UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549




FORM
10-Q




[Mark
      One]x
              QUARTERLY
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF
                THE SECURITIES EXCHANGE ACT OF
      1934
                For
      the Quarterly Period Ended June 30, 2009ORo
              TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF
                THE
      SECURITIES EXCHANGE ACT OF 1934
                For
      the Transition Period from _____to _____Commission
      File Number: 0-6377




LASERCARD
CORPORATION


(Exact
name of registrant as specified in its charter)


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





1875
      North Shoreline Boulevard, Mountain View, CA
                  
                  
                  94043-1601(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. xYes o No




Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§ 229.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files). o Yes o No




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


Large
      accelerated filer o
              Accelerated
      filer oNon–accelerated
      filer o
              Smaller
      reporting company x




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




Number of
outstanding shares of common stock, $.01 par value, at August 11, 2009:
12,142,595







TABLE
      OF CONTENTSPage
      NumberPART
      I.
                            FINANCIAL
      INFORMATIONItem
      1.
                            Condensed
      Consolidated Financial Statements (Unaudited)
                            3Condensed
      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 FinancialCondition and Results of
      Operations
                            27Item
      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
                            
                            49EXHIBIT
      INDEX
                            
                            50
 2
  PART
      I.
                            FINANCIAL
      INFORMATIONITEM
      1.
                            CONDENSED
      CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)




LASERCARD
CORPORATION AND SUBSIDIARIES


CONDENSED
CONSOLIDATED BALANCE SHEETS


(UNAUDITED)


(In
thousands)


June
      30,

                          2009
                        
                        
                        March
      31,2009*ASSETSCurrent
      assets:Cash
      and cash equivalents
                        
                        $
                        25,990
                        
                        
                        $
                        15,912Short-term
      investments
                        
                        
                        13,632
                        
                        
                        
                        174Accounts
      receivable, net of allowance of $148 at June 30, 2009 and $59 at March 31,
      2009
                        
                        
                        5,574
                        
                        
                        
                        10,217Inventories,
      net of reserves of $983 at June 30, 2009 and $863 at March 31,
      2009
                        
                        
                        12,201
                        
                        
                        
                        14,232Deferred
      contract costs
                        
                        
                        397
                        
                        
                        
                        345Prepaid
      and other current assets
                        
                        
                        1,223
                        
                        
                        
                        934Total
      current assets
                        
                        
                        59,017
                        
                        
                        
                        41,814Property
      and equipment, net of accumulated depreciation of $22,276 at June 30, 2009
      and $21,555 at March 31, 2009
                        
                        
                        10,458
                        
                        
                        
                        10,872Long-term
      equipment held for resale
                        
                        
                        7,113
                        
                        
                        
                        7,062Long-term
      investments
                        
                        
                        —
                        
                        
                        
                        13,239Patents
      and other intangibles, net
                        
                        
                        377
                        
                        
                        
                        400Notes
      receivable
                        
                        
                        239
                        
                        
                        
                        227Long-term
      deferred contract costs
                        
                        
                        79
                        
                        
                        
                        568Other
      non-current assets
                        
                        
                        49
                        
                        
                        
                        108Total
      assets
                        
                        $
                        77,332
                        
                        
                        $
                        74,290LIABILITIES
      AND STOCKHOLDERS’ EQUITYCurrent
      liabilities:Accounts
      payable
                        
                        $
                        2,197
                        
                        
                        $
                        1,698Accrued
      liabilities
                        
                        
                        3,688
                        
                        
                        
                        3,397Deferred
      income tax liability
                        
                        
                        253
                        
                        
                        
                        234Advance
      payments from customers
                        
                        
                        7,615
                        
                        
                        
                        7,958Short-term
      debt
                        
                        
                        8,899
                        
                        
                        
                        8,681Deferred
      revenue
                        
                        
                        443
                        
                        
                        
                        589Deferred
      rent
                        
                        
                        257
                        
                        
                        
                        257Capital
      lease obligation
                        
                        
                        75
                        
                        
                        
                        72Total
      current liabilities
                        
                        
                        23,427
                        
                        
                        
                        22,886Capital
      lease obligation, net of current portion
                        
                        
                        145
                        
                        
                        
                        166Advance
      payments from customers, net of current portion
                        
                        
                        26,213
                        
                        
                        
                        26,122Deferred
      revenue, net of current portion
                        
                        
                        3,468
                        
                        
                        
                        3,788Deferred
      rent, net of current portion
                        
                        
                        1,147
                        
                        
                        
                        1,203Income
      tax payable
                        
                        
                        277
                        
                        
                        
                        277Total
      liabilities
                        
                        
                        54,677
                        
                        
                        
                        54,442Stockholders’
      equity:Common
      stock
                        
                        
                        121
                        
                        
                        
                        121Additional
      paid-in capital
                        
                        
                        67,201
                        
                        
                        
                        66,422Accumulated
      deficit
                        
                        
                        (44,864
                        )
                        
                        
                        (46,807
                        )Accumulated
      other comprehensive income (loss)
                        
                        
                        197
                        
                        
                        
                        112Total
      stockholders’ equity
                        
                        
                        22,655
                        
                        
                        
                        19,848Total
      liabilities and stockholders’ equity
                        
                        $
                        77,332
                        
                        
                        $
                        74,290*Amounts
      derived from audited consolidated financial statements




The
accompanying notes are an integal 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,
                  2009
                
                
                June
      30,
                  2008Revenues
                
                $
                16,308
                
                
                $
                10,722Cost
      of sales
                
                
                9,705
                
                
                
                7,255Gross
      profit
                
                
                6,603
                
                
                
                3,467Operating
      expenses:Selling,
      general, and administrative expenses
                
                
                4,074
                
                
                
                3,900Research
      and development expenses
                
                
                371
                
                
                
                860Total
      operating expenses
                
                
                4,445
                
                
                
                4,760Operating
      income (loss)
                
                
                2,158
                
                
                
                (1,293
                )Other
      income, net
                
                
                182
                
                
                
                46Income
      (loss) before provision for income taxes
                
                
                2,340
                
                
                
                (1,247
                )Provision
      for income tax
                
                
                397
                
                
                
                27Net
      income (loss)
                
                $
                1,943
                
                
                $
                (1,274
                )Net
      income (loss) per share:Basic
                
                $
                0.16
                
                
                $
                (0.11
                )Diluted
                
                $
                0.16
                
                
                $
                (0.11
                )Weighted-average
      shares of common stock used in computing net income (loss) per
      share:Basic
                
                
                12,113
                
                
                
                11,991Diluted
                
                
                12,140
                
                
                
                11,991




The
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 Ended
                  June
      30,2009
                
                
                2008Cash
      flows from operating activities:Net
      income (loss)
                
                $
                1,943
                
                
                $
                (1,274
                )Adjustments
      to reconcile net income (loss) to net cash provided by (used in) operating
      activities:Depreciation
      and amortization
                
                
                683
                
                
                
                722Fixed
      asset disposal
                
                
                5
                
                
                
                —Provision
      for doubtful accounts receivable
                
                
                86
                
                
                
                13Provision
      for excess and obsolete inventory
                
                
                116
                
                
                
                (6
                )Provision
      for warranty reserve
                
                
                (3
                )
                
                
                (54
                )Decrease
      in income tax payable and deferred tax asset
                
                
                —
                
                
                
                9Stock-based
      compensation
                
                
                571
                
                
                
                538Put
      option, loss on fair value
                
                
                16
                
                
                
                —Mark
      to market, trading
                
                
                (234
                )
                
                
                —Changes
      in operating assets and liabilities:Decrease
      (increase) in accounts receivable
                
                
                4,632
                
                
                
                (2,710
                )Decrease
      (increase) in inventories
                
                
                2,018
                
                
                
                (369
                )Decrease
      in deferred contract costs
                
                
                447
                
                
                
                158Increase
      in prepaid and other current assets
                
                
                (267
                )
                
                
                —Increase
      in equipment held for resale
                
                
                (51
                )
                
                
                (151
                )Decrease
      (increase) in other non-current assets
                
                
                60
                
                
                
                (321
                )Increase
      (decrease) in accounts payable and accrued liabilities
                
                
                717
                
                
                
                (167
                )Increase
      in deferred income tax liabilities
                
                
                7
                
                
                
                7Decrease
      in deferred revenue
                
                
                (475
                )
                
                
                (26
                )Increase
      (decrease) in deferred rent
                
                
                (56
                )
                
                
                75Decrease
      in advance payments from customers
                
                
                (360
                )
                
                
                (605
                )Net
      cash provided by (used in) operating activities
                
                
                9,855
                
                
                
                (4,161
                )Cash
      flows from investing activities:Purchases
      of property and equipment
                
                
                (175
                )
                
                
                (278
                )Acquisition
      of patents and other intangibles
                
                
                (5
                )
                
                
                (45
                )Net
      cash used in investing activities
                
                
                (180
                )
                
                
                (323
                )Cash
      flows from financing activities:Proceeds
      from sale of common stock through stock plans
                
                
                —
                
                
                
                73Tax
      benefit on carryforward of gain from exercise of common stock
      options
                
                
                214
                
                
                
                —Employee
      taxes withheld and paid for restricted stock
                
                
                (6
                )
                
                
                —Net
      borrowing on revolving credit agreement
                
                
                218
                
                
                
                —Principal
      payments on capital lease obligation
                
                
                (22
                )
                
                
                (9
                )Net
      cash provided by financing activities
                
                
                404
                
                
                
                64Effect
      of exchange rate changes on cash and cash equivalents
                
                
                (1
                )
                
                
                (22
                )Net
      increase in cash and cash equivalents
                
                
                10,078
                
                
                
                (4,442
                )Cash
      and cash equivalents:Beginning
      of period
                
                
                15,912
                
                
                
                5,583End
      of period
                
                $
                25,990
                
                
                $
                1,141Supplemental
      disclosures - cash payments for:Income
      taxes
                
                $
                60
                
                
                $
                —Interest
      expense
                
                $
                61
                
                
                $
                47Supplemental schedule
      of non-cash investing activities:Unrealized
      gain (loss) in fair value of investments
                
                $
                218
                
                
                $
                (173
                )*




* in
accumulated other comprehensive loss




The
accompanying notes are an integal 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, 2009 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, 2009, included in the Company’s Annual Report on
Form 10-K, filed with the SEC on June 15, 2009 (the “2009 Form
10-K”).




The
results of operations for the three-month period ended June 30, 2009 are not
necessarily indicative of results to be expected for any future period. Certain
prior year amounts have been reclassified to conform to the current year
presentation.




Recently Adopted Accounting
Pronouncements: In December 2007, the Financial Accounting Standards
Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No.
141 (revised 2007), “Business Combinations” (“SFAS No. 141(R)”). SFAS No. 141(R)
establishes principles and requirements for how an acquirer recognizes and
measures in its financial statements significant aspects of a business
combination. Under SFAS No. 141(R), acquisition costs are generally expensed as
incurred; noncontrolling interests are valued at fair value at the acquisition
date; in-process research and development is recorded at fair value as an
indefinite-lived intangible asset at the acquisition date; restructuring costs
associated with a business combination are generally expensed subsequent to the
acquisition date; contingent consideration is measured at fair value at the
acquisition date, with changes in the fair value after the acquisition date
affecting earnings; and changes in deferred tax asset valuation allowances and
income tax uncertainties after the acquisition date affect income tax expense.
SFAS No. 141(R) amends SFAS No. 109, “Accounting for Income Taxes,” such that adjustments made
to valuation allowances on deferred taxes and acquired tax contingencies
associated with acquisitions that closed prior to the effective date of SFAS No.
141(R) would also apply the provisions of SFAS No. 141(R). SFAS No. 141(R) also
establishes disclosure requirements to enable the evaluation of the nature and
financial effects of the business combination. SFAS No. 141(R) is effective on a
prospective basis for all business combinations for which the acquisition date
is on or after the beginning of the first annual period subsequent to December
15, 2008, with the exception of the accounting for valuation allowances on
deferred taxes and acquired tax contingencies. The adoption of SFAS No. 141(R)
did not have an impact on the Company’s condensed consolidated financial
statements.




In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements—an amendment of Accounting Research Bulletin
No. 51” (“SFAS No. 160”). SFAS No. 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 No. 160 also establishes disclosure requirements that
clearly identify and distinguish between the interests of the parent and the
interests of the noncontrolling owners. The Company adopted SFAS No. 160 in the
first quarter of fiscal year 2009. The adoption of SFAS No. 160 did not have an
impact on the Company’s condensed consolidated financial
statements.


6


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 adopted SFAS No. 161 in the
first quarter of fiscal year 2009 and has evaluated the requirements of SFAS No.
161, which provides for additional disclosure on the Company’s derivative
instruments. The adoption of SFAS No. 161 did not have an impact on the
Company’s condensed consolidated financial statements. See Notes for the
Company’s disclosure on derivative financial instruments.




In
April 2008, the FASB issued FASB Staff Position (“FSP”) No. 142-3,
“Determination of the Useful Life of Intangible Assets” (“FSP No. 142-3”). FSP
No. 142-3 amends the factors that should be considered in developing renewal or
extension assumptions used to determine the useful life of a recognized
intangible asset under SFAS No. 142, “Goodwill and Other Intangible
Assets” (“SFAS No. 142”). The objective of FSP No. 142-3 is to improve
the consistency between the useful life of a recognized intangible asset under
SFAS No. 142 and the period of expected cash flows used to measure the fair
value of the asset under SFAS No. 141(R), and other accounting principles. FSP
No. 142-3 applies to all intangible assets, whether acquired in a business
combination or otherwise, and early adoption is prohibited. The Company adopted
FSP No. 142-3 in the first quarter of fiscal year 2009. The adoption of FSP No.
142-3 did not have a significant impact on the Company’s condensed consolidated
financial statements.




In
April 2009, the FASB issued FSP No. 141(R)-1, “Accounting for Assets Acquired
and Liabilities Assumed in a Business Combination That Arise from Contingencies”
(“FSP No. 141(R)-1”), which amends and clarifies the initial recognition and
measurement, subsequent measurement and accounting, and related disclosures of
assets and liabilities arising from contingencies in a business combination
under SFAS No. 141(R). FSP No. 141(R)-1 is effective for assets and liabilities
arising from contingencies in business combinations for which the acquisition
date is on or after December 15, 2008. The Company adopted FSP No. 141(R)-1 in
the first quarter of fiscal year 2009 in conjunction with the adoption of SFAS
No. 141(R). The adoption of FSP No. 141(R)-1 did not have an impact on the
Company’s condensed consolidated financial statements.




In
April 2009, FASB issued FSP SFAS No.157-4, Determining Fair Value When the
Volume and Level of Activity for the Asset or Liability Have Significantly
Decreased and Identifying Transactions That Are Not Orderly. FSP SFAS No.157-4
provides guidelines for making fair value measurements more consistent with the
principles presented in SFAS No.157, Fair Value Measurements. The FSP relates to
determining fair values when there is no active market or where the price inputs
being used represent distressed sales. It reaffirms what SFAS No.157 states is
the objective of fair value measurement—to reflect how much an asset would be
sold for in an orderly transaction (as opposed to a distressed or forced
transaction) at the date of the financial statements under current market
conditions. Specifically, it reaffirms the need to use judgment to ascertain if
a formerly active market has become inactive and in determining fair values when
markets have become inactive. The FSP is effective for the Company’s interim
reporting period ending on July 3, 2009. The implementation of FSP SFAS No.157-4
did not have a material impact on the Company’s condensed consolidated financial
position, results of operations and cash flows.




Recently Issued Accounting
Pronouncements: In June 2009, FASB issued SFAS No. 168, The FASB Accounting Standards
Codification and the Hierarchy of Generally Accepted Accounting Principles—a
replacement of FASB Statement No. 162. SFAS No. 168 establishes the FASB
Accounting Standards Codification as the source of authoritative accounting
principles and the framework for selecting the principles used in the
preparation of financial statements of nongovernmental entities that are
presented in conformity with generally accepted accounting principles in the
United States. This Statement is effective for the Company’s interim reporting
period ending on October 2, 2009. The Company is currently evaluating the
requirements of SFAS No. 168 and does not believe that it will have a
significant impact on the Company’s condensed consolidated financial
statements.


7


LASERCARD
CORPORATION AND SUBSIDIARIES


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(UNAUDITED)




In
May 2009, FASB issued SFAS No. 165, Subsequent Events. SFAS No.
165 is intended to establish general standards of accounting for and disclosure
of events that occur after the balance sheet date but before financial
statements are issued or are available to be issued. This SFAS requires the
disclosure of the date through which an entity has evaluated subsequent events
and the basis for that date. The disclosure requirement under this SFAS is
effective for the Company’s interim reporting period ending June 30, 2009. The
Company is currently evaluating the requirements of SFAS No. 165 and does not
believe that it will have a significant impact on the Company’s condensed
consolidated financial statements.




2.
Summary of Significant Accounting Policies




(1.) Principles of Consolidation and
Basis of Presentation. The accompanying condensed consolidated financial
statements have been prepared in accordance with U.S. generally accepted
accounting principles. The condensed consolidated financial statements include
the accounts of the Company 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.




(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
2010 ended on July 3, 2009, and the 13-week first quarter of fiscal year 2009
ended on June 27, 2008.




(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 other income and
expense 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 (expense), net. 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, 2009 and March 31, 2009 the Company
had foreign exchange forward contracts with a maturity of less than 30 days to
purchase 1.2 million Euros and 1.3 million Euros, respectively. The fair value
of the forward contracts was not material at June 30, 2009 and March 31,
2009.




Refer
to Note 2, caption 8, Cash and
Cash Equivalents, Short-term Investments and Long-term Investments of the
consolidated financial statement for further discussion of the Company’s
noncurrent investments.


8


LASERCARD
CORPORATION AND SUBSIDIARIES


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(UNAUDITED)




(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, 2009, the Company
held $13.5 million par value (with fair value approximately $12.5 million), of
marketable securities consisting of ARSs that were re-classified as current
assets from non-current assets in its consolidated balance sheet. Also included
in the Company’s short-term investments is the Put Option received in this
rights offering from UBS recognized as a benefit with a fair value of
approximately $1 million. UBS has the “Right” to purchase its ARSs at par at any
time through July 3, 2012 and the Company has the “Right” to sell its ARSs at
par to UBS beginning June 30, 2010 through July 3, 2012. The Company intends to
exercise its put options and to sell its ARS to UBS on June 30, 2010, which is
now within one year. Hence, the Company reclassified the ARS investments to
current assets, net of put options and its fair value approximates par at June
30, 2009. The Company had borrowed $8.9 million from UBS as of June 30, 2009
under a credit line collateralized by the ARS. As of March 31, 2009, its ARS
investment with a fair value of $12.2 million and the put option valued at $1
million were classified as non-current assets for trading
securities.




More
detailed information about the reasons behind the designation and the risks the
Company faces with regard to its investment in the ARS can be found under Cash
and Cash Equivalents, Short-term Investments and Long-Term Investments
below.




Accounts
receivable are derived from revenue earned from customers primarily located in
the United States, Italy, Kingdom of Saudi Arabia and Germany. The Company
performs ongoing credit evaluations of its customers’ financial condition and
generally does not require collateral. The Company maintains reserves for
potential credit losses and historically, such losses have been
immaterial.




(7.) Major Customers.The
following customers accounted for more than 10% of revenues for the periods
shown below. The revenue from these customers was attributable to both of the
optical memory card including multi-technology cards (“OMC”) and the drive,
system and enabling services segments. No other customer accounted for more than
10% of revenues during these periods.


Three
      Months Ended
                          June
      30,2009
                        
                        2008General
      Dynamics Information Technology (“GDIT”)
                        
                        34
                        %
                        
                        16
                        %Gemalto
      S.A. (“Gemalto”)
                        
                        30
                        %
                        
                        13
                        %Omar
      K. ACSS Communications and Space Services
                        
                        8
                        %
                        
                        17
                        %Direccion
      General de Migracion Y Estranjeria (“DGME”)
                        
                        —
                        
                        
                        16
                        %




One
customer accounted for 30% and two customers each accounted for 13% of accounts
receivable at June 30, 2009. Two customers accounted for 33% and 30% of accounts
receivable at June 30, 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 reevaluates the classification of
investments as of each balance sheet date.


9


LASERCARD
CORPORATION AND SUBSIDIARIES


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(UNAUDITED)




The
Company accounts for its short-term marketable securities in accordance with
SFAS No. 115, Accounting for
Certain Investments in Debt and Equity Securities (“SFAS No. 115”). The
Company considers all highly liquid investments, consisting primarily of
commercial paper, discount notes, U.S. government bonds, and ARSs, 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 noncurrent assets.
The Company determines the length of its investments after considering its cash
requirements and yields available for the type of investment considered by the
Company. The Company determines the appropriate classification of debt and
equity securities at the time of purchase and reevaluates the classification of
investments as of each balance sheet date. The Company owns investments in
marketable securities that have been designated as “trading securities”. Trading
securities are bought and sold principally for the purpose of selling them in
the near term and are reported in the financial statements at fair value.
Changes in the fair value from period to period are reported as a component of
net income.




Auction
Rate Securities are structured with short-term interest rate reset dates of
generally 28 to 35 days but with contractual maturities that are in some cases
well in excess of ten years. Ninety-six and 3/10 percent (96.3%) of the
Company’s investments in Student Loan Auction Rate Securities (“SLARSs”), have
95% of principal and interest guaranteed under the Federal Family Education Loan
Program (“FFELP”) and are AAA rated. The remaining balance is privately financed
and consists of an over-collateralized pool of graduate student loans. The
Company believes that the credit quality of these securities is high based on
the guarantees and collateralization. Until February 2008, at the end of each
reset period, the Company could sell or continue to hold the securities at par
value. This auction process historically provided a liquid market for ARSs.
Since 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 or UBS
purchases them as described below. At June 30, 2009 and March 31, 2009, there
was insufficient observable ARS market information available to determine the
fair value of the ARS. Therefore, in order to validate the fair value estimate
of these securities, the Company incorporated assumptions such as credit quality
or financial standing of the issuer, final stated maturities, estimates on the
probability of the issue being called prior to final maturity, impact due to
extended periods of maximum auction rates, liquidity risk premium, and broker
quotes from independent valuators using widely accepted financial models.
Management believes that the resulting estimates considering the unique
circumstances of the subject SLARS and the method of valuing the Put Option as
forward contracts is reasonable. The Company continues to earn interest at the
contractual rate on the ARS. As of June 30, 2009 and March 31, 2009, the Company
held $13.5 million par value (with a fair value of approximately $12.5 million
as of June 30, 2009 and $12.2 million as of March 31, 2009), of marketable
securities consisting of ARSs, classified as trading securities. They were
classified as non-current assets in the Company’s consolidated balance sheet as
of March 31, 2009 and as current assets on the Company’s balance sheet as of
June 30, 2009 as the Company intends to exercise its put option and sell its ARS
to UBS on June 30, 2010.




UBS
AG issued a prospectus dated October 7, 2008 for a “Rights” offering whereby UBS
offered to purchase certain ARSs it placed, including those the Company holds,
at par or face value. On October 29, 2008 (“Acceptance Date”), the Company
submitted the acceptance form to participate in the “Rights” offering. UBS has
the “Right” to purchase its ARSs at par at any time through July 3, 2012 and the
Company has the “Right” to sell its ARSs at par to UBS beginning June 30, 2010
through July 3, 2012. As part of the offering, UBS offered a line of credit of
about 75% of the fair value of the ARSs, as calculated by UBS, until they are
purchased by UBS. The line of credit has certain restrictions described in the
prospectus. The Company borrowed a total of $8.9 million as of June 30, 2009, an
increase of $0.2 million from its balance as of March 31, 2009 of $8.7
million.


10


LASERCARD
CORPORATION AND SUBSIDIARIES


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(UNAUDITED)




The
Rights represent a firm agreement in accordance with SFAS No. 133, Accounting
for Derivative Instruments and Hedging Activities (“SFAS No. 133”), which
defines a firm agreement as an agreement with an unrelated party, binding on
both parties and usually legally enforceable, with the following
characteristics: a) the agreement specifies all significant terms, including the
quantity to be exchanged, the fixed price, and the timing of the transaction,
and b) the agreement includes a disincentive for nonperformance that is
sufficiently large to make performance probable. The enforceability of the
Rights results in a Put Option and should be recognized as a free standing
derivative separate from the ARS. By electing to participate in the rights
offering, the Company granted UBS the right, exercisable at any time prior to
July 3, 2012, to purchase or cause the sale of its ARSs (the “Call Right”). UBS
has agreed to pay us the par value of their ARS within one day of settlement of
any Call Right transaction. Notwithstanding the Call Right, the Company is
permitted to sell ARSs to other parties besides UBS, in which case the Put
Rights attached to the ARSs that are sold would be extinguished. The Company
elected to adopt SFAS No. 159, The Fair Value Option for Financial Assets and
Financial Liabilities (“SFAS No. 159”) on December 31, 2008 on the Put Option
and elected to treat its ARS portfolio from available-for-sale to trading
securities. During the three-month period ended June 30, 2009, the Company
recognized a $0.2 million gain due to the fair value of the ARS investment net
of the loss on the put option. The Company reclassified these investments from
non-current assets on March 30, 2009 to current assets on June 30, 2009 to
reflect management’s intent to exercise its Put Option on June 30, 2010 which is
within one year. The Company believes that if the assumptions that it used for
UBS’ credit risk remain unchanged through June 30, 2010, the Company will
recover the remaining differential of $42,000 in future periods until June 30,
2010 when it intends to exercise its put option with UBS Financial Services.
During fiscal year 2009, the Company recorded a net loss of about $0.3 million
resulting from the fair values of the ARS and the put option at March 31,
2009.




Cash
equivalents and investments consist of the following (in
thousands):


June
      30, 2009Cost
                      
                      
                      Gross

                        Unrealized
                        Gains
                      
                      
                      Gross

                        Unrealized
                        Losses
                      
                      
                      Estimated
                        Fair
      ValueCash
      equivalents
                      
                      $
                      22,501
                      
                      
                      $
                      —
                      
                      
                      $
                      —
                      
                      
                      $
                      22,501Short-term
      investments-ARS
                      
                      
                      13,500
                      
                      
                      
                      —
                      
                      
                      
                      (1,033
                      )
                      
                      
                      12,467Put
      option
                      
                      
                      —
                      
                      
                      
                      990
                      
                      
                      
                      —
                      
                      
                      
                      990$
                      36,001
                      
                      
                      $
                      990
                      
                      
                      $
                      (1,033
                      )
                      
                      $
                      35,958







March
      31, 2009Cost
                          
                          
                          Gross

                            Unrealized
                            Gains
                          
                          
                          Gross

                            Unrealized
                            Losses
                          
                          
                          Estimated
                            Fair
      ValueCash
      equivalents
                          
                          $
                          14,400
                          
                          
                          $
                          —
                          
                          
                          $
                          —
                          
                          
                          $
                          14,400Long-term
      investments-ARS
                          
                          
                          13,500
                          
                          
                          
                          —
                          
                          
                          
                          (1,267
                          )
                          
                          
                          12,233Put
      option
                          
                          
                          —
                          
                          
                          
                          1,006
                          
                          
                          
                          —
                          
                          
                          
                          1,006$
                          27,900
                          
                          
                          $
                          1,006
                          
                          
                          $
                          (1,267
                          )
                          
                          $
                          27,639




(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 FSP 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 is 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.


11


LASERCARD
CORPORATION AND SUBSIDIARIES


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(UNAUDITED)




In
accordance with SFAS 157, the Company measures its cash equivalents and
marketable securities at fair value. The Company’s cash equivalents and
marketable securities are primarily classified within Level 1 with the exception
of its investments in ARSs, 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 ARSs are
classified within Level 3 because there are no active markets for the ARSs and
therefore the Company is unable to obtain independent valuations from market
sources. Therefore, the ARSs 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 17% of total assets as of June 30, 2009.




The
table below shows, by level, the Company’s financial assets that were accounted
for at fair value as of June 30, 2009 and March 31, 2009. 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, 2009Items
      measured at fair value on a recurring basis:
                  
                  Portion
      of
                    Carrying
      Value
                    Measured
      at Fair
                    Value
                  
                  
                  Level
      1
                  
                  
                  Level
      3Cash
      equivalents: Money Market funds
                  
                  $
                  22,501
                  
                  
                  $
                  22,501
                  
                  
                  $
                  —Short-term
      investments - other
                  
                  
                  174
                  
                  
                  
                  174
                  
                  
                  
                  —Short-term
      investments: Auction Rate Securities
                  
                  
                  12,467
                  
                  
                  
                  —
                  
                  
                  
                  12,467Put
      option
                  
                  
                  990
                  
                  
                  
                  —
                  
                  
                  
                  990$
                  36,132
                  
                  
                  $
                  22,675
                  
                  
                  $
                  13,457







March
      31, 2009Items
      measured at fair value on a recurring basis:
                    
                    Portion
      of
                      Carrying
      Value
                      Measured
      at Fair
                      Value
                    
                    
                    Level
      1
                    
                    
                    Level
      3Cash
      equivalents: Money Market funds
                    
                    $
                    14,400
                    
                    
                    $
                    14,400
                    
                    
                    $
                    —Short-term
      investments - other
                    
                    
                    174
                    
                    
                    
                    174
                    
                    
                    
                    —Long-term
      investments: Auction Rate Securities
                    
                    
                    12,233
                    
                    
                    
                    —
                    
                    
                    
                    12,233Put
      option
                    
                    
                    1,006
                    
                    
                    
                    —
                    
                    
                    
                    1,006$
                    27,813
                    
                    
                    $
                    14,574
                    
                    
                    $
                    13,239


12


LASERCARD
CORPORATION AND SUBSIDIARIES


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(UNAUDITED)




The
following table summarizes the change in fair values for Level 3 items as of
June 30, 2009 and March 31, 2009 (in thousands):


June
      30, 2009
                Level
      3
              
              
              March
      31, 2009
                Level
      3Balance
      at beginning of period
              
              $
              13,239
              
              
              $
              12,875Unrealized
      gain (loss) on FV of ARS included in income
              
              
              234
              
              
              
              (1,267
              )Unrealized
      gain (loss) on FV of put option included in income
              
              
              (16
              )
              
              
              1,006Reversal
      of unrealized loss associated with transfer of securities to
      trading
              
              
              —
              
              
              
              625Balance
      at end of period
              
              $
              13,457
              
              
              $
              13,239




(10.) Accounts Receivable, Net.Accounts receivable are net of allowance for doubtful accounts of
$148,000 and $59,000 as of June 30, 2009 and March 31, 2009, respectively. 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 product returns. The Company generally computes its
allowances based on specifically identifying accounts that are past due and that
are likely not collectible. Interest receivable is accrued from investments in
ARSs 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, 2009 and March 31, 2009 are (in
thousands):


June
      30,
                    2009
                  
                  
                  March
      31,
                    2009Trade
      receivables
                  
                  $
                  5,640
                  
                  
                  $
                  10,193Allowance
      for doubtful accounts
                  
                  
                  (148
                  )
                  
                  
                  (59
                  )Interest
      receivable
                  
                  
                  4
                  
                  
                  
                  6Other
      receivables
                  
                  
                  78
                  
                  
                  
                  77Total
      net receivables
                  
                  $
                  5,574
                  
                  
                  $
                  10,217




(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,
2009 and March 31, 2009 are (in thousands):


June
      30,
                    2009
                  
                  
                  March
      31,
                    2009Raw
      materials
                  
                  $
                  6,368
                  
                  
                  $
                  6,996Work-in-process
                  
                  
                  1,037
                  
                  
                  
                  1,444Finished
      goods
                  
                  
                  4,796
                  
                  
                  
                  5,792Total
      inventory, net
                  
                  $
                  12,201
                  
                  
                  $
                  14,232




The
Company establishes lower of cost or market reserves, excess 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, 2009 and 2008 the Company recorded inventory
reserve expense of $138,000 and $2,000, respectively. Inventory related to a
contract close-out resulted in $88,000 of the reserve expense.




(12.) Equipment Held for Resale.Equipment held for resale consists primarily of parts, labor costs and
other costs incurred to build equipment under contracts from which the Company
has received $29.5 million in non-refundable advance payments. Direct
incremental costs associated with the purchase or construction of these items is
deferred until revenue is recognized.


13




LASERCARD
CORPORATION AND SUBSIDIARIES


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(UNAUDITED)




The
components of equipment held for resale as of June 30, 2009 and March 31, 2009
are (in thousands):


June
      30,
                    2009
                  
                  
                  March
      31,
                    2009Parts
                  
                  $
                  5,463
                  
                  
                  $
                  5,463Labor
      costs
                  
                  
                  1,536
                  
                  
                  
                  1,485Other
                  
                  
                  114
                  
                  
                  
                  114Total
      equipment held for resale
                  
                  $
                  7,113
                  
                  
                  $
                  7,062






(13.)
Property and Equipment, Net. The components of property and equipment as
of June 30, 2009 and March 31, 2009 are (in thousands):


June
      30,
                    2009
                  
                  
                  March
      31,
                    2009Building
      and land
                  
                  $
                  937
                  
                  
                  $
                  887Equipment
      and furniture
                  
                  
                  26,164
                  
                  
                  
                  26,001Construction
      in progress, including purchased equipment
                  
                  
                  405
                  
                  
                  
                  338Leasehold
      improvements
                  
                  
                  5,228
                  
                  
                  
                  5,20132,734
                  
                  
                  
                  32,427Less:
      accumulated depreciation and amortization
                  
                  
                  (22,276
                  )
                  
                  
                  (21,555
                  )Total
      property and equipement, net
                  
                  $
                  10,458
                  
                  
                  $
                  10,872




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 including extensions using the
straight-line method. Depreciation and leasehold amortization expense was about
$0.7 million each for the three-month periods ended June 30, 2009 and 2008.
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.




(14.)
Other Intangible Assets.Definite life intangible assets capitalized and
accumulated amortization as of June 30, 2009 and March 31, 2009 are as follows
(in thousands):


June
      30,
                    2009
                  
                  
                  March
      31,
                    2009Patent
      expenditures
                  
                  $
                  3,799
                  
                  
                  $
                  3,795Technology
      transfer expenditures
                  
                  
                  545
                  
                  
                  
                  545Total
      patent and other intangible expenditures
                  
                  
                  4,344
                  
                  
                  
                  4,340Patent
      accumulated amortization
                  
                  
                  (3,422
                  )
                  
                  
                  (3,395
                  )Technology
      transfer accumulated amortization
                  
                  
                  (545
                  )
                  
                  
                  (545
                  )(3,967
                  )
                  
                  
                  (3,940
                  )Amortizable
      patents and other intangibles, net
                  
                  $
                  377
                  
                  
                  $
                  400




Patent
amortization expense for the three-month periods ended June 30, 2009 and 2008
were $27,000 and $30,000, respectively.


14




LASERCARD
CORPORATION AND SUBSIDIARIES


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(UNAUDITED)




(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. At June 30, 2009 and March 31, 2009, 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 or a
significant decrease in the benefits realized from an acquired business,
management has determined that the fair value of long-lived assets exceeded
their book value.




(16.)
Accrued Liabilities. The components of accrued short and long-term
liabilities as of June 30, 2009 and March 31, 2009 are (in
thousands):


June
      30,
                      2009
                    
                    
                    March
      31,
                      2009Deferred
      compensation
                    
                    $
                    263
                    
                    
                    $
                    340Warranty
      reserves
                    
                    
                    558
                    
                    
                    
                    561Accrued
      compensated absences
                    
                    
                    601
                    
                    
                    
                    625Other
      accrued liabilities
                    
                    
                    915
                    
                    
                    
                    1,574Accrued
      payroll and fringe benefits
                    
                    
                    1,351
                    
                    
                    
                    297Total
      accrued liabilities
                    
                    $
                    3,688
                    
                    
                    $
                    3,397




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 it 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 at the time
product revenue is recognized. Factors that affect the estimate 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 quarterly and adjusts the amount as necessary. The Company utilizes
historical trends and information received from its 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 as of June 30, 2009 and March 31, 2009 are (in
thousands):


June
      30,
                    2009
                  
                  
                  March
      31,
                    2009Beginning
      balance
                  
                  $
                  561
                  
                  
                  $
                  655Accruals
      for products sold
                  
                  
                  (2
                  )
                  
                  
                  67Costs
      incurred/adjustments
                  
                  
                  (1
                  )
                  
                  
                  (161
                  )Ending
      balance
                  
                  $
                  558
                  
                  
                  $
                  561


15




LASERCARD
CORPORATION AND SUBSIDIARIES


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(UNAUDITED)




Approximately
$0.9 million was accrued at June 30, 2009 for performance-based incentives
during fiscal year 2008. The Company recorded deferred compensation related to
the Planned Retirement Agreement with its former Chief Executive Officer and
President. The balance was approximately $260,000 and $340,000 at June 30, 2009
and March 31, 2009, respectively.




(17.)
Software Development Costs. Development costs incurred in the research
and development of new software products for general distribution 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 that do not meet capitalization criteria are
charged to research and development expenses in the accompanying condensed
consolidated statements of operations. Software development costs incurred in
the execution of contract obligations are capitalized and charged to cost of
goods sold at the time the related revenue is recorded. There was no capitalized
software cost as of June 30, 2009 and 2008.




(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 on the consolidated balance sheets until the related orders are
shipped or services are performed or revenue would otherwise be recognized.
Advance payments of approximately $24.5 million from Prevent Global družba za
upravljanje, investicije in razvoj d.d. (“Prevent Global”), and approximately
$1.7 million from the contract to deliver a turnkey non-optical card
manufacturing facility in the Kingdom of Saudi Arabia were classified as
noncurrent liabilities in the condensed consolidated balance sheet at June 30,
2009 and March 31, 2009 as these projects are not expected to be completed
within twelve months.




(19.)
Revenue Recognition. Product sales primarily consist of optical card
sales, multi-technology card sales, sales of drives, systems and enabling
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, warranty 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.




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 BulletinNo. 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 or have a
history of being 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 renders 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) the arrangement includes a general
right of return and 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.


16




LASERCARD
CORPORATION AND SUBSIDIARIES


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(UNAUDITED)




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 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’s long-term program accounted for under SOP 81-1
concluded during the last quarter of fiscal year 2009 with revenue of
approximately $540,000 during fiscal year 2009. For the three-month period ended
June 30, 2008 the Company recognized revenue of approximately $68,000 based on a
zero profit margin.




At
June 30, 2009, the Company was informed that no additional cards would be
purchased under the 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 included OMCs,
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 since the fair value of the undelivered items cannot be
readily determined. Due to the contract close-out for decentralized card
issuance, the Company recognized as revenue all remaining deferred revenue. The
Company recognized revenue from this subcontract of $1.3 million (including $0.5
million of previously deferred revenue) and $1.9 million during the three-month
periods ended June 30, 2009 and 2008, respectively. The Company’s card supply
subcontract with another subcontractor related to the centralized issuance of
enhanced OMC cards for this program has continued. The Company recognizes
revenue upon shipment of cards under the terms of the subcontract. The Company’s
revenue from this subcontract during the three-month period ended June 30, 2009
was $4.2 million and zero during the three-month period ended June 30,
2008.




The
Company applies the provisions of SOP No. 97-2, Software Revenue Recognition,
as amended by SOP 98-9, Modification of SOP 97-2, Software
Revenue Recognition, With Respect to Certain Transactions to all
transactions involving the sale of software products. Revenue from the license
of the Company’s software products is recognized when persuasive evidence of an
arrangement exists, the software product has been delivered, the fee is fixed or
determinable and collectibility is probable, and, if applicable, upon acceptance
when acceptance criteria are specified or upon expiration of the acceptance
period. There was no software revenue recognized for the three-month periods
ended June 30, 2009 and 2008.


17




LASERCARD
CORPORATION AND SUBSIDIARIES


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(UNAUDITED)




The
Company entered into license and OMC equipment purchase and support agreements,
effective April 3, 2004, with Global Investments Group (“GIG”), based in
Auckland, New Zealand, for OMC manufacturing in Slovenia. GIG transferred the
license and other agreements, with the Company’s approval, to Prevent Global in
March 2007. The agreements provide for payments (other than interest on late
payments) to the Company of about $28.5 million, for a 20-year license, the
required manufacturing equipment for a targeted initial manufacturing capacity
of 10 million optical cards annually and installation support, and a four-year
training and support package. Of the $27.8 million the Company has received,
$24.5 million was recorded as advance payments from the customer and $3.3
million for the licensing and other fees was recorded as deferred revenue. Both
were classified as long term liabilities in the consolidated balance sheets at
June 30, 2009 and March 31, 2009. As of June 30, 2009 and March 31, 2009, the
Company held approximately $7.1 million of acquired equipment, including direct
and incremental expenses, classified as equipment held for resale on its
consolidated balance sheets related to this contract. The Company is to ship
this equipment to Prevent Global upon their request after a suitable facility is
established by them. The Company will inspect the facility when requested to
assure it has the necessary services available for installation of the
equipment. At this time, the Company does not know if or when Prevent Global
will initiate such a request. Beginning April 1, 2008, the agreement provides
for payments by Prevent Global of $3 million for a three-year support package,
and options for thirteen additional years of support for payments of $1 million
annually. In addition, Prevent Global is to pay royalties of $0.60 per card for
each card produced under the license. The non-exclusive territories covered by
the license include most of the European Union and Eastern European regions. The
Company retains rights to utilize up to 20% of the new facility capacity as
backup and a capacity buffer to augment its own card manufacturing facilities.
The granting of this license to Prevent Global establishes a potential
manufacturing supplier of OMCs for existing and prospective customers who may
request multiple sources for cards. In accordance with EITF 00-21, “Revenue
Arrangements with Multiple Deliverables,” the card manufacturing license, sale
and installation of equipment, training and support package, have been accounted
for as one unit of accounting, since the Company was unable to determine
evidence of the fair value for the undelivered items other than ongoing support.
The Company is able to determine evidence of fair value for the last predominant
item to be delivered, which is the ongoing annual support. Accordingly, revenues
for the arrangement have been deferred and will be recognized when the equipment
is installed and accepted, with the exception of the value of the ongoing annual
support of the manufacturing equipment which will be recognized quarterly as
earned, beginning when the equipment is accepted and training has been
completed, which date is dependent on Prevent Global establishing a suitable
facility in Slovenia. Pursuant to FTB 90-1, Accounting for Separately Priced
Extended Warranty and Product Maintenance Contracts, the support revenue will be
recognized ratably over the remaining term of the agreement. During the fourth
quarter of calendar year 2008, the Company began the training of employees prior
to the expected transfer of the manufacturing equipment to a to-be-built
facility in Slovenia. Since that time, GIG has asserted rights under the
contract and Prevent Global has been reviewing this project to determine their
next steps. It is possible that the Company, Prevent Global or GIG will commence
litigation to enforce rights under this agreement. Refer to risk factor, “In March 2004, We Sold a Card Manufacturing License
Under Which We Will Provide Certain Factory Set-Up and Training Services in
Slovenia to Global Investment Group Ltd. (“GIG”) In Conjunction With Prevent
Global of Slovenia (“Prevent Global”). Neither GIG nor Prevent Global Are
Current With the Obligations Under the Agreement. It Is Possible That Litigation
Will Ensue.”




(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,
materials, building 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 $207,000 and $120,000 for the
three-month periods ended June 30, 2009 and 2008, respectively.




(23.)
Stock-based Compensation. Effective April 1, 2006, the Company adopted
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.




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).


18




LASERCARD
CORPORATION AND SUBSIDIARIES


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(UNAUDITED)




The
2004 Equity Incentive
Compensation Plan, as amended, (the “2004 Plan”):In October 2004, the
Company’s stockholders approved the 2004 Equity Incentive Compensation Plan,
which replaced the existing 1991 Stock Option 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 2004 Plan is administered by the Compensation Committee of the
Board of Directors, which has complete discretion to select the participants and
to establish the terms and conditions of each award, subject to the provisions
of the 2004 Plan. Options granted under the 2004 Plan may be “incentive stock
options” as defined in Section 422 of the Internal Revenue Code of 1986 (“The
Code”), as amended, or nonqualified options. A total of 2,525,219 and 2,592,668
shares of common stock were reserved for issuance under the 1991 and 2004 Plans
as of June 30, 2009 and March 31, 2009, respectively. If any award granted under
the 2004 Plan is forfeited or expires for any reason, then the shares subject to
that award will once again be available for additional awards. If any
outstanding option issued under the 1991 Plan expires or terminates for any
reason without having been exercised in full, then the unpurchased shares
subject to that option will be available for additional awards under the 2004
Plan. Under the 2004 Plan, the exercise price of incentive 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 to an employee who owns
more than 10% of the total combined voting power of all classes of the Company’s
capital stock). The Code currently limits the aggregate value of common stock
for which incentive stock options may become exercisable in any calendar year
under the 2004 Plan or any other option plan adopted by the Company to $100,000.
Nonstatutory stock options may be granted under the 2004 Plan at an exercise
price of not less than 100% of the fair market value of the common stock on the
date of grant. There is no limitation on the amount of common stock for which
nonstatutory grants may first become exercisable in any calendar year. Repricing
a stock option or stock appreciation right is not permitted without stockholder
approval. Subject to the limitations contained in the 2004 Plan, the Committee
sets the terms of each option grant. Any options that were not exercisable on
the date of termination of employment immediately terminate at that time.
Options granted under the 2004 Plan 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 and the vesting schedule for exercise
of options. No options were granted to consultants during the three-month
periods ended June 30, 2009 and 2008.




On
June 2, 2008, the Company granted its new chief executive officer (the “CEO”) a
non-statutory stock option (the “Time-Based Option”) outside the 2004 Plan to
purchase 220,000 shares of Common Stock with an exercise price of $7.115 per
share. The Time-Based Option has a term of ten (10) years and vests 25% on June
2, 2009 and 6.25% on each of the following twelve (12) three-month anniversaries
of such date, so that the Time-Based Option is fully vested on June 2, 2012.
Additionally, the CEO was granted a non-statutory stock option (the
“Market-Based Option”) outside the 2004 Plan to purchase 330,000 shares of
Common Stock with an exercise price of $7.115 per share. The Market-Based Option
has a term of ten (10) years and vests if, prior to June 2, 2013, the closing
trading price of Common Stock for twenty (20) consecutive days is greater than
or equal to $10, $13, $16, $19, and $22 per share, with vesting of 60,000 shares
for each of the first two price points achieved and of 70,000 shares for each of
the last three price points achieved. The Company registered 593,726 shares of
the Company’s Common Stock in February 2009, par value of $0.01 per share,
underlying the Time-Based and Market-Based Options with the SEC on Form S-8. For
the Market Based Options and options granted to Company officers with similar
vesting schedules, the Company used the Lattice-model with the stated
assumptions to value the stock-based employee compensation
expenses.




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. For the Market
Based Options and options granted to Company officers with similar vesting
schedules, the Company has used the Lattice-model with the stated assumptions to
value the stock-based employee compensation expenses.


19


LASERCARD
CORPORATION AND SUBSIDIARIES


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(UNAUDITED)




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, 2009 and
2008:


Three
      Months Ended
                    June
      30,2009
                  
                  2008Expected
      stock price volatility
                  
                  55%
                  
                  55%Risk-free
      interest rates
                  
                  1.65%
      to 1.80%
                  
                  2.44%
      to 3.35%Average
      expected life of options
                  
                  4.4
      to 5 years
                  
                  4.4
      to 5 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.




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




The
following table lists stock option activity at June 30, 2009 and March 31, 2009
(in thousands, except for weighted average exercise price):


June
      30, 2009
                                                                                      
                                                                                      
                                                                                      March
      31, 2009Number
      of
                                                                                        Shares
                                                                                      
                                                                                      
                                                                                      Weighted
                                                                                        Average
                                                                                        Exercise
      Price
                                                                                      
                                                                                      
                                                                                      Number
      of
                                                                                        Shares
                                                                                      
                                                                                      
                                                                                      Weighted
                                                                                        Average
                                                                                        Exercise
      PriceOutstanding
      at beginning of year
                                                                                      
                                                                                      
                                                                                      2,513
                                                                                      
                                                                                      
                                                                                      $
                                                                                      10.01
                                                                                      
                                                                                      
                                                                                      
                                                                                      2,152
                                                                                      
                                                                                      
                                                                                      $
                                                                                      12.75Granted
                                                                                      
                                                                                      
                                                                                      7
                                                                                      
                                                                                      
                                                                                      
                                                                                      2.80
                                                                                      
                                                                                      
                                                                                      
                                                                                      1,049
                                                                                      
                                                                                      
                                                                                      
                                                                                      6.09Exercised
                                                                                      
                                                                                      
                                                                                      —
                                                                                      
                                                                                      
                                                                                      
                                                                                      —
                                                                                      
                                                                                      
                                                                                      
                                                                                      —
                                                                                      
                                                                                      
                                                                                      
                                                                                      —Canceled
                                                                                      
                                                                                      
                                                                                      (33
                                                                                      )
                                                                                      
                                                                                      
                                                                                      9.98
                                                                                      
                                                                                      
                                                                                      
                                                                                      (688
                                                                                      )
                                                                                      
                                                                                      
                                                                                      12.59Outstanding
      at end of period
                                                                                      
                                                                                      
                                                                                      2,487
                                                                                      
                                                                                      
                                                                                      $
                                                                                      9.99
                                                                                      
                                                                                      
                                                                                      
                                                                                      2,513
                                                                                      
                                                                                      
                                                                                      $
                                                                                      10.01Options
      vested and exercisable at end of period
                                                                                      
                                                                                      
                                                                                      1,317
                                                                                      
                                                                                      
                                                                                      $
                                                                                      12.60
                                                                                      
                                                                                      
                                                                                      
                                                                                      1,188
                                                                                      
                                                                                      
                                                                                      $
                                                                                      13.13




The
weighted-average grant-date fair value per share of options granted during the
three-month periods ended June 30, 2009 and 2008 was $1.28 and $3.61,
respectively.




The
weighted-average remaining contractual term for outstanding options at June 30,
2009 and March 31, 2009 was 6 years and 6.3 years, respectively.


20


LASERCARD
CORPORATION AND SUBSIDIARIES


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(UNAUDITED)




The
following table summarizes information about stock options outstanding at June
30, 2009 and March 31, 2009, (in thousands, except for weighted average exercise
price and contractual life):


June
      30, 2009Options
      Outstanding
                                                                                              
                                                                                              
                                                                                              ExercisableRange of Exercise
      Price
                                                                                              
                                                                                              Number
      of
                                                                                                Outstanding
                                                                                                Vested/Unvested
      at
                                                                                                June
      30, 2009
                                                                                              
                                                                                              Weighted
                                                                                                  Average
                                                                                                  Exercise
      Price
                                                                                              
                                                                                              Weighted
                                                                                                Average
                                                                                                Remaining
                                                                                                Contractual
                                                                                                Life
                                                                                              
                                                                                              
                                                                                              Number
      of
                                                                                                  Shares
                                                                                                  Exercisable
      at
                                                                                                  June
      30, 2009
                                                                                              
                                                                                              Weighted
                                                                                                  Average
                                                                                                  Exercise
                                                                                                  Price$2.56
      - $4.18
                                                                                              
                                                                                              
                                                                                              7
                                                                                              
                                                                                              $
                                                                                              2.80
                                                                                              
                                                                                              
                                                                                              6.77
                                                                                              
                                                                                              
                                                                                              
                                                                                              —
                                                                                              
                                                                                              $
                                                                                              —$4.84
      - $5.56
                                                                                              
                                                                                              
                                                                                              475
                                                                                              
                                                                                              
                                                                                              4.85
                                                                                              
                                                                                              
                                                                                              8.65
                                                                                              
                                                                                              
                                                                                              
                                                                                              —
                                                                                              
                                                                                              
                                                                                              —$6.05
      - $6.05
                                                                                              
                                                                                              
                                                                                              228
                                                                                              
                                                                                              
                                                                                              6.05
                                                                                              
                                                                                              
                                                                                              5.74
                                                                                              
                                                                                              
                                                                                              
                                                                                              228
                                                                                              
                                                                                              
                                                                                              6.05$7.11
      - $7.26
                                                                                              
                                                                                              
                                                                                              560
                                                                                              
                                                                                              
                                                                                              7.12
                                                                                              
                                                                                              
                                                                                              8.86
                                                                                              
                                                                                              
                                                                                              
                                                                                              58
                                                                                              
                                                                                              
                                                                                              7.12$7.50
      - $10.71
                                                                                              
                                                                                              
                                                                                              257
                                                                                              
                                                                                              
                                                                                              9.94
                                                                                              
                                                                                              
                                                                                              5.31
                                                                                              
                                                                                              
                                                                                              
                                                                                              169
                                                                                              
                                                                                              
                                                                                              11.93$10.99
      - $12.43
                                                                                              
                                                                                              
                                                                                              167
                                                                                              
                                                                                              
                                                                                              11.94
                                                                                              
                                                                                              
                                                                                              4.80
                                                                                              
                                                                                              
                                                                                              
                                                                                              124
                                                                                              
                                                                                              
                                                                                              11.93$13.13
      - $15.34
                                                                                              
                                                                                              
                                                                                              194
                                                                                              
                                                                                              
                                                                                              14.40
                                                                                              
                                                                                              
                                                                                              2.87
                                                                                              
                                                                                              
                                                                                              
                                                                                              194
                                                                                              
                                                                                              
                                                                                              14.40$16.31
      - $22.75
                                                                                              
                                                                                              
                                                                                              460
                                                                                              
                                                                                              
                                                                                              17.25
                                                                                              
                                                                                              
                                                                                              2.87
                                                                                              
                                                                                              
                                                                                              
                                                                                              409
                                                                                              
                                                                                              
                                                                                              17.282,348
                                                                                              
                                                                                              $
                                                                                              9.78
                                                                                              
                                                                                              
                                                                                              6.20
                                                                                              
                                                                                              
                                                                                              
                                                                                              1,181
                                                                                              
                                                                                              $
                                                                                              12.50
 March
      31, 2009Options
      Outstanding
                              
                              
                              ExercisableRange
      of Exercise Price
                              
                              Number
      of
                                Outstanding
                                Vested/Unvested
      at
                                March
      31, 2009
                              
                              Weighted
                                Average
                                Exercise
      Price
                              
                              Weighted
                                Average
                                Remaining
                                Contractual
                                Life
                              
                              
                              Number
      of
                                Shares
                                Exercisable
      at
                                March
      31, 2009
                              
                              Weighted
                                Average
                                Exercise
                                Price$4.84
      - $5.56
                              
                              
                              476
                              
                              $
                              4.85
                              
                              
                              8.90
                              
                              
                              
                              —
                              
                              $
                              —$6.05
      - $6.05
                              
                              
                              228
                              
                              
                              6.05
                              
                              
                              6.14
                              
                              
                              
                              161
                              
                              
                              6.05$7.11
      - $7.26
                              
                              
                              560
                              
                              
                              7.12
                              
                              
                              9.11
                              
                              
                              
                              —
                              
                              
                              —$7.50
      - $10.71
                              
                              
                              284
                              
                              
                              9.87
                              
                              
                              5.11
                              
                              
                              
                              184
                              
                              
                              9.58$10.99
      - $12.43
                              
                              
                              168
                              
                              
                              11.94
                              
                              
                              5.12
                              
                              
                              
                              119
                              
                              
                              11.93$13.13
      - $15.34
                              
                              
                              313
                              
                              
                              13.91
                              
                              
                              3.52
                              
                              
                              
                              313
                              
                              
                              13.91$16.31
      - $22.75
                              
                              
                              484
                              
                              
                              17.20
                              
                              
                              3.40
                              
                              
                              
                              411
                              
                              
                              17.252,513
                              
                              $
                              10.01
                              
                              
                              6.28
                              
                              
                              
                              1,188
                              
                              $
                              13.13




The
Company had 96,000 and 111,000 of unvested restricted stock units issued under
the 2004 Plan outstanding at June 30, 2009 and March 31, 2009,
respectively.


21




LASERCARD
CORPORATION AND SUBSIDIARIES


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(UNAUDITED)




With
the adoption of SFAS No. 123(R), the Company recorded stock-based employee
compensation expense related to stock options, restricted stock units, and
restricted shares net of estimated forfeitures in its condensed consolidated
statements of operations allocated as follows (in thousands):


Three
      Months Ended
                  June
      30,2009
                
                
                2008Cost
      of sales
                
                $
                152
                
                
                $
                137Selling,
      general and administrative expense
                
                
                398
                
                
                
                309Research
      and development expense
                
                
                21
                
                
                
                64Stock-based
      compensation expense before income tax
                
                
                571
                
                
                
                510Less:
      income tax benefit
                
                
                —
                
                
                
                —Net
      stock-based compensation expense after income tax
                
                $
                571
                
                
                $
                510




The
Company did not capitalize any such costs in the condensed consolidated balance
sheets other than in the general overhead pool for inventory costs.




Restricted
Shares and Restricted Stock Units:Beginning 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, 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 rights.




On
June 2, 2008, the Company’s CEO was granted 20,000 restricted shares (the
“Restricted Stock”) outside the 2004 Plan at no charge to the CEO. The
Restricted Stock vests over four years, with vesting to be 25% on each of the
first four one-year anniversaries of June 2, 2008. The Company committed to
register the Restricted Stock with the SEC on Form S-8 since they were issued
outside of the 2004 Plan in compliance Nasdaq Rule No. 4350(i)(1)(A). The fair
value of restricted shares, including the Restricted Stock, at the time of the
award is expensed on a straight-line basis, primarily in selling, general and
administrative expenses over the vesting period.




As
of June 30, 2009, approximately $3.8 million of total unrecognized compensation
cost related to unvested stock options, restricted share awards and restricted
stock units was expected to be recognized over the remaining vesting period
through June 2013. As of March 31, 2009, about $4.3 million of total
unrecognized compensation cost related to unvested stock options, restricted
share awards and restricted stock units was expected to be recognized over the
remaining vesting period through August 2012.




The
Company recorded no income tax benefit on stock-based compensation expense for
the three-month periods ended June 30, 2009 and 2008, as the Company has
cumulative operating loss carryforwards, for which a full valuation allowance
has been established.




The
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 123R-3 to calculate
its 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.


22


LASERCARD
CORPORATION AND SUBSIDIARIES


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(UNAUDITED)




Employee
Stock Purchase Plan. Until February 20, 2009, the Company maintained an
Employee Stock Purchase Plan (the “ESPP”), under which eligible employees could
designate from 2% to 6% of their compensation to be withheld for the purchase of
shares of common stock at 67% of the average price over the three-day period
prior to the purchase date. The differential between fair market value and the
average price of the shares sold under the ESPP is charged to operations as a
compensation expense and is taxed to the employee as income. Contributions that
had accumulated in each employee’s account through February, 2009 were used to
purchase full shares of the Company’s common stock at the discounted price. The
balance of the contributions that were not used to purchase whole shares was
refunded to the employees. The Company did not incur further expense associated
with the ESPP after February 2009. The Company had stock-based compensation
expense related to the ESPP of $28,000 during the three-month period ended June
30, 2008.




(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.
The Company’s 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 recorded a valuation allowance for the full amount of its calculated
deferred tax asset as of June 30, 2009 and March 31, 2009.




In
June 2006, the 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 greater than fifty percent that is
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. The Company continually monitors the need for
tax reserves under FIN 48. The Company did not identify any new reserve
requirements during the three-month periods ended June 30, 2009 and
2008.




(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, 2009, and 2008, comprehensive income
(loss) is as follows (in thousands):


June
      30,2009
                                
                                
                                2008Net
      income (loss)
                                
                                $
                                1,943
                                
                                
                                $
                                (1,274
                                )Net
      change in cumulative foreign currency translation
    adjustments
                                
                                
                                84
                                
                                
                                
                                (12
                                )Unrealized
      loss on available-for-sale investments
                                
                                
                                —
                                
                                
                                
                                (173
                                )Comprehensive
      income (loss)
                                
                                $
                                2,027
                                
                                
                                $
                                (1,459
                                )


23




LASERCARD
CORPORATION AND SUBSIDIARIES


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(UNAUDITED)




(26.)
Recent Accounting Pronouncements. In June 2009, FASB issued SFAS No. 168,
The FASB Accounting Standards
Codification and the Hierarchy of Generally Accepted Accounting Principles–a
replacement of FASB Statement No. 162. SFAS No. 168 establishes the FASB
Accounting Standards Codification as the source of authoritative accounting
principles and the framework for selecting the principles used in the
preparation of financial statements of nongovernmental entities that are
presented in conformity with generally accepted accounting principles in the
United States. This Statement is effective for the Company’s interim reporting
period ending on October 2, 2009. The Company is currently evaluating the
requirements of SFAS No. 168 and does not believe that it will have a
significant impact on the Company’s condensed consolidated financial
statements.




In
May 2009, FASB issued SFAS No. 165, Subsequent Events. SFAS No. 165 is intended
to establish general standards of accounting for and disclosure of events that
occur after the balance sheet date but before financial statements are issued or
are available to be issued. This SFAS requires the disclosure of the date
through which an entity has evaluated subsequent events and the basis for that
date. The disclosure requirement under this SFAS is effective for the Company’s
interim reporting period ending July 3, 2009. The Company is currently
evaluating the requirements of SFAS No. 165 and does not believe that it will
have a significant impact on the Company’s condensed consolidated financial
statements.


3.
              Net
      Income (Loss) per Share




Basic
earnings per share was computed by dividing net income by the weighted-average
number of common shares outstanding during the three-month period ended June 30,
2009. Diluted earnings per share during the three-month period ended June 30,
2009 was computed by dividing net income by the weighted-average number of
common shares outstanding plus dilutive common stock equivalents, primarily
shares issuable upon the exercise of stock options using the treasury stock
method. Antidilutive securities include outstanding stock options and warrants
with exercise prices in excess of the average fair market value of the Company’s
common stock for the related period. Antidilutive options and warrants were
excluded from the calculation of diluted net income per share but could become
dilutive in the future. Basic net loss per share and diluted net loss per share
was computed by dividing net loss by the weighted average number of shares of
common stock outstanding during the three-month periods ended June 30, 2009 and
2008, respectively.


24




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, 2009 and 2008 is shown in
the following table (in thousands, except per share data):


Three
      Month Ended
                  June
      30,2009
                
                
                2008Net
      income (loss)
                
                $
                1,943
                
                
                $
                (1,274
                )Basic
      net income (loss) per share:Weighted
      average common shares outstanding
                
                
                12,113
                
                
                
                11,991Basic
      net income (loss) per share
                
                $
                0.16
                
                
                $
                (0.11
                )Diluted
      net income (loss) per share:Weighted
      average common shares and common stock equivalents
    outstanding
                
                
                12,140
                
                
                
                11,991Diluted
      net income (loss) per share
                
                $
                0.16
                
                
                $
                (0.11
                )





4.
                SegmentsSegment
      Reporting.




The
Company operates in three reportable segments: (1) optical memory cards
including multi-technology cards (referred to as the OMC segment), (2) drives,
systems and enabling 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, as well as, at
times, other miscellaneous items. The segments were determined based on the
information used by the Company’s chief operating decision maker. The OMCs and
the drives, systems and enabling 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 card 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 OMC and drive, system and enabling services segments in a
manner that optimizes OMC 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. There were no intersegment revenues during the three-month
periods ended June 30, 2009, and 2008. 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. All of the Company’s
long-lived assets are attributable to the United States except for $2.2 million
at June 30, 2009 and March 31, 2009. These long-lived assets were attributable
to the operations in Germany, including long-lived assets owned by the U.S.
operations 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.


25




LASERCARD
CORPORATION AND SUBSIDIARIES


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(UNAUDITED)




The
table below presents information for the OMCs, the drives, systems and enabling
services, and specialty cards and the card printers segments 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,
2009 and 2008, respectively, (in thousands):


Three
      Months Ended June 30, 2009Optical
                                                                                                    Memory
                                                                                                    Cards
                                                                                                  
                                                                                                  
                                                                                                  Drives,
                                                                                                    Systems
      &
                                                                                                    Enabling
                                                                                                    Services
                                                                                                  
                                                                                                  
                                                                                                  Specialty
                                                                                                    Cards
      &
                                                                                                    Printers
                                                                                                  
                                                                                                  
                                                                                                  Segment
                                                                                                    Total
                                                                                                  
                                                                                                  
                                                                                                  Other
      (a)
                                                                                                  
                                                                                                  
                                                                                                  TotalRevenues
                                                                                                  
                                                                                                  $
                                                                                                  12,364
                                                                                                  
                                                                                                  
                                                                                                  $
                                                                                                  759
                                                                                                  
                                                                                                  
                                                                                                  $
                                                                                                  3,185
                                                                                                  
                                                                                                  
                                                                                                  $
                                                                                                  16,308
                                                                                                  
                                                                                                  
                                                                                                  $
                                                                                                  —
                                                                                                  
                                                                                                  
                                                                                                  $
                                                                                                  16,308Cost
      of sales
                                                                                                  
                                                                                                  
                                                                                                  6,278
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  1,121
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  2,306
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  9,705
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  —
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  9,705Gross
      profit (loss)
                                                                                                  
                                                                                                  
                                                                                                  6,086
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  (362
                                                                                                  )
                                                                                                  
                                                                                                  
                                                                                                  879
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  6,603
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  —
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  6,603Depreciation
      and amortization expenses
                                                                                                  
                                                                                                  
                                                                                                  471
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  30
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  39
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  540
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  143
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  683Three
      Months Ended June 30, 2008Optical
                                                                                                    Memory
                                                                                                    Cards
                                                                                                  
                                                                                                  
                                                                                                  Drives,
                                                                                                    Systems
      &
                                                                                                    Enabling
                                                                                                    Services
                                                                                                  
                                                                                                  
                                                                                                  Specialty
                                                                                                    Cards
      &
                                                                                                    Printers
                                                                                                  
                                                                                                  
                                                                                                  Segment
                                                                                                    Total
                                                                                                  
                                                                                                  
                                                                                                  Other
      (a)
                                                                                                  
                                                                                                  
                                                                                                  TotalRevenues
                                                                                                  
                                                                                                  $
                                                                                                  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
      and amortization expenses
                                                                                                  
                                                                                                  
                                                                                                  422
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  47
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  94
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  563
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  159
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  722





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


26





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




The
following discussion and analysis of our 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 Quarterly Report on Form 10-Q and the consolidated financial
statements and notes thereto for the fiscal year ended March 31, 2009, included
in the 2009 Form 10-K.




FORWARD-LOOKING
STATEMENTS




All
statements contained in this report that are not historical facts are
forward-looking statements within the meaning of the federal securities laws.
Forward-looking statements are not 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 risks and uncertainties
that are difficult to predict. As a result, our actual results may differ
materially from the statements made. Often such forward-looking statements can
be identified by their use of words such as “may,” “will,” “intends,” “plans,”
“believes,” “anticipates,” “visualizes,” “expects,” “estimates,” or similar
language. Forward-looking statements made in this report include but are not
limited to statements regarding 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 GIG/Prevent Global; our
expectations as to the continuation, production quantities, delivery rates and
requested and actual delivery schedule, backlog, revenue, margins, and profit
for our products for U.S. or foreign government ID card programs; plans to
increase card production capacity for anticipated increases in orders including
possibly $1.8 million in capital equipment and leasehold improvements through
March 31, 2010; our expectation of negative gross profit from the drive, system
and enabling services market; the need for, expected success of, expense and
potential benefits from our research and development efforts; estimates that
revenues and advance payments will be sufficient to generate cash from operating
activities during fiscal 2010 and fund our actual capital expenditures despite
expected quarterly fluctuations; our projected liquidity in light of the issues
surrounding our investments in auction rate securities (“ARS”) and our ability
to secure more contracts; and our belief as to the credit quality of our ARS and
the changes in the fair value of these securities and our belief that the Put
Option will not significantly impact our future earnings.




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 (“OMCs”) as opposed to other
technologies; significant customer concentration and reliance on continued U.S.,
Saudi Arabian, Angolan, and Italian government business; risks associated with
doing business in and with foreign countries; whether we will be successful in
assisting GIG/Prevent Global with factory startup and training; whether
GIG/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 OMCs 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; 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; the possibility that OMCs will not be purchased
for the full implementation of card programs in Italy, the Kingdom of Saudi
Arabia, Angola, 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 UBS AG will purchase our ARS, and the risks set
forth in the section entitled “Risk Factors” and elsewhere in this report and
our other SEC filings. These forward-looking statements speak only as of 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.


27




CRITICAL
ACCOUNTING POLICIES




The
preparation of condensed consolidated financial statements requires us to make
estimates and judgments that affect the reported amounts of assets, liabilities,
sales and expenses, and related disclosure of contingent assets and liabilities.
On an ongoing basis, we evaluate our estimates, including those related to bad
debts, inventories, intangible assets, income taxes, restructurings, pensions
and other post-retirement benefits, stock-based compensation, warranty costs,
contingencies and litigation. We base our estimates on historical experience and
on various other assumptions that we believe to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent from
other sources. Actual results may differ from these estimates under different
assumptions or conditions.




Critical
accounting policies are those policies that affect our more significant
judgments and estimates used in the preparation of our condensed consolidated
financial statements. We believe our critical accounting policies include our
policies regarding revenue recognition, allowances for doubtful accounts,
inventory valuation, business combinations, value of long-lived assets,
including intangibles, employee compensation and benefits, restructuring
activities, gains or losses on dispositions and income taxes. For a more
detailed discussion of our critical accounting policies, please refer to the
2009 Form 10-K.




RESULTS
OF OPERATIONS




Overview




Headquartered
in Mountain View, California, we are, together with our subsidiaries, a leading
provider of secure ID solutions to governments and commercial clients worldwide.
Our wholly-owned German subsidiary, 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 develop, manufacture, and integrate LaserCard® optical
memory cards (“OMCs”), multi-technology cards, encoders, peripherals, smart and
specialty cards, biometrics, and modular software. Our cards and systems are
used in demanding applications, including citizen and foreign resident
identification, government service delivery and facility access used in
countries around the world, such as the United States, Germany, United Kingdom,
Angola, Italy, India, Costa Rica and the Kingdom of Saudi Arabia.




The
majority of our revenue is from sales of 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 our products. We have sales staff located in California, the
Washington D.C. area and Germany.




Our
revenues are derived mainly from advanced technology cards such as optical
memory, contact, contactless and RFID cards, or multi-technology versions of
these cards including optical memory and one or more other technologies, used in
government identity programs, and from high quality specialty cards for
applications such as major event badging and access control. The remainder of
our revenues comes from equipment sales, the sale of enabling services, such as
consulting, custom application development and the integration of ID management
solutions, and from knowledge transfer and licensing.




Our
reseller partners generally add value in the form of system integration,
installation, training, application software development and support services.
We are continuing our program to recruit new VARs and SIs in strategically
important markets.


28




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


Three
      Months Ended
                                  June
      30,2009
                                
                                
                                2008U.S.
      operations
                                
                                $
                                13,123
                                
                                
                                $
                                7,090German
      operations
                                
                                
                                3,185
                                
                                
                                
                                3,632$
                                16,308
                                
                                
                                $
                                10,722




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
focus on the sales of secure credentials into government programs for individual
identification. We offer a range of credentials, including cards that contain
magnetic stripe, contactless Radio Frequency Identification tags (“RFID”),
contact and contactless IC chip, optical memory (sometimes combined in
multi-technology cards), holograms, biometric identification, or a combination
of such features. This allows us to sell to a wide range of customers around the
world.




OMCs
are our proprietary product for which we hold 20 U.S. patents. In addition, we
have years of know-how in the manufacture and use of cards, encoding devices,
read/write drives, systems, enabling services and software. This provides a
basis for highly leveraged contribution margins in the OMC segment. Therefore,
our strategy is to sell all card technologies with a goal to upgrade programs to
optical memory when possible.




We
sell encoders and read/write drives at near direct manufacturing cost to enable
sales of OMCs. This often results in negative gross profits for our drives,
systems and enabling services segment when equipment volume does not allow for
the contribution necessary to cover fixed costs and we do not have sizable
enabling services. Even at higher volume, the gross profit margin on encoders
and read/write drives will probably not exceed 10%.




We
provide enabling services as a strategy to promote card sales. Examples include
the furnishing of equipment, application software, integration, and
installation, training and support services for a card issuance system for the
Kingdom of Saudi Arabia national ID card program, and a complete data
collection, database, and card issuing system for the Costa Rica Foreign
Resident ID Card program.




We
believe the major near term growth potential for our OMCs 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, that they will include optical cards or our products.




Our
principal strategies for long-term revenue growth are to:


o
                  Maintain,
      leverage and expand the existing OMC user community of national and
      regional governments worldwide;o
                  Increase
      revenues by offering enabling services, such as consulting, custom
      software development, and the development of integrated secure ID
      solutions, which can include data capture, personalization, quality
      assurance and credential issuance modules; ando
                  Increase
      market share for specialized cards and associated ID management solutions,
      such as major event badging and access control and university student
      ID.




Currently
our OMC segment revenues are mainly derived from the following programs; the
U.S. DHS Green Card program, a National ID Card for the Kingdom of Saudi Arabia,
three state-level vehicle registration card programs in India, a Foreign
Resident ID Card program in Italy, and the Foreign Resident ID card program in
Costa Rica. Also, we expect to recognize revenue from the National ID Card
program in Angola beginning next quarter.


29




Revenues
from the following government card programs are shown below as a percentage of
total revenues:


Three
      Months Ended
                June
      30,2009
              
              2008National
      ID Cards in the Kingdom of Saudi Arabia
              
              34
              %
              
              17
              %U.S.
      Green Cards
              
              31
              %
              
              15
              %Foreign
      Resident ID Card in Costa Rica
              
              —
              
              
              16
              %Vehicle
      Registration in India
              
              5
              %
              
              14
              %




In
July 2009, we announced the following:


o
              The
      Angolan government has officially approved the design of its new national
      ID card, triggering our production start-up for the initial supply of
      secure OMCs for the country’s national ID program. Delivery of the $8.8
      million card backlog is expected to begin during the second quarter ending
      September 30, 2009 and is scheduled to be completed this fiscal
      year.o
              We
      have been awarded the contract to supply secure OMCs for the Carabinieri,
      the Italian national police force. The cards will be issued as secure ID
      credentials to all uniformed and civilian employees of the agency
      nationwide and will store personal data including employment, biometric
      identification and health information. We have received a purchase order
      valued at approximately $800,000 to design, produce and deliver the cards
      during the quarter ending September 30, 2009.o
              We
      received a purchase order of approximately $1.5 million for the supply of
      ID cards for Italy’s Foreign Resident Card program. The order calls for
      deliveries to be completed during the quarter ending September 30,
      2009.




We
may invest up to $1.8 million through March 31, 2010 in additional capital
equipment and leasehold improvement expenditures for OMC and specialty card
production capacity and manufacturing enhancement at our facilities as necessary
for increased volumes and for manufacturing efficiency.




Revenues




Segment
Revenues. Our total revenues consisted of sales in our three segments of
(1) OMCs and multi-technology cards (referred to herein as the OMC segment), (2)
optical card drives, systems and enabling services, and (3) specialty cards and
card printers, as well as, at times, other miscellaneous items. Total revenues
for the three-month periods ended June 30, 2009 and 2008 were $16.3 million and
$10.7 million, respectively.


30




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


Three
      Months Ended
                    June
      30,2009
                  
                  
                  2008Optical
      memory cards
                  
                  $
                  12,364
                  
                  
                  $
                  5,904%
      of total revenues
                  
                  
                  76
                  %
                  
                  
                  55
                  %Optical
      cards drives, systems and services
                  
                  
                  759
                  
                  
                  
                  1,185%
      of total revenues
                  
                  
                  5
                  %
                  
                  
                  11
                  %Specialty
      cards and card printers
                  
                  
                  3,185
                  
                  
                  
                  3,633%
      of total revenues
                  
                  
                  20
                  %
                  
                  
                  34
                  %Total
      revenues
                  
                  $
                  16,308
                  
                  
                  $
                  10,722




The
following table presents our OMC revenues by major program (in
thousands):


Three
      Months Ended
                  June
      30,
                
                
                Change2009
                
                
                2008
                
                
                2009
      vs 2008U.S.
      Green Cards
                
                $
                5,058
                
                
                $
                1,617
                
                
                $
                3,441National
      ID Cards for the Kingdom of Saudi Arabia
                
                
                4,996
                
                
                
                1,782
                
                
                
                3,214Italian
      Government ID Card programs
                
                
                1,038
                
                
                
                20
                
                
                
                1,018Vehicle
      Registration in India
                
                
                811
                
                
                
                1,510
                
                
                
                (699
                )Foreign
      Resident ID Card Program in Costa Rica
                
                
                —
                
                
                
                736
                
                
                
                (736
                )All
      other programs
                
                
                461
                
                
                
                239
                
                
                
                222Total
      optical memory card revenues
                
                $
                12,364
                
                
                $
                5,904
                
                
                $
                6,460Percent
      increase
                
                
                
                
                
                
                
                
                
                
                109
                %




OMC
revenues for the three-month period ended June 30, 2009 increased by $6.5
million or 109% over the three-month period ended June 30, 2008 due to increases
for U.S. Green Cards, the Kingdom of Saudi Arabia’s national ID card program and
the Italian government’s foreign resident card program partially offset by
decreases for the Vehicle Registration program in India and the Costa Rican
permanent resident card program.




Specialty
card and card printer revenues for the three-month period ended June 30, 2009
decreased by $0.4 million or 12% as compared to three-month period ended June
30, 2008 largely due to the foreign exchange rate fluctuation. The weakening
world economy will likely have a negative effect on revenue in some portions of
the specialty cards and card printers segment.




Backlog




Some
of our customers generally place orders for a period of several months to a year
or more, and others place orders for immediate or fast turn delivery. 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 revenue trends. Our backlog as of June 30, 2009 was $16.2 million for
OMCs and $1.2 million for specialty cards and card printers as compared with our
backlog as of March 31, 2009 for OMCs of $21.4 million and $1.2 million for
specialty cards and card printers. There was no significant backlog for optical
card drives, systems and enabling services as of June 30, 2009 or March 31,
2009.




Subsequent
to June 30, 2009, two purchase orders amounting to a total of $2.3 million were
received to supply OMCs to the Italian National police and the Italian Foreign
Resident Card program.


31




Gross
Margin




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


Three
      Months Ended
                                                                      June
      30,
                                                                    
                                                                    
                                                                    Change2009
                                                                    
                                                                    
                                                                    2008
                                                                    
                                                                    
                                                                    2009 vs
      2008Optical
      memory cards
                                                                    
                                                                    $
                                                                    6,086
                                                                    
                                                                    
                                                                    $
                                                                    2,143
                                                                    
                                                                    
                                                                    $
                                                                    3,943%
      of optical memory card revenues
                                                                    
                                                                    
                                                                    49
                                                                    %
                                                                    
                                                                    
                                                                    36
                                                                    %Optical
      cards drives, systems and services
                                                                    
                                                                    
                                                                    (362
                                                                    )
                                                                    
                                                                    
                                                                    281
                                                                    
                                                                    
                                                                    
                                                                    (643
                                                                    )%
      of optical card drive, systems revenues
                                                                    
                                                                    
                                                                    (48
                                                                    %)
                                                                    
                                                                    
                                                                    24
                                                                    %Specialty
      cards and card printers
                                                                    
                                                                    
                                                                    879
                                                                    
                                                                    
                                                                    
                                                                    1,043
                                                                    
                                                                    
                                                                    
                                                                    (164
                                                                    )%
      of specialty cards and card printers revenues
                                                                    
                                                                    
                                                                    28
                                                                    %
                                                                    
                                                                    
                                                                    29
                                                                    %Total
      gross margin
                                                                    
                                                                    $
                                                                    6,603
                                                                    
                                                                    
                                                                    $
                                                                    3,467
                                                                    
                                                                    
                                                                    $
                                                                    3,136%
      of total revenue
                                                                    
                                                                    
                                                                    40
                                                                    %
                                                                    
                                                                    
                                                                    32
                                                                    %




OMCs.
OMC gross margin for the three-month period ended June 30, 2009 was 49% of OMC
revenue as compared to 36% of OMC revenue for the three-month period ended June
30, 2008. The combined favorable impact of increased sales volume in several
major ID card programs, productivity improvements, and manufacturing cost
reduction initiatives attributed to the increased gross margin. OMC
manufacturing depreciation and amortization expense was $471,000 and $422,000
for the three-month period ended June 30, 2009 and 2008,
respectively.




Drives,
Systems and Enabling Services. Except for the quarter ended June 30,
2008, the drives, systems and enabling services gross margin has been negative
over the past three years due to low sales volume and our policy to price drives
close to direct manufacturing cost to promote card sales resulting in the
inability to cover fixed overhead costs at current sales volumes. This segment
also includes enabling services, which also have lower margins than OMCs. This
segment depreciation and amortization expense was approximately $30,000 and
$47,000 for the three-month period ended June 30, 2009 and 2008, respectively.
We anticipate that drives, systems and enabling services negative gross margins
will continue in the future unless equipment sales volume is sufficient to cover
fixed costs or there is material amount of Enabling Services
revenue.




Specialty
Cards and Card Printers. The gross margin on specialty cards and card
printers was 28% of this segment’s revenue for the three-month period ended June
30, 2009 as compared with 29% for the three-month period ended June 30, 2008 due
to product mix and the decrease in sales volume. Due to the current economic
conditions, we anticipate pressure on selling prices for specialty cards and
margins. This could lead to a decrease in margins in this segment unless offset
by the continuation of increased revenues of the higher value printer and
systems products. Our gross margin in this segment for fiscal year 2010 may also
be lower than fiscal year 2009 which included $540,000 in revenue and $440,000
in gross profit from a consulting contract that was concluded last year adding
3% to the overall margin in the period. This segment depreciation and
amortization expense was approximately $61,000 and $136,000 for the three-month
periods ended June 30, 2009 and 2008, respectively.


32




Operating
Expenses




The
following table presents operating expenses (in thousands, except for
percentages):


Three
      Months Ended
                  June
      30,2009
                
                
                2008Selling,
      general and administrative expenses
                
                $
                4,074
                
                
                $
                3,900%
      of total revenue
                
                
                25
                %
                
                
                36
                %%
      of change from prior year
                
                
                4
                %
                
                
                12
                %Research
      and development expenses
                
                $
                371
                
                
                $
                860%
      of total revenue
                
                
                2
                %
                
                
                8
                %%
      of change from prior year
                
                
                (57
                %)
                
                
                9
                %




Selling,
General, and Administrative Expenses (“SG&A”). SG&A expenses for
the three-month period ended June 30, 2009 increased by approximately $0.2
million, or 4% as compared with the three-month period ended June 30, 2008. As a
percentage of revenue, SG&A expenses were 25% and 36% for the three-month
periods ended June 30, 2009 and 2008, respectively. The $0.2 million increase
was due to $0.5 million for an incentive accrual partially offset by decreases
in other expenses. SG&A depreciation and amortization expense was
approximately $0.1 million for the three-month periods ended June 30, 2009 and
2008. SG&A expense, inclusive of sales commissions and performance-based
incentives, are expected to range between $4 million and $4.5 million quarterly
through the remainder of fiscal year 2010.




Research
and Development Expenses (“R&D”). R&D expenses for the
three-month period ended June 30, 2009 decreased by approximately $0.5 million,
or 57% as compared with the three-month period ended June 30, 2008. As a
percentage of revenue, R&D expenses were 2% and 8% for the three-month
periods ended June 30, 2009 and 2008, respectively. During the fiscal year ended
March 31, 2009, various R&D projects were realigned and cost reductions were
implemented consistent with a ‘milestone’-based R&D strategy. We are
continuing our effort to develop new card features and structures, including
various composite card structures and multi-technology cards containing
contactless chips with RF capability, dual-interface (contact-contactless) with
optical memory, OVD products, and other market-driven requirements. We are also
developing enhanced OMC 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 OMC sales growth. We anticipate that
these ongoing research and development efforts 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 efforts will be successful. These features are important for our
existing and future OMC markets. We anticipate R&D expenditures of about
$0.4 million per quarter during fiscal year 2010.




Other
Income (Expense), Net




The
following table presents other income (expense), net (in thousands):


Three
      Months Ended
                              June
      30,2009
                            
                            
                            2008Interest
      income
                            
                            $
                            34
                            
                            
                            $
                            70Interest
      expense
                            
                            
                            (48
                            )
                            
                            
                            (18
                            )Gain
      due to fair value of investment
                            
                            
                            218
                            
                            
                            
                            —Other
      expense
                            
                            
                            (22
                            )
                            
                            
                            (6
                            )$
                            182
                            
                            
                            $
                            46


33




Other
Income (Expense), Net. Interest income for the three-month period ended
June 30, 2009 decreased by $36,000, or 51% as compared with the three-month
period ended June 30, 2008 due to a decline in interest rates from a
weighted-average of 1.57% during the three-month period ended June 30, 2008 to
0.67% during the three-month period ended June 30, 2009. Interest expense
increased for the three-month period ended June 30, 2009 by $30,000 as compared
with the three-month period ended June 30, 2008 due largely to the increase in
borrowing under the credit line established with UBS in December, 2008. The
change in fair value of the ARS’ investments resulted in an approximately $0.2
million non-cash gain for the three-month period ended June 30, 2009. We believe
that if the assumptions that we used for UBS’ credit risk remain unchanged
through June 30, 2010, we will recover the remaining differential of $42,000 in
future periods until June 30, 2010 when we intend to exercise our Put Option
with UBS Financial Services related to our investment in auction rate
securities. The other expense was mainly due to losses on foreign exchange
fluctuations.




Income
Taxes




The
following table presents income taxes (in thousands):


Three
      Months Ended
                              June
      30,2009
                            
                            
                            2008Foreign
      income tax
                            
                            $
                            6
                            
                            
                            $
                            27U.S.
      income taxes
                            
                            
                            391
                            
                            
                            
                            —$
                            397
                            
                            
                            $
                            27




Income
Taxes. Income tax expense amounted to approximately $0.4 million for the
three-month period ended June 30, 2009. We expected an effective tax rate of
about 17% for the fiscal year 2010. During the three-month period ended June 30,
2008, we received a tax benefit due to the assimilation of the new reduction in
tax rate based on our foreign subsidiary’s net loss.






LIQUIDITY
AND CAPITAL RESOURCES




The
following table summarizes cash, cash equivalents and investments (in
thousands):


June
      30,
                  2009
                
                
                March
      31,
                  2009Cash
      and cash equivalents
                
                $
                25,990
                
                
                $
                15,912Investments
      in auction rate securities, net of put options
                
                
                13,458
                
                
                
                13,239Investments
      - other
                
                
                174
                
                
                
                174Total
      cash, cash equivalents and investments
                
                $
                39,622
                
                
                $
                29,325




As
of June 30, 2009, we held $13.5 million par value (with fair value approximately
$12.5 million), of marketable securities consisting of ARSs that were
re-classified as current investment from non-current in our consolidated balance
sheet. Also included in our short-term investment is the Put Option received in
this rights offering from UBS recognized as a benefit with a fair value of
approximately $1 million. UBS has the “Right” to purchase its ARSs at par at any
time through July 3, 2012 and we have the “Right” to sell our ARSs at par to UBS
beginning June 30, 2010 through July 3, 2012. We intend to exercise our put
option and sell our ARSs to UBS on June 30, 2010, which is now within one year.
Hence, we reclassified the ARS investments to current assets, net of put options
and its fair value approximates par at June 30, 2009. We borrowed $8.9 million
from UBS as of June 30, 2009 under a credit line collateralized by the
ARS.




As
of March 31, 2009, our ARS investment had a fair value of $12.2 million and the
put option was valued at $1 million.


34




Refer
to Note 2, caption 8, Cash and Cash Equivalents, Short-term Investments of the
condensed consolidated financial statement for further discussion of our current
investments.




The
following table displays the sources and uses of cash by activity for the fiscal
years ended March 31 (in thousands):


Three
      Months Ended
                              June
      30,2009
                            
                            
                            2008Net
      cash provided by (used in) operating activities
                            
                            $
                            9,855
                            
                            
                            $
                            (4,161
                            )Net
      cash used in investing activities
                            
                            $
                            (180
                            )
                            
                            $
                            (323
                            )Net
      cash provided by financing activities
                            
                            $
                            404
                            
                            
                            $
                            64






Net
cash provided by operating activities for the three-month period ended June 30,
2009 was $9.9 million consisted of net income of $1.9 million plus $1.2 million
of various non-cash charges and the decrease in operating assets, net of changes
in operating liabilities, of $6.7 million. Net cash used by operating activities
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.




Net
cash used in investing activities was approximately $0.2 million for the
three-month period ended June 30, 2009, compared to $0.3 million of cash used by
investing activities for the three-month period ended June 30, 2008 due mainly
to the capital expenditures. We may invest an additional $1.8 million in capital
equipment and leasehold improvement expenditures for OMC and specialty card
production capacity and manufacturing enhancement at our facilities through
March 31, 2010. 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 financing activities was $404,000 for the three-month period
ended June 30, 2009, compared to $64,000 of cash provided by financing
activities for the three-month period ended June 30, 2008. Net cash provided by
financing activities for the first quarter of fiscal 2010 was due to the
non-cash charge of $214,000 related to the tax benefit on carryforward of gain
from exercises of common stock options, an additional $218,000 drawn from the
UBS credit line offset by $28,000 of capital lease payments and other stock
activities. Net cash provided by financing activities for the three-month period
ended June 30, 2008 was $64,000, which primarily consisted of net proceeds from
the sale of common stock under our employee stock plans.




In
November 2007 we received an advance payment in the amount of 1.2 million Euros
($1.7 million U.S. dollars) under a contract with our German subsidiary, CCD, to
provide consulting services and equipment to the Golden Chip Company (“GCC”) of
Saudi Arabia to enable GCC to establish a card manufacturing facility in Saudi
Arabia. The advance payment has been recorded on our balance sheet as advance
payments from customers. After many delays on the part of GCC, GCC has alleged
that CCD failed to perform under this contract and has demanded payment of
damages. We have disputed this claim and reserved the right to terminate the
contract and claim damages against GCC for lost profits. GCC has threatened to
bring arbitration proceedings in London, United Kingdom, to enforce its rights
under the agreement. Litigation, including arbitration, can be expensive,
especially in the United Kingdom, and can cause significant management
distraction, even if we ultimately prevail. In any case, we do not anticipate
receiving the original benefits of this contract including revenue upon
completion of the contract in the amount of 5.9 million Euros ($8.3 million U.S.
dollars).


35




Current
Borrowing Arrangements




As
of June 30, 2009, we held $13.5 million par value (with fair value approximately
$12.5 million), of marketable securities consisting of ARSs that were
re-classified as current from non-current investments in our consolidated
balance sheet. UBS offered and we accepted a “Rights” offering whereby UBS
offered to purchase certain ARSs it placed, including those we hold, at par or
face value. Also included in our short-term investment is the Put Option
received in this rights offering from UBS, recognized as a benefit with a fair
value of approximately $1 million. UBS has the “Right” to purchase its ARSs at
par at any time through July 3, 2012 and we have the “Right” to sell our ARSs at
par to UBS beginning June 30, 2010 through July 3, 2012. We intend to exercise
our Put Option and sell them to UBS on June 30, 2010, which is now within one
year. Hence, we reclassified the ARS investments to current assets, net of put
options and its fair value approximates par at June 30, 2009. We had borrowed
$8.9 million from UBS as of June 30, 2009 under a credit line collateralized by
the ARS.




The
intent of the credit line is to provide a no-cost loan where the interest rate
charged on the credit line is equal to the interest rate earned on the ARSs.
Variable rate advances under the UBS Credit Line will bear interest at a
variable rate equal to the lesser of: (a) London Interbank Offered Rate, plus a
percentage rate between 1.25% to 2.75%, depending on the amount of the advance,
and (b) the then applicable weighted average rate of interest or dividend rate
paid to us by the issuer of the ARSs, and in each case, such interest rate is
subject to adjustment at any time and from time to time to reflect changes in
the composition of the ARSs. When calculating the weighted average interest
rate, the interest rate paid to us with respect to the ARSs equal to, (i) for
the period up to and including January 21, 2009, the applicable coupon rate(s)
and (ii) from January 22, 2009 and thereafter, the then applicable Taxable
Student Loan Auction Rate Certificates Maximum Auction Rate for the Taxable
Student Loan Auction Rate Securities (“SLARS”).







The
      UBS Credit Line also provides, among other things, that:o
                  UBS
      may demand full or partial payment of the credit line at its sole
      discretion and without cause at any time; ando
                  UBS
      may at any time in its sole discretion and without cause terminate and
      cancel the credit line; provided, however, that UBS must provide us with
      alternative financing on substantially similar terms, unless the demand
      right was exercised as a result of certain specified
    events.




Refer
to Note 2, caption 8, Cash and
Cash Equivalents, Short-term Investments and Long-term Investments of the
consolidated financial statement for further discussion of our noncurrent
investments.




We
believe that we have sufficient available cash to execute our business plan for
fiscal year 2010 as we expect the estimated level of revenues to be sufficient
to generate cash from operating activities over the same period. 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 and if
this and other card programs are not replaced by other card orders or other
sources of income.


36




CONTRACTUAL
OBLIGATIONS:




The
following table provides a summary of the effect on liquidity and cash flows
from our contractual obligations as of June 30, 2009 (in
thousands):


2010
                
                
                2011
                
                
                2012
                
                
                2013
                
                
                2014
                
                
                Thereafter
                
                
                TotalNon-cancelable
      operating leases (1)
                
                $
                1,352
                
                
                $
                1,993
                
                
                $
                1,884
                
                
                $
                1,502
                
                
                $
                1,275
                
                
                $
                2
                
                
                $
                8,008Non-cancelable
      purchase orders
                
                
                2,544
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                2,544Net
      borrowing on revolving credit with UBS (2)
                
                
                8,899
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                8,899Total
                
                $
                12,795
                
                
                $
                1,993
                
                
                $
                1,884
                
                
                $
                1,502
                
                
                $
                1,275
                
                
                $
                2
                
                
                $
                19,451




(1)
      Includes capitalized leases(2)
      For the purposes of this table, the obligation has been calculated without
      interest
obligations.






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:


o
                Commercial
      paper rated A1/P1 or debt instruments rated AAA, as rated by the major
      rating serviceso
                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.




We
are subject to interest rate risk on our short-term borrowings under our Credit
Line Agreement with UBS wherein we drew down an aggregate of $8.9 million as of
June 30, 2009; secured by the ARSs we currently hold. However, the credit line
provides a no-cost loan where the interest rate charged on the credit line is
equal to the interest rate earned on the ARS. We entered into a Rights
settlement whereby UBS offered to purchase certain ARSs it placed, including
those we hold, at par or face value. UBS has the “Right” to purchase its ARSs at
par at any time through July 3, 2012 and we have the “Right” to sell our ARSs at
par to UBS beginning June 30, 2010 through July 3, 2012. We have no other short
or long-term borrowings other than the credit line with UBS and capitalized
lease agreements that would give rise to significant interest rate risk.
Although our interest income is sensitive to changes in the general level of
U.S. interest rates, particularly since some portion of our investments are in
money market funds, we do not expect our operating results or cash flows to be
affected to any significant degree by the effects of a change in market interest
rates on our investments. A plus or minus ten percent change will not have a
material impact on the valuation of our investments.




We
do not enter into investments for speculative purposes. Although our ARS
investments had been designated as trading securities as of June 30, 2009 and
March 31, 2009, we expect to recover the par value of the ARSs based on our
“Rights” agreement with UBS. We intend to sell them to UBS on June 30, 2010,
which is now within one year. Hence, we reclassified the ARS investments to
current assets, net of put options and its’ fair value approximates par at June
30, 2009. We believe that we have sufficient available cash to execute our
business plan for fiscal year 2010 as we expect the estimated level of revenues
to be sufficient to generate cash from operating activities over the same
period.




Refer
to Note 2, caption 8, Cash and
Cash Equivalents, Short-term Investments and Long-term Investments of the
consolidated financial statement for further discussion of our noncurrent
investments.




Fair
Value Fluctuation Risk: At June 30, 2009 and March 31, 2009, there was
insufficient observable ARS market information available to determine the fair
value of our ARS investments, or the Put Option. Therefore, in order to validate
the fair value estimate of these securities, we incorporated assumptions such as
credit quality or financial standing of the issuer, final stated maturities,
estimates on the probability of the issue being called prior to final maturity,
impact due to extended periods of maximum auction rates, liquidity risk premium,
and broker quotes from independent valuators using widely accepted financial
models. Management believes that these are reasonable estimates reflecting the
unique circumstances of the subject SLARS and the method of valuing the Put
Option as forward contracts is reasonable. As of June 30, 2009, we held $13.5
million par value (with fair value approximately $12.5 million), of marketable
securities consisting of ARSs UBS offered and we accepted a “Rights” offering
whereby UBS offered to purchase certain ARSs it placed, including those we hold,
at par or face value. Also included in our current investments is the Put Option
received in this rights offering from UBS recognized as a benefit with a fair
value of approximately $1 million at June 30, 2009. UBS has the “Right” to
purchase its ARSs at par at any time through July 3, 2012 and we have the
“Right” to sell our ARSs at par to UBS beginning June 30, 2010 through July 3,
2012. We intend to sell them to UBS on June 30, 2010, which is now within one
year. Hence, we reclassified the ARS investments and the put options from
non-current to current assets in our condensed consolidated balance sheet at
their fair values which approximates par at June 30, 2009. The change in fair
value of the ARS’ investments resulted in approximately $0.2 million non-cash
gain for the three-month period ended June 30, 2009. We believe that if the
assumptions that we used for UBS’ credit risk remain unchanged through June 30,
2010, we will recover the remaining differential of $42,000 in future periods
until June 30, 2010 when we intend to exercise our put option with UBS Financial
Services. During fiscal year 2009, we recorded a net loss of about $0.3 million
resulting from the fair values of the ARS and the put option at March 31, 2009.
A plus or minus ten percent change will not have a material impact on the
valuation of our investments.


38




The
following summarizes investments at fair value, weighted average yields and
expected maturity dates as of (in thousands):


June
      30, 2009
                
                
                March
      31, 2009
                
                
                Change
      in
                  fair
      valueAuction
      rate securities
                
                
                13,500
                
                
                
                13,500
                
                
                
                —Gross
      unrealized losses
                
                
                (1,033
                )
                
                
                (1,267
                )
                
                
                234
                (3)Estimated
      fair market value of ARS
                
                
                12,467
                
                
                
                12,233Put
      option
                
                
                990
                
                
                
                1,006
                
                
                
                (16
                ) 
      (4)Estimated
      fair market value of ARS, net of put option
                
                $
                13,457
                (1)
                
                $
                13,239
                (2)
                
                $
                218Weighted
      average yield
                
                
                0.67
                %
                
                
                1.57
                %Maturity
      Dates
                
                July
      15, 2029 through
                  January
      25, 2047
                
                
                July
      15, 2029 through
                  January
      25, 2047




(1)
      classified as current assets(2)
      classified as non-current assets(3)
      change in fair value - unrealized gain in income(4)
      change in fair value - unrealized loss in
income




Foreign
Currency Exchange Rate Risk. Our U.S. operations sell products in various
international markets. Revenue by our German subsidiary of approximately $3.2
million and 3.6 million, net income of $41,000 and net loss of $7,000, during
the three month-periods ended June 30, 2009 and 2008, respectively, were
denominated in foreign currency (Euro). In addition, some raw material purchases
and purchased services were denominated in foreign currency.




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 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, 2009, we had a foreign exchange forward contract with a
maturity of less than 30 days to purchase 1.2 millon Euros. The fair value of
the forward contract was not material at June 30, 2009. At March 31, 2009, we
had a foreign exchange forward contract with a maturity of less than 30 days to
purchase 1.3 million Euros. A plus or minus ten percent change in foreign
exchange rates will not have a material impact on the condensed consolidated
financial statements.


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 SEC
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, 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, 2009that 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




This
description of the risk factors associated with our business supersedes the
description previously disclosed in Part I, Item 1A of the 2009 Form
10-K.




OUR
CURRENT AND FUTURE EXPECTED REVENUES ARE DERIVED FROM A SMALL NUMBER OF ULTIMATE
CUSTOMERS SO THAT THE LOSS OF OR REDUCTIONS IN PURCHASES BY ANY ONE ULTIMATE
CUSTOMER COULD MATERIALLY REDUCE OUR REVENUES AND LEAD TO LOSSES. During the
three-month period ended June 30, 2009 and each of the previous two fiscal
years, we derived, on average, 68% of our revenues from seven programs. Due to
the lengthy sales cycles, we believe that these programs, with perhaps the
addition of a few other 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 of
our largest customers due to program cutbacks, competition, or other reasons
could materially reduce our revenue base. 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. We had two customers during the three-month period
ended June 30, 2009 that accounted for 31% and 34%, respectively, of our total
revenue. We had four customers during the three-month period ended June 30, 2008
that accounted for 14%, 15%, 16%, and 17%, respectively, of our total
revenue.


40




WE
HAVE INCURRED NET LOSSES IN ALL BUT SIX QUARTERS DURING THE PREVIOUS FIVE YEARS
AND WE MAY NOT BE ABLE TO GENERATE SUFFICIENT REVENUE IN THE FUTURE TO MAINTAIN
OR ACHIEVE PROFITABILITY. In the past five years, only fiscal year 2006
generated a net income. Although the three-month period ended June 30, 2009 was
profitable, there can be no assurance that we will generate enough revenues to
maintain 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 sustain profitability. Losses would also occur if expenses exceed
revenue.




OUR
CONTRACTS WITH OUR LARGEST CUSTOMERS PROVIDE FOR AN INDEFINITE
DELIVERY/INDEFINITE QUANTITY OF SUPPLIES OR SERVICES. We typically receive
purchase orders where customers have the right to delay or cancel at any time.
We have no long-term firm order commitments from any of our largest customers.
Therefore delays in orders, contract cancellations or changes in technology
decisions could result in decreased revenues and operating losses. Our revenue
is predominantly dependent on the receipt of purchase orders on a recurring
basis. We do not have contracts with firm commitments for deliveries over an
extended period of time. This can create volatility in revenues and earnings.
Also, customers may change their technology decisions which could cause further
delays or possibly loss of business.




OUR
OPTICAL MEMORY CARD PRODUCT REVENUES WILL NOT GROW IF WE DO NOT WIN NEW BUSINESS
AND IF PROGRAMS SUCH AS THE ANGOLAN NATIONAL ID PROGRAM OR THE ITALIAN NATIONAL
ID PROGRAM ARE NOT IMPLEMENTED AS SUCCESSFULLY AS ANTICIPATED. There can be no
assurance that these programs will be implemented as planned or 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 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.
Because our customers are large government entities, obtaining substantial
orders usually involves a lengthy sales cycle, requiring marketing and technical
time and often times significant 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, the equipment
supply and consulting work we undertake on occasion for the set up of card
manufacturing facilities involves substantial time from start to finish, with
the potential for obstacles to intervene outside our control such as delays in
the construction and readying of the building and site by the customer and the
potential for our customer to request changed specifications for the facility’s
throughput, so there can be substantial lags between when we sign a contract and
receive a deposit and when we complete a project and recognize
revenue.




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 grow significantly. We have made and may continue to make
significant capital expenditures to expand our card manufacturing capacity
depending upon projected volume. However, since customer demand is difficult to
predict and can be terminated at any time, 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, such as was the case during
fiscal years 2007 and 2008. The addition of fixed overhead costs increases our
breakeven point and results in lower gross 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 and inventory
write-offs can result. We may experience manufacturing complications associated
with increasing our manufacturing capacity. We may also experience difficulties
implementing new manufacturing processes, meeting customers’ quality or
international standards requirements, or outsourcing some of our
manufacturing.


41




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 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 when our line goes down and when our line
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 produced by its manufacturer, requiring us to
adapt a newer version to our needs, which would involve additional delay, effort
and expense on our part. If current or potential customers require a second
source for their card programs (which is a common business practice) they could
decide to use one of our competitors that may have multiple sources of supply.
This would harm our business and financial results.




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 RESULTING IN A DECLINE IN REVENUES. Most of the raw
materials used in the manufacture of optical memory cards are available from one
or more qualified suppliers. 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. We often order
significant quantities of raw materials to prepare for expected demand. If the
demand does not materialize as expected, raw material inventory supplies will
grow as it takes longer to consume in production sized for actual sales volume.
It is possible that this could lead to high levels of obsolescence and inventory
write-downs if product designs change or demand decreases. Also, certain
photographic films are commercially available solely from Eastman Kodak Company
(“Kodak”) of the United States. No assurance can be given that Kodak will
continue to supply such photographic film on a satisfactory basis and in
sufficient quantities to meet our requirements. If Kodak were to discontinue
manufacturing the film from which our optical media is made, we would endeavor
to establish an alternate supplier for such film, although the purchase price
could increase and reliability and quality could decrease with a new supplier.
No assurance can be given that we will have adequate demand to attract a second
source. In addition, an alternate supplier could encounter technical issues in
producing the film, as there may be know-how and manufacturing expertise which
Kodak has developed over the years which an alternate supplier may have
difficulty replicating. We currently have enough film inventory on hand and on
order to produce cards for orders projected over the next nine to fifteen
months. If Kodak announced that it would no longer offer film, we would request
that Kodak provide us with a last-buy opportunity which we would plan to take
maximum advantage of, although no assurance can be given that Kodak would
provide us with such an opportunity. There can be no assurance that we would be
able to procure an alternate source of supply of this film on reasonable terms
or at all, which could force us to design new cards using different materials.
This could be very disruptive to our business, result in increased costs and
lower quality products, and cause us to lose sales. We are also researching
other materials besides film for use as optical memory card media. Even if
developed or procured, there can be no assurance that other materials could be
used as a replacement for Kodak film in our current product or be
cost-effective.




THE
VOLATILITY IN THE COST OF PETROLEUM CAN NEGATIVELY IMPACT OUR OPERATING INCOME
AND GROSS MARGIN IF THIS RESULTS IN INCREASES IN THE COST OF OUR PRODUCTION
MATERIALS SUCH AS THE POLYCARBONATE-BASED PRODUCTS. The polycarbonate raw
material for our cards is petroleum based. The volatility in the cost of
petroleum could impact our costs for such raw material and also lead to higher
energy bills for running our manufacturing facilities. Long-term increases in
petroleum prices 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 our products. 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. While we carry a large inventory of safety stock for this
item, any delays in or inability to obtain parts from this supplier could cause
us to lose revenues while we source a second supplier. The ability to produce
read/write drives in high-volume, if required, will be dependent upon
maintaining or developing sources of supply for 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. Any of this could cause us to lose optical card sales, as
well as sales of our drives.


42




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 us to maintain and
enhance the technological capabilities of the LaserCard product line. There can
be no assurance that our products currently being sold or under development will
remain competitive or provide sustained revenue growth.




SEVERAL
OF OUR PROGRAMS INVOLVE OUR CARDS AS PART OF A SOLUTION WHICH INCLUDES
TECHNOLOGIES OF THIRD PARTIES. DIFFICULTIES ENCOUNTERED BY THESE THIRD PARTIES
COULD CAUSE OUR ULTIMATE CUSTOMERS, GENERALLY GOVERNMENTS, TO FIND FAULT IN
OPTICAL CARDS AND SWITCH TO OTHER SOLUTIONS EVEN IF OUR OPTICAL TECHNOLOGY IS
NOT THE ROOT CAUSE OF ANY FAULT. In certain of our current 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 with 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 if 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 mainly sell to VARs and system integrators who in turn sell solutions to the
end customer. The system integrators may not follow the recommendations we
provide for the handling, processing, and printing on our cards and working with
the end-user in the card issuing process. This could lead to low quality, high
costs, or both, resulting in damage to our reputation, the LaserCard name and
loss of the contract. In order to mitigate this risk, we work to train the
integrators to avoid such situations but cannot control their work and may not
always be successful in our training. 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, the LaserCard name,
reduce our revenues, or cause us to lose various governmental
programs.




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 IF WE FAIL TO COMPLY WITH THESE CHARACTERISTICS. 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 strive to deliver products
that meet 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 products held by customers
or give credit for products previously delivered. Any failure to meet our
customers’ standards may harm our reputation, result in product returns and
inventory write downs, and may cause us to lose sales and
customers.


43




IF
WE FAIL TO PROTECT OUR INTELLECTUAL PROPERTY RIGHTS, COMPETITORS MAY BE ABLE TO
USE OUR TECHNOLOGIES, WHICH COULD WEAKEN OUR COMPETITIVE POSITION, REDUCE
REVENUES, OR INCREASE COSTS. We use a combination of patent, trademark, and
trade secret laws, confidentiality procedures, and licensing arrangements to
establish and protect our proprietary rights. Our existing and future patents
may not be sufficiently broad to protect our proprietary technologies. Despite
our efforts to protect proprietary rights, we cannot be certain that the steps
we have taken will prevent the misappropriation or unauthorized use of our
technologies, particularly in foreign countries where the laws may not protect
proprietary rights as fully as U.S. law. Any patents we may obtain may not be
adequate to protect our proprietary rights. Our competitors may independently
develop similar technology, duplicate our products, or design around any of our
issued patents or other intellectual property rights. Litigation may be
necessary to enforce our intellectual property rights or to determine the
validity or scope of the proprietary rights of others. This litigation could
result in substantial costs and diversion of resources and may not ultimately be
successful. Litigation, or the threat of litigation, may also cause us to have
to license third-party technology, which would increase our costs and harm our
margins, or to discontinue the sale of certain products. 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.




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 technologies applied to ID cards. These may include RF
enabled chip and RFID tags. Financial, personnel and marketing resources of some
of the competing companies are significantly 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 could be a competitive disadvantage in
some of our targeted markets. Nevertheless, we believe the cost of ownership of
an optical card system is competitive in applications requiring large
populations of cards because of the relatively high overall cost to implement a
system based on our major competition, IC cards.




THE
PRICE OF OUR COMMON STOCK IS SUBJECT TO SIGNIFICANT VOLATILITY. The price of our
common stock is subject to significant volatility, which may be due to
fluctuations in revenues, earnings, liquidity, press coverage, analyst
recommendations, 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 our stock which may result in losses. For example, during fiscal
year 2009 our stock price fluctuated from a high of $9.73 per share to a low of
$2.05 per share. 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 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 or greater than 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 of our products 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. As of June 30, 2009, we had not
entered into a forward exchange contract or other hedging transaction to hedge
against or potentially minimize the foreign currency exchange risk related to
transactions other than those related to inter-company transactions. The losses
on foreign currency exchange related to purchase and intercompany transactions
for these periods were immaterial, but we have no assurance that such losses
will not be significant in the future.


44




WE
HAVE INVESTED A SIGNIFICANT PORTION OF OUR CASH IN AUCTION RATE SECURITIES
(“ARS”), WHICH BECAME ILLIQUID IN FEBRUARY 2008. WE COULD RECORD FURTHER
IMPAIRMENT CHARGES IF THE FAIR VALUE OF THESE INVESTMENTS DECLINES FURTHER. As
of June 30, 2009, we held $13.5 million par value (with fair value of
approximately $12.5 million), of marketable securities consisting of ARSs that
we classified as current investments in our consolidated balance sheet.
Previously UBS Financial offered and we accepted a “Rights” offering whereby UBS
offered to purchase certain ARSs it placed, including those we hold, at par or
face value. Also included in our short-term investment is the Put Option
received in this rights offering from UBS recognized as a benefit with a fair
value of approximately $1 million. Although we recorded a net gain of $0.2
million during the three-month period ended June 30, 2009 resulting from a
change in fair values, there is no assurance that the fair value will continue
to be favorable in the future. UBS has the “Right” to purchase its ARSs at par
at any time through July 3, 2012 and we have the “Right” to sell our ARSs at par
to UBS at any time from June 30, 2010 through July 3, 2012. We intend to
exercise our put option and sell our ARSs to UBS on June 30, 2010. As of June
30, 2009, we have borrowed $8.9 million from UBS under a credit line
collateralized by the ARSs. We recognized a net loss of $0.3 million related to
the fair values of the ARSs and the put option during fiscal year
2009.




We
will analyze the fair value of the ARSs at each balance sheet date. In order to
validate the fair value estimate of these securities, we incorporated
assumptions such as credit quality or financial standing of the issuer, final
stated maturities, estimates on the probability of the issue being called prior
to final maturity, impact due to extended periods of maximum auction rates,
liquidity risk premium, and broker quotes from independent valuators using
widely accepted financial models. We believe that these are reasonable estimates
reflecting the unique circumstances of the subject ARSs and the method of
valuing the put as a forward contract is reasonable. However, due to the
unprecedented issues surrounding the global credit market, these assumptions may
change considerably and may result in further impairment charges. If UBS is
insolvent on June 30, 2010 or otherwise unable to fulfill its obligations
described in the October 7, 2008 prospectus for the rights offering, we may
incur additional losses on the ARSs, especially if we would need to liquidate
them over a short period of time.




THE
AMOUNT OF OUR NET OPERATING LOSS CARRYFORWARDS (“NOLS”) IS UNCERTAIN AND PRIOR
TRANSACTIONS TO WHICH WE HAVE BEEN A PARTY AND FUTURE TRANSACTIONS TO WHICH WE
MAY BECOME A PARTY, INCLUDING STOCK ISSUANCES AND CERTAIN SHAREHOLDER STOCK
TRANSACTIONS, MAY JEOPARDIZE OUR ABILITY TO USE SOME OR ALL OF OUR NOLS. Based
on current tax law, we believe we have NOLs sufficient for U.S. federal and
state income tax purposes to offset future taxable income in the amount of $19.2
million as of March 31, 2009. As of June 30, 2009, we had incurred significant
cumulative losses in the U.S. Our ability to utilize these NOLs may be subject
to significant limitations under Section 382 of the Internal Revenue Code
if we have undergone, or undergo in the future, an ownership change. An
ownership change occurs for purposes of Section 382 of the Internal Revenue
Code if, among other things, stockholders who own or have owned, directly or
indirectly, 5% or more of our common stock (with certain groups of less-than-5%
stockholders treated as a single stockholder for this purpose) increase their
aggregate percentage ownership of our common stock by more than fifty percentage
points above the lowest percentage of the stock owned by these stockholders at
any time during the relevant three-year testing period. In the event of an
ownership change, Section 382 imposes an annual limitation, based upon the
value of the company at the time of the ownership change, on the amount of
taxable income a corporation may offset with NOLs. Any unused annual limitation
may be carried over to later years until the applicable expiration date for the
respective NOLs. To the extent that these NOLs become significantly limited, we
expect to be taxed on our income, if any, at the U.S. federal and state
statutory rates. As a result, any inability to utilize these NOLs would
adversely affect future operating results by the amount of the federal or state
taxes that would not have otherwise been payable, having an adverse impact on
our operating results and financial condition. In addition, the inability to use
NOLs could harm the value at which we might be acquired by a third-party and
would adversely affect our financial condition relative to our financial
condition had the NOLs been available. In addition, California and certain
states have suspended use of NOLs, and other states are considering similar
measures. As a result, we may incur higher state income tax expense in the
future. Depending on our future tax position, continued suspension of our
ability to use state NOLs could have an adverse impact on our operating results
and financial condition.


45




IN
MARCH 2004, WE SOLD A CARD MANUFACTURING LICENSE UNDER WHICH WE WILL PROVIDE
CERTAIN FACTORY SET-UP AND TRAINING SERVICES IN SLOVENIA TO GLOBAL INVESTMENT
GROUP Ltd. (“GIG”) IN CONJUNCTION WITH PREVENT GLOBAL OF SLOVENIA (“PREVENT
GLOBAL”). NEITHER GIG NOR PREVENT GLOBAL ARE CURRENT WITH THE OBLIGATIONS UNDER
THE AGREEMENT. IT IS POSSIBLE THAT LITIGATION WILL ENSUE. There have been
certain agreements made between us and GIG in conjunction with Prevent Global of
Slovenia (Prevent) regarding this contract. We are obligated to deliver
manufacturing equipment and installation support specified in the contract to
GIG/Prevent Global for a card manufacturing facility in Slovenia that has not
yet been provided by GIG or Prevent, to provide a targeted initial manufacturing
capacity of 10 million optical cards annually. Our obligation arises under an
agreement with GIG which was assumed by Prevent in 2007. We have performed our
obligations under the agreements and stand ready to complete the remaining
obligations. GIG has claimed that it still has rights to the agreement. It is
possible that we, Prevent Global or GIG will commence litigation to enforce
rights under this agreement (which includes determining who between GIG and
Prevent is the current co-party under the agreement) in England, the venue for
disputes under the agreement. Any such litigation may be expensive to us and
distracting to our management even if we ultimately prevail. In addition, if
either Prevent Global or GIG does not perform under the agreement, we may not
receive the expected benefits under the agreement, including profits and payment
of past due amounts.




No
assurance can be given that GIG or Prevent Global will make a plant site ready
to accept equipment deliveries; that GIG or Prevent Global will arrange for
pick-up of the equipment; that the equipment will be able to be successfully
installed so that the plant becomes operational; or that GIG or Prevent Global
will raise the financing required to complete the project and commence
operations. Assuming the plant becomes operational, 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 GIG or Prevent Global, 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 GIG or Prevent
Global is unable to raise sufficient capital to build, equip, and operate this
facility, we would not obtain the hoped-for benefits--including ongoing
royalties, sales of raw materials to GIG or Prevent Global, 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. Revenue
on the contract will begin to be recognized when the equipment has been
installed and is operating according to specification and training completed,
which date is dependent in part on GIG or Prevent Global providing a
satisfactory facility in Slovenia.




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, vice president of finance and chief financial officer,
the managing directors of our German operations, or our vice president of
marketing, 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
in our field 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.


46




FOREIGN GOVERNMENT REGULATIONS COULD ADVERSELY AFFECT RESULTS OF OPERATIONS. We
sell our products worldwide and, therefore, our products must comply with
various domestic and international laws, regulations and standards and our
business could be subject to risks due to changes in a country’s or region’s
political, regulatory or economic conditions. We may experience difficulty in
securing required approvals, licenses or permits on commercially reasonable
terms, or at all. Differing tax laws and changes in those laws may also affect
our future results of operations. The implementation of unfavorable regulations
or industry standards, or unfavorable interpretations of existing regulations by
courts or regulatory bodies, could require us to incur significant compliance
costs, cause the development of the affected products to become impractical, or
otherwise adversely affect our ability to produce or market our products.
Failure to comply with existing or new laws or regulations, including export and
import restrictions and barriers, or to obtain timely domestic or foreign
regulatory approvals, licenses or permits could result in lost sales or
increased costs.




DISRUPTIONS
TO OUR BUSINESS OR THE BUSINESS OF OUR CUSTOMERS OR SUPPLIERS COULD ADVERSELY
IMPACT OUR OPERATIONS AND FINANCIAL RESULTS. Business disruptions, including
from severe weather events (such as hurricanes, floods and blizzards), from
casualty events (such as explosions, fires or material equipment breakdown),
from the occurrence of a pandemic (such as the Swine Flu), from acts of
terrorism or acts of war, and from other similar events, coupled with any lack
of government readiness and support in those countries where we do business, may
cause damage or disruption to our properties, business, employees, suppliers,
distributors, resellers, and customers, which could have an adverse effect on
our business, financial condition, and operating results. Such events may also
result in an economic slowdown in the United States or elsewhere, which could
adversely affect our business, financial condition, and operating
results.




AS
A RESULT OF OUR REQUIRED ANNUAL EVALUATION OF OUR INTERNAL CONTROLS OVER
FINANCIAL REPORTING, WE MAY IDENTIFY INTERNAL CONTROL WEAKNESSES NEEDING
REMEDIATION, WHICH COULD HARM OUR REPUTATION. We have completed the evaluation
of our internal controls over financial reporting as required by Section 404 of
the Sarbanes-Oxley Act of 2002 for the fiscal years ended March 31, 2009 and
2008. Although our assessment, testing, and evaluation resulted in our
conclusion that, as of March 31, 2009 and 2008, our internal control over
financial reporting was 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 or
can be eliminated. 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.




IF
WE ENGAGED IN ACQUISITIONS, WE WOULD INCUR A VARIETY OF COSTS AND THE
ANTICIPATED BENEFITS MIGHT NEVER BE REALIZED. In recent times, we have not made
any acquisitions other than Challenge Card Design and Cards & More in March
2004 and there can be no assurance that we will be able to successfully
integrate any business, products, technologies or personnel that we might
acquire in the future. Future acquisitions may result in substantial dilution of
our current stockholders’ percentage ownership; expenditure of our current
limited cash resources; incurrence of debt, amortization of expenses related to
goodwill, research and development, and other intangible assets or large and
immediate write-offs; and assumption of liabilities. Our operation of any
acquired business will also involve numerous risks, including assimilating
employees, operations, technologies, and products; unanticipated costs;
diverting our management’s time and attention from the day-to-day operation of
our business; entering markets in which we have no or limited direct experience;
potentially losing key employees from the acquired company; and adversely
affecting our existing business relationships. If we fail to adequately manage
these risks, we may not achieve the intended benefit of any
acquisition.




WE
MAY FACE RISKS FROM OUR FOREIGN OPERATIONS AND SUBSTANTIAL INTERNATIONAL SALES.
Our products are used in countries around the world in addition to the United
States, such as Germany, the United Kingdom, Switzerland, Angola, Italy, India,
Costa Rica, and the Kingdom of Saudi Arabia. International sales accounted for
approximately 67% and 83% of our revenues during the three-month periods ended
June 30, 2009 and 2008, respectively. We also operate a subsidiary in Germany.
Our international operations are subject to the following risks, among others:
difficulty with staffing and managing international operations; transportation
and supply chain disruptions and increased transportation expense as a result of
epidemics, terrorist activity, acts of war or hostility, increased security and
less developed infrastructure; political and economic uncertainty caused by
changes in governments, epidemics, terrorism or acts of war or hostility;
difficulties in collecting receivables and longer accounts receivable payment
cycles; and potentially adverse tax consequences.


47




OUR
CONTRACT WITH GOLDEN CHIP COMPANY (“GCC”) COULD BE THE SUBJECT OF LITIGATION. In
November 2007 we received an advance payment in the amount of 1.2 million Euros
($1.7 million U.S. dollars) under a contract entered into with our German
subsidiary, CCD, to provide consulting services and equipment to GCC to enable
GCC to establish a card manufacturing facility in Saudi Arabia. The advance
payment has been recorded on our balance sheet as advance payments from
customers. After many delays on the part of GCC, GCC has alleged that CCD failed
to perform under this contract and has demanded payment of damages. CCD has
disputed this claim and reserved the right to terminate the contract and claim
damages against GCC for lost profits. GCC has threatened to bring arbitration
proceedings in London, United Kingdom, to enforce its rights under the
agreement. Litigation, including arbitration, can be expensive, especially in
the United Kingdom, and can cause significant management distraction, even if we
ultimately prevail.




Item
6. - Exhibits




See
the Exhibit Index following the signature page to this Quarterly Report on Form
10-Q for the information required by this item.


48




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
            
            
            Date/s/
      Robert T. DeVincenzi
            
            August
      11, 2009Robert
      T. DeVincenziChief
      Executive Officer(Principal
      Executive Officer)/s/
      Steven G. Larson
            
            August
      11, 2009Steven
      G. LarsonChief
      Financial Officer(Principal
      Financial Officer)




49




EXHIBIT
INDEX


Exhibit
                                Number
                              
                              Description3.1
                              
                              Certificate
      of Incorporation. (1)3.2
                              
                              Amended
      and Restated Bylaws. (2)31.1
                              
                              Chief
      Executive Officer Certification pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002.*31.2
                              
                              Chief
      Financial Officer Certification pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002.*32.1
                              
                              Chief
      Executive Officer Certification pursuant to 18 U.S.C. Section 1350, as
      adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
    2002.*32.2
                              
                              Chief
      Financial Officer Certification pursuant to 18 U.S.C. Section 1350, as
      adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
      2002.*




*Filed
herewith.




(1)
Previously filed as an exhibit to the Company’s Annual Report on Form 10-K for
the fiscal year ended March 31, 2005 and incorporated herein by
reference.


(2)
Previously filed as an exhibit to the Company’s Current Report on Form 8-K,
filed with the SEC on July 29, 2009 and incorporated herein by
reference.




50