UNITED
        STATES
 SECURITIES
        AND EXCHANGE COMMISSION
 Washington,
        D.C. 20549
  FORM
        10-Q
 
 QUARTERLY
        REPORT PURSUANT TO SECTION 13 OR 15(d) OF
 THE
        SECURITIES EXCHANGE ACT OF 1934
 
 For
        the
        Quarterly Period Ended December 31, 2007
 
  LASERCARD
        CORPORATION
 (Exact
        name of registrant as specified in its charter)
 
 Delaware
              0-6377
              77-0176309(State
                  or other jurisdiction of incorporation or organization)
              (Commission
                  File Number)
              (I.R.S.
                  Employer Identification No.)
 
 1875
        North Shoreline
        Boulevard, Mountain View, California 94043-1319
 (Address
        of principal executive offices) (Zip Code)
 
 (650)
        969-4428
 (Registrant's
        telephone number, including area code)
 
 Indicate
        by check mark whether the registrant (1) has filed all reports required to
        be
        filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
        the
        preceding 12 months (or for such shorter period that the registrant was required
        to file such reports) and (2) has been subject to such filing requirements
        for
        the past 90 days.   x Yes  o
        No
 
 Indicate
        by check mark whether the registrant is a large accelerated filer, an
        accelerated filer, or a non-accelerated filer.  See definition
        of  “accelerated filer and large accelerated filer” in Rule 12b-2 of the
        Exchange Act.  (Check one):
 
 Large
                  accelerated filer o
              Accelerated
                  filer x
              Non-accelerated
                  filer o
 
 
 Indicate
        by check mark whether the registrant is a shell company (as defined in Rule
        12b-2 of the Exchange Act).   o Yes  x
        No
 
 Number
        of
        outstanding shares of common stock, $.01 par value, at February 5,
        2008:  11,976,469
   Exhibit
        Index is onPage44
  Total
        number of pages is121
  
  TABLE
        OF CONTENTS
 
 PART
                  I.
              FINANCIAL
                  INFORMATION
              Page
                  NumberItem
                  1.
              Condensed
                  Consolidated Financial Statements (Unaudited)
              2Condensed
                  Consolidated Balance Sheets (Unaudited)
              3Condensed
                  Consolidated Statements of Operations (Unaudited)
              4Condensed
                  Consolidated Statements of Cash Flows (Unaudited)
              5Notes
                  to Condensed Consolidated Financial Statements (Unaudited)
              6Item
                  2.
              Management’s
                  Discussion and Analysis of Financial Condition and Results of
                  Operations
              21Item
                  3.
              Quantitative
                  and Qualitative Disclosures about Market Risk
              32Item
                  4.
              Controls
                  and Procedures
              33PART
                  II.
              OTHER
                  INFORMATIONItem
                  1.
              Legal
                  Proceedings
              33Item
                  1A.
              Risk
                  Factors
              33Item
                  2.
              Unregistered
                  Sales of Equity Securities and Use of Proceeds
              41Item
                  3.
              Defaults
                  Upon Senior Securities
              41Item
                  4.
              Submission
                  of Matters to a Vote of Security Holders
              41Item
                  5.
              Other
                  Information
              41Item
                  6.
              Exhibits
              41SIGNATURES
              
              43EXHIBIT
                  INDEX
              44
 
 
  PART
                  I.
              FINANCIAL
                  INFORMATIONITEM
                  1.
              CONDENSED
                  CONSOLIDATED FINANCIAL STATEMENTS
                  (UNAUDITED)
  2
  LASERCARD
        CORPORATION AND SUBSIDIARIES
 CONDENSED
        CONSOLIDATED BALANCE SHEETS
 (In
        thousands)
  December
                    31,2007
                
                
                March
                    31,(Unaudited)
                
                
                2007*ASSETSCurrent
                    assets:Cash
                    and cash
                    equivalents
                
                $
                1,920
                
                
                $
                3,026Restricted
                    Cash
                
                
                167
                
                
                
                -Short-term
                    investments
                
                
                16,500
                
                
                
                17,500Accounts
                    receivable, net of
                    allowance of $88 at December 31, 2007
                
                
                5,218
                
                
                
                3,489and
                    $144 at March 31,
                    2007Inventories,
                    net of reserve of
                    $821 at December 31, 2007
                
                
                11,367
                
                
                
                11,462and
                    $837 at March 31,
                    2007Deferred
                    contract
                    costs
                
                
                92
                
                
                
                233Prepaid
                    and other current
                    assets
                
                
                1,266
                
                
                
                1,594Total
                    current
                    assets
                
                
                36,530
                
                
                
                37,304Property
                    and equipment,
                    net
                
                
                12,092
                
                
                
                12,988Deferred
                    long-term contract
                    costs
                
                
                561
                
                
                
                721Equipment
                    held for
                    resale
                
                
                6,552
                
                
                
                6,340Patents
                    and other intangibles,
                    net
                
                
                389
                
                
                
                411Notes
                    receivable
                
                
                247
                
                
                
                227Other
                    non-current
                    assets
                
                
                109
                
                
                
                109Total
                    assets
                
                $
                56,480
                
                
                $
                58,100LIABILITIES
                    AND STOCKHOLDERS'
                    EQUITYCurrent
                    liabilities:Accounts
                    payable
                
                $
                2,180
                
                
                $
                2,284Accrued
                    liabilities
                
                
                2,576
                
                
                
                2,989Deferred
                    income tax
                    liability
                
                
                390
                
                
                
                388Advance
                    payments from
                    customers
                
                
                2,353
                
                
                
                1,838Deferred
                    revenue
                
                
                897
                
                
                
                1,584Capital
                    lease
                    obligation
                
                
                28
                
                
                
                -Total
                    current
                    liabilities
                
                
                8,424
                
                
                
                9,083Capital
                    lease obligation, net of
                    current portion
                
                
                76
                
                
                
                -Advance
                    payments from
                    customers
                
                
                23,554
                
                
                
                23,554Deferred
                    revenue
                
                
                2,356
                
                
                
                2,000Long-term
                    deferred
                    rent
                
                
                1,094
                
                
                
                864Total
                    liabilities
                
                
                35,504
                
                
                
                35,501Stockholders'
                    equity:Common
                    stock
                
                
                120
                
                
                
                119Additional
                    paid-in
                    capital
                
                
                63,317
                
                
                
                61,068Accumulated
                    deficit
                
                
                (42,598
                )
                
                
                (38,722
                )Accumulated
                    other comprehensive
                    income
                
                
                137
                
                
                
                134Total
                    stockholders'
                    equity
                
                
                20,976
                
                
                
                22,599Total
                    liabilities and
                    stockholders’ equity
                
                $
                56,480
                
                
                $
                58,100*Amounts
                    derived from audited
                    consolidated financial statementsThe
                    accompanying notes are an
                    integral part of these condensed consolidated financial
                    statements.
  3
  LASERCARD
        CORPORATION AND SUBSIDIARIES
 CONDENSED
        CONSOLIDATED STATEMENTS OF OPERATIONS
 (UNAUDITED)
 (In
        thousands, except per share amounts)
  Three
                    Months
                    Ended
                
                
                Nine
                    Months
                    EndedDecember
                    31,
                
                
                December
                    31,2007
                
                
                2006
                
                
                2007
                
                
                2006Revenues
                
                $
                11,159
                
                
                $
                6,184
                
                
                $
                29,753
                
                
                $
                23,032Cost
                    of sales (includes $105 and
                    $244 stock-basedcompensation
                    in the three and nine
                    month periodsended
                    December 31, 2007 and $90
                    and $258 in the threeand
                    nine month periods ended
                    December 31, 2006, respectively)
                
                
                7,670
                
                
                
                5,397
                
                
                
                21,414
                
                
                
                17,252Gross
                    profit
                
                
                3,489
                
                
                
                787
                
                
                
                8,339
                
                
                
                5,780Operating
                    expenses:Selling,
                    general, and
                    administrative expenses (includes$527
                    and $1,178 stock-based
                    compensation in the threeand
                    nine month periods ended
                    December 31, 2007 and$334
                    and $805 in the three and
                    nine month periods endedDecember
                    31, 2006,
                    respectively)
                
                
                4,056
                
                
                
                3,294
                
                
                
                10,826
                
                
                
                9,712Research
                    and development expenses
                    (includes $69 and $190stock-based
                    compensation in the
                    three and nine monthperiods
                    ended December 31, 2007
                    and $83 and $291 in the threeand
                    nine month periods ended
                    December 31, 2006, respectively)
                
                
                719
                
                
                
                763
                
                
                
                2,212
                
                
                
                2,308Total
                    operating
                    expenses
                
                
                4,775
                
                
                
                4,057
                
                
                
                13,038
                
                
                
                12,020Operating
                    loss
                
                
                (1,286
                )
                
                
                (3,270
                )
                
                
                (4,699
                )
                
                
                (6,240
                )Other
                    income,
                    net
                
                
                225
                
                
                
                267
                
                
                
                655
                
                
                
                706Loss
                    before income
                    taxes
                
                
                (1,061
                )
                
                
                (3,003
                )
                
                
                (4,044
                )
                
                
                (5,534
                )Income
                    tax expense
                    (benefit)
                
                
                19
                
                
                
                (25
                )
                
                
                (106
                )
                
                
                (96
                )Net
                    loss
                
                $
                (1,080
                )
                
                $
                (2,978
                )
                
                $
                (3,938
                )
                
                $
                (5,438
                )Net
                    loss per
                    share:Basic
                
                $
                (0.09
                )
                
                $
                (0.25
                )
                
                $
                (0.33
                )
                
                $
                (0.46
                )Diluted
                
                $
                (0.09
                )
                
                $
                (0.25
                )
                
                $
                (0.33
                )
                
                $
                (0.46
                )Weighted-average
                    shares of common
                    stockused
                    in computing net loss per
                    share:Basic
                
                
                11,971
                
                
                
                11,827
                
                
                
                11,912
                
                
                
                11,803Diluted
                
                
                11,971
                
                
                
                11,827
                
                
                
                11,912
                
                
                
                11,803The
                    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)
 
 Nine
                    Months
                    EndedDecember
                    31,2007
                
                
                2006Cash
                    flows from operating
                    activities:Net
                    loss
                
                $
                (3,938
                )
                
                $
                (5,438
                )Adjustments
                    to reconcile net loss
                    to net cash used in operating activities:Depreciation
                    and
                    amortization
                
                
                2,226
                
                
                
                2,034Gain
                    (loss) on disposal of
                    equipment
                
                
                (10
                )
                
                
                63Provision
                    for doubtful accounts
                    receivable
                
                
                15
                
                
                
                19Provision
                    for excess and obsolete
                    inventory
                
                
                53
                
                
                
                130Provision
                    for warranty
                    reserve
                
                
                96
                
                
                
                97Stock-based
                    compensation
                
                
                1,612
                
                
                
                1,354Changes
                    in operating assets and
                    liabilities:Decrease
                    (increase) in accounts
                    receivable
                
                
                (1,594
                )
                
                
                2,935Increase
                    (decrease) in
                    inventories
                
                
                206
                
                
                
                (1,756
                )Decrease
                    (increase) in deferred
                    contract costs
                
                
                454
                
                
                
                (1,973
                )Decrease
                    (increase) in prepaid and
                    other current assets
                
                
                363
                
                
                
                (329
                )Increase
                    in equipment held for
                    resale
                
                
                (212
                )
                
                
                (371
                )Decrease
                    (increase)  in
                    other non-current assets
                
                
                (152
                )
                
                
                49Decrease
                    in accounts payable and
                    accrued
                
                
                (676
                )
                
                
                (2,581
                )Decrease
                    in deferred income
                    tax
                
                
                (31
                )
                
                
                (55
                )(Decrease)
                    increase in deferred
                    revenue
                
                
                (360
                )
                
                
                213Increase
                    in long-term deferred
                    rent
                
                
                230
                
                
                
                191Increase
                    in advance payments from
                    customers
                
                
                421
                
                
                
                2,120Net
                    cash used in operating
                    activities
                
                
                (1,297
                )
                
                
                (3,298
                )Cash
                    flows from investing
                    activities:Purchases
                    of property and
                    equipment
                
                
                (953
                )
                
                
                (2,538
                )Acquisition
                    of patents and other
                    intangibles
                
                
                (71
                )
                
                
                (109
                )Purchases
                    of short-term
                    investments
                
                
                (7,000
                )
                
                
                (15,600
                )Proceeds
                    from maturities of
                    short-term investments
                
                
                8,000
                
                
                
                22,150Net
                    cash provided by (used in)
                    investing activities
                
                
                (24
                )
                
                
                3,903Cash
                    flows from financing
                    activities:Proceeds
                    from sale of common stock
                    through stock plans
                
                
                639
                
                
                
                867Principal
                    payments on capital
                    lease obligation
                
                
                (9
                )
                
                
                -Net
                    cash provided by financing
                    activities
                
                
                630
                
                
                
                867Effect
                    of exchange rate changes on
                    cash and cash equivalents
                
                
                (248
                )
                
                
                (123
                )Net
                    decrease in cash and cash
                    equivalents
                
                
                (939
                )
                
                
                1,349Cash
                    and cash
                    equivalents:Beginning
                    of
                    period
                
                
                3,026
                
                
                
                2,121End
                    of
                    period
                
                $
                2,087
                
                
                $
                3,470Supplemental
                    schedule of non-cash investing activities:Equipment
                    acquired under capital
                    lease
                
                $
                113
                
                
                $
                -The
                    accompanying notes are an
                    integral part of these condensed consolidated financial
                    statements.
  5
  LASERCARD
          CORPORATION AND SUBSIDIARIES
 NOTES
          TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (UNAUDITED)
  1.    
        Basis of Presentation
 
 The
        unaudited condensed consolidated financial statements contained herein include
        the accounts of LaserCard Corporation (the “Company” and “we”) and its wholly
        owned subsidiaries. All significant intercompany accounts and transactions
        have
        been eliminated upon consolidation. The consolidated balance sheet data as
        of
        March 31, 2007 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, 2007, included in the Company's Annual Report
        on Form 10-K, filed with the SEC on June 12, 2007.
 
 The
        results of operations for the three and nine-month periods ended December
        31,
        2007 are not necessarily indicative of results to be expected for the entire
        fiscal year ending March 31, 2008 or future interim periods.
  Recently
        Adopted Accounting
        Pronouncements:  In June 2006, the Financial Accounting
        Standards Board (“FASB”) issued Interpretation No. 48, Accounting for Uncertainty
        in Income
        Taxes—an interpretation of FASB Statement No. 109 (“FIN 48”). This
        Interpretation clarifies the accounting for uncertainty in income taxes
        recognized in the Company’s financial statements in accordance with FASB
        Statement No. 109, Accounting for Income
        Taxes.
        FIN 48 prescribes a recognition threshold and measurement attribute for the
        financial statement recognition and measurement of a tax position taken or
        expected to be taken in a tax return. This Interpretation also provides guidance
        on derecognition, classification, interest and penalties, accounting in interim
        periods, disclosure, and transition. The evaluation of a tax position in
        accordance with FIN 48 is a two-step process. The first step is recognition:
        The
        Company determines whether it is “more-likely-than-not” that a tax position will
        be sustained upon examination, including resolution of any related appeals
        or
        litigation processes, based on the technical merits of the position. In
        evaluating whether a tax position has met the “more-likely-than-not” recognition
        threshold, the Company presumes that the position will be examined by the
        appropriate taxing authority that would have full knowledge of all relevant
        information. The second step is measurement: A tax position that meets the
        “more-likely-than-not” recognition threshold is measured to determine the amount
        of benefit to recognize in the financial statements. The tax position is
        measured at the largest amount of benefit that is greater than 50 percent
        likely
        to be realized upon ultimate settlement. FIN 48 is effective for fiscal years
        beginning after December 15, 2006 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.
        At
        December 31, 2007, the Company has unrecognized tax benefits of
        $202,000.  The Company does not expect any material change in its
        unrecognized tax benefits over the next twelve months.
 
 The
        Company recognizes interest and penalties accrued on any unrecognized tax
        benefits as a component of its provision for income taxes. As of December
        31,
        2007, the Company has accrued $48,000 for payment of interest and penalties
        related to unrecognized tax benefits.
  6
  LASERCARD
          CORPORATION AND SUBSIDIARIES
 NOTES
          TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (UNAUDITED)
 The
        table
        below shows the changes in the accumulated deficit as of December 31, 2007
        (in
        thousands):
  Balance
                    at March 31, 2007, as
                    reported
                
                $
                (38,722
                )FIN
                    48 adjustments to beginning
                    balance
                
                
                62Net
                    loss during the
                    period
                
                
                (3,938
                )Balance
                    at December 31,
                    2007
                
                $
                (42,598
                )
 
 Although
        the Company files U.S. federal, various state, and foreign tax returns, the
        Company’s only major tax jurisdictions are the United States, California and
        Germany.  Tax years 1993 – 2007 remain subject to examination by the
        appropriate governmental agencies, mainly the United States, due to tax loss
        carryovers from those years.
  Recently
        Issued Accounting
        Pronouncements:In June 2007, EITF Issue No. 07-3 (EITF 07-3) Accounting for
        Nonrefundable Advance
        Payments for Goods or Services to Be Used in Future Research and Development
        Activities, was issued that requires companies to defer and capitalize
        prepaid, nonrefundable research and development payments to third parties
        and
        recognize such amounts over the period that the research and development
        activities are performed or the services are provided, subject to an assessment
        of recoverability. The guidance is effective for new contracts entered into
        in
        fiscal years beginning after December 15, 2007, including interim periods
        within
        those fiscal years.  Earlier application is not
        permitted.  The Company believes that application of this guidance
        would not have a material impact on its condensed consolidated financial
        statements.
  In
        September 2006, the FASB issued Statement No. 157, Fair Value Measurements
        (“SFAS No. 157”). SFAS No. 157 defines fair value, establishes a framework for
        measuring fair value in U.S. generally accepted accounting principles, and
        expands disclosures about fair value measurements. SFAS No. 157 is intended
        to
        be applied in conjunction with other accounting pronouncements that require
        or
        permit fair value measurements. Although SFAS No. 157 does not require any
        new
        fair value measurements, its application may change current practice for
        some
        entities. The definition of fair value contained in SFAS No. 157 retains
        the
        exchange price notion inherent in earlier definitions of fair value. SFAS
        No.
        157 clarifies that the exchange price is the price in an orderly transaction
        between market participants to sell an asset or transfer a liability in the
        principal (or most advantageous) market for the asset or liability. Accordingly,
        the definition focuses on the price that would be received to sell the asset
        or
        paid to transfer the liability at the measurement date (an exit price), not
        the
        price that would be paid to acquire the asset or received to assume the
        liability at the measurement date (an entry price). SFAS No. 157 emphasizes
        that
        fair value is a market-based measurement, not an entity-specific measurement.
        Therefore, SFAS No. 157 prescribes that a fair value measurement be determined
        based on the assumptions that market participants would use in pricing the
        asset
        or liability. The Company has not yet determined what impact this statement
        will
        have on its condensed consolidated financial statements.
  In
        February 2007, the FASB issued SFAS No. 159, The Fair Value Option
        for Financial
        Assets and Financial Liabilities (“SFAS No. 159”). SFAS No. 159 provides
        entities with an option to report selected financial assets and liabilities
        at
        fair value, with the objective to reduce both the complexity in accounting
        for
        financial instruments and the volatility in earnings caused by measuring
        related
        assets and liabilities differently.  SFAS No. 159 is effective for
        fiscal years beginning after November 15, 2007.  The Company has not
        yet determined what impact this statement will have on its condensed
        consolidated financial statements.
  2.    
        Summary of Significant Accounting Policies
  (1.)
        Principles of Consolidation and
        Basis of Presentation.  The accompanying condensed consolidated
        financial statements have been prepared in accordance with U.S. generally
        accepted accounting principles. The condensed consolidated financial statements
        include the accounts of LaserCard Corporation and its wholly owned subsidiaries.
        All significant intercompany accounts and transactions have been eliminated
        upon
        consolidation.
  (2.)
        Use of
        Estimates.  The preparation of condensed consolidated financial
        statements in conformity with U. S. generally accepted accounting principles
        requires management to make estimates and assumptions that affect the reported
        amounts of assets and liabilities and disclosure of contingent assets and
        liabilities at the date of the financial statements and the reported amounts
        of
        revenues and expenses during the reporting period. Actual results could differ
        from those estimates.
  7
  LASERCARD
          CORPORATION AND SUBSIDIARIES
 NOTES
          TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (UNAUDITED)
  (3.)
        Fiscal
        Period.  For purposes of presentation, the Company labels its
        annual accounting period end as March 31 and its quarterly accounting
        period ends as June 30, September 30 and December 31.  The Company, in
        fact, operates and reports based on quarterly periods ending on the Friday
        closest to month end.  The 13-week third quarter of fiscal year 2008
        ended on December 28, 2007, and the 13-week third quarter of fiscal year
        2007
        ended on December 29, 2006.
  (4.)Foreign
        Currency
        Transactions.The
        functional currency of the Company's foreign subsidiary is generally the
        local
        currency. The financial statements of this subsidiary are translated to United
        States dollars using period-end rates of exchange for assets and liabilities
        and
        average rates of exchange for the period for revenues and expenses. Translation
        gains (losses) are recorded in accumulated other comprehensive income as
        a
        component of stockholders' equity. Net gains and losses resulting from foreign
        exchange transactions are included in selling, general and administrative
        expenses and were not significant during the periods presented.
  (5.)
        Derivative Financial
        Instruments.The Company uses short-term foreign exchange forward
        contracts to mitigate foreign currency risk associated primarily with
        inter-company receivables and payables, and loan receivables (denominated
        in
        Euros) with its German subsidiary. Our foreign exchange forward contracts
        are
        not designated for accounting purposes as hedging instruments under SFAS
        No.
        133, Accounting for Derivative
        Instruments and Hedging Activities, as amended.  Accordingly,
        any gains or losses resulting from changes in the fair value of the forward
        contracts are reported in other income. The gains and losses on these forward
        contracts generally offset gains and losses associated with the underlying
        foreign currency denominated inter-company receivables and payables, and
        loans
        receivable.  At December 31, 2007, we had foreign exchange forward
        contracts with a maturity of less than 30 days to purchase 1.3 million
        euros.  The fair value of the forward contracts was not material at
        December 31, 2007 and March 31, 2007.
  (6.)
        Concentrations
        of Risk.Financial
        instruments that potentially subject the Company to significant concentrations
        of credit risk consist principally of cash, cash equivalents, short-term
        investments, long-term investments and accounts receivable. The Company places
        its cash, cash equivalents, and short-term and long-term investments in
        high-credit quality financial institutions. The Company is exposed to credit
        risk in the event of default by these institutions to the extent of the amount
        recorded on the condensed consolidated balance sheet. As ofDecember 31, 2007,
        the Company’s short-term investments
        consist ofauction rate securities and there were no long-term
        investments. Accounts receivable
        are derived from revenue earned from customers primarily located in theUnited States,Italy,
        Middle EastandGermany.
        The Company performs ongoing credit
        evaluations of its customers’ financial condition and generally does not require
        collateral. The Company maintains reserves for potential credit losses and
        historically, such losses have been immaterial.
  (7.)
        Major Customers.The
        following customers accounted for more than 10% of revenues for the periods
        shown below.  The revenue from these customers was attributable to
        both the optical memory card and the drive, system and services
        segments.  No other customer accounted for more than 10% of revenues
        during these periods.
  Three
                    Months
                    Ended
                
                Nine
                    Months
                    EndedDecember
                    31,
                
                December
                    31,2007
                
                2006
                
                2007
                
                2006Customer
                    A
                21%
                
                41%
                
                29%
                
                34%Customer
                    B
                17%
                
                ―
                
                21%
                
                ―Customer
                    C
                <10%
                
                ―
                
                <10%
                
                11%Customer
                    D
                33%
                
                <10%
                
                15%
                
                <10%
 
 Three
        customers accounted for 35%, 20%, and 12%, respectively, of accounts receivable
        at December 31, 2007.  Two customers accounted for 31% and 17%,
        respectively, of accounts receivable at March 31, 2007.
   8
  LASERCARD
          CORPORATION AND SUBSIDIARIES
 NOTES
          TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (UNAUDITED)
 (8.)
        Cash and Cash Equivalents,
        Short-term Investments and Long-term Investments.  The Company
        considers all highly liquid investments, consisting primarily of commercial
        paper, discount notes and U.S. government bonds, with maturities of three
        months
        or less at the date of purchase, to be cash equivalents.  Cash and
        cash equivalents were $2.1 million at December 31, 2007 and $3 million at
        March
        31, 2007.  As of December 31, 2007 and March 31, 2007, the Company
        held auction rate securities which were accounted for as available-for-sale
        and
        classified as short-term investments.  The fair values of the auction
        rate securities, based on quoted market prices, were substantially equal to their
        carrying costs due to the frequency of the reset dates.  Short-term
        investments also include investments with maturities at date of purchase
        of more
        than three months and investments with remaining maturities of less than
        one
        year.  All investments with maturities at date of purchase greater
        than one year are classified as long-term investments.  Management
        determines the appropriate classification of debt securities at the time
        of
        purchase and re-evaluates the classification of investments as of each balance
        sheet date.
 
 All
        short-term investments, except for auction rate securities which are recorded
        at
        fair value, and long-term investments are classified as held-to-maturity
        and are
        stated in the condensed consolidated balance sheet at amortized
        cost.  As such investments are classified as held-to-maturity, no
        unrealized gains or losses are recorded.  The carrying amounts of
        individual held-to-maturity securities are reviewed at the condensed
        consolidated balance sheet date for potential impairment.  As of
        December 31, 2007 and March 31, 2007, there are no short-term or long-term
        investments other than auction rate securities.
 
 The
        carrying amounts of short-term investments in the form of auction rate
        securities as of December 31, 2007 and March 31, 2007 are $16.5 million and
        $17.5 million, respectively.
 
 (9.)
        Fair Value of Financial
        Instruments.  The carrying amounts of the Company’s financial
        instruments including cash and cash equivalents, short-term investments,
        accounts receivable, accounts payable and accrued liabilities, approximate
        their
        fair values due to their short maturities.
 
 (10.)
        Accounts Receivable, Net.We maintain allowances for doubtful accounts and product return reserves
        for anticipated losses resulting from the inability of our customers to make
        required payments and in-process product returns. We generally compute our
        allowances based on specifically identifying accounts that are past due and
        that
        are likely not collectible.  Interest receivable is accrued from
        investments in auction rate securities and other interest-bearing
        securities.  Other receivables are comprised of value added tax
        refunds and miscellaneous items.  The components of accounts
        receivable as of December 31, 2007 and March 31, 2007 are (in
        thousands):
  December
                    31,
                
                
                March
                    31,2007
                
                
                2007Trade
                    receivables
                
                $
                5,066
                
                
                $
                3,383Allowance
                    for doubtful
                    accounts
                
                
                (88
                )
                
                
                (66
                )Product
                    return
                    reserves
                
                
                -
                
                
                
                (78
                )Interest
                    receivable
                
                
                42
                
                
                
                34Other
                    receivables
                
                
                198
                
                
                
                216Total
                    accounts receivable,
                    net
                
                $
                5,218
                
                
                $
                3,489
  9
  LASERCARD
          CORPORATION AND SUBSIDIARIES
 NOTES
          TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (UNAUDITED)
   (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 December 31, 2007 and March 31,
        2007
        are (in thousands):
  December
                    31,
                
                
                March
                    31,2007
                
                
                2007Raw
                    materials
                
                $
                7,825
                
                
                $
                7,763Work-in-process
                
                
                882
                
                
                
                860Finished
                    goods
                
                
                2,660
                
                
                
                2,839Total
                    inventory,
                    net
                
                $
                11,367
                
                
                $
                11,462
 The
          Company establishes lower of cost or market reserves, aged inventory reserves
          and obsolescence reserves. Inventory reserves are generally recorded when
          management determines that an item is not readily saleable. Inventory reserves
          are not relieved until the related inventory has been sold or scrapped.
          For the
          three and nine-month periods ended December 31, 2007, the Company recorded
          inventory reserve expense of $3,000 and $53,000, respectively. For the
          three and
          nine-month periods ended December 31, 2006, the Company recorded inventory
          reserve expense of $6,000 and $139,000, respectively. We did not record
          any
          lower of cost or market adjustments in our condensed consolidated statements
          of
          operations for the three and nine-month periods ended December 31, 2007
          and
          2006.
 
 (12.)
        Equipment Held for
        Resale.Equipment held for resale consists primarily of parts,
        labor costs and other costs incurred to build equipment under a contract
        assigned to Prevent in March 2007.  Direct incremental costs
        associated with the purchase or construction of these items are deferred
        until
        revenue is recognized.  The components of equipment held for resale as
        of December 31, 2007 and March 31, 2007 are (in thousands):
  December
                    31,
                
                
                March
                    31,2007
                
                
                2007Parts
                
                $
                5,318
                
                
                $
                5,297Labor
                    costs
                
                
                1,121
                
                
                
                931Other
                
                
                113
                
                
                
                112Total
                    equipment held for
                    resale
                
                $
                6,552
                
                
                $
                6,340
  (13.)
        Property and Equipment,
        Net.  The components of property and equipment as of December
        31, 2007 and March 31, 2007 are (in thousands):
  December
                    31,
                
                
                March
                    31,2007
                
                
                2007Building
                    and
                    land
                
                $
                967
                
                
                $
                885Equipment
                    and
                    furniture
                
                
                25,503
                
                
                
                24,334Construction
                    in progress,
                    includingpurchased
                    equipment
                
                
                264
                
                
                
                774Leasehold
                    improvements
                
                
                5,193
                
                
                
                4,70131,927
                
                
                
                30,694Less:
                    accumulated depreciation and
                    amortization
                
                
                (19,835
                )
                
                
                (17,706
                )Total
                    property and equipment,
                    net
                
                $
                12,092
                
                
                $
                12,988
 
 Property
        and equipment are recorded at cost. Depreciation is provided over the estimated
        useful lives which currently are four to seven years for equipment and furniture
        using the straight-line method and twenty-five years for the building using
        the
        straight-line method. Leasehold improvements are amortized over the shorter
        of
        the life of the asset or the life of the lease using the straight-line method.
        Depreciation and leasehold amortization expense for the three and nine-month
        periods ended December 31, 2007 was $731,000 and $2,132,000, respectively.
        Depreciation and leasehold amortization expense for the three and nine-month
        periods ended December 31, 2006 was $675,000 and $1,930,000, respectively.
        Maintenance and minor repairs and replacements are expensed when incurred.
        Disposition or retirement of property and equipment related gains and losses
        are
        charged to other income and expenses.
  10
  LASERCARD
          CORPORATION AND SUBSIDIARIES
 NOTES
          TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (UNAUDITED)
 Certain
        costs incurred in connection with acquisition of software for internal use
        are
        capitalized following Statement of Position (SOP) 98-1, Accounting for the Costs
        of Computer
        Software Developed or Obtained for Internal Use and EITF Issue No. 97-13,
Accounting for
        Costs Incurred
        in Connection with a Consulting Contract or an Internal Project That Combines
        Business Process Reengineering and Information Technology
        Transformation.  Capitalized software costs are included in the
        equipment and furniture account and are amortized over four to seven
        years.  Software costs that do not meet capitalization criteria are
        expensed immediately.
 
 (14.)
        Goodwill and Other Intangible
        Assets.Goodwill represents the excess of the purchase price
        over the fair value of identifiable net tangible and intangible assets acquired
        in a business combination.  In accordance with SFAS No. 142, Goodwill and Other Intangible
        Assets, the Company does not amortize goodwill.  Instead, the
        Company evaluates goodwill for impairment annually in the fourth quarter
        and
        whenever events or changes in circumstances indicate that it is more likely
        than
        not that an impairment loss has been incurred.  At March 31, 2007, the
        Company determined that estimated future cash flows were insufficient to
        justify
        the carrying value of goodwill and other intangible assets based on management’s
        decision to suspend optical memory card production in Germany. As such, in
        the
        fourth quarter of fiscal year 2007, the Company recorded a non-cash impairment
        charge of approximately $3.8 million for the full amount of remaining goodwill
        and other intangible assets related to the Company’s purchase of Challenge Card
        Design Plastikkarten GmbH of Rastede, Germany, and Cards & More GmbH of
        Ratingen, Germany on March 31, 2004.  We intend to continue to use the
        facility and equipment to produce specialty cards although plans to use the
        facility to produce LaserCard® optical memory cards in Germany have been
        suspended.
 
 Definite
        life intangible assets capitalized and accumulated amortization as of December
        31, 2007 and March 31, 2007 are as follows (in thousands):
 December
                    31,
                
                
                March
                    31,2007
                
                
                2007Patent
                    expenditures
                
                $
                3,625
                
                
                $
                3,554Technology
                    transfer
                    expenditures
                
                
                545
                
                
                
                545Total
                    patent and other intangible
                    expenditures
                
                
                4,170
                
                
                
                4,099Patent
                    accumulated
                    amortization
                
                
                (3,236
                )
                
                
                (3,149
                )Technology
                    transfer accumulated
                    amortization
                
                
                (545
                )
                
                
                (539
                )(3,781
                )
                
                
                (3,688
                )Patents
                    and other intangibles,
                    net
                
                $
                389
                
                
                $
                411
  Patent
        and technology transfer amortization expense for the three and nine-month
        periods ended December 31, 2007 was $30,000 and $94,000,
        respectively.  Patent and technology transfer amortization expense for
        the three and nine-month periods ended December 31, 2006 was $36,000 and
        $104,000, respectively.
 
 (15.)
        Assessment of Impairment of
        Tangible and Intangible Long-Lived Assets.  In accordance with
        SFAS No. 144, Accounting
        for the Impairment or Disposal of Long-Lived Assets, the Company assesses
        the impairment of long-lived assets whenever events or changes in circumstances
        indicate that their carrying value may not be recoverable from the estimated
        future cash flows expected to result from their use and eventual
        disposition.  The Company’s long-lived assets subject to this
        evaluation include property and equipment and amortizable intangible
        assets.  If the Company’s estimate of future undiscounted net cash
        flows is insufficient to recover the carrying value of the assets, the Company
        will record an impairment loss in the amount by which the carrying value
        of the
        assets exceeds the fair value.  If assets are determined to be
        recoverable but the useful lives are shorter than originally estimated, the
        Company depreciates or amortizes the net book value of the asset over the
        newly
        determined remaining useful lives.  As of December 31, 2007 and March
        31, 2007, the fair value of long-lived assets exceeds their book
        value.  Therefore, no impairment loss has been
        recognized.
  11
  LASERCARD
          CORPORATION AND SUBSIDIARIES
 NOTES
          TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (UNAUDITED)
 (16.)
        Accrued
        Liabilities.  The components of accrued liabilities as of
        December 31, 2007 and March 31, 2007 are (in thousands):
  December
                    31,
                
                
                March
                    31,2007
                
                
                2007Accrued
                    payroll and fringe
                    benefits
                
                $
                481
                
                
                $
                497Accrued
                    compensated
                    absences
                
                
                533
                
                
                
                855Warranty
                    reserves
                
                
                603
                
                
                
                743Other
                    accrued
                    liabilities
                
                
                959
                
                
                
                894Total
                    accrued
                    liabilities
                
                $
                2,576
                
                
                $
                2,989
 
 Where
          appropriate, provision is made at the time of shipment for estimated warranty
          costs. We provide a limited warranty for the replacement of defective products.
          Our limited warranty requires us to repair or replace defective products
          at no
          cost to the customer within a specified time period after sale. We estimate
          the
          costs that may be incurred under our limited warranty and record a liability
          in
          the amount of such costs at the time product revenue is recognized. Factors
          that
          affect our estimate of warranty liability include the number of units sold,
          and
          historical and anticipated rates of warranty claims. We assess the adequacy
          of
          our recorded warranty liability and adjust the amount as necessary. We
          utilize
          historical trends and information received from our customers to assist
          in
          determining the appropriate estimated warranty accrual levels. The Company’s product warranty claims
          are settled through the return of defective products and the shipment of replacement
          products.Theadequacy
          of thewarranty reserve
          is reviewed quarterly
          to verify that it properly reflects the remaining obligations based on
          the
          anticipatedwarranty costsover
          the balance of the
          obligation period. Adjustments are made when actual return claim experience
          differs from estimates.Warranty activities
          for the three and
          nine-month periods ended December 31, 2007 and 2006 are as follow (in
          thousands):
  Three
                    Months
                    Ended
                
                
                Nine
                    Months
                    EndedDecember
                    31,
                
                
                December
                    31,2007
                
                
                2006
                
                
                2007
                
                
                2006Beginning
                    balance
                
                $
                607
                
                
                $
                679
                
                
                $
                743
                
                
                $
                699Accruals
                    for products
                    sold
                
                
                5
                
                
                
                (1
                )
                
                
                92
                
                
                
                97Costs
                    incurred
                
                
                (9
                )
                
                
                (4
                )
                
                
                (232
                )
                
                
                (122
                )Ending
                    balance
                
                $
                603
                
                
                $
                674
                
                
                $
                603
                
                
                $
                674
 
 (17.)
        Software Development
        Costs.  Development costs incurred in the research and
        development of new software products are expensed as incurred until
        technological feasibility in the form of a working model has been
        established.  To date, the Company’s software development has been
        completed concurrent with the establishment of technological feasibility
        and,
        accordingly, all software development costs have been charged to research
        and
        development expenses in the accompanying condensed consolidated statements
        of
        operations.
 
 (18.)
        Advance Payments from
        Customers.  The Company routinely receives advance payments on
        orders placed by its customers.  The advance payments are recorded as
        a liability in the condensed consolidated balance sheets until the related
        orders are shipped or services are performed or revenue would otherwise be
        recognized.
 
 (19.)
        Revenue
        Recognition.  Product sales primarily consist of optical card
        sales, sales of drives, systems and services and sales of specialty cards
        and
        card printers.  The Company recognizes revenue from product sales when
        the following criteria are met:  (1) persuasive evidence of an
        arrangement exists; (2) delivery has occurred; (3) the fee is fixed or
        determinable; and (4) collectibility is reasonably assured.  The
        Company recognizes revenue on product sales at the time of shipment when
        shipping terms are F.O.B. shipping point, orders are placed pursuant to a
        pre-existing sales arrangement and there are no post-shipment obligations
        other
        than customer acceptance criteria or, in the case of a U.S. government contract,
        warehousing.  Where appropriate, provision is made at the time of
        shipment for estimated warranty costs and estimated returns.
  12
  LASERCARD
          CORPORATION AND SUBSIDIARIES
 NOTES
          TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (UNAUDITED)
 Orders
        for Permanent Resident and Border Crossing Cards for the U.S. government
        require
        delivery into a secure Company-controlled vault.  Shipments are later
        made from the vault to a U.S. government site.  The bill and hold
        procedures also provide that at the end of any one-year contract term when
        a
        renewal option is not exercised, the U.S. government is to take final delivery
        of any and all of its remaining inventory within six months.  At the
        time the cards are delivered into the vault, title to the cards is transferred
        to the U.S. government and all risks of ownership are transferred as
        well.  The prime contractor is invoiced, with payment due within
        thirty days and the purchase orders do not contain any return (other than
        for
        warranty) or cancellation provisions. Pursuant to the provisions of SEC Staff
        Accounting Bulletin No. 104 ―Revenue
        Recognition (“SAB
        104”), revenue is recognized on delivery into the vault as the Company has
        fulfilled its contractual obligations and the earnings process is
        complete.
 
 The
        Company applies the provisions of the Emerging Issues Task Force Issue No.
        00-21, Revenue Arrangements
        with Multiple Deliverables (“EITF 00-21”), to revenue arrangements with
        multiple deliverables.  EITF 00-21 provides criteria governing how to
        identify whether goods or services that are to be delivered separately in
        a
        bundled sales arrangement should be accounted for separately. Deliverables
        are
        accounted for separately if they meet all of the following criteria: a) the
        delivered items have stand-alone value to the customer; b) the fair value
        of any
        undelivered items can be reliably determined; and c) if the arrangement includes
        a general right of return, delivery of the undelivered items is probable
        and
        substantially controlled by the seller. In situations where the deliverables
        fall within higher-level literature as defined by EITF 00-21, the Company
        applies the guidance in that higher-level literature. Deliverables that do
        not
        meet these criteria are combined with one or more other
        deliverables.
 
 The
        Company applies the provisions of Statement of Position 81-1, Accounting for Performance
        of
        Construction-Type and Certain Production-Type Contracts (“SOP 81-1”), in
        applicable contracts. Revenues on time and materials contracts are recognized
        as
        services are rendered at contract labor rates plus material and other direct
        costs incurred.  Revenues on fixed price contracts are recognized on
        the percentage of completion method based on the ratio of total costs incurred
        to date compared to estimated total costs to complete the
        contract.  Estimates of costs to complete include material, direct
        labor, overhead and allowable general and administrative expenses.  In
        circumstances where estimates of costs to complete a project cannot be
        reasonably estimated, but it is assured that a loss will not be incurred,
        the
        percentage-of-completion method based on a zero profit margin, rather than
        the
        completed-contract method, is used until more precise estimates can be made.
        The
        full amount of an estimated loss is charged to operations in the period it
        is
        determined that a loss will be realized from the performance of a
        contract.  The Company recognized approximately $123,000 and $169,000
        of revenues for the three and nine-month periods ended December 31, 2007,
        respectively, and $1,000 and $10,000 for the three and nine-month periods
        ended
        December 31, 2006, respectively, based on a zero profit margin related to
        a
        long-term contract.
 
 In
        the
        fourth quarter of fiscal year 2006, the Company entered into a subcontract
        covering product and services with a prime contractor for a Middle Eastern
        country to provide them with card personalization workstation integration
        for
        use in that country’s personalized national ID program with decentralized card
        issuance which includes optical memory cards, hardware, and software. The
        contract called for multiple deliverables, installation, and certain client
        acceptance criteria, as defined in the agreement.  In applying the
        guidance within EITF 00-21, the Company determined the deliverables are not
        to
        be accounted for as separate units, but rather as a bundled arrangement as
        the
        fair value of the undelivered items cannot be readily determined. 
Therefore, revenue recognition on this contract and the associated contract
        costs were deferred until the predominant undelivered element, the card
        personalization, was delivered and accepted, commencing when the installation
        and acceptance of the card personalization system was complete. The Company
        determined that once the card personalization system was accepted, contract
        revenue would be recognized ratably based on actual cards personalized and
        accepted.  As the card personalization system was accepted during the
        quarter ended March 31, 2007, the Company began recognizing revenue under
        this
        contract during that period on cards that had been accepted by
        customer.  On June 23, 2007, the Company and the prime contractor
        entered into an amendment agreement whereby the Company will provide cards
        and
        supplies according to a delivery schedule for the balance of this fiscal
        year.  In addition, the Company no longer has obligations pertaining
        to the installation of equipment, card personalization workstation integration
        or card personalization.  As a result of this amendment, the Company
        will ratably recognize revenue upon receipt of the customer’s certificate of
        acceptance of cards delivered.  Also under the amendment and
        associated sales incentives, new prices per card have been
        established.  During the three and nine-month periods ended December
        31, 2007, we recognized revenue of approximately $1.9 million and $6.2 million,
        respectively.  The Company has completed the initial orders under the
        subcontract at December 31, 2007; however, the subcontract allows for optional
        orders at customer request over a four-year period through December 2010,
        valued
        at up to another approximately $35 million in cards based on the new agreed
        upon
        price per card under the amendment.  We anticipate smaller orders for
        this program during calendar year 2008.
  13
  LASERCARD
          CORPORATION AND SUBSIDIARIES
 NOTES
          TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (UNAUDITED)
 The
        Company applies the provisions of Statement of Position (“SOP”) No. 97-2, Software Revenue Recognition,
        as amended by Statement of Position 98-9, Modification of SOP 97-2,
        Software
        Revenue Recognition, With Respect to Certain Transactions to all
        transactions involving the sale of software products.  Revenue from
        the license of the Company’s software products is recognized when persuasive
        evidence of an arrangement exists, the software product has been delivered,
        the
        fee is fixed or determinable and collectibility is probable, and, if applicable,
        upon acceptance when acceptance criteria are specified or upon expiration
        of the
        acceptance period.  There was no software revenue recognized for the
        nine-month period ended December 31, 2007. Software revenue was immaterial
        for
        the nine-month period ended December 31, 2006.
 
 License
        revenue, which may consist of up-front license fees and long-term royalty
        payments, is recognized as revenue when earned.  There were no license
        revenues recorded for the three and nine-month periods ended December 31,
        2007
        and 2006.
 
 The
        Company entered into license and optical memory card equipment purchase and
        support agreements, effective April 3, 2004, with Global Investments Group
        (GIG), based in Auckland, New Zealand, for optical memory card manufacturing
        in
        Slovenia.  GIG transferred the license and other agreements, with our
        approval, to Prevent Global družba za upravljanje, investicije in razvoj d.d
        (“Prevent”) in March 2007.  The agreements provide for payments (other
        than interest on late payments) to the Company of about $25.6 million which
        were fully paid as of March 31, 2007, for a 20-year license, the required
        manufacturing equipment for a targeted initial manufacturing capacity of
        10
        million optical cards annually and installation support, and a four-year
        training and support package.  Of the $25.6 million we received, $23.6
        million was recorded as advance payments from customer and $2 million for
        the
        licensing fee was recorded as deferred revenue.  Both were classified
        as long term liabilities in the condensed consolidated balance
        sheets.  As of December 31, 2007, the Company had $6.6 million of
        acquired equipment, plus direct and incremental expenses, classified as
        equipment held for resale on our condensed consolidated balance
        sheets.  The Company is to ship this equipment to Prevent upon request
        for installation in a facility.  At this time, the Company does not
        know when Prevent will initiate such a request.  Beginning in the
        fourth year of the contract, Prevent is to pay $3 million for a three-year
        support package, and has options for thirteen additional years of support
        for
        payments of $1 million annually.  In addition to the $41.6 million
        discussed above, Prevent is to pay royalties of $0.60 per card for each card
        produced under the license.  The territories covered by the license include
        most of the European Union and Eastern European regions.  Prevent has
        exclusive marketing rights in certain territories, with performance goals
        to
        maintain these rights.  The Company retains rights to utilize up to
        20% of the new facility capacity as backup and a capacity buffer to augment
        our
        own card manufacturing facilities in Mountain View, California and possibly
        at
        the Company’s German subsidiary.  The granting of this license to
        Prevent establishes a potential second source supplier of optical memory
        cards
        for existing and prospective customers who may request multiple sources for
        cards.  The agreement contains various elements including a card
        manufacturing license, sale and installation of equipment, training and ongoing
        support, and contingent payments for support, materials, and royalty payments
        for cards manufactured.  In accordance with EITF 00-21 Revenue Arrangements with
        Multiple
        Deliverables, the card manufacturing license, sale and installation of
        equipment, training and support package, have been accounted for as one unit
        of
        accounting, since we were unable to determine evidence of the fair value
        for the
        undelivered items other than ongoing support.  The Company is able to
        determine evidence of fair value for the last predominant item to be delivered,
        which is the ongoing annual support of the manufacturing
        equipment.  Accordingly, revenues for the arrangement have been
        deferred and will be recognized when the equipment is installed and accepted,
        with the exception of the value of the ongoing annual support of the
        manufacturing equipment which will be recognized quarterly as earned, beginning
        when the equipment is accepted and training has been completed, which date
        is
        dependent on Prevent establishing a suitable facility in
        Slovenia.  Pursuant to FTB 90-1, Accounting for Separately
        Priced
        Extended Warranty and Product Maintenance Contracts, the support revenue
        will be recognized ratably over the remaining term of the
        agreement.
  14
 LASERCARD
          CORPORATION AND SUBSIDIARIES
 NOTES
          TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (UNAUDITED)
 (20.)
        Research and Development
        Expenses.  Costs related to research, design and development of
        products are charged to research and development expense as
        incurred.  Research and development costs include salaries, contractor
        fees, building and utility costs, and depreciation.
 
 (21.)
        Shipping and Handling
        Costs.Shipping
        and handling costs are recorded
        in cost of sales.
 
 (22.)
          Advertising
          Costs.Advertising costs
          consist of development and placement costs of the Company’s advertising
          campaigns and are charged to expense when incurred.There
          was no recorded advertising
          expense for the three-month period ended December 31, 2007, and 2006.
          Advertising expensewas approximately
          $202,000
          and $188,000for thenine-month
          periods endedDecember
          31,
          2007, and 2006, respectively.
  (23.)
        Stock-based
        Compensation.  Effective April 1, 2006, the Company adopted
        Statement of Financial Accounting Standard (“SFAS”) No. 123(R), Share-Based Payment, which
        requires share-based payment transactions to be accounted for using a fair
        value
        based method and the recognition of the related expense in the results of
        operations.
  The
        Company adopted SFAS No. 123(R) using the modified prospective method of
        transition which requires compensation expense related to share based payments
        to be recognized beginning on the adoption date over the requisite service
        period, generally the vesting period, for awards granted after April 1,
        2006, and over the remaining service period for the unvested portion of awards
        granted prior to April 1, 2006.  The condensed consolidated
        financial statements for prior fiscal years have not been restated to reflect
        the impact of adopting SFAS No. 123(R).
  2004
        Equity Incentive Compensation
        Plan (the “2004 Plan”):The 2004 Plan provides for the grant of
        restricted share awards, options, stock units and stock appreciation rights,
        any
        of which may or may not require the satisfaction of performance objectives,
        with
        respect to shares of our common stock to directors, officers, employees and
        consultants of the Company and its subsidiaries.  The exercise price
        of stock options may not be less than 100% of the fair market value of the
        common stock as of the date of grant (110% of the fair market value if the
        grant
        is of an incentive stock option to an employee who owns more than 10% of
        the
        total combined voting power of all classes of the Company’s capital
        stock).  Options granted may not be exercised more than 10 years after
        the date of grant (five years after the date of grant if the grant is an
        incentive stock option to an employee who owns more than 10% of the total
        combined voting power of all classes of the Company’s capital stock). The Board
        of Directors specifies the term of options, typically 7 years, and the vesting
        schedule for exercise of options, generally 25% after one year and 6.25%
        quarterly for the next 3 years.
 
 Stock
        Options: Under the
        provisions of SFAS No. 123(R), stock-based compensation cost is estimated
        at the grant date based on the fair value of the award and compensation cost
        is
        recognized as an expense over the requisite service period of the award,
        generally the vesting period. The fair value of non-vested stock awards was
        determined by reference to the fair market value of the Company’s common stock
        on the date of grant. Consistent with the valuation method the Company used
        for
        disclosure-only purposes under the provisions of SFAS No. 123, 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.
  15
 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 and nine-month periods ended December
        31,
        2007 and 2006:
 
 Three
                    Months
                    Ended
                
                Nine
                    Months
                    EndedDecember
                    31,
                
                December
                    31,2007
                
                2006
                
                2007
                
                2006Expected
                    stock price
                    volatility
                55%
                
                55%
                
                55%
                
                55%Risk-free
                    interest
                    rates
                3.62%
                
                4.52%
                
                3.62%
                    to
                    4.93%
                
                4.40%
                    to
                    4.96%Expected
                    life of
                    options
                4.4
                    to 5
                    years
                
                4.4
                    to 5
                    years
                
                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
        Company recognized the full amount of the stock-based employee compensation
        expense of its equity incentive plans in the condensed consolidated statements
        of operations for the three and nine-month periods ended December 31, 2007
        and
        2006, and did not capitalize any such costs in the condensed consolidated
        balance sheets other than in the general overhead pool for inventory
        costs.
  Stock-based
        compensation expense related to stock options and restricted shares were
        recorded in the Company’s condensed consolidated statements of operations was
        allocated as follows (in thousands):
  Three
                    Months
                    Ended
                
                
                Nine
                    Months
                    EndedDecember
                    31,
                
                
                December
                    31,2007
                
                
                2006
                
                
                2007
                
                
                2006Cost
                    of
                    sales
                
                $
                105
                
                
                $
                90
                
                
                $
                244
                
                
                $
                258Selling,
                    general and
                    administrative expense (excludes ESPP)
                
                
                487
                
                
                
                303
                
                
                
                1,083
                
                
                
                726Research
                    and development
                    expense
                
                
                69
                
                
                
                83
                
                
                
                190
                
                
                
                291Stock-based
                    compensation expense
                    before income tax
                
                
                661
                
                
                
                476
                
                
                
                1,517
                
                
                
                1,275Less:
                    income tax
                    benefit
                
                
                ―
                
                
                
                ―
                
                
                
                ―
                
                
                
                ―Net
                    stock-based compensation
                    expense after income tax
                
                $
                661
                
                
                $
                476
                
                
                $
                1,517
                
                
                $
                1,275
  Restricted
        Shares and Restricted
        Stock Units:On September 21, 2007, restricted shares and restricted
        stock units were awarded to certain Company employees and directors under
        the
        provisions of the 2004 Plan. These shares and units are subject to time-based
        vesting provisions, and were awarded at no cost to the recipients, and cannot
        be
        sold, assigned, transferred, or pledged during the restriction period.
        Recipients of the restricted shares have the right to vote such shares and
        receive dividends, whereas the recipients of restricted stock units do not
        have
        these same benefits.
 
 Restricted
        shares were awarded to officers and directors of the Company. The fair value
        of
        the shares at the time of the award is expensed on a straight-line basis,
        primarily in selling, general and administrative expenses over the vesting
        period.  For officers, 25% of these restricted shares shall vest
        subject to continuous common-law employment with the Company on each of the
        first, second, third, and fourth anniversaries of the date of grant of their
        award with no expiration.  For directors, the restricted shares will
        vest in full on the eleventh month after the date of their award.  For
        officers, as the shares vest, the Company will affect tax withholding by
        retaining that number of shares having a fair market value equal to the taxes
        being withheld.
  16
  LASERCARD
          CORPORATION AND SUBSIDIARIES
 NOTES
          TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (UNAUDITED)
 Restricted
        stock units were awarded to certain employees of the Company. The fair value
        at
        the time of the award is expensed on a straight-line basis over the vesting
        period. Subject to the employee’s continuous common-law employment with the
        Company, 25% of these restricted units vest on each of the first, second,
        third,
        and fourth anniversaries of the date of their award.  As the units
        vest, shares will be issued in settlement, net of shares retained to satisfy
        withholding obligations.
 
 As
        of
        December 31, 2007, about $5.2 million of total unrecognized compensation
        cost
        related to unvested stock options, restricted share awards and restricted
        stock
        units is expected to be recognized over the remaining vesting period through
        December 31, 2012.  As of December 31, 2006, there was approximately
        $4.3 million of total unrecognized compensation cost related to unvested
        share-based compensation arrangements granted under our stock incentive plans
        which was expected to be recognized over the remaining vesting period through
        December 31, 2011.
 
 The
        Company recorded no income tax benefit on stock-based compensation expense
        for
        the three and nine-month periods ended December 31, 2007 and 2006, as the
        Company has cumulative operating loss carryforwards, for which a full valuation
        allowance has been established.
 
 The
        FASB
        Staff Position ("FSP") No. 123R-3, Transition Election Related
        to
        Accounting for the Tax Effects of Share-Based Payment Awards, requires an
        entity to follow either the transition guidance for the
        additional-paid-in-capital (APIC) pool as prescribed in SFAS No. 123(R) or
        the
        alternative transition method described in FSP No. 123R-3. An entity that
        adopts SFAS No. 123(R) using the modified prospective application may make
        a
        one-time election to adopt the transition method described in the FSP No.
        123R-3, and may take up to one year from the latter of its initial adoption
        of
        SFAS No. 123(R) or the effective date of the FSP No. 123R-3 to evaluate the
        available transition alternatives and make its one-time election. We have
        elected to use the simplified method provided for in FSP FAS 123R-3 to calculate
        our APIC pool effective April 1, 2007. The adoption of the FSP did not have
        a
        material impact on our consolidated financial position, results of operations
        or
        cash flows.
 
 Employee
        Stock Purchase
        Plan.  The Company has an Employee Stock Purchase Plan (ESPP),
        under which eligible employees may designate from 2% to 6% of their compensation
        to be withheld for the purchase of shares of common stock at 67% of the average
        price over the three-day period prior to the purchase date.  The
        differential between fair market value and the average price of the shares
        sold
        under the ESPP is charged to operations as a compensation expense and is
        taxed
        to the employee as income.  For the three and nine-month periods ended
        December 31, 2007 and 2006, the stock-based compensation expense relating
        to the
        ESPP which was included in the Company’s condensed consolidated statements of
        operations in selling, general and administrative expenses is as follows
        (in
        thousands):




Three
                  Months
                  Ended
              
              
              Nine
                  Months
                  EndedDecember
                  31,
              
              
              December
                  31,2007
              
              
              2006
              
              
              2007
              
              
              2006Employee
                  Stock Purchase
                  Plan
              
              $
              40
              
              
              $
              31
              
              
              $
              95
              
              
              $
              79$
              40
              
              
              $
              31
              
              
              $
              95
              
              
              $
              79


17
  LASERCARD
          CORPORATION AND SUBSIDIARIES
 NOTES
          TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (UNAUDITED)
 (24)
        Comprehensive Income
        (Loss).  Under SFAS No. 130, Reporting Comprehensive
        Income, comprehensive income (loss) is defined as the changes in equity
        of an enterprise except for those resulting from stockholders’ transactions. For
        the three and nine-month periods ended December 31, 2007 and 2006, comprehensive
        loss is as follows (in thousands):
  Three
                    Months
                    Ended
                
                
                Nine
                    Months
                    EndedDecember
                    31,
                
                
                December
                    31,2007
                
                
                2006
                
                
                2007
                
                
                2006Net
                    loss
                
                $
                (1,080
                )
                
                $
                (2,978
                )
                
                $
                (3,938
                )
                
                $
                (5,438
                )Net
                    change in cumulative
                    foreigncurrency
                    translation
                    adjustments
                
                
                (23
                )
                
                
                63
                
                
                
                3
                
                
                
                160Comprehensive
                    loss
                
                $
                (1,103
                )
                
                $
                (2,915
                )
                
                $
                (3,935
                )
                
                $
                (5,278
                )
  (25)
        Indemnification.  The Company’s major sales agreements provide
        remedies to customers, such as defense, settlement, or payment of judgment
        for
        intellectual property claims related to the use of the Company’s products. The
        Company also has indemnified various vendors for certain potential
        claims.  The Company has also entered into indemnification agreements
        with its directors and officers and the Company’s bylaws contain similar
        indemnification obligations.  To date, there have been no claims made
        under such indemnification provisions and as a result the associated estimated
        fair value of the liability is not material.
 
 3.     Net
        Loss per Share
 
 Basic
        net
        loss per share and diluted net loss per share are computed by dividing net
        loss
        by the weighted average number of shares of common stock outstanding during
        the
        three and nine-month periods ended December 31, 2007.  Diluted net
        income per share is computed by dividing net income by the weighted average
        number of shares of common stock and common stock equivalents outstanding
        during
        the three and nine-month periods ended December 31, 2007.  Common
        stock equivalents consist of stock options and warrants using the treasury
        stock
        method.
 
 The
        reconciliation of the denominators
        of the basic and diluted net loss per share computation for the three and
        nine-month periods ended December 31, 2007 and 2006 is shown in the following
        table (in thousands, except per share data):
  Three
                    Months
                    Ended
                
                
                Nine
                    Months
                    EndedDecember
                    31,
                
                
                December
                    31,2007
                
                
                2006
                
                
                2007
                
                
                2006Net
                    loss
                
                $
                (1,080
                )
                
                $
                (2,978
                )
                
                $
                (3,938
                )
                
                $
                (5,438
                )Basic
                    net loss per
                    share:Weighted
                    average common shares
                    outstanding
                
                
                11,971
                
                
                
                11,827
                
                
                
                11,912
                
                
                
                11,803Basic
                    net loss per
                    share
                
                $
                (0.09
                )
                
                $
                (0.25
                )
                
                $
                (0.33
                )
                
                $
                (0.46
                )Diluted
                    net loss per
                    share:Weighted
                    average common shares
                    outstanding
                
                
                11,971
                
                
                
                11,827
                
                
                
                11,912
                
                
                
                11,803Weighted
                    average common stock
                    equivalent outstanding
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —Weighted
                    average common shares and
                    common stockequivalents
                    outstanding
                
                
                11,971
                
                
                
                11,827
                
                
                
                11,912
                
                
                
                11,803Diluted
                    net loss per
                    share
                
                $
                (0.09
                )
                
                $
                (0.25
                )
                
                $
                (0.33
                )
                
                $
                (0.46
                )
 
 All
        stock
        options and warrants were excluded from the calculation of diluted net loss
        per
        share since their effect would be anti-dilutive.
  18
  LASERCARD
          CORPORATION AND SUBSIDIARIES
 NOTES
          TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (UNAUDITED)
 4.      Segments
 
 Segment
        Reporting.
 
 The
        Company operates in three reportable segments: (1) optical memory cards,
        (2)
        drives, systems and services (which we formerly called the “optical memory card
        drives” segment), including read/write drives, maintenance, systems and enabling
        services, and (3) specialty cards and card printers.  The segments
        were determined based on the information used by the chief operating decision
        maker.  The optical memory cards and drives, systems and services
        reportable segments are not strategic business units which offer unrelated
        products and services; rather these reportable segments utilize compatible
        technology and are marketed jointly.  Specialty cards and printers is
        a strategic business unit offering at times unrelated products and at times
        related products with the other reportable segments.
 
 The
        accounting policies used to derive reportable segment results are the same
        as
        those described in the "Summary of Significant Accounting
        Policies."  Resources are allocated to the optical memory card and
        drive, system and services segments in a manner that optimizes optical memory
        card revenues and to the specialty card and printers segment in a manner
        that
        optimizes consolidated income as determined by the chief operating decision
        maker. Segment revenues are comprised of sales to external
        customers.  Segment gross profit (loss) includes all segment revenues
        less the related cost of sales.  Accounts receivable, cash, deferred
        income taxes, prepaid expenses, fixed assets and inventory are not separately
        reported by segment to the chief operating decision maker.  Therefore,
        the amount of assets by segment is not meaningful.  There are no
        inter-segment sales or transfers.  All of the Company’s long-lived
        assets are attributable to the United States except for $3.4 million and
        $3.7
        million at December 31, 2007, and March 31, 2007, respectively, that are
        located
        in Germany.
 
 The
        Company's chief operating decision maker is currently the Company's Chief
        Executive Officer.  The chief operating decision maker reviews
        financial information presented on a consolidated basis that is accompanied
        by
        disaggregated information about revenues and gross profit (loss) by
        segment.
  19
  LASERCARD
        CORPORATION AND SUBSIDIARIES
 NOTES
        TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (UNAUDITED)
 
 The
        table
        below presents information for optical memory cards, drives, systems and
        services, and specialty cards and card printers and a reconciliation of segment
        results to amounts included in the Company’s condensed consolidated financial
        statements for the three and nine-month periods ended December 31, 2007 and
        2006
        (in thousands):
  T
                    h r e e   M o n t h
                    s   E n d e d   Dece m b e r   3 1 , 
                     2 0 0 7Optical
                
                
                Drives,
                
                
                SpecialtyMemory
                
                
                Systems
                    &
                
                
                Cards
&
                
                
                SegmentCards
                
                
                Services
                
                
                Printers
                
                
                Total
                
                
                Other
                    (a)
                
                
                TotalRevenue
                
                $
                7,924
                
                
                $
                174
                
                
                $
                3,061
                
                
                $
                11,159
                
                
                $
                -
                
                
                $
                11,159Cost
                    of
                    sales
                
                
                4,656
                
                
                
                392
                
                
                
                2,622
                
                
                
                7,670
                
                
                
                -
                
                
                
                7,670Gross
                    profit
                    (loss)
                
                
                3,268
                
                
                
                (218
                )
                
                
                439
                
                
                
                3,489
                
                
                
                -
                
                
                
                3,489Depreciation
                    andamortization
                    expense
                
                
                469
                
                
                
                46
                
                
                
                80
                
                
                
                595
                
                
                
                165
                
                
                
                760T
                    h r e e   M o n t h s
                      E n d e d   Decemb e r   31 ,   2 0 0
                    6Optical
                
                
                Drives,
                
                
                SpecialtyMemory
                
                
                Systems
                    &
                
                
                Cards
&
                
                
                SegmentCards
                
                
                Services
                
                
                Printers
                
                
                Total
                
                
                Other
                
                
                TotalRevenue
                
                $
                3,086
                
                
                $
                182
                
                
                $
                2,916
                
                
                $
                6,184
                
                
                $
                -
                
                
                $
                6,184Cost
                    of
                    sales
                
                
                2,745
                
                
                
                258
                
                
                
                2,394
                
                
                
                5,397
                
                
                
                -
                
                
                
                5,397Gross
                    profit
                    (loss)
                
                
                341
                
                
                
                (76
                )
                
                
                522
                
                
                
                787
                
                
                
                -
                
                
                
                787Depreciation
                    andamortization
                    expense
                
                
                441
                
                
                
                45
                
                
                
                83
                
                
                
                569
                
                
                
                142
                
                
                
                711N
                    i n e   M o n t h
                    s   E n d e d   Dece m b e r   3 1 , 
                     2 0 0 7Optical
                
                
                Drives,
                
                
                SpecialtyMemory
                
                
                Systems
                    &
                
                
                Cards
&
                
                
                SegmentCards
                
                
                Services
                
                
                Printers
                
                
                Total
                
                
                Other
                
                
                TotalRevenue
                
                $
                19,178
                
                
                $
                1,261
                
                
                $
                9,314
                
                
                $
                29,753
                
                
                $
                -
                
                
                $
                29,753Cost
                    of
                    sales
                
                
                12,087
                
                
                
                1,813
                
                
                
                7,514
                
                
                
                21,414
                
                
                
                -
                
                
                
                21,414Gross
                    profit
                    (loss)
                
                
                7,091
                
                
                
                (552
                )
                
                
                1,800
                
                
                
                8,339
                
                
                
                -
                
                
                
                8,339Depreciation
                    andamortization
                    expense
                
                
                1,373
                
                
                
                139
                
                
                
                234
                
                
                
                1,746
                
                
                
                480
                
                
                
                2,226N
                    i n e   M o n t h
                    s   E n d e d   Decemb e r   31 , 
                     2 0 0 6Optical
                
                
                Drives,
                
                
                SpecialtyMemory
                
                
                Systems
                    &
                
                
                Cards
&
                
                
                SegmentCards
                
                
                Services
                
                
                Printers
                
                
                Total
                
                
                Other
                
                
                TotalRevenue
                
                $
                13,860
                
                
                $
                481
                
                
                $
                8,691
                
                
                $
                23,032
                
                
                $
                -
                
                
                $
                23,032Cost
                    of
                    sales
                
                
                9,631
                
                
                
                861
                
                
                
                6,760
                
                
                
                17,252
                
                
                
                -
                
                
                
                17,252Gross
                    profit
                    (loss)
                
                
                4,229
                
                
                
                (380
                )
                
                
                1,931
                
                
                
                5,780
                
                
                
                -
                
                
                
                5,780Depreciation
                    andamortization
                    expense
                
                
                1,258
                
                
                
                134
                
                
                
                247
                
                
                
                1,639
                
                
                
                395
                
                
                
                2,034
 
 (a)
              Other
                  depreciation and amortization expense represents amounts charged
                  to
                  selling, general and administrative expense and research and development
                  expense.
  20
   ITEM
                  2.
              MANAGEMENT'S
                  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
                  OPERATIONS
 
 The
        following discussion and analysis of the Company's financial condition, results
        of operations and critical accounting policies should be read in conjunction
        with the condensed consolidated financial statements and related notes included
        elsewhere in this Form 10-Q Report and the consolidated financial statements
        and
        notes thereto for the fiscal year ended March 31, 2007, included in the
        Company's fiscal 2007 Annual Report on Form 10-K.
 
 FORWARD-LOOKING
        STATEMENTS
 
 All
        statements contained in this report that are not historical facts are
        forward-looking statements.  The forward-looking statements in this report
        are made pursuant to the safe harbor provisions of the Private Securities
        Litigation Reform Act of 1995.  They are not historical facts or
        guarantees of future performance or events. Rather, they are based on current
        expectations, estimates, beliefs, assumptions, and goals and objectives and
        are
        subject to uncertainties that are difficult to predict.  As a result,
        our actual results may differ materially from the statements
        made.  Often such statements can be identified by their use of words
        such as “may,” “will,” “intends,” “plans,” “believes,” “anticipates,”
“visualizes,” “expects,” and “estimates.”  Forward-looking statements
        made in this report include statements as to our beliefs as to current and
        potential market segments, customers, and applications for and deployment
        of our
        products; the advantages of, potential income from, and duties to be performed
        under the sale of a second-source card manufacturing license to Prevent Global;
        our intent to retain the Prevent Global equipment until Prevent Global is
        ready
        to receive the equipment; future scheduled payments and contingent royalties
        under the Prevent Global contract, Prevent Global’s planned production capacity,
        and that we will sell equipment to Prevent Global and provide Prevent Global
        with installation support; production quantities, delivery rates and expected
        delivery schedule, backlog, and revenue recognition for our products for
        U.S. or
        foreign government ID card programs, potential annual revenues being $40
        to $50
        million at full implementation from the Italy programs with expected revenues
        unable to be determined until the prime contractor issues follow-on orders;
        our
        expectation that Poligrafico will request us to supply 1,300 encoders via
        a
        separate solicitation if Poligrafico moves forward with its workstation RFP;
        revenue potential of up to $90 million over five years from the Angolan program;
        our expectation for no future growth from the U.S. Green Card program, with
        steady state revenue to average $8 million if the option years are elected
        but
        with a short-term decrease followed by an increase in orders as the government
        transitions to a new card design; plans to increase card production capacity
        for
        anticipated increases in orders including possibly $10 million in capital
        equipment and leasehold improvements during the next twelve months; and
        expecting growth of less than 10% in the specialty card and printer segment
        and
        expecting negative gross profit from the drive, system and services market;
        our
        intent to update our SFAS No. 123(R), Shared-Based Payments,
        assumptions at least annually; that the Middle Eastern country will exercise
        its
        option to place orders over a four-year period of up-to another approximately
        $35 million in cards under the amended contract, with expected orders during
        fiscal 2009 to be less than during fiscal 2008; our intent to find another
        photographic film supplier should Kodak cease supplying such film and to
        take
        advantage of any last-buy opportunity which Kodak may choose to provide;
        our
        intent to pursue patent infringers by litigation, arbitration, or negotiation;
        the need for, expected success of, and potential benefits from our research
        and
        development efforts, including our attempts to develop other forms of optical
        recording media for use in optical memory cards and the potential benefits
        derived therefrom; expectations regarding revenues (overall and by segment
        and
        by customer), margins, profit (including likely losses in the future if full
        implementation of the Italian program is further delayed), and our deferred
        income tax asset and related valuation allowance; our expectation that fiscal
        2008 fourth quarter SG&A expenses will be higher than those in third quarter
        and that R&D expenses will increase 15% in the fiscal 2008 fourth quarter
        over the previous quarter; that we do not expect any material change in our
        unrecognized tax benefits over the next twelve months; our expectations that
        examination of open tax years by the appropriate governmental agencies due
        to
        the tax loss carryovers from those years will pose no material change in
        our tax
        position; our
        expectation that our interest income during the fourth quarter will decline
        due
        to the lower interest rates resulting from recent cuts in the Federal funds
        rate
        by the Federal Reserve Board; our belief that our current five major
        programs, plus maybe one or two others, will be the basis for
        a  majority of our revenues in the near term; estimates of optical
        card production capacity, our ability to expand production capacity, and
        our
        plans and expectations regarding the growth and associated capital costs
        of such
        capacity; estimates that revenues and advance payments will be sufficient
        to
        generate cash from operating activities over the next twelve months and fund
        our
        actual capital expenditures despite expected quarterly fluctuations;
        expectations regarding market growth, product demand, and the continuation
        of
        current programs; and our long-term revenue growth objectives, and drive
        pricing
        strategy.
  21
  These
        forward-looking statements are based upon our assumptions about and assessment
        of the future, which may or may not prove true, and involve a number of risks
        and uncertainties including, but not limited to, whether there is a market
        for
        cards for homeland security in the U.S. and abroad, and if so whether such
        market will utilize optical memory cards as opposed to other technology;
        customer concentration and reliance on continued U.S. and Italian government
        business; risks associated with doing business in and with foreign countries;
        whether we will be successful in assisting Prevent Global with factory startup
        and training; whether Prevent Global will obtain the financial resources
        to make
        the balance of its required payments to us and to operate the facility; whether
        the facility will efficiently produce high quality optical memory cards in
        volume and that meet our standards; lengthy sales cycles and changes in and
        dependence on government policy-making; reliance on value-added resellers
        and
        system integrators to generate sales, perform customer system integration,
        develop application software, integrate optical card systems with other
        technologies, test products, and work with governments to implement card
        programs; risks and difficulties associated with development, manufacture,
        and
        deployment of optical cards, drives, and systems; our ability or our customers’
ability to initiate and develop new programs utilizing our card products;
        risks
        and difficulties associated with development, manufacture, and deployment
        of
        optical cards, drives, and systems; potential manufacturing difficulties
        and
        complications associated with increasing manufacturing capacity of cards
        and
        drives, implementing new manufacturing processes, and outsourcing manufacturing;
        our ability to produce and sell read/write drives in volume; the
        unpredictability of customer demand for products and customer issuance and
        release of corresponding orders; government rights to withhold order releases,
        reduce the quantities released, and extend shipment dates; the impact of
        technological advances, general economic trends, and competitive products;
        the
        impact of changes in the design of the cards; and the possibility that optical
        memory cards will not be purchased for the full implementation of card programs
        in Italy, a Middle Eastern country and India, or for Department of Homeland
        Security (DHS) programs in the U.S., or will not be selected for other
        government programs in the U.S. and abroad; whether we will be successful
        in
        developing alternative optical recording media; and  the risks set
        forth in the section entitled “Risks” and elsewhere in this report; and other
        risks detailed from time to time in our SEC filings.  These
        forward-looking statements speak only as to the date of this report, and,
        except
        as required by law, we undertake no obligation to publicly release updates
        or
        revisions to these statements whether as a result of new information, future
        events, or otherwise.
 
 CRITICAL
        ACCOUNTING POLICIES
 
 Except
        for the adoption of the Financial Accounting Standards Board (“FASB”) issued
        Interpretation No. 48, Accounting for Uncertainty
        in Income
        Taxes—an interpretation of FASB Statement No. 109 (“FIN 48”), as
        described in Note 1 of the notes to condensed consolidated financial statements,
        our critical accounting policies in our Annual Report on Form 10-K for the
        fiscal year ended March 31, 2007 have not changed materially.
 
 RESULTS
        OF OPERATIONS
 
 Overview
 
 We
        are
        headquartered in Mountain View, California where we manufacture LaserCard®
optical memory cards and card related products, including chip-ready
        Optical/SmartTM cards.  In addition, we operate a wholly owned German
        subsidiary, Challenge Card Design Plastikkarten GmbH (“CCD”), with offices in
        Rastede and Ratingen, Germany, which manufactures advanced-technology cards,
        can
        provide manufacturing capacity for certain steps of optical memory card
        production, and markets cards, system solutions, and thermal card
        printers.
 
 We
        sell
        our products and services through partners such as value added resellers
        (VARs),
        system integrators and card distribution licensees, who generally have knowledge
        in specific markets, for the development of markets and applications for
        LaserCard products.  We have sales staff located in California, New
        York, the Washington D.C. area, and Germany, whose principal role is developing
        and supporting the reseller channel. Revenue consists primarily of optical
        memory cards, drives, systems and services, and specialty cards and card
        printers.  Our partner customers provide country-specific or
        market-specific services necessary for contract negotiation and also may
        add
        application software, personal computers, and other peripherals, and then
        resell
        these products as integrated solutions. We are continuing our efforts to
        recruit
        new VARs and eliminate nonproductive VARs.
  22
  The
        table
        below presents condensed consolidated revenues, excluding inter-company
        transactions, recorded by our U.S. and German operations (in
        thousands):
  Three
                    Months
                    Ended
                
                
                Nine
                    Months
                    EndedDecember
                    31,
                
                
                December
                    31,2007
                
                
                2006
                
                
                2007
                
                
                2006U.S.
                    operations
                
                $
                8,098
                
                
                $
                3,277
                
                
                $
                20,438
                
                
                $
                14,365German
                    operations
                
                
                3,061
                
                
                
                2,907
                
                
                
                9,315
                
                
                
                8,667$
                11,159
                
                
                $
                6,184
                
                
                $
                29,753
                
                
                $
                23,032
 
 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.
 
 Major
        near term growth potential for LaserCard® optical memory cards is in
        government-sponsored identification programs in several
        countries.  Since governmental card programs typically rely on
        policy-making, which in turn is subject to technical requirements, budget
        approvals, and political considerations, there is no assurance that these
        programs will be implemented as expected or that they will include optical
        cards.  Our objectives for long-term revenue growth include: (1)
        contracting for the supply of complete, integrated ID Management Solutions
        with
        a focus on optical memory card-based systems (2) winning new optical memory
        card
        programs in newly rapidly developing markets (3) realizing incremental revenues
        from a more diversified customer based outside of traditional card programs,
        and
        (4) diversifying OM products into, and effectively penetrating, industrial
        and
        commercial markets.
 
 We
        are
        currently dependent on revenues from the following programs; the U.S. Department
        of Homeland Security (DHS) Permanent Resident Card (Green Card) program,
        the
        U.S. Department of State (DOS) Laser Visa Border Crossing Card program, the
        Canadian government Permanent Resident Card program, a national ID card for
        a
        Middle Eastern country, and emerging programs such as the national citizens
        ID
        card program in Italy, the foreign
        resident IDcardprogram in
        Italy, and the recently
        announced national ID card program in Angola.
 
 Our
        major
        government programs are shown below as a percentage of total
        revenues:
  Three
                    Months
                    Ended
                
                Nine
                    Months
                    EndedDecember
                    31,
                
                December
                    31,2007
                
                2006
                
                2007
                
                2006National
                    ID Cards in a Middle
                    Eastern Country
                
                38%
                
                ―
                
                29%
                
                ―U.S.
                    Green Cards & Laser
                    Visas
                
                11%
                
                33%
                
                20%
                
                28%Canadian
                    Permanent Resident
                    Cards
                
                9%
                
                7%
                
                7%
                
                5%Vehicle
                    Registration in
                    India
                
                12%
                
                8%
                
                9%
                
                6%Italian
                    Carta d'Identita
                    Elettonica (CIE) Cards
                
                ―
                
                ―
                
                1%
                
                1%Italian
                    Permesso di Soggiorno
                    Elettronico (PSE) Cardsand
                    Carta di Soggiorno Elettronico
                    (CSE) Cards
                
                ―
                
                ―
                
                ―
                
                10%
 
 Thenational
        citizen ID (CIE)cardprogram
        has been largely stalled since
        January 2006 following a change of government
        and the instigation
        of a review designed to reduce cost and improve efficiency of the
        program.If
        theCIE
        and foreign resident IDcard(PSE)systemsfunction
        as designed, CIE and PSE card
        orders could ramp toward their full implementation level which could
        potentially result
        in annual revenues of $40 to $50 million.We received and shipped
        a small order
        for foreign language versions of the CIE card during the nine-month period
        ended
        December 31, 2007.  We havepreviously supplied
        approximately $17 million
        worth of optical
        memory cards and 440 encoders for this program.
  23
  On
        January 4, 2008, a Request for
        Proposal (RFP) was issued by Italy's state printer, Istituto Poligrafico
        e Zecca
        dello Stato S.p.A. (Poligrafico), inviting interested partiesto submit their qualifications
        to bid
        on an anticipated follow-on RFP for up to 60 millioneuros(approximately
        $88 million) in key
        components and installation and support services for the national infrastructure
        required to roll out theCIEcardprogram.The
        RFP specifies a requirement for more
        than 9,000 enrollment workstations to be installed and supported nationwide
        in
        regional and city-based service centers. The workstations will be employed
        in
        gathering personal information of citizens prior toissuance of theirCIE
        IDcards.  The RFP also specifies
        installation and support services for about 1,300 secure optical memory card
        encoders.  While
        we do not provide theseworkstationsand
        services, this is a key step for
        building the infrastructureneeded to move the
        program to full
        implementation.  WebelievethatPoligrafico
        will requestusto
        supplythe 1,300 encodersvia
        a separate
        solicitation.
 
 The
        issuance system for PSE cardsinItalyis
        in place and operatingwith about 1 million
        applications receivedand
        the government is in
        possession of a substantial card inventoryfor personalization.Backlog
        for theCIE and PSEprograms
        atDecember 31,
        2007was immaterial.We
        believe that follow-on orders for
        both programs will be received and significant card revenue
        will be realized
        during fiscal 2009 although it remains unclear when the prime contractor
        will
        issue follow-on orders.
 
 U.S.
        Green Cards for the U.S. Department
        of Homeland Security (DHS),
        and to a lesser extent LaserVisa
        Border Crossing Cards (BCCs)are
        an important part of our revenue
        base.  For these programs, we recorded card revenues of $1.2 million
        and $6.1million
        for the three and nine-month
        periods ended December 31, 2007, respectively, and we recorded card revenues
        of
        $2 million and
        $6.1million
        for the three and nine-month
        periods ended December 31, 2006, respectively.  We received a
        five-year follow-onU.S.government
        subcontract in
        March 2007covering these
        programswith an initial
        one-year term and four one-year extensionoptions.  There was no backlog
        for these programs at December 31, 2007.  DHS has tasked us to support
        the redesign of the Green Cards.  The transition to a redesigned card
        could cause delays in future orders as DHS reduces its inventory of current
        cards that
        were designed in
        1997.  However, we anticipate that this decrease will be followed by
        an increase in orders of the newly designed cards to replenish the strategic
        reserve, although no assurance can be given.  We anticipate that the
        Border Crossing Card(BCC)
        design will be reconfigured to include an RFID chip in keeping with the
        requirements of the Western Hemisphere Travel Initiative as specified for
        Department of State’snew
        U.S. Passport Card.  Recently it was
        announced that GDIT won the U.S. Passport Card contract.  We bid two types of
        cards to
        GDIT for this program.One
        type was a polycarbonate card
        withan
        RFID feature
        but without our optical memory feature.This
        conformed with the Department of State bid
        request.We also bid a card
        with our
        optical memoryfeature
        in addition to the RFID feature.We
        were the exclusive bidder to GDIT for
        the card with the optical memory feature.  We were not the exclusive bidder
        to GDIT for the card without the optical feature.The
        Department of Statehas
        selectedthecard
        without the optical feature and
        GDIT may or may not subcontract the order to us.  We anticipate that
        any future BCC will follow the U.S. Passport Card model.We have recorded about
        $1 million in
        revenue for the BCC program this fiscal year.
 
 Under
        a
        subcontract for Canada’s Permanent Resident Cards, we recorded revenue of about
        $1 million and $2.2 million for the three and nine-month periods ended December
        31, 2007, respectively compare with $0.4 million and $1.2 million for the
        three
        and nine-month periods ended December 31, 2006, respectively. The backlog
        at
        December 31, 2007, was $0.6 million originally scheduled for delivery through
        June 2008.  The delivery quantity is subject to fluctuation at
        customer request.
 
 During
        the three and nine-month periods ended December 31, 2007, we recorded revenue
        under purchase orders and a subcontract for the supply of secure national
        ID
        cards and supporting hardware, software, and integration services to a Middle
        Eastern government of approximately $4.2 million and $8.5 million, respectively,
        in addition to the $4 million recognized in fiscal year 2007.  The
        cards are being issued to adult citizens for national identity purposes and
        feature the latest advancements in identity fraud protection provided by
        Optical
        IDLockTM, a combination of the highly-secure LaserCard® optical memory technology
        and Embedded HologramHDTM, the new high-definition “photographic quality” etched
        image security feature.  As of December 31, 2007, there was no backlog
        for this program. The subcontract continues to allow for optional orders
        at
        customer request over a four-year period ending December 2010, potentially
        valued at up to another approximately $35 million in cards.  We
        anticipate smaller orders for this program during calendar year
        2008.  See Note 2, Item 19 of the notes to condensed consolidated
        financial statements for a further discussion of the subcontract.
  24
  Effective
        April 3, 2004, we sold a second-source card-manufacturing license, including
        equipment, training, and support, to Global Investments Group (GIG), based
        in
        Auckland, New Zealand, for card manufacturing in Slovenia and began receiving
        associated cash payments.  Recently, and with our approval, GIG
        transferred the license to Prevent Global of Slovenia.  We will begin
        to recognize revenue on this arrangement over the remaining term of the
        agreement starting when the equipment has been accepted and the training
        has
        been completed, which date is in turn dependent on Prevent establishing a
        suitable facility in Slovenia.  Refer to Note 2, Item 19 of the notes
        to condensed consolidated financial statements for further disclosure of
        the
        Prevent agreement.
 
 On
        November 6, 2007, our subsidiary, CCD, signed a 5.9 million euros ($8.5 million)
        contract with a company based in Saudi Arabia to deliver a turnkey card
        manufacturing facility by the end of calendar year 2008.  The contract
        includes the supply and installation of state-of-the-art plastic card production
        equipment, transfer of manufacturing know-how, training, and production
        support.  It does not include constructing or preparing the building
        that will house the equipment.  The new factory will be used to
        produce and personalize high quality scratch-off cards, loyalty cards, SIM
        cards
        and credit cards for the telecommunication and banking
        sectors.  Rights to optical memory card technology or manufacturing
        are not included in the arrangement.  Revenue and costs will be
        deferred until the primary deliverables are completed.
 
 On
        December 20, 2007, we have signed an agreement with the government of Costa
        Rica
        valued at approximately $1.7 million for the supply of an ID Management System
        for the country’s Foreign Resident program.  Under the terms of the
        agreement, we will supply a suite of demographic and biometric data collection
        and card issuance equipment and software solutions to assist the Costa Rican
        government to manage the issuing of highly secure optical memory based Foreign
        Resident Cards. The applications include the centralized enrollment of legal
        foreign residents, automatic fingerprint identification to prevent the issuance
        of duplicate cards, optical memory encoding and card printing servers, quality
        assurance and card issuance controlled by our biometric verification system.
        The
        issuance process will also include biometric identification of workstation
        operators and strict card auditing processes.  The contract terms
        include a limited supply of Foreign Resident ID Cards, which incorporate
        a
        number of security features in addition to our secure optical memory. The
        card’s
        optical memory will store cardholder information including high resolution
        color
        facial image, fingerprint images and templates (for automatic one-to-one
        identity verification), digitized signature and biographic data. In addition,
        the optical stripe will also feature our unique Embedded HologramHD, a
        personalized optical variable device which, like the digital data, cannot
        be
        fraudulently altered.  Installation of the system is expected to be
        completed in the spring of 2008. Revenues from the contract will be deferred
        until the customer’s acceptance of the equipment, software, and cards which is
        anticipated to be during the spring or summer of 2008.
 
 On
        January 17, 2008 we announced that we are on the winning team for a national
        ID
        card project in Angola.  We will provide optical memory cards, card
        personalization systems, printer consumables, installation and
        training.  This is our first national-level optical memory card
        program in the African continent.  Revenues could reach $90 million
        over five years if the prime contract is fully implemented.
 
 We
        may
        invest up to $10 million in additional capital equipment and leasehold
        improvement expenditures for optical memory card production capacity and
        manufacturing enhancement at our facilities when orders and forecasts justify
        the investment.  Additional capital expenditures could be made for
        production capacity for new products in the specialty cards and printers
        segment
        as well as information technology infrastructure.  These expenditures
        could occur throughout the next twelve months, as more fully discussed under
        “Management’s Discussion and Analysis--Liquidity and Capital Resources,” of the
        Form 10-K for the fiscal year ended March 31, 2007.
 
 Revenues
 
 Product
        Revenues.  Our total revenues consisted of sales in our three
        segments of (1) optical memory cards, (2) drives, systems and services, and
        (3)
        specialty cards and card printers, as well as, at times, other miscellaneous
        items.  Product revenues for the three and nine-month periods ended
        December 31, 2007 were $11.2 million and $29.8 million, respectively. The
        optical card drive segment was renamed as drives, systems and services segment
        this quarter to better report the related activities. Product revenues for
        the
        three and nine-month periods ended December 31, 2006 were $6.2 million and
        $23
        million, respectively.
  25
  The
        following table presents our product revenue by segment (in thousands, except
        for percentages):
  Three
                    Months
                    Ended
                
                
                Nine
                    Months
                    EndedDecember
                    31,
                
                
                December
                    31,2007
                
                
                2006
                
                
                2007
                
                
                2006Optical
                    memory
                    cards
                
                $
                7,924
                
                
                $
                3,086
                
                
                $
                19,178
                
                
                $
                13,860%
                    of total
                    revenues
                
                
                71
                %
                
                
                50
                %
                
                
                64
                %
                
                
                60
                %Drives,
                    systems and
                    services
                
                
                174
                
                
                
                182
                
                
                
                1,261
                
                
                
                481%
                    of total
                    revenues
                
                
                2
                %
                
                
                3
                %
                
                
                4
                %
                
                
                2
                %Specialty
                    cards and card
                    printers
                
                
                3,061
                
                
                
                2,916
                
                
                
                9,314
                
                
                
                8,691%
                    of total
                    revenues
                
                
                27
                %
                
                
                47
                %
                
                
                31
                %
                
                
                38
                %Total
                    revenues
                
                $
                11,159
                
                
                $
                6,184
                
                
                $
                29,753
                
                
                $
                23,032
 
 The
        following table presents our optical memory card (OMC) revenue by major program
        (in thousands):
  Three
                    Months
                    Ended
                
                
                Nine
                    Months
                    EndedDecember
                    31,
                
                
                December
                    31,2007
                
                
                2006
                
                
                2007
                
                
                2006U.S.
                    Green Cards & Laser
                    Visas
                
                $
                1,235
                
                
                $
                2,022
                
                
                $
                6,065
                
                
                $
                6,359Italian
                    National ID Card
                    Programs
                
                
                15
                
                
                
                -
                
                
                
                198
                
                
                
                2,408Canadian
                    Permanent Resident
                    Cards
                
                
                967
                
                
                
                404
                
                
                
                2,177
                
                
                
                1,226National
                    ID Cards in a Middle
                    Eastern Country
                
                
                4,105
                
                
                
                -
                
                
                
                7,650
                
                
                
                53Vehicle
                    Registration in
                    India
                
                
                1,375
                
                
                
                511
                
                
                
                2,609
                
                
                
                1,285Sports
                    Event
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                2,125All
                    other
                    programs
                
                
                227
                
                
                
                149
                
                
                
                479
                
                
                
                404Total
                    OMC
                    revenue
                
                $
                7,924
                
                
                $
                3,086
                
                
                $
                19,178
                
                
                $
                13,860
 
 Optical
        memory card revenue increased for the three-month period ended December 31,
        2007
        by 157% as compared with the three-month period ended December 31, 2006 due
        to
        the increase in card unit volume for a Middle Eastern country ID card program,
        Canadian Permanent Resident card program, and the vehicle registration card
        in
        India. Optical memory card revenue increased for the nine-month period ended
        December 31, 2007 by 38% as compared with the nine-month period ended December
        31, 2006 due to the increase in card unit volume for a Middle Eastern country
        ID
        card program, Canadian Permanent Resident card program, and the vehicle
        registration card in India.
 
 Revenue
        in the drives, systems and services did not materially change during the
        three-month period ended December 31, 2007 as compared with the three-month
        period ended December 31, 2006.  However, revenue during the
        nine-month period ended December 31, 2007 grew about $0.8 million as compared
        with the nine-month period ended December 31, 2006, largely due to the activity
        in the ID card program for a Middle Eastern country.  We do not
        anticipate that we will derive significant profits in the near term on drive
        sales as prices are set near the manufacturing cost in order to promote optical
        memory card sales.
 
 Specialty
        cards and printers revenue was approximately $3.1 million for the three-month
        period ended December 31, 2007 or an increase of 5% from the $2.9 million
        for
        the three-month period ended December 31, 2006; and $9.3 million for the
        nine-month period ended December 31, 2007 or an increase of 7% from the $8.7
        million recorded in the nine-month period ended December 31, 2006 primarily
        due to the effect of the Euro-Dollar exchange rate.
  26
  License
        Fees and Other
        Revenues.  There were no license revenues for the three and
        nine-month periods ended December 31, 2007, and 2006.  We entered into
        a license and optical memory card equipment purchase and support agreements,
        effective April 3, 2004, for optical memory card manufacturing in Slovenia
        which
        were transferred with our approval to Prevent Global in March
        2007.  On November 6, 2007, we have entered into an agreement totaling
        5.9 million euros ($8.5 million) with a company based in Saudi Arabia to
        deliver
        a turnkey card manufacturing facility by end of calendar year
        2008.  Refer to Note 2, Item 19 of the notes to condensed consolidated
        financial statements for further disclosure of the Prevent
        agreement.
 
 Backlog
 
 As
        of
        December 31, 2007, the backlog for LaserCard® optical memory cards totaled $1.5
        million, which is scheduled for delivery through June 2008, as compared with
        $5.7 million at March 31, 2007. We have only a few customers who generally
        place
        orders for a period of several months to a year or more so that variations
        in
        order placement from a single customer can materially affect
        backlog.  As a result, the relative size of our backlog has not been a
        reliable indicator of future sales revenue trends.
 
 The
        backlog as of December 31, 2007, for specialty cards and printers totaled
        0.9
        million euros (approximately $1.4 million) compared with 0.6 million euros
        (approximately $0.8 million) at March 31, 2007.  In addition, the
        contract to deliver a turnkey card manufacturing facility by the end of calendar
        year 2008 has a backlog of 5.9 million euros (approximately $8.6 million)
        at
        December 31, 2007 and the contract to develop a conventional non-optical
        card
        production facility totaled 0.6 million euros (approximately $0.8 million)
        at
        December 31, 2007 and 0.7 million euros (approximately $0.9 million) at March
        31, 2007.
 
 At
        December 31, 2007, our backlog in the drives, systems and services was $1
        million due largely to the Costa Rica contract for an ID Management System
        for
        the country’s Foreign Resident program.  We had no significant backlog
        for read/write drives at March 31, 2007.
 
 Gross
        Margin
 
 The
        following table represents our gross margin in absolute amount and as a
        percentage of revenue by segment (in thousands, except for
        percentages):
  Three
                    Months
                    Ended
                
                
                Nine
                    Months
                    EndedDecember
                    31,
                
                
                December
                    31,2007
                
                
                2006
                
                
                2007
                
                
                2006Optical
                    memory
                    cards
                
                $
                3,268
                
                
                $
                341
                
                
                $
                7,091
                
                
                $
                4,229%
                    of optical memory card
                    revenues
                
                
                41
                %
                
                
                11
                %
                
                
                37
                %
                
                
                31
                %Drives,
                    systems and
                    services
                
                
                (218
                )
                
                
                (76
                )
                
                
                (552
                )
                
                
                (380
                )%
                    of optical card drive
                    revenues
                
                NM
                
                
                NM
                
                
                NM
                
                
                NMSpecialty
                    cards and card
                    printers
                
                
                439
                
                
                
                522
                
                
                
                1,800
                
                
                
                1,931%
                    of specialty cards and card
                    printers revenues
                
                
                14
                %
                
                
                18
                %
                
                
                19
                %
                
                
                22
                %Total
                    gross
                    margin
                
                $
                3,489
                
                
                $
                787
                
                
                $
                8,339
                
                
                $
                5,780
 
 Optical
        Memory
        Cards.  Optical memory card gross margin can vary significantly
        based upon changes in average selling price, production and sales volumes,
        mix
        of card types, production efficiency and yields, and changes in fixed
        costs.  Unit volume greatly affects gross margin due to the absorption
        of fixed manufacturing costs.  The increase in optical memory card
        gross margin to 41% of revenue for the three-month period ended December
        31,
        2007, as compared with 11% of revenue for the three-month period ended December
        31, 2006, is mainly due to the 91% increase in sales unit volume and the
        resultant gain of production efficiencies. The increase in optical memory
        card
        gross margin to 37% of revenue for the nine-month period ended December 31,
        2007, as compared with 31% of revenue for the nine-month period ended December
        31, 2006, is due to the 16% increase in sales unit volume.
  27
  Drives,
        Systems and
        Services.  Drives, systems and services gross margin has been
        negative over the past three years, inclusive of fixed overhead costs, due
        to
        low sales volume and our policy to price drives close to manufacturing cost
        to
        promote card sales.  This segment also includes enabling services,
        also with lower margins than optical memory cards.  We anticipate that
        drives, systems and services negative gross margins will continue in the
        future
        unless sales volume is sufficient to cover fixed costs.
 
 Specialty
        Cards and Card
        Printers.  The gross margin on specialty cards and card printers was
        14% and 18% in the three-month periods ended December 31, 2007, and 2006,
        respectively.  During the three-month period ended December 31, 2007 we
        accepted orders at low margin in order to load the factory.  We do not
        anticipate future margins will drop to this level based upon projected order
        growth.  During the nine-month periods ended December 31, 2007, and
        2006, the gross margin on specialty cards and card printers was 19% and 22%,
        respectively.  Over the past three years, the quarterly gross margins
        have generally been in the low to mid 20% range.
 
 Operating
        Expenses
 
 The
        following table presents operating expenses for the three and nine-month
        periods
        ended December 31, 2007 and 2006 (in thousands, except for
        percentage):
  Three
                    Months
                    Ended
                
                
                Nine
                    Months
                    EndedDecember
                    31,
                
                
                December
                    31,2007
                
                
                2006
                
                
                2007
                
                
                2006Selling,
                    general and
                    administrative expenses
                
                $
                4,056
                
                
                $
                3,294
                
                
                $
                10,826
                
                
                $
                9,712Percent
                    of change from prior
                    year
                
                
                23
                %
                
                
                
                
                
                
                11
                %Research
                    and development
                    expenses
                
                $
                719
                
                
                $
                763
                
                
                $
                2,212
                
                
                $
                2,308Percent
                    of change from prior
                    year
                
                
                (6
                %)
                
                
                
                
                
                
                (4
                %)
 
 Selling,
        General, and Administrative
        Expenses (SG&A).  The $762,000 increase in SG&A
        expenses for the three-month period ended December 31, 2007 as compared with
        the
        three-month period ended December 31, 2006 was due to the increase of $184,000
        in stock-based compensation expenses, $191,000 of consulting work for marketing
        and lobbying efforts, $94,000 increase of legal, accounting and director’s fees,
        and the balance attributable to the CEO’s retirement agreement described in the
        next paragraph and increased sales effort.  The $1.1 million increase
        in SG&A expenses for the nine-month period ended December 31, 2007 as
        compared with the nine-month period ended December 31, 2006 was due to $356,000
        increase in stock-based compensation, $228,000 of consulting, $80,000 increase
        in depreciation due to the ERP implementation, $132,000 of legal, accounting
        and
        director’s fees, and the balance due to the CEO’s retirement agreement and other
        miscellaneous costs.
 
 On
        November 28, 2007, we entered into a Planned Retirement Agreement and an
        Age
        Discrimination Release Agreement with our Chief Executive Officer (CEO) and
        President.  Provided that prior to his retirement date of March 31, 2008
        (referred to below as the Retirement Date), the CEO is not terminated for
        cause
        and does not resign without good reason, these agreements provide for the
        CEO to
        receive two years of separation pay at the per annum rate of $350,002;
        consulting retainer of $18,000 for nine months of consulting availability
        and
        services; and bonus of up to $100,000, of which $50,000 is discretionary
        to be
        paid based on recommendations from the Chairman and Vice Chairman and we
        will
        continue to pay our portion of his health care insurance premium should he
        elect
        COBRA coverage for up to 18 months.  His stock options will cease
        vesting on the Retirement Date, other than the 18,750 options scheduled to
        vest
        on May 24, 2008, which will vest if he is then consulting for us.  He
        owns 3,125 restricted shares which will vest on September 21, 2008 if he
        is then
        a consultant with LaserCard and his other restricted shares will be
        forfeited.  We have allocated the costs of the postretirement payments
        and the bonus using the discounted cash-flow basis over the remaining months
        of
        total expected service.  The options were remeasured using the
        Black-Scholes method. During the three-month period ended December 31, 2007,
        we
        expensed $255,000, charged to SG&A.  For the three-month period
        ending March 31, 2008, we will expense approximately $575,000 for future
        post-retirement payments, which along with recruiting expenses will result
        in
        increased SG&A expenses for that quarter.
  28
  Research
        and Development Expenses
        (R&D).  The decrease in R&D expenses during the three
        and nine-month periods ended December 31, 2007 as compared with the three
        and
        nine-month periods ended December 31, 2006 was mainly due to share-based
        expenses and the closure of some R&D projects such as the employee badging
        system and the optical chip project. We are continuing our efforts to develop
        new optical memory card features and structures, including various composite
        card structures to allow the insertion of contactless chips with radio frequency
        (RF) capability, dual-interface (contact-contactless) with optical memory,
        OVD
        (optically variable device) products, and other market-driven
        requirements.  We are also performing optical media development to
        allow new form factors for more flexibility in card layouts and integrated
        security features; enhanced optical memory card read/write drives for both
        increased reliability and ease of use and integration; new versions of read-only
        drives (readers) to meet various operational requirements such as office
        desktop
        units or handheld field units with integrated displays, biometrics, and RFID
        capability; and new software products in an effort to provide new products
        that
        can stimulate optical memory card sales growth.  Additionally, after a
        year of in-house evaluation of our OpticalProximity system for building access
        control, we completed installation during May 2007 at our first customer
        location, as a test and evaluation site.  In our German subsidiary, we
        recently completed the development of a new integrated card personalization
        system and have shipped several systems to customers in the past year. We
        anticipate that these ongoing research and development efforts should result
        in
        enhanced card features and capabilities, new versions of read-only drives,
        and
        drives with advanced security features and/or lower manufacturing costs;
        however, there is no assurance that such product development efforts will
        be
        successful.  These features are important for our existing and future
        optical memory card markets.  We anticipate the R&D expenditures
        will increase about 15% from the previous quarter in the next
        quarter.
 
 Other
        Income,
        Net.  The decrease in interest income was mainly due to a lower
        amount of invested funds.  The decrease in interest expense was due to
        improved management of the forward contracts.  We expect interest income to
        decrease in the near-term due to the declining short-term interest rates
        resulting from the recent actions of the Federal Reserve Bank in lowering
        the
        Federal funds rate.
 
 The
        following table presents other income, net for the three and nine-month periods
        ended December 31, 2007 and 2006 (in thousands):
  Three
                    Months
                    Ended
                
                
                Nine
                    Months
                    EndedDecember
                    31,
                
                
                December
                    31,2007
                
                
                2006
                
                
                2007
                
                
                2006Interest
                    income
                
                $
                243
                
                
                $
                246
                
                
                $
                689
                
                
                $
                762Other
                    income
                
                
                -
                
                
                
                26
                
                
                
                18
                
                
                
                40Interest
                    expense
                
                
                (16
                )
                
                
                (13
                )
                
                
                (50
                )
                
                
                (95
                )Other
                    income
                    (expense)
                
                
                (2
                )
                
                
                8
                
                
                
                (2
                )
                
                
                (1
                )$
                225
                
                
                $
                267
                
                
                $
                655
                
                
                $
                706
 
 Income
        Taxes.  The
        tax benefit in the nine-month period ended December 31, 2007 was largely
        due to
        $100,000 credit for our foreign subsidiary’s assimilation of the new reduction
        in tax rate.
 
 The
        following table presents income taxes for the three and nine-month periods
        ended
        December 31, 2007 and 2006 (in thousands):
  Three
                    Months
                    Ended
                
                
                Nine
                    Months
                    EndedDecember
                    31,
                
                
                December
                    31,2007
                
                
                2006
                
                
                2007
                
                
                2006U.S.
                    income
                    taxes
                
                $
                -
                
                
                $
                -
                
                
                $
                -
                
                
                $
                -Foreign
                    income
                    tax
                
                
                19
                
                
                
                (25
                )
                
                
                (106
                )
                
                
                (96
                )$
                19
                
                
                $
                (25
                )
                
                $
                (106
                )
                
                $
                (96
                )
 
 LIQUIDITY
        AND CAPITAL RESOURCES
 
 The
        following table summarizes cash,
        cash equivalents and investments as of December 31, 2007 and March 31, 2007
        (in
        thousands):
  December
                    31,
                
                
                March
                    31,2007
                
                
                2007Cash
                    and cash
                    equivalents
                
                $
                2,087
                
                
                $
                3,026Cash,
                    cash equivalents and
                    short-term investments
                
                $
                18,587
                
                
                $
                20,526
  29
  The
        following table displays the sources and uses of cash by activity (in
        thousands):
  Nine
                    Months
                    EndedDecember
                    31,2007
                
                
                2006Net
                    cash used in operating
                    activities
                
                $
                (1,297
                )
                
                $
                (3,298
                )Net
                    cash provided by (used in)
                    investing activities
                
                $
                (24
                )
                
                $
                3,903Net
                    cash provided by financing
                    activities
                
                $
                630
                
                
                $
                867
 
 Cash
        used
        in operations of $1.3 million for the nine-month period ended December 31,
        2007
        consists mainly of $0.9 million for increases in operating assets and $0.4
        million for decreases in operating liabilities.  Cash used in
        operations of $3.3 million for the nine-month period ended December 31, 2006
        was
        due to the $5.4 million loss less non-cash items $1.7 million and the $1.4
        million decrease in operating assets.
 
 For
        investing activities in the nine-month period ended December 31, 2007, was
        due
        to $1 million from net proceeds provided from investments, offset by capital
        and
        patent expenditures of slightly over $1 million.  Net cash provided by
        investing activities for the nine-month period ended December 31, 2006, was
        due
        to $6.5 million of net proceeds from maturing investments offset by $2.5
        million
        in purchases of property and equipment.
 
 Net
        cash
        provided by financing activities for the nine-month period ended December
        31,
        2007 was $0.6 million, which primarily consisted of net proceeds from the
        sale
        of common stock under our employee stock plans.  Net cash provided by
        financing activities for the nine-month period ended December 31, 2006 was
        $0.9
        million, which primarily consisted of net proceeds from the sale of common
        stock
        under our employee stock plans.
 
 We
        believe that the estimated level of revenues and customer advance payments
        over
        the next twelve months will be sufficient to generate cash from operating
        activities over the same period.  However, quarterly fluctuations are
        expected, especially in the March 2008 quarter where we expect to have a
        decrease in revenue.  Operating cash flows could be negatively
        impacted to a significant degree if either of our largest U.S. government
        programs were to be delayed, reduced, canceled, or not extended, or if the
        Italian CIE and Angolan card programs do not grow as planned, and if these
        programs are not replaced by other card orders or other sources of income,
        or if
        increases in product revenues or licenses do not keep pace with anticipated
        increases in marketing and R&D expenditures.
 
 Our
        agreement with the government of Costa Rica signed on December 20, 2007 required
        us to issue a completion bond of about $167,000, equivalent to 10% of the
        contract price. Our cash deposit is classified as restricted cash at December
        31, 2007. The bond shall remain in effect for one year (12 months) after
        the
        final acceptance date of delivery of the last batch of shipment.
 
 We
        have
        not established a line of credit.  We may negotiate a line of credit,
        although no assurance can be made that such financing would be available
        on
        favorable terms or at all, if needed.
 
 As
        a
        result of our net loss for the nine-month period ended December 31, 2007,
        our
        accumulated deficit increased from $38.7 million to $42.6
        million.  Upon adoption of FIN 48, the Company recognized a cumulative
        effect adjustment of $62,000, decreasing its income tax liability for
        unrecognized tax benefits, and decreasing the March 31, 2007 accumulated
        deficit
        balance. Stockholders’ equity at December 31, 2007 decreased to $21 million from
        $22.6 million at March 31, 2007 as a result of the net loss partially offset
        by
        the cumulative effect upon adoption of FIN 48 and issuance of common stock
        under
        our employee stock plans.
 
 We
        consider all highly liquid investments, consisting primarily of commercial
        paper, discount notes, and U.S. government bonds, with original or remaining
        maturities of three months or less at the date of purchase, to be cash
        equivalents.  All investments with original or remaining maturities of
        more than three months but not more than one year at the date of purchase
        are
        classified as short-term.  Investments with original or remaining
        maturities of more than one year at the date of purchase are classified as
        long-term.  We determine the length of our investments after
        considering our cash requirements and yields available for the type of
        investment considered by our Company.  We determine the appropriate
        classification of debt and equity securities at the time of purchase and
        reevaluate the classification of investments as of each balance sheet
        date.  As of December 31, 2007, we had $16.5 million of short-term
        investments, compared with $17.5 million of short-term investments at March
        31,
        2007.  These investments were in the form of auction rate
        securities.  All auction rate securities are accounted for as
        available-for-sale and all other interest-bearing securities are accounted
        for
        as held-to-maturity.
  30
  We
        made
        capital equipment and leasehold improvement purchases of approximately $1
        million for the nine-month period ended December 31, 2007 compared with
        approximately $2.5 million for the nine-month period ended December 31,
        2006.  We have an annual production capacity of 10 million
        roll-process cards in conjunction with approximately 9 million sheet-process
        cards depending upon the optimum mix of features.  We plan to purchase
        additional production equipment in a series of steps when we deem appropriate
        based in part upon orders and forecasts.  We may use cash on hand and
        cash generated from operations or debt financing to fund possible capital
        expenditures of possibly $10 million for equipment and leasehold improvements
        for card production as customer orders justify the investment.  These
        expenditures could occur throughout the next twelve months.
 
 During
        thenine-month
        period endedDecember 31,
        2007, we entered into a lease
        agreement with a four-year term to acquire equipment.  This was
        recorded as a capitalized lease in the amount of about $113,000 (80,000
        euros) in accordance with SFAS 13,Accounting
        for
        Leases.Wehad
        no other debt financing
        activities.
 
 OFF-BALANCE
        SHEET ARRANGEMENTS
 
 We
        have
        no off-balance sheet arrangement as of December 31, 2007 and March 31, 2007,
        that has or is reasonably likely to have a current or future effect on our
        financial condition, changes in financial condition, revenues or expenses,
        results of operations, liquidity, capital expenditures, or capital resources
        that is material to investors.
 
 RECENT
        ACCOUNTING PRONOUNCEMENTS
 
 Recent
        accounting pronouncements are disclosed in Note 1 of the notes to condensed
        consolidated financial statements.
  31
 
 ITEM
                3.
              QUANTITATIVE
                AND QUALITATIVE
                DISCLOSURES ABOUT MARKET RISKS
  Interest
        Rate
        Risk.  We invest our cash, beyond that needed for daily
        operations, in high quality debt securities.  In doing so, we seek
        primarily to preserve the value and liquidity of our capital and, secondarily,
        to safely earn income from these investments.  To accomplish these
        goals, we invest only in debt securities issued by (a) the U.S. Treasury
        and
        U.S. government agencies, state agencies and corporations and (b) debt
        instruments that meet the following criteria:
 
 ●
              Commercial
                  paper rated A1/P1 or debt instruments rated AAA, as rated by the
                  major
                  rating services●
              Can
                  readily be sold for cash
 
 Investments
        in both fixed rate and
        floating rate interest earning instruments carry a degree of interest rate
        risk.Fixed
        rate securities may have their
        fair market value adversely impacted because of a rise in interest rates,
        while
        floating rate securities may produce less income than expected if interest
        rates
        fall. Due in part to these factors, our future investment income may fall
        short
        of expectations because of changes in interest rates or we may suffer losses
        in
        principal if forced to sell securities that have seen a decline in market
        value
        because of changes in interest rates. We expect our income from cash
        investments to decline over the next quarter due to lower interest rates
        resulting from recent decreases in the Federal fund rates.
 
 There
        were no material changes for the nine-month period ended December 31, 2007
        in
        our exposure to market risk for changes in interest rates.
 
 The
        following summarizes short-term investments at fair value (in thousands),
        weighted average yields and maturity dates:
  December
                    31,
                    2007
                
                
                March
                    31,
                    2007Auction
                    rate
                    securities
                
                $
                16,500
                
                
                $
                17,500Weighted
                    average
                    yield
                
                
                6.46
                %
                
                
                5.29
                %Total
                    investments
                
                $
                16,500
                
                
                $
                17,500Maturity
                    dates
                
                January
                    1 - 25,
                    2008
                
                
                October
                    3 - 27,
                    2006
 
 There
        were no long-term investments
        as of December 31, 2007.
 
 Foreign
        Currency
        Exchange Rate Risk.  OurU.S.operations
        sell products in various
        international markets.  For thenine-monthperiodendedDecember
        31, 2007, revenue by
        our German subsidiary
        of approximately $9.3million
        was denominated in
        foreign currency. In addition, some raw material purchases and purchased
        services are denominated in foreign currency.Cash
        provided by/used in CCD operating
        activities has been immaterial.
 
 We
        use
        short-term foreign exchange forward contracts to mitigate foreign currency
        risk
        associated primarily with inter-company receivables and payables, and loans
        receivable (denominated in Euros) to our German subsidiary.  Our
        foreign exchange forward contracts are not designated for accounting purposes
        as
        hedging instruments under SFAS No. 133, Accounting for Derivative
        Instruments and Hedging Activities, as amended.  Accordingly,
        any gains or losses resulting from changes in the fair value of the forward
        contract are reported in other income, net of expenses.  The gains and
        losses on these forward contracts generally offset gains and losses associated
        with the underlying foreign currency denominated inter-company receivables
        and
        payables, and loans receivable.  At December 31, 2007, we had a
        foreign exchange forward contract with a maturity of less than 30 days to
        purchase 1.3 million euros. The fair value of the forward contract was not
        material at December 31, 2007.
  32
 ITEM
                  4.
                CONTROLS
                  AND PROCEDURES
 (a)  
        Evaluation of Disclosure
        Controls and Procedures.  We maintain disclosure controls and
        procedures that are designed to ensure that information required to be disclosed
        by us in reports that we file or submit under the Securities Exchange Act
        of
        1934 is recorded, processed, summarized, and reported within the time periods
        specified in Securities and Exchange Commission rules and forms, and that
        such
        information is accumulated and communicated to our management, including
        our
        Chief Executive Officer and Chief Financial Officer, as appropriate, to allow
        timely decisions regarding required disclosure. In designing and evaluating
        our
        disclosure controls and procedures, management recognized that disclosure
        controls and procedures, no matter how well conceived and operated, can provide
        only reasonable, not absolute, assurance that the objectives of the disclosure
        controls and procedures are met.  Our disclosure controls and
        procedures have been designed to meet, and management believes that they
        meet,
        reasonable assurance standards.  Additionally, in designing disclosure
        controls and procedures, our management necessarily was required to apply
        its
        judgment in evaluating the cost-benefit relationship of possible disclosure
        controls and procedures. The design of any disclosure controls and procedures
        also is based in part upon certain assumptions about the likelihood of future
        events, and there can be no assurance that any design will succeed in achieving
        its stated goals under all potential future conditions.
 
 Based
        on
        their evaluation as of the end of the period covered by this Form 10-Q, our
        Chief Executive Officer and Chief Financial Officer have concluded that,
        subject
        to the limitations noted above, as of such date, our disclosure controls
        and
        procedures were effective at the reasonable assurance level.
 
 (b)  
        Changes in Internal Control
        over Financial Reporting.  There were no significant changes in
        our internal control over financial reporting that occurred during the
        three-month period ended December 31, 2007that have materially
        affected, or are reasonably likely to materially affect, our internal control
        over financial reporting.
 
 PART
        II. OTHER
        INFORMATION
 
 Item
        1.Legal
        Proceedings
 
 From
        time
        to time we are a party to litigation matters and pending or threatened claims
        and assessments that are normal in the course of our operations. While we
        believe that the ultimate outcome of these matters will not have a material
        adverse effect on our financial position, results of operations or cash flows,
        the outcome of these matters is not determinable and negative outcomes may
        adversely affect our financial position, liquidity, or results of
        operations.
 
 Item
        1A.Risk
        Factors
 
 A
        revised
        description of the risk factors associated with our business is set forth
        below.
        This description includes any material changes to and supersedes the description
        of the risk factors associated with our business previously disclosed in
        Part
        II, Item 1A of our Quarterly Report on Form 10-Q for the fiscal quarter ended
        September 30, 2007.  Because of these risk factors, as well as other
        factors affecting the Company’s business and operating results and financial
        condition, including those set forth elsewhere in this report, our actual
        future
        results could differ materially from the results contemplated by the
        forward-looking statements contained in this report and our past financial
        performance should not be considered to be a reliable indicator of future
        performance, so that investors should not use historical trends to anticipate
        results or trends in future periods.
 
 RISK
        FACTORS
 
 OUR
        CURRENT AND FUTURE EXPECTED REVENUES ARE DERIVED FROM A SMALL NUMBER OF ULTIMATE
        CUSTOMERS SO THAT THE LOSS OF OR REDUCTIONS IN PURCHASES BY ANY ONE ULTIMATE
        CUSTOMER COULD MATERIALLY REDUCE OUR REVENUES AND LEAD TO
        LOSSES.  During our nine-month period ended December 31, 2007 and each
        of the previous three fiscal years, we derived more than 60% of our revenues
        from sixprograms ―
twoU.S.
        government programs and four foreign government
        programs.  Due to the lengthy sales cycles, we believe that these
        programs, with perhaps the addition of a few other foreign programs, will
        be the
        basis for a majority of our revenues in the near-term.  The loss of or
        reductions in purchases by any one customer due to program cutbacks,
        competition, or other reasons would materially reduce our revenue base. Annual
        or quarterly losses occur when there are material reductions, gaps or delays
        in
        card orders from our largest U.S. or foreign government programs or if such
        programs were to be reduced in scope, delayed, canceled, or not extended
        and not
        replaced by other card orders or other sources of income.
  33
  WE
        INCURRED NET LOSSES DURING ALL BUT THREE OF THE PREVIOUS NINETEEN QUARTERS
        AND
        MAY NOT BE ABLE TO GENERATE SUFFICIENT REVENUE IN THE FUTURE TO REGAIN
        PROFITABILITY. Although we generated $3.3 million of profit during the three
        quarters from October 1, 2005 through June 30, 2006, we incurred a loss for
        our
        last six quarters and we had incurred losses as well for the ten quarters
        preceding the quarter ended October 1, 2005.  Our loss for the
        nine-month period ended December 31, 2007, was $3.9 million and for our fiscal
        year 2007 our loss was $12.4 million, and we had an accumulated deficit of
        $42.6
        million at December 31, 2007.  There can be no assurance that we will
        generate enough revenues in the near term to achieve
        profitability.  We are relying upon our optical memory card technology
        to generate future product revenues, earnings, and cash flows.  If
        alternative technologies emerge or if we are otherwise unable to compete,
        we may
        not be able to achieve or sustain profitability on a quarterly or annual
        basis.  Annual or quarterly losses would also continue if increases in
        product revenues or license revenues do not keep pace with increased
        expenses.
 
 OUR
        PROGRAM WITH ITALY, WHICH WE BELIEVE WILL BE ONE OF OUR LARGEST CUSTOMERS
        ONCE
        FULLY IMPLEMENTED, MAY BE FURTHER DELAYED OR CANCELLED FOR REASONS OUTSIDE
        OUR
        CONTROL WHICH WOULD CAUSE US TO HAVE LESS REVENUE THAN PLANNED AND WOULD
        LIKELY
        LEAD US TO CONTINUED OPERATING LOSSES IF OTHER EXPECTED BUSINESS DOES NOT
        MATERIALIZE.  We believe that the Italian government will be our
        largest customer when the CIE program is fully implemented.  We expect
        that CIE and PSE card programs may comprise a significant portion of future
        revenues.  Sales of cards and drives for the Italian government’s CIE
        and PSE card programs have been a small portion of our total revenue for
        the
        past year.  However, during fiscal year 2007, we increased card
        manufacturing capacity to meet anticipated demand and we have expected a
        large
        order since the first quarter of fiscal year 2007.  This order has not
        yet been placed and there can be no assurance that the order will be placed
        in
        the near-term or that demand will increase or be sustained as we
        anticipate.  We would most likely continue to incur losses if orders
        are further delayed, or if the program is not implemented at the level foreseen
        or if the government was to change its technology decision and no longer
        use
        optical memory cards and other new programs do not materialize as
        expected.  While selected Italian cities have issued cards and tested
        the distributed card issuing process and the Italian government has recently
        solicited interested parties to provide their qualifications for expansion
        of
        the data collection and issuance infrastructure, full implementation is
        dependent upon regionalized and further decentralized card issuance
        infrastructure developments being successfully undertaken and the national
        ID
        card system functioning as designed, of which there can be no assurance.
        Overcoming some of these issues may be difficult and complex and involve
        third
        parties, which could be time consuming and expensive and lead to further
        delays
        for implementation.
 
 THE
        U.S.
        GOVERNMENT, ONE OF OUR TWO LARGEST ULTIMATE CUSTOMERS, HAS THE RIGHT TO DELAY
        ITS ORDERS OR COULD CHANGE ITS TECHNOLOGY DECISIONS, WHICH WOULD RESULT IN
        ORDER
        DELAYS AND POSSIBLY IN OPERATING LOSSES. For the nine-month period ended
        December 31, 2007 revenues included sales of approximately $6.1 million of
        Green
        Cards and Laser Visa BCCs, and comprised 20% of our total revenue. For the
        nine-month period ended December 31, 2006, revenues included sales of
        approximately $6.4 million of Green Cards and Laser Visa BCCs, and comprised
        28%
        of our total revenue.  These revenues could average approximately $10
        million annually ($8 million for Green Cards and $2 million for Laser Visa
        BCCs)
        if the U.S. government continues to use our cards in these programs, continues
        to personalize cards at that rate and continues to maintain an inventory
        level
        equal to six-months of usage.  On April 2, 2007, we announced a
        subcontract with General Dynamics Information Technology (GDIT) for the
        manufacture and supply of Green Cards and Laser Visas.  The
        subcontract is for an initial 12-month period with optional extensions up
        to a
        total of five years.  Under U.S. government procurement regulations,
        even with a contract in place, the government reserves certain rights, such
        as
        the right to withhold releases, to reduce the quantities released, extend
        delivery dates, reduce the rate at which cards are issued, and cancel all
        or
        part of its unfulfilled purchase orders.  At December 31, 2007 we have
        no backlog for these programs.
  34
  The
        U.S.
        government recently announced that it had awarded the Passport Card program
        to GDIT for a non-optical card which we expect would replace the Laser Visa
        BCCs
        if and when implemented unless the technology decision
        changes.  Therefore, we may not receive further orders for Laser Visa
        BCCs as the government has a substantial inventory on hand. Over the past
        nine
        months, we have recorded revenues of $1 million for Laser Visa
        BCC's.
  Also,
          the Green Card is currently
          undergoing a redesign process.  It is possible that our revenue will
          be reduced during the period of transition from the current card to the
          new
          design after which we would expect orders to increase as their inventory
          is
          rebuilt to their desired safety-stock level.  Our revenues for Green
          Cards could average approximately $8 million annually if the U.S. government
          continues to use our cards in this program, continues to personalize cards
          at
          that rate and continues to maintain an inventory level equal to six–months of
          usage.  We would most likely have reduced operating results if the
          Green Card program were to be delayed, canceled, or not extended or if
          the
          government were to change its technology decision and no longer use optical
          memory cards.  Over the past nine months, we have recorded revenues of
          $5 million for Green Cards.
 OUR
        OPTICAL MEMORY CARD PRODUCT REVENUES WILL NOT GROW IF WE DO NOT WIN NEW BUSINESS
        IN THE U.S. OR ABROAD OR IF THE ITALIAN AND ANGOLAN NATIONAL ID PROGRAMS
        ARE NOT
        IMPLEMENTED AS ANTICIPATED.  Quarterly OMC revenues from April 1, 2006
        through December 31, 2007 from our core programs have been $5.3 million,
        $3.2
        million, $2.9 million, $4.9 million, $4.4 million, $6.6 million, and $7.7
        million, respectively.  These programs include the U.S. Green Card, the
        Laser Visa BCC, the Canadian Permanent Resident Card, the vehicle registration
        cards used by three states in India, and a national ID card used in a Middle
        Eastern country.  During full implementation, we expect our revenues
        from programs in Italy will reach approximately $40 to $50 million per
        year.  On January 17, 2008, we announced that we were part of the
        winning team for a national ID card project in Angola.  Revenues could
        total $90 million over five years for this project.  We also are
        working on potential secure ID card business in more than ten countries around
        the world.  In order for us to achieve our overall revenue growth
        goal, we will need the Italian programs to continue and reach their anticipated
        levels, of which there can be no assurance, and we will also need to win
        some of
        the new business opportunities we see in the U.S. and
        abroad.  Emerging optical memory card programs or prospective
        applications include permanent resident cards and national identification
        cards
        in several countries such as in Angola as well as secure identification cards
        for governmental agencies.  There can be no assurance that we will
        receive sizable future orders for any of these programs, nor any assurance
        that
        we will be able to win any other new business in the U.S. or abroad which
        is
        necessary to grow our business to the level we desire.
 
 SINCE
        THE
        SALES CYCLE FOR OUR PRODUCTS IS TYPICALLY LONG AND UNPREDICTABLE, WE HAVE
        DIFFICULTY PREDICTING WHEN NEW BUSINESS WILL CONTRIBUTE TO REVENUE
        GROWTH.  Obtaining substantial orders usually involves a lengthy sales
        cycle, requiring marketing and technical time and expense with no guarantee
        that
        substantial orders will result. This long sales cycle results in uncertainties
        in predicting operating results, particularly on a quarterly basis. In addition,
        since our major marketing programs involve the U.S. and various foreign
        governments and quasi-governmental organizations, additional uncertainties
        and
        extended sales cycles can result. Factors which increase the length of the
        sales
        cycle include government regulations, bidding procedures, budget cycles,
        and
        other government procurement procedures, as well as changes in governmental
        policy.
 
 WE
        COULD
        EXPERIENCE EQUIPMENT, RAW MATERIAL, QUALITY CONTROL, OR OTHER PRODUCTION
        PROBLEMS ESPECIALLY IN PERIODS OF INCREASING VOLUME.  There can be no
        assurance that we will be able to meet our projected card manufacturing capacity
        if and when customer orders reach higher levels. We have made and intend
        to
        continue to make significant capital expenditures to expand our card
        manufacturing capacity. For example, we may invest up to $10 million of capital
        expenditures during the next twelve months for optical memory card production
        capacity assuming certain business developments. However, since customer
        demand
        is difficult to predict, and we generally wait for such demand to materialize
        prior to making capital expenditure commitments, we may be unable to ramp
        up our
        production quickly enough to fill new customer orders in a timely fashion.
        This
        could cause us to lose new business and possibly existing business. In addition,
        if we overestimate customer demand, we could incur significant costs from
        creating excess capacity which was the case during fiscal years 2005 and
        2007.  We may experience manufacturing complications associated with
        increasing our manufacturing capacity of cards and drives, including the
        adequate production capacity for sheet-lamination process cards to meet order
        requirements and delivery schedules. We may also experience difficulties
        implementing new manufacturing processes, meeting customers’ quality or
        standards requirements, or outsourcing some of our manufacturing. The addition
        of fixed overhead costs increases our breakeven point and results in lower
        profit margins unless compensated for by increased product sales. When
        purchasing raw materials for our anticipated optical card demand, we take
        into
        consideration the order-to-delivery lead times of vendors and the economic
        purchase order quantity for such raw materials. If we over-estimate customer
        demand, excess raw material inventory can result.
  35
  WE
        ARE
        CURRENTLY OUR OWN SOLE SOURCE OF OPTICAL MEMORY CARDS AND SEVERAL OF THE
        STEPS
        IN OUR CARD MANUFACTURING PROCESS HAVE NO BUILT-IN
        REDUNDANCY.  THEREFORE, WE ARE SUSCEPTIBLE TO SUPPLY INTERRUPTIONS,
        INCLUDING IF CERTAIN MACHINERY WERE TO BREAK DOWN.  MUCH OF OUR
        MACHINERY IS COMPRISED OF CUSTOM VERSIONS OF MACHINERY SOME OF WHICH IS MORE
        THAN 20 YEARS OLD.  Unless and until Prevent Global comes on line as a
        second source, of which there can be no assurance, we are the only source
        of our
        optical memory cards, making them in our Mountain View facility using a
        proprietary manufacturing process, with our German subsidiary capable of
        performing a few key steps in certain instances.  There is no
        assurance that the Prevent facility, if and when operational, will be an
        acceptable second source to some of our key government accounts.  For
        example, the Prevent facility as currently designed would not be capable
        of
        producing cards for most of our key government programs.  We are
        susceptible to supply interruptions or yield decreases when our line goes
        down
        or malfunctions.  Much of our machinery is comprised of customized
        versions of machinery which has long lead times to replace and may be difficult
        to maintain or repair, requiring us to be self-reliant.  Some of the
        machinery we use is more than 20 years old and is no longer manufactured
        for
        others, which would require us to adapt a newer version to our needs, which
        would involve additional effort on our part.
 
 IF
        WE ARE
        UNABLE TO BUY RAW MATERIALS IN SUFFICIENT QUANTITIES AND ON A TIMELY BASIS,
        WE
        WILL NOT BE ABLE TO DELIVER PRODUCTS TO CUSTOMERS ON TIME WHICH COULD CAUSE
        US
        TO LOSE CUSTOMERS, AND OUR REVENUES COULD DECLINE.  We depend on sole
        source and limited source suppliers for optical card raw materials. Such
        materials include plastic films used in optical memory card production, which
        are available from one supplier in the U.S. and from multiple foreign suppliers.
        Processing chemicals, inks, and bonding adhesives are obtained from various
        U.S.
        and foreign suppliers. Certain photographic films are commercially available
        solely from Eastman Kodak Company, of the United States.  We do not
        expect any difficulty in obtaining the film necessary for orders projected
        over
        the next nine to fifteen months considering the inventory currently on hand
        and
        on order.  No assurance can be given that Kodak will continue to
        supply such photographic films on a satisfactory basis and in sufficient
        quantities although we believe Kodak will continue to supply such films for
        several years.  If Kodak were to announce that it was no longer going
        to sell film, we would request that Kodak provide us with a last-buy opportunity
        which we would plan to take maximum advantage of in order to purchase from
        Kodak
        sufficient supply of films to continue our card production until an appropriate
        substitute can be found or developed, although no assurance can be given
        that
        Kodak would provide us with such an opportunity.  Also we have ongoing
        R&D efforts in the area of alternate media, designed to develop an alternate
        to the current Kodak film-based media, though there is no assurance that
        those
        efforts will be successful.
 
 AN
        INTERRUPTION IN THE SUPPLY OF READ/WRITE DRIVE PARTS OR DIFFICULTIES ENCOUNTERED
        IN READ/WRITE DRIVE ASSEMBLY COULD CAUSE A DELAY IN DELIVERIES OF DRIVES
        AND
        OPTICAL MEMORY CARDS AND A POSSIBLE LOSS OF SALES, WHICH WOULD ADVERSELY
        AFFECT
        OUR OPERATING RESULTS.  Several major components of our read/write
        drives are designed specifically for that unit. For example, the optical
        recording head for the current drive is a part obtained from one supplier;
        and
        at current production volumes, it is not economical to have more than one
        supplier for this custom component. The ability to produce read/write drives
        in
        high-volume, if required, will be dependent upon maintaining or developing
        sources of supply of components that meet our requirements for high volume,
        quality, and cost. In addition, we could encounter quality control or other
        production problems at high-volume production of read/write drives. We are
        also
        investing in research and development in an effort to develop new drive
        products.
 
 IF
        WE ARE
        UNABLE TO DEVELOP UPGRADED READ/WRITE DRIVES THAT COST LESS TO MANUFACTURE
        AND
        ALSO A READ-ONLY DRIVE, WE COULD LOSE POTENTIAL NEW BUSINESS.  The
        price of our read/write drive product line ranges from $1,800 to approximately
        $2,500 depending on features and quantity purchased.  We believe the
        price of our drives is competitive in applications requiring a large number
        of
        cards per drive, because the relatively low cost for our cards offsets the
        high
        cost per drive when compared with our major competition, IC card systems.
        In
        addition, we have undertaken a product development program for a portable
        read-only drive that has been sampled in limited quantities at prices less
        than
        $1,000, which we believe would increase our prospects for winning future
        business.  However, there can be no assurance that our development
        program will be successful, that volume production of any new design will
        occur
        in the near term, or that significantly lower manufacturing costs or increased
        sales will result.
  36
  WE
        MAY
        NOT BE ABLE TO ADAPT OUR TECHNOLOGY AND PRODUCTS TO COMMERCIAL APPLICATIONS
        WHICH GENERATE MATERIAL AMOUNTS OF REVENUE AND PROFIT.  THIS WOULD
        LIMIT THE FUTURE GROWTH OF OUR BUSINESS TO THE GOVERNMENT SECTOR AND THE
        LACK OF
        DIVERSIFICATION EXPOSES US TO ENHANCED RISK OF COMPETITION.  We are
        exploring commercial applications for our optical memory products in order
        to
        lessen our dependence upon the government sector.  Our efforts to
        develop applications for OpticalProximityTM access cards are one
        example.  We may be unsuccessful in these efforts in which case we
        would not obtain the diversity of revenues we are seeking for the
        future.  If our customer base remains limited to secure ID card
        applications for government use, then we are more susceptible to other
        technologies and products making in-roads or to political pressures or changing
        laws.
 
 IF
        WE ARE
        UNABLE TO ADAPT TO TECHNOLOGICAL CHANGES IN THE SECURE ID CARD INDUSTRY AND
        IN
        THE INFORMATION TECHNOLOGY INDUSTRY GENERALLY, WE MAY NOT BE ABLE TO EFFECTIVELY
        COMPETE FOR FUTURE BUSINESS.  The secure ID technology industry is
        characterized by rapidly changing technology and continuing product evolution.
        The future success and growth of our business will require the ability to
        maintain and enhance the technological capabilities of the LaserCard® product
        line. There can be no assurance that our products currently sold or under
        development will remain competitive or provide sustained revenue
        growth.
 
 SEVERAL
        OF OUR FOREIGN PROGRAMS INVOLVE OUR CARDS AS PART OF A SOLUTION WHICH INCLUDES
        TECHNOLOGIES OF THIRD PARTIES.  SOMETIMES THESE THIRD PARTY
        TECHNOLOGIES ARE INTEGRATED WITH OUR CARDS BY OUR SYSTEMS INTEGRATOR CUSTOMER
        OR
        SUBCONTRACTOR.  WE THEREFORE HAVE VARYING DEGREES OF CONTROL OVER THE
        OVERALL SYSTEM WHICH COULD LEAD TO TECHNICAL, QUALITY, AND SYSTEM COMPATIBILITY
        ISSUES WHICH ARE DIFFICULT, EXPENSIVE, AND TIME CONSUMING TO SOLVE. THIS
        COULD
        CAUSE OUR ULTIMATE CUSTOMERS, GENERALLY GOVERNMENTS, TO FIND FAULT IN OPTICAL
        CARDS AND SWITCH TO OTHER SOLUTIONS EVEN THOUGH OUR OPTICAL TECHNOLOGY IS
        NOT
        THE ROOT CAUSE.  In certain of our current foreign programs such as
        Italy, India, and a Middle Eastern country, and possibly in future other
        programs, various third party technologies such as contact or contactless
        chips
        will be added to our cards.  The embedding or addition of other
        technologies to the LaserCard® optical memory card, especially when contracted
        to independent third parties, could potentially lead to technical, compatibility
        and other issues.  In such circumstances, it may be difficult to
        determine whether a fault originated with our technology or that of a
        co-supplier or the person embedding or adding the third party technology
        to our
        cards.  If such faults occur, they could be difficult, expensive, and
        time-consuming to resolve.  Such difficulties could lead to our
        ultimate customers, the foreign governments, switching to other technologies
        even though optical technology is not the root cause of the
        fault(s).  The resulting loss of customers would adversely affect our
        revenues.
 
 WE
        ARE
        LARGELY DEPENDENT ON SYSTEMS INTEGRATORS FOR IMPLEMENTATION OF CARD PROGRAMS
        AND
        THEIR METHOD OF IMPLEMENTATION MAY NOT BE SUCCESSFUL DUE TO QUALITY OR
        COST.  We sell to VARs and system integrators who in turn sell
        solutions to the end customer.  The integrators may not follow the
        recommendations we provide for the handling, possible incorporation of smart
        or
        RFID chips, processing, and/or printing on our cards and working with the
        end-user in the card issuing process.  This could lead to low quality
        or high costs or both resulting in damage to our reputation and/or loss of
        the
        contract.  We work to train the integrators to avoid such situations,
        but cannot control their work.  Also, we can step in to demonstrate
        how to successfully implement an optical memory card issuing
        system.  We plan to continue to offer this support then transition the
        card issuing process to local resources once the program is running
        successfully.
  37
  OUR
        OPTICAL MEMORY CARDS HAVE A COMPLEX STRUCTURE THAT REQUIRES A HIGH DEGREE
        OF
        TECHNICAL KNOWLEDGE AND EXPERIENCE TO MEET INCREASINGLY STRINGENT PERFORMANCE
        REQUIREMENTS.  WE HAVE AND COULD IN THE FUTURE AGREE TO CERTAIN
        CHARACTERISTICS BEYOND THOSE REQUIRED IN INDEPENDENTLY PUBLISHED
        STANDARDS.  THIS COULD INCREASE OUR COST OF MANUFACTURING CARDS OR RESULT
        IN ACCEPTING RETURNS OR GIVING CREDITS TO THE CUSTOMER.  MANY CUSTOMERS
        MAINTAIN SIGNIFICANT ADVANCE INVENTORY WHICH INCREASES THIS
        RISK.  There can be no assurance that we will be able to meet
        customers’ quality or standards requirements consistently.  This could lead
        to high manufacturing costs due to low product yields or unexpected product
        returns.  We employ a rigorous quality control procedure, are ISO 9000
        certified and we strive to deliver product that meets published standards
        and
        customer expectations.  Even so, we cannot give assurance that our products
        will meet customer expectations in all cases.  We have in the past, and we
        may in the future, replace product held by the customer or give credit for
        products previously delivered.
 
 IF
        WE
        FAIL TO PROTECT OUR INTELLECTUAL PROPERTY RIGHTS, COMPETITORS MAY BE ABLE
        TO USE
        OUR TECHNOLOGIES, WHICH COULD WEAKEN OUR COMPETITIVE POSITION, REDUCE REVENUES,
        OR INCREASE COSTS.  We use a combination of patent, trademark, and
        trade secret laws, confidentiality procedures, and licensing arrangements
        to
        establish and protect our proprietary rights. Our existing and future patents
        may not be sufficiently broad to protect our proprietary technologies. Despite
        our efforts to protect proprietary rights, we cannot be certain that the
        steps
        we have taken will prevent the misappropriation or unauthorized use of our
        technologies, particularly in foreign countries where the laws may not protect
        proprietary rights as fully as U.S. law. Any patents we may obtain may not
        be
        adequate to protect our proprietary rights. Our competitors may independently
        develop similar technology, duplicate our products, or design around any
        of our
        issued patents or other intellectual property rights. Litigation may be
        necessary to enforce our intellectual property rights or to determine the
        validity or scope of the proprietary rights of others. This litigation could
        result in substantial costs and diversion of resources and may not ultimately
        be
        successful. We cannot predict whether the expiration or invalidation of our
        patents would result in the introduction of competitive products that would
        affect our future revenues adversely. However, since our technology is now
        in
        the commercial stage, our know-how and experience in volume card production,
        system development and software capabilities, brand-name recognition within
        our
        card markets, and dominant-supplier status for optical memory cards are of
        far
        greater importance than our patents. At this time, we believe that our existing
        patent portfolio is helpful but is no longer essential for maintaining the
        LaserCard®'s market position.
 
 THE
        MARKETS FOR OUR PRODUCTS ARE COMPETITIVE, AND IF WE ARE UNABLE TO COMPETE
        SUCCESSFULLY, REVENUES COULD DECLINE OR FAIL TO GROW.  Our optical
        memory cards may compete with optical memory cards that can be manufactured
        and
        sold by three of our licensees (although none is currently doing so) and
        with
        other types of portable data storage cards and technologies used for the
        storage
        and transfer of digital information.  These may include contact or
        contactless integrated circuit (IC) chip cards; holographic optical storage
        cards, 2-dimensional bar code cards and symbology cards; thick, rigid CD
        or DVD
        read-only cards or recordable cards; radio frequency, or RFID cards; and
        small,
        digital devices such as data-storage keys, tokens, and small cards and
        tags.  The financial and marketing resources of some of the competing
        companies are greater than our resources.  Competitive product factors
        include system/card portability, interoperability, price-performance ratio
        of
        cards and associated equipment, durability, environmental tolerance, and
        card
        security. Although we believe our cards offer key technological and security
        advantages for certain applications, the current price of optical card
        read/write drives is a competitive disadvantage in some of our targeted
        markets.  However, we believe the price of our drives is competitive
        in applications requiring a large number of cards per drive, because the
        relatively low cost for our cards offsets the high cost per drive when compared
        with our major competition, IC card systems.  In countries where the
        telecommunications infrastructure is extensive and low cost, centralized
        databases and wide-area networks may limit the penetration of optical memory
        cards.  These trends toward Internet, intranet, and remote wireless
        networks will in some cases preclude potential applications for our
        cards.
 
 THE
        PRICE
        OF OUR COMMON STOCK IS SUBJECT TO SIGNIFICANT VOLATILITY.  The price
        of our common stock is subject to significant volatility, which may be due
        to
        fluctuations in revenues, earnings, liquidity, press coverage, financial
        market
        interest, trading volume, and stock market conditions, as well as changes
        in
        technology and customer demand and preferences.  As a result, our
        stock price might be low at the time a stockholder wants to sell the stock.
        Also, since we have a relatively low number of shares outstanding (approximately
        12 million shares) there will be more volatility in our stock if one or two
        major holders, for example, large institutional holders, attempt to sell
        a large
        number of shares in the open market.  Furthermore, our trading volume
        is often small, meaning that a few trades may have disproportionate influence
        on
        our stock price.  In addition, someone seeking to liquidate a sizeable
        position in our stock may have difficulty doing so except over an extended
        period or privately at a discount.  Thus, if one or more stockholders
        were to sell or attempt to sell a large number of its shares within a short
        period of time, such sale or attempt could cause our stock price to
        decline.  There can be no guarantee that stockholders will be able to
        sell the shares that they acquired at a price per share equal to the price
        they
        paid for the stock.
  38
  WE
        ARE
        SUBJECT TO RISKS ASSOCIATED WITH CHANGES IN FOREIGN CURRENCY EXCHANGE
        RATES.  Part of the manufacturing process of certain LaserCard
        products that we sell outside the U.S.A. takes place in our operations in
        Germany.  Also, some of the raw materials we use to manufacture
        optical memory cards are sourced in Europe.  These costs are
        denominated in euros, the currency used in much of Europe.  However,
        when we sell our finished products, the prices that we charge are denominated
        in
        United States dollars.  Accordingly, we are subject to exposure when
        the exchange rate for euros increases in relation to the United States
        dollar.  Recent declines in the U.S. dollar/euro exchange rate, if not
        reversed, will eventually result in increases in raw material
        costs.  As of December 31, 2007, we had not entered into a forward
        exchange contract to hedge against or potentially minimize the foreign currency
        exchange risk related to transactions other than those related to inter-company
        payables and receivables.  The losses on foreign currency exchange
        related to purchase transactions and intercompany receivables for both fiscal
        year 2007 and the nine-month period ended December 31, 2007 were
        immaterial.
 
 WE
        SOLD A
        SECOND-SOURCE CARD MANUFACTURING LICENSE THAT WAS SUBSEQUENTLY TRANSFERRED
        TO
        PREVENT GLOBAL (PREVENT), UNDER WHICH WE WILL PROVIDE CERTAIN FACTORY SET-UP
        AND
        TRAINING SERVICES.  IF WE ARE NOT SUCCESSFUL OR IF PREVENT GLOBAL IS
        UNABLE TO FINANCE THIS OPERATION, THE SECOND-SOURCE SUPPLY OF OPTICAL CARDS
        WILL
        NOT MATERIALIZE.  IF WE AND PREVENT GLOBAL ARE SUCCESSFUL, THE
        SECOND-SOURCE WILL COMPETE WITH US FOR BUSINESS.  We will be obligated
        to deliver the contracted manufacturing equipment and installation support
        to
        Prevent Global for its to-be-built new card manufacturing facility in Slovenia,
        to provide a targeted initial manufacturing capacity of 10 million optical
        cards
        annually.  If Prevent Global is successful, Prevent Global would
        become a second source for certain types of optical memory cards.  We
        will also be assigning personnel to be on site during the license term, if
        such
        option is elected by Prevent Global, to assist with quality, security, and
        operational procedures, with a mutual goal that the facility and the cards
        made
        in Slovenia conform to our standards.  If cards are not produced in
        conformance with our quality standards, the reputation and marketability
        of
        optical memory card technology could be damaged.  If the factory does
        not become operational and produce quality cards in high volume, or if Prevent
        Global is unable to raise sufficient capital to build, equip and operate
        this
        facility, we would not obtain the hoped-for benefits--including ongoing
        royalties, sales of raw materials to Prevent Global, expansion of the European
        market, and a bona fide second source for certain types of optical memory
        cards.  On the other hand, if and when the factory is successfully
        manufacturing the cards in high volume, it will compete against us for business
        in certain territories, which could reduce our potential card revenues if
        the
        market does not expand.  Revenue on the contract will be recognized
        when the equipment has been accepted and training completed, which date is
        dependent on Prevent Global providing a facility in Slovenia.  We
        could incur greater expenses than we anticipate for the purchase and
        installation of the required manufacturing equipment, thereby reducing cash
        and
        anticipated profits.  If Prevent Global is not successful, but current
        and potential customers require a second source of optical memory cards (which
        is a common business practice), they could decide to use alternate technology
        cards, such as chip cards, that have multiple-source suppliers.
 
 WE
        MAY
        NOT BE ABLE TO ATTRACT, RETAIN OR INTEGRATE KEY PERSONNEL, WHICH MAY PREVENT
        US
        FROM SUCCEEDING.  IN PARTICULAR, OUR CEO IS RETIRING AFTER MORE THAN
        25 YEARS OF SERVICE ON MARCH 31, 2008, AND WE MAY NOT BE ABLE TO RECRUIT
        OUR
        LONG-TERM CEO BY THEN, IN WHICH CASE WE WOULD NEED TO HAVE AN INTERIM
        CEO.  SUCH A FAILURE TO HAVE A SMOOTH TRANSITION COULD NEGATIVELY
        IMPACT OUR OPERATIONS AND IMPEDE OUR ABILITY TO MAKE MAJOR DECISIONS AS COULD
        RECRUITING AN INADEQUATE CEO.  We may not be able to retain our key
        personnel or attract other qualified personnel in the future. Our success
        will
        depend upon the continued service of key management personnel.  The
        loss of services of any of the key members of our management team, including
        our
        chief executive officer, chief operating officer, the managing directors
        of our
        German operations, vice president of business development or our vice president
        of finance and CFO, or our failure to attract and retain other key personnel
        could disrupt operations and have a negative effect on employee productivity
        and
        morale, thus decreasing production and harming our financial
        results.  In addition, the competition to attract, retain and motivate
        qualified personnel is intense.  We are currently in the process of
        conducting a nationwide recruiting search to replace our chief executive
        officer
        who is retiring effective March 31, 2008.  We may not be able to
        recruit our long-term CEO by then, in which case we would need to have an
        interim CEO.  Such a failure to have a smooth transition could
        negatively impact our operations and impede our ability to make major decisions
        as could recruiting an inadequate CEO.
  39
  OUR
        CALIFORNIA FACILITIES ARE LOCATED IN AN EARTHQUAKE ZONE AND THESE OPERATIONS
        COULD BE INTERRUPTED IN THE EVENT OF AN EARTHQUAKE, FIRE, OR OTHER
        DISASTER.  Our card manufacturing, corporate headquarters, and drive
        assembly operations, administrative, and product development activities are
        located near major earthquake fault lines.  In the event of a major
        earthquake, we could experience business interruptions, destruction of
        facilities and/or loss of life, all of which could materially adversely affect
        us.  Likewise, fires, floods, or other events could similarly disrupt
        our operations and interrupt our business.
 
 FOREIGN
        GOVERNMENT INTERVENTION COULD ADVERSELY AFFECT RESULTS OF
        OPERATIONS.  Economic, political and other risks associated with
        foreign operations could adversely affect our international sales.  We
        sell our products worldwide and therefore, our business could be subject
        to
        risks due to changes in a country’s or region’s political or economic
        conditions.  Differing tax laws and changes in those laws may also
        affect future results of our operations.
 
 PANDEMICS
        THROUGHOUT THE WORLD COULD ADVERSELY AFFECT OUR BUSINESS.  The
        occurrence of a pandemic such as the Bird Flu coupled with the lack of
        government readiness and support in those countries where we do business
        could
        temporarily impede our revenue growth.
 
 ACTS
        OF
        TERRORISM OR WAR MAY ADVERSELY AFFECT OUR BUSINESS.  Acts of
        terrorism, acts of war, and other events may cause damage or disruption to
        our
        properties, business, employees, suppliers, distributors, resellers, and
        customers, which could have an adverse effect on our business, financial
        condition, and operating results. Such events may also result in an economic
        slowdown in the United States or elsewhere, which could adversely affect
        our
        business, financial condition, and operating results.
 
 AS
        A
        RESULT OF OUR REQUIRED ANNUAL EVALUATION OF OUR INTERNAL CONTROLS OVER FINANCIAL
        REPORTING, WE MAY IDENTIFY INTERNAL CONTROL WEAKNESSES NEEDING REMEDIATION,
        WHICH COULD HARM OUR REPUTATION.  We have completed the evaluation of
        our internal controls over financial reporting as required by Section 404
        of the
        Sarbanes-Oxley Act of 2002 for the fiscal years ended March 31, 2007 and
        2006.
        Although our assessment, testing and evaluation resulted in our conclusion
        that
        as of March 31, 2007 and 2006, our internal controls over financial reporting
        were effective, we cannot predict the outcome of our testing in future periods.
        Because of the inherent limitation of disclosure controls, no evaluation
        of such
        controls can provide absolute assurance that all control issues and instances
        of
        fraud, if any, within our Company have been detected.  If our internal
        controls are found to be ineffective in future periods, our reputation could
        be
        harmed. We may incur additional expenses and commitment of management’s time in
        connection with further evaluations, both of which could materially increase
        our
        operating expenses and accordingly reduce our net income.
 
 BEGINNING
        WITH OUR FISCAL YEAR 2007, WE WERE REQUIRED TO RECORD COMPENSATION EXPENSE
        FOR
        STOCK OPTIONS, THEREBY REDUCING OUR EARNINGS.  THIS COULD LEAD TO
        REDUCED ENTERPRISE VALUE AND TO OUR GRANTING FEWER OPTIONS WHICH HURTS OUR
        ABILITY TO RECRUIT AND RETAIN EMPLOYEES.  In December 2004, the
        Financial Accounting Standards Board (“FASB”) issued Financial Accounting
        Standard 123(R) (SFAS No. 123(R)) that requires the fair value of all
        equity-based awards granted to employees be recognized in the statement of
        operations as compensation expense, for fiscal years beginning after December
        15, 2005, rather than just to disclose such expense in a footnote as we have
        done in the previous years.  The adoption of this accounting standard
        reduced our profitability as measured by generally accepted accounting
        principles (GAAP) due to our outstanding options and our current intention
        to
        continue to grant options in the future as an incentive and retention tool
        for
        our employees.  This may adversely affect our stock price.  For
        example, for the nine-month periods ended December 31, 2007 and 2006, we
        recognized approximately $1.5 million and $1.3 million, respectively, of
        additional expenses due to SFAS No. 123(R) which we would not otherwise
        have recognized.  Such adoption has also led us to reduce our use of
        stock options and to award restricted shares and restricted stock
        units.  While all of these equity awards help align our employees’
long-term interests with increasing our enterprise value, options provide
        more
        of a reward if enterprise value substantially increases.  Our reduced
        use of options could hurt our ability to recruit employees and retain existing
        employees and directors.
 
 40
 
 Item
        2. – Unregistered Sales of
        Equity Securities and Use of Proceeds
 
 None
 
 Item
        3. - Defaults Upon Senior Securities
 
 None
 
 Item
        4. - Submission of Matters to a Vote of Security Holders
 
 There
        were no matters submitted to a
        vote of security holders during the period for which this report is
        filed.
 
 Item
          5. - Other Information
 
 None.
 
 Item
        6. - Exhibits
 
 Exhibit
                  No.
              Exhibit
                  Description3(I)
              Certificate
                  of Incorporation; previously filed as Exhibit 3.1 to Annual Report
                  on Form
                  10-K for the fiscal year ended March 31, 2005, filed with the SEC
                  on June
                  15, 2005, and incorporated herein by reference3(II)
              Amended
                  Bylaws; previously filed as Exhibit 3(II) to Report on Form 10-Q
                  for
                  period ended September 30, 2006 and incorporated herein by
                  reference10.1
              Building
                  lease agreement with Renault & Handley Employees Investment Co. for
                  2644-2648 Bayshore Parkway, Mountain View, CA; previously filed
                  as Exhibit
                  10.1 to Report on Form 10-Q for period ended December 31, 2003
                  and
                  incorporated herein by reference10.2
              Building
                  lease agreement with Shoreline Park LLC for 1395 Charleston Road,
                  Mountain
                  View, CA (mailing address 1875 North Shoreline Boulevard, Mountain
                  View,
                  CA); previously filed as Exhibit 10.2 to Report on Form 10-K for
                  fiscal
                  year ended March 31, 2004 and incorporated herein by
                  reference10.3*
              Amended
                  and Restated Stock Option Plan; previously filed as Exhibit 10.4.1
                  to
                  Report on Form 10-Q for period ended September 30, 2002 and
                  incorporated herein by reference10.7
              Stock
                  and Warrant Purchase Agreement (as amended); previously filed as
                  Exhibit
                  99.2 to Report on Form 10-Q for period ended December 31, 2003
                  and
                  incorporated herein by reference10.8
              Optical
                  Card Manufacturing License Agreement with Global Investments Group;
                  previously filed as Exhibit 10.8 to Report on Form 10-K for fiscal
                  year
                  ended March 31, 2004 and incorporated herein by
                  reference**
  41
  10.9*
              2004
                  Equity Incentive Compensation Plan, as Amended; previously filed
                  as
                  Appendix C to Schedule 14A Proxy Statement for 2006 Annual Stockholders
                  Meeting filed with the SEC on August 11, 2006, and incorporated
                  herein by
                  reference10.10
              June
                  29, 2006 Amendment to License and Equipment Agreement with Global
                  Investments Group and Prevent LOK; previously filed as Exhibit
                  10.10 to
                  Report on Form 10-Q for period ending June 30, 2006, and incorporated
                  herein by reference**10.11
              October
                  27, 2006 Modified Third Amendment to License and Equipment Agreements
                  with
                  Global Investments Group and Prevent LOK; previously filed as Exhibit
                  10.11 to Form 8-K dated October 30, 2006, which was filed with
                  the SEC on
                  November 1, 2006, and incorporated herein by reference10.12*
              Employee
                  Stock Purchase Plan, as Amended; previously filed as Appendix A
                  to amended
                  Schedule 14A Proxy Statement for 2007 Annual Stockholders Meeting
                  filed
                  with the SEC on August 3, 2007, and incorporated herein by
                  reference10.13*
              November
                  28, 2007, Planned Retirement Agreement and Age Discrimination Release
                  Agreement with Richard M. Haddock are filed herewith10.14*
              January
                  4, 2008, Executive Employment Agreements with Christopher J. Dyball
                  and
                  Steven G. Larson are filed herewith31.1
              Rule
                  13a-14(a) Certification of Richard M. Haddock, chief executive
                  officer is
                  filed herewith31.2
              Rule
                  13a-14(a) Certification of Steven G. Larson, chief financial officer
                  is
                  filed herewith32.1
              Section
                  1350 Certification of Richard M. Haddock, chief executive officer
                  is filed
                  herewith32.2
              Section
                  1350 Certification of Steven G. Larson, chief financial officer
                  is filed
                  herewith
 
 Exhibits
        31.1, 31.2, 32.1, and 32.2 are filed herewith while the other exhibits are
        incorporated by reference.  No other exhibits are included in this
        report as the contents of the required exhibits are either not applicable
        to
        Registrant, to be provided only if Registrant desires, or contained elsewhere
        in
        this report.
 
 *
        Indicates management contract or compensatory plan or arrangement
 **
        Portions were omitted pursuant to a request for confidential
        treatment
  42
  SIGNATURES
 
 Pursuant
        to the requirements of
        Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant
        has
        duly caused this report to be signed on its behalf by the undersigned, thereunto
        duly authorized:
 
 LASERCARD
        CORPORATION
 (Registrant)
 
 
 Signature
              Title
              
              Date/s/
                  Richard M. Haddock
              
              Chief
                  Executive Officer
              
              February
                  5, 2008Richard
                  M. Haddock/s/
                  Steven G. Larson
              
              Chief
                  Financial Officer
              
              February
                  5, 2008Steven
                  G. Larson
   43
  INDEX
        TO EXHIBITS
 
 [ITEM
        14(c)]
  ExhibitNumber
              Description3(I)
              Certificate
                  of Incorporation; previously filed as Exhibit 3.1 to Annual Report
                  on Form
                  10-K for the fiscal year ended March 31, 2005, filed with the SEC
                  on June
                  15, 2005, and incorporated herein by reference3(II)
              Amended
                  and Restated Bylaws (to add new Section 4.6.5 re Vice Chairman)
                  are filed
                  herewith10.1
              Building
                  lease agreement with Renault & Handley Employees Investment Co. for
                  2644-2648 Bayshore Parkway, Mountain View, CA; previously filed
                  as Exhibit
                  10.1 to Report on Form 10-Q for period ended December 31, 2003
                  and
                  incorporated herein by reference10.2
              Building
                  lease agreement with Shoreline Park LLC for 1395 Charleston Road,
                  Mountain
                  View, CA (mailing address 1875 North Shoreline Boulevard, Mountain
                  View,
                  CA); previously filed as Exhibit 10.2 to Report on Form 10-K for
                  fiscal
                  year ended March 31, 2004 and incorporated herein by
                  reference10.3*
              Amended
                  and Restated Stock Option Plan; previously filed as Exhibit 10.4.1
                  to
                  Report on Form 10-Q for period ended September 30, 2002 and
                  incorporated herein by reference10.7
              Stock
                  and Warrant Purchase Agreement (as amended); previously filed as
                  Exhibit
                  99.2 to Report on Form 10-Q for period ended December 31, 2003
                  and
                  incorporated herein by reference10.8
              Optical
                  Card Manufacturing License Agreement with Global Investments Group;
                  previously filed as Exhibit 10.8 to Report on Form 10-K for fiscal
                  year
                  ended March 31, 2004 and incorporated herein by
                  reference**10.9*
              2004
                  Equity Incentive Compensation Plan, as Amended; previously filed
                  as
                  Appendix C to Schedule 14A Proxy Statement for 2005 Annual Stockholders
                  Meeting filed with the SEC on August 11, 2006, and incorporated
                  herein by
                  reference10.10
              June
                  29, 2006 Amendment to License and Equipment Agreement with Global
                  Investments Group and Prevent LOK; previously filed as Exhibit
                  10.10 to
                  Report on Form 10-Q for period ending June 30, 2006, and incorporated
                  herein by reference**10.11
              October
                  27, 2006 Modified Third Amendment to License and Equipment Agreements
                  with
                  Global Investments Group and Prevent LOK; previously filed as Exhibit
                  10.11 to Form 8-K dated October 30, 2006, which was filed with
                  the SEC on
                  November 1, 2006, and incorporated herein by reference10.12*
              Employee
                  Stock Purchase Plan, as Amended; previously filed as Appendix A
                  to
                  Schedule 14A Proxy Statement for 2007 Annual Stockholders Meeting
                  filed
                  with the SEC on August 3, 2007, and incorporated herein by
                  reference10.13*
              November
                  28, 2007, Planned Retirement Agreement and Age Discrimination Release
                  Agreement with Richard M. Haddock are filed herewith10.14*
              January
                  4, 2008, Executive Employment Agreements with Christopher J. Dyball
                  and
                  Steven G. Larson are filed herewith




44


31.1
              Rule
                  13a-14(a) Certification of Richard M. Haddock, chief executive
                  officer is
                  filed herewith31.2
              Rule
                  13a-14(a) Certification of Steven G. Larson, chief financial officer
                  is
                  filed herewith32.1
              Section
                  1350 Certification of Richard M. Haddock, chief executive officer
                  is filed
                  herewith32.2
              Section
                  1350 Certification of Steven G. Larson, chief financial officer
                  is filed
                  herewith*Indicates
                management contract or compensatory plan or arrangement**Portions
                were omitted pursuant to a request for confidential
                treatment


45