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, 2008
 
 0-6377
 (Commission
File Number)
 
  LASERCARD
CORPORATION
 (Exact
name of registrant as specified in its charter)
 
 Delaware
              77-0176309(State
      or other jurisdiction of incorporation or organization)
              (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 xNon-accelerated
      filer o
              Smaller
      Reporting Company o
 
 Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).   o Yes  x No
 
 Number of
outstanding shares of common stock, $.01 par value, at February 10,
2009:  12,093,444
 
 
 
 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
              28Item
      3.
              Quantitative
      and Qualitative Disclosures about Market Risk
              39Item
      4.
              Controls
      and Procedures
              41PART
      II.
              OTHER
      INFORMATIONItem
      1.
              Legal
      Proceedings
              41Item
      1A.
              Risk
      Factors
              41Item
      6.
              Exhibits
              48SIGNATURES
              
              49EXHIBIT
      INDEX
              
              50
  
 
 PART
      I.
              FINANCIAL
      INFORMATIONITEM
      1.
              CONDENSED
      CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 
 2
 
 LASERCARD
CORPORATION AND SUBSIDIARIES
 CONDENSED
CONSOLIDATED BALANCE SHEETS
 (UNAUDITED)
 (In
thousands)
  December
      31,2008
                
                
                March
      31,(Unaudited)
                
                
                2008*ASSETSCurrent
      assets:Cash
      and cash equivalents
                
                $
                8,601
                
                
                $
                5,583Accounts
      receivable, net of allowance of $29 at December 31, 2008
                
                
                6,098
                
                
                
                2,952and
      $35 at March 31, 2008Inventories,
      net of reserve of $971, at December 31, 2008
                
                
                15,426
                
                
                
                13,080and
      $913 at March 31, 2008Deferred
      contract costs
                
                
                209
                
                
                
                303Equipment
      held for resale
                
                
                7,181
                
                
                
                89Prepaid
      and other current assets
                
                
                1,451
                
                
                
                1,618Total
      current assets
                
                
                38,966
                
                
                
                23,625Property
      and equipment, net of accumulated depreciation of $21,585 at December 31,
      2008
                
                
                11,552
                
                
                
                11,700and
      $20,294 at March 31, 2008Long-term
      investments
                
                
                13,295
                
                
                
                12,875Long-term
      deferred contract costs
                
                
                326
                
                
                
                561Long-term
      equipment held for resale
                
                
                -
                
                
                
                6,599Patents
      and other intangibles, net
                
                
                409
                
                
                
                402Notes
      receivable
                
                
                238
                
                
                
                269Other
      non-current assets
                
                
                109
                
                
                
                275Total
      assets
                
                $
                64,895
                
                
                $
                56,306LIABILITIES
      AND STOCKHOLDERS' EQUITYCurrent
      liabilities:Accounts
      payable
                
                $
                2,272
                
                
                $
                2,561Accrued
      liabilities
                
                
                2,721
                
                
                
                3,221Deferred
      income tax liability
                
                
                286
                
                
                
                405Advance
      payments from customers
                
                
                30,398
                
                
                
                3,060Short-Term
      Debt
                
                
                3,000
                
                
                
                -Deferred
      revenue
                
                
                3,660
                
                
                
                589Deferred
      rent
                
                
                131
                
                
                
                -Capital
      lease obligation
                
                
                73
                
                
                
                30Total
      current liabilities
                
                
                42,541
                
                
                
                9,866Capital
      lease obligation, net of current portion
                
                
                190
                
                
                
                76Accrued
      liabilities, net of current portion
                
                
                93
                
                
                
                -Advance
      payments from customers, net of current portion
                
                
                1,695
                
                
                
                23,770Deferred
      revenue, net of current portion
                
                
                564
                
                
                
                3,437Deferred
      rent, net of current portion
                
                
                1,258
                
                
                
                1,168Income
      tax payable
                
                
                263
                
                
                
                263Total
      liabilities
                
                
                46,604
                
                
                
                38,580Stockholders'
      equity:Common
      stock
                
                
                121
                
                
                
                120Additional
      paid-in capital
                
                
                65,755
                
                
                
                63,868Accumulated
      deficit
                
                
                (47,750
                )
                
                
                (45,867
                )Accumulated
      other comprehensive loss
                
                
                165
                
                
                
                (395
                )Total
      stockholders' equity
                
                
                18,291
                
                
                
                17,726Total
      liabilities and stockholders’ equity
                
                $
                64,895
                
                
                $
                56,306*Amounts
      derived from audited consolidated financial statementsThe
      accompanying notes are an integral part of these condensed consolidated
      financial statements.
 3
  LASERCARD
CORPORATION AND SUBSIDIARIES
 CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
 (UNAUDITED)
 (In
thousands, except per share amounts)
 
 Three
      Months Ended
                
                
                Nine
      Months EndedDecember
      31,
                
                
                December
      31,2008
                
                
                2007
                
                
                2008
                
                
                2007Revenues
                
                $
                10,906
                
                
                $
                11,159
                
                
                $
                35,095
                
                
                $
                29,753Cost
      of sales (includes $187 and $482 stock-basedcompensation
      in the three and nine-month periodsended
      December 31, 2008 and $105 and $244 in the threeand
      nine-month periods ended December 31, 2007, respectively)
                
                
                7,314
                
                
                
                7,670
                
                
                
                23,471
                
                
                
                21,414Gross
      profit
                
                
                3,592
                
                
                
                3,489
                
                
                
                11,624
                
                
                
                8,339Operating
      expenses:Selling,
      general, and administrative expenses (includes$426
      and $1172 stock-based compensation in the threeand
      nine-month periods ended December 31, 2008 and$527
      and $1178 in the three and nine-month periods endedDecember
      31, 2007, respectively)
                
                
                3,950
                
                
                
                4,056
                
                
                
                11,437
                
                
                
                10,826Research
      and development expenses (includes $25 and $96stock-based
      compensation in the three and nine-monthperiods
      ended December 31, 2008 and $69 and $190 in the threeand
      nine-month periods ended December 31, 2007, respectively)
                
                
                286
                
                
                
                719
                
                
                
                1,974
                
                
                
                2,212Total
      operating expenses
                
                
                4,236
                
                
                
                4,775
                
                
                
                13,411
                
                
                
                13,038Operating
      loss
                
                
                (644
                )
                
                
                (1,286
                )
                
                
                (1,787
                )
                
                
                (4,699
                )Other
      income (expense), net
                
                
                (219
                )
                
                
                225
                
                
                
                (94
                )
                
                
                655Loss
      before income taxes
                
                
                (863
                )
                
                
                (1,061
                )
                
                
                (1,881
                )
                
                
                (4,044
                )Income
      tax expense (benefit)
                
                
                (14
                )
                
                
                19
                
                
                
                3
                
                
                
                (106
                )Net
      loss
                
                $
                (849
                )
                
                $
                (1,080
                )
                
                $
                (1,884
                )
                
                $
                (3,938
                )Net
      loss per share:Basic
                
                $
                (0.07
                )
                
                $
                (0.09
                )
                
                $
                (0.16
                )
                
                $
                (0.33
                )Diluted
                
                $
                (0.07
                )
                
                $
                (0.09
                )
                
                $
                (0.16
                )
                
                $
                (0.33
                )Weighted-average
      shares of common stockused
      in computing net income (loss) per share:Basic
                
                
                12,085
                
                
                
                11,971
                
                
                
                12,035
                
                
                
                11,912Diluted
                
                
                12,085
                
                
                
                11,971
                
                
                
                12,035
                
                
                
                11,912The
      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
      31,2008
                
                
                2007Cash
      flows from operating activities:Net
      loss
                
                $
                (1,884
                )
                
                $
                (3,938
                )Adjustments
      to reconcile net loss to net cash used in operating
      activities:Depreciation
      and amortization
                
                
                2,160
                
                
                
                2,226Loss
      on disposal of property and equipment
                
                
                296
                
                
                
                (10
                )Provision
      (adjustment) for doubtful accounts receivable
                
                
                (2
                )
                
                
                15Adjustment
      for excess and obsolete inventory
                
                
                66
                
                
                
                53Provision
      for warranty reserve
                
                
                51
                
                
                
                96Decrease
      in deferred income tax assets
                
                
                65
                
                
                
                -Stock-based
      compensation
                
                
                1,751
                
                
                
                1,612Put
      option gain
                
                
                (1,227
                )
                
                
                -Mark
      to market, trading securities
                
                
                1,431
                
                
                
                -Changes
      in operating assets and liabilities:Increase
      in accounts receivable
                
                
                (3,424
                )
                
                
                (1,594
                )Decrease
      (increase) in inventories
                
                
                (2,747
                )
                
                
                206Decrease
      in deferred contract costs
                
                
                328
                
                
                
                454Decrease
      in other current assets
                
                
                32
                
                
                
                363Increase
      in equipment held for resale
                
                
                (517
                )
                
                
                (212
                )Decrease
      (increase)  in other non-current assets
                
                
                168
                
                
                
                (152
                )Decrease
      in accounts payable and accrued expenses
                
                
                (379
                )
                
                
                (676
                )Decrease
      in deferred income tax
                
                
                (82
                )
                
                
                (31
                )Increase
      (decrease) in deferred revenue
                
                
                269
                
                
                
                (360
                )Increase
      in deferred rent
                
                
                221
                
                
                
                230Increase
      in advance payments from customers
                
                
                5,585
                
                
                
                421Net
      cash provided by (used in) operating activities
                
                
                2,161
                
                
                
                (1,297
                )Cash
      flows from investing activities:Purchases
      of property and equipment
                
                
                (2,366
                )
                
                
                (981
                )Proceeds
      from sale of equipment
                
                
                -
                
                
                
                28Acquisition
      of patents and other intangibles
                
                
                (119
                )
                
                
                (71
                )Purchases
      of short-term investments
                
                
                -
                
                
                
                (7,000
                )Proceeds
      from maturities of short-term investments
                
                
                -
                
                
                
                8,000Net
      cash used in investing activities
                
                
                (2,485
                )
                
                
                (24
                )Cash
      flows from financing activities:Proceeds
      from sale of common stock through stock plans
                
                
                138
                
                
                
                639Net
      borrowing on revolving credit agreement
                
                
                3,000
                
                
                
                -Principal
      payments on capital lease obligation
                
                
                (36
                )
                
                
                (9
                )Net
      cash provided by financing activities
                
                
                3,102
                
                
                
                630Effect
      of exchange rate changes on cash and cash equivalents
                
                
                240
                
                
                
                (248
                )Net
      increase (decrease) in cash and cash equivalents
                
                
                3,018
                
                
                
                (939
                )Cash
      and cash equivalents:Beginning
      of period
                
                $
                5,583
                
                
                $
                3,026End
      of period
                
                $
                8,601
                
                
                $
                2,087Supplemental schedule
      of non-cash investing activities:Equipment
      acquired under capital lease
                
                $
                198
                
                
                $
                113Interest
      paid
                
                $
                93
                
                
                $
                50The
      accompanying notes are an integral part of these condensed consolidated
      financial statements.
 5
  LASERCARD
CORPORATION AND SUBSIDIARIES
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (UNAUDITED)
 1.
Basis of Presentation
 
 The
unaudited condensed consolidated financial statements contained herein include
the accounts of LaserCard Corporation (the “Company”) and its wholly owned
subsidiaries. All significant intercompany accounts and transactions have been
eliminated upon consolidation. The consolidated balance sheet data as of March
31, 2008 was derived from audited consolidated financial statements, but does
not include all disclosures required by U.S. generally accepted accounting
principles.
 
 The
condensed consolidated financial statements included herein have been prepared
by the Company, without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission (“SEC”).  Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with U.S. generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations, although the
Company believes the disclosures which are made herein are adequate to make the
information presented not misleading.  Further, the condensed
consolidated financial statements reflect, in the opinion of management, all
adjustments (which include only normal recurring adjustments) necessary to
present fairly the financial position and results of operations as of and for
the periods indicated.
 
 These
condensed consolidated financial statements should be read in conjunction with
the audited consolidated financial statements and the notes thereto for the
fiscal year ended March 31, 2008, included in the Company's Annual Report
on Form 10-K, filed with the SEC on June 6, 2008 (the “2008 Form
10-K”).
 
 The
results of operations for the three and nine-month periods ended December 31,
2008 are not necessarily indicative of results to be expected for the entire
fiscal year ending March 31, 2009.  Certain prior year amounts
have been reclassified to conform to the current year presentation.
  Recently Adopted Accounting
Pronouncements:  In September 2006, the Financial Accounting
Standards Board (“FASB”) issued Statement of Financial Accounting Standards
(“SFAS”) No. 157, “Fair Value Measurements” (“SFAS No. 157”), which
clarifies the principle that fair value should be based on the assumptions
market participants would use when pricing an asset or liability, establishes a
fair value hierarchy that prioritizes the information used to develop those
assumptions, and expands the related disclosure requirements. Under the
standard, fair value measurements are to be separately disclosed by level within
the fair value hierarchy. SFAS No. 157 applies under other accounting
pronouncements that require or permit fair value measurements. SFAS No. 157
defines fair value based upon an exit price model. The FASB also issued FASB
Staff Position (“FSP”) No. 157-2 in February 2008 (“FSP No. 157-2”).
FSP No. 157-2 delays the effective date of the application of SFAS
No. 157 to fiscal years beginning after November 15, 2008 for all
nonfinancial assets and nonfinancial liabilities that are recognized at fair
value in the financial statements on a nonrecurring basis. The Company adopted
SFAS No. 157 as of April 1, 2008, with the exception of the application of
the statement to non-recurring nonfinancial assets and nonfinancial liabilities.
See Note 2, caption 9 below, Fair Value of Measurements,
for additional details.
 
 In
February 2007, the FASB issued SFAS No. 159,The Fair Value Option for Financial
Assets and Financial Liabilities (“SFAS No. 159”). SFAS No. 159
provides entities with an option to report selected financial assets and
liabilities at fair value, with the objective to reduce both the complexity in
accounting for financial instruments, and the volatility in earnings caused by
measuring related financial assets and liabilities differently. Unrealized gains
and losses on items for which the fair value option is elected would be reported
in earnings. The Company adopted SFAS No. 159 as of April 1, 2008, but has
not elected to measure financial instruments and other items at fair value
except for the Company’s long-term investments on auction rate securities
(“ARS”) during the three-month period ended December 31, 2008. See Note 2,
caption 8 below, Cash and Cash
Equivalents, Short-term Investments and Long-term Investments, for
additional details. Other material financial assets and liabilities not carried
at fair value, such as the Company’s short-term debt obligations and trade
accounts receivable and accounts payable, are still reported at their carrying
values. Any other future transacted financial asset or liability will be
evaluated for the fair value election as prescribed by SFAS No. 159. The
adoption of SFAS No. 159 resulted in a $0.2 million net impact on the Company’s
consolidated financial position, results of operations and cash
flows.
  6
  LASERCARD
CORPORATION AND SUBSIDIARIES
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (UNAUDITED)
 In June
2007, EITF Issue No. 07-3, Accounting for Nonrefundable Advance
Payments for Goods or Services to Be Used in Future Research and Development
Activities, (“EITF 07-3”), was issued that requires companies to defer
and capitalize prepaid, nonrefundable research and development payments to third
parties and recognize such amounts over the period that the research and
development activities are performed or the services are provided, subject to an
assessment of recoverability. The guidance is effective for new contracts
entered into in fiscal years beginning after December 15, 2007, including
interim periods within those fiscal years.  The Company adopted EITF
No. 07-3, on a prospective basis, as of April 1, 2008 and the adoption did
not have an impact on its consolidated financial statements.
 
 Recently Issued Accounting
Pronouncements:  In December 2007, the FASB issued SFAS
No. 141 (revised 2007), “Business Combinations”
(“SFAS No. 141(R)”). SFAS No. 141(R) establishes principles and
requirements for how an acquirer recognizes and measures in its financial
statements significant aspects of a business combination. Under SFAS
No. 141(R), acquisition costs will generally be expensed as incurred;
noncontrolling interests will be valued at fair value at the acquisition date;
in-process research and development will be recorded at fair value as an
indefinite-lived intangible asset at the acquisition date; restructuring costs
associated with a business combination will generally be expensed subsequent to
the acquisition date; and changes in deferred tax asset valuation allowances and
income tax uncertainties after the acquisition date generally will affect income
tax expense. SFAS No. 141(R) amends SFAS No. 109, “Accounting for Income
Taxes,” such that adjustments made to valuation allowances on deferred
taxes and acquired tax contingencies associated with acquisitions that closed
prior to the effective date of SFAS No. 141(R) would also apply the
provisions of SFAS No. 141(R). SFAS No. 141(R) also establishes
disclosure requirements to enable the evaluation of the nature and financial
effects of the business combination. Early adoption of SFAS No. 141(R) is not
permitted. SFAS No. 141(R) is effective on a prospective basis for all
business combinations for which the acquisition date is on or after the
beginning of the first annual period subsequent to December 15, 2008, with
the exception of the accounting for valuation allowances on deferred taxes and
acquired tax contingencies. The Company will assess the potential impact of the
adoption of SFAS 141R if and when a future acquisition occurs.
  In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements—an amendment of Accounting Research Bulletin
No. 51” (“SFAS No. 160”). SFAS No. 160 establishes
accounting and reporting standards for ownership interests in subsidiaries held
by parties other than the parent, the amount of consolidated net income
attributable to the parent and to the noncontrolling interest, changes in a
parent’s ownership interest, and the valuation of retained noncontrolling equity
investments when a subsidiary is deconsolidated. SFAS No. 160 also
establishes disclosure requirements that clearly identify and distinguish
between the interests of the parent and the interests of the noncontrolling
owners. The Company will be required to adopt SFAS No. 160 on or after the
beginning of the first annual period subsequent to December 15, 2008. The
Company is currently evaluating the requirements of SFAS No. 160 and does
not believe that its adoption will have a material impact, if any, on its
consolidated financial statements.
  In March
2008, the FASB issued SFAS No. 161,“Disclosures about Derivative
Instruments and Hedging Activities—an amendment of FASB Statement
No. 133”
(“SFAS No. 161”). SFAS No. 161 is intended to improve transparency in
financial reporting by requiring enhanced disclosures of an entity’s derivative
instruments and hedging activities and their effects on the entity’s financial
position, financial performance, and cash flows. SFAS No. 161 applies to
all derivative instruments within the scope of SFAS No. 133, “Accounting for Derivative
Instruments and Hedging Activities,” as well as related hedged
items, bifurcated derivatives, and nonderivative instruments that are designated
and qualify as hedging instruments. SFAS No. 161 establishes principles and
requirements for how an entity identifies derivative instruments and related
hedged items that affect its financial position, financial performance, and cash
flows. SFAS No. 161 also establishes disclosure requirements that the fair
values of derivative instruments and their gains and losses are disclosed in a
tabular format and that derivative features which are credit-risk related be
disclosed to provide clarification to an entity’s liquidity and
cross-referencing within footnotes. The Company will be required to adopt SFAS
No. 160 on or after the beginning of the first annual period subsequent to
December 15, 2008.  The Company is currently evaluating the
requirements of SFAS No. 161 and has not yet determined the impact of its
adoption on its consolidated financial statements.
  7
  LASERCARD
CORPORATION AND SUBSIDIARIES
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (UNAUDITED)
 In April
2008, the FASB issued FSP No. 142-3, “Determination of the Useful Life of
Intangible Assets” (“FSP No. 142-3”). FSP No. 142-3 amends the
factors that should be considered in developing renewal or extension assumptions
used to determine the useful life of a recognized intangible asset under SFAS
No. 142, “Goodwill and
Other Intangible Assets” (“SFAS No. 142”). The objective of FSP
No. 142-3 is to improve the consistency between the useful life of a
recognized intangible asset under SFAS No. 142 and the period of expected
cash flows used to measure the fair value of the asset under SFAS
No. 141(R), and other accounting principles. FSP No. 142-3 applies to
all intangible assets, whether acquired in a business combination or otherwise,
and early adoption is prohibited. The Company will be required to adopt FSP
No. 142-3 in the first quarter of fiscal year 2010. The Company is
currently evaluating the requirements of FSP No. 142-3 and has not yet
determined the impact of its adoption on its consolidated financial
statements.
 
 2.
Summary of Significant Accounting Policies
 
 (1.) Principles of Consolidation and
Basis of Presentation.  The accompanying condensed consolidated
financial statements have been prepared in accordance with U.S. generally
accepted accounting principles. The condensed consolidated financial statements
include the accounts of the Company and its wholly owned subsidiaries. All
significant intercompany accounts and transactions have been eliminated upon
consolidation.
 
 (2.) Use of
Estimates.  The preparation of condensed consolidated financial
statements in conformity with U. S. generally accepted accounting principles
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
 
 (3.) Fiscal
Period.  For purposes of presentation, the Company labels its
annual accounting period end as March 31 and its quarterly accounting
period ends as June 30, September 30 and December 31.  The Company, in
fact, operates and reports based on quarterly periods ending on the Friday
closest to month end.  The 13-week third quarter of fiscal year 2009
ended on January 2, 2009, and the 13-week third quarter of fiscal year 2008
ended on December 28, 2007.
 
 (4.)Foreign Currency
Transactions. The functional currency of the Company's foreign subsidiary
is generally the local currency. The financial statements of this subsidiary are
translated to United States dollars using period-end rates of exchange for
assets and liabilities and average rates of exchange for the period for revenues
and expenses. Translation gains (losses) are recorded in accumulated other
comprehensive loss as a component of stockholders' equity. Net gains and losses
resulting from foreign exchange transactions are included in selling, general
and administrative expenses and were not significant during the periods
presented.
 
 (5.) Derivative Financial
Instruments.The Company uses short-term foreign exchange forward
contracts to mitigate foreign currency risk associated primarily with
inter-company receivables and payables, and loan receivables (denominated in
Euros) with its German subsidiary.  The Company's foreign exchange forward
contracts are not designated for accounting purposes as hedging instruments
under SFAS No. 133, Accounting for Derivative Instruments and Hedging
Activities, as amended.  Accordingly, any gains or losses resulting from
changes in the fair value of the forward contracts are reported in other
income.  The gains and losses on these forward contracts generally offset
gains and losses associated with the underlying foreign currency denominated
inter-company receivables and payables, and loans receivable.  At December
31, 2008 and March 31, 2008, the Company had foreign exchange forward contracts
with a maturity of less than 30 days to purchase 1.4 million euros and 1.2
million euros, respectively.  The fair value of the forward contracts was
not material at December 31, 2008 and March 31, 2008.
 
 As of
December 31, 2008, the Company held $13.5 million par value (with a fair value
of approximately $12.1 million), of marketable securities consisting of
ARSs, that are structured with short-term interest rate reset dates of generally
28 to 35 days but with contractual maturities that are in some cases well in
excess of ten years.  Ninety-six and 3/10 percent (96.3%) of the Company’s
investments represent student loan auction rate securities (“SLARS”), of which
95% of principal and interest is guaranteed under the Federal Family Education
Loan Program (“FFELP”) and AAA rated.  The remaining balance is
privately financed and consists of an over-collateralized pool of graduate
student loans.  The Company believes that the credit quality of these
securities is high based on the guarantees and collateralization.  At the
end of each reset period, the Company can sell or continue to hold the
securities at par value. This auction process has historically provided a
liquid market for ARSs.  In February 2008, however, auctions failed
due to sell orders exceeding buy orders. The funds associated with failed
auctions will not be accessible until a successful auction occurs, a buyer is
found outside of the auction process, or the underlying securities have matured
or are recalled by the issuer.  Given the disruptions in the credit markets
and the fact that the liquidity for these types of securities remains uncertain,
as of December 31, 2008 and March 31, 2008, the Company has classified all of
its ARSs as noncurrent assets in its consolidated balance sheets as its ability
to liquidate such securities in the next twelve (12) months is uncertain. Refer
to Note 2, caption 6, Concentrations of Risk and
caption 8, Cash and Cash
Equivalents, Short-term Investments and Long-term Investments for further
discussion on the ARS.  As of March 31, 2008, the Company had $12.9
million of ARSs, net of $0.6 million of unrealized loss under “Accumulated Other
Comprehensive Income” of the stockholders’ equity, accounted for as
available-for-sale and classified as long-term securities. The Company held no
short-term investments as of December 31, 2008 and March 31,
2008.  The Company continues to earn interest at the maximum
contractual rate on the ARS.
  8
  LASERCARD
CORPORATION AND SUBSIDIARIES
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (UNAUDITED)
 (6.) Concentrations of
Risk. Financial instruments that potentially subject the Company to
significant concentrations of credit risk consist principally of cash, cash
equivalents, short-term investments, long-term investments and accounts
receivable. The Company places its cash, cash equivalents, short-term and
long-term investments in high-credit quality financial institutions.  The
Company is exposed to credit risk in the event of default by these institutions
to the extent of the amount recorded on the consolidated balance sheets.
 As of December 31, 2008, the Company held $13.5 million par value (with a
fair value of approximately $12.1 million), of marketable securities with UBS AG
consisting of ARSs, that are structured with short-term interest rate reset
dates of generally 28 to 35 days but with contractual maturities that can be
well in excess of ten years.  Ninety-six and 3/10 percent (96.3%) of the
Company’s investments represent SLARSs, of which 95% of principal and interest
is guaranteed under the FFELP and AAA rated.  The remaining balance is
privately financed and consisting of an over-collateralized pool of graduate
student loans.  The Company believes that the credit quality of these
securities is high based on these guarantees.  At the end of each reset
period, the Company can sell or continue to hold the securities at par
value. This auction process has historically provided a liquid market for
ARSs.  In February 2008, however, auctions failed due to sell orders
exceeding buy orders. The funds associated with failed auctions will not be
accessible until a successful auction occurs, a buyer is found outside of the
auction process, or the underlying securities have matured or are recalled by
the issuer.  Given the disruptions in the credit markets and the fact that
the liquidity for these types of securities remains uncertain, as of December
31, 2008 and March 31, 2008, the Company has classified all of its ARSs as
noncurrent assets in its consolidated balance sheets as its ability to liquidate
such securities in the next twelve months is uncertain. As of March 31, 2008,
the Company had $12.9 million of ARSs, net of $0.6 million of unrealized loss
under “Accumulated Other Comprehensive Income” of the stockholders’ equity,
accounted for as available-for-sale and classified as long-term securities. The
Company held no short-term investments as of December 31, 2008 or March 31,
2008.  The Company continues to earn interest at the maximum
contractual rate on the ARS.
 
 The
Company accepted a Put Rights offering by UBS in December 2008. The Company
elected to adopt SFAS No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities(“SFAS No. 159”) on the Put Option
and elected to treat its ARS portfolio from available-for-sale to trading
securities.  The transfer resulted in the reversal of prior unrealized
losses, net of taxes, on the ARSs from accumulated other comprehensive income to
an other-than temporary impairment of approximately $1.4 million on the $13.5
million (par value) portion of the Company’s ARS portfolio and the recognition
of a benefit of approximately $1.2 million related to the Put Option provided by
the settlement. The transfer to trading securities reflects management’s intent
to exercise its Put Option during the period June 30, 2010 through July 3,
2012.
 
 More
detailed information about the risks the Company faces with regard to its
investment in the ARSs can be found in the Note 2, caption 8 below, Cash and Cash Equivalents,
Short-term Investments and Long-term Investments.
 
 Accounts
receivable are historically derived from revenue earned from customers primarily
located in the United States, Kingdom of Saudi Arabia, India, Costa Rica,
Germany, and Italy.  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.
  9
  LASERCARD
CORPORATION AND SUBSIDIARIES
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (UNAUDITED)
 (7.) Major Customers.The
following customers accounted for more than 10% of revenues for the periods
shown below.  The revenue from these customers was attributable to
both of the optical memory card and the drive, system and enabling services
segments.  No other customer accounted for more than 10% of revenues
during these periods.
 
 Three
      Months Ended
                
                Nine
      Months EndedDecember
      31,
                
                December
      31,2008
                
                2007
                
                2008
                
                2007Customer
      A
                25%
                
                38%
                
                22%
                
                29%Customer
      B
                20%
                
                21%
                
                23%
                
                29%Customer
      C
                17%
                
                -
                
                <10%
                
                -Customer
      D
                <10%
                
                33%
                
                <10%
                
                15%
 
 Three
customers accounted for 47%, 16%, and 14%, respectively, of accounts receivable
at December 31, 2008.  One customer accounted for 37% of accounts
receivable at March 31, 2008.
 
 (8.) Cash and Cash Equivalents,
Short-term Investments and Long-term Investments.  The Company
considers all highly liquid investments, consisting primarily of commercial
paper, discount notes and U.S. government bonds, with maturities of three months
or less at the date of purchase, to be cash equivalents.  Short-term
investments include securities with maturities at date of purchase of more than
three months and investments with remaining maturities of less than one
year.  All investments with maturities at date of purchase greater than one
year are classified as long-term investments.  Management determines the
appropriate classification of debt securities at the time of purchase and
re-evaluates the classification of investments as of each balance sheet
date.
 
 The
Company accounts for its short-term marketable securities in accordance with
SFAS No. 115, Accounting
for Certain Investments in Debt and Equity Securities (“SFAS
No. 115”).  The Company considers all highly liquid investments,
consisting primarily of commercial paper, discount notes, U.S. government bonds,
and ARSs, with original or remaining maturities of three months or less at the
date of purchase, to be cash equivalents.  All investments with
original or remaining maturities of more than three months but not more than one
year at the date of purchase are classified as
short-term.  Investments with original or remaining maturities of more
than one year at the date of purchase are classified as noncurrent assets. The
Company determines the length of its investments after considering its cash
requirements and yields available for the type of investment considered by the
Company. The Company determines the appropriate classification of debt and
equity securities at the time of purchase and reevaluates the classification of
investments as of each balance sheet date.  The Company owns
investments in marketable securities that have been designated as “available for
sale” or “trading securities”. Securities available for sale are carried at fair
value with the unrealized gains and losses reported in “Accumulated Other
Comprehensive Income,” a component of stockholders’ equity.  Trading
securities are carried at fair value with unrealized gains and losses reported
in the Company’s consolidated Statement of Operations under “Other income
(expense), net”.
 
 As of
December 31, 2008, the Company held $13.5 million par value (with a fair value
of approximately $12.1 million), of marketable securities consisting of ARSs,
that are structured with short-term interest rate reset dates of generally 28 to
35 days but with contractual maturities that are in some cases well in excess of
ten years.  Ninety-six and 3/10 percent (96.3%) of the Company’s
investments represent SLARSs, of which 95% of principal and interest is
guaranteed under the FFELP and AAA rated.  The remaining balance is
privately financed and consists of an over-collateralized pool of graduate
student loans.  The Company believes that the credit quality of these
securities is high based on the guarantees and collateralization.  At the
end of each reset period, the Company can sell or continue to hold the
securities at par value. This auction process has historically provided a
liquid market for ARSs.  In February 2008, however, auctions failed
due to sell orders exceeding buy orders. The funds associated with failed
auctions will not be accessible until a successful auction occurs, a buyer is
found outside of the auction process, or the underlying securities have matured
or are recalled by the issuer.  Given the disruptions in the credit markets
and the fact that the liquidity for these types of securities remains uncertain,
as of December 31, 2008 and March 31, 2008, the Company has classified all of
its ARSs as noncurrent assets in its consolidated balance sheets as its ability
to liquidate such securities in the next twelve (12) months is uncertain. As of
March 31, 2008, the Company had $12.9 million of ARSs, net of $0.6 million of
unrealized loss under “Accumulated Other Comprehensive Income” of the
stockholders’ equity, accounted for as available-for-sale and classified as
long-term securities. The Company held no short-term investments as of December
31, 2008 and March 31, 2008.  The Company continues to earn interest
at the maximum contractual rate on the ARS.
  10
  LASERCARD
CORPORATION AND SUBSIDIARIES
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (UNAUDITED)
 UBS AG
issued a prospectus dated October 7, 2008 for a “Rights” offering whereby UBS
offered to purchase certain ARSs it placed, including those the Company holds,
at par or face value.  On October 29, 2008 (“Acceptance Date”) the Company
submitted the acceptance form to participate in the “Rights” offering.  UBS
has the “Right” to purchase its ARSs at par at any time through July 3, 2012 and
the Company have the “Right” to sell its ARSs at par to UBS beginning June 30,
2010 through July 3, 2012.  As part of the offering, UBS offered a line of
credit of about 75% of the fair value of the ARSs, as calculated by UBS, until
they are purchased by UBS.  The line of credit has certain restrictions
described in the prospectus.  In December 2008 the Company obtained a line
of credit from UBS in the amount of $8.7 million that is collateralized by the
SLARS. The Company drew down $3 million on this credit line also in December
2008.  Subsequent to December 2008, the Company drew down the balance of
$5.7 million.
 
 The
Rights represent a firm agreement in accordance with SFAS No. 133, Accounting
for Derivative Instruments and Hedging Activities (“SFAS No. 133”), which
defines a firm agreement as an agreement with an unrelated party, binding on
both parties and usually legally enforceable, with the following
characteristics:  a) the agreement specifies all significant terms,
including the quantity to be exchanged, the fixed price, and the timing of the
transaction, and b) the agreement includes a disincentive for nonperformance
that is sufficiently large to make performance probable.  The
enforceability of the Rights results in a Put Option and should be recognized as
a free standing derivative separate from the ARS. By electing to
participate in the rights offering, the Company granted UBS the right,
exercisable at any time prior to July 3, 2012, to purchase or cause the sale of
its ARSs (the “Call Right”).  UBS has agreed to pay us the par value of
their ARS within one day of settlement of any Call Right transaction. 
Notwithstanding the Call Right, the Company is permitted to sell ARSs to other
parties other than UBS, in which case the Put Rights attached to the ARSs that
are sold would be extinguished.  The Company elected to adopt SFAS No. 159,
The Fair Value Option for Financial Assets and Financial Liabilities (“SFAS
No. 159”) on December 31, 2008 on the Put Option and elected to treat its
ARS portfolio from available-for-sale to trading securities.  The transfer
resulted in the reversal of prior unrealized losses, net of taxes, on the ARSs
from accumulated other comprehensive income to an other-than temporary
impairment of approximately $1.4 million on the $13.5 million (par value)
portion of the Company’s ARS portfolio and the recognition of a benefit of
approximately $1.2 million related to the Put Option provided by the
settlement.  The transfer to trading securities reflects management’s
intent to exercise its Put Option during the period June 30, 2010 through July
3, 2012.
 
 At
December 31, 2008, there was insufficient observable ARS market information
available to determine the fair value of the Company’s ARS investments, or the
Put Option. Therefore, in order to validate the fair value estimate of these
securities, the Company incorporated assumptions such as credit quality or
financial standing of the issuer, final stated maturities, estimates on the
probability of the issue being called prior to final maturity, impact due to
extended periods of maximum auction rates, liquidity risk premium, and broker
quotes from independent valuators using widely accepted financial models.
Management believes that these are reasonable estimates reflecting the unique
circumstances of the subject SLARS and the method of valuing the Put Option as
forward contracts is reasonable.
  11
  LASERCARD
CORPORATION AND SUBSIDIARIES
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (UNAUDITED)
 Cash
equivalents and investments consist of the following (in
thousands):
  December
      31, 2008Gross
                
                
                GrossUnrealized
                
                
                Unrealized
                
                
                EstimatedCost
                
                
                Gains
                
                
                Losses
                
                
                Fair
      ValueCash
      equivalents
                
                $
                7,117
                
                
                $
                —
                
                
                $
                —
                
                
                $
                7,117Long-term
      investments-ARS
                
                
                13,500
                
                
                
                —
                
                
                
                (1,431
                )
                
                
                12,069Put
      option
                
                
                —
                
                
                
                1,226
                
                
                
                —
                
                
                
                1,226$
                20,617
                
                
                $
                1,226
                
                
                $
                (1,431
                )
                
                $
                20,412March
      31, 2008Gross
                
                
                GrossUnrealized
                
                
                Unrealized
                
                
                EstimatedCost
                
                
                Gains
                
                
                Losses
                
                
                Fair
      ValueCash
      equivalents
                
                $
                4,581
                
                
                $
                —
                
                
                $
                —
                
                
                $
                4,581Long-term
      investments
                
                
                13,500
                
                
                
                —
                
                
                
                (625
                )
                
                
                12,875$
                18,081
                
                
                $
                —
                
                
                $
                (625
                )
                
                $
                17,456
  (9.) Fair Value of
Measurements.  Effective April 1, 2008, the Company adopted
SFAS No. 157, Fair Value
Measurements (“SFAS 157”), except as it applies to the nonfinancial
assets and nonfinancial liabilities subject to FSP 157-2. SFAS 157
clarifies that fair value is an exit price, representing the amount that would
be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants. As such, fair value is a market-based
measurement that is determined based on assumptions that market participants
would use in pricing an asset or a liability. As a basis for considering such
assumptions, SFAS 157 establishes a three-tier value hierarchy, which
prioritizes the inputs used in the valuation methodologies in measuring fair
value:
  Level 1
      - Observable inputs that reflect quoted prices (unadjusted) for identical
      assets or liabilities in active markets.Level 2
      - Include other inputs that are directly or indirectly observable in the
      marketplace.Level 3
      - Unobservable inputs which are supported by little or no market
      activity.
  The fair
value hierarchy also requires an entity to maximize the use of observable inputs
and minimize the use of unobservable inputs when measuring fair
value.
  In
accordance with SFAS 157, the Company measures its cash equivalents and
marketable securities at fair value. The Company’s cash equivalents and
marketable securities are primarily classified within Level 1 with the exception
of its investments in ARSs, which are classified within Level 3. Cash
equivalents and marketable securities are valued primarily using quoted market
prices utilizing market observable inputs.  The Company’s investments in
ARSs are classified within Level 3 because there are no active markets for the
ARSs and therefore the Company is unable to obtain independent valuations from
market sources.  Therefore, the ARSs were valued using a discounted cash
flow model. Some of the inputs to the cash flow model are unobservable in the
market. The total amount of assets measured using Level 3 valuation
methodologies represented 20% of total assets as of December 31,
2008.
  12
  LASERCARD
CORPORATION AND SUBSIDIARIES
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (UNAUDITED)
 The table
below shows, by level, the Company’s financial assets that were accounted for at
fair value as of December 31, 2008.  The table does not include assets
and liabilities which are measured at historical cost or any basis other than
fair value (in thousands):
  December
      31, 2008Items
      measured at fair value on a recurring basis:
                
                Portion
      of Carrying Value Measured at
                  Fair
      Value
                
                
                Level
      1
                
                
                Level
      3Cash
      equivalents: Money Market funds
                
                $
                7,117
                
                
                $
                7,117
                
                
                $
                —Restricted
      Cash
                
                
                171
                
                
                
                171
                
                
                
                —Long-term
      investments: Auction Rate Securities
                
                
                12,069
                
                
                
                —
                
                
                
                12,069Put
      option
                
                
                1,226
                
                
                
                
                
                
                
                1,226$
                20,583
                
                
                $
                7,288
                
                
                $
                13,295
  The
following table summarizes the change in fair values for Level 3 items during
the three and nine-month periods ended December 31, 2008 (in
thousands):
  Auction
      Rate SecuritiesThree
      Months Ended
                  
                  
                  Nine
      Months EndedDecember
      31, 2008
                  
                  
                  December
      31, 2008Balance
      at beginning of period
                  
                  $
                  12,377
                  
                  
                  $
                  12,875Put
      option
                  
                  
                  1,226
                  
                  
                  
                  1,226Reversal
      of unrealized loss associated with transfer of securities
      to  trading
                  
                  
                  1,123
                  
                  
                  
                  625Unrealized
      loss included in income
                  
                  
                  (1,431
                  )
                  
                  
                  (1,431
                  )Ending
      Balance at December 31, 2008
                  
                  $
                  13,295
                  
                  
                  $
                  13,295
  The
Company's agreement with the government of Costa Rica signed on December 20,
2007, required it to issue a completion bond of approximately $167,000, the
equivalent of 10% of the contract price.  The Company purchased a
certificate of deposit representing the completion bond. The remaining term of
the bond will be in effect for less than one year. At December 31, 2008, the
Company had classified the restricted cash as current assets and at March 31,
2008, the Company had classified the restricted cash as noncurrent assets in its
condensed consolidated balance sheets.
  (10.) Accounts Receivable, Net.The Company maintains allowances for doubtful accounts and product return
reserves for anticipated losses resulting from the inability of its customers to
make required payments and in-process product returns. The Company generally
computes its allowances based on specifically identifying accounts that are past
due and that are likely not collectible.  Interest receivable is
accrued from investments in ARSs and other interest-bearing
securities.  Other receivables are comprised of value added tax
refunds and miscellaneous items.  The components of accounts
receivable as of December 31, 2008 and March 31, 2008 are (in
thousands):
  December
      31,
                
                
                March
      31,2008
                
                
                2008Trade
      receivables
                
                $
                6,048
                
                
                $
                2,899Allowance
      for doubtful accounts
                
                
                (29
                )
                
                
                (35
                )Interest
      receivable
                
                
                1
                
                
                
                12Other
      receivables
                
                
                78
                
                
                
                76Total
      accounts receivable, net
                
                $
                6,098
                
                
                $
                2,952
  13
 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, 2008 and March 31, 2008 are (in thousands):
  December
      31,
                
                
                March
      31,2008
                
                
                2008Raw
      materials
                
                $
                7,869
                
                
                $
                7,675Work-in-process
                
                
                1,369
                
                
                
                1,518Finished
      goods
                
                
                6,188
                
                
                
                3,887Total
      inventory, net
                
                $
                15,426
                
                
                $
                13,080
 The
Company establishes lower of cost or market reserves, excess and obsolescence
reserves. Inventory reserves are generally recorded when management determines
that an item does not have a foreseeable revenue forecast. Inventory reserves
are not relieved until the related inventory has been sold or
scrapped.  Activities for inventory reserves for the three and
nine-month periods ended December 31, 2008 and 2007 are (in
thousands):
 
 Three
      Months Ended
                  
                  
                  Nine
      Months EndedDecember
      31,
                  
                  
                  December
      31,2008
                  
                  
                  2007
                  
                  
                  2008
                  
                  
                  2007Beginning
      balance
                  
                  $
                  1,021
                  
                  
                  $
                  828
                  
                  
                  $
                  847
                  
                  
                  $
                  838Accruals
      for obsolete inventory
                  
                  
                  104
                  
                  
                  
                  3
                  
                  
                  
                  291
                  
                  
                  
                  53Write
      offs
                  
                  
                  (215
                  )
                  
                  
                  (10
                  )
                  
                  
                  (228
                  )
                  
                  
                  (70
                  )Ending
      balance
                  
                  $
                  910
                  
                  
                  $
                  821
                  
                  
                  $
                  910
                  
                  
                  $
                  821
 For the
three and nine-month periods ended December 31, 2008 the Company recorded
inventory reserve expense of $104,000 and $291,000, respectively. During the
three and nine-month periods ended December 31, 2008, the Company wrote off
$215,000 and $228,000, respectively, of previously reserved inventory mainly due
to obsolescence of partially processed inventory. The Company recorded $8,000 of
lower of cost or market adjustments in its condensed consolidated statements of
operations for the three and nine-month periods ended December 31, 2008 in its
drives, systems, and enabling services segment. There was no lower of cost or
market adjustment during the three and nine-month periods ended December 31,
2007.
 
 (12.) Equipment Held for
Resale.Equipment held for resale consists primarily of parts,
labor costs and other costs incurred to build equipment under contracts from
which the Company has received $29.5 million in non-refundable advance
payments.  Direct incremental costs associated with the purchase or
construction of these items are deferred until revenue is
recognized.  The components of equipment held for resale as of
December 31, 2008 and March 31, 2008 are (in thousands):
  December
      31,
                
                
                March
      31,2008
                
                
                2008Parts
                
                $
                5,644
                
                
                $
                5,417Labor
      costs
                
                
                1,424
                
                
                
                1,158Other
                
                
                113
                
                
                
                113Total
      equipment held for resale
                
                $
                7,181
                
                
                $
                6,688
  14
  LASERCARD
CORPORATION AND SUBSIDIARIES
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (UNAUDITED)
 (13.) Property and Equipment,
Net.  The components of property and equipment as of December
31, 2008 and March 31, 2008 are (in thousands):
  December
      31,
                
                
                March
      31,2008
                
                
                2008Building
      and land
                
                $
                931
                
                
                $
                1,052Equipment
      and furniture
                
                
                24,927
                
                
                
                25,438Construction
      in progress, includingpurchased
      equipment
                
                
                2,069
                
                
                
                282Leasehold
      improvements
                
                
                5,210
                
                
                
                5,22233,137
                
                
                
                31,994Less:
      accumulated depreciation and amortization
                
                
                (21,585
                )
                
                
                (20,294
                )Total
      property and equipement, net
                
                $
                11,552
                
                
                $
                11,700
  Property
and equipment are recorded at cost. Depreciation is provided over the estimated
useful lives which currently are four to seven years for equipment and furniture
using the straight-line method and twenty-five years for the building using the
straight-line method.  Leasehold improvements are amortized over the
shorter of the life of the asset or the life of the lease including extensions
using the straight-line method.  Depreciation and leasehold
amortization expense for the three and nine-month periods ended December 31,
2008 were about $0.7 million and $2.1 million,
respectively.  Depreciation and leasehold amortization expense for the
three and nine-month periods ended December 31, 2007 were about $0.7 million and
$2.1 million, 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. At December 31, 2008, the Company had capital equipment and leasehold
improvement purchases of approximately $2.4 million as compared with
approximately $1.2 million at March 31, 2008.  The Company disposed of
obsolete equipment totaling approximately $0.8 million and recorded a loss of
$0.2 million for parts tooling for a discontinued device recorded in costs of
goods sold during the nine-month period ended December 31, 2008.
 
 The
Company plans to use cash on hand, cash generated from operations, and leasing
to fund capital expenditures of approximately $0.4 million for equipment and
leasehold improvements for card production throughout the remainder of the
current fiscal year.
 
 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.
  15
 LASERCARD
CORPORATION AND SUBSIDIARIES
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (UNAUDITED)
 Definite
life intangible assets capitalized and accumulated amortization as of December
31, 2008 and March 31, 2008 are as follows (in thousands):
  December
      31,
                  
                  
                  March
      31,2008
                  
                  
                  2008Patent
      expenditures
                  
                  $
                  3,772
                  
                  
                  $
                  3,669Technology
      transfer expenditures
                  
                  
                  545
                  
                  
                  
                  545Total
      patent and other intangible expenditures
                  
                  
                  4,317
                  
                  
                  
                  4,214Patent
      accumulated amortization
                  
                  
                  (3,363
                  )
                  
                  
                  (3,267
                  )Technology
      transfer accumulated amortization
                  
                  
                  (545
                  )
                  
                  
                  (545
                  )(3,908
                  )
                  
                  
                  (3,812
                  )Amortizable
      patents and other intangible, net
                  
                  $
                  409
                  
                  
                  $
                  402
 Patent
amortization expense for the three and nine-month periods ended December 31,
2008 was $48,000 and $110,000, respectively. Patent and technology transfer
amortization expense for the three and nine-month periods ended December 31,
2007 was $30,000 and $94,000, 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 their 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.  The Company disposed of obsolete
equipment totaling approximately $0.8 million and recorded a loss of $0.2
million for parts tooling for a discontinued device recorded in costs of goods
sold during the nine-month period ended December 31, 2008. At March 31, 2008,
based on the Company’s estimated future cash flow analysis and having had no
triggering events such as a significant disposal of a portion of such assets, an
adverse change in the market involving the business employing the related asset
or a significant decrease in the benefits realized from an acquired business,
management has determined that the fair value of long-lived assets exceeded
their book value.
  (16.) Accrued
Liabilities.  The components of accrued short and long-term
liabilities as of December 31, 2008 and March 31, 2008 are (in
thousands):
 December
      31,
                    
                    
                    March
      31,2008
                    
                    
                    2008Accrued
      compensated absences
                    
                    $
                    520
                    
                    
                    $
                    846Deferred
      compensation
                    
                    
                    429
                    
                    
                    
                    713Warranty
      reserves
                    
                    
                    560
                    
                    
                    
                    655Accrued
      payroll and fringe benefits
                    
                    
                    472
                    
                    
                    
                    449Other
      accrued liabilities
                    
                    
                    833
                    
                    
                    
                    558Total
      accrued liabilities
                    
                    $
                    2,814
                    
                    
                    $
                    3,221
 The
Company provides a limited warranty for the replacement of defective products.
The Company’s limited warranty requires them to repair or replace defective
products at no cost to the customer within a specified time period after sale.
Where appropriate, provision is made at the time of shipment for estimated
warranty costs. The Company estimates the costs that may be incurred under its
limited warranty and records a liability in the amount of such costs. Factors
that affect the Company’s estimates of warranty liability include the number of
units sold, and historical and anticipated rates of warranty claims. The Company
assesses the adequacy of its recorded warranty liability and adjusts the amount
as necessary. The Company utilizes historical trends and information received
from its customers to assist in determining the appropriate estimated warranty
accrual levels. The Company’s product warranty claims are settled through the
return of defective products and the shipment of replacement products. The
adequacy of the warranty reserve is reviewed quarterly to verify that it
properly reflects the remaining obligations based on the anticipated warranty
costs over the balance of the obligation period. Adjustments are made when
actual return claim experience differs from estimates.
 16
  LASERCARD
CORPORATION AND SUBSIDIARIES
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (UNAUDITED)
 Warranty
activities for the three and nine-month periods ended December 31, 2008 and 2007
are (in thousands):
 
 Three
      Months Ended
                  
                  
                  Nine
      Months EndedDecember
      31,
                  
                  
                  December
      31,2008
                  
                  
                  2007
                  
                  
                  2008
                  
                  
                  2007Beginning
      balance
                  
                  $
                  547
                  
                  
                  $
                  607
                  
                  
                  $
                  655
                  
                  
                  $
                  743Accruals
      for products sold
                  
                  
                  13
                  
                  
                  
                  5
                  
                  
                  
                  51
                  
                  
                  
                  92Costs
      incurred
                  
                  
                  -
                  
                  
                  
                  (9
                  )
                  
                  
                  (146
                  )
                  
                  
                  (232
                  )Ending
      balance
                  
                  $
                  560
                  
                  
                  $
                  603
                  
                  
                  $
                  560
                  
                  
                  $
                  603
 
 (17.) Software Development
Costs.  Development costs incurred in the research and
development of new software products for general distribution are expensed as
incurred until technological feasibility in the form of a working model has been
established.  To date, the Company’s software development has been
completed concurrent with the establishment of technological feasibility and,
accordingly, all software development costs that do not meet capitalization
criteria are charged to research and development expenses in the accompanying
condensed consolidated statements of operations.  Software development
costs incurred in the execution of contract obligations are capitalized and
charged to cost of goods sold at the time the related revenue is
recorded.
 
 (18.) Advance Payments from
Customers.  The Company routinely receives advance payments on
orders placed by its customers.  Advance payments received 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.  Advance payments received of approximately $27.8 million from
Prevent Global, previously classified as non-current liabilities, were
classified as current liabilities in the condensed consolidated balance sheets
at December 31, 2008 as the Company expects this project to be completed within
the next nine to twelve months.  Conversely, advance payments received of
approximately $1.7 million from the contract to deliver a turnkey non-optical
card manufacturing facility in the Kingdom of Saudi Arabia, previously
classified as current liabilities, were classified as non-current liabilities in
the condensed consolidated balance sheet at December 31, 2008 as this project is
no longer expected to be completed within twelve months.
 
 (19.) Revenue
Recognition.  Product sales primarily consist of optical card
sales, sales of drives, systems and enabling services and sales of specialty
cards and card printers.  The Company recognizes revenue from product
sales when the following criteria are met:  (1) persuasive evidence of
an arrangement exists; (2) delivery has occurred; (3) the fee is fixed or
determinable; and (4) collectibility is reasonably assured.  The
Company recognizes revenue on product sales at the time of shipment when
shipping terms are F.O.B. shipping point, orders are placed pursuant to a
pre-existing sales arrangement and there are no post-shipment obligations other
than customer acceptance criteria or, in the case of a U.S. government contract,
warehousing.  Where appropriate, provision is made at the time of
shipment for estimated warranty costs and estimated returns.
 
 Orders
for Permanent Resident and Border Crossing Cards for the U.S. government require
delivery into a secure Company-controlled vault.  Shipments are later
made from the vault to a U.S. government site.  The bill and hold
procedures also provide that at the end of any one-year contract term when a
renewal option is not exercised, the U.S. government is to take final delivery
of any and all of its remaining inventory within six months.  At the
time the cards are delivered into the vault, title to the cards is transferred
to the U.S. government and all risks of ownership are transferred as
well.  The prime contractor is invoiced, with payment due within
thirty days and the purchase orders do not contain any return (other than for
warranty) or cancellation provisions. Pursuant to the
provisions of SEC Staff Accounting 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.
  17
 LASERCARD
CORPORATION AND SUBSIDIARIES
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (UNAUDITED)
 For
contracts that include customer-specified acceptance criteria, the Company
recognizes revenue only after the acceptance criteria have been met and
presuming that all other revenue criteria have been met.  The Company
defers revenue from services and recognizes it over the contractual period or as
the Company renders services and the customer accepts them.
 
 The
Company applies the provisions of the Emerging Issues Task Force Issue No.
00-21, Revenue Arrangements
with Multiple Deliverables (“EITF 00-21”), to revenue arrangements with
multiple deliverables.  EITF 00-21 provides criteria governing how to
identify whether goods or services that are to be delivered separately in a
bundled sales arrangement should be accounted for separately. Deliverables are
accounted for separately if they meet all of the following criteria: a) the
delivered items have stand-alone value to the customer; b) the fair value of any
undelivered items can be reliably determined; and c) 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 SOP 81-1, Accounting for Performance of
Construction-Type and Certain Production-Type Contracts (“SOP 81-1”), in
applicable contracts. Revenues on time and materials contracts are recognized as
services rendered at contract labor rates plus material and other direct costs
incurred.  Revenues on fixed price contracts are recognized on the
percentage of completion method based on the ratio of total costs incurred to
date compared to estimated total costs to complete the
contract.  Estimates of costs to complete include material, direct
labor, overhead and allowable general and administrative expenses.  In
circumstances where estimates of costs to complete a project cannot be
reasonably estimated, but it is assured that a loss will not be incurred, the
percentage-of-completion method based on a zero profit margin, rather than the
completed-contract method, is used until more precise estimates can be made. The
full amount of an estimated loss is charged to operations in the period it is
determined that a loss will be realized from the performance of a
contract.  The Company recognized approximately $19,000 and $95,000,
of revenues for the three and nine-month periods ended December 31, 2008,
respectively, and $123,000 and $169,000 for the three and nine-month periods
ended December 31, 2007, respectively, based on a zero profit margin related to
a long-term contract.
 
 In the
fourth quarter of fiscal year 2006, the Company entered into a subcontract
covering product and services with a prime contractor for the Kingdom of Saudi
Arabia to provide them with card personalization workstation integration for use
in that country’s personalized national ID card program with decentralized card
issuance which includes optical memory cards, hardware, and software. The
contract called for multiple deliverables, installation, and certain client
acceptance criteria, as defined in the agreement.  In applying the guidance
within EITF 00-21, the Company determined the deliverables should not 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 the
customer.  On June 23, 2007, the Company and the prime contractor
entered into an agreement amending the terms of the provision of cards and
supplies according to a delivery schedule for the balance of fiscal year
2008.  In addition, the Company no longer has obligations pertaining
to the installation of equipment, card personalization workstation integration
or card personalization.  As a result of this amendment, the Company
recognizes revenue upon receipt of the customer’s certificate of acceptance of
cards delivered.  Also under the amendment and associated sales
incentives, new prices per card have been established.  The Company
has completed the initial orders under the subcontract as of March 31, 2008;
however, the subcontract allows for optional orders at a customer’s request over
a four-year period through December 2010, valued at up to another approximately
$35 million in cards based on the new agreed upon price per card under the
amendment.  During the three and nine-month periods ended December 31,
2008, the Company recognized revenue of approximately $2.8 million and $7.6
million, respectively.  During the three and nine-month periods ended
December 31, 2007, the Company recognized revenue of $4.2 million and $8.5
million, respectively.
  18
  LASERCARD
CORPORATION AND SUBSIDIARIES
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (UNAUDITED)
 As of
December 31, 2008 and March 31, 2008, there remained $0.5 million and $0.6
million of deferred revenue, respectively, relating to this
contract.
 
 The
Company applies the provisions of SOP No. 97-2, Software Revenue Recognition,
as amended by SOP 98-9, Modification of SOP 97-2, Software
Revenue Recognition, With Respect to Certain Transactions to all
transactions involving the sale of software products.  Revenue from
the license of the Company’s software products is recognized when persuasive
evidence of an arrangement exists, the software product has been delivered, the
fee is fixed or determinable and collectibility is probable, and, if applicable,
upon acceptance when acceptance criteria are specified or upon expiration of the
acceptance period.  Software sold separately under the drives, systems
and enabling services segment was immaterial for the three and nine-month
periods ended December 31, 2008.  There was no software revenue
recognized for the three and nine-month periods ended December 31,
2007.
 
 (20.) Research and Development
Expenses.  Costs related to research, design and development of
products are charged to research and development expense as
incurred.  Research and development costs include salaries, contractor
fees, building and utility costs, and depreciation.
 
 (21.) Shipping and Handling
Costs.The Company
reports shipping and handling costs in both the sales and the related cost of
goods sold to the extent that they are billed to customers.  In all other
instances, they are reflected as a component of cost of goods sold.
 
 (22.) Advertising
Costs.  Advertising costs consist of development and placement
costs of the Company’s advertising campaigns and are charged to expense when
incurred. Advertising expenses for the three-month periods ended December
31, 2008 and 2007, respectively, were immaterial. Advertising expense was
approximately $239,000 for the nine-month period ended December 31,
2008.  Advertising expense was approximately $202,000 for the
nine-month period ended December 31, 2007.
 
 (23.) Stock-based
Compensation.  Effective April 1, 2006, the Company adopted
SFAS No. 123(R), Share-Based Payment, which requires share-based payment
transactions to be accounted for using a fair value based method and the
recognition of the related expense in the results of operations. Prior to the
adoption of SFAS No. 123(R), as permitted by SFAS No. 123, Accounting for Stock-Based
Compensation, the Company accounted for share-based payments to employees
in accordance with Accounting Principles Board (“APB”) Opinion No. 25,
Accounting for Stock Issued to
Employees, utilizing the intrinsic value method. Therefore, the Company
did not recognize compensation cost for employee and director stock options
because there was no intrinsic value. SFAS No. 123(R) allows companies to
choose one of two transition methods: the modified prospective transition method
or the modified retrospective transition method.
 
 The
Company adopted SFAS No. 123(R) using the modified prospective method of
transition which requires compensation expense related to share based payments
to be recognized beginning on the adoption date over the requisite service
period, generally the vesting period, for awards granted after April 1,
2006, and over the remaining service period for the unvested portion of awards
granted prior to April 1, 2006.  The condensed consolidated
financial statements for prior fiscal years have not been restated to reflect
the impact of adopting SFAS No. 123(R).
  Prior to
April 1, 2006, the Company accounted for its stock-based compensation plans
using the intrinsic value method prescribed in APB No. 25. Accordingly,
compensation cost for stock options, if any, was measured at the excess of the
quoted market price of the Company’s stock on the date of grant over the amount
an employee must pay to acquire the stock. SFAS No. 123(R) established
accounting and disclosure requirements using a fair-value based method of
accounting for stock-based employee compensation plans.
  19
  LASERCARD
CORPORATION AND SUBSIDIARIES
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (UNAUDITED)
 The 2004
Equity Incentive Compensation Plan (the “2004 Plan”): the 2004 Plan provides for
the grant of restricted share awards, options, stock units and stock
appreciation rights, any of which may or may not require the satisfaction of
performance objectives, with respect to shares of the Company's common stock to
directors, officers, employees and consultants of the Company and its
subsidiaries.  The exercise price of stock options may not be less
than 100% of the fair market value of the common stock as of the date of grant
(110% of the fair market value if the grant is of an incentive stock option to
an employee who owns more than 10% of the total combined voting power of all
classes of the Company’s capital stock).  Options granted may not be
exercised more than ten years after the date of grant (five years after the date
of grant if the grant is an incentive stock option to an employee who owns more
than 10% of the total combined voting power of all classes of the Company’s
capital stock). The Board of Directors specifies the term of options (prior to
fiscal year 2006 typically ten years and thereafter typically seven years) and
the vesting schedule for when options, other than market price options described
below, become exercisable, is generally 25% after one year and 6.25% quarterly
for the next three 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.
 
 During
the nine-month period ended December 31, 2008, the Company granted its new chief
executive officer and his staff non-statutory stock options (the “Market-Based
Option”) to purchase a total of 715,000 shares of Common Stock with an exercise
price of $7.12 and $4.84 per share, respectively, which was market price at the
date of grant.  The Market-Based Options have a term of ten years and vest
if, prior to five years from the Grant date, the closing trading price of Common
Stock for twenty consecutive days is greater than or equal to $10, $13, $16,
$19, and $22 per share with different vesting points. For the Market Based
Options and options granted to Company officers with similar vesting schedules,
the Company has used the Lattice-model with the stated assumptions to value the
stock-based employee compensation expenses.
 
 The
following assumptions were utilized to estimate the fair value of the Company’s
stock option awards during the nine-month periods ended December 31, 2008 and
2007:
 
 Three
      Months Ended
                
                Nine
      Months EndedDecember
      31,
                
                December
      31,2008
                
                2007
                
                2008
                
                2007Expected
      stock price volatility
                55%
                
                55%
                
                55%
                
                55%Risk-free
      interest rates
                2.44%
      - 3.35%
                
                3.62%
                
                2.44%
      - 3.35%
                
                3.62%
      to 4.93%Expected
      life of options
                4.4
      - 5 years
                
                4.4
      - 5 years
                
                4.4
      - 5 years
                
                4.4
      - 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.
  20
  LASERCARD
CORPORATION AND SUBSIDIARIES
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (UNAUDITED)
 With the
adoption of SFAS No. 123(R), the Company recorded stock-based employee
compensation expense related to stock options, restricted stock units, and
restricted shares net of estimated forfeitures in its condensed consolidated
statements of operations allocated as follows (in thousands):
  Three
      Months Ended
                
                
                Nine
      Months EndedDecember
      31,
                
                
                December
      31,2008
                
                
                2007
                
                
                2008
                
                
                2007Cost
      of sales
                
                $
                187
                
                
                $
                105
                
                
                $
                482
                
                
                $
                244Selling,
      general and administrative expense (excludes ESPP)
                
                
                408
                
                
                
                487
                
                
                
                1,097
                
                
                
                1,083Research
      and development expense
                
                
                25
                
                
                
                69
                
                
                
                96
                
                
                
                190Stock-based
      compensation expense before income tax
                
                
                620
                
                
                
                661
                
                
                
                1,675
                
                
                
                1,517Less:
      income tax benefit
                
                
                ―
                
                
                
                ―
                
                
                
                ―
                
                
                
                ―Net
      stock-based compensation expense after income tax
                
                $
                620
                
                
                $
                661
                
                
                
                1,675
                
                
                $
                1,517
  The
Company did not capitalize any such costs in the condensed consolidated balance
sheets other than in the general overhead pool for inventory costs.
  The
following table lists stock option activity for the nine-month period ended
December 31, 2008 (in thousands, except for weighted average exercise
price):
  2008Number
      of Shares
                
                
                Weighted
      Average Exercise
                  Price
                
                
                Weighted
      Average Remaining Contractual Life(shares
      in thousands)Outstanding
      at March 31, 2008
                
                
                2,152
                
                
                $
                12.75Granted
                
                
                1,049
                
                
                $
                6.09Exercised
                
                
                –
                
                
                $
                0.00Canceled
                
                
                594
                
                
                $
                13.13Outstanding
      at December 31, 2008
                
                
                2,607
                
                
                $
                9.99
                
                
                
                6.3Options
      vested and exercisable at end of year
                
                
                1,233
                
                
                $
                12.87
                
                
                
                4.1
 
 The
weighted-average grant-date fair value per share of options granted during the
nine-month period ended December 31, 2008 and 2007 were $3.03 and $6.79,
respectively.
 
 Restricted Shares and Restricted
Stock Units:Beginning September 21, 2007, restricted shares and
restricted stock units were awarded to certain Company employees and directors
under the provisions of the 2004 Plan.  These shares and units are subject
to time-based vesting provisions, 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 rights.
 
 On June
2, 2008, the Company’s CEO was granted 20,000 restricted shares (the “Restricted
Stock”) outside the 2004 Plan at no charge to the CEO. The Restricted Stock
vests over four years, with vesting to be 25% on each of the first four one-year
anniversaries of June 2, 2008. The Company committed to register the Restricted
Stock with the SEC on Form S-8 since they were issued outside of the 2004 Plan
in compliance Nasdaq Rule No. 4350(i)(1)(A). On September 19, 2008,
restricted shares were awarded to directors of the Company.  For
directors, the restricted shares will vest in full on the eleventh month after
the date of their award.  The fair value of restricted shares,
including the Restricted Stock, at the time of the award is expensed on a
straight-line basis, primarily in selling, general and administrative expenses
over the vesting period.
  21
  LASERCARD
CORPORATION AND SUBSIDIARIES
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (UNAUDITED)
 Restricted
stock units were awarded to certain employees of the Company on September 22,
2008. 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 or
earlier upon a change in control.  As the units vest, shares will be issued
in settlement, net of shares retained to satisfy withholding
obligations.
  The
following table lists restricted stock unit activity for the nine-month period
ended December 31, 2008, (in thousands):
  2008Number
      of
                  SharesOutstanding
      at March 31, 2008
                
                
                81Granted
                
                
                58Exercised
                
                
                (18
                )Canceled
                
                
                (9
                )Outstanding
      at December 31, 2008
                
                
                112
 
 As of
December 31, 2008, about $4.8 million of total unrecognized compensation costs
related to unvested stock options, restricted share awards and restricted stock
units is expected to be recognized over the remaining vesting period through
August 31, 2012  As of December 31, 2007, there was approximately $5.2
million of total unrecognized compensation costs related to unvested share-based
compensation arrangements expected to be recognized over the remaining vesting
period through December 31, 2010.
 
 The
Company recorded no income tax benefit on stock-based compensation expense for
the three and nine-month periods ended December 31, 2008 and 2007, as the
Company has cumulative operating loss carryforwards, for which a full valuation
allowance has been established.
 
 The FSP
No. 123R-3, Transition
Election Related to Accounting for the Tax Effects of Share-Based Payment
Awards, requires an entity to follow either the transition guidance for
the additional-paid-in-capital (“APIC”) pool as prescribed in SFAS No. 123(R) or
the alternative transition method described in FSP No. 123R-3. An entity
that adopts SFAS No. 123(R) using the modified prospective application may make
a one-time election to adopt the transition method described in the FSP No.
123R-3, and may take up to one year from the latter of its initial adoption of
SFAS No. 123(R) or the effective date of the FSP No. 123R-3 to evaluate the
available transition alternatives and make its one-time election. The Company
has elected to use the simplified method provided for in FSP FAS 123R-3 to
calculate its APIC pool effective April 1, 2007. The adoption of the FSP did not
have a material impact on its consolidated financial position, results of
operations or cash flows.
 
 Employee Stock Purchase
Plan.  The Company has an Employee Stock Purchase Plan (the “ESPP”),
under which 49,841 and 103,386 shares were reserved as of December 31, 2008 and
2007, respectively, for future purchases by employees. Under the ESPP, eligible
employees may designate from 2% to 6% of their compensation to be withheld for
the purchase of shares of common stock at 67% of the average price over the
three-day period prior to the purchase date.  Under the ESPP, employees
purchased 44,344 shares during the nine-month period ended December 31, 2008.
The weighted average purchase price per share was $3.89 and the weighted average
market price per share for shares purchased was $5.77 during the nine-month
period ended December 31, 2008. During the nine-month period ended December 31,
2007, employees purchased 27,713 shares with a weighted average purchase price
per share of $7.19 and a weighted average market price per share for shares
purchased of $10.58. The differential between fair market value and the average
price of the shares sold under the ESPP is charged to operations as a
compensation expense and is taxed to the employee as income.  The
stock-based compensation expense of approximately $17,000 and $76,000 relating
to the ESPP was included in the Company’s condensed consolidated statements of
operations in selling, general and administrative expenses during the three and
nine-month periods ended December 31, 2008, respectively. The stock-based
compensation expense of approximately $40,000 and $95,000 relating to the ESPP
was included in the Company’s condensed consolidated statements of operations in
selling, general and administrative expenses during the three and nine-month
periods ended December 31, 2007, respectively.
  22
 LASERCARD
CORPORATION AND SUBSIDIARIES
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (UNAUDITED)
 (24.) Income
Taxes.Income taxes are accounted for in accordance with FASB
Statement No. 109, Accounting
for Income Taxes,which requires the use of the asset and liability
method.  Under this method, deferred tax assets and liabilities are
determined based upon the differences between the financial reporting and the
tax bases of assets and liabilities and are measured using enacted tax rules and
laws that are anticipated to be in effect when the differences are expected to
reverse.  The Company’s net deferred tax assets are reduced by a
valuation allowance to the extent that realization of the related deferred tax
asset is not assured.  The Company has recorded a valuation allowance
for the full amount of its calculated deferred tax asset as of December 31, 2008
and March 31, 2008.
 
 In June
2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in Income
Taxes—an interpretation of FASB Statement No. 109 (“FIN
48”).  FIN 48 clarifies the accounting for uncertainty in income taxes
recognized in the Company’s financial statements in accordance with FASB
Statement No. 109, Accounting
for Income Taxes.FIN 48 prescribes a recognition threshold
and measurement attribute for the financial statement recognition and
measurement of a tax position taken or expected to be taken in a tax
return.  FIN 48 also provides guidance on derecognition,
classification, interest and penalties, accounting in interim periods,
disclosure, and transition.  The evaluation of a tax position in
accordance with FIN 48 is a two-step process.  The first step is
recognition: The Company determines whether it is “more-likely-than-not” that a
tax position will be sustained upon examination, including resolution of any
related appeals or litigation processes, based on the technical merits of the
position.  In evaluating whether a tax position has met the
“more-likely-than-not” recognition threshold, the Company presumes that the
position will be examined by the appropriate taxing authority that would have
full knowledge of all relevant information.  The second step is
measurement: A tax position that meets the “more-likely-than-not” recognition
threshold is measured to determine the amount of benefit to recognize in the
financial statements.  The tax position is measured at the largest
amount of benefit that is greater than fifty percent likely to be realized upon
ultimate settlement.  FIN 48 is effective for fiscal years beginning
after December 15, 2006, which for the Company was the fiscal year commencing on
April 1, 2007.  Upon adoption of FIN 48 on April 1, 2007, the Company
recognized a cumulative effect adjustment of $62,000, decreasing its income tax
liability for unrecognized tax benefits, and decreasing the March 31, 2007
accumulated deficit balance.
 
 (25) Comprehensive Income
(Loss).  Under SFAS No. 130, Reporting Comprehensive
Income, comprehensive income (loss) is defined as the changes in equity
of an enterprise except for those resulting from stockholders’ transactions. For
the three and nine-month periods ended December 31, 2008 and 2007, comprehensive
income (loss) is as follows (in thousands):
  Three
      Months Ended
                
                
                Nine
      Months EndedDecember
      31,
                
                
                December
      31,2008
                
                
                2007
                
                
                2008
                
                
                2007Net
      loss
                
                $
                (849
                )
                
                $
                (1,080
                )
                
                $
                (1,884
                )
                
                $
                (3,938
                )Net
      change in cumulative foreignCurrency
      transaction adjustments
                
                
                124
                
                
                
                (23
                )
                
                
                (65
                )
                
                
                3Reversal
      of unrealized loss associated with transfer of securities to
      trading
                
                
                1,122
                
                
                
                -
                
                
                
                625
                
                
                
                -Comprehensive
      income (loss)
                
                $
                397
                
                
                $
                (1,103
                )
                
                $
                (1,324
                )
                
                $
                (3,935
                )
  23
  LASERCARD
CORPORATION AND SUBSIDIARIES
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (UNAUDITED)
 (26.)Recent Accounting
Pronouncements: In December 2007, the FASB issued SFAS
No. 141 (revised 2007), “Business Combinations”
(“SFAS No. 141(R)”). SFAS No. 141(R) establishes principles and
requirements for how an acquirer recognizes and measures significant aspects of
a business combination in its financial statements. Under SFAS No. 141(R),
acquisition costs will generally be expensed as incurred; noncontrolling
interests will be valued at fair value on the acquisition date; in-process
research and development will be recorded at fair value as an indefinite-lived
intangible asset at the acquisition date; restructuring costs associated with a
business combination will generally be expensed subsequent to the acquisition
date; and changes in deferred tax asset valuation allowances and income tax
uncertainties after the acquisition date generally will affect income tax
expense. SFAS No. 141(R) amends SFAS No. 109, “Accounting for Income
Taxes,” such that adjustments made to valuation allowances on deferred
taxes and acquired tax contingencies associated with acquisitions that closed
prior to the effective date of SFAS No. 141(R) would also apply the
provisions of SFAS No. 141(R). SFAS No. 141(R) also establishes
disclosure requirements to enable the evaluation of the nature and financial
effects of the business combination. Early adoption of SFAS No. 141(R) is
not permitted. SFAS No. 141(R) is effective on a prospective basis for all
business combinations for which the acquisition date is on or after the
beginning of the first annual period subsequent to December 15, 2008, with
the exception of the accounting for valuation allowances on deferred taxes and
acquired tax contingencies. The Company will assess the potential impact of the
adoption of SFAS 141(R) if and when a future acquisition occurs.
  In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements—an amendment of Accounting Research Bulletin
No. 51” (“SFAS No. 160”). SFAS No. 160 establishes
accounting and reporting standards for ownership interests in subsidiaries held
by parties other than the parent, the amount of consolidated net income
attributable to the parent and to the noncontrolling interest, changes in a
parent’s ownership interest, and the valuation of retained noncontrolling equity
investments when a subsidiary is deconsolidated. SFAS No. 160 also
establishes disclosure requirements that clearly identify and distinguish
between the interests of the parent and the interests of the noncontrolling
owners. The Company will be required to adopt SFAS No. 160 on or after the
beginning of the first annual period subsequent to December 15, 2008. The
Company is currently evaluating the requirements of SFAS No. 160 and does
not believe that its adoption will have a material impact, if any, on its
consolidated financial statements.
  In March
2008, the FASB issued SFAS No. 161,“Disclosures about Derivative
Instruments and Hedging Activities—an amendment of FASB Statement
No. 133”
(“SFAS No. 161”). SFAS No. 161 is intended to improve transparency in
financial reporting by requiring enhanced disclosures of an entity’s derivative
instruments and hedging activities and their effects on the entity’s financial
position, financial performance, and cash flows. SFAS No. 161 applies to
all derivative instruments within the scope of SFAS No. 133, “Accounting for Derivative
Instruments and Hedging Activities,” as well as related hedged
items, bifurcated derivatives, and nonderivative instruments that are designated
and qualify as hedging instruments. SFAS No. 161 establishes principles and
requirements for how an entity identifies derivative instruments and related
hedged items that affect its financial position, financial performance, and cash
flows. SFAS No. 161 also establishes disclosure requirements that the fair
values of derivative instruments and their gains and losses are disclosed in a
tabular format, that derivative features which are credit-risk related be
disclosed to provide clarification to an entity’s liquidity and
cross-referencing within footnotes. The Company will be required to adopt SFAS
No. 160 on or after the beginning of the first annual period subsequent to
December 15, 2008.  The Company is currently evaluating the
requirements of SFAS No. 161 and has not yet determined the impact of its
adoption on its consolidated financial statements.
  In April
2008, the FASB issued FSP No. 142-3, “Determination of the Useful Life of
Intangible Assets” (“FSP No. 142-3”). FSP No. 142-3 amends the
factors that should be considered in developing renewal or extension assumptions
used to determine the useful life of a recognized intangible asset under SFAS
No. 142, “Goodwill and
Other Intangible Assets” (“SFAS No. 142”). The objective of FSP
No. 142-3 is to improve the consistency between the useful life of a
recognized intangible asset under SFAS No. 142 and the period of expected
cash flows used to measure the fair value of the asset under SFAS
No. 141(R), and other accounting principles. FSP No. 142-3 applies to
all intangible assets, whether acquired in a business combination or otherwise,
and early adoption is prohibited. The Company will be required to adopt FSP
No. 142-3 in the first quarter of fiscal year 2010. The Company is
currently evaluating the requirements of FSP No. 142-3 and has not yet
determined the impact of its adoption on its consolidated financial
statements.
 
 (27)
Indemnification.  The Company’s major sales agreements provide
remedies to customers, such as defense, settlement, or payment of judgment for
intellectual property claims related to the use of the Company’s products. The
Company also has indemnified various vendors for certain potential
claims.  The Company has also entered into indemnification agreements
with its directors and officers and the Company’s bylaws contain similar
indemnification obligations.  To date, there have been no claims made
under such indemnification provisions and as a result the associated estimated
fair value of the liability is not material.
  24
  LASERCARD
CORPORATION AND SUBSIDIARIES
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (UNAUDITED)
   3.
Net Loss per Share
  Basic net
loss per share and diluted net loss per share was computed by dividing net loss
by the weighted average number of shares of common stock outstanding during the
three-month period ended December 31, 2008 and 2007, respectively.
 
 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, 2008 and
2007 is shown in the following table (in thousands, except per share
data):
  Three
      Months Ended
                
                
                Nine
      Months EndedDecember
      31,
                
                
                December
      31,2008
                
                
                2007
                
                
                2008
                
                
                2007Net
      loss
                
                $
                (849
                )
                
                $
                (1,080
                )
                
                $
                (1,884
                )
                
                $
                (3,938
                )Basic
      net loss per share:Weighted
      average common shares outstanding
                
                
                12,085
                
                
                
                11,971
                
                
                
                12,035
                
                
                
                11,912Basic
      net loss per share
                
                $
                (0.07
                )
                
                $
                (0.09
                )
                
                $
                (0.16
                )
                
                $
                (0.33
                )Diluted
      net loss per share:Weighted
      average common shares outstanding
                
                
                12,085
                
                
                
                11,971
                
                
                
                12,035
                
                
                
                11,912Weighted
      average common stock equivalent outstanding
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —Weighted
      average common shares and common stockequivalents
      outstanding
                
                
                12,085
                
                
                
                11,971
                
                
                
                12,035
                
                
                
                11,912Diluted
      net loss per share
                
                $
                (0.07
                )
                
                $
                (0.09
                )
                
                $
                (0.16
                )
                
                $
                (0.33
                )
 
 4.
Segments
 
 Segment
Reporting.
 
 The
Company operates in three reportable segments: (1) optical memory cards, (2)
drives, systems and enabling services (which was formerly called the “optical
memory card drives” segment), including read/write drives, maintenance, systems
and enabling services, and (3) specialty cards and card printers.  The
segments were determined based on the information used by the chief operating
decision maker.  The optical memory cards and drives, systems and
enabling services reportable segments are not strategic business units which
offer unrelated products and services; rather these reportable segments utilize
compatible technology and are marketed jointly.  Specialty cards and
card printers is a strategic business unit offering at times unrelated products
and at times related products with the other reportable segments.
 
 The
accounting policies used to derive reportable segment results are the same as
those described in the “Summary of Significant Accounting
Policies.”  Resources are allocated to the optical memory card and
drive, system and enabling 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.  During the three and nine-month periods ended December 31,
2008, there was approximately $0.1 million of intersegment revenue. There were
no inter-segment sales or transfers during the three and nine-month periods
ended December 31, 2007. Segment gross profit (loss) includes all segment
revenues less the related cost of sales.  Accounts receivable, cash,
deferred income taxes, prepaid expenses, fixed assets and inventory are not
separately reported by segment to the chief operating decision
maker.  Therefore, the amount of assets by segment is not
meaningful.  All of the Company’s long-lived assets are attributable
to the United States except for $2.4 million at December 31, 2008 and $3.3
million at March 31, 2008 that are located in Germany. The decrease in
long-lived assets at December 31, 2008 as compared with March 31, 2008 is
largely due to the impact of the foreign exchange rates.
  25
  LASERCARD
CORPORATION AND SUBSIDIARIES
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (UNAUDITED)
 The
Company's chief operating decision maker is currently the Company's Chief
Executive Officer.  The chief operating decision maker reviews
financial information presented on a consolidated basis that is accompanied by
disaggregated information about revenues and gross profit (loss) by
segment.
  26
  LASERCARD
CORPORATION AND SUBSIDIARIES
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (UNAUDITED)
 The table
below presents information for optical memory cards, drives, systems and
enabling 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,
2008 and 2007 (in thousands):
  T h
      r e e  M o n t h s  E n d e d  D e c e m b e r  3 1
      ,  2 0 0 8Drives,Optical
                
                
                Systems
      &
                
                
                SpecialtyMemory
                
                
                Enabling
                
                
                Cards
      &
                
                
                SegmentCards
                
                
                Services
                
                
                Printers
                
                
                Total
                
                
                Intersegment
                
                
                Other
      (a)
                
                
                TotalRevenues
                
                $
                5,984
                
                
                $
                738
                
                
                $
                4,297
                
                
                $
                11,019
                
                
                $
                (113
                )
                
                $
                -
                
                
                $
                10,906Cost
      of sales
                
                
                3,203
                
                
                
                885
                
                
                
                3,339
                
                
                
                7,427
                
                
                
                (113
                )
                
                
                -
                
                
                
                7,314Gross
      profit (loss)
                
                
                2,781
                
                
                
                (147
                )
                
                
                958
                
                
                
                3,592
                
                
                
                -
                
                
                
                -
                
                
                
                3,592Depreciation
      andamortization
      expenses
                
                
                425
                
                
                
                29
                
                
                
                80
                
                
                
                534
                
                
                
                -
                
                
                
                183
                
                
                
                717T h
      r e e  M o n t h s  E n d e d  D e c e m b e r  3 1
      ,  2 0 0 7Drives,Optical
                
                
                Systems
      &
                
                
                SpecialtyMemory
                
                
                Enabling
                
                
                Cards
      &
                
                
                SegmentCards
                
                
                Services
                
                
                Printers
                
                
                Total
                
                
                Intersegment
                
                
                Other
      (a)
                
                
                TotalRevenues
                
                $
                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
      expenses
                
                
                469
                
                
                
                46
                
                
                
                80
                
                
                
                595
                
                
                
                -
                
                
                
                165
                
                
                
                760N i
      n e  M o n t h s  E n d e d  D e c e m b e r  3 1
      ,  2 0 0 8Drives,Optical
                
                
                Systems
      &
                
                
                SpecialtyMemory
                
                
                Enabling
                
                
                Cards
      &
                
                
                SegmentCards
                
                
                Services
                
                
                Printers
                
                
                Total
                
                
                Intersegment
                
                
                Other
      (a)
                
                
                TotalRevenues
                
                $
                20,520
                
                
                $
                2,831
                
                
                $
                11,857
                
                
                $
                35,208
                
                
                $
                (113
                )
                
                $
                -
                
                
                $
                35,095Cost
      of sales
                
                
                11,939
                
                
                
                2,915
                
                
                
                8,730
                
                
                
                23,584
                
                
                
                (113
                )
                
                
                -
                
                
                
                23,471Gross
      profit (loss)
                
                
                8,581
                
                
                
                (84
                )
                
                
                3,127
                
                
                
                11,624
                
                
                
                -
                
                
                
                -
                
                
                
                11,624Depreciation
      andamortization
      expenses
                
                
                1,267
                
                
                
                122
                
                
                
                265
                
                
                
                1,654
                
                
                
                -
                
                
                
                506
                
                
                
                2,160N i
      n e  M o n t h s  E n d e d  D e c e m b e r  3 1
      ,  2 0 0 7Drives,Optical
                
                
                Systems
      &
                
                
                SpecialtyMemory
                
                
                Enabling
                
                
                Cards
      &
                
                
                SegmentCards
                
                
                Services
                
                
                Printers
                
                
                Total
                
                
                Intersegment
                
                
                Other
      (a)
                
                
                TotalRevenues
                
                $
                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
      expenses
                
                
                1,373
                
                
                
                139
                
                
                
                234
                
                
                
                1,746
                
                
                
                -
                
                
                
                480
                
                
                
                2,226
  (a)
              Other
      depreciation and amortization expenses represent amounts charged to
      selling, general and administrative expenses and research and development
      expenses.
 
 27
 
 ITEM
      2.
              MANAGEMENT'S
      DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
      OPERATIONS
 
 The
following discussion and analysis of the Company's financial condition, results
of operations and critical accounting policies should be read in conjunction
with the condensed consolidated financial statements and related notes included
elsewhere in this Form 10-Q Report and the consolidated financial statements and
notes thereto for the fiscal year ended March 31, 2008, included in the 2008
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” Or similar
language.  Forward-looking statements made in this report include
statements regarding our beliefs as to current and potential market segments,
customers, and applications for and deployment of our products; the advantages
of, potential income from, and duties to be performed under the sale of a
second-source card manufacturing license to Prevent Global; our expectation that
the optical memory card license and factory equipment project for Prevent Global
will be completed within twelve months of December 31, 2008; our expectations as
to production quantities, delivery rates and requested and actual delivery
schedule, backlog, revenue, and revenue potential for our products for U.S. or
foreign government ID card programs at various future times, including at full
implementation; plans to increase card production capacity for anticipated
increases in orders including possibly $0.4 million in capital equipment and
leasehold improvements during the next three 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 enabling services market; our ability to
obtain photographic film from Kodak; our intent to pursue patent infringers by
litigation, arbitration, or negotiation and the outcome of such actions; the
need for, expected success of, and potential benefits from our research and
development effort; expectations regarding the continuation of various ID card
programs and regarding revenues (overall and by segment and by customer),
margins, and our profit (including likely losses in the future if full
implementation of the Italian program is further delayed); our expectation that
R&D expenses will be $350,000 in the fourth quarter; our plan to expand our
Enabling Services business; our plans regarding the growth and associated
capital costs of expanding optical card production capacity; estimates that
revenues and advance payments will be sufficient to generate cash from operating
activities during fiscal 2009 and 2010 and fund our actual capital expenditures
despite expected quarterly fluctuations; expectations regarding market growth,
product demand, and continuation of current programs; our long-term revenue
growth objectives and drive pricing strategy; our projected liquidity in light
of the issues surrounding our investments in ARSs and our ability to secure more
contracts; and our belief as to the credit quality of our ARSs and the changes
in the fair value of these securities and our belief that the Put Option will
not significantly impact our future earnings.
 
 These
forward-looking statements are based upon our assumptions about and assessment
of the future, which may or may not prove true, and involve a number of risks
and uncertainties including, but not limited to, whether there is a market for
cards for homeland security in the U.S. and abroad, and if so whether such
market will utilize optical memory cards as opposed to other technology;
customer concentration and reliance on continued U.S., Saudi
Arabian,  government business and potential Angolan and Italian
business; risks associated with doing business in and with foreign countries;
whether we will be successful in assisting Prevent Global with factory startup
and training; whether Prevent Global will obtain the financial resources to make
the balance of its required payments to us and to operate the facility; whether
the facility will efficiently produce high quality optical memory cards in
volume and that meet our standards; lengthy sales cycles and changes in and
dependence on government policy-making; reliance on value-added resellers and
system integrators to generate sales, perform customer system integration,
develop application software, integrate optical card systems with other
technologies, test products, and work with governments to implement card
programs; risks and difficulties associated with development, manufacture, and
deployment of optical cards, drives, and systems; our ability or our customers’
ability to initiate and develop new programs utilizing our card products; risks
and difficulties associated with development, manufacture, and deployment of
optical cards, drives, and systems; potential manufacturing difficulties and
complications associated with increasing manufacturing capacity of cards and
drives, implementing new manufacturing processes, and outsourcing manufacturing;
our ability to produce and sell read/write drives in volume; the
unpredictability of customer demand for products and customer issuance and
release of corresponding orders; government rights to withhold order releases,
reduce the quantities released, and extend shipment dates; the impact of
technological advances, general economic trends, and competitive products; the
impact of changes in the design of the cards; and the possibility that optical
memory cards will not be purchased for the full implementation of card programs
in Italy, the Kingdom of Saudi Arabia and India, or for Department of Homeland
Security (DHS) programs in the U.S., or will not be selected for other
government programs in the U.S. and abroad; whether we will be successful in
developing alternative optical recording media; whether UBS AG will provide us
with a credit line until it purchases our ARSs, and the risks set forth in the
section entitled “Risk Factors” 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.
  28
 CRITICAL
ACCOUNTING POLICIES
 
 The
preparation of condensed consolidated financial statements requires us to make
estimates and judgments that affect the reported amounts of assets, liabilities,
sales and expenses, and related disclosure of contingent assets and liabilities.
On an ongoing basis, we evaluate our estimates, including those related to bad
debts, inventories, intangible assets, income taxes, restructurings, pensions
and other post-retirement benefits, stock-based compensation, warranty costs,
contingencies and litigation. We base our estimates on historical experience and
on various other assumptions that we believe to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent from
other sources. Actual results may differ from these estimates under different
assumptions or conditions.
  Critical
accounting policies are those policies that affect our more significant
judgments and estimates used in the preparation of our condensed consolidated
financial statements. We believe our critical accounting policies include our
policies regarding revenue recognition, allowances for doubtful accounts,
inventory valuation, business combinations, value of long-lived assets,
including intangibles, employee compensation and benefits, restructuring
activities, gains or losses on dispositions and income taxes. For a more
detailed discussion of our critical accounting policies, please refer to the
2008 Form 10-K.
 
 RESULTS
OF OPERATIONS
 
 Overview
  Headquartered
in Mountain View, California, LaserCard Corporation, together with its
subsidiaries, is a leading provider of secure ID solutions to governments and
commercial clients worldwide. We develop, manufacture, and integrate LaserCard®
optical memory cards, encoders, peripherals, smart and specialty cards,
biometrics, and modular software.  Our cards and systems are used in
various applications, including citizen identification, border security,
government service delivery and facility access.  Our cards and
systems are used in countries around the world, including the United States,
Canada, Italy, India and the Kingdom of Saudi Arabia, for demanding applications
including border security, government service provision and facility access.
LaserCard’s wholly-owned German subsidiary, Challenge Card Design Plastikkarten
GmbH (CCD), with offices in Rastede and Ratingen, Germany, manufactures and
offers a wide range of high quality specialty cards, plus card personalization
and ID management solutions under the CCD and Cards & More
brands.
  We sell
our products and services through partners such as value added resellers (VARs)
and system integrators (SIs) who generally have specific experience in the
development of markets and applications for LaserCard products.  We
have sales staff located in California, the Washington D.C. area, and Germany,
whose principal role is developing and supporting our VAR and SI reseller
channel.
  29
  Our
revenues are derived mainly from advanced technology cards used in government
identity programs, such as optical memory, contact, contactless and RFID cards,
and from high quality specialty cards for applications such as major event
badging and access control. The remainder of our revenues come from a variety of
activities including the sale of enabling services, such as consulting, custom
application development and the integration of ID Management Solution modules,
such as data capture, card personalization and quality assurance; and from card
factory design and equipment sales, knowledge transfer and
licensing.
  Our
reseller partners generally add value in the form of application software
development, system integration, installation, training and support services. We
are continuing our program to recruit new VARs and SIs in strategically
important markets.
 
 The table
below presents condensed consolidated revenues recorded by our U.S. and German
operations (in thousands):
  Three
      Months Ended
                
                
                Nine
      Months EndedDecember
      31,
                
                
                December
      31,2008
                
                
                2007
                
                
                2008
                
                
                2007U.S.
      operations
                
                $
                6,609
                
                
                $
                8,098
                
                
                $
                23,238
                
                
                $
                20,438German
      operations
                
                
                4,297
                
                
                
                3,061
                
                
                
                11,857
                
                
                
                9,315$
                10,906
                
                
                $
                11,159
                
                
                $
                35,095
                
                
                $
                29,753
 
 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 in Germany and the rest of Europe, the Middle East and
Africa, or EMEA region.
 
 We
emphasize selling secure credentials into government programs for individual
identification.  We offer a range of products including cards that
contain magnetic stripe, contactless RFID (Radio Frequency Identification),
contact IC (Integrated Circuit) chip, optical memory, holograms, biometric
identification, or a combination of such features.  This allows us to
sell to a wide range of customers around the world.
 
 Optical
memory cards are a proprietary product of LaserCard for which we hold 21 U.S.
patents.  In addition, we have years of know-how in the manufacture
and use of cards, encoding devices, read/write drives, systems, enabling
services and software.  This provides a basis for highly leveraged
contribution margins in the optical memory card segment.  Therefore,
our strategy is to sell all card technologies with a goal to upgrade programs to
optical memory when possible.
 
 We sell
encoders and read/write drives at near direct manufacturing cost to enable sales
of the optical memory card.  This often results in quarterly losses at
the gross profit line of the Drives, Systems and Enabling Services segment when
equipment volume does not allow for the contribution necessary to cover fixed
costs and we do not have sizable enabling services.  Even at higher
volume, the gross profit margin on encoders and read/write drives will probably
not exceed 10%.
 
 We
provide Enabling Services as a strategy to promote card
sales.  Examples include the furnishing of equipment, training and
management of a card issuance system for the Kingdom of Saudi Arabia national ID
card program, and a complete data collection, data base, and card issuing system
for the Costa Rica Foreign Resident Card program and the National ID Card
program in Angola.
 
 The 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, that they will include optical cards
or our products.
  30
  Our
principal strategies for long-term revenue growth are to:
 
 ●
              Maintain,
      leverage and expand the existing optical memory card user community of
      national and regional governments worldwide;●
              Increase
      revenues by selling Enabling Services, such as consulting, custom software
      development, and the development of integrated secure ID solutions, which
      can include data capture, personalization, quality assurance and issuance
      modules; and●
              Increase
      market share for specialized cards and associated ID management solutions,
      such as major event badging and access control, and university student ID,
      and expand sales of these products and services into the
      Americas.
 
 Currently
our optical memory card segment revenues are mainly derived from the following
programs; the U.S. Department of Homeland Security (DHS) Permanent Resident Card
(Green Card) program, the Canadian government Permanent Resident Card program, a
National ID Card for the Kingdom of Saudi Arabia, three state-level vehicle
registration card program in India, a Foreign Resident ID Card program in Italy,
and the Foreign Resident ID card program in Costa Rica.  Also there
are emerging programs such as the National Citizen ID Card program in Italy, a
government agency card program in Italy, and the recently announced National ID
Card program in Angola.
 
 Our
largest government card programs are shown below as a percentage of total
revenues:
 
 Three
      Months Ended
                
                Nine
      Months EndedDecember
      31,
                
                December
      31,2008
                
                2007
                
                2008
                
                2007National
      ID Cards in the Kingdom of Saudi Arabia
                
                25%
                
                38%
                
                22%
                
                29%U.S.
      Green Cards
                
                20%
                
                8%
                
                18%
                
                17%National
      ID Card in Angola
                
                17%
                
                —
                
                <10%
                
                —Vehicle
      Registration in India
                
                <10%
                
                12%
                
                10%
                
                <10%
 
 In
January, 2009, we received a purchase order of approximately $8 million for the
supply of new advanced U.S. Permanent Resident Cards (the “Green Card”). 
The order calls for deliveries to commence in March 2009 and be completed by
October 2009.
 
 In
January, 2009, we received a follow-on purchase order valued at $5.4 million for
the National ID card program in the Kingdom of Saudi
Arabia.  Deliveries are scheduled to begin in the quarter ending March
31, 2009 and are scheduled to be completed in the quarter ending June 30,
2009.
 
 In
January 2008, the government of Angola announced a contract award to
DGM-Sistemas (“DGM”), of Luanda, Angola, for the delivery of a complete ID
management system.  The contract calls for an initial 8 million
optical memory cards for the country’s new national citizen ID program to be
issued as the infrastructure is built. Up to an additional 12 million cards
could be issued later.  We teamed with DGM as the exclusive supplier
of cards for the project.  Other team members include Unisys
Corporation (NYSE: UIS) which is responsible for systems integration and our
value-added reseller, Identicard S.A. of Portugal, which developed the system
architecture.  The DGM bid includes $103 million of products and
services to be provided by LaserCard including optical memory cards, card
personalization systems, and printer consumables under a five-year
subcontract.  On October 30, 2008 we announced the receipt of purchase
orders totaling $11.6 million for the Angola national citizen ID
program.  These orders were preceded by advance payments in the amount
of $5.8 million received in July 2008, representing fifty percent (50%) of the
value of an order for cards, printers, encoders and consumables.  We
recorded revenue of approximately $2 million for card personalization
equipment during the three and nine-month periods ended December 31, 2008. Our
backlog at December 31, 2008 for this order includes $8.8 million for optical
memory cards and approximately $0.8 million for hardware and
consumables.
 
 We may
invest up to $0.4 million in additional capital equipment and leasehold
improvement expenditures for optical memory card and specialty card production
capacity and manufacturing enhancement at our facilities through March 31, 2009,
as more fully discussed under “Liquidity and Capital Resources.”
  31
 Revenues
 
 Segment
Revenues.  Our total revenues consisted of sales in our three
segments of (1) optical memory cards, (2) drives, systems and enabling services,
and (3) specialty cards and card printers, as well as, at times, other
miscellaneous items.  Revenues for the three and nine-month periods
ended December 31, 2008 were $10.9 million and $35.1 million, respectively.
Revenues for the three and nine-month periods ended December 31, 2007 were
$11.2 million and $29.8 million, respectively.
 
 The
following table presents our consolidated revenues by segment (in thousands,
except for percentages):
  Three
      Months Ended
                
                
                Nine
      Months EndedDecember
      31,
                
                
                December
      31,2008
                
                
                2007
                
                
                2008
                
                
                2007Optical
      memory cards
                
                $
                5,984
                
                
                $
                7,924
                
                
                $
                20,520
                
                
                $
                19,178%
      of total revenues
                
                
                55
                %
                
                
                71
                %
                
                
                58
                %
                
                
                64
                %Optical
      cards drives, systems and enabling services
                
                
                738
                
                
                
                174
                
                
                
                2,831
                
                
                
                1,261%
      of total revenues
                
                
                7
                %
                
                
                2
                %
                
                
                8
                %
                
                
                4
                %Specialty
      cards and card printers
                
                
                4,297
                
                
                
                3,061
                
                
                
                11,857
                
                
                
                9,314%
      of total revenues
                
                
                39
                %
                
                
                27
                %
                
                
                34
                %
                
                
                31
                %Elimination
      of Intersegment revenue
                
                
                (113
                )
                
                
                -
                
                
                
                (113
                )
                
                
                -%
      of total revenues
                
                
                -1
                %
                
                
                N/A
                
                
                <1%
                
                
                
                N/ATotal
      revenues
                
                $
                10,906
                
                
                $
                11,159
                
                
                $
                35,095
                
                
                $
                29,753
  The
following table presents our optical memory card, revenues by major program (in
thousands):
  Three
      Months Ended
                  
                  
                  Nine
      Months EndedDecember
      31,
                  
                  
                  December
      31,2008
                  
                  
                  2007
                  
                  
                  2008
                  
                  
                  2007National
      ID Cards in the Kingdom of Saudi Arabia
                  
                  $
                  2,623
                  
                  
                  $
                  4,105
                  
                  
                  $
                  7,078
                  
                  
                  $
                  7,650U.S.
      Green Cards
                  
                  
                  1,999
                  
                  
                  
                  855
                  
                  
                  
                  6,272
                  
                  
                  
                  5,055Vehicle
      Registration in India
                  
                  
                  611
                  
                  
                  
                  1,375
                  
                  
                  
                  3,402
                  
                  
                  
                  2,609Foreign
      Resident ID Cards in Costa Rica
                  
                  
                  703
                  
                  
                  
                  -
                  
                  
                  
                  1,439
                  
                  
                  
                  -
 Optical
memory cards revenues decreased for the three-month period ended December 31,
2008 by 24% as compared with the three-month period ended December 31, 2007 due
to a 41% decrease in card unit volume. There was a slight increase in average
selling price due partially to offset third party commissions on new programs.
Optical memory cards revenues increased by 6% for the nine-month period ended
December 31, 2008 as compared with the nine-month period ended December 31, 2007
due to an increase in average selling price caused by product mix.
 
 Revenues
in the drives, systems and enabling services segment increased $0.6 million for
the three-month period ended December 31, 2008 as compared with the three-month
period ended December 31, 2007 due to an increase in unit volume.  The $1.6
million increase in the nine-month period ended December 31, 2008 as compared
with the same period last year was due to increased unit volume and services
revenue recorded on a contract for Costa Rica.
 
 Specialty
cards and card printers revenues were approximately $4.3 million for the
three-month period ended December 31, 2008 or an increase of 40% from the
$3.1 million for the three-month period ended December 31, 2007, due to an
increase in sales of $1.6 million mainly for the Angola ID Card program
partially offset by $0.4 million due to the decrease in the Euro/Dollar exchange
rates.  Specialty cards and card printers revenues of approximately $11.9
million for the nine-month period ended December 31, 2008 increased 27% from the
$9.3 million for the nine-month period ended December 31, 2007, due to an
increase in sales of $2 million and $0.5 million attributable to a favorable
effect of Euro/Dollar exchange rates.  We anticipate further deliveries of
card issuing systems for Angola in the amount of $0.8 million over the remainder
of the current fiscal year; however, the weakening world economy will
probably have a negative effect on some portions of the specialty cards and card
printers segment.
  32
 Backlog
 
 Some of
our customers generally place orders for a period of several months to a year or
more, and others place orders for immediate or fast turn
delivery.  Variations in order placement from a single customer can
materially affect backlog.  As a result, the relative size of our
backlog has not been a reliable indicator of future revenues
trends.
 
 Gross
Margin
 
 The
following table represents our gross margin in absolute dollar amount and as a
percentage of revenue by segment (in thousands, except for
percentages):
  Three
      Months Ended
                
                
                Nine
      Months EndedDecember
      31,
                
                
                December
      31,2008
                
                
                2007
                
                
                2008
                
                
                2007Optical
      memory cards
                
                $
                2,781
                
                
                $
                3,268
                
                
                $
                8,581
                
                
                $
                7,091%
      of optical memory card revenues
                
                
                46
                %
                
                
                41
                %
                
                
                42
                %
                
                
                37
                %Optical
      cards drives, systems and enabling services
                
                
                (147
                )
                
                
                (218
                )
                
                
                (84
                )
                
                
                (552
                )%
      of optical card drives, systems and enabling services
    revenues
                
                NM
                
                
                NM
                
                
                NM
                
                
                NMSpecialty
      cards and card printers
                
                
                958
                
                
                
                439
                
                
                
                3,127
                
                
                
                1,800%
      of specialty cards and card printers revenues
                
                
                22
                %
                
                
                14
                %
                
                
                26
                %
                
                
                19
                %Total
      gross margin
                
                $
                3,592
                
                
                $
                3,489
                
                
                $
                11,624
                
                
                $
                8,339%
      of total gross revenues
                
                
                33
                %
                
                
                31
                %
                
                
                33
                %
                
                
                28
                %
 
 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.  Production unit volume greatly affects gross margin due to the
absorption of fixed manufacturing costs.  Optical memory card gross
margin increased by 5 percentage points to 46% for the three-month period ended
December 31, 2008 as compared with 41% for the three-month period ended December
31, 2007.  The increase was due mainly to an increase in average
selling price due partially to offset third party commissions included in the
selling price.  These commissions are recorded in selling, general and
administration expense.  Optical memory card gross margin of 42% for
the nine-month period ended December 31, 2008 increased by 5 percentage points
as compared with the 37% gross margin for the nine-month period ended December
31, 2007 and was mainly due to an increase in average selling
price.
 
 Drives, Systems and Enabling
Services.  We do not anticipate that we will derive significant
profits in the near term on drives sales as prices are set near the
manufacturing cost in order to promote optical memory card sales.  Except
for the quarter ended June 30, 2008, drives, systems and enabling 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, which also have lower margins than optical memory cards.
Although the gross margin improved slightly with increased sales during the
three-month period ended December 31, 2008 as compared with the three-month
ended December 31, 2007, the increased costs due to the reallocation of
resources with the associated overhead expenses in the amount of approximately
about $0.2 for the implementation of enabling services capabilities resulted in
a lower gross margin. This is expected to continue until and if enabling
services revenues increase.  During the nine-month period ended December
31, 2008, gross margin has improved by $0.5 million due to increased sales of
approximately $1.7 million in enabling services revenue mainly from the Foreign
Resident ID Card program in Costa Rica.  There was a non-cash charge of
approximately $0.1 million for obsolete inventory reserve, a $0.2 write-off of
obsolete tooling, and increased overhead of $0.2 million due to the reallocation
of resources.
  33
  Specialty Cards and Card
Printers.  The gross margin on specialty cards and card printers was
22% for the three-month period ended December 31, 2008 compared with 14% for the
three-month period ended December 31, 2007 due to an increase of sales of higher
margin card personalization systems, a decrease of lower margin card printer
distribution sales, all partially offset by decreases in selling prices for
specialty cards.  The gross margin on specialty cards and card
printers was 26% for the nine-month period ended December 31, 2008 compared with
19% for the nine-month period ended December 31, 2007 due to an increase of
sales of higher margin card personalization systems and high value card
printers.  We anticipate continued pressure on selling prices for
specialty cards leading to a continuation of lower margins in this segment
unless offset by the continuation of increased revenues of the higher value
printer and systems products.
 
 Operating
Expenses
 
 The
following table presents operating expenses for the three-month periods ended
December 31, 2008 and 2007 (in thousands, except for percentage):
  Three
      Months Ended
                
                
                Nine
      Months EndedDecember
      31,
                
                
                December
      31,2008
                
                
                2007
                
                
                2008
                
                
                2007Selling,
      general and administrative expenses
                
                $
                3,950
                
                
                $
                4,056
                
                
                $
                11,437
                
                
                $
                10,826Percent
      of change from prior year
                
                
                (3
                %)
                
                
                
                
                
                
                6
                %Research
      and development expenses
                
                $
                286
                
                
                $
                719
                
                
                $
                1,974
                
                
                $
                2,212Percent
      of change from prior year
                
                
                (60
                %)
                
                
                
                
                
                
                (11
                %)
  Selling, General, and Administrative
Expenses (SG&A).  SG&A expenses decreased by $0.1
million, or 3% during the three-month period ended December 31, 2008 as compared
with the three-month period ended December 31, 2007.  Selling and marketing
expenses increased $0.4 million mainly due to a $0.7 million increase in sales
commissions partially offset by a $0.3 million decrease in consulting.  The
commission expenses relate to new programs. General and administrative expenses
decreased $0.5 million due to a $0.2 million severance payment expense in 2007
and decreases in consulting and professional services, travel and 123(R)
expenses.  The increase of $0.6 million or 6% during the nine-month period
ended December 31, 2008 as compared with the nine-month period ended December
31, 2007 was mainly due to the increase of $0.9 million in sales commission
expenses partially offset by decreases in consulting and professional
services.
 
 Research and Development Expenses
(R&D).  R&D expenses decreased by $0.4 million or 60%
and $0.2 million or 11% during the three and nine-month periods ended December
31, 2008 as compared with the three and nine-month periods ended December 31,
2007, respectively, due to a realignment of various R&D projects. We are
continuing our effort to develop new optical memory card and non-optical card
features and structures, including various composite card structures to allow
the insertion of contactless chips with radio frequency (RF) capability,
dual-interface (contact-contactless) with optical memory, OVD (optically
variable device) products, and other market-driven requirements.  We are
also performing optical media development to allow new form factors for more
flexibility in card layouts and integrated security features; enhanced optical
memory card read/write drives for both increased reliability and ease of use and
integration; and new software products and services in an effort to provide new
products that can stimulate optical memory card sales growth.  We
anticipate that these ongoing research and development efforts should result in
enhanced card features and capabilities and drives with advanced security
features and/or lower manufacturing costs; however, there is no assurance that
such product development effort will be successful.  These features are
important for our existing and future optical memory card markets.  During
the September quarter we made reductions in R&D consistent with a
‘milestone’-based R&D strategy.  We anticipate R&D expenditures of
about $350,000 next quarter.
  34
 Other
Income (Expense), Net
 
 The
following table presents other income, net, for the three and nine-month periods
ended December 31, 2008 and 2007 (in thousands):
  Three
      Months Ended
                
                
                Nine
      Months EndedDecember
      31,
                
                
                December
      31,2008
                
                
                2007
                
                
                2008
                
                
                2007Interest
      income
                
                $
                104
                
                
                $
                243
                
                
                $
                276
                
                
                $
                689Interest
      expense
                
                
                (64
                )
                
                
                (16
                )
                
                
                (105
                )
                
                
                (50
                )Loss
      due to fair value of Investments
                
                
                (205
                )
                
                
                -
                
                
                
                (205
                )
                
                
                -Other
      income (expense)
                
                
                (54
                )
                
                
                (2
                )
                
                
                (60
                )
                
                
                16$
                (219
                )
                
                $
                225
                
                
                $
                (94
                )
                
                $
                655
 
 Other Income (Expense),
Net.  The decrease in interest income during the three and
nine-month periods ended December 31, 2008 as compared with the three and
nine-month periods ended December 31, 2007 was due to an 18% decrease in
invested funds and a marked decline in interest rates from a weighted-average of
6.46% down to 1.93%.  The increase of interest expense during the three and
nine-month periods ended December 31, 2008 as compared with the three and
nine-month periods ended December 31, 2007 was due to the effects on premiums
from our forward contracts.  The loss on fair value of the ARSs investment,
net of gain on the fair value of the Put Option resulted in a $0.2 million
non-cash charge during the three and nine-month periods ended December 31,
2008. We believe that if the assumptions that we used for UBS’ credit risk
remain unchanged through June 30, 2010, we will recover this loss in future
periods up to the quarter ended June 30, 2010. The other income and expense was
caused by foreign exchange fluctuations during the three and nine-month periods
ended December 31, 2008.
 
 Income
Taxes
 
 The following table presents income
taxes for the three and nine-month periods ended December 31, 2008 and 2007 (in
thousands): [Missing Graphic Reference]
  Three
      Months Ended
                
                
                Nine
      Months EndedDecember
      31,
                
                
                December
      31,2008
                
                
                2007
                
                
                2008
                
                
                2007Foreign
      income tax (benefit)
                
                
                (14
                )
                
                
                19
                
                
                
                3
                
                
                
                (106
                )$
                (14
                )
                
                $
                19
                
                
                $
                3
                
                
                $
                (106
                )
 
 Income Taxes. In the
nine-month period ended December 31, 2007, we received a tax benefit due to the
assimilation of the new reduction in tax rate based on our foreign subsidiary’s
net loss.
 
 35
 
 LIQUIDITY
AND CAPITAL RESOURCES
 
 The following table summarizes cash,
cash equivalents and investments as of December 31, 2008 and March 31, 2008 (in
thousands):
  December
      31,
                
                
                March
      31,2008
                
                
                2008Cash
      and cash equivalents
                
                $
                8,601
                
                
                $
                5,583Long-term
      investments in auction rate securities
                
                $
                12,069
                
                
                $
                12,875Put
      option
                
                $
                1,226
                
                
                $
                -
 
 The
following table displays the sources and uses of cash by activity (in
thousands):
  Nine
      Months EndedDecember 31,2008
                
                
                2007Net
      cash provided by (used in) operating activities
                
                $
                2,161
                
                
                $
                (1,297
                )Net
      cash used in investing activities
                
                $
                (2,485
                )
                
                $
                (24
                )Net
      cash provided by financing activities
                
                $
                3,102
                
                
                $
                630
 
 The $2.2
million net cash provided by operating activities during the nine-month period
ended December 31, 2008 was due to the $2.7 million provided from the net loss
adjusted by the non-cash charges partially offset by $0.5 million used in
operating assets and operating liabilities. Cash used in operating activities of
$1.3 million for the nine-month period ended December 31, 2007 was due to
changes in operating assets and in operating liabilities.
 
 The $2.5
million cash used for investing activities in the nine-month period ended
December 31, 2008 was mainly due to $2.4 million of capital asset
expenditures.  Net cash provided by investing activities during the
nine-month period ended December 31, 2007 was due to $1 million from net
proceeds provided by our investments, offset by capital and patent expenditures
of slightly over $1 million.
 
 Net cash
provided by financing activities for the nine-month period ended December 31,
2008 of $3.1 million, was primarily due to the $3 million drawn from the UBS
credit line.  Net cash provided by financing activities during 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.
 
 We made
capital equipment and leasehold improvement purchases of approximately $2.4
million during the nine-month period ended December 31, 2008 as compared with
approximately $1 million during the nine-month period ended December 31,
2007.  We anticipate capital expenditures of approximately $0.4 million for
remainder of the current fiscal year.
 
 As of
December 31, 2008, we held $13.5 million par value (with a fair value of
approximately $12.1 million), of marketable securities consisting of ARSs that
were classified as noncurrent assets in our condensed consolidated balance
sheet. UBS has offered and we have accepted a “Rights” offering whereby UBS
offered to purchase certain ARSs it placed, including those we hold, at par or
face value.  As part of the offering, we obtained a line of credit in the
amount of $8.7 million that is collateralized by the SLARSs of which $3 million
was drawn in December 2008. Subsequent to December 2008, we drew down the
balance of $5.7 million. Refer to Note 2, caption 8, Cash and Cash Equivalents,
Short-term Investments and Long-term Investments of the condensed
consolidated financial statement for further discussion of our noncurrent
investments.
 
 We
believe that we have sufficient available cash to execute our business plan for
fiscal year 2009 and our anticipated operations in fiscal year 2010 as we expect
the estimated level of revenues and customer advance payments to be sufficient
to generate cash from operating activities over the same period.  We expect
to recover the par value of the ARSs based on our “Rights” agreement with UBS.
Operating cash flows could be negatively impacted to a significant degree if our
largest U.S. government program were to be delayed, reduced, canceled, or not
extended; if the Angolan national ID card program does not materialize as
planned internally; and if these programs are not replaced by other card orders
or other sources of income.
  36
  Our
agreement with the government of Costa Rica that was signed on December 20,
2007, required us to issue a completion bond of approximately $167,000,
equivalent to 10% of the contract price.  We purchased a certificate
of deposit representing the completion bond.  The bond will remain in
effect for less than one year. At December 31, 2008, we had classified the
restricted cash as current assets and at March 31, 2008, we had classified the
restricted cash as noncurrent assets in our condensed consolidated balance
sheets.
 
 The
optical memory card license and factory equipment project for Prevent Global/GIG
is now expected to be completed within twelve months.  As a result, we
have classified the deferred revenue and advance payments totaling $27.8 million
for this project as current liabilities and the equipment held for resale to GIG
valued at $7 million as current assets in the condensed consolidated balance
sheet.  Deferred revenue and advance payments do not represent an
obligation on our part to make a future cash payment; instead, we will recognize
revenue equal to these current liabilities when the contract is
completed.  The advance payments received are not
refundable.  The classification of these large amounts as current
assets and liabilities will affect our working capital and current ratio
measures until the project is complete and the revenues and costs are recorded
in the statement of operations.
 
 CONTRACTUAL
OBLIGATIONS:
 
 The
following table provides a summary of the effect on liquidity and cash flows
from our contractual obligations as of December 31, 2008 (in
thousands):
  Fiscal
      Year2009
                
                
                2010
                
                
                2011
                
                
                2012
                
                
                2013
                
                
                Thereafter
                
                
                TotalNon-cancelable
      operating leases
                
                $
                262
                
                
                $
                1,503
                
                
                $
                1,536
                
                
                $
                1,570
                
                
                $
                1,562
                
                
                $
                1,221
                
                
                $
                7,654Non-cancelable
      purchase orders
                
                
                1,518
                
                
                
                1,113
                
                
                
                9
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                2,640Net
      Borrowing on revolving credit with UBS (1)
                
                
                3,000
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                3,000Total
                
                $
                4,780
                
                
                $
                2,616
                
                
                $
                1,545
                
                
                $
                1,570
                
                
                $
                1,562
                
                
                $
                1,221
                
                
                $
                13,294(1) For
      the purposes of this table, the obligation has been calculated without
      interest obligations.
 
 OFF-BALANCE
SHEET ARRANGEMENTS
 
 On
December 11, 2008, we entered into a Credit Line Agreement (the “UBS Credit
Line”) with UBS, pursuant to which we may borrow up to an aggregate of $8.7
million in the form of an uncommitted revolving line of credit, which is secured
by the ARSs currently held by us. The credit line amount could vary if and when
the ARS fair value changes.  The credit line amount will be reduced if and
when portions of the ARS are sold.  The intent of the credit line is to
provide a no-cost loan where the interest rate charged on the credit line is
equal to the interest rate earned on the ARSs.  Variable rate advances
under the UBS Credit Line will bear interest at a variable rate equal to the
lesser of: (a) LIBOR, plus a percentage rate between 1.25% to 2.75%, depending
on the amount of the advance, and (b) the then applicable weighted average rate
of interest or dividend rate paid to us by the issuer of the ARSs, and in each
case, such interest rate is subject to adjustment at any time and from time to
time to reflect changes in the composition of the ARSs.  When calculating
the weighted average interest rate, the interest rate paid to us with respect to
the ARSs shall be deemed to be equal to, (i) for the period up to and including
January 21, 2009, the applicable coupon rate(s) and (ii) from January 22, 2009
and thereafter, the then applicable Taxable SLARC Maximum Auction Rate for the
Taxable SLARSs.
  37
  The UBS
Credit Line also provides, among other things, that:
  ●
              UBS
      may demand full or partial payment of the credit line at its sole
      discretion and without cause at any time; and●
              UBS
      may at any time in its sole discretion terminate and cancel the credit
      line; provided, however, that UBS is required to provide to us alternative
      financing on substantially similar terms, unless the demand right was
      exercised as a result of certain specified events or the customer
      relationship between UBS and LaserCard is terminated for cause by
      UBS.
  On
December 22, 2008, we borrowed approximately $3 million under the UBS
Credit Line. Subsequent to December 2008, we drew down the balance of $5.7
million.
 
 We had no
off-balance sheet arrangements as of March 31, 2008.
  RELATED-PARTY
TRANSACTIONS
 
 Since
October 21, 2001, we have contracted with Wexler & Walker Public Policy
Associates, a unit of Hill and Knowlton, Inc., (“Wexler”) to be lobbyists on
behalf of us.  The Chairman of Wexler is Robert S. Walker, a brother of
Walter F. Walker, member of our Board of Directors. The contract was
terminated on December 1, 2008.
 
 We paid
Wexler $30,000 during the three-month period ended December 31, 2008 and
$165,000 during the nine-month period ended December 31, 2008. For the three and
nine-month periods ended December 31, 2007, we paid Wexler, $35,000 and $95,000,
respectively. We have no other related-party transaction after December 31,
2008.
 
 RECENT
ACCOUNTING PRONOUNCEMENTS
 
 Recent
accounting pronouncements are disclosed in Note 1 of the notes to condensed
consolidated financial statements.
 
 38
  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:
 
 m
              Commercial
      paper rated A1/P1 or debt instruments rated AAA, as rated by the major
      rating servicesm
              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.
 
 As of
December 31, 2008, we held $13.5 million par value (with a fair value of
approximately $12.1 million), of marketable securities consisting of ARSs, that
are structured with short-term interest rate reset dates of generally 28 to 35
days but with contractual maturities that can be well in excess of ten
years.  Ninety-six and 3/10 percent (96.3%) of our investments represent
SLARSs, of which 95% of principal and interest is guaranteed under the FFELP and
AAA rated.  The remaining balance is privately financed and consisting
of an over-collateralized pool of graduate student loans.  We believe
that the credit quality of these securities is high based on these
guarantees.  At the end of each reset period, we can sell or continue to
hold the securities at par value. This auction process has historically
provided a liquid market for ARSs.  In February 2008, however,
auctions failed due to sell orders exceeding buy orders. The funds associated
with failed auctions will not be accessible until a successful auction occurs, a
buyer is found outside of the auction process, or the underlying securities have
matured or are recalled by the issuer.  Given the disruptions in the credit
markets and the fact that the liquidity for these types of securities remains
uncertain, as of December 31, 2008 and March 31, 2008, we have classified all of
our ARSs as noncurrent assets in our consolidated balance sheets as our ability
to liquidate such securities in the next twelve (12) months is uncertain. As of
March 31, 2008, we had $12.9 million of ARSs, net of $0.6 million of unrealized
loss under “Accumulated Other Comprehensive Income” of the stockholders’ equity,
accounted for as available-for-sale and classified as long-term securities. We
held no short-term investments as of December 31, 2008 and March 31,
2008.  We continue to earn interest at the maximum contractual rate on
the ARS. We entered into a Credit Line Agreement (the “UBS Credit Line”) with
UBS, pursuant to which we may borrow up to an aggregate of $8.7 million in the
form of an uncommitted revolving line of credit, which is secured by the ARSs
currently held by us. The credit line amount could vary if and when the ARS fair
value changes.  The credit line amount will be reduced if and when
portions of the ARS are sold.  The intent of the credit line is to
provide a no-cost loan where the interest rate charged on the credit line is
equal to the interest rate earned on the ARSs.  Additional information
regarding our investment portfolio is detailed in Note 2 to the condensed
Consolidated Financial Statements for the period ended December 31,
2008.
  Fair value fluctuation risk:
At December 31, 2008, there was insufficient observable ARS market information
available to determine the fair value of our ARS investments, or the Put Option.
Therefore, in order to validate the fair value estimate of these securities, the
Company incorporated assumptions such as credit quality or financial standing of
the issuer, final stated maturities, estimates on the probability of the issue
being called prior to final maturity, impact due to extended periods of maximum
auction rates, liquidity risk premium, and broker quotes from independent
valuators using widely accepted financial models.  Management believes
that these are reasonable estimates reflecting the unique circumstances of the
subject SLARS and the method of valuing the Put Option as forward contracts is
reasonable.
  The loss
on fair value of the ARSs investment, net of gain on the fair value of the Put
Option resulted in a $0.2 million non-cash charge during the three and
nine-month periods ended December 31, 2008. We believe that if the
assumptions that we used for UBS’ credit risk remain unchanged through June 30,
2010, we will recover this loss in future periods up to the quarter ended June
30, 2010.
  39
  The
following summarizes investments at fair value (in thousands), weighted average
yields and expected maturity dates:
  December
      31, 2008
                
                
                March
      31, 2008Auction
      rate securities, long-term
                
                $
                13,500
                
                
                $
                13,500Gross
      unrealized losses
                
                
                (1,431
                )(1)
                
                
                (625
                )(2)Put
      option
                
                
                1,226Estimated
      fair market value
                
                $
                13,295
                
                
                $
                12,875Weighted
      average yield
                
                
                1.93
                %
                
                
                2.18
                %Maturity
      dates
                
                July
      15, 2029 through January
                  25,
      2047
                
                
                July
      15, 2029 through
                  January25,
      2047(1)
      Unrealized loss in income(2)
      Unrealized loss included in accumulated other comprehensive
      income
 
 Foreign Currency Exchange Rate
Risk.  Our U.S. operations sell products in various
international markets.  For the three and nine-month periods ended
December 31, 2008, revenues by our German subsidiary, CCD, of approximately
$4.3 million and $11.9 million were denominated in foreign currency (Euro).
In addition, some raw material purchases and purchased services are denominated
in foreign currency.  Net cash used by CCD’s operating activities was
$0.6 million at December 31, 2008 and consisted of $0.6 million of advance
payments from customers offset by $1.2 million used for working capital
requirements.
 
 We use
short-term foreign exchange forward contracts to mitigate foreign currency risk
associated primarily with inter-company receivables and payables, and loans
receivable (denominated in Euros) to our German subsidiary.  Our
foreign exchange forward contracts are not designated for accounting purposes as
hedging instruments under SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, as amended.  Accordingly,
any gains or losses resulting from changes in the fair value of the forward
contract are reported in other income, net of expenses.  The gains and
losses on these forward contracts generally offset gains and losses associated
with the underlying foreign currency denominated inter-company receivables and
payables, and loans receivable.  At December 31, 2008, we had a
foreign exchange forward contract with a maturity of less than 30 days to
purchase 1.4 million euros. The fair value of the forward contract was not
material at December 31, 2008. At March 31, 2008, we had a foreign exchange
forward contract with a maturity of less than 30 days to purchase 1.2 million
euros.  The fair value of the forward contract was not material at
March 31, 2008.
  40
  ITEM
      4.
              CONTROLS
      AND PROCEDURES
 
 (a)    Evaluation of Disclosure Controls
and Procedures.  We maintain disclosure controls and procedures
that are designed to ensure that information required to be disclosed by us in
reports that we file or submit under the Securities Exchange Act of 1934 is
recorded, processed, summarized, and reported within the time periods specified
in SEC rules and forms, and that such information is accumulated and
communicated to our management, including our Chief Executive Officer and Chief
Financial Officer, as appropriate, to allow timely decisions regarding required
disclosure. In designing and evaluating our disclosure controls and procedures,
management recognized that disclosure controls and procedures, no matter how
well conceived and operated, can provide only reasonable, not absolute,
assurance that the objectives of the disclosure controls and procedures are
met.  Our disclosure controls and procedures have been designed to
meet, and management believes that they meet, reasonable assurance
standards.  Additionally, in designing disclosure controls and
procedures, our management was required to apply its judgment in evaluating the
cost-benefit relationship of possible disclosure controls and procedures. The
design of any disclosure controls and procedures also is based in part upon
certain assumptions about the likelihood of future events, and there can be no
assurance that any design will succeed in achieving its stated goals under all
potential future conditions.
 
 Based on
their evaluation as of the end of the period covered by this Form 10-Q, our
Chief Executive Officer and Chief Financial Officer have concluded that, as of
such date, our disclosure controls and procedures were effective at the
reasonable assurance level.
 
 (b)   Changes in Internal Control over
Financial Reporting.  There were no significant changes in our
internal control over financial reporting that occurred during the three-month
period ended December 31, 2008that have materially
affected, or are reasonably likely to materially affect, our internal control
over financial reporting.
  PART
II.  OTHER INFORMATION
 
 Item
1.      Legal Proceedings
 
 From time
to time we are a party to litigation matters and pending or threatened claims
and assessments that are normal in the course of our operations. While we
believe that the ultimate outcome of these matters will not have a material
adverse effect on our financial position, results of operations or cash flows,
the outcome of these matters is not determinable and negative outcomes may
adversely affect our financial position, liquidity, or results of
operations.
 
 Item
1A.   Risk Factors
 
 A revised
description of the risk factors associated with our business is set forth below.
This description includes any material changes to and supersedes the description
of the risk factors associated with our business previously disclosed in Part
II, Item 1A of our Quarterly Report on Form 10-Q for the fiscal quarter ended
September 30, 2008.  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.
 
 OUR
CURRENT AND FUTURE EXPECTED REVENUES ARE DERIVED FROM A SMALL NUMBER OF ULTIMATE
CUSTOMERS SO THAT THE LOSS OF OR REDUCTIONS IN PURCHASES BY ANY ONE ULTIMATE
CUSTOMER COULD MATERIALLY REDUCE OUR REVENUES AND LEAD TO CONTINUED
LOSSES.  Over the past four and three quarter years, we derived 62% of
our total revenues from sevenprograms ― two U.S.
government programs andsix non-U.S. government programs.  Due
to the lengthy sales cycles, we believe that these programs, with the addition
of a few other non-U.S. programs, will be the basis for a majority of our
revenues in the near-term.  The loss of or reductions in purchases by
any one customer due to program cutbacks, competition, or other reasons could
materially reduce our revenue base. Annual or quarterly losses have occurred
when there are material reductions, gaps or delays in card orders from our
largest U.S. or foreign government programs or if such programs were to be
reduced in scope, delayed, canceled, or not extended and not replaced by other
card orders or other sources of income.
  41
  WE
INCURRED NET LOSSES DURING ALL BUT ONE OF THE PREVIOUS FIVE YEARS AND WE MAY NOT
BE ABLE TO GENERATE SUFFICIENT REVENUE IN THE FUTURE TO OBTAIN PROFITABILITY. We
incurred a loss in the current quarter and in eight of the preceding nine
quarters and we also incurred losses for the ten quarters preceding the quarter
ended October 1, 2005.  We had an accumulated deficit of $47.8 million
at December 31, 2008.  There can be no assurance that we will generate
enough revenues in the near term to attain profitability.  We are
relying principally upon our optical memory card technology to generate future
product revenues, earnings, and cash flows.  If alternative
technologies emerge or if we are otherwise unable to compete, we may not be able
to sustain profitability on a quarterly or annual basis.  Annual or
quarterly losses would also occur if product revenues do not keep pace with
increased expenses.
 
 OUR
CONTRACTS WITH OUR LARGEST CUSTOMERS PROVIDE FOR AN INDEFINITE QUANTITY OR
INDEFINITE DELIVERY OF SUPPLIES OR SERVICES OR WE MAY RECEIVE PURCHASE ORDERS
WHERE CUSTOMERS HAVE THE RIGHT TO DELAY OR CANCEL AT ANY TIME. WE HAVE NO
LONG-TERM FIRM ORDER COMMITMENTS FROM ANY OF OUR LARGEST CUSTOMERS. 
THEREFORE DELAYS IN ORDERS, CONTRACT CANCELLATIONS OR CHANGES IN TECHNOLOGY
DECISIONS COULD RESULT IN DECREASED REVENUES AND OPERATING LOSSES. Our revenue
is predominantly dependent on the receipt of purchase orders on a recurring
basis.  In most cases we do not have contracts with firm commitments for
deliveries over an extended period of time.  This can create volatility in
revenues and earnings.  Also, customers may change their technology
decisions which could cause further delays or possibly loss of business.
 As an example, the Border Crossing Card, a U.S. government program,
accounted for approximately $1.2 million in revenue during each of the past two
fiscal years.  However, the card was reconfigured in keeping with the
requirements of the Western Hemisphere Travel Initiative and is no longer
produced by us.
 
 OUR
OPTICAL MEMORY CARD PRODUCT REVENUES WILL NOT GROW IF WE DO NOT WIN NEW BUSINESS
IN THE U.S. OR ABROAD AND IF PROGRAMS SUCH AS THE ANGOLAN NATIONAL ID PROGRAM OR
THE ITALIAN NATIONAL ID PROGRAM ARE NOT IMPLEMENTED AS
ANTICIPATED.  There can be no assurance that these programs will be
implemented as planned or that we will receive sizable future orders for any of
these programs, nor any assurance that we will be able to win any other new
business 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,
the equipment supply and consulting work we undertake on occasion for the set up
of card manufacturing facilities involves substantial time from start to finish,
with the potential for obstacles to intervene outside our control such as delays
in the construction and readying of the building and site by the customer and
the potential for our customer to request changed specifications for the
facility's throughput, so there can be substantial lags between when we sign a
contract and receive a deposit and when we complete a project and recognize
revenue.
 
 WE COULD
EXPERIENCE EQUIPMENT, RAW MATERIAL, QUALITY CONTROL, OR OTHER PRODUCTION
PROBLEMS ESPECIALLY IN PERIODS OF INCREASING VOLUME.  There can be no
assurance that we will be able to meet our projected card manufacturing capacity
if and when customer orders reach higher levels. We have made and may continue
to make significant capital expenditures to expand our card manufacturing
capacity dependant upon projected volume. However, since customer demand is
difficult to predict and can be terminated at any time, and we generally wait
for such demand to materialize prior to making capital expenditure commitments,
we may be unable to ramp up our production quickly enough to fill new customer
orders in a timely fashion. This could cause us to lose new business and
possibly existing business. In addition, if we overestimate customer demand, we
could incur significant costs, including inventory write-offs, from creating
excess capacity such as was the case during fiscal years 2007 and 2008. When
purchasing raw materials for our anticipated optical card demand, we take into
consideration the order-to-delivery lead times of vendors and the economic
purchase order quantity for such raw materials. If we over-estimate customer
demand, excess raw material inventory and inventory write-offs can
result.  We may experience manufacturing complications associated with
increasing our manufacturing capacity of cards and drives. We may also
experience difficulties implementing new manufacturing processes, meeting
customers’ quality or international 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.
  42
  WE ARE
CURRENTLY OUR OWN SOLE SOURCE OF OPTICAL MEMORY CARDS AND SEVERAL OF THE STEPS
IN OUR CARD MANUFACTURING PROCESS HAVE NO BUILT-IN
REDUNDANCY.  THEREFORE, WE ARE SUSCEPTIBLE TO SUPPLY INTERRUPTIONS,
INCLUDING IF CERTAIN MACHINERY WERE TO BREAK DOWN.  MUCH OF OUR
MANUFACTURING EQUIPMENT IS COMPRISED OF CUSTOM VERSIONS OF MACHINERY SOME OF
WHICH IS MORE THAN 20 YEARS OLD.  IN ADDITION, WE ARE AT RISK OF
LOSING OR NOT OBTAINING CERTAIN PROGRAMS SHOULD THEY REQUIRE A SECOND
SOURCE.  We use a proprietary manufacturing process with custom
machinery and several of the steps in our card manufacturing process have no
built-in redundancy, or in some cases have the redundancy located in
Germany.  We are susceptible to supply interruptions when our line
goes down or yield decreases when our line malfunctions.  Much of our
machinery is comprised of customized versions of machinery which has long lead
times to replace and may be difficult to maintain or repair, requiring us to be
self-reliant.  Some of the machinery we use is more than 20 years old
and is no longer manufactured for others, which would require us to adapt a
newer version to our needs, which would involve additional delay, effort and
expense on our part.  If current or potential customers require a
second source for their card programs (which is a common business practice) they
could decide to use alternate technology cards that may have multiple sources of
supply.
 
 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.  No assurance
can be given that Kodak will continue to supply such photographic films on a
satisfactory basis and in sufficient quantities.  If Kodak were to
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.
 
 THE
VOLATILITY IN THE COST OF PETROLEUM CAN NEGATIVELY IMPACT OUR OPERATING INCOME
AND GROSS MARGIN IF THIS RESULTS IN INCREASES IN THE COST OF OUR PRODUCTION
MATERIALS SUCH AS THE POLYCARBONATE-BASED PRODUCTS.  The polycarbonate
raw material for our cards is petroleum based.  The volatility in the
cost of petroleum could impact our costs for such raw material and also lead to
higher energy bills for running our manufacturing
facilities.  Long-term increases in petroleum prices could lead to a
decline in our gross margins and income unless we are able to adjust our selling
prices.
 
 AN
INTERRUPTION IN THE SUPPLY OF READ/WRITE DRIVE PARTS OR DIFFICULTIES ENCOUNTERED
IN READ/WRITE DRIVE ASSEMBLY COULD CAUSE A DELAY IN DELIVERIES OF DRIVES AND
OPTICAL MEMORY CARDS AND A POSSIBLE LOSS OF SALES, WHICH WOULD ADVERSELY AFFECT
OUR OPERATING RESULTS.  Several major components of our read/write
drive are designed specifically for our products. For example, the optical
recording head for the current drive is a part obtained from one supplier; and
at current production volumes, it is not economical to have more than one
supplier for this custom component. While we carry a large inventory of safety
stock for this item, any delays in or inability to obtain parts from this
supplier could cause us to lose revenues while we source a second
supplier.  The ability to produce read/write drives in high-volume, if
required, will be dependent upon maintaining or developing sources of supply 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.
  43
  IF WE ARE
UNABLE TO DEVELOP UPGRADED READ/WRITE DRIVES THAT COST LESS TO MANUFACTURE WE
COULD LOSE POTENTIAL NEW BUSINESS.  The selling price of our
read/write drive products is in the low to mid two thousand dollar range each
depending on features and quantity purchased.  This relatively high
cost may cause us to lose customers to lower cost IC card
providers.  Nevertheless, we believe the cost of ownership of an
optical card system is competitive in applications requiring large populations
of cards because of the relatively high over all cost to implement a system
based on our major competition, IC cards.
 
 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.  DIFFICULTIES ENCOUNTERED BY THESE
THIRD PARTIES COULD CAUSE OUR ULTIMATE CUSTOMERS, GENERALLY GOVERNMENTS, TO FIND
FAULT IN OPTICAL CARDS AND SWITCH TO OTHER SOLUTIONS EVEN THOUGH OUR OPTICAL
TECHNOLOGY IS NOT THE ROOT CAUSE OF ANY FAULT.  In certain of our
current foreign programs such as Italy, India, and the Kingdom of Saudi Arabia,
and possibly in other future programs, various third-party technologies such as
contact or contactless chips are added to our cards.  The embedding or
addition of other technologies to the LaserCard optical memory card, especially
when contracted to independent third parties, could potentially lead to
technical, compatibility and other issues.  In such circumstances, it
may be difficult to determine whether a fault originated with our technology or
that of a co-supplier or the person embedding or adding the third party
technology to our cards.  If such faults occur, they could be
difficult, expensive, and time-consuming to resolve.  Such
difficulties could lead to our ultimate customers, the foreign governments,
switching to other technologies even though optical technology is not the root
cause of the fault(s).  The resulting loss of customers would
adversely affect our revenues.
  WE ARE
LARGELY DEPENDENT ON SYSTEMS INTEGRATORS FOR IMPLEMENTATION OF CARD PROGRAMS AND
THEIR METHOD OF IMPLEMENTATION MAY NOT BE SUCCESSFUL DUE TO QUALITY OR
COST.  We mainly 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, processing, and printing on our
cards and working with the end-user in the card issuing process.  This
could lead to low quality, high costs, or both resulting in damage to our
reputation and loss of the contract.  We work to train the integrators
to avoid such situations, but cannot control their work.  We plan to
continue to offer this support and then transition the card issuing process to
local resources once the program is running successfully.  There can
be no assurance that issues with our systems integrators in the future will not
damage our reputation, reduce our revenues, or cause us to lose various
governmental programs.
  OUR
OPTICAL MEMORY CARDS HAVE A COMPLEX STRUCTURE THAT REQUIRES A HIGH DEGREE OF
TECHNICAL KNOWLEDGE AND EXPERIENCE TO MEET INCREASINGLY STRINGENT PERFORMANCE
REQUIREMENTS.  WE HAVE AND COULD IN THE FUTURE AGREE TO CERTAIN
CHARACTERISTICS BEYOND THOSE REQUIRED IN INDEPENDENTLY PUBLISHED
STANDARDS.  THIS COULD INCREASE OUR COST OF MANUFACTURING CARDS OR RESULT
IN ACCEPTING RETURNS OR GIVING CREDITS TO THE CUSTOMER.  MANY CUSTOMERS
MAINTAIN SIGNIFICANT ADVANCE INVENTORY WHICH INCREASES THIS
RISK.  There can be no assurance that we will be able to meet
customers’ quality or standards requirements consistently.  This could lead
to high manufacturing costs due to low product yields or unexpected product
returns.  We employ a rigorous quality control procedure, are ISO 9001:2000
certified and we strive to deliver product that meets published standards and
customer expectations.  Even so, we cannot give assurance that our products
will meet customer expectations in all cases.  We have in the past, and we
may in the future, replace product held by the customer or give credit for
products previously delivered.
  44
  IF WE
FAIL TO PROTECT OUR INTELLECTUAL PROPERTY RIGHTS, COMPETITORS MAY BE ABLE TO USE
OUR TECHNOLOGIES, WHICH COULD WEAKEN OUR COMPETITIVE POSITION, REDUCE REVENUES,
OR INCREASE COSTS.  We use a combination of patent, trademark, and
trade secret laws, confidentiality procedures, and licensing arrangements to
establish and protect our proprietary rights. Our existing and future patents
may not be sufficiently broad to protect our proprietary technologies. Despite
our effort to protect proprietary rights, we cannot be certain that the steps we
have taken will prevent the misappropriation or unauthorized use of our
technologies, particularly in foreign countries where the laws may not protect
proprietary rights as fully as U.S. law. Any patents we may obtain may not be
adequate to protect our proprietary rights. Our competitors may independently
develop similar technology, duplicate our products, or design around any of our
issued patents or other intellectual property rights. Litigation may be
necessary to enforce our intellectual property rights or to determine the
validity or scope of the proprietary rights of others. This litigation could
result in substantial costs and diversion of resources and may not ultimately be
successful. We cannot predict whether the expiration or invalidation of our
patents would result in the introduction of competitive products that would
affect our future revenues adversely. However, since our technology is now in
the commercial stage, our know-how and experience in volume card production,
system development and software capabilities, brand-name recognition within our
card markets, and well-known status in the optical memory cards market may be of
greater importance than our patents. At this time, we believe that our existing
patent portfolio is helpful but is no longer essential for maintaining the
LaserCard optical memory card's market position.
  THE
MARKETS FOR OUR PRODUCTS ARE COMPETITIVE, AND IF WE ARE UNABLE TO COMPETE
SUCCESSFULLY, REVENUES COULD DECLINE OR FAIL TO GROW.  Our optical
memory cards may compete with optical memory cards that can be manufactured and
sold by three of our licensees (although none is currently doing so) and with
other types of portable data storage technologies applied to ID
cards.  These may include contact or contactless integrated circuit
(IC) chips, RFID chips, holographic optical storage, and 2-dimensional bar
codes.  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 could be a competitive disadvantage in some of our targeted
markets.  Nevertheless, we believe the cost of ownership of an optical
card system is competitive in applications requiring large populations of cards
because of the relatively high over all cost to implement a system based on our
major competition, IC cards.
  THE PRICE
OF OUR COMMON STOCK IS SUBJECT TO SIGNIFICANT VOLATILITY.  The price
of our common stock is subject to significant volatility, which may be due to
fluctuations in revenues, earnings, liquidity, press coverage, analyst
recommendations, financial market interest, trading volume, and stock market
conditions, as well as changes in technology and customer demand and
preferences.  As a result, our stock price might be low at the time a
stockholder wants to sell the stock.  For example, over the last 12
months our stock price has fluctuated from a high of $12.94 per share to a low
of $2.54 per share.  Also, since we have a relatively low number of
shares outstanding (approximately 12 million shares) there will be more
volatility in our stock if one or two major holders, for example, large
institutional holders, attempt to sell a large number of shares in the open
market.  Furthermore, our trading volume is often small, meaning that
a few trades may have disproportionate influence on our stock
price.  In addition, someone seeking to liquidate a sizeable position
in our stock may have difficulty doing so except over an extended period or
privately at a discount.  Thus, if one or more stockholders were to
sell or attempt to sell a large number of 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 or greater than
the price they paid for the stock.
  WE ARE
SUBJECT TO RISKS ASSOCIATED WITH CHANGES IN FOREIGN CURRENCY EXCHANGE
RATES.  Part of the manufacturing process of certain LaserCard
products that we sell outside the U.S. takes place in our operations in
Germany.  Also, some of the raw materials we use to manufacture
optical memory cards are sourced in Europe.  These costs are
denominated in euros, the currency used in much of Europe.  However,
when we sell our finished products, the prices that we charge are denominated in
U.S. dollars.  Accordingly, we are subject to exposure when the
exchange rate for euros increases in relation to the U.S.
dollar.  Declines in the U.S. dollar value relative to the euro and
other currencies over the past year, if not reversed, will further result in
increases in raw material costs.  As of December 31, 2008, we had not
entered into a forward exchange contract to hedge against or potentially
minimize the foreign currency exchange risk related to transactions other than
those related to inter-company payables and receivables.  The losses
on foreign currency exchange related to purchase transactions and intercompany
receivables for the nine-month period ended December 31, 2008 was $138,000 and
it was immaterial for the nine-month period ended December 31,
2007.
  45
  WE HAVE
INVESTED A SIGNIFICANT PORTION OF OUR CASH IN AUCTION RATE SECURITIES, WHICH
SUBJECTS US TO LIQUIDITY RISK AND COULD REQUIRE US TO RECORD FURTHER IMPAIRMENT
CHARGES IF THE FAIR VALUE OF THESE INVESTMENTS DECLINE FURTHER.  As of
December 31, 2008, we held $13.5 million par value (with a fair value of
approximately $12.1 million), of marketable securities consisting of
ARSs.  Given the disruptions in the credit markets and the fact that
the liquidity for these types of securities remains uncertain, as of December
31, 2008 and March 31, 2008, we have classified all of our ARSs as noncurrent
assets in our consolidated balance sheets as our ability to liquidate such
securities in the next twelve months is uncertain. We accepted a rights offering
by UBS in December 2008. The Company elected to adopt SFAS No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities (“SFAS No. 159”) on the Put Option
received in the rights offering and elected to treat our ARS portfolio from
available-for-sale to trading securities.  The transfer resulted in the
reversal of prior unrealized losses, net of taxes, on the ARSs from accumulated
other comprehensive income and the recording of an other-than temporary
impairment of approximately $1.4 million on the $13.5 million (par value)
portion of our ARS portfolio and the recognition of a benefit of approximately
$1.2 million related to the Put Option provided by the settlement. The transfer
to trading securities reflects management’s intent to exercise its Put Option
during the period June 30, 2010 through July 3, 2012. We will analyze the fair
value of the ARSs at each balance sheet date. In order to validate the fair
value estimate of these securities, we incorporated assumptions such as credit
quality or financial standing of the issuer, final stated maturities, estimates
on the probability of the issue being called prior to final maturity, impact due
to extended periods of maximum auction rates, liquidity risk premium, and broker
quotes from independent valuators using widely accepted financial models. 
We believe that these are reasonable estimates reflecting the unique
circumstances of the subject SLARS and the method of valuing the put as a
forward contract is reasonable.  However, due to the unprecedented issues
surrounding the global credit market, these assumptions may change considerably
and may result in further impairment charges.  If UBS is insolvent on June
30, 2010 or otherwise unable to fulfill its obligations described in the October
7, 2008 prospectus, we may incur additional losses on the ARS especially if we
would need to liquidate them over a short period of time.
  WE SOLD A
CARD MANUFACTURING LICENSE UNDER WHICH WE WILL PROVIDE CERTAIN FACTORY SET-UP
AND TRAINING SERVICES TO PREVENT OF SLOVENIA.  IF WE AND PREVENT ARE
SUCCESSFUL, THEY COULD COMPETE WITH US FOR BUSINESS.  We are obligated
to deliver the contracted manufacturing equipment and installation support to
Prevent for its to-be-built new card manufacturing facility in Slovenia, to
provide a targeted initial manufacturing capacity of 10 million optical cards
annually.  The delivery and installation support is anticipated to
occur within twelve months, although no assurance can be given that the plant
site will be ready to accept equipment deliveries during this time frame, or
ever; that Prevent will arrange for pick-up of the equipment; that the equipment
will be able to be successfully installed so that the plant becomes operational;
or that Prevent will raise the financing required to complete the project and
commence operations.  Assuming the plant becomes operational, we will
also be assigning a person to be on site through March 31, 2011, and throughout
the license term if the option is elected by Prevent, to monitor quality,
security, and operational procedures, with a mutual goal that the facility and
the cards made in Slovenia conform to our standards.  If cards are not
produced in conformance with our quality standards, the reputation and
marketability of optical memory card technology could be damaged.  If
the factory does not become operational and produce quality cards in high
volume, or if Prevent is unable to raise sufficient capital to build, equip and
operate this facility, we would not obtain the hoped-for benefits--including
ongoing royalties, sales of raw materials to Prevent, and expansion of the
European market.  On the other hand, if and when the factory is
successfully manufacturing the cards in high volume, it could compete against us
for business in certain territories, which could reduce our potential card
revenues if the market does not expand.  Revenue on the contract will
be recognized when the equipment has been installed and is operating according
to specification and training completed, which date is dependent in part on
Prevent providing a facility in Slovenia.  We could incur greater
expenses than we anticipate for the purchase and installation of the required
manufacturing equipment, thereby reducing cash and anticipated
profits.
  46
  WE MAY
NOT BE ABLE TO ATTRACT, RETAIN OR INTEGRATE KEY PERSONNEL, WHICH MAY PREVENT US
FROM SUCCEEDING.  We may not be able to retain our key personnel or
attract other qualified personnel in the future. Our success will depend upon
the continued service of key management personnel.  The loss of
services of any of the key members of our management team, including our chief
executive officer, chief operating officer, vice president of finance and chief
financial officer, the managing directors of our German operations, or our vice
president of marketing, or our failure to attract and retain other key personnel
could disrupt operations and have a negative effect on employee productivity and
morale, thus decreasing production and harming our financial
results.  In addition, the competition to attract, retain and motivate
qualified personnel is intense.
  OUR
CALIFORNIA FACILITIES ARE LOCATED IN AN EARTHQUAKE ZONE AND THESE OPERATIONS
COULD BE INTERRUPTED IN THE EVENT OF AN EARTHQUAKE, FIRE, OR OTHER
DISASTER.  Our card manufacturing, corporate headquarters, and drive
assembly operations, administrative, and product development activities are
located near major earthquake fault lines.  In the event of a major
earthquake, we could experience business interruptions, destruction of
facilities and/or loss of life, all of which could materially adversely affect
us.  Likewise, fires, floods, or other events could similarly disrupt
our operations and interrupt our business.
  FOREIGN
GOVERNMENT INTERVENTION COULD ADVERSELY AFFECT RESULTS OF
OPERATIONS.  Economic, political and other risks associated with
foreign operations could adversely affect our international sales.  We
sell our products worldwide and therefore, our business could be subject to
risks due to changes in a country’s or region’s political or economic
conditions.  Differing tax laws and changes in those laws may also
affect future results of our operations.
  PANDEMICS
THROUGHOUT THE WORLD COULD ADVERSELY AFFECT OUR BUSINESS.  The
occurrence of a pandemic such as the Bird Flu coupled with the lack of
government readiness and support in those countries where we do business could
temporarily impede our revenue growth.
  ACTS OF
TERRORISM OR WAR MAY ADVERSELY AFFECT OUR BUSINESS.  Acts of
terrorism, acts of war, and other events may cause damage or disruption to our
properties, business, employees, suppliers, distributors, resellers, and
customers, which could have an adverse effect on our business, financial
condition, and operating results.  Such events may also result in an
economic slowdown in the United States or elsewhere, which could adversely
affect our business, financial condition, and operating results.
  AS A
RESULT OF OUR REQUIRED ANNUAL EVALUATION OF OUR INTERNAL CONTROLS OVER FINANCIAL
REPORTING, WE MAY IDENTIFY INTERNAL CONTROL WEAKNESSES NEEDING REMEDIATION,
WHICH COULD HARM OUR REPUTATION.  We have completed the evaluation of
our internal controls over financial reporting as required by Section 404 of the
Sarbanes-Oxley Act of 2002 for the fiscal years ended March 31, 2008 and 2007.
Although our assessment, testing and evaluation resulted in our conclusion that
as of March 31, 2008 and 2007, our internal controls over financial reporting
were effective, we cannot predict the outcome of our testing in future periods.
Because of the inherent limitation of disclosure controls, no evaluation of such
controls can provide absolute assurance that all control issues and instances of
fraud, if any, within our Company have been detected.  If our internal
controls are found to be ineffective in future periods, our reputation could be
harmed.  We may incur additional expenses and commitment of
management’s time in connection with further evaluations, both of which could
materially increase our operating expenses and accordingly reduce our net
income.
  BEGINNING
WITH OUR FISCAL YEAR 2007, WE WERE REQUIRED TO RECORD COMPENSATION EXPENSE FOR
STOCK OPTIONS, THEREBY REDUCING OUR EARNINGS.  THIS COULD LEAD TO
REDUCED ENTERPRISE VALUE AND TO OUR GRANTING FEWER OPTIONS WHICH COULD HURT OUR
ABILITY TO RECRUIT AND RETAIN EMPLOYEES.  In December 2004, the 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 period ended December 31, 2008
and 2007, we recognized approximately $1.7 million and $1.5 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.
  47
 Item
6. - Exhibits
  See the
Exhibit Index following the signature page to this Quarterly Report on Form 10-Q
for the information required by this item.
  48
  SIGNATURES
 
 Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized:
 
 LASERCARD
CORPORATION
 (Registrant)
   Signature
              
              Date/s/  Robert T.
      DeVincenzi
              
              February
      10, 2009Robert
      T. DeVincenziChief
      Executive Officer(Principal
      Executive Officer)/s/  Steven G.
    Larson
              
              February
      10, 2009Steven
      G. LarsonChief
      Financial Officer(Principal
      Financial Officer)
 
 49
 
 EXHIBIT
INDEX
 
 ExhibitNumber
              Description3.1
              Certificate
      of Incorporation. (1)3.2
              Amended
      and Restated Bylaws. (2)10.1*
              UBS
      AG Credit Line Agreement and Approval dated December 5,
    2008.*31.1
              Chief
      Executive Officer Certification pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002.*31.2
              Chief
      Financial Officer Certification pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002.*32.1
              Chief
      Executive Officer Certification pursuant to 18 U.S.C. Section 1350, as
      adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
      2002.*32.2
              Chief
      Financial Officer Certification pursuant to 18 U.S.C. Section 1350, as
      adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
      2002.*
 
 *Filed
herewith.
 
 (1)
Previously filed as an exhibit to the Company’s Annual Report on Form 10-K for
the fiscal year ended March 31, 2005 and incorporated herein by
reference.
 (2)
Previously filed as an exhibit to the Company’s Quarterly Report on Form 10-Q
for the period ended December 31, 2007 and incorporated herein by
reference.
    50