures about Market Risk
              38Item
      4.
              Controls
      and Procedures
              40PART
      II.
              OTHER
      INFORMATIONItem
      1.
              Legal
      Proceedings
              40Item
      1A.
              Risk
      Factors
              40Item
      6.
              Exhibits
              48SIGNATURES
              50EXHIBIT
      INDEX
              51
 
 PART
      I.
              FINANCIAL
      INFORMATIONITEM
      1.
              CONDENSED
      CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 
 
 2
 
 LASERCARD
CORPORATION AND SUBSIDIARIES
 CONDENSED
CONSOLIDATED BALANCE SHEETS
 (In
thousands)
 
 June
      30,2008
                
                
                March
      31,(Unaudited)
                
                
                2008*ASSETSCurrent
      assets:Cash
      and cash equivalents
                
                $
                1,142
                
                
                $
                5,583Accounts
      receivable, net of allowance of $48 at June 30, 2008
                
                
                5,649
                
                
                
                2,952and
      $35 at March 31, 2008Inventories,
      net of reserve of $908 at June 30, 2008
                
                
                13,454
                
                
                
                13,080and
      $913 at March 31, 2008Deferred
      contract costs
                
                
                224
                
                
                
                303Equipment
      held for resale
                
                
                118
                
                
                
                89Prepaid
      and other current assets
                
                
                2,106
                
                
                
                1,618Total
      current assets
                
                
                22,693
                
                
                
                23,625Property
      and equipment, net
                
                
                11,124
                
                
                
                11,700Long-term
      investments
                
                
                12,702
                
                
                
                12,875Long-term
      defered contract costs
                
                
                481
                
                
                
                561Long-term
      equipment held for resale
                
                
                6,722
                
                
                
                6,599Patents
      and other intangibles, net
                
                
                417
                
                
                
                402Notes
      receivable
                
                
                267
                
                
                
                269Other
      non-current assets
                
                
                275
                
                
                
                275Total
      assets
                
                $
                54,681
                
                
                $
                56,306LIABILITIES
      AND STOCKHOLDERS' EQUITYCurrent
      liabilities:Accounts
      payable
                
                $
                2,711
                
                
                $
                2,561Accrued
      liabilities
                
                
                2,588
                
                
                
                3,221Deferred
      income tax liability
                
                
                412
                
                
                
                405Advance
      payments from customers
                
                
                2,455
                
                
                
                3,060Deferred
      revenue
                
                
                492
                
                
                
                589Capital
      lease obligation
                
                
                30
                
                
                
                30Total
      current liabilities
                
                
                8,688
                
                
                
                9,866Capital
      lease obligation, net of current portion
                
                
                67
                
                
                
                76Accrued
      liabilities, net of current portion
                
                
                264
                
                
                
                -Advance
      payments from customers, net of current portion
                
                
                23,770
                
                
                
                23,770Deferred
      revenue, net of current portion
                
                
                3,508
                
                
                
                3,437Deferred
      rent
                
                
                1,243
                
                
                
                1,168Income
      tax payable
                
                
                263
                
                
                
                263Total
      liabilities
                
                
                37,803
                
                
                
                38,580Stockholders'
      equity:Common
      stock
                
                
                120
                
                
                
                120Additional
      paid-in capital
                
                
                64,479
                
                
                
                63,868Accumulated
      deficit
                
                
                (47,141
                )
                
                
                (45,867
                )Accumulated
      other comprehensive loss
                
                
                (580
                )
                
                
                (395
                )Total
      stockholders' equity
                
                
                16,878
                
                
                
                17,726Total
      liabilities and stockholders’ equity
                
                $
                54,681
                
                
                $
                56,306*Amounts
      derived from audited consolidated financial statementsThe
      accompanying notes are an integral part of these condensed consolidated
      financial statements.
 3
  LASERCARD
CORPORATION AND SUBSIDIARIES
 CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
 (UNAUDITED)
 (In
thousands, except per share amounts)
 
 Three
      Months EndedJune
      30,2008
                
                
                2007Revenues
                
                $
                10,722
                
                
                $
                7,855Cost
      of sales (includes $137 and $66 stock-based compensation
inthe
      three-month periods ended June 30, 2008 and 2007,
      respectively)
                
                
                7,255
                
                
                
                6,194Gross
      profit
                
                
                3,467
                
                
                
                1,661Operating
      expenses:Selling,
      general, and administrative expenses (includes$337
      and $311 stock-based compensation in the three-monthperiods
      ended June 30, 2008 and 2007, respectively)
                
                
                3,900
                
                
                
                3,489Research
      and development expenses (includes $64 and $60stock-based
      compensation in the three-month periods endedJune
      30, 2008 and 2007, respectively)
                
                
                860
                
                
                
                788Total
      operating expenses
                
                
                4,760
                
                
                
                4,277Operating
      loss
                
                
                (1,293
                )
                
                
                (2,616
                )Other
      income, net
                
                
                46
                
                
                
                241Loss
      before provision for income taxes
                
                
                (1,247
                )
                
                
                (2,375
                )Provision
      for income taxes (benefit)
                
                
                27
                
                
                
                (16
                )Net
      loss
                
                $
                (1,274
                )
                
                $
                (2,359
                )Net
      loss per share:Basic
      and diluted
                
                $
                (0.11
                )
                
                $
                (0.20
                )Weighted-average
      shares of common stockused
      in computing net loss per share:Basic
      and diluted
                
                
                11,991
                
                
                
                11,866The
      accompanying notes are an integral part of these condensed consolidated
      financial statements.
 4
  LASERCARD
CORPORATION AND SUBSIDIARIES
 CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
 (UNAUDITED)
 (In
thousands)
 
 Three
      Months EndedJune
      30,2008
                
                
                2007Cash
      flows from operating activities:Net
      loss
                
                $
                (1,274
                )
                
                $
                (2,359
                )Adjustments
      to reconcile net loss to net cashused
      in operating activities:Depreciation
      and amortization
                
                
                722
                
                
                
                731Loss
      on disposal of equipment
                
                
                -
                
                
                
                2Provision
      for doubtful accounts receivable
                
                
                13
                
                
                
                8Provision
      for excess and obsolete inventory
                
                
                (6
                )
                
                
                37Provision
      for warranty reserve
                
                
                (54
                )
                
                
                39Decrease
      in deferred income tax assets
                
                
                9
                
                
                
                -Stock-based
      compensation
                
                
                538
                
                
                
                437Changes
      in operating assets and liabilities:Increase
      in accounts receivable
                
                
                (2,710
                )
                
                
                (155
                )Increase
      in inventories
                
                
                (369
                )
                
                
                (51
                )Decrease
      (increase) in deferred contract costs
                
                
                158
                
                
                
                (18
                )Increase
      in prepaid and other current assets
                
                
                -
                
                
                
                (71
                )Increase
      in equipment held for resale
                
                
                (151
                )
                
                
                (93
                )Increase  in
      other non-current assets
                
                
                (321
                )
                
                
                -Decrease
      in accounts payable and accrued liabilities
                
                
                (167
                )
                
                
                (953
                )Increase
      (decrease) in deferred income tax liability
                
                
                7
                
                
                
                (16
                )Increase
      (decrease) in deferred revenue
                
                
                (26
                )
                
                
                132Increase
      in long-term deferred rent
                
                
                75
                
                
                
                83Decrease
      in advance payments from customers
                
                
                (605
                )
                
                
                (488
                )Net
      cash used in operating activities
                
                
                (4,161
                )
                
                
                (2,735
                )Cash
      flows from investing activities:Purchases
      of property and equipment
                
                
                (278
                )
                
                
                (246
                )Acquisition
      of patents and other intangibles
                
                
                (45
                )
                
                
                (26
                )Proceeds
      from maturities of short-term investments
                
                
                -
                
                
                
                1,900Net
      cash provided by (used in) investing activities
                
                
                (323
                )
                
                
                1,628Cash
      flows from financing activities:Proceeds
      from sale of common stock through stock plans
                
                
                73
                
                
                
                106Principal
      payments on capital lease obligation
                
                
                (9
                )
                
                
                -Net
      cash provided by financing activities
                
                
                64
                
                
                
                106Effect
      of exchange rate changes on cash and cash equivalents
                
                
                (22
                )
                
                
                (34
                )Net
      decrease in cash and cash equivalents
                
                
                (4,442
                )
                
                
                (1,035
                )Cash
      and cash equivalents:Beginning
      of period
                
                
                5,583
                
                
                
                3,026End
      of period
                
                $
                1,141
                
                
                $
                1,991Supplemental
      schedule of non-cash investing activities:Equipment
      acquired under capital leases
                
                $
                -
                
                
                $
                -Increase
      in unrealized loss in fair value of investments
                
                $
                (173
                )
                
                $
                -The
      accompanying notes are an integral part of these condensed consolidated
      financial statements.
 5
  LASERCARD
CORPORATION AND SUBSIDIARIES
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (UNAUDITED)
   1.
Basis of Presentation
  The
unaudited condensed consolidated financial statements contained herein include
the accounts of LaserCard Corporation (the “Company”) and its wholly owned
subsidiaries. All significant intercompany accounts and transactions have been
eliminated upon consolidation. The consolidated balance sheet data as of March
31, 2008 was derived from audited consolidated financial statements, but does
not include all disclosures required by U.S. generally accepted accounting
principles.
  The
condensed consolidated financial statements included herein have been prepared
by the Company, without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission (SEC).  Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with U.S. generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations, although the
Company believes the disclosures which are made herein are adequate to make the
information presented not misleading.  Further, the condensed
consolidated financial statements reflect, in the opinion of management, all
adjustments (which include only normal recurring adjustments) necessary to
present fairly the financial position and results of operations as of and for
the periods indicated.
  These
condensed consolidated financial statements should be read in conjunction with
the audited consolidated financial statements and the notes thereto for the
fiscal year ended March 31, 2008, included in the Company's Annual Report
on Form 10-K, filed with the SEC on June 6, 2008.
  The
results of operations for the three-month period ended June 30, 2008 is not
necessarily indicative of results to be expected for the entire fiscal year
ending March 31, 2009.  Certain prior year amounts have been
reclassified to conform to the current year presentation.
  Recently Adopted Accounting
Pronouncements:  In February 2007, the FASB issued SFAS
No. 159,The Fair Value
Option for Financial Assets and Financial Liabilities (“SFAS No.
159”). SFAS No. 159 provides entities with an option to report selected
financial assets and liabilities at fair value, with the objective to reduce
both the complexity in accounting for financial instruments, and the volatility
in earnings caused by measuring related financial assets and liabilities
differently. Unrealized gains and losses on items for which the fair value
option is elected would be reported in earnings. The Company adopted SFAS
No. 159 as of April 1, 2008, and has elected not to measure any financial
instruments and other items at fair value. Therefore, material financial assets
and liabilities not carried at fair value, such as the Company’s short-term and
long-term debt obligations and trade accounts receivable and accounts payable,
are still reported at their carrying values. Any future transacted financial
asset or liability will be evaluated for the fair value election as prescribed
by SFAS No. 159. The adoption of SFAS No. 159 did not have an impact on the
Company’s consolidated financial position, results of operations and cash
flows.
  In June
2007, EITF Issue No. 07-3 ("EITF 07-3"), Accounting for Nonrefundable Advance
Payments for Goods or Services to Be Used in Future Research and Development
Activities, was issued that requires companies to defer and capitalize
prepaid, nonrefundable research and development payments to third parties and
recognize such amounts over the period that the research and development
activities are performed or the services are provided, subject to an assessment
of recoverability. The guidance is effective for new contracts entered into in
fiscal years beginning after December 15, 2007, including interim periods within
those fiscal years.  The Company adopted EITF No. 07-3, on a
prospective basis, as of April 1, 2008 and the adoption did not have an impact
on its consolidated financial statements.
  Recently Issued Accounting
Pronouncements:  In September 2006, the FASB issued Statement
No. 157, Fair Value
Measurements (“SFAS No. 157”). SFAS No. 157 defines fair value,
establishes a framework for measuring fair value in U.S. generally accepted
accounting principles, and expands disclosures about fair value measurements.
SFAS No. 157 is intended to be applied in conjunction with other accounting
pronouncements that require or permit fair value measurements. Although SFAS No.
157 does not require any new fair value measurements, its application may change
current practice for some entities. The definition of fair value contained in
SFAS No. 157 retains the exchange price notion inherent in earlier definitions
of fair value. SFAS No. 157 clarifies that the exchange price is the price in an
orderly transaction between market participants to sell an asset or transfer a
liability in the principal (or most advantageous) market for the asset or
liability. Accordingly, the definition focuses on the price that would be
received to sell the asset or paid to transfer the liability at the measurement
date (an exit price), not the price that would be paid to acquire the asset or
received to assume the liability at the measurement date (an entry price). SFAS
No. 157 emphasizes that fair value is a market-based measurement, not an
entity-specific measurement. Therefore, SFAS No. 157 prescribes that a fair
value measurement be determined based on the assumptions that market
participants would use in pricing the asset or liability. The FASB also issued
FASB Staff Position (“FSP”) 157-2 in February 2008. FSP 157-2 delays the
effective date of the application of SFAS No. 157 to fiscal years beginning
after November 15, 2008 for all nonfinancial assets and nonfinancial
liabilities that are recognized at fair value in the financial statements on a
nonrecurring basis. The Company will continue to assess the potential impact of
the adoption of SFAS 157 on its consolidated financial
statements.
  6
  LASERCARD
CORPORATION AND SUBSIDIARIES
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (UNAUDITED)
 In
December 2007, the FASB issued SFAS No. 141 (revised 2007), Business
Combinations (“SFAS 141R”).  SFAS 141R establishes principles and
requirements for how an acquirer recognizes and measures in its financial
statements the identifiable assets acquired, the liabilities assumed, any
noncontrolling interest in the acquiree and the goodwill acquired. SFAS 141R
also establishes disclosure requirements to enable the evaluation of the nature
and financial effects of the business combination. SFAS 141R is effective for
fiscal years beginning after December 15, 2008. The Company will assess the
potential impact of the adoption of SFAS 141R if and when a future acquisition
occurs.
  In
December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in
Consolidated Financial Statements—an amendment of Accounting Research Bulletin
No. 51 (“SFAS 160”).  SFAS 160 establishes accounting and
reporting standards for ownership interests in subsidiaries held by parties
other than the parent, the amount of consolidated net income attributable to the
parent and to the noncontrolling interest, changes in a parent’s ownership
interest, and the valuation of retained noncontrolling equity investments when a
subsidiary is deconsolidated. SFAS 160 also establishes disclosure requirements
that clearly identify and distinguish between the interests of the parent and
the interests of the noncontrolling owners. SFAS 160 is effective for fiscal
years beginning after December 15, 2008. The Company is currently evaluating the
potential impact of the adoption of SFAS 160 on its consolidated financial
statements.
  In March
2008, the FASB issued SFAS No. 161,Disclosures about Derivative
Instruments and Hedging Activities—an amendment of FASB Statement
No. 133 (“SFAS No. 161”). SFAS No. 161 is intended to
improve transparency in financial reporting by requiring enhanced disclosures of
an entity’s derivative instruments and hedging activities and their effects on
the entity’s financial position, financial performance, and cash flows. SFAS
No. 161 applies to all derivative instruments within the scope of SFAS
No. 133,Accounting for Derivative
Instruments and Hedging Activities (“SFAS No. 133”) as well as
related hedged items, bifurcated derivatives, and nonderivative instruments that
are designated and qualify as hedging instruments. SFAS No. 161 establishes
principles and requirements for how an entity identifies derivative instruments
and related hedged items that affect its financial position, financial
performance, and cash flows. SFAS No. 161 also establishes disclosure
requirements that the fair values of derivative instruments and their gains and
losses are disclosed in a tabular format, that derivative features which are
credit-risk related be disclosed to provide clarification to an entity’s
liquidity and cross-referencing within footnotes. The Company will be required
to adopt SFAS No. 161 in the first quarter of fiscal year 2009. The Company
is currently evaluating the requirements of SFAS No. 161 and has not yet
determined the impact of its adoption on its consolidated financial
statements.
 
 2.  
Summary of
Significant Accounting Policies
  (1.) Principles of Consolidation and
Basis of Presentation.  The accompanying condensed consolidated
financial statements have been prepared in accordance with U.S. generally
accepted accounting principles. The condensed consolidated financial statements
include the accounts of LaserCard Corporation and its wholly owned subsidiaries.
All significant intercompany accounts and transactions have been eliminated upon
consolidation.
  (2.) Use of
Estimates.  The preparation of condensed consolidated financial
statements in conformity with U. S. generally accepted accounting principles
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
  7
  LASERCARD
CORPORATION AND SUBSIDIARIES
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (UNAUDITED)
 (3.) Fiscal
Period.  For purposes of presentation, the Company labels its
annual accounting period end as March 31 and its quarterly accounting
period ends as June 30, September 30 and December 31.  The Company, in
fact, operates and reports based on quarterly periods ending on the Friday
closest to month end.  The 13-week first quarter of fiscal year 2009
ended on June 27, 2008, and the 13-week first quarter of fiscal year 2008 ended
on June 29, 2007.
  (4.)Foreign Currency
Transactions. The functional currency of the Company's foreign subsidiary
is generally the local currency. The financial statements of this subsidiary are
translated to United States dollars using period-end rates of exchange for
assets and liabilities and average rates of exchange for the period for revenues
and expenses. Translation gains (losses) are recorded in accumulated other
comprehensive loss as a component of stockholders' equity. Net gains and losses
resulting from foreign exchange transactions are included in selling, general
and administrative expenses and were not significant during the periods
presented.
  (5.) Derivative Financial
Instruments.The Company uses short-term foreign exchange forward
contracts to mitigate foreign currency risk associated primarily with
inter-company receivables and payables, and loan receivables (denominated in
Euros) with its German subsidiary.  The Company's foreign exchange
forward contracts are not designated for accounting purposes as hedging
instruments under SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, as amended.  Accordingly,
any gains or losses resulting from changes in the fair value of the forward
contracts are reported in other income.  The gains and losses on these
forward contracts generally offset gains and losses associated with the
underlying foreign currency denominated inter-company receivables and payables,
and loans receivable.  At June 30, 2008 and March 31, 2008, the
Company had foreign exchange forward contracts with a maturity of less than 30
days to purchase 1.5 million euros and 1.2 million euros,
respectively.  The fair value of the forward contracts was not
material at June 30, 2008 and March 31, 2008.
  (6.) Concentrations of
Risk. Financial instruments that potentially subject the Company to
significant concentrations of credit risk consist principally of cash, cash
equivalents, short-term investments, long-term investments and accounts
receivable. The Company places its cash, cash equivalents, short-term and
long-term investments in high-credit quality financial institutions.  The
Company is exposed to credit risk in the event of default by these institutions
to the extent of the amount recorded on the consolidated balance sheets.
 As of June 30, 2008 and March 31, 2008, the Company had a net of
impairment of $12.7 million and $12.9 million, respectively, of student loan
auction rate securities accounted for as available-for-sale and classified as
long-term securities due to the underlying events surrounding the failed
auctions.  Given the recent disruptions in the credit markets and the fact
that the liquidity for these types of securities remains uncertain, the Company
has classified all of its auction rate securities as long-term assets in the
Company's consolidated balance sheet as the Company's ability to liquidate such
securities in the next 12 months is uncertain.  More detailed information
about the risks the Company faces with regard to its investment in the auction
rate securities can be found in the Note 2 of the Notes to Consolidated
Financial statements regarding cash and cash equivalents, short-term investments
and long-term investments.
  Accounts
receivable are derived from revenue earned from customers primarily located in
the United States, Kingdom of Saudi Arabia, Costa Rica, and Germany.  The
Company performs ongoing credit evaluations of its customers’ financial
condition and generally does not require collateral.  The Company maintains
reserves for potential credit losses and historically, such losses have been
immaterial.
  8
  LASERCARD
CORPORATION AND SUBSIDIARIES
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (UNAUDITED)
 (7.) Major Customers.The
following customers accounted for more than 10% of revenues for the periods
shown below.  The revenue from these customers was attributable to
both the optical memory card and the drive, system and services
segments.  No other customer accounted for more than 10% of revenues
during these periods.
  Three
      Months EndedJune
      30,2008
                
                
                2007Customer
      A
                
                17%
                
                
                14%Customer
      B
                
                16%
                
                
                -Customer
      C
                
                16%
                
                
                38%Customer
      D
                
                13%
                
                
                1%
  Two
customers accounted for 33% and 30% of accounts receivable at June 30,
2008.  One customer accounted for 37% of accounts receivable at March 31,
2008.
  (8.) Cash and Cash Equivalents,
Short-term Investments and Long-term Investments.  The Company
considers all highly liquid investments, consisting primarily of commercial
paper, discount notes and U.S. government bonds, with maturities of three months
or less at the date of purchase, to be cash equivalents.  Short-term
investments include securities with maturities at date of purchase of more than
three months and investments with remaining maturities of less than one
year.  All investments with maturities at date of purchase greater than one
year are classified as long-term investments.  Management determines the
appropriate classification of debt securities at the time of purchase and
re-evaluates the classification of investments as of each balance sheet
date.
  All
short-term and long-term investments, except investments in auction rate
securities, are classified as held to maturity and are stated in the condensed
consolidated balance sheets at amortized cost.  As such investments are
classified as held to maturity, no unrealized gains or losses are
recorded.  The carrying amounts of individual held to maturity securities
are reviewed at the consolidated balance sheet date for potential
impairment.
  The
Company's auction rate securities are classified as available-for-sale and are
carried at fair value.  Unrealized gain and losses, if any, are recorded as
a component of accumulated other comprehensive income.  Declines in fair
value judged to be other-than-temporary, if any, are recorded in the Company's
consolidated statement of operations as incurred.  The auction rate
securities are classified based on an assessment of their liquidity as of the
Company's most recent balance sheet date.  These securities typically have
fixed reset dates within one year, which are designed to allow investors to exit
these instruments at par even though the underlying debt instruments may have
nominal maturity of as much as 40 years.  However, auctions recently began
to fail and as a result, the Company's ability to exit these instruments in the
short-term is not guaranteed.  A failed auction is generally considered an
auction with more sellers than buyers or an auction with no buyers at all. 
An assessment is performed for auction rate securities with failed auctions and
the instruments are classified based on the Company’s ability to hold the
auction rate securities until the forecasted recovery of fair
value.
  In
accordance with EITF 03-01 and FSP FAS 115-1 and 124-1, The Meaning of Other-Than-Temporary
Impairment and Its Application to Certain Investments, the Company
evaluates their investments periodically for possible other-than-temporary
impairment by reviewing factors such as current economic and market conditions,
the length of time and extent to which fair value has been below cost basis, the
financial condition and credit rating of the issuer and the Company's ability
and intent to hold the investment for a period of time which may be sufficient
for anticipated recovery of market value.  The Company will record an
impairment charge to the extent that the carrying value of the Company's
available for sale securities exceeds the estimated fair market value of the
securities and the decline in value is determined to be other-than-temporary.
The Company will continue to monitor and evaluate the value of their investments
at each balance sheet date for a possible impairment or a cause to believe there
is any other-than-temporary impairment to their investment
holdings.
  9
  LASERCARD
CORPORATION AND SUBSIDIARIES
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (UNAUDITED)
 In
valuing its investments, the Company primarily uses market data or fair values
derived from brokerage statements supplied by the Company’s brokerage
firm.  The fair value of the auction rate securities with failed auctions
are subject to unobservable inputs in the fair value measurement that are
derived from fair values calculated by the Company’s brokerage firm using their
internally developed valuation methodology based on a present value cash flow
model. The Company also used a valuation firm at March 31, 2008 to help
management analyze the reasonableness of the fair values provided by the
brokerage firm.
 
 Cash
equivalents and investments consist of the following (in
thousands):
  June
      30, 2008Gross
                
                
                GrossUnrealized
                
                
                Unrealized
                
                
                EstimatedCost
                
                
                Gains
                
                
                Losses
                
                
                Fair
      ValueCash
      equivalents
                
                $
                156
                
                
                $
                —
                
                
                $
                —
                
                
                $
                156Short-term
      investments
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —Long-term
      investments
                
                
                13,500
                
                
                
                —
                
                
                
                (798
                )
                
                
                12,702$
                13,656
                
                
                $
                —
                
                
                $
                (798
                )
                
                $
                12,858March
      31, 2008Gross
                
                
                GrossUnrealized
                
                
                Unrealized
                
                
                EstimatedCost
                
                
                Gains
                
                
                Losses
                
                
                Fair
      ValueCash
      equivalents
                
                $
                4,581
                
                
                $
                —
                
                
                $
                —
                
                
                $
                4,581Short-term
      investments
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —Long-term
      investments
                
                
                13,500
                
                
                
                —
                
                
                
                (625
                )
                
                
                12,875$
                18,081
                
                
                $
                —
                
                
                $
                (625
                )
                
                $
                17,456
  Investments
at June 30, 2008 and March 31, 2008 represent student loan auction rate
securities, 96.3% of which have Federal Family Education Loan Program (“FFELP”)
guaranty of the underlying debt obligations and the remaining balance privately
financed and consisting of an over-collateralized pool of graduate student
loans.  As a result of recent auction failures during fiscal 2008, actual
market prices or relevant observable inputs were not readily available to
determine the fair value of the Company’s auction rate securities.  The
Company valued the auction rate securities using the fair value supplied by the
Company’s brokerage firm derived from the brokerage firm’s internal valuation
methodology using a discounted cash flow model and our own analysis.  Based
on the estimated fair value at June 30, 2008, the Company recorded an unrealized
other comprehensive loss of $173,000 in addition to the $625,000 recorded at
March 31, 2008.  Also, the Company reclassified the auction rate securities
of $12.7 million and $12.9 million at June 30, 2008 and March 31, 2008,
respectively, to long-term investments from short-term investments in the
condensed consolidated balance sheet as the Company has the ability and intent
to hold the securities until anticipated recovery of fair value
occurs.
  The
Company expects to liquidate its auction rate securities without significant
loss primarily due to the government guarantees of a large portion of the
underlying securities.  The Company has determined that these securities
are temporarily impaired, mostly due to changes in interest rates and liquidity
factors and not credit quality, and because the Company has the ability and
intent to hold its auction rate securities that it held until market stability
is restored with respect to these securities.  However, it could take until
the nominal maturity of the underlying debt instruments to realize the
investments’ recorded value.
  10
 
 LASERCARD
CORPORATION AND SUBSIDIARIES
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (UNAUDITED)
 (9.) Fair Value of
Measurements.  Effective April 1, 2008, the Company adopted
SFAS No. 157, “Fair Value Measurements” (“SFAS 157”), except as it applies
to the nonfinancial assets and nonfinancial liabilities subject to Financial
Staff Position SFAS 157-2. SFAS 157 clarifies that fair value is an exit price,
representing the amount that would be received to sell an asset or paid to
transfer a liability in an orderly transaction between market participants. As
such, fair value is a market-based measurement that should be determined based
on assumptions that market participants would use in pricing an asset or a
liability. As a basis for considering such assumptions, SFAS 157 establishes a
three-tier value hierarchy, which prioritizes the inputs used in the valuation
methodologies in measuring fair value:
  Level 1
      - Observable inputs that reflect quoted prices (unadjusted) for identical
      assets or liabilities in active markets.Level 2
      - Include other inputs that are directly or indirectly observable in the
      marketplace.Level 3
      - Unobservable inputs which are supported by little or no market
      activity.
  The fair
value hierarchy also requires an entity to maximize the use of observable inputs
and minimize the use of unobservable inputs when measuring fair
value.
  In
accordance with SFAS 157, the Company measures our cash equivalents and
marketable securities at fair value. Our cash equivalents and marketable
securities are primarily classified within Level 1 with the exception of our
investments in auction rate securities, which are classified within Level 3.
Cash equivalents and marketable securities are valued primarily using quoted
market prices utilizing market observable inputs.  The Company’s
investments in auction rate securities are classified within Level 3 because
there are no active markets for the auction rate securities and therefore the
Company is unable to obtain independent valuations from market sources. 
Therefore, the auction rate securities were valued using a discounted cash flow
model. Some of the inputs to the cash flow model are unobservable in the market.
The total amount of assets measured using Level 3 valuation methodologies
represented 2% of total assets as of June 30, 2008.
  The table below shows, by level, our
financial assets that were accounted for at fair value as of June 30,
2008.  The table does not include assets and liabilities which are measured
at historical cost or any basis other than fair value (in
thousands):
  June
      30, 2008Items
      measured at fair value on a recurring basis:
                
                Portion
      of
                  Carrying
      Value
                  Measured
      at Fair
                  Value
                
                
                Level
      1
                
                
                Level
      3Cash
      equivalents: Money Market funds
                
                $
                156
                
                
                $
                156
                
                
                $
                —Short-term
      investments
                
                
                —
                
                
                
                —
                
                
                
                —Long-term
      investments: Auction Rate Securities
                
                
                12,702
                
                
                
                —
                
                
                
                12,702$
                12,858
                
                
                $
                156
                
                
                $
                12,702
   11
 
 LASERCARD
CORPORATION AND SUBSIDIARIES
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (UNAUDITED)
  The
following table summarizes the change in fair values for Level 3 items during
the three-month period ended June 30, 2008 (in thousands):
  Level
      3Changes
      in fair value during the period ended June 30, 2008
    (pre-tax)Beginning
      Balance at March 31, 2008
                
                $
                12,875Purchases
                
                
                —Sales
                
                
                —Unrealized
      loss included in other comprehensive income
                
                
                (173
                )Ending
      Balance at June 30, 2008
                
                $
                12,702
 
 The
Company's agreement with the government of Costa Rica signed on December 20,
2007, required it to issue a completion bond of approximately $167,000,
equivalent to 10% of the contract price.  The Company purchased a
certificate of deposit representing the completion bond which is classified as
other non-current assets in the Company's consolidated balance sheets at March
31, 2008.  The bond shall remain in effect for one year (12 months)
after the final acceptance date of delivery of the last batch of shipment, which
occurred in the first quarter of fiscal year 2009.  At June 30, 2008
and March 31, 2008, the Company had classified the restricted cash as
non-current assets.
  (10.) Accounts Receivable, Net.The Company maintains allowances for doubtful accounts and product return
reserves for anticipated losses resulting from the inability of its customers to
make required payments and in-process product returns. The Company generally
compute its allowances based on specifically identifying accounts that are past
due and that are likely not collectible.  Interest receivable is
accrued from investments in auction rate securities and other interest-bearing
securities.  Other receivables are comprised of value added tax
refunds and miscellaneous items.  The components of accounts
receivable as of June 30, 2008 and March 31, 2008 are (in
thousands):
  June
      30,
                  
                  
                  March
      31,2008
                  
                  
                  2008Trade
      receivables
                  
                  $
                  5,608
                  
                  
                  $
                  2,899Allowance
      for doubtful accounts
                  
                  
                  (48
                  )
                  
                  
                  (35
                  )Interest
      receivable
                  
                  
                  7
                  
                  
                  
                  12Other
      receivables
                  
                  
                  82
                  
                  
                  
                  76Total
      accounts receivable, net
                  
                  $
                  5,649
                  
                  
                  $
                  2,952
 (11.) Inventories, Net.
Inventories are stated at the lower of cost or market,
with cost determined on a first-in, first-out basis and
market based on replacement cost or estimated realizable value less cost to
sell. The components of inventories as of June 30, 2008 and March 31, 2008 are
(in thousands):
  June
      30,
                  
                  
                  March
      31,2008
                  
                  
                  2008Raw
      materials
                  
                  $
                  7,064
                  
                  
                  $
                  7,675Work-in-process
                  
                  
                  1,785
                  
                  
                  
                  1,518Finished
      goods
                  
                  
                  4,605
                  
                  
                  
                  3,887Total
      inventory, net
                  
                  $
                  13,454
                  
                  
                  $
                  13,080
 12
  LASERCARD
CORPORATION AND SUBSIDIARIES
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (UNAUDITED)
 The
Company establishes lower of cost or market reserves, aged inventory reserves
and obsolescence reserves. Inventory reserves are generally recorded when
management determines that an item does not have a foreseeable revenue forecast.
Inventory reserves are not relieved until the related inventory has been sold or
scrapped.  For the three-month periods ended June 30, 2008 and 2007
the Company recorded inventory reserve expense of $2,000 and $50,000,
respectively.  The Company did not record any lower of cost or market
adjustments in our condensed consolidated statements of operations for the
three-month periods ended June 30, 2008 and 2007.
 
 (12.) Equipment Held for
Resale.Equipment held for resale consists primarily of parts,
labor costs and other costs incurred to build equipment under a contract from
which the Company has received $25.8 million in non-refundable advance
payments.  Direct incremental costs associated with the purchase or
construction of these items are deferred until revenue is
recognized.  The components of equipment held for resale as of June
30, 2008 and March 31, 2008 are (in thousands):
  June
      30,
                
                
                March
      31,2008
                
                
                2008Parts
                
                $
                5,474
                
                
                $
                5,417Labor
      costs
                
                
                1,253
                
                
                
                1,158Other
                
                
                113
                
                
                
                113Total
      equipment held for resale
                
                $
                6,840
                
                
                $
                6,688
  (13.) Property and Equipment,
Net.  The components of property and equipment as of June 30,
2008 and March 31, 2008 are (in thousands):
  June
      30,
                
                
                March
      31,2008
                
                
                2008Building
      and land
                
                $
                1,045
                
                
                $
                1,052Equipment
      and furniture
                
                
                25,601
                
                
                
                25,438Construction
      in progress, includingpurchased
      equipment
                
                
                223
                
                
                
                282Leasehold
      improvements
                
                
                5,228
                
                
                
                5,22232,097
                
                
                
                31,994Less:
      accumulated depreciation and amortization
                
                
                (20,973
                )
                
                
                (20,294
                )Total
      property and equipement, net
                
                $
                11,124
                
                
                $
                11,700
  Property
and equipment are recorded at cost. Depreciation is provided over the estimated
useful lives which currently are four to seven years for equipment and furniture
using the straight-line method and twenty-five years for the building using the
straight-line method.  Leasehold improvements are amortized over the
shorter of the life of the asset or the life of the lease using the
straight-line method.  Depreciation and leasehold amortization expense
for the three-month periods ended June 30, 2008 and 2007 were $692,000 and
$696,000, respectively.  Maintenance and minor repairs and
replacements are expensed when incurred.  Disposition or retirement of
property and equipment related gains and losses are charged to other income and
expenses.
 
 Certain
costs incurred in connection with acquisition of software for internal use are
capitalized following Statement of Position (SOP) 98-1, Accounting for the Costs
of Computer Software Developed or Obtained for Internal Use and EITF Issue No.
97-13, Accounting for Costs Incurred in Connection with a Consulting Contract or
an Internal Project That Combines Business Process Reengineering and Information
Technology Transformation.  Capitalized software costs are included in
the equipment and furniture account and are amortized over four to seven
years.  Software costs that do not meet capitalization criteria are
expensed immediately.
 
 (14.) Goodwill and Other Intangible
Assets.Goodwill represents the excess of the purchase price
over the fair value of identifiable net tangible and intangible assets acquired
in a business combination.  In accordance with SFAS No. 142, Goodwill and Other Intangible
Assets, the Company does not amortize goodwill.  Instead, the
Company evaluates goodwill for impairment annually in the fourth quarter and
whenever events or changes in circumstances indicate that it is more likely than
not that an impairment loss has been incurred.  At March 31, 2007, the
Company determined that estimated future cash flows were insufficient to justify
the carrying value of goodwill and other intangible assets based on management’s
decision to suspend optical memory card production in Germany. As such, in the
fourth quarter of fiscal year 2007, the Company recorded a non-cash impairment
charge of approximately $3.8 million for the full amount of remaining goodwill
and other intangible assets related to the Company’s purchase of Challenge Card
Design Plastikkarten GmbH of Rastede, Germany, and Cards & More GmbH of
Ratingen, Germany on March 31, 2004.  The Company intends to continue
to use the facility and equipment to produce specialty cards although plans to
use the facility to produce LaserCard® optical memory cards in Germany have been
suspended.
  13
  LASERCARD
CORPORATION AND SUBSIDIARIES
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (UNAUDITED)
   Definite
life intangible assets capitalized and accumulated amortization as of June 30,
2008 and March 31, 2008 are as follows (in thousands):
  June
      30,
                  
                  
                  March
      31,2008
                  
                  
                  2008Patent
      expenditures
                  
                  $
                  3,714
                  
                  
                  $
                  3,669Technology
      transfer expenditures
                  
                  
                  545
                  
                  
                  
                  545Total
      patent and other intangible expenditures
                  
                  
                  4,259
                  
                  
                  
                  4,214Patent
      accumulated amortization
                  
                  
                  (3,297
                  )
                  
                  
                  (3,267
                  )Technology
      transfer accumulated amortization
                  
                  
                  (545
                  )
                  
                  
                  (545
                  )(3,842
                  )
                  
                  
                  (3,812
                  )Amortizable
      patents and other intangible, net
                  
                  $
                  417
                  
                  
                  $
                  402
 
 The
amortization expense for the three-month periods ended June 30, 2008 and 2007
were $30,000 and $35,000, respectively.
 
 (15.) Assessment of Impairment of
Tangible and Intangible Long-Lived Assets.  In accordance with
SFAS No. 144, Accounting
for the Impairment or Disposal of Long-Lived Assets, the Company assesses
the impairment of long-lived assets whenever events or changes in circumstances
indicate that their carrying value may not be recoverable from the estimated
future cash flows expected to result from their use and eventual
disposition.  The Company’s long-lived assets subject to this
evaluation include property and equipment and amortizable intangible
assets.  If the Company’s estimate of future undiscounted net cash
flows is insufficient to recover the carrying value of the assets, the Company
will record an impairment loss in the amount by which the carrying value of the
assets exceeds the fair value.  If assets are determined to be
recoverable but the useful lives are shorter than originally estimated, the
Company depreciates or amortizes the net book value of the asset over the newly
determined remaining useful lives.  Based on the Company’s estimated
future cash flow analysis and having had no triggering events such as a
significant disposal of a portion of such assets, an adverse change in the
market involving the business employing the related asset, a significant
decrease in the benefits realized from an acquired business, management has
determined that as of June 30, 2008 and March 31, 2008, the fair value of
long-lived assets exceeds their book value.  Therefore, no impairment
loss has been recognized.
  14
  LASERCARD
CORPORATION AND SUBSIDIARIES
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (UNAUDITED)
 (16.) Accrued
Liabilities.  The components of accrued short and long-term
liabilities as of June 30, 2008 and March 31, 2008 are (in
thousands):
  June
      30,
                
                
                March
      31,2008
                
                
                2008Accrued
      compensated absences
                
                $
                675
                
                
                $
                846Deferred
      compensation
                
                
                591
                
                
                
                713Warranty
      reserves
                
                
                537
                
                
                
                655Accrued
      payroll and fringe benefits
                
                
                364
                
                
                
                449Other
      accrued liabilities
                
                
                684
                
                
                
                558Total
      accrued liabilities
                
                $
                2,851
                
                
                $
                3,221
 
 Where
appropriate, provision is made at the time of shipment for estimated warranty
costs. The Company provides a limited warranty for the replacement of defective
products. The Company’s limited warranty requires them to repair or replace
defective products at no cost to the customer within a specified time period
after sale. The Company estimates the costs that may be incurred under its
limited warranty and record a liability in the amount of such costs. Factors
that affect the Company’s estimates of warranty liability include the number of
units sold, and historical and anticipated rates of warranty claims. The Company
assesses the adequacy of its recorded warranty liability and adjusts the amount
as necessary. The Company utilizes historical trends and information received
from our customers to assist in determining the appropriate estimated warranty
accrual levels. The Company’s product warranty claims are settled through the
return of defective products and the shipment of replacement products. The
adequacy of the warranty reserve is reviewed quarterly to verify that it
properly reflects the remaining obligations based on the anticipated warranty
costs over the balance of the obligation period. Adjustments are made when
actual return claim experience differs from estimates.
 
 Warranty
activities for the three-month periods ended June 30, 2008 and 2007 are as
follow (in thousands):
 Three
      Months EndedJune
      30,2008
                  
                  
                  2007Beginning
      balance
                  
                  $
                  655
                  
                  
                  $
                  743Accruals
      for products sold
                  
                  
                  (55
                  )
                  
                  
                  38Costs
      incurred
                  
                  
                  (63
                  )
                  
                  
                  (109
                  )Ending
      balance
                  
                  $
                  537
                  
                  
                  $
                  672
 
 (17.) Software Development
Costs.  Development costs incurred in the research and
development of new software products are expensed as incurred until
technological feasibility in the form of a working model has been
established.  To date, the Company’s software development has been
completed concurrent with the establishment of technological feasibility and,
accordingly, all software development costs have been charged to research and
development expenses in the accompanying condensed consolidated statements of
operations.
 
 (18.) Advance Payments from
Customers.  The Company routinely receives advance payments on
orders placed by its customers.  The advance payments are recorded as
a liability in the condensed consolidated balance sheets until the related
orders are shipped or services are performed or revenue would otherwise be
recognized.
 
 (19.) Revenue
Recognition.  Product sales primarily consist of optical card
sales, sales of drives, systems and services and sales of specialty cards and
card printers.  The Company recognizes revenue from product sales when
the following criteria are met:  (1) persuasive evidence of an
arrangement exists; (2) delivery has occurred; (3) the fee is fixed or
determinable; and (4) collectibility is reasonably assured.  The
Company recognizes revenue on product sales at the time of shipment when
shipping terms are F.O.B. shipping point, orders are placed pursuant to a
pre-existing sales arrangement and there are no post-shipment obligations other
than customer acceptance criteria or, in the case of a U.S. government contract,
warehousing.  Where appropriate, provision is made at the time of
shipment for estimated warranty costs and estimated returns.
  15
  LASERCARD
CORPORATION AND SUBSIDIARIES
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (UNAUDITED)
 Orders
for Permanent Resident and Border Crossing Cards for the U.S. government require
delivery into a secure Company-controlled vault.  Shipments are later
made from the vault to a U.S. government site.  The bill and hold
procedures also provide that at the end of any one-year contract term when a
renewal option is not exercised, the U.S. government is to take final delivery
of any and all of its remaining inventory within six months.  At the
time the cards are delivered into the vault, title to the cards is transferred
to the U.S. government and all risks of ownership are transferred as
well.  The prime contractor is invoiced, with payment due within
thirty days and the purchase orders do not
contain any return (other than for warranty) or cancellation provisions.
Pursuant to the provisions of SEC Staff Accounting Bulletin No. 104 ―
Revenue Recognition
(“SAB 104”), revenue is recognized on delivery into the vault as the Company has
fulfilled its contractual obligations and the earnings process is
complete.
 
 For
contracts that include customer-specified acceptance criteria, the Company
recognizes revenue only after the acceptance criteria have been met and
presuming that all other revenue criteria have been met.  The Company
defers revenue from services and recognizes it over the contractual period or as
the Company render services and the customer accepts them.
 
 The
Company applies the provisions of the Emerging Issues Task Force Issue No.
00-21, Revenue Arrangements
with Multiple Deliverables (“EITF 00-21”), to revenue arrangements with
multiple deliverables.  EITF 00-21 provides criteria governing how to
identify whether goods or services that are to be delivered separately in a
bundled sales arrangement should be accounted for separately. Deliverables are
accounted for separately if they meet all of the following criteria: a) the
delivered items have stand-alone value to the customer; b) the fair value of any
undelivered items can be reliably determined; and c) if the arrangement includes
a general right of return, delivery of the undelivered items is probable and
substantially controlled by the seller. In situations where the deliverables
fall within higher-level literature as defined by EITF 00-21, the Company
applies the guidance in that higher-level literature. Deliverables that do not
meet these criteria are combined with one or more other
deliverables.
 
 The
Company applies the provisions of Statement of Position 81-1, Accounting for Performance of
Construction-Type and Certain Production-Type Contracts (“SOP 81-1”), in
applicable contracts. Revenues on time and materials contracts are recognized as
services are rendered at contract labor rates plus material and other direct
costs incurred.  Revenues on fixed price contracts are recognized on
the percentage of completion method based on the ratio of total costs incurred
to date compared to estimated total costs to complete the
contract.  Estimates of costs to complete include material, direct
labor, overhead and allowable general and administrative expenses.  In
circumstances where estimates of costs to complete a project cannot be
reasonably estimated, but it is assured that a loss will not be incurred, the
percentage-of-completion method based on a zero profit margin, rather than the
completed-contract method, is used until more precise estimates can be made. The
full amount of an estimated loss is charged to operations in the period it is
determined that a loss will be realized from the performance of a
contract.  The Company recognized approximately $68,000 and $13,000 of
revenues for the three-month periods ended June 30, 2008 and 2007, respectively,
based on a zero profit margin related to a long-term contract.
 
 In the
fourth quarter of fiscal year 2006, the Company entered into a subcontract
covering product and services with a prime contractor for the Kingdom of Saudi
Arabia to provide them with card personalization workstation integration for use
in that country’s personalized national ID card program with decentralized card
issuance which includes optical memory cards, hardware, and software. The
contract called for multiple deliverables, installation, and certain client
acceptance criteria, as defined in the agreement.  In applying the guidance
within EITF 00-21, the Company determined the deliverables are not to be
accounted for as separate units, but rather as a bundled arrangement as the fair
value of the undelivered items cannot be readily determined.  Therefore,
revenue recognition on this contract and the associated contract costs were
deferred until the predominant undelivered element, the card personalization,
was delivered and accepted, commencing when the installation and acceptance of
the card personalization system was complete.  The Company determined
that once the card personalization system was accepted, contract revenue would
be recognized ratably based on actual cards personalized and
accepted.  As the card personalization system was accepted during the
quarter ended March 31, 2007, the Company began recognizing revenue under this
contract during that period on cards that had been accepted by
customer.  On June 23, 2007, the Company and the prime contractor
entered into an agreement amending the terms of the provision of cards and
supplies according to a delivery schedule for the balance of fiscal
2008.  In addition, the Company no longer has obligations pertaining
to the installation of equipment, card personalization workstation integration
or card personalization.  As a result of this amendment, the Company
recognizes revenue upon receipt of the customer’s certificate of acceptance of
cards delivered.  Also under the amendment and associated sales
incentives, new prices per card have been established.  The Company
has completed the initial orders under the subcontract at March 31, 2008;
however, the subcontract allows for optional orders at customer request over a
four-year period through December 2010, valued at up to another approximately
$35 million in cards based on the new agreed upon price per card under the
amendment.  During the three-month period ended June 30, 2008, the
Company received another $4.7 million card order and recognized revenue of
approximately $1.9 million.  During the three-month period ended June
30, 2007, the Company recognized card revenue of $0.9 million.
  16
 LASERCARD
CORPORATION AND SUBSIDIARIES
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (UNAUDITED)
 As of
June 30, 2008 and March 31, 2008 there remained $0.5 million and $0.6 million of
deferred revenue, respectively, relating to this contract. As of June 30, 2008
and March 31, 2008, there were $0.5 million and $0.6 million of deferred
contract costs, respectively, relating to this 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 all
transactions involving the sale of software products.  Revenue from
the license of the Company’s software products is recognized when persuasive
evidence of an arrangement exists, the software product has been delivered, the
fee is fixed or determinable and collectibility is probable, and, if applicable,
upon acceptance when acceptance criteria are specified or upon expiration of the
acceptance period.  There was no software sold separately under the
drives, systems, and services for the three-month period ended June 30,
2008.  Software revenue was immaterial for the three-month period
ended June 30, 2007.
 
 License
revenue, which may consist of up-front license fees and long-term royalty
payments, is recognized as revenue when earned.  There were no license
revenues recorded for the three-month periods ended June 30, 2008 and
2007.
 
 (20.) Research and Development
Expenses.  Costs related to research, design and development of
products are charged to research and development expense as
incurred.  Research and development costs include salaries, contractor
fees, building and utility costs, and depreciation.
 
 (21.) Shipping and Handling
Costs.The Company
reports shipping and handling costs in both the sales and the related cost of
goods sold to the extent that they are billed to customers.  In all other
instances, they are reflected as a component of cost of goods sold.
 
 (22.) Advertising
Costs.  Advertising costs consist of development and placement
costs of the Company’s advertising campaigns and are charged to expense when
incurred. Advertising expense was approximately $120,000 and $202,000 for
the three-month periods ended June 30, 2008, and 2007,
respectively.
 
 (23.) Stock-based
Compensation.  Effective April 1, 2006, the Company adopted
Statement of Financial Accounting Standards (“SFAS”) No. 123(R), Share-Based
Payment, which requires share-based payment transactions to be accounted for
using a fair value based method and the recognition of the related expense in
the results of operations. Prior to the adoption of SFAS No. 123(R), as
permitted by SFAS No. 123, Accounting for Stock-Based
Compensation, the Company accounted for share-based payments to employees
in accordance with Accounting Principles Board (“APB”) Opinion No. 25,
Accounting for Stock Issued to
Employees, utilizing the intrinsic value method. Therefore, the Company
did not recognize compensation cost for employee and director stock options
because there was no intrinsic value. SFAS No. 123(R) allows companies to
choose one of two transition methods: the modified prospective transition method
or the modified retrospective transition method.
 17
  LASERCARD
CORPORATION AND SUBSIDIARIES
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (UNAUDITED)
 The
Company adopted SFAS No. 123(R) using the modified prospective method of
transition which requires compensation expense related to share based payments
to be recognized beginning on the adoption date over the requisite service
period, generally the vesting period, for awards granted after April 1,
2006, and over the remaining service period for the unvested portion of awards
granted prior to April 1, 2006.  The condensed consolidated
financial statements for prior fiscal years have not been restated to reflect
the impact of adopting SFAS No. 123(R).
  Prior to
April 1, 2006, the Company accounted for its stock-based compensation plans
using the intrinsic value method prescribed in APB No. 25. Accordingly,
compensation cost for stock options, if any, was measured at 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(R) established
accounting and disclosure requirements using a fair-value based method of
accounting for stock-based employee compensation plans.
  2004
Equity Incentive Compensation Plan (the “2004 Plan”): The 2004 Plan provides for
the grant of restricted share awards, options, stock units and stock
appreciation rights, any of which may or may not require the satisfaction of
performance objectives, with respect to shares of the Company's common stock to
directors, officers, employees and consultants of the Company and its
subsidiaries.  The exercise price of stock options may not be less
than 100% of the fair market value of the common stock as of the date of grant
(110% of the fair market value if the grant is of an incentive stock option to
an employee who owns more than 10% of the total combined voting power of all
classes of the Company’s capital stock).  Options granted may not be
exercised more than 10 years after the date of grant (five years after the date
of grant if the grant is an incentive stock option to an employee who owns more
than 10% of the total combined voting power of all classes of the Company’s
capital stock). The Board of Directors specifies the term of options (prior to
fiscal year 2006 typically 10 years and thereafter typically 7 years) and the
vesting schedule for exercise of options, generally 25% after one year and 6.25%
quarterly for the next 3 years.
  Stock Options: Under the
provisions of SFAS No. 123(R), stock-based compensation cost is estimated
at the grant date based on the fair value of the award and compensation cost is
recognized as an expense over the requisite service period of the award,
generally the vesting period. The fair value of non-vested stock awards was
determined by reference to the fair market value of the Company’s common stock
on the date of grant. Consistent with the valuation method the Company used for
disclosure-only purposes under the provisions of SFAS No. 123, Accounting for Stock-Based
Compensation, the Company uses the Black-Scholes valuation model to
estimate the fair value of option awards.  Determining the appropriate
fair value model and related assumptions requires judgment, including estimating
stock price volatility, forfeiture rates and expected terms.
 
 The
following assumptions were utilized to estimate the fair value of the Company’s
stock option awards during the three-month periods ended June 30, 2008 and
2007:
  Three
      Months EndedJune
      30,2008
                
                
                2007Expected
      stock price volatility
                
                55%
                
                
                55%Risk-free
      interest rates
                
                2.44%
      - 3.35%
                
                
                4.93%Expected
      life of options
                
                4.4
      - 5 years
                
                
                4.4
      yearsExpected
      annual dividends
                
                ―
                
                
                ―
 
  The
expected volatility rate was based on the historical volatility of the Company’s
common stock.  The expected life represents the average time options
that vest are expected to be outstanding based on the vesting provisions and the
Company’s historical exercise, cancellation and expiration patterns. The Company
estimated forfeitures based on historical rates when recognizing compensation
expense.  Forfeitures were estimated based on voluntary termination
behavior, as well as an analysis of actual option forfeitures.
  18
  LASERCARD
CORPORATION AND SUBSIDIARIES
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (UNAUDITED)
   The
risk-free interest rate was based on U.S. Treasury zero-coupon issues with a
maturity approximating the expected life as of the week of the grant
date.  There was no annual dividend rate assumed as a cash dividend is
not expected to be declared and paid in the foreseeable future.  The
Company updates these assumptions at least on an annual basis and on an interim
basis if significant changes to the assumptions are warranted.
  With the
adoption of SFAS No. 123(R), the Company recorded stock-based employee
compensation expense related to stock options and restricted shares of
approximately $510,000 and $409,000, respectively, net of estimated forfeitures,
for the three-month period ended June 30, 2008 and 2007.  The Company
recognized the full amount of the stock-based employee compensation expense of
its equity incentive plans in the consolidated statements of operations for the
three-month periods ended June 30, 2008 and 2007 and did not capitalize any such
costs in the condensed consolidated balance sheets other than in the general
overhead pool for inventory costs.
  The
following table lists stock option activity for the three-month period ended
June 30, 2008, (in thousands, except for weighted average exercise
price):
  2008Number
      of Shares
                
                
                Weighted
                  Average
                  Exercise
                  Price
                
                
                Weighted
      Average Remaining Contractual(shares
      in thousands)Outstanding
      at March 31, 2008
                
                
                2,152
                
                
                $
                12.74Granted
                
                
                567
                
                
                $
                7.15Exercised
                
                
                –
                
                
                $
                0.00Canceled
                
                
                (110
                )
                
                $
                13.67Outstanding
      at June 30, 2008
                
                
                2,609
                
                
                $
                11.49
                
                
                
                4.7Options
      vested and exercisable at end of year
                
                
                1,583
                
                
                $
                12.95
                
                
                
                3.6
 
 The
weighted-average grant-date fair value per share of options granted during the
three-month periods ended June 30, 2008 and 2007 were $3.62 and $5.80,
respectively.
 
 Stock-based
compensation expense related to stock options and restricted shares were
recorded in the Company’s condensed consolidated statements of operations was
allocated as follows (in thousands):
  Three
      Months EndedJune
      30,2008
                
                
                2007Cost
      of sales
                
                $
                137
                
                
                $
                66Selling,
      general and administrative expense*
                
                
                309
                
                
                
                283Research
      and development expense
                
                
                64
                
                
                
                60Stock-based
      compensation expense before income tax
                
                
                510
                
                
                
                409Less:
      income tax benefit
                
                
                ―
                
                
                
                ―Net
      stock-based compensation expense after income tax
                
                $
                510
                
                
                $
                409*Stock-based
      compensation expense related to Employee Stock Purchase Plan is disclosed
      under
      such caption below.
 
 Restricted Shares and Restricted
Stock Units:On September 21, 2007, restricted shares and restricted
stock units were awarded to certain Company employees and directors under the
provisions of the 2004 Plan. These shares and units are subject to time-based
vesting provisions, and were awarded at no cost to the recipients, and cannot be
sold, assigned, transferred, or pledged during the restriction period.
Recipients of the restricted shares have the right to vote such shares and
receive dividends, whereas the recipients of restricted stock units do not have
these same benefits.
  19
  LASERCARD
CORPORATION AND SUBSIDIARIES
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (UNAUDITED)
 Restricted
shares were awarded to officers and directors of the Company. The fair value of
the shares at the time of the award is expensed on a straight-line basis,
primarily in selling, general and administrative expenses over the vesting
period.  For officers, 25% of these restricted shares shall vest
subject to continuous common-law employment with the Company on each of the
first, second, third, and fourth anniversaries of the date of grant of their
award with no expiration.  For directors, the restricted shares will
vest in full on the eleventh month after the date of their award.  For
officers, as the shares vest, the Company will affect tax withholding by
retaining that number of shares having a fair market value equal to the taxes
being withheld.  On June 2, 2008, the new chief executive officer was
granted 20,000 restricted shares under Nasdaq Rule No.
4350(i)(1)(A).
 
 Restricted
stock units were awarded to certain employees of the Company. The fair value at
the time of the award is expensed on a straight-line basis over the vesting
period. Subject to the employee’s continuous common-law employment with the
Company, 25% of these restricted units vest on each of the first, second, third,
and fourth anniversaries of the date of their award.  As the units
vest, shares will be issued in settlement, net of shares retained to satisfy
withholding obligations.
 
 The
following table lists restricted stock unit activity for the three-month period
ended June 30, 2008, (in thousands):
  2008Number
      of SharesOutstanding
      at March 31, 2008
                81Granted
                –Vested
      issued
                –Canceled
                (3)Outstanding
      at June 30, 2008
                78
  As of
June 30, 2008, about $5.9 million of total unrecognized compensation cost
related to unvested stock options, restricted share awards and restricted stock
units is expected to be recognized over the remaining vesting period through
December 31, 2012.  As of June 30, 2007, there was approximately $4
million of total unrecognized compensation cost related to unvested share-based
compensation arrangements granted under our stock incentive plans which was
expected to be recognized over the remaining vesting period through June 30,
2011.
 
 The
Company recorded no income tax benefit on stock-based compensation expense for
the three-month periods ended June 30, 2008 and 2007, as the Company has
cumulative operating loss carryforwards, for which a full valuation allowance
has been established.
 
 The FASB
Staff Position ("FSP") No. 123R-3, Transition Election Related to
Accounting for the Tax Effects of Share-Based Payment Awards, requires an
entity to follow either the transition guidance for the
additional-paid-in-capital (APIC) pool as prescribed in SFAS No. 123(R) or the
alternative transition method described in FSP No. 123R-3. An entity that
adopts SFAS No. 123(R) using the modified prospective application may make a
one-time election to adopt the transition method described in the FSP No.
123R-3, and may take up to one year from the latter of its initial adoption of
SFAS No. 123(R) or the effective date of the FSP No. 123R-3 to evaluate the
available transition alternatives and make its one-time election. The Company
has elected to use the simplified method provided for in FSP FAS 123R-3 to
calculate our APIC pool effective April 1, 2007. The adoption of the FSP did not
have a material impact on its consolidated financial position, results of
operations or cash flows.
  20
 LASERCARD
CORPORATION AND SUBSIDIARIES
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (UNAUDITED)
 Employee Stock Purchase
Plan.  The Company has an Employee Stock Purchase Plan (ESPP), under
which 81,229 and 23,215 shares were reserved as of June 30, 2008 and 2007,
respectively, for future purchases by employees. Under the Stock Purchase Plan,
eligible employees may designate from 2% to 6% of their compensation to be
withheld for the purchase of shares of common stock at 67% of the average price
over the three-day period prior to the purchase date.  Under the ESPP plan,
employees purchased 12,956 shares during the three-month period ended June 30,
2008. The weighted average purchase price per share was $4.91 and the weighted
average market price per share for shares purchased was $7.80 during the
three-month period ended June 30, 2008. During the three-month period ended June
30, 2007, employees purchased 7,884 shares with a weighted average purchase
price per share of $7.39 and a weighted average market price per share for
shares purchased of $10.31. The differential between fair market value and the
average price of the shares sold under the ESPP is charged to operations as a
compensation expense and is taxed to the employee as income.  The
stock-based compensation expense of $28,000 relating to the ESPP which was
included in the Company’s condensed consolidated statements of operations in
selling, general and administrative expenses during the three-month periods
ended June 30, 2008 and 2007.
 
 (24.) Income
Taxes.Income taxes are accounted for in accordance with FASB
Statement No. 109, Accounting
for Income Taxes,which requires the use of the asset and liability
method.  Under this method, deferred tax assets and liabilities are
determined based upon the differences between the financial reporting and the
tax bases of assets and liabilities and are measured using enacted tax rules and
laws that are anticipated to be in effect when the differences are expected to
reverse.  Our net deferred tax assets are reduced by a valuation
allowance to the extent that realization of the related deferred tax asset is
not assured.  The Company have recorded a valuation allowance for the
full amount of our calculated deferred tax asset as of June 30, 2008 and March
31, 2008.
 
 In June
2006, the Financial Accounting Standards Board (“FASB”) issued Interpretation
No. 48, Accounting for
Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109
(“FIN 48”).  FIN 48 clarifies the accounting for uncertainty in income
taxes recognized in the Company’s financial statements in accordance with FASB
Statement No. 109, Accounting
for Income Taxes.FIN 48 prescribes a recognition threshold
and measurement attribute for the financial statement recognition and
measurement of a tax position taken or expected to be taken in a tax
return.  FIN 48 also provides guidance on derecognition,
classification, interest and penalties, accounting in interim periods,
disclosure, and transition.  The evaluation of a tax position in
accordance with FIN 48 is a two-step process.  The first step is
recognition: The Company determines whether it is “more-likely-than-not” that a
tax position will be sustained upon examination, including resolution of any
related appeals or litigation processes, based on the technical merits of the
position.  In evaluating whether a tax position has met the
“more-likely-than-not” recognition threshold, the Company presumes that the
position will be examined by the appropriate taxing authority that would have
full knowledge of all relevant information.  The second step is
measurement: A tax position that meets the “more-likely-than-not” recognition
threshold is measured to determine the amount of benefit to recognize in the
financial statements.  The tax position is measured at the largest
amount of benefit that is greater than 50 percent likely to be realized upon
ultimate settlement.  FIN 48 is effective for fiscal years beginning
after December 15, 2006, which for the Company was the fiscal year commencing on
April 1, 2007.  Upon adoption of FIN 48 on April 1, 2007, the Company
recognized a cumulative effect adjustment of $62,000, decreasing its income tax
liability for unrecognized tax benefits, and decreasing the March 31, 2007
accumulated deficit balance.
 
 (25) Comprehensive Income
(Loss).  Under SFAS No. 130, Reporting Comprehensive
Income, comprehensive income (loss) is defined as the changes in equity
of an enterprise except for those resulting from stockholders’ transactions. For
the three-month periods ended June 30, 2008 and 2007, comprehensive loss is as
follows (in thousands):
  Three
      Months EndedJune
      30,2008
                
                
                2007Net
      loss
                
                $
                (1,274
                )
                
                $
                (2,359
                )Net
      change in cumulative foreigncurrency
      translation adjustments
                
                
                (12
                )
                
                
                6Unrealized
      loss on investments
                
                
                (173
                )
                
                
                -Comprehensive
      loss
                
                $
                (1,459
                )
                
                $
                (2,353
                )
  21
  LASERCARD
CORPORATION AND SUBSIDIARIES
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (UNAUDITED)
  (26.)Recent Accounting
Pronouncements: In February 2007, the FASB issued SFAS
No. 159,The Fair Value
Option for Financial Assets and Financial Liabilities (“SFAS No.
159”). SFAS No. 159 provides entities with an option to report selected
financial assets and liabilities at fair value, with the objective to reduce
both the complexity in accounting for financial instruments, and the volatility
in earnings caused by measuring related financial assets and liabilities
differently. Unrealized gains and losses on items for which the fair value
option is elected would be reported in earnings. The Company adopted SFAS
No. 159 as of April 1, 2008, and has elected not to measure any financial
instruments and other items at fair value. Therefore, material financial assets
and liabilities not carried at fair value, such as the Company’s short-term and
long-term debt obligations and trade accounts receivable and accounts payable,
are still reported at their carrying values. Any future transacted financial
asset or liability will be evaluated for the fair value election as prescribed
by SFAS No. 159.
 
 In June
2007, EITF Issue No. 07-3 ("EITF 07-3"), Accounting for Nonrefundable Advance
Payments for Goods or Services to Be Used in Future Research and Development
Activities, was issued that requires companies to defer and capitalize
prepaid, nonrefundable research and development payments to third parties and
recognize such amounts over the period that the research and development
activities are performed or the services are provided, subject to an assessment
of recoverability. The guidance is effective for new contracts entered into in
fiscal years beginning after December 15, 2007, including interim periods within
those fiscal years.  The Company adopted EITF No. 07-3, on a
prospective basis, as of April 1, 2008 and the adoption did not have an impact
on its consolidated financial statements.
 
 In
September 2006, the FASB issued Statement No. 157, Fair Value Measurements
(“SFAS No. 157”). SFAS No. 157 defines fair value, establishes a framework for
measuring fair value in U.S. generally accepted accounting principles, and
expands disclosures about fair value measurements. SFAS No. 157 is intended to
be applied in conjunction with other accounting pronouncements that require or
permit fair value measurements. Although SFAS No. 157 does not require any new
fair value measurements, its application may change current practice for some
entities. The definition of fair value contained in SFAS No. 157 retains the
exchange price notion inherent in earlier definitions of fair value. SFAS No.
157 clarifies that the exchange price is the price in an orderly transaction
between market participants to sell an asset or transfer a liability in the
principal (or most advantageous) market for the asset or liability. Accordingly,
the definition focuses on the price that would be received to sell the asset or
paid to transfer the liability at the measurement date (an exit price), not the
price that would be paid to acquire the asset or received to assume the
liability at the measurement date (an entry price). SFAS No. 157 emphasizes that
fair value is a market-based measurement, not an entity-specific measurement.
Therefore, SFAS No. 157 prescribes that a fair value measurement be determined
based on the assumptions that market participants would use in pricing the asset
or liability. The FASB also issued FASB Staff Position (“FSP”) 157-2 in February
2008. FSP 157-2 delays the effective date of the application of SFAS
No. 157 to fiscal years beginning after November 15, 2008 for all
nonfinancial assets and nonfinancial liabilities that are recognized at fair
value in the financial statements on a nonrecurring basis. The Company will
continue to assess the potential impact of the adoption of SFAS 157 on its
consolidated financial statements.
 
 In
December 2007, the FASB issued SFAS No. 141 (revised 2007), Business Combinations (“SFAS
141R”).  SFAS 141R establishes principles and requirements for how an
acquirer recognizes and measures in its financial statements the identifiable
assets acquired, the liabilities assumed, any noncontrolling interest in the
acquiree and the goodwill acquired. SFAS 141R also establishes disclosure
requirements to enable the evaluation of the nature and financial effects of the
business combination. SFAS 141R is effective for fiscal years beginning after
December 15, 2008. The Company will assess the potential impact of the adoption
of SFAS 141R if and when a future acquisition occurs.
 
 In
December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in
Consolidated Financial Statements—an amendment of Accounting Research Bulletin
No. 51 (“SFAS 160”).  SFAS 160 establishes accounting and
reporting standards for ownership interests in subsidiaries held by parties
other than the parent, the amount of consolidated net income attributable to the
parent and to the noncontrolling interest, changes in a parent’s ownership
interest, and the valuation of retained noncontrolling equity investments when a
subsidiary is deconsolidated. SFAS 160 also establishes disclosure requirements
that clearly identify and distinguish between the interests of the parent and
the interests of the noncontrolling owners. SFAS 160 is effective for fiscal
years beginning after December 15, 2008. The Company is currently evaluating the
potential impact of the adoption of SFAS 160 on its consolidated financial
statements.
  22
  LASERCARD
CORPORATION AND SUBSIDIARIES
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (UNAUDITED)
 In March
2008, the FASB issued SFAS No. 161,Disclosures about Derivative
Instruments and Hedging Activities—an amendment of FASB Statement
No. 133 (“SFAS No. 161”). SFAS No. 161 is intended to
improve transparency in financial reporting by requiring enhanced disclosures of
an entity’s derivative instruments and hedging activities and their effects on
the entity’s financial position, financial performance, and cash flows. SFAS
No. 161 applies to all derivative instruments within the scope of SFAS
No. 133,Accounting for Derivative
Instruments and Hedging Activities (“SFAS No. 133”) as well as
related hedged items, bifurcated derivatives, and nonderivative instruments that
are designated and qualify as hedging instruments. SFAS No. 161 establishes
principles and requirements for how an entity identifies derivative instruments
and related hedged items that affect its financial position, financial
performance, and cash flows. SFAS No. 161 also establishes disclosure
requirements that the fair values of derivative instruments and their gains and
losses are disclosed in a tabular format, that derivative features which are
credit-risk related be disclosed to provide clarification to an entity’s
liquidity and cross-referencing within footnotes. The Company will be required
to adopt SFAS No. 161 in the first quarter of fiscal year 2009. The Company
is currently evaluating the requirements of SFAS No. 161 and has not yet
determined the impact of its adoption on its consolidated financial
statements.
 
 (27)
Indemnification.  The Company’s major sales agreements provide
remedies to customers, such as defense, settlement, or payment of judgment for
intellectual property claims related to the use of the Company’s products. The
Company also has indemnified various vendors for certain potential
claims.  The Company has also entered into indemnification agreements
with its directors and officers and the Company’s bylaws contain similar
indemnification obligations.  To date, there have been no claims made
under such indemnification provisions and as a result the associated estimated
fair value of the liability is not material.
 
 3. 
       Net Loss per Share
 
 Basic net
loss per share and diluted net loss per share are computed by dividing net loss
by the weighted average number of shares of common stock outstanding during the
three-month periods ended June 30, 2008 and 2007.  Diluted net income
per share is computed by dividing net income by the weighted average number of
shares of common stock and common stock equivalents outstanding during the
three-month periods ended June 30, 2008 and 2007.  Common stock
equivalents consist of stock options and warrants using the treasury stock
method.
  23
  LASERCARD
CORPORATION AND SUBSIDIARIES
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (UNAUDITED)
 The
reconciliation of the denominators of the basic and diluted net loss per share
computation for the three-month periods ended June 30, 2008 and 2007 is shown in
the following table (in thousands, except per share data):
  Three
      Months EndedJune
      30,2008
                
                
                2007Net
      loss
                
                $
                (1,274
                )
                
                $
                (2,359
                )Basic
      net loss per share:Weighted
      average common shares outstanding
                
                
                11,991
                
                
                
                11,866Basic
      net loss per share
                
                $
                (0.11
                )
                
                $
                (0.20
                )Diluted
      net loss per share:Weighted
      average common shares outstanding
                
                
                11,991
                
                
                
                11,866Weighted
      average common shares from stock option grants
                
                
                -
                
                
                
                -Weighted
      average common shares and common stockequivalents
      outstanding
                
                
                11,991
                
                
                
                11,866Diluted
      net loss per share
                
                $
                (0.11
                )
                
                $
                (0.20
                )
  All stock
options and warrants were excluded from the calculation of diluted net loss per
share since their effect would be anti-dilutive.
 
 4. 
       Segments
 
 Segment
Reporting.
 
 The
Company operates in three reportable segments: (1) optical memory cards, (2)
drives, systems and services (which was formerly called the “optical memory card
drives” segment), including read/write drives, maintenance, systems and enabling
services, and (3) specialty cards and card printers.  The segments
were determined based on the information used by the chief operating decision
maker.  The optical memory cards and drives, systems and services
reportable segments are not strategic business units which offer unrelated
products and services; rather these reportable segments utilize compatible
technology and are marketed jointly.  Specialty cards and printers is
a strategic business unit offering at times unrelated products and at times
related products with the other reportable segments.
 
 The
accounting policies used to derive reportable segment results are the same as
those described in the "Summary of Significant Accounting
Policies."  Resources are allocated to the optical memory card and
drive, system and services segments in a manner that optimizes optical memory
card revenues and to the specialty card and printers segment in a manner that
optimizes consolidated income as determined by the chief operating decision
maker. Segment revenues are comprised of sales to external
customers.  Segment gross profit (loss) includes all segment revenues
less the related cost of sales.  Accounts receivable, cash, deferred
income taxes, prepaid expenses, fixed assets and inventory are not separately
reported by segment to the chief operating decision maker.  Therefore,
the amount of assets by segment is not meaningful.  There are no
inter-segment sales or transfers.  All of the Company’s long-lived
assets are attributable to the United States except for $3 million at June 30,
2008 and $3.3 million at March 31, 2008 that are located in
Germany.
 
 The
Company's chief operating decision maker is currently the Company's Chief
Executive Officer.  The chief operating decision maker reviews
financial information presented on a consolidated basis that is accompanied by
disaggregated information about revenues and gross profit (loss) by
segment.
  24
  LASERCARD
CORPORATION AND SUBSIDIARIES
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (UNAUDITED)
 The table
below presents information for optical memory cards, drives, systems and
services, and specialty cards and card printers and a reconciliation of segment
results to amounts included in the Company’s condensed consolidated financial
statements for the three-month periods ended June 30, 2008 and 2007 (in
thousands):
  T h
      r e e  M o n t h s  E n d e d  J u n e  3 0 ,  2
      0 0 8Optical
                
                
                Drives,
                
                
                SpecialtyMemory
                
                
                Systems
      &
                
                
                Cards
      &
                
                
                SegmentCards
                
                
                Services
                
                
                Printers
                
                
                Total
                
                
                Other
      (a)
                
                
                TotalRevenue
                
                $
                5,904
                
                
                $
                1,185
                
                
                $
                3,633
                
                
                $
                10,722
                
                
                $
                -
                
                
                $
                10,722Cost
      of sales
                
                
                3,761
                
                
                
                904
                
                
                
                2,590
                
                
                
                7,255
                
                
                
                -
                
                
                
                7,255Gross
      profit
                
                
                2,143
                
                
                
                281
                
                
                
                1,043
                
                
                
                3,467
                
                
                
                -
                
                
                
                3,467Depreciation
      andamortization
      expense
                
                
                422
                
                
                
                47
                
                
                
                94
                
                
                
                563
                
                
                
                159
                
                
                
                722T h
      r e e  M o n t h s  E n d e d  J u n e  3 0 ,  2
      0 0 7Optical
                
                
                Drives,
                
                
                SpecialtyMemory
                
                
                Systems
      &
                
                
                Cards
      &
                
                
                SegmentCards
                
                
                Services
                
                
                Printers
                
                
                Total
                
                
                Other
      (a)
                
                
                TotalRevenue
                
                $
                4,562
                
                
                $
                355
                
                
                $
                2,938
                
                
                $
                7,855
                
                
                $
                -
                
                
                $
                7,855Cost
      of sales
                
                
                3,522
                
                
                
                438
                
                
                
                2,234
                
                
                
                6,194
                
                
                
                -
                
                
                
                6,194Gross
      profit (loss)
                
                
                1,040
                
                
                
                (83
                )
                
                
                704
                
                
                
                1,661
                
                
                
                -
                
                
                
                1,661Depreciation
      andamortization
      expense
                
                
                454
                
                
                
                46
                
                
                
                77
                
                
                
                577
                
                
                
                154
                
                
                
                731
 
 (a)
              Other
      depreciation and amortization expense represents amounts charged to
      selling, general and administrative expense and research and development
      expense.
  25
  ITEM
      2.
              MANAGEMENT'S
      DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
      OPERATIONS
 
 The
following discussion and analysis of the Company's financial condition, results
of operations and critical accounting policies should be read in conjunction
with the condensed consolidated financial statements and related notes included
elsewhere in this Form 10-Q Report and the consolidated financial statements and
notes thereto for the fiscal year ended March 31, 2008, included in the
Company's fiscal year 2008 Annual Report on Form 10-K.
 
 FORWARD-LOOKING
STATEMENTS
 
 All
statements contained in this report that are not historical facts are
forward-looking statements.  The forward-looking statements in this
report are made pursuant to the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995.  They are not historical facts or
guarantees of future performance or events. Rather, they are based on current
expectations, estimates, beliefs, assumptions, and goals and objectives and are
subject to uncertainties that are difficult to predict.  As a result,
our actual results may differ materially from the statements
made.  Often such statements can be identified by their use of words
such as “may,” “will,” “intends,” “plans,” “believes,” “anticipates,”
“visualizes,” “expects,” and “estimates.”  Forward-looking statements
made in this report include statements as to our beliefs as to current and
potential market segments, customers, and applications for and deployment of our
products; the advantages of, potential income from, and duties to be performed
under the sale of a second-source card manufacturing license to Prevent Global;
our intent to retain the Prevent Global equipment until Prevent Global is ready
to receive the equipment; future scheduled payments and contingent royalties
under the Prevent Global contract, Prevent Global’s planned production capacity,
and that we will sell equipment to Prevent Global and provide Prevent Global
with installation support; production quantities, delivery rates and expected
delivery schedule, backlog, and revenue recognition for our products for U.S. or
foreign government ID card programs, potential production capacity, potential
annual revenues being $35 million at full implementation from the Italy programs
with expected revenues unable to be determined until the prime contractor issues
follow-on orders; revenue from the Angolan program; our expectation of a
short-term decrease in the U.S. Green Card program followed by an increase in
orders as the government transitions to a new card design and our expectation
regarding the decrease in our BCC business; plans to increase card production
capacity for anticipated increases in orders including possibly $7 million in
capital equipment and leasehold improvements during the next twelve months; and
expecting growth of less than 10% in the specialty card and printer segment and
expecting negative gross profit from the drive, system and services market; that
the Kingdom of Saudi Arabia country will exercise its option to place orders
over a four-year period of up-to another approximately $35 million in cards
under the amended contract, with expected orders during fiscal year 2009 to be
less than during fiscal year 2008; our ability to obtain photographic film from
Kodak; our intent to pursue patent infringers by litigation, arbitration, or
negotiation and the outcome of such actions; the need for, expected success of,
and potential benefits from our research and development effort, including our
attempts to develop other forms of optical recording media for use in optical
memory cards and the potential benefits derived therefrom; expectations
regarding revenues (overall and by segment and by customer), margins, and our
profit (including likely losses in the future if full implementation of the
Italian program is further delayed); our expectation that R&D expenses will
increase in the fiscal year 2009 over the previous fiscal year; our belief that
our current seven major programs, plus maybe one or two others, will be the
sources for a  majority of our revenues in the near term; expansion of
our enabling services business; estimates of optical card production capacity,
our ability to expand production capacity, and our plans and expectations
regarding the growth and associated capital costs of such capacity; estimates
that revenues and advance payments will be sufficient to generate cash from
operating activities over the next twelve months and fund our actual capital
expenditures despite expected quarterly fluctuations; expectations regarding
market growth, product demand, continuation of current programs, our long-term
revenue growth objectives, and drive pricing strategy and our projected
liquidity in light of the issues surrounding our investments in auction rate
securities and our ability to secure more contracts; and our belief as to the
cretdit qualify of our action rate securities and the termpory nature of the
decline in the value of these securities.
  26
  These
forward-looking statements are based upon our assumptions about and assessment
of the future, which may or may not prove true, and involve a number of risks
and uncertainties including, but not limited to, whether there is a market for
cards for homeland security in the U.S. and abroad, and if so whether such
market will utilize optical memory cards as opposed to other technology;
customer concentration and reliance on continued U.S. and Italian government
business; risks associated with doing business in and with foreign countries;
whether we will be successful in assisting Prevent Global with factory startup
and training; whether Prevent Global will obtain the financial resources to make
the balance of its required payments to us and to operate the facility; whether
the facility will efficiently produce high quality optical memory cards in
volume and that meet our standards; lengthy sales cycles and changes in and
dependence on government policy-making; reliance on value-added resellers and
system integrators to generate sales, perform customer system integration,
develop application software, integrate optical card systems with other
technologies, test products, and work with governments to implement card
programs; risks and difficulties associated with development, manufacture, and
deployment of optical cards, drives, and systems; our ability or our customers’
ability to initiate and develop new programs utilizing our card products; risks
and difficulties associated with development, manufacture, and deployment of
optical cards, drives, and systems; potential manufacturing difficulties and
complications associated with increasing manufacturing capacity of cards and
drives, implementing new manufacturing processes, and outsourcing manufacturing;
our ability to produce and sell read/write drives in volume; the
unpredictability of customer demand for products and customer issuance and
release of corresponding orders; government rights to withhold order releases,
reduce the quantities released, and extend shipment dates; the impact of
technological advances, general economic trends, and competitive products; the
impact of changes in the design of the cards; and the possibility that optical
memory cards will not be purchased for the full implementation of card programs
in Italy, the Kingdom of Saudi Arabia and India, or for Department of Homeland
Security (DHS) programs in the U.S., or will not be selected for other
government programs in the U.S. and abroad; whether we will be successful in
developing alternative optical recording media; and  the risks set
forth in the section entitled “Risks” and elsewhere in this report; and other
risks detailed from time to time in our SEC filings.  These
forward-looking statements speak only as to the date of this report, and, except
as required by law, we undertake no obligation to publicly release updates or
revisions to these statements whether as a result of new information, future
events, or otherwise.
 
 CRITICAL
ACCOUNTING POLICIES
 
 Except
for the adoption of the Financial Accounting Standards Board (“FASB”) issued
SFAS No. 159,The Fair Value Option for Financial
Assets and Financial Liabilities (“SFAS No. 159”) and Issue No. 07-3
("EITF 07-3"), Accounting for
Nonrefundable Advance Payments for Goods or Services to Be Used in Future
Research and Development Activities as described in Note 1 of the
notes to condensed consolidated financial statements, our critical accounting
policies in our Annual Report on Form 10-K for the fiscal year ended March 31,
2008 have not changed materially.
  RESULTS
OF OPERATIONS
 
 Overview
 
 Headquartered
in Mountain View, California, we are a leading provider of secure ID solutions
to governments and commercial clients around the world, and also manufacture a
wide range of advanced, secure identity documents.  These ID documents
include the LaserCard® optical memory card and hybrid cards combining optical
memory with contact, contactless and RFID chip technology.  Our cards
and systems are widely used in countries around the world, including the United
States, Canada, Italy, India and the Kingdom of Saudi Arabia, for demanding
applications including border security, government service provision and
facility access. LaserCard’s wholly-owned German subsidiary, Challenge Card
Design Plastikkarten GmbH (CCD), with offices in Rastede and Ratingen, Germany,
manufactures and offers a wide range of high quality specialty cards, plus card
personalization and ID management solutions under the CCD and Cards & More
brands.
 
 We sell
our products and services through partners such as value added resellers (VARs)
and system integrators (SIs) who generally have specific experience in the
development of markets and applications for LaserCard products.  We
have sales staff located in California, the Washington D.C. area, and Germany,
whose principal role is developing and supporting the reseller
channel.
 
 Revenue
is derived mainly from advanced technology cards, such as optical memory,
contact, contactless and RFID cards, and from high quality specialty cards for
applications such as major event badging and access control. The remainder of
our revenue comes from a variety of activities including the sale of enabling
services, such as consulting, custom application development and the integration
of ID Management Solution modules, such as data capture, card personalization
and quality assurance; and from card factory design and equipment sales,
knowledge transfer and licensing.
  27
  Our
reseller partners generally add value in the form of application software
development, system integration, installation, training and support services. We
are continuing our program to recruit new VARs and SIs in strategically
important markets.
 
 The table
below presents condensed consolidated revenues, excluding inter-company
transactions, recorded by our U.S. and German operations (in
thousands):
  Three
      Months EndedJune
      30,2008
                
                
                2007U.S.
      operations
                
                $
                7,090
                
                
                $
                4,917German
      operations
                
                
                3,632
                
                
                
                2,938$
                10,722
                
                
                $
                7,855
 Revenues
recorded by our U.S. operations are generally derived from a small number of
government customers located throughout the world.  Revenues recorded
by our German operations are generally from a relatively large number of
commercial customers, including universities in Germany for student
identification cards and organizers of sporting events for secure access
cards.
 
 We
emphasize selling secure credentials into government programs for individual
identification.  As such we offer a range of products including
magnetic stripe, contactless RFID (Radio Frequency Identification), contacting
IC (Integrated Circuit) chip, optical memory, and optical memory with either
contacting IC chip or contactless RFID.  This allows us to sell into a
wide range of customers around the world.
 
 Optical
memory cards are a proprietary product of LaserCard Corporation for which we
hold approximately 21 U.S. patents.  In addition, we have years of
know-how in the manufacture and use of cards, encoding devices, reader/write
devices, systems, enabling services and software.  This provides a
basis for highly leveraged contribution margins in the optical memory card
segment.  Therefore, our strategy is to sell all card technologies
with a goal to upgrade programs to optical memory when possible.
 
 The
optical memory card model is analogous to the razor-razorblade
model.  We sell encoder and read/write devices at near the direct
manufacturing cost to enable sales of the optical memory card.  This
often results in quarterly losses at the gross profit line when volume does not
allow for the contribution necessary to cover fixed costs.  Even at
higher volume, the gross profit margin on encoders and read/write devices will
probably not exceed 10%.
 
 Recently
we have begun to provide enabling services as a strategy to promote card
sales.  Examples include the furnishing of equipment, training and
management of a card issue system in Saudi Arabia for their national ID card
program, and a complete data collection, data base, and card issuing system in
Costa Rica for their foreign resident’s card program.
 
 Major
near term growth potential for LaserCard® optical memory cards is in
government-sponsored identification programs in several
countries.  Since governmental card programs typically rely on
policy-making, which in turn is subject to technical requirements, budget
approvals, and political considerations, there is no assurance that these
programs will be implemented as expected or that they will include optical
cards.  Our objectives for long-term revenue growth include: (1)
contracting for the supply of complete, integrated ID Management Solutions with
a focus on optical memory card-based systems (2) winning new optical memory card
programs in newly rapidly developing markets (3) realizing incremental revenues
from a more diversified customer based outside of traditional card programs, and
(4) diversifying OM products into, and effectively penetrating, industrial and
commercial markets.
 
 Currently
our optical memory card segment revenues are mainly derived from the following
programs; the U.S. Department of Homeland Security (DHS) Permanent Resident Card
(Green Card) program, the Canadian government Permanent Resident Card program, a
national ID card for the Kingdom of Saudi Arabia and a vehicle registration card
program in India.  Also there are emerging programs such as the
national citizen ID card program in Italy, the foreign resident ID card program
in Italy, and the recently announced national ID card program in
Angola.
  28
  Our major
optical memory card programs are shown below as a percentage of total
revenues:
  Three
      Months EndedJune
      30,2008
                
                
                2007Kingdom
      of Saudi Arabia
                
                17%
                
                
                14%Foreign
      Resident ID Cards in Costa Rica
                
                16%
                
                
                -U.S.
      Green Cards
                
                15%
                
                
                27%Vehicle
      Registration in India
                
                14%
                
                
                8%
 
 Since our
fiscal year ended March 31, 1998, the U.S. Green Card program for the U.S.
Department of Homeland Security (DHS) has been an important part of our revenue
base.  We recorded card revenues of about $6.4 million in each of the
past two fiscal years for this program.  In March 2007 we received a
five-year follow-on subcontract for this program with an initial one-year term
and four one-year extension options of which the first year was
exercised.  Orders generally are received calling for deliveries over
several months or more.  Therefore, our backlog varies greatly from
quarter to quarter.  Our current backlog at June 30, 2008 of $0.4
million is for the supply of a redesigned card with updated
features.  The transition to a redesigned card could cause delays in
future orders as DHS reduces its inventory of current cards that were designed
in 1997.  However, we anticipate that this decrease will be followed
by an increase in orders of the newly designed cards to replenish the strategic
reserve, although no assurance can be given.  We anticipate an order
worth $3 million with scheduled deliveries from August through October for these
cards.
 
 Another
U.S. government program, the Border Crossing Card (BCC) accounted for
approximately $1 million in revenue during each of the past two fiscal
years.  We anticipate that the BCC design will be reconfigured to
include an RFID chip as specified for the U.S. Department of State’s new U.S.
Passport Card and in keeping with the requirements of the Western Hemisphere
Travel Initiative.  If and when this change occurs, we could expect
our BCC business to cease. There was no revenue recorded for this program during
the three month period ended June 30, 2008.
 
 We also
supply secure national ID cards to the Kingdom of Saudi Arabia.  We
recorded revenue of $1.9 million and $1.1 million of card and optical card
drives, during the three-month periods ended June 30, 2008 and 2007,
respectively.  There was $2.8 million of backlog for this program at
June 30, 2008. We anticipate revenue of $5 million to $10 million annually for
this program.
 
 During
the just completed quarter ended June 30, 2008, we completed a contract with the
government of Costa Rica valued at approximately $1.7 million for the supply of
an ID Management System for the country’s foreign resident
program.  The ID Management System included a suite of demographic and
biometric data collection and card issuance equipment and software solutions to
assist the Costa Rican government to manage the issuing of highly secure optical
memory based foreign resident ID cards.  The applications include the
centralized enrollment of legal foreign residents, automatic fingerprint
identification to prevent the issuance of duplicate cards, optical memory
encoding and card printing servers, quality assurance and card issuance
controlled by our biometric verification system.  The issuance process
will also include biometric identification of workstation operators and strict
card auditing processes.  The contract terms include a limited supply
of foreign resident ID cards, which incorporate a number of security features in
addition to our secure optical memory.  The card’s optical memory will
store cardholder information including high resolution color facial image,
fingerprint images and templates (for automatic one-to-one identity
verification), digitized signature and biographic data.  In addition,
the optical stripe will also feature our unique Embedded HologramHD, a
personalized optical variable device which, like the digital data, cannot be
fraudulently altered.
 
 The
national citizen ID (CIE) card program has been largely stalled since January
2006 following a change of government.  Should the program proceed,
and the cards are issued over a five-year period, we would anticipate that card
orders could ramp toward their full implementation level which could result in
annual revenues of $35 million.  We shipped a small amount from orders
for foreign language versions of the CIE card during the three month periods
ended June 30, 2008 and June 30, 2007.  It remains unclear when the
prime contractor will issue follow-on orders for this program.  We do
not expect orders this calendar year.
  29
  In March
2008, we signed a non-exclusive license agreement with Ritel to manufacture our
optical memory drives in Italy and distribute the resulting drives
worldwide.  Ritel, a telecommunications and technology contract
manufacturer, brings significant know-how, new production processes, and new
product development.  This could lead to further innovation and
development of lower cost drives.  We expect to supply parts sets to
Ritel to manufacture the encoders with delivery of the first 400 units expected
for September 2008.
 
 The
issuance system for PSE/CSE cards in Italy is in place and operating and we
believe issuing about 5,000 cards per day.  There is a backlog of $1.1
million for this program at June 30, 2008.  We believe that follow-on
orders will be received during fiscal year 2009 although it remains unclear when
the prime contractor will issue follow-on orders.
 
 In
January 2008, the government of Angola announced a contract award to
DGM-Sistemas, of Luanda, Angola, for the delivery of a complete ID management
system.  The contract calls for an initial 8 million optical memory
cards for the country’s new national citizen ID program to be issued as the
infrastructure is built. Up to an additional 12 million cards could be issued
later.  We teamed with DGM as the exclusive supplier of cards for the
project.  Other team members include Unisys Corporation (NYSE: UIS)
which is responsible for systems integration and our value-added reseller,
Identicard S.A. of Portugal, which developed the system
architecture.  The DGM bid includes $90 million of products and
services to be provided by us including optical memory cards, card
personalization systems, printer consumables, installation and training. Key
factors emphasized in the proposal to the Angolan government included the
security characteristics and high data storage capacity of the optical memory
and the fact that the optical memory’s digital security has never been
compromised.  Purchase orders are expected to be received through
Identicard S.A. After quarter end, in July, 2008, we received advance payments
in the amount of $5.8 million representing fifty percent (50%) of the
anticipated order value for cards, printers, encoders and
consumables.  The anticipated order would include $8.8 million for
optical memory cards and $2.8 million for hardware and
consumables.  We anticipate contract negotiations will be finalized in
the quarter ending September 2008 with initial deliveries in the quarter ending
December 2008.
 
 We may
invest up to $7 million in additional capital equipment and leasehold
improvement expenditures for optical memory card and specialty card production
capacity and manufacturing enhancement at our facilities throughout the next
twelve months, as more fully discussed under “Liquidity and Capital
Resources.”
 
 Revenues
 
 Product
Revenues.  Our total revenues consisted of sales in our three
segments of (1) optical memory cards, (2) drives, systems and services, and (3)
specialty cards and card printers, as well as, at times, other miscellaneous
items.  Product revenues for the three-month periods ended June 30,
2008 and 2007 were $10.7 million and $7.9 million, respectively.
  30
  The
following table presents our product revenue by segment (in thousands, except
for percentages):
  Three
      Months EndedJune
      30,2008
                
                
                2007Optical
      memory cards
                
                $
                5,904
                
                
                $
                4,562%
      of total revenues
                
                
                55
                %
                
                
                58
                %Optical
      card drives, systems and services
                
                
                1,185
                
                
                
                355%
      of total revenues
                
                
                11
                %
                
                
                5
                %Specialty
      cards and card printers
                
                
                3,633
                
                
                
                2,938%
      of total revenues
                
                
                34
                %
                
                
                37
                %Total
      revenues
                
                $
                10,722
                
                
                $
                7,855
 
 The
following table presents our optical memory card (OMC) revenue by major program
(in thousands):
  Three
      Months EndedJune
      30,2008
                
                
                2007National
      ID Cards for the Kingdom of Saudi Arabia
                
                $
                1,782
                
                
                $
                865U.S.
      Green Cards
                
                
                1,617
                
                
                
                2,100Vehicle
      Registration in India
                
                
                1,510
                
                
                
                599Foreign
      Resident ID Card Program in Costa Rica
                
                
                736
                
                
                
                -Canadian
      Permanent Resident Cards
                
                
                -
                
                
                
                182Italian
      National ID Card Program
                
                
                20
                
                
                
                29All
      other programs
                
                
                239
                
                
                
                787Total
      optical memory card revenues
                
                $
                5,904
                
                
                $
                4,562
 
 Optical
memory card revenue increased for the three-month period ended June 30, 2008 by
29% as compared with the three-month period ended June 30, 2007 due to the
increase in card unit volume for the Kingdom of Saudi Arabia’s national ID card
program, Vehicle Registration in India,  and the Foreign Resident ID
card program in Costa Rica.
 
 Revenue
in the drives, systems and enabling services segment increased for the
three-month period ended June 30, 2008 by $0.8 million as compared with the
three-month period ended June 30, 2007 due to the delivery and acceptance of the
equipment, software, and related services on the Foreign Resident ID card
program in Costa Rica.
 
 Specialty
cards and printers revenue was approximately $3.6 million for the three-month
period ended June 30, 2008 or an increase of 24% from the $2.9 million for the
three-month period ended June 30, 2007 mainly due to 9% increase in sales and
17% attributable to increase in foreign currency exchange rates.  We
anticipate growth in this segment in fiscal year 2009 to be driven by demand for
card issuing systems in Angola.
 
 License Fees and Other
Revenues.  There were no license revenues for the three-month
period ended June 30, 2008 and 2007.  In fiscal year 2004, we entered
into license and optical memory card equipment purchase and support agreements,
effective April 3, 2004, with Global Investments Group (GIG), based in Auckland,
New Zealand, for optical memory card manufacturing in Slovenia.  GIG
transferred the license and other agreements, with our approval, to Prevent
Global in March 2007.  The agreements provide for payments of about
$26.7 million which were current as of March 31, 2008, for a 20-year license,
the required manufacturing equipment for a targeted initial manufacturing
capacity of 10 million optical cards annually and installation support, and a
four-year training and support package.  Subsequent to June 30, 2008
and pursuant to the amended agreement with Prevent Global, we submitted a
non-performance default notice to Prevent Global related to their past due
balances of which they have 30 days to cure and a non-facilitation of equipment
shipments of which they have 60 days to cure from receipt of the notice. 
The total amount due at June 30, 2008 was $635,000.
  31
 Backlog
 
 As of
June 30, 2008, the backlog for LaserCard® optical memory cards totaled $4.9
million, which is scheduled for delivery through August 2008, as compared with
$7 million at June 30, 2007. Some of our customers generally place orders for a
period of several months to a year or more so that variations in order placement
from a single customer can materially affect backlog.  As a result,
the relative size of our backlog has not been a reliable indicator of future
sales revenue trends.
 
 At June
30, 2008, our backlog in the drives, systems and services was $0.3 million
compared with $0.4 million at June 30, 2007.
 
 The
backlog as of June 30, 2008 for specialty cards and printers totaled 0.7 million
euros (approximately $1.1 million) compared with 0.8 million euros
(approximately $1 million) at June 30, 2007.
 
 In
addition, we have a contract to deliver a turnkey non-optical card manufacturing
facility in the Kingdom of Saudi Arabia valued at 5.9 million euros
(approximately $9.3 million) and a contract to develop a conventional
non-optical card production facility in Serbia valued at 0.5 million euros
(approximately $0.7 million) at June 30, 2008 compared with 0.7 million euros
(approximately $0.9 million) at June 30, 2007.  We also have about $27
million in advance payments and deferred revenue from our Prevent contract for
which revenue has not been recorded.
 
 Gross
Margin
 
 The
following table represents our gross margin in absolute amount and as a
percentage of revenue by segment (in thousands, except for
percentages):
  June
      30,2008
                
                
                2007Optical
      memory cards
                
                $
                2,143
                
                
                $
                1,040%
      of optical memory card revenues
                
                
                36
                %
                
                
                23
                %Optical
      card drives, systems and services
                
                
                281
                
                
                
                (83
                )%
      of optical card drives, systems and services revenues
                
                
                24
                %
                
                NMSpecialty
      cards and card printers
                
                
                1,043
                
                
                
                704%
      of specialty cards and card printers revenues
                
                
                29
                %
                
                
                24
                %Total
      gross margin
                
                $
                3,467
                
                
                $
                1,661%
      of product revenue
                
                
                32
                %
                
                
                21
                %
 Optical Memory
Cards.  Optical memory card gross margin can vary significantly
based upon changes in average selling price, production and sales volumes, mix
of card types, production efficiency and yields, and changes in fixed
costs.  Unit volume greatly affects gross margin due to the absorption
of fixed manufacturing costs.  The increase in optical memory card
gross margin to 36% of revenue for the three-month period ended June 30, 2008,
as compared with 23% of revenue for the three-month period ended June 30, 2007,
is mainly due to the 20% increase in sales unit volume and the resultant gain of
production efficiencies.
 
 Drives, Systems and
Services.  We do not anticipate that we will derive significant
profits in the near term on drive sales as prices are set near the manufacturing
cost in order to promote optical memory card sales.  Except for the
quarter ended June 30, 2008, drives, systems and services gross margin has been
negative over the past three years, inclusive of fixed overhead costs, due to
low sales volume and our policy to price drives close to manufacturing cost to
promote card sales.  This segment also includes enabling services,
also with lower margins than optical memory cards.  The gross margin
increase in drives, systems, and services for the three-month period ended June
30, 2008 to 24% as compared with a historical negative margin is largely due to
the delivery of systems and related services for the Foreign Resident ID Card
program in Costa Rica. We anticipate that drives, systems and services negative
gross margins will continue in the future unless sales volume is sufficient to
cover fixed costs.  However, gross margin in this segment may be
variable depending upon the occurrence of enabling services
revenue.
  32
  Specialty Cards and Card
Printers.  The gross margin on specialty cards and card printers
increased to 29%  in the three-month period ended June 30, 2008
compared with 24% in the three-month period ended June 30, 2007 due to an
increase in the sales of higher margin printer products inclusive of value-added
features versus lower margin commodity printer products.
 
 Operating
Expenses
 
 The
following table presents operating expenses for the three-month periods ended
June 30, 2008 and 2007 (in thousands, except for percentage):
  Three
      Months EndedJune
      30,2008
                
                
                2007Selling,
      general and administrative expenses
                
                $
                3,900
                
                
                $
                3,489Percent
      of change from prior year
                
                
                12
                %Research
      and development expenses
                
                $
                860
                
                
                $
                788Percent
      of change from prior year
                
                
                9
                %
 
 Selling, General, and Administrative
Expenses (SG&A).  SG&A expenses increased by $0.4
million, or 12% during the three-month period ended June 30, 2008 as compared
with the three-month period ended June 30, 2007 due to increases in SFAS No.
123(R) stock option expenses, recruiting expenses for the CEO search, and sales
commission expenses.
 
 Research and Development Expenses
(R&D).  R&D expenses increased by $72,000 during the
three-month period ended June 30, 2008 as compared with the three-month period
ended June 30, 2007 due to various R&D projects. We are continuing our
effort to develop new optical memory card and non-optical card features and
structures, including various composite card structures to allow the insertion
of contactless chips with radio frequency (RF) capability, dual-interface
(contact-contactless) with optical memory, OVD (optically variable device)
products, and other market-driven requirements.  We are also
performing optical media development to allow new form factors for more
flexibility in card layouts and integrated security features; enhanced optical
memory card read/write drives for both increased reliability and ease of use and
integration; and new software products and services in an effort to provide new
products that can stimulate optical memory card sales growth.  We
anticipate that these ongoing research and development effort should result in
enhanced card features and capabilities and drives with advanced security
features and/or lower manufacturing costs; however, there is no assurance that
such product development effort will be successful.  These features
are important for our existing and future optical memory card
markets.
  33
 Other
Income and Expenses
 
 The
following table presents other income, net for the three-month periods ended
June 30, 2008 and 2007 (in thousands):
  Three
      Months EndedJune
      30,2008
                
                
                2007Interest
      income
                
                $
                70
                
                
                $
                239Interest
      expense
                
                
                (18
                )
                
                
                (16
                )Other
      income (expense)
                
                
                (6
                )
                
                
                18$
                46
                
                
                $
                241
 
 Other Income,
Net.  The decrease in interest income during the three-month
period ended June 30, 2008 as compared with the three-month period ended June
30, 2007 was due to an 18% decrease in invested funds and a marked decline in
interest rates from a weighted-average of 5.3% down to 2.3% resulting from the
issues surrounding our investments in auction rate securities and the actions of
the Federal Reserve in lowering the Federal funds rate.  The increase
of interest expense during the three-month period ended June 30, 2008 as
compared with the three-month period ended June 30, 2007 was
minimal.
 
 Income
Taxes
 
 The
following table presents income taxes for the three-month periods ended June 30,
2008 and 2007 (in thousands):
  Three
      Months EndedJune
      30,2008
                
                
                2007Foreign
      income tax (benefit)
                
                
                27
                
                
                
                (16
                )$
                27
                
                
                $
                (16
                )
  Income Taxes.  The
$27,000 income tax expense during the three-month period ended June 30, 2008 was
mainly due to a change in our foreign subsidiary’s tax base. In the three-month
period ended June 30, 2007, we received a tax benefit  largely due to
a $16,000 credit to allow our foreign subsidiary’s assimilation of the new
reduction in tax rate.
 
 
 LIQUIDITY
AND CAPITAL RESOURCES
 
 The
following table summarizes cash, cash equivalents and investments as of June 30,
2008 and March 31, 2008 (in thousands):
  June
      30,
                
                
                March
      31,2008
                
                
                2008Cash
      and cash equivalents
                
                $
                1,142
                
                
                $
                5,583Long-term
      investments in auction rate securities
                
                $
                12,702
                
                
                $
                12,875
  34
  The
following table displays the sources and uses of cash by activity (in
thousands):
  Three
      Months EndedJune
      30,2008
                
                
                2007Net
      cash used in operating activities
                
                $
                (4,161
                )
                
                $
                (2,735
                )Net
      cash provided by (used in) investing activities
                
                $
                (323
                )
                
                $
                1,628Net
      cash provided by financing activities
                
                $
                64
                
                
                $
                106
 
 Subsequent
to the quarter end, we received $5.8 million in advance payments for an
anticipated purchase order relating to the Angola program.  This and
collections of accounts receivable will bolster our cash in the near
term.
 
 We
account for our short-term marketable securities in accordance with SFAS
No. 115, Accounting for
Certain Investments in Debt and Equity Securities (“SFAS
No. 115”).  We consider all highly liquid investments, consisting
primarily of commercial paper, discount notes, and U.S. government bonds,
auction rate securities, with original or remaining maturities of three months
or less at the date of purchase, to be cash equivalents.  All
investments with original or remaining maturities of more than three months but
not more than one year at the date of purchase are classified as
short-term.  Investments with original or remaining maturities of more
than one year at the date of purchase are classified as long-term. We determine
the length of our investments after considering our cash requirements and yields
available for the type of investment considered by our Company. We determine the
appropriate classification of debt and equity securities at the time of purchase
and reevaluate the classification of investments as of each balance sheet
date.
 
 As of
June 30, 2008, we had $12.7 million of auction rate securities, net of $0.8
million of unrealized loss, accounted for as available-for-sale and classified
as long-term securities due to the underlying events surrounding the failed
auctions as explained in the next paragraph. As of March 31, 2008, we had $12.9
million of auction rate securities, net of $0.6 million of unrealized loss,
accounted for as available-for-sale and classified as long-term securities. We
held no short-term investments as of June 30, 2008 and March 31,
2008.
 
 Auction
rate securities are securities that are structured with short-term interest rate
reset dates of generally 28 to 35 days but with contractual maturities that can
be well in excess of ten years.  Our auction rate securities consist of
investments that are secured by pools of student loans which are guaranteed for
96.3% of principal and interest under the Federal Family Education Loan Program
(“FFELP) and are AAA rated.  We believe that the credit quality of
these securities is high based on these guarantees.  At the end of each
reset period, we can sell or continue to hold the securities at par
value. This auction process has historically provided a liquid market for
auction rate securities.  In February 2008, however, auctions failed
due to sell orders exceeding buy orders. The funds associated with failed
auctions will not be accessible until a successful auction occurs, a buyer is
found outside of the auction process, or the underlying securities have matured
or are recalled by the issuer.  Given the recent disruptions in the credit
markets and the fact that the liquidity for these types of securities remains
uncertain, as of June 30, 2008 and March 31, 2008, we have classified all of our
auction rate securities as a long-term asset in our consolidated balance sheets
as our ability to liquidate such securities in the next 12 months is
uncertain.
 
 We
believe declines in auction rate securities fair values due to the lack of
liquidity to be temporary.  We have the ability and intent to hold
these investments until recovery of fair value occurs.  As such, we
did not consider the impairment to be other than temporary and recorded an
unrealized loss of $0.8 million and $0.6 million, net of tax, in other
comprehensive income (loss) in the shareholder's equity section of the
consolidated balance sheets at June 30, 2008 and March 31, 2008,
respectively.
 
 In
valuing its investments, we primarily use market data or fair values derived
from brokerage statements supplied by our brokerage firm.  The fair
values of the auction rate securities with failed auctions and are subject to
unobservable inputs in the fair value measurement that are derived from fair
values calculated by our brokerage firm using their internally developed
valuation methodology based on a present value cash flow model. We also used a
valuation firm at March 31, 2008 to help us analyze the reasonableness of the
fair values provided by our brokerage firm.
  35
  We
evaluate our investments periodically for possible other-than-temporary
impairment by reviewing factors such as the length of time and extent to which
fair value has been below cost basis, the financial condition of the issuer and
our ability and intent to hold the investment for a period of time which may be
sufficient for anticipated recovery of market value.  We will record an
impairment charge to the extent that the carrying value of our available for
sale securities exceeds the estimated fair market value of the securities and
the decline in value is determined to be other-than-temporary.
 
 We
believe that we have sufficient available cash to execute our business plan for
fiscal 2009 and our anticipated operations in fiscal 2010 as we expect the
estimated level of revenues and customer advance payments over the next 12
months to be sufficient to generate cash from operating activities over the same
period.  Although quarterly fluctuations are expected, we do not
expect to have need for liquidity for our funds invested in auction rate
securities during fiscal 2009 and 2010 to fund our
operations.  However, operating cash flows could be negatively
impacted to a significant degree if our largest U.S. government program were to
be delayed, reduced, canceled, or not extended; if the Angolan national ID card
program does not materialize as planned internally; and if these programs are
not replaced by other card orders or other sources of income. Should we
unexpectedly require additional cash resources, an absence of liquidity from our
auction rate investments would require us to see funds elsewhere, which may be
more unattractive or unavailable.
  Our
agreement with the government of Costa Rica that was signed on December 20,
2007, required us to issue a completion bond of approximately $167,000,
equivalent to 10% of the contract price.  We purchased a certificate
of deposit representing the completion bond.  The bond will remain in
effect for one year (12 months) after the final acceptance date of delivery of
the last batch of shipment, tentatively scheduled in the first quarter of fiscal
year 2009.  At June 30, 2008 and March 31, 2008, we had classified the
restricted cash as non-current assets in our condensed consolidated balance
sheets.
 
 We have
not established a line of credit.  We are in the process of
negotiating a line of credit, although no assurance can be made that such
financing would be available on favorable terms or at all.
 
 Cash used
in operations of $4.2 million for the three-month period ended June 30, 2008
consisted mainly of $3.4 million for increases in operating assets and $0.7
million for decreases in operating liabilities.  Cash used in
operations of $2.7 million during the three months ended June 30, 2007 consisted
of $1.1 million used due to the net loss, net of non-cash items, a $1.0 million
decrease in accounts payable and accrued liabilities, a decrease of $0.5 million
in advance payments from customers, and $0.1 million due to changes in other
working capital items.  We anticipate we will have cash provided by
operations in the quarter ending September 30, 2008 due to receipt of payments
from customers.
 
 Net cash
used for investing activities in the three-month period ended June 30, 2008 was
due to $0.3 million of capital and patent expenditures.  Net cash
provided by investing activities of $1.6 million during the three-month period
ended June 30, 2007, was due to $1.9 million from net proceeds of maturity of
investments, partially offset by capital and patent expenditures of
approximately $0.3 million.
 
 Net cash
provided by financing activities for the three-month period ended June 30, 2008
was $65,000, which primarily consisted of net proceeds from the sale of common
stock under our employee stock plans.  Net cash provided by financing
activities during the three-month period ended June 30, 2007 was $0.1 million,
which primarily consisted of net proceeds from the sale of common stock under
our employee stock plans.
 
 We made
capital equipment and leasehold improvement purchases of approximately $0.3
million during the three-month period ended June 30, 2008 as compared with
approximately $0.2 million during the three-month period ended June 30,
2007.  We have an annual production capacity of 10 million
roll-process cards in conjunction with approximately 9 million sheet-process
cards depending upon the optimum mix of features.  Additional
manufacturing equipment currently on order for delivery in September 2008 will
increase our capacity for sheet-process cards to 16 million per year. We plan to
use cash on hand, cash generated from operations, and leasing to fund capital
expenditures of approximately $7 million for equipment and leasehold
improvements for card production, read/write drive tooling and assembly, and
general support items throughout the next twelve months.  A portion of
the capital expenditures will require debt financing which we believe can be
obtained on reasonable terms.  In addition, should we unexpectedly
require additional cash resources, an absence of liquidity from our auction rate
investments could require us to seek funds elsewhere, which may be more
unattractive or unavailable.
  36
  During
fiscal year 2008, we entered into a lease agreement with a four-year term to
acquire equipment.  This was recorded as a capitalized lease in the
amount of about $113,000 (80,000 euros) in accordance with SFAS 13, Accounting
for Leases.  The accumulated depreciation at June 30, 2008 was
approximately $24,000 (16,000 euros) and approximately $17,000 (12,000 euros) at
March 31, 2008.  We had no other debt financing
activities.
 
 OFF-BALANCE
SHEET ARRANGEMENTS
 
 We have
no off-balance sheet arrangement as of June 30, 2008 and March 31, 2008, that
has or is reasonably likely to have a current or future effect on our financial
condition, changes in financial condition, revenues or expenses, results of
operations, liquidity, capital expenditures, or capital resources that is
material to investors.
 
 RELATED-PARTY
TRANSACTIONS
 
 Since
October 21, 2001, we contracted with Wexler & Walker Public Policy
Associates, a unit of Hill and Knowlton, Inc., (“Wexler”) to be lobbyists on
behalf of the Company.  The Chairman of Wexler is Robert S. Walker, a
brother of Walter F. Walker, member of the Company’s Board of Directors. 
The contract has been extended through fiscal year 2009 on the same terms and
conditions with a new monthly retainer of $15,000 and reimbursement of related
expenses.
 
 We paid
Wexler $75,000 and $30,000 during the three-month periods ended June 30, 2008
and 2007, respectively.
 
 RECENT
ACCOUNTING PRONOUNCEMENTS
 
 Recent
accounting pronouncements are disclosed in Note 1 of the notes to condensed
consolidated financial statements.
  37
  ITEM
3.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISKS
 
 Interest Rate
Risk.  We invest our cash, beyond that needed for daily
operations, in high quality debt securities.  In doing so, we seek
primarily to preserve the value and liquidity of our capital and, secondarily,
to safely earn income from these investments.  To accomplish these
goals, we invest only in debt securities issued by (a) the U.S. Treasury and
U.S. government agencies, state agencies and corporations and (b) debt
instruments that meet the following criteria:
 
 ●
              Commercial
      paper rated A1/P1 or debt instruments rated AAA, as rated by the major
      rating services●
              Can
      readily be sold for cash
 
 Investments
in both fixed rate and floating rate interest earning instruments carry a degree
of interest rate risk. Fixed rate securities may have their fair market value
adversely impacted because of a rise in interest rates, while floating rate
securities may produce less income than expected if interest rates fall. Due in
part to these factors, our future investment income may fall short of
expectations because of changes in interest rates or we may suffer losses in
principal if forced to sell securities that have seen a decline in market value
because of changes in interest rates.
  Auction
rate securities are securities that are structured with short-term interest rate
reset dates of generally 28 to 35 days but with contractual maturities that can
be well in excess of ten years.  Our auction rate securities consist
of investments that are secured by pools of student loans which are guaranteed
for 96.3% of principal and interest under the Federal Family Education Loan
Program (“FFELP) and are AAA rated.  We believe that the credit
quality of these securities is high based on these guarantees.  We do
not own, and have not invested in, any auction rate securities secured by
mortgages or collateralized debt obligations.  At the end of each
reset period, investors can sell or continue to hold the securities at par
value.  This auction process has historically provided a liquid market
for auction rate securities.  Recently, however, certain auctions
failed due to sell orders exceeding buy orders.  We continued to see
deterioration in the market for these types of securities which spread from
initially primarily subprime mortgage related securities to other forms of
securities.  The funds associated with failed auctions will not be
accessible until a successful auction occurs, a buyer is found outside of the
auction process, or the underlying securities have matured or are recalled by
the issuer.  Given the recent disruptions in the credit markets and
the fact that the liquidity for these types of securities remains uncertain, as
of June 30, 2008 and March 31, 2008, we have classified all of our auction rate
securities as a long-term asset in our consolidated balance sheets as our
ability to liquidate such securities in the next 12 months is
uncertain.
  Based on
an analysis of other-than-temporary impairment factors, we recorded a temporary
impairment within other accumulated comprehensive loss of approximately $0.8
million and $0.6 million at June 30, 2008 and March 31, 2008, respectively,
related to these auction rate securities.  Our auction rate securities
portfolio as of June 30, 2008 and March 31, 2008 was $12.7 million and $12.9
million, respectively, and has continued to experience failed
auctions.
 
 Our
marketable securities are reported at fair value with the related unrealized
gains and losses included in accumulated other comprehensive income (loss), a
component of shareholders' equity, net of tax.  We evaluate our
investments periodically for possible other-than-temporary impairment by
reviewing factors such as the length of time and extent to which fair value has
been below cost basis, the financial condition of the issuer and our ability and
intent to hold the investment for a period of time which may be sufficient for
anticipated recovery of market value.  We will record an impairment
charge to the extent that the carrying value of our available for sale
securities exceeds the estimated fair market vale of the securities and the
decline in value is determined to be other-than-temporary.  Refer to
Note 2 of the Notes to Consolidated Financial Statements in Item 8 of the
Company’s Annual Report on Form 10-K, “Financial Statements and Supplementary
Data,” for further discussion of our investments in marketable
securities.
  38
  The
following summarizes investments at fair value (in thousands), weighted average
yields and expected maturity dates:
  June
      30, 2008
                
                
                March
      31, 2008Auction
      rate securities, long-term
                
                $
                13,500
                
                
                $
                13,500Gross
      unrealized losses
                
                
                (798
                )
                
                
                (625
                )Estimated
      fair market value
                
                $
                12,702
                
                
                $
                12,875Weighted
      average yield
                
                
                2.30
                %
                
                
                2.18
                %Maturity
      dates
                
                July
      15, 2029 through January 25, 2047
                
                
                July
      15, 2029 through January 25, 2047
 
 Foreign Currency Exchange Rate
Risk.  Our U.S. operations sell products in various
international markets.  For the three-month period ended June 30,
2008, revenue by our German subsidiary of approximately $3.6 million was
denominated in foreign currency. In addition, some raw material purchases and
purchased services are denominated in foreign currency.  Net cash used
in CCD operating activities was $0.4 million at June 30, 2008 mainly for working
capital requirements.
 
 We use
short-term foreign exchange forward contracts to mitigate foreign currency risk
associated primarily with inter-company receivables and payables, and loans
receivable (denominated in Euros) to our German subsidiary.  Our
foreign exchange forward contracts are not designated for accounting purposes as
hedging instruments under SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, as amended.  Accordingly,
any gains or losses resulting from changes in the fair value of the forward
contract are reported in other income, net of expenses.  The gains and
losses on these forward contracts generally offset gains and losses associated
with the underlying foreign currency denominated inter-company receivables and
payables, and loans receivable.  At June 30, 2008, we had a foreign
exchange forward contract with a maturity of less than 30 days to purchase 1.5
million euros. The fair value of the forward contract was not material at June
30, 2008. At March 31, 2008, we had a foreign exchange forward contract with a
maturity of less than 30 days to purchase 1.2 million euros.  The fair
value of the forward contract was not material at March 31, 2008.
  39
  ITEM
      4.
              CONTROLS
      AND PROCEDURES
 
 (a)
       Evaluation of Disclosure Controls
and Procedures.  We maintain disclosure controls and procedures
that are designed to ensure that information required to be disclosed by us in
reports that we file or submit under the Securities Exchange Act of 1934 is
recorded, processed, summarized, and reported within the time periods specified
in Securities and Exchange Commission rules and forms, and that such information
is accumulated and communicated to our management, including our Chief Executive
Officer and Chief Financial Officer, as appropriate, to allow timely decisions
regarding required disclosure. In designing and evaluating our disclosure
controls and procedures, management recognized that disclosure controls and
procedures, no matter how well conceived and operated, can provide only
reasonable, not absolute, assurance that the objectives of the disclosure
controls and procedures are met.  Our disclosure controls and
procedures have been designed to meet, and management believes that they meet,
reasonable assurance standards.  Additionally, in designing disclosure
controls and procedures, our management was required to apply its judgment in
evaluating the cost-benefit relationship of possible disclosure controls and
procedures. The design of any disclosure controls and procedures also is based
in part upon certain assumptions about the likelihood of future events, and
there can be no assurance that any design will succeed in achieving its stated
goals under all potential future conditions.
 
 Based on
their evaluation as of the end of the period covered by this Form 10-Q, our
Chief Executive Officer and Chief Financial Officer have concluded that, subject
to the limitations noted above, as of such date, our disclosure controls and
procedures were effective at the reasonable assurance level.
 
 (b)       Changes in Internal Control over
Financial Reporting.  There were no significant changes in our
internal control over financial reporting that occurred during the three-month
period ended June 30, 2008that have materially
affected, or are reasonably likely to materially affect, our internal control
over financial reporting.
 
 PART
II.  OTHER INFORMATION
 
 Item
1.           Legal
Proceedings
 
 From time
to time we are a party to litigation matters and pending or threatened claims
and assessments that are normal in the course of our operations. While we
believe that the ultimate outcome of these matters will not have a material
adverse effect on our financial position, results of operations or cash flows,
the outcome of these matters is not determinable and negative outcomes may
adversely affect our financial position, liquidity, or results of
operations.
 
 Item
1A.        Risk Factors
 
 A revised
description of the risk factors associated with our business is set forth below.
This description includes any material changes to and supersedes the description
of the risk factors associated with our business previously disclosed in Part I,
Item 1A of our Annual Report on Form 10-K for the fiscal year ended March 31,
2008, and in Part II, Item 1A of our Quarterly Report on Form 10-Q for the
fiscal quarter ended December 31, 2007.  Because of these risk
factors, as well as other factors affecting the Company’s business and operating
results and financial condition, including those set forth elsewhere in this
report, our actual future results could differ materially from the results
contemplated by the forward-looking statements contained in this report and our
past financial performance should not be considered to be a reliable indicator
of future performance, so that investors should not use historical trends to
anticipate results or trends in future periods.
 
 RISK
FACTORS
 
 OUR
CURRENT AND FUTURE EXPECTED REVENUES ARE DERIVED FROM A SMALL NUMBER OF ULTIMATE
CUSTOMERS SO THAT THE LOSS OF OR REDUCTIONS IN PURCHASES BY ANY ONE ULTIMATE
CUSTOMER COULD MATERIALLY REDUCE OUR REVENUES AND LEAD TO CONTINUED
LOSSES.  During the three-month period ended June 30, 2008 and each of
the previous four fiscal years, we derived from 60% of our revenues from
sevenprograms ― two
U.S. government programs andfive foreign government
programs.  Due to the lengthy sales cycles, we believe that these
programs, with perhaps the addition of a few other foreign programs, will be the
basis for a majority of our revenues in the near-term.  The loss of or
reductions in purchases by any one customer due to program cutbacks,
competition, or other reasons could materially reduce our revenue base. Annual
or quarterly losses have occurred when there are material reductions, gaps or
delays in card orders from our largest U.S. or foreign government programs or if
such programs were to be reduced in scope, delayed, canceled, or not extended
and not replaced by other card orders or other sources of income.
  40
  WE
INCURRED NET LOSSES DURING ALL BUT ONE OF THE PREVIOUS FIVE YEARS AND MAY NOT BE
ABLE TO GENERATE SUFFICIENT REVENUE IN THE FUTURE TO REGAIN PROFITABILITY.
Although we generated $3.3 million of profit during the three quarters from
October 1, 2005 through June 30, 2006, we incurred a loss for our last seven
quarters and we had incurred losses as well for the ten quarters preceeding the
quarter ended October 1, 2005.  Our net loss for the three-month
period ended June 30, 2008 was $1.3 million compared to a net loss for the
three-month period ended June 30, 2007 was $2.4 million.  We had an
accumulated deficit of $47.1 million at June 30, 2008.  There can be
no assurance that we will generate enough revenues in the near term to achieve
profitability.  We are relying principally upon our optical memory
card technology to generate future product revenues, earnings, and cash
flows.  If alternative technologies emerge or if we are otherwise
unable to compete, we may not be able to achieve or sustain profitability on a
quarterly or annual basis.  Annual or quarterly losses would also
continue if increases in product revenues or license revenues do not keep pace
with increased expenses.
 
 OUR
PROGRAM IN ITALY, WHICH WE BELIEVE WILL RESULT IN SECURING ONE OF OUR LARGEST
CUSTOMERS ONCE FULLY IMPLEMENTED, MAY BE FURTHER DELAYED OR CANCELLED FOR
REASONS OUTSIDE OUR CONTROL WHICH WOULD CAUSE US TO HAVE LESS REVENUE THAN
PLANNED AND COULD RESULT IN CONTINUED OPERATING LOSSES IF OTHER EXPECTED
BUSINESS DOES NOT MATERIALIZE.  We believe the Italian government could be
our largest customer if the CIE program is fully implemented with card
expiration terms of five years.  Sales of cards and drives for the Italian
government’s CIE, and PSE/CSE card programs have been a small portion of our
total revenue for the past two years.  However, during fiscal year 2007, we
increased card manufacturing capacity to meet anticipated demand and we have
expected a large order since the first quarter of fiscal year 2007.  This
order has not yet been placed and there can be no assurance that the order will
be placed in the near-term or that demand will increase or be sustained as we
anticipate.  We do not anticipate significant CIE card orders this calendar
year.  We could continue to incur losses if full implementation does not
occur or if orders are further delayed, or if the program is not implemented at
the level foreseen or if the government was to change its technology decision
and no longer use optical memory cards and other new programs do not materialize
as expected.  While selected Italian cities have issued cards and tested
the distributed card issuing process and the Italian government has recently
solicited interested parties to provide their qualifications for expansion of
the data collection and issuance infrastructure, full implementation is
dependent upon regionalized and further decentralized card issuance
infrastructure developments being successfully undertaken and the national ID
card system functioning as designed, of which there can be no assurance.
Overcoming some of these issues may be difficult and complex and involve third
parties, which could be time consuming and expensive and lead to further delays
for implementation.  Ritel S.p.A, our new drive manufacturing licensee in
Italy may not devote substantial resources to the program and as a result may
not lead to further innovation and development of lower cost drives.  Also,
the expansion of infrastructure for data collection, card issuance, and
maintenance services may be further delayed.  In this case, our estimate of
$35 million in annual revenue at full implementation would be further delayed
and be at risk.  Currently, the program is experiencing uncertainty due to
political factors within the Italian government.
 
 THE U.S.
GOVERNMENT, ONE OF OUR TWO LARGEST ULTIMATE CUSTOMERS, HAS THE RIGHT TO DELAY
ITS ORDERS OR COULD CHANGE ITS TECHNOLOGY DECISIONS, WHICH WOULD RESULT IN ORDER
DELAYS AND POSSIBLY IN OPERATING LOSSES. For the three-month period ended June
30, 2008, we recorded revenues of approximately $1.6 million for Green Cards
comprising 15% of our total revenue.  We recorded card revenues of about
$6.4 million in each of the past two fiscal years for this program.  On
April 2, 2007, we announced a subcontract with General Dynamics Information
Technology (GDIT) for the manufacture and supply of Green Cards and Laser
Visas.  The subcontract is for an initial 12-month period with four
optional one-year extensions of which the first year was exercised. Under U.S.
government procurement regulations, even with a contract in place, the
government reserves certain rights, such as the right to withhold releases, to
reduce the quantities released, extend delivery dates, reduce the rate at which
cards are issued, and cancel all or part of its unfulfilled purchase
orders.  At June 30, 2008, we have $0.4 million backlog for this program,
for delivery by August 2008.  We have recorded revenues of $2.1 million for
Green Cards during the three-month period ended June 30, 2007.
  41
  Also, the
Green Card is currently undergoing a redesign process.  It is possible that
our revenue will be reduced during the period of transition from the current
card to the new design after which we would expect orders to increase as their
inventory is rebuilt to their desired safety-stock level.  We would most
likely have reduced operating results if the Green Card program were to be
delayed, canceled, or not extended or if the government were to change its
technology decision and no longer use optical memory cards.
 
 Another
U.S. government program, the Border Crossing Card (BCC) accounted for
approximately $1 million in revenue during each of the prior two fiscal
years.  We anticipate that the BCC design will be reconfigured to include
an RFID chip as specified for the U.S. Department of State’s new U.S. Passport
Card and in keeping with the requirements of the Western Hemisphere Travel
Initiative.  If and when this change occurs, we could expect our BCC
business to cease. There was no revenue recorded for this program during the
three-month period ended June 30, 2008.
 
 OUR
OPTICAL MEMORY CARD PRODUCT REVENUES WILL NOT GROW IF WE DO NOT WIN NEW BUSINESS
IN THE U.S. OR ABROAD AND IF EMERGING PROGRAMS SUCH AS THE ANGOLAN NATIONAL ID
PROGRAM ARE NOT IMPLEMENTED AS ANTICIPATED.Emerging
optical memory card programs or prospective applications include permanent
resident cards and national identification cards in several countries such as in
Angola as well as secure identification cards for governmental agencies. 
There can be no assurance that we will receive sizable future orders for any of
these programs, nor any assurance that we will be able to win any other new
business in the U.S. or abroad which is necessary to grow our business to the
level we desire.
 
 SINCE THE
SALES CYCLE FOR OUR PRODUCTS IS TYPICALLY LONG AND UNPREDICTABLE, WE HAVE
DIFFICULTY PREDICTING WHEN NEW BUSINESS WILL CONTRIBUTE TO REVENUE
GROWTH.  Obtaining substantial orders usually involves a lengthy sales
cycle, requiring marketing and technical time and expense with no guarantee that
substantial orders will result. This long sales cycle results in uncertainties
in predicting operating results, particularly on a quarterly basis. In addition,
since our major marketing programs involve the U.S. and various foreign
governments and quasi-governmental organizations, additional uncertainties and
extended sales cycles can result. Factors which increase the length of the sales
cycle include government regulations, bidding procedures, budget cycles, and
other government procurement procedures, as well as changes in governmental
policy.
 
 WE COULD
EXPERIENCE EQUIPMENT, RAW MATERIAL, QUALITY CONTROL, OR OTHER PRODUCTION
PROBLEMS ESPECIALLY IN PERIODS OF INCREASING VOLUME.  There can be no
assurance that we will be able to meet our projected card manufacturing capacity
if and when customer orders reach higher levels. We have made and intend to
continue to make significant capital expenditures to expand our card
manufacturing capacity. For example, we may invest up to $7 million of capital
expenditures during the next twelve months assuming certain business
developments. However, since customer demand is difficult to predict, and we
generally wait for such demand to materialize prior to making capital
expenditure commitments, we may be unable to ramp up our production quickly
enough to fill new customer orders in a timely fashion. This could cause us to
lose new business and possibly existing business. In addition, if we
overestimate customer demand, we could incur significant costs from creating
excess capacity which was the case during fiscal years 2007 and
2008.  We may experience manufacturing complications associated with
increasing our manufacturing capacity of cards and drives, including the
adequate production capacity for sheet-lamination process cards to meet order
requirements and delivery schedules. We may also experience difficulties
implementing new manufacturing processes, meeting customers’ quality or
standards requirements, or outsourcing some of our manufacturing. The addition
of fixed overhead costs increases our breakeven point and results in lower
profit margins unless compensated for by increased product sales. When
purchasing raw materials for our anticipated optical card demand, we take into
consideration the order-to-delivery lead times of vendors and the economic
purchase order quantity for such raw materials. If we over-estimate customer
demand, excess raw material inventory can result.
 
 WE ARE
CURRENTLY OUR OWN SOLE SOURCE OF OPTICAL MEMORY CARDS AND SEVERAL OF THE STEPS
IN OUR CARD MANUFACTURING PROCESS HAVE NO BUILT-IN
REDUNDANCY.  THEREFORE, WE ARE SUSCEPTIBLE TO SUPPLY INTERRUPTIONS,
INCLUDING IF CERTAIN MACHINERY WERE TO BREAK DOWN.  MUCH OF OUR
MANUFACTURING EQUIPMENT IS COMPRISED OF CUSTOM VERSIONS OF MACHINERY SOME OF
WHICH IS MORE THAN 20 YEARS OLD.  IN ADDITION, WE ARE AT RISK OF
LOSING OR NOT OBTAINING CERTAIN PROGRAMS SHOULD THEY REQUIRE A SECOND
SOURCE.  We are the only source of our optical memory cards, making
them in our Mountain View facility using a proprietary manufacturing process,
with our German subsidiary capable of performing a few key steps in certain
instances.  We use a proprietary manufacturing process with custom
machinery and several of the steps in our card manufacturing process have no
built-in redundancy, or in some cases have the redundancy located in
Germany.  We are susceptible to supply interruptions or yield
decreases when our line goes down or malfunctions.  Much of our
machinery is comprised of customized versions of machinery which has long lead
times to replace and may be difficult to maintain or repair, requiring us to be
self-reliant.  Some of the machinery we use is more than 20 years old
and is no longer manufactured for others, which would require us to adapt a
newer version to our needs, which would involve additional delay and effort on
our part.  If current or potential customers require a second source
for optical memory cards (which is a common business practice), they could
decide to use alternate technology cards, such as chip cards, that may have
multiple sources of supply.
  42
  IF WE ARE
UNABLE TO BUY RAW MATERIALS IN SUFFICIENT QUANTITIES AND ON A TIMELY BASIS, WE
WILL NOT BE ABLE TO DELIVER PRODUCTS TO CUSTOMERS ON TIME WHICH COULD CAUSE US
TO LOSE CUSTOMERS, AND OUR REVENUES COULD DECLINE.  We depend on sole
source and limited source suppliers for optical card raw materials. Such
materials include plastic films used in optical memory card production, which
are available from one supplier in the U.S. and from multiple foreign suppliers.
Processing chemicals, inks, and bonding adhesives are obtained from various U.S.
and foreign suppliers. Certain photographic films are commercially available
solely from Eastman Kodak Company, of the United States.  We do not
expect any difficulty in obtaining the film necessary for orders projected over
the next nine to fifteen months considering the inventory currently on hand and
on order.  No assurance can be given that Kodak will continue to
supply such photographic films on a satisfactory basis and in sufficient
quantities although we believe Kodak will continue to supply such films for
several years.  If Kodak were to announce that it was no longer going
to sell film, we would request that Kodak provide us with a last-buy opportunity
which we would plan to take maximum advantage of in order to purchase from Kodak
sufficient supply of films to continue our card production until an appropriate
substitute can be found or developed, although no assurance can be given that
Kodak would provide us with such an opportunity.  Also we have ongoing
R&D effort in the area of alternate media, designed to develop an alternate
to the current Kodak film-based media, though there is no assurance that those
effort will be successful.
 
 THE
UNPRECEDENTED RISE IN PETROLEUM COST WOULD NEGATIVELY IMPACT OUR OPERATING
INCOME AND GROSS MARGIN IF RELATIVE INCREASES IN THE COST OF OUR PRODUCTION
MATERIALS SUCH AS THE POLYCARBONATE-BASED PRODUCTS OCCUR AND THE RELATED SELLING
PRICES ARE NOT ADJUSTED FOR INFLATION.  The polycarbonate raw material
for our cards is petroleum based.  The unprecedented rise in the cost
of petroleum could impact our costs for such raw material and lead to higher
energy bills for running our manufacturing facilities.  This could
lead to a decline in our gross margins and income unless we are able to adjust
our selling prices.
 
 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
drive are designed specifically for that unit. 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, if required, will be dependent upon maintaining or developing
sources of supply of components that meet our requirements for high volume,
quality, and cost. In addition, we could encounter quality control or other
production problems at high-volume production of read/write drives. We are also
investing in research and development in an effort to develop new drive
products.
 
 IF WE ARE
UNABLE TO DEVELOP UPGRADED READ/WRITE DRIVES THAT COST LESS TO MANUFACTURE AND
ALSO A READ-ONLY DRIVE, WE COULD LOSE POTENTIAL NEW BUSINESS.  The
selling price of our read/write drive products is in the low to mid two thousand
range each depending on features and quantity purchased.  We believe
the price of our drives is competitive in applications requiring a large number
of cards per drive, because the relatively low cost for our cards offsets the
high cost per drive when compared with our major competition, IC card systems.
In addition, we have undertaken a product development program for a portable
read-only drive that has been sampled in limited quantities at prices less than
$1,000, which we believe would increase our prospects for winning future
business.  However, there can be no assurance that our development
program will be successful, that volume production of any new design will occur
in the near term, or that significantly lower manufacturing costs or increased
sales will result.
  43
  WE MAY
NOT BE ABLE TO ADAPT OUR TECHNOLOGY AND PRODUCTS TO COMMERCIAL APPLICATIONS
WHICH GENERATE MATERIAL AMOUNTS OF REVENUE AND PROFIT.  THIS WOULD
LIMIT THE FUTURE GROWTH OF OUR BUSINESS TO THE GOVERNMENT SECTOR AND THE LACK OF
DIVERSIFICATION EXPOSES US TO ENHANCED RISK OF COMPETITION.  We are
exploring commercial applications for our optical memory products in order to
lessen our dependence upon the government sector.  We may be
unsuccessful in these efforts in which case we would not obtain the diversity of
revenues we are seeking for the future.  If our customer base remains
limited to secure ID card applications for government use, then we are more
susceptible to other technologies and products making in-roads or to political
pressures or changing laws.
 
 IF WE ARE
UNABLE TO ADAPT TO TECHNOLOGICAL CHANGES IN THE SECURE ID CARD INDUSTRY AND IN
THE INFORMATION TECHNOLOGY INDUSTRY GENERALLY, WE MAY NOT BE ABLE TO EFFECTIVELY
COMPETE FOR FUTURE BUSINESS.  The secure ID technology industry is
characterized by rapidly changing technology and continuing product evolution.
The future success and growth of our business will require the ability to
maintain and enhance the technological capabilities of the LaserCard® product
line. There can be no assurance that our products currently sold or under
development will remain competitive or provide sustained revenue
growth.
 
 SEVERAL
OF OUR FOREIGN PROGRAMS INVOLVE OUR CARDS AS PART OF A SOLUTION WHICH INCLUDES
TECHNOLOGIES OF THIRD PARTIES.  SOMETIMES THESE THIRD PARTY
TECHNOLOGIES ARE INTEGRATED WITH OUR CARDS BY OUR SYSTEMS INTEGRATOR CUSTOMER OR
SUBCONTRACTOR.  WE THEREFORE HAVE VARYING DEGREES OF CONTROL OVER THE
OVERALL SYSTEM WHICH COULD LEAD TO TECHNICAL, QUALITY, AND SYSTEM COMPATIBILITY
ISSUES WHICH ARE DIFFICULT, EXPENSIVE, AND TIME CONSUMING TO SOLVE. THIS COULD
CAUSE OUR ULTIMATE CUSTOMERS, GENERALLY GOVERNMENTS, TO FIND FAULT IN OPTICAL
CARDS AND SWITCH TO OTHER SOLUTIONS EVEN THOUGH OUR OPTICAL TECHNOLOGY IS NOT
THE ROOT CAUSE OF ANY FAULT.  In certain of our current foreign
programs such as Italy, India, and the Kingdom of Saudi Arabia, and possibly in
other future programs, various third party technologies such as contact or
contactless chips are added to our cards.  The embedding or addition
of other technologies to the LaserCard® optical memory card, especially when
contracted to independent third parties, could potentially lead to technical,
compatibility and other issues.  In such circumstances, it may be
difficult to determine whether a fault originated with our technology or that of
a co-supplier or the person embedding or adding the third party technology to
our cards.  If such faults occur, they could be difficult, expensive,
and time-consuming to resolve.  Such difficulties could lead to our
ultimate customers, the foreign governments, switching to other technologies
even though optical technology is not the root cause of the
fault(s).  The resulting loss of customers would adversely affect our
revenues.
 
 WE ARE
LARGELY DEPENDENT ON SYSTEMS INTEGRATORS FOR IMPLEMENTATION OF CARD PROGRAMS AND
THEIR METHOD OF IMPLEMENTATION MAY NOT BE SUCCESSFUL DUE TO QUALITY OR
COST.  We sell to VARs and system integrators who in turn sell
solutions to the end customer.  The integrators may not follow the
recommendations we provide for the handling, possible incorporation of smart or
RFID chips, processing, and/or printing on our cards and working with the
end-user in the card issuing process.  This could lead to low quality
or high costs or both resulting in damage to our reputation and/or loss of the
contract.  We work to train the integrators to avoid such situations,
but cannot control their work.  Also, we can step in to demonstrate
how to successfully implement an optical memory card issuing
system.  We plan to continue to offer this support and then transition
the card issuing process to local resources once the program is running
successfully.  There can be no assurance that issues with our systems
integrators in the future will not damage our reputation, reduce our revenues,
or cause us to lose various governmental programs.
  44
  OUR
OPTICAL MEMORY CARDS HAVE A COMPLEX STRUCTURE THAT REQUIRES A HIGH DEGREE OF
TECHNICAL KNOWLEDGE AND EXPERIENCE TO MEET INCREASINGLY STRINGENT PERFORMANCE
REQUIREMENTS.  WE HAVE AND COULD IN THE FUTURE AGREE TO CERTAIN
CHARACTERISTICS BEYOND THOSE REQUIRED IN INDEPENDENTLY PUBLISHED
STANDARDS.  THIS COULD INCREASE OUR COST OF MANUFACTURING CARDS OR RESULT
IN ACCEPTING RETURNS OR GIVING CREDITS TO THE CUSTOMER.  MANY CUSTOMERS
MAINTAIN SIGNIFICANT ADVANCE INVENTORY WHICH INCREASES THIS
RISK.  There can be no assurance that we will be able to meet
customers’ quality or standards requirements consistently.  This could lead
to high manufacturing costs due to low product yields or unexpected product
returns.  We employ a rigorous quality control procedure, are ISO 9001:2000
certified and we strive to deliver product that meets published standards and
customer expectations.  Even so, we cannot give assurance that our products
will meet customer expectations in all cases.  We have in the past, and we
may in the future, replace product held by the customer or give credit for
products previously delivered.
 
 IF WE
FAIL TO PROTECT OUR INTELLECTUAL PROPERTY RIGHTS, COMPETITORS MAY BE ABLE TO USE
OUR TECHNOLOGIES, WHICH COULD WEAKEN OUR COMPETITIVE POSITION, REDUCE REVENUES,
OR INCREASE COSTS.  We use a combination of patent, trademark, and
trade secret laws, confidentiality procedures, and licensing arrangements to
establish and protect our proprietary rights. Our existing and future patents
may not be sufficiently broad to protect our proprietary technologies. Despite
our effort 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® optical memory card's market position.
 
 THE
MARKETS FOR OUR PRODUCTS ARE COMPETITIVE, AND IF WE ARE UNABLE TO COMPETE
SUCCESSFULLY, REVENUES COULD DECLINE OR FAIL TO GROW.  Our optical
memory cards may compete with optical memory cards that can be manufactured and
sold by three of our licensees (although none is currently doing so) and with
other types of portable data storage cards and technologies used for the storage
and transfer of digital information.  These may include contact or
contactless integrated circuit (IC) chip cards; holographic optical storage
cards, 2-dimensional bar code cards and symbology cards; thick, rigid CD or DVD
read-only cards or recordable cards; radio frequency, or RFID cards; and small,
digital devices such as data-storage keys, tokens, and small cards and
tags.  The financial and marketing resources of some of the competing
companies are greater than our resources.  Competitive product factors
include system/card portability, interoperability, price-performance ratio of
cards and associated equipment, durability, environmental tolerance, and card
security. Although we believe our cards offer key technological and security
advantages for certain applications, the current price of optical card
read/write drives is a competitive disadvantage in some of our targeted
markets.  However, we believe the price of our drives is competitive
in applications requiring a large number of cards per drive, because the
relatively low cost for our cards offsets the high cost per drive when compared
with our major competition, IC card systems.  In countries where the
telecommunications infrastructure is extensive and low cost, centralized
databases and wide-area networks may limit the penetration of optical memory
cards.  These trends toward Internet, intranet, and remote wireless
networks will in some cases preclude potential applications for our
cards.
  45
  THE PRICE
OF OUR COMMON STOCK IS SUBJECT TO SIGNIFICANT VOLATILITY.  The price
of our common stock is subject to significant volatility, which may be due to
fluctuations in revenues, earnings, liquidity, press coverage, financial market
interest, trading volume, and stock market conditions, as well as changes in
technology and customer demand and preferences.  As a result, our
stock price might be low at the time a stockholder wants to sell the stock.
Also, since we have a relatively low number of shares outstanding (approximately
12 million shares) there will be more volatility in our stock if one or two
major holders, for example, large institutional holders, attempt to sell a large
number of shares in the open market.  Furthermore, our trading volume
is often small, meaning that a few trades may have disproportionate influence on
our stock price.  In addition, someone seeking to liquidate a sizeable
position in our stock may have difficulty doing so except over an extended
period or privately at a discount.  Thus, if one or more stockholders
were to sell or attempt to sell a large number of its shares within a short
period of time, such sale or attempt could cause our stock price to
decline.  There can be no guarantee that stockholders will be able to
sell the shares that they acquired at a price per share equal to the price they
paid for the stock.
 
 WE ARE
SUBJECT TO RISKS ASSOCIATED WITH CHANGES IN FOREIGN CURRENCY EXCHANGE
RATES.  Part of the manufacturing process of certain LaserCard
products that we sell outside the U.S. takes place in our operations in
Germany.  Also, some of the raw materials we use to manufacture
optical memory cards are sourced in Europe.  These costs are
denominated in euros, the currency used in much of Europe.  However,
when we sell our finished products, the prices that we charge are denominated in
U.S. dollars.  Accordingly, we are subject to exposure when the
exchange rate for euros increases in relation to the U.S.
dollar.  Recent declines in the U.S. dollar value relative to the euro
and other currencies, if not reversed, will further result in increases in raw
material costs.  As of June 30, 2008, we had not entered into a
forward exchange contract to hedge against or potentially minimize the foreign
currency exchange risk related to transactions other than those related to
inter-company payables and receivables.  The losses on foreign
currency exchange related to purchase transactions and intercompany receivables
for the three-month periods ended June 30, 2008 and 2007 were
immaterial.
 
 WE HAVE
INVESTED A SIGNIFICANT PORTION OF OUR CASH IN AUCTION RATE SECURITIES, WHICH
SUBJECTS US TO LIQUIDITY RISK AND COULD REQUIRE US TO RECORD FURTHER IMPAIRMENT
CHARGES IF THE FAIR VALUE OF THESE INVESTMENTS DECLINE PERMANENTLY OR ARE
OTHER-THAN TEMPORARILY IMPAIRED.  IN ADDITION, SHOULD WE UNEXPECTEDLY
REQUIRE ADDITIONAL CASH RESOURCES, AN ABSENCE OF LIQUIDITY FROM THESE
INVESTMENTS COULD REQUIRE US TO SEEK FUNDS ELSEWHERE, WHICH MAY BE MORE
UNATTRACTIVE OR UNAVAILABLE.  Auction rate securities are securities
that are structured with short-term interest rate reset dates of generally 28 to
35 days but with contractual maturities that can be well in excess of ten
years.  Our auction rate securities consist of investments that are secured
by pools of student loans which are guaranteed for 96.3% of principal and
interest under the Federal Family Education Loan Program (“FFELP) and are AAA
rated.  At the end of each reset period, we can sell or continue to
hold the securities at par value. This auction process has historically
provided a liquid market for auction rate securities.  In February
2008, however, certain auction rate securities experienced failed auctions due
to sell orders exceeding buy orders. We believe that the credit quality of these
securities is high based on these guarantees.  The funds associated with
failed auctions will not be accessible until a successful auction occurs, a
buyer is found outside of the auction process, or the underlying securities have
matured or are recalled by the issuer.  Given the recent disruptions
in the credit markets and the fact that the liquidity for these types of
securities remains uncertain, as of June 30, 2008 and March 31, 2008, we have
classified all of our auction rate securities as a long-term asset in our
consolidated balance sheet as our ability to liquidate such securities in the
next 12 months is uncertain.  We have also recorded an additional
temporary impairment at June 30, 2008 within other accumulated comprehensive
loss of approximately $0.2 million from $0.6 million at March 31, 2008, related
to these auction rate securities and we may have to incur further temporary
impairment if the situation does not change.  If the fair value of
these investments declines permanently or is other-than temporarily impaired, we
would be required to take a further impairment charge which would flow through
our Statement of Operations as an expense and could cause us to incur a loss for
the relevant fiscal period.
  We
believe that we have sufficient available cash to execute our business plan for
fiscal 2009 as we expect the estimated level of revenues and customer advance
payments over the next twelve months to be sufficient to generate cash from
operating activities over the same period.  A portion of our capital
expenditures will require debt financing which we believe can be obtained on
reasonable terms.  Although quarterly fluctuations are expected, we do
not expect to have a need for liquidity for our funds invested in auction rate
securities during fiscal 2009 or 2010 to fund our
operations.  However, operating cash flows could be negatively
impacted to a significant degree if our largest U.S. government program were to
be delayed, reduced, canceled, or not extended; if the Angolan national ID card
program does not materialize as planned internally; and if these programs are
not replaced by other card orders or other sources of income.  Should
we unexpectedly require additional cash resources, an absence of liquidity from
our auction rate investments could require us to seek funds elsewhere, which may
be more unattractive or unavailable.
  46
  WE SOLD A
CARD MANUFACTURING LICENSE UNDER WHICH WE WILL PROVIDE CERTAIN FACTORY SET-UP
AND TRAINING SERVICES TO PREVENT OF SLOVENIA.  IF WE AND PREVENT ARE
SUCCESSFUL, THEY COULD COMPETE WITH US FOR BUSINESS.  We will be
obligated to deliver the contracted manufacturing equipment and installation
support to Prevent for its to-be-built new card manufacturing facility in
Slovenia, to provide a targeted initial manufacturing capacity of 10 million
optical cards annually.  We will also be assigning a person to be on
site through March 31, 2011, and throughout the license term if the option is
elected by Prevent, to monitor quality, security, and operational procedures,
with a mutual goal that the facility and the cards made in Slovenia conform to
our standards.  If cards are not produced in conformance with our
quality standards, the reputation and marketability of optical memory card
technology could be damaged.  If the factory does not become
operational and produce quality cards in high volume, or if Prevent is unable to
raise sufficient capital to build, equip and operate this facility, we would not
obtain the hoped-for benefits--including ongoing royalties, sales of raw
materials to Prevent, and expansion of the European market.  On the
other hand, if and when the factory is successfully manufacturing the cards in
high volume, it could compete against us for business in certain territories,
which could reduce our potential card revenues if the market does not
expand.  Revenue on the contract will be recognized when the equipment
has been accepted and training completed, which date is dependent in part on
Prevent providing a facility in Slovenia.  We could incur greater
expenses than we anticipate for the purchase and installation of the required
manufacturing equipment, thereby reducing cash and anticipated
profits.
 
 WE MAY
NOT BE ABLE TO ATTRACT, RETAIN OR INTEGRATE KEY PERSONNEL, WHICH MAY PREVENT US
FROM SUCCEEDING.  We may not be able to retain our key personnel or
attract other qualified personnel in the future. Our success will depend upon
the continued service of key management personnel.  The loss of
services of any of the key members of our management team, including our chief
executive officer, chief operating officer, the managing directors of our German
operations, vice president of marketing or our vice president of finance and
CFO, or our failure to attract and retain other key personnel could disrupt
operations and have a negative effect on employee productivity and morale, thus
decreasing production and harming our financial results.  In addition,
the competition to attract, retain and motivate qualified personnel is
intense.
 
 OUR
CALIFORNIA FACILITIES ARE LOCATED IN AN EARTHQUAKE ZONE AND THESE OPERATIONS
COULD BE INTERRUPTED IN THE EVENT OF AN EARTHQUAKE, FIRE, OR OTHER
DISASTER.  Our card manufacturing, corporate headquarters, and drive
assembly operations, administrative, and product development activities are
located near major earthquake fault lines.  In the event of a major
earthquake, we could experience business interruptions, destruction of
facilities and/or loss of life, all of which could materially adversely affect
us.  Likewise, fires, floods, or other events could similarly disrupt
our operations and interrupt our business.
 
 FOREIGN
GOVERNMENT INTERVENTION COULD ADVERSELY AFFECT RESULTS OF
OPERATIONS.  Economic, political and other risks associated with
foreign operations could adversely affect our international sales.  We
sell our products worldwide and therefore, our business could be subject to
risks due to changes in a country’s or region’s political or economic
conditions.  Differing tax laws and changes in those laws may also
affect future results of our operations.
 
 PANDEMICS
THROUGHOUT THE WORLD COULD ADVERSELY AFFECT OUR BUSINESS.  The
occurrence of a pandemic such as the Bird Flu coupled with the lack of
government readiness and support in those countries where we do business could
temporarily impede our revenue growth.
 
 ACTS OF
TERRORISM OR WAR MAY ADVERSELY AFFECT OUR BUSINESS.  Acts of
terrorism, acts of war, and other events may cause damage or disruption to our
properties, business, employees, suppliers, distributors, resellers, and
customers, which could have an adverse effect on our business, financial
condition, and operating results.  Such events may also result in an
economic slowdown in the United States or elsewhere, which could adversely
affect our business, financial condition, and operating results.
  47
  AS A
RESULT OF OUR REQUIRED ANNUAL EVALUATION OF OUR INTERNAL CONTROLS OVER FINANCIAL
REPORTING, WE MAY IDENTIFY INTERNAL CONTROL WEAKNESSES NEEDING REMEDIATION,
WHICH COULD HARM OUR REPUTATION.  We have completed the evaluation of
our internal controls over financial reporting as required by Section 404 of the
Sarbanes-Oxley Act of 2002 for the fiscal years ended March 31, 2008 and 2007.
Although our assessment, testing and evaluation resulted in our conclusion that
as of March 31, 2008 and 2007, our internal controls over financial reporting
were effective, we cannot predict the outcome of our testing in future periods.
Because of the inherent limitation of disclosure controls, no evaluation of such
controls can provide absolute assurance that all control issues and instances of
fraud, if any, within our Company have been detected.  If our internal
controls are found to be ineffective in future periods, our reputation could be
harmed.  We may incur additional expenses and commitment of
management’s time in connection with further evaluations, both of which could
materially increase our operating expenses and accordingly reduce our net
income.
 
 BEGINNING
WITH OUR FISCAL YEAR 2007, WE WERE REQUIRED TO RECORD COMPENSATION EXPENSE FOR
STOCK OPTIONS, THEREBY REDUCING OUR EARNINGS.  THIS COULD LEAD TO
REDUCED ENTERPRISE VALUE AND TO OUR GRANTING FEWER OPTIONS WHICH COULD HURT OUR
ABILITY TO RECRUIT AND RETAIN EMPLOYEES.  In December 2004, the
Financial Accounting Standards Board (“FASB”) issued Financial Accounting
Standard 123(R) (SFAS No. 123(R)) that requires the fair value of all
equity-based awards granted to employees be recognized in the statement of
operations as compensation expense, for fiscal years beginning after December
15, 2005, rather than just to disclose such expense in a footnote as we have
done in the previous years.  The adoption of this accounting standard
reduced our profitability as measured by generally accepted accounting
principles (GAAP) due to our outstanding options and our current intention to
continue to grant options in the future as an incentive and retention tool for
our employees.  This may adversely affect our stock
price.  For example, for the three-month period ended June 30, 2008
and 2007, we recognized approximately $0.5 million and $0.4 million,
respectively, of additional expenses due to SFAS No. 123(R) which we would not
otherwise have recognized.  Such adoption has also led us to reduce
our use of stock options and to award restricted shares and restricted stock
units.  While all of these equity awards help align our employees’
long-term interests with increasing our enterprise value, options provide more
of a reward if enterprise value substantially increases.  Our reduced
use of options could hurt our ability to recruit employees and retain existing
employees and directors.
  Item
6. -        Exhibits
 
 Exhibit
      No.
              Exhibit
      Description3(i)
              Certificate
      of Incorporation; previously filed as Exhibit 3.1 to Annual Report on Form
      10-K for the fiscal year ended March 31, 2005, filed with the SEC on June
      15, 2005, and incorporated herein by reference3(ii)
              Amended
      Bylaws; previously filed as Exhibit 3(II) to Report on Form 10-Q for
      period ended September 30, 2006 and incorporated herein by
      reference10.1*
              June
      2, 2008, Executive Employment Agreement with Robert T. DeVincenzi is filed
      herewith10.2*
              June
      2, 2008, Restricted Stock Award of Robert T. DeVincenzi is filed
      herewith10.3*
              June
      2, 2008, Non-Statutory Stock Option Agreements of Robert T. DeVincenzi are
      filed herewith31.1
              Rule
      13a-14(a) Certification of Robert T. DeVincenzi, chief executive officer
      is filed herewith31.2
              Rule
      13a-14(a) Certification of Steven G. Larson, chief financial officer is
      filed herewith32.1
              Section
      1350 Certification of Robert T. DeVincenzi, chief executive officer is
      filed herewith32.2
              Section
      1350 Certification of Steven G. Larson, chief financial officer is filed
      herewith
  48
  Exhibits
31.1, 31.2, 32.1, and 32.2 are filed herewith while the other exhibits are
incorporated by reference.  No other exhibits are included in this
report as the contents of the required exhibits are either not applicable to
Registrant, to be provided only if Registrant desires, or contained elsewhere in
this report.
 
 *
Indicates management contract or compensatory plan or arrangement
  49
  SIGNATURES
 
 Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized:
 
 LASERCARD
CORPORATION
 (Registrant)
 
 
 Signature
              
              Title
              
              Date/s/  Robert T.
      DeVincenzi
              
              
              Chief
      Executive Officer
              
              August
      5, 2008Robert
      T. DeVincenzi/s/  Steven G.
    Larson
              
              
              Chief
      Financial Officer
              
              August
      5, 2008Steven
      G. Larson
  50
  INDEX
TO EXHIBITS
 
 [ITEM
14(c)]
  ExhibitNumber
              Description3(i)
              Certificate
      of Incorporation; previously filed as Exhibit 3.1 to Annual Report on Form
      10-K for the fiscal year ended March 31, 2005, filed with the SEC on June
      15, 2005, and incorporated herein by reference3(ii)
              Amended
      and Restated Bylaws (to add new Section 4.6.5 re Vice Chairman)
      incorporated herein by reference10.1*
              June
      2, 2008, Executive Employment Agreement with Robert T. DeVincenzi is filed
      herewith10.2*
              June
      2, 2008, Restricted Stock Award of Robert T. DeVincenzi is filed
      herewith10.3*
              June
      2, 2008, Non-Statutory Stock Option Agreements of Robert T. DeVincenzi are
      filed herewith31.1
              Rule
      13a-14(a) Certification of Robert T. DeVincenzi, chief executive officer
      is filed herewith31.2
              Rule
      13a-14(a) Certification of Steven G. Larson, chief financial officer is
      filed herewith32.1
              Section
      1350 Certification of Robert T. DeVincenzi, chief executive officer is
      filed herewith32.2
              Section
      1350 Certification of Steven G. Larson, chief financial officer is filed
      herewith*
              Indicates
      management contract or compensatory plan or
  arrangement








51