<PAGE>

                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-K
[Mark One]

   [ x ]        ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
                       THE SECURITIES EXCHANGE ACT OF 1934
                    For the Fiscal Year Ended March 31, 2005

                                       OR
   [   ]      TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
                       THE SECURITIES EXCHANGE ACT OF 1934
                    For the Transition Period from to _____

                        Commission File Number: 000-6377

                              LASERCARD CORPORATION
                    (FORMERLY DREXLER TECHNOLOGY CORPORATION)

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

1875 North Shoreline Boulevard, Mountain View, CA            94043-1601
-------------------------------------------------     -----------------------
(Address of principal executive offices)                      (Zip Code)

                                 (650) 969-7277
                                 --------------
              (Registrant's telephone number, including area code)

           Securities registered pursuant to Section 12(b) of the Act:

        NONE                                                   NONE
-----------------------                               -----------------------
 (Title of each class                                 (Name of each exchange
    so registered)                                      on which registered)

           Securities registered pursuant to Section 12(g) of the Act:

                          Common Stock, $.01 Par Value
                          ----------------------------
                                (Title of class)

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. [x] Yes [ ] No

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein and will not be contained, to the best
of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). [x] Yes [ ] No

Based on the last trade price of the Company's Common Stock on The Nasdaq Stock
Market on the last business day of the registrant's most recently completed
second fiscal quarter (September 30, 2004), the aggregate market value of the
voting stock held by non-affiliates of the registrant is approximately
$104,000,000. Shares of common stock held by officers, directors and other
persons who may be "affiliates" of the Registrant have been excluded from this
computation. This determination of affiliate status is not necessarily a
conclusive determination for other purposes.

          Number of outstanding shares of Common Stock, $.01 par value,
                          at June 10, 2005: 11,436,794


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                    DOCUMENTS INCORPORATED BY REFERENCE: NONE

                           Exhibit Index is on Page 86

                          Total number of pages is 113



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<TABLE>
<CAPTION>
                                                         PART I

                                                                                                                   Page
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<S>                                                                                                                <C>
Item 1.    Business..............................................................................................     4
               Forward-Looking Statements........................................................................     4
               General Development of Business...................................................................     5
               Financial Information about Segments..............................................................     6
               Narrative Description of Business.................................................................     6
               Risk Factors and Factors that May Affect Future Operating Results.................................    17
Item 2.    Properties............................................................................................    23
Item 3.    Legal Proceedings.....................................................................................    24
Item 4.    Submission of Matters to a Vote of Security Holders...................................................    24

                                                         PART II

Item 5.    Market for the Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases
                of Equity Securities.............................................................................    25
Item 6.    Selected Financial Data...............................................................................    26
Item 7.    Management's Discussion and Analysis of Results of Operations and Financial Condition.................    27
               Critical Accounting Policies......................................................................    27
               Results of Operations--Fiscal 2005 Compared with Fiscal 2004 and Fiscal 2003......................    30
               Liquidity and Capital Resources...................................................................    36
Item 7A.   Quantitative and Qualitative Disclosures about Market Risk............................................    39
Item 8.    Financial Statements and Supplementary Data...........................................................    40
               Reports of Independent Registered Public Accounting Firms.........................................    40
               Consolidated Financial Statements.................................................................    44
               Notes to Consolidated Financial Statements........................................................    48
               Quarterly Financial Information (Unaudited).......................................................    68
Item 9.    Changes in and Disagreements with Accountants on Accounting and Financial Disclosure..................    69
Item 9A.   Controls and Procedures...............................................................................    69
Item 9B.   Other Information.....................................................................................    69

                                                        PART III

Item 10.   Directors and Executive Officers of the Registrant....................................................    70
Item 11.   Executive Compensation................................................................................    72
Item 12.   Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters........    74
Item 13.   Certain Relationships and Related Transactions........................................................    76
Item 14.   Principal Accountant Fees and Services................................................................    77

                                                         PART IV

Item 15.   Exhibits and Financial Statement Schedules............................................................    78
Signatures ......................................................................................................    85
</TABLE>


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                                     PART I

ITEM 1.  BUSINESS

        FORWARD-LOOKING STATEMENTS. All statements contained in this report that
are not historical facts are forward-looking statements. The forward-looking
statements in this report are made pursuant to the safe harbor provisions of the
Private Securities Litigation Reform Act of 1995. They are not historical facts
or guarantees of future performance or events. Rather, they are based on current
expectations, estimates, beliefs, assumptions, and goals and objectives and are
subject to uncertainties that are difficult to predict. As a result, the
Company's actual results may differ materially from the statements made. Often
such statements can be identified by their use of words such as "may," "will,"
"intends," "plans," "believes," "anticipates," "visualizes," "expects," and
"estimates." Forward-looking statements made in this report include statements
as to the Company's belief that its U.S. government contract will be extended
and as to card personalization rates to current and potential market segments,
customers, and applications for and deployment of the products of the Company;
statements as to the advantages of, potential income from, and duties to be
performed under the sale of a second-source card manufacturing license to Global
Investments Group (GIG); statements as to the GIG license for second-source card
production in Slovenia, including future scheduled payments and royalties, GIG's
targeted startup date and production capacity, and that the Company will sell
equipment to GIG, provide GIG with installation support, and have on-site
personnel; production quantities, delivery rates and expected delivery schedule,
backlog, and revenue recognition for Company products for U.S. or foreign
government programs; statements as to potential deployment and use of the
Company's products by the Department of Homeland Security (DHS); belief that the
European marketing base provided by the German operations will accelerate
European acceptance of OMCs; belief that the Company's supply of film is
adequate to bring up a second source without interruption should Kodak cease as
a supplier; intent to pursue infringers of its patents; plans to increase card
production capacity for anticipated increases in orders from programs from the
Italian government and other potential programs; anticipated continued use of
the Company's products by the governments of the United States, Canada, and
Italy, including that Italy will be the largest customer for the next few years
the need for, expected success of, and potential benefits from the Company's
research and engineering efforts, including developing new or enhanced card
capabilities, software products, production-model read-only drives, or drives
with advanced security features or lower manufacturing costs; whether
introduction of new drives will increase sales, the effects of read/write drive
prices and sales volume on gross profits or gross margins from read/write drive
sales; belief that there is a market for both designs of its read/write drives
to support and expand optical card sales and that the read/write drive inventory
on hand will be ordered by customers; expectations regarding revenues, margins,
SG&A and R&D expenses, capital resources, and capital expenditures and
investments, and the Company's deferred tax asset and related valuation
allowance; anticipated reductions of federal tax cash payments due to current
Company tax benefits; statements as to expected card delivery volumes, estimates
of optical card production capacity, expected card yields there from, the
Company's ability to expand production capacity, and the Company's plans and
expectations regarding the growth and associated capital costs of such capacity;
estimates that revenues and advance payments will be sufficient to generate cash
from operating activities over the next 12 months despite expected quarterly
fluctuations; expectations regarding market growth, product demand, and the
continuation of current programs; potential expansion or implementation of
government programs utilizing optical memory cards, including without
limitation, those in Italy, India, and a Middle Eastern country, and the timing
of the award of any prime contracts for such programs; and the Company's plans,
objectives, and expected future economic performance including without
limitation, its marketing objectives.

        These forward-looking statements are based upon the Company's
assumptions about and assessment of the future, which may or may not prove true,
and involve a number of risks and uncertainties including, but not limited to,
whether there is a market for cards for homeland security in the U.S. and
abroad, and if so whether such market will utilize optical memory cards as
opposed to other technology; customer concentration and reliance on continued
U.S. and Italian government business; risks associated with doing business in
and with foreign countries; whether the Company can successfully integrate and
operate its recently acquired German subsidiaries; whether the Company will be
successful in assisting GIG with factory startup and training; whether GIG will
have the financial wherewithal to make its required payments to the Company and
to operate the facility; whether the facility will efficiently produce high
quality optical memory cards in volume and that meets 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


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with development, manufacture, and deployment of optical cards, drives, and
systems; the impact of litigation; the ability of the Company or its customers
to initiate and develop new programs utilizing the Company's card products;
risks and difficulties associated with development, manufacture, and deployment
of optical cards, drives, and systems; potential manufacturing difficulties and
complications associated with increasing manufacturing capacity of cards and
drives, implementing new manufacturing processes, and outsourcing manufacturing;
the Company's ability to produce and sell read/write drives in volume; the
unpredictability of customer demand for products and customer issuance and
release of corresponding orders; government rights to withhold order releases,
reduce the quantities released, and extend shipment dates; whether the Company
receives a fixed shipment schedule, enabling the Company to recognize revenues
on cards delivered to the vault instead of when cards later are shipped from the
vault; the impact of technological advances, general economic trends, and
competitive products; the impact of changes in the design of the cards; and the
possibility that optical memory cards will not be purchased for the full
implementation of card programs in Italy, a Middle Eastern country and India, or
for DHS programs in the U.S., or will not be selected for other government
programs in the U.S. and abroad; the risks set forth in the section entitled
"Risks Factors And Factors That May Affect Future Operating Results" and
elsewhere in this report; and other risks detailed from time to time in the
Company's SEC filings. These forward-looking statements speak only as to the
date of this report, and, except as required by law, the Company undertakes no
obligation to publicly release updates or revisions to these statements whether
as a result of new information, future events, or otherwise.

        TRADEMARKS. LaserCard(R) and Drexon(R) are the Company's registered
trademarks. OpticalSmartTM card, OpticalProximityTM caRD, LaserCard(R)
ConciergeCardTM, OptiChipTM, and LaserBadgeTM are the Company's trademarks. The
Company may also refer to trademarks of other corporations and organizations in
this document.

GENERAL DEVELOPMENT OF BUSINESS

        Headquartered in Mountain View, California, LaserCard Corporation, a
Delaware corporation, (formerly known as Drexler Technology Corporation, until
October 1, 2004) is primarily a holding company that operates all its operations
through its three wholly owned subsidiaries. LaserCard Corporation, a California
corporation, of Mountain View, develops, manufactures and sells optical memory
cards, read/write drives; and system software; card-related systems, and markets
peripherals, specialty cards and card printers. Challenge Card Design
Plastikkarten GmbH, of Rastede, Germany, manufactures specialty cards; and cards
& more GmbH, of Ratingen, Germany, markets cards, system solutions, and card
printers. The Company is reviewing the viability of merging cards & more GmbH
into Challenge Card Design Plastikkarten GmbH during the next twelve months.

        LaserCard Corporation was incorporated under the laws of the State of
California on July 23, 1968, and was reincorporated as a Delaware corporation on
June 24, 1987. The Company's mailing address and executive offices are located
at 1875 North Shoreline Boulevard, Mountain View, California 94043, and the
telephone number is (650) 969-7277. Throughout this report, the "Company," "we,"
and "us" refer to LaserCard Corporation and subsidiaries, unless otherwise
indicated.

        The Company's annual report on Form 10-K, quarterly reports on Form
10-Q, current reports on Form 8-K, and all amendments to those reports can be
obtained free of charge after such material is electronically filed with or
furnished to the Securities and Exchange Commission (SEC). These documents are
available as soon as reasonably practicable using the hypertext link to the
SEC's website via the Company's website, www.lasercard.com. They also may be
obtained directly from the SEC's website,
www.sec.gov/edgar/searchedgar/companysearch.html under CIK code 30140. In
addition, these documents and the Company's "Code of Ethics and Business Conduct
for Employees, Officers, and Directors" are posted on the Company's website.

        The Company's primary product is the LaserCard optical memory card which
is a credit-card sized, data storage card--invented, patented, developed, and
manufactured by the Company. Along with its ability to record, update, and store
up to 2.86 megabytes of user data, this unique card offers multiple
data-security features, can be carried in a wallet, and is highly resistant to
counterfeiting and data tampering. This makes the LaserCard ideal for portable
and secure data storage and for cardholder identification.

        Applications for the LaserCard include the following:


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        o       United States Permanent Resident Card ("Green Card")
        o       United States Department of State Laser Visa Border Crossing
                Card (BCC)
        o       United States Department of Defense Automated Manifest System
                Card
        o       Government of Canada "Maple Leaf" Permanent Resident Card
        o       Italian citizens' ID card
        o       Middle Eastern country national ID card
        o       Other developing programs involving banking, medical records,
                and vehicle registration

        On March 31, 2004, the Company successfully completed the acquisition of
two related German card companies, Challenge Card Design Plastikkarten GmbH of
Rastede, Germany, and cards & more GmbH of Ratingen, Germany, including their
sales operations in the USA and Korea. These acquisitions provide the Company
with a strong card manufacturing base to serve the European, Middle Eastern,
African, and Asian markets, supplementing the Company's newly expanded
manufacturing operations in California. While operating results of these German
companies are consolidated into the Company's financial statements for fiscal
2005, the historic operating results of CCD and C&M have not been included in
the financial statements for fiscal 2004 and prior periods although the
consolidated balance sheets as of March 31, 2005 and March 31, 2004 reflect the
acquisition of these two companies.

        Effective April 3, 2004, the Company sold a royalty-bearing,
second-source card-manufacturing license to Global Investments Group, for
optical memory card manufacturing in Slovenia. This agreement provides for
payments to the Company of $41 million over the 20-year term of the license
(consisting of the sale of equipment for approximately $12 million, a five-year
training support package, followed by an ongoing support phase for an additional
15 years). The required manufacturing equipment and installation support for the
licensee's new facility are targeted to achieve an initial manufacturing
capacity of 10 million optical cards annually. The Company has received the
initial $15 million of payments called for in the agreements as of March 31,
2005. We have been informed that Global Investments Group is planning to start
manufacturing operations in their new facility early in 2006.

        For a discussion of the risk factors related to the Company's business
operations, see the "Forward-Looking Statements" narrative at the beginning of
this report, the "Risk Factors and Factors That May Affect Future Operating
Results" at the end of this section, and the "Management's Discussion and
Analysis of Results of Operations and Financial Condition" contained in Item 7.

FINANCIAL INFORMATION ABOUT SEGMENTS

        The Company's three reportable segments are: (1) optical memory cards,
(2) optical memory card drives, maintenance, and related accessories ("optical
card drives"), and (3) specialty cards and printers. The segments were
determined based on the information used by the chief operating decision maker.
The optical memory cards and optical card drives reportable segments are not
strategic business units which offer unrelated products and services; rather
these reportable segments utilize compatible technology and are marketed
jointly. Specialty cards and printers is a strategic business unit offering at
times unrelated products and at times related products with the other reportable
segments. See "Segment Reporting" in Note 4 in Item 8, "Consolidated Financial
Statements and Supplementary Data," for additional industry segment information.

NARRATIVE DESCRIPTION OF BUSINESS

        LaserCard Corporation develops, manufactures and sells optical memory
cards, read/write drives, system software and card-related systems, and markets
peripherals, specialty cards and card printers. The primary product of the
Company is the LaserCard optical memory card (OMC).

LASERCARD; A SECURE COUNTERFEIT-RESISTANT CREDENTIAL

        The Company's LaserCard optical memory card is a secure,
counterfeit-resistant credential whose current primary use is by national
governments in identification applications.

        Digital data is recorded in an irreversible process so that ID
information on a legitimate card cannot be


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fraudulently altered for criminal purposes. Each implementation for secure ID is
customized to the issuers' own specifications. Key characteristics of the card's
memory and the issuing and inspection hardware are matched. To date, the
Company's users have concluded that the hurdle for would-be card counterfeiters
is so high that such persons instead would seek some other vulnerability in the
issuance process.

        Another security benefit of optical memory is its ability to create
visible, high-resolution micro images and security patterns in the optical media
itself at resolutions up to 12,000 dots per inch. These features, which cannot
be accurately simulated, are used by inspectors and forensic specialists for
both overt and aided visual card authentication.

        It is also possible to create a "laser-etched," eye visible image in the
media, irreversibly marking the digital memory with the visible identity of the
card holder, a unique security feature among all machine readable card
technologies.

        These images are recorded during card personalization using a secure
optical memory card (OMC) encoder unit: the diffraction pattern created results
in a highly visible image on the optical media. This image cannot be altered,
since the media is not erasable, and the permanent laser etching can be visually
compared to more readily changeable colored photographic images of the
cardholder that may also be printed on the card's surface.

        LaserCard OMC also offers a hologram under overlay where a custom
hologram is laminated into the structure of the card and is visible through a
transparent outer layer of the card. The hologram will never be subject to wear
and attempts at cannibalization of the feature are rendered useless.

LASERCARD NATIONAL GOVERNMENT APPLICATIONS

        The predominant present application is secure identity in government
programs, covering both immigration and border entry along with citizenship. The
counterfeit-resistant cards are typically replaced every five or ten years. The
following are examples of these national government applications:

        o       The current U.S. Permanent Resident Card (or "Green Card"), made
                by the Company and issued by the Department of Homeland
                Security, evidences that a non-US citizen is approved to reside
                and be employed in the United States.

        o       The current Laser Visa Border Crossing Card, made by the Company
                and issued by the United States Department of State, permits
                Mexican citizens to visit the United States (close to the U.S.
                border) for up to 30 days.

        o       The current Canadian "Maple Leaf" Permanent Resident Card, made
                by the Company, has been issued by the Government of Canada
                since mid-2002 to confirm Canadian permanent resident status.

        o       The electronic citizen ID card of Italy, approved for full
                implementation, identifies the holder as a citizen and confers
                upon the holder the rights and privileges to which a citizen is
                entitled. According to recent legislation an Italian resident
                permit card for non-EU citizens will also be implemented.

        o       In a program for a Middle Eastern country, the LaserCard would
                be used as a national identification card. The Company has sold
                read/write drives for installation of the infrastructure
                required for card issuance, and also has shipped about 300,000
                optical memory cards for testing and sample purposes.

        o       A motor vehicle registration program in the States of Delhi and
                Gujarat, India, in which the OpticalSmart LaserCard is used for
                storing the payment of road tax, vehicle registration,
                insurance, violations, and vehicle fitness. We have been
                informed that the two states have issued more than 300,000 such
                optical card-based registrations to date, and other Indian
                states have planned OpticalSmart card vehicle registration
                programs as well.


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        o       The U.S. Department of Defense uses the LaserCard as a paperless
                cargo manifest in its Automated Manifest System for governing
                and facilitating the shipment of military cargo to Army and
                Marine deployments.

DATA STORAGE CAPACITY

        The gross data storage capacity of the standard LaserCard is 4.1
megabytes on the 35mm optical stripe and 1.5 megabytes on the 16mm stripe. The
LaserCard itself is the size of a conventional credit card.

        A significant portion of the LaserCard's total data capacity is used for
an error detection and correction, or EDAC, algorithm. EDAC is routinely used in
various data storage and transfer methods to compensate for data errors
resulting from transmission errors, surface scratches above the recording
material, or contamination such as dust or fingerprints. EDAC is automatically
added to data written onto the LaserCard, to achieve written data error rates of
less than one in a trillion.

        The resulting data storage capacities are 2.86 megabytes of "user"
capacity for the standard 4.1 megabyte LaserCard and 1.1 megabytes of "user"
capacity for the 1.5 megabyte LaserCard. The 16-millimeter stripe LaserCard with
1.1 megabytes of user capacity can be employed in conjunction with an IC chip to
create a hybrid smart card, which the Company calls an OpticalSmart(TM) card.

Durability

        Durability is another important feature, primarily in industrial
applications. The U.S. Defense Logistics Agency's (DLA) Automated Manifest
System (AMS) uses optical memory cards to resolve the problem of in-transit
identification for critical supplies. The AMS card solution provides in-transit
visibility, expedited receipt processing, prioritizes container processing,
facilitates discrepancy reporting, minimizes impact on existing systems and
achieves a portable permanent record of transactions. Since 1993 more than
750,000 LaserCard optical memory cards and approximately 2,000 LaserCard OMC
drives have been installed for use in shipping goods all over the world, often
in the most hazardous environments. Environmental testing done by the U.S. Army
showed high durability with the optical memory card.

        The AMS program has won several government awards, including the
Vice-Presidential Golden Hammer for cutting logistics costs more than 67%.

INTERNATIONAL STANDARDS FOR OPTICAL MEMORY CARDS

        Standardization of optical memory cards allows interchange of the
digital information encoded on the cards and facilitates compatibility among
optical memory card systems. The Company participates in optical card standards
activities in the United States and internationally. Shown below is the current
status of optical memory card standards under ISO/IEC (the International
Organization for Standardization/International Electrotechnical Committee). The
LaserCard optical memory card system, complies with all of the documents listed.

        o       ISO/IEC 11693 describes the general characteristics of optical
                memory cards. This international standard was first published in
                1994.

        o       ISO/IEC 11694-1 describes the physical characteristics of the
                card, such as height, width, thickness, etc. This international
                standard was first published in 1994.

        o       ISO/IEC 11694-2 describes the dimensions and location of the
                accessible area--the area on the card where data writing/reading
                occurs. This international standard was first published in 1995.

        o       ISO/IEC 11694-3 describes the optical properties and
                characteristics of the card and provides the technical
                specifications which allow interchange. This international
                standard was published in 1995.


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        o       ISO/IEC 11694-4 describes the logical data structure on the card
                and defines the method of writing and reading card data. This
                international standard was published in 1996.

        In the United States, ANSI (the American National Standards Institute)
has adopted all of the above ISO Standards as ANSI/ISO Standards.

        Other standards defining the use of optical memory cards in certain
application areas, such as drivers license and machine readable travel
documents, also exist.

LASERCARD MANUFACTURING

        The Company's LaserCard optical memory card manufacturing operations are
located in Mountain View, California, and Rastede, Germany. The Company produces
optical memory cards using the original roll-lamination process or a newer
sheet-lamination process. The sheet-lamination process is currently more labor
intensive than the roll-lamination process but allows the use of high security
offset printing and other special features, resulting in a premium card. The
Company has an annual production capacity of 10 million roll-process cards in
conjunction with approximately 6 million sheet-process cards depending with the
optimum mix of features. The optical memory card manufacturing facilities permit
incremental expansion of production capacity.

        The March 31, 2004 acquisition of Challenge Card Design Plastikkarten
GmbH of Rastede, Germany, provides the Company with a card manufacturing base to
serve the European, Middle Eastern, African, and Asian markets, supplementing
the Company's card manufacturing operations in California. CCD has a
manufacturing capacity of up to 20 million non-optical cards per year. The
Company may enhance the existing CCD factory to manufacture finished optical
card blanks in Germany if and when European customer orders justify such
capacity expansion and such European expansion is determined to be cost
effective. This would enable CCD to manufacture cards featuring four of the key
ID card technologies (optical memory, contact IC chip, contactless RF ID, and
magnetic stripe) either singly or in combination, along with other high-security
features.

RAW MATERIALS

        To maintain adequate raw material supplies for the manufacture of
optical memory cards, the Company establishes ongoing relationships with
principal suppliers, qualified and when commercially reasonable utilizes
multiple suppliers, and obtains information about alternate suppliers. The
Company maintains raw materials inventory levels that take into account current
expected demand, order-to-delivery lead times, supplier production cycles, and
minimum order quantities. If the Company is unable to buy raw materials in
sufficient quantities and on a timely basis, it would not be able to deliver
products to customers on time.

        Most of the raw materials used in the manufacture of optical memory
cards are available from one or more qualified suppliers. Such materials include
plastic films used in optical memory card production, which are available from
one supplier in the U.S. and from multiple foreign suppliers. Processing
chemicals, inks, and bonding adhesives are obtained from various U.S. and
foreign suppliers. However, certain photographic films are commercially
available solely from Eastman Kodak Company, of the United States. No assurance
can be given that Kodak will continue to supply such photographic films on a
satisfactory basis and in sufficient quantities. If Kodak were to discontinue
manufacturing the film from which the optical media is made, the Company would
endeavor to establish an alternate supplier for such film, although the purchase
price could increase and reliability and quality could decrease from a new
supplier. The Company anticipates that an alternate supplier of such film could
be established and qualified; however, no assurance can be given that there will
be adequate demand to attract a second source for such film. In addition, an
alternate supplier could encounter technical issues in producing the film as
there may be know-how and manufacturing expertise which Kodak has developed over
the years which an alternate supplier may have difficulty to replicate. With
regard to the film from which the optical media is made, the Company currently
has an order which Kodak has accepted with deliveries scheduled through December
2005. If Kodak announced that it was no longer going to sell this film, the
Company would request that Kodak provide a last-buy opportunity, which the
Company would plan to take maximum advantage of, although no assurance can be
given that Kodak would provide such an opportunity. The Company has film on hand
plus on order that it believes would provide an adequate supply to meet
anticipated demand


                                       9
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until the Company could locate and begin volume purchases of film from a second
source. In addition, the Company is researching other materials for use as its
optical memory card media.

LASERCARD READ/WRITE DRIVES; MANUFACTURING AND PARTS/COMPONENTS

        Optical memory cards are used in conjunction with a card read/write
device (drive) that connects to a personal computer. The price, performance, and
availability of read/write drives are factors in the commercialization of
optical cards. The Company maintains read/write drive manufacturing operations
in its Mountain View, California facilities. The Company continuously seeks
design and procurement changes to improve performance and reduce the drive
selling price.

        To maintain adequacy of parts and components for the manufacture of
read/write drives, the Company attempts to establish ongoing relationships with
principal suppliers and obtains information about alternate suppliers. If the
Company is unable to buy parts and components in sufficient quantities and on a
timely basis, it would not be able to deliver products to customers on time. The
Company purchases read/write drive parts for its anticipated read/write drive
demand, taking into consideration the order-to-delivery lead times of vendors
and the economic purchase order quantity for such parts. For read/write drives,
the optical recording head for the current drive is a Company-specific part
obtained from one supplier: Audio-Technica Corp., of Japan.

APPLICATION PROGRAMMING INTERFACE (APIS) AND APPLICATION SOFTWARE

        APIS. As part of its read/write drive and system sales, LaserCard
includes a comprehensive set of APIs in order for its customers to develop
optical card applications. An API is a set of routines, protocols, and tools
used by programmers for building software applications. LaserCard-related APIs
control or facilitate the basic operations and read/write functions of optical
memory card drives so that they can interface directly with personal computers.
LaserCard develops LaserCard-related APIs such as device drivers, file system
DLLs (dynamic link libraries), and custom software tools to enhance read/write
drive integration.

        CUSTOM APPLICATIONS. The Company also offers contract services for
purchase by customers that require custom programming in the development and
integration of their LaserCard applications. It also makes available for
purchase by customers, software for demonstrating data storage, medical, and
security concepts involving the LaserCard, software-development tools for
related peripherals, and a card issuance application software package.

        APPLICATION SOFTWARE. End-user application software is an important
factor in developing commercial markets for optical memory cards because it
directs computers to do specific tasks related to the customer's end-user
application for the LaserCard. Typically, the Company's VARs and/or their
customers develop software for specific end-user applications. In this role,
VARs may integrate optical card products into existing software products, write
new application software for specific optical memory card programs, or license
software from other VARs. Several VARs have written optical card software
programs for applications. C&M markets the BadgeMaker card personalization and
issuing applications used for card issuance and data management; the Company
markets the LaserBadge derivative of BadgeMaker, and a Biometric ID Verification
System application (discussed below).

        API and application software sales have not been a significant portion
of revenues thus far. To date, the Company's software development has been
completed concurrent with the establishment of technological feasibility and,
accordingly, all software development costs have been charged to research and
engineering expense in the accompanying statements of operations.

LASERCARD BIOMETRIC ID VERIFICATION SYSTEM

        The Company has developed a LaserCard Biometric ID Verification System
that can quickly confirm validity of optical memory card biometric ID cards,
read and display digitally stored photographs and other digital data from the
cards, and biometrically verify the cardholders' live-scanned fingerprints with
the fingerprint templates stored on the cards at time of card issuance.

        During the fiscal 2004 third quarter, the Company received an order for
and delivered 1,000 optical memory card read/write drives and biometric
verification system software for a Department of Homeland Security program.
These


                                       10
<PAGE>

1,000 drives and software systems have been deployed by the DHS at U.S. borders,
to enable the DHS to read the encoded data on more than 16 million Green Cards
and Border Crossing Cards previously manufactured by the Company and issued by
the U.S. government since 1998.

        The Company also is marketing the LaserCard Biometric ID Verification
System as a "concept" package, meaning that software which performs the same
functions (but not usable with U.S. government cards) is available in customized
form to other customers for government, industrial, and commercial applications.

OTHER ADVANCED-TECHNOLOGY CARDS

        Acquired by the Company on March 31, 2004, Challenge Card Design
Plastikkarten GmbH and cards & more GmbH are recognized leaders in Europe as
providers of advanced contactless card solutions, primarily in the consumer,
event, and access control sectors. CCD has the production capacity to
manufacture up to 20 million advanced-technology cards per year--including
contact IC chip cards, contactless RFID cards, and magnetic stripe cards--while
C&M markets CCD cards, thermal card printers, and system solutions worldwide.
The CCD card manufacturing plant in Rastede provides significant capacity and
product flexibility to the Company's product line. With expertise in contactless
IC technology and high resolution security printing, the European factory
positions the Company to move into new market areas.

SALES AND MARKETING

        The Company markets its OMC products, primarily through value-added
resellers (VARs) of the Company in the United States and other countries. The
Company makes available for sale optical memory cards, optical card read/write
drives and software, and third-party peripherals to its VARs. VARs/licensees may
add value in the form of services, application-specific software, personal
computers, or other peripherals, and then resell these products as integrated
systems. Sales to the United States government and foreign governments are made
indirectly through VARs and licensees. For example, products are sold indirectly
to ultimate use customers such as the U.S. Department of State, U.S. Department
of Defense, U.S. Department of Homeland Security, and the government of Canada,
through a VAR that is a government subcontractor.

        Revenues by geographic region are shown in Note 4 of the "Notes to
Consolidated Financial Statements" in Item 8, "Consolidated Financial Statements
and Supplementary Data." Substantially all foreign product sales have been made
through VARs and licensees. The Company believes that international markets will
be an important source of product sales and license revenue in the future.

        LaserCard marketing operations are conducted through its offices in
California, New York, and Germany. In addition, the LaserCard Corporation
website (www.lasercard.com) supports worldwide marketing activities. The
Company's marketing staff, general management, and technical personnel work
closely with customers and provide pre-sales technical support to assist VARs
and licensees.

        EUROPEAN OPERATIONS. The Company's German subsidiaries, Challenge Card
Design and cards & more, provide the marketing base for most of Europe, Middle
East, and Africa (EMEA), and also maintain a sales office in Korea. These
subsidiaries give the Company an established position in the European Union in
the advanced-technology card market. CCD and C&M have become recognized leaders
in Europe as providers of advanced contactless card solutions, primarily in the
consumer, event, and access control sectors. C&M heads the Company's European
marketing effort in coordination with LaserCard Corporation. The Company
believes that the European marketing base, along with the optical card
manufacturing capability in Germany, will accelerate European acceptance of the
use of optical memory products in EU government and business solutions.

        The cards & more subsidiary serves and supports its existing customer
base for advanced-technology cards and thermal printers, while adding new
resources to build the optical memory card business throughout the EMEA region.
The Company intends to focus principally on biometric ID solutions for national
and regional governments in this region, as well as promoting optical cards in
commercial and industrial markets which can benefit from the large data capacity
and robust security that optical cards offer.

        MARKETING OBJECTIVES.


                                       11
<PAGE>

        o       Maintain, leverage and expand existing OMC user base
        o       Broaden the OMC range to address lower end applications
                characterized by higher price sensitivity
        o       Diversify Optical Memory (OM) products into, and effectively
                penetrate, industrial and commercial markets
        o       Expand hardware product offerings to address new markets and add
                value to current offering
        o       Increase OM product revenues by selling more application
                software and integrated solutions, such as personalization and
                kiosk systems
        o       Increase market share for non-OM card and related products

LICENSING

        The Company has entered into three nonexclusive, royalty bearing, patent
and know-how licenses for optical memory card manufacture. The first such
license was sold in fiscal 1989 to Canon Inc. The second was sold in fiscal 1991
to Optical Memory Card Business Corporation (OMCBC), a joint venture formed by
four Japanese companies (three of the Company's read/write drive equipment
licensees and Dai Nippon Printing Co., Ltd.). On July 1, 2002, the joint
venture's license was fully assumed by Dai Nippon Printing. These two licensees
are not manufacturing or selling such cards at this time.

        In the fiscal 2005 first quarter, the Company announced the sale of a
royalty-bearing, optical memory card manufacturing license to Global Investments
Group (GIG) for card manufacturing in Slovenia. The license agreement provides
for payments to the Company of $29 million for the license (including a
five-year training support package, followed by an ongoing support phase for an
additional 15 years). Additionally, the Company agreed to sell approximately $12
million worth of manufacturing equipment and installation support for the new
facility to provide a targeted initial manufacturing capacity of 10 million
optical cards annually, with options to increase capacity to 30 million cards
per year. As of March 31, 2005, the Company has received $15 million in payments
called for in the agreements, consisting of a partial payment for equipment and
support of $13 million, recorded as advance payments, and $2 million toward the
license fee, recorded as deferred revenue. The payments of $41 million called
for in the agreements will be recognized as revenue over the remaining term of
the arrangement beginning when operation of the factory commences, presently
targeted by GIG for early in 2006. Direct and incremental costs will also be
deferred and recorded as cost of sales along with the revenue. In addition, the
agreement calls for royalty payments based upon unit sales and for purchases of
certain raw materials for card manufacture from the Company.

        Also from time to time, the Company has offered nonexclusive, royalty
bearing licenses for optical card read/write drive manufacture, for assembly of
read/write drives from kits, for optical card finishing using Company-supplied
materials, and for card manufacturing. In the past, the Company also offered
card distribution licenses to create distributors, in selected regions of the
world that can buy cards wholesale from the Company at prices lower than those
charged to VARs. During the past five years, there have been no material
purchases of optical memory cards by the licensees. The Company conducts its
licensing efforts on a selective basis. The timing, number, type, and magnitude
of future license sales, if any, cannot be predicted or inferred from past
events. There is no assurance that any of the Company's licensing efforts will
be successful.

        License revenues for fiscal 2005, 2004, and 2003 are detailed in the
"Management's Discussion and Analysis" section of this report, under the heading
"License Fees and Other Revenues."

COMPETITION

        The Company's primary competition is other card products. Competitive
factors among the various card technologies include system/card portability,
interoperability, price-performance ratio of cards and associated read/write
drive equipment, installed base of compatible equipment, durability,
environmental tolerance, and card security. The Company believes its optical
memory cards offer key technological and security advantages. The current price
of optical card read/write drives is a competitive disadvantage to the Company
in some markets because alternative technologies typically have lower priced
drives. However, when the cost of drives and a large number of cards is factored
together, the Company's optical memory card technology can offer competitive
pricing compared with its closest competitor, high capacity IC cards, especially
when the very high cost of Public Key encryption is


                                       12
<PAGE>

factored into the cost of an IC card system. Another disadvantage is the
widespread use and availability of equipment for reading magnetic stripes. There
are companies known to the Company, and there may be other companies unknown to
the Company, which are working on optical memory and optical memory card
products which could compete with the Company.

        Other card technologies that compete with optical memory cards include
integrated circuit (IC) cards, 2-dimensional bar code cards and symbology cards,
CD-read only cards and recordable cards, and RF (radio frequency) cards. The
financial and marketing resources of some of the competing companies are greater
than the Company's resources. The Company believes that the LaserCard's storage
capacity, read/write capability, price-performance ratio, rugged card
construction and flexibility, optional technology add-ons, ability to store
audit trails, and resistance to counterfeiting and tampering make the LaserCard
optical memory card a viable choice for a variety of digital card applications.

        In addition, centralized on-line databases combined with wide-area
networks may limit the penetration of optical memory cards in certain
applications, and are a form of competition.

        SMART CARDS. The LaserCard competes primarily with cards that contain an
integrated circuit (IC) microprocessor and memory. Known as "smart cards," or
"chip cards," their prices and performance vary widely. The smart card uses a
much lower cost read/write unit than is currently used with an optical card,
whereas a typical smart card containing a 64-kilobyte IC and a microprocessor is
typically more than the cost of the Company's 2,800 kilobyte optical memory
card. The IC card is more vulnerable to tampering and can be more easily damaged
in everyday use, whereas the Company's card construction and the use of
polycarbonate plastic make the LaserCard more rugged. For multi-function
applications, the Company currently offers "chip ready" optical cards to which
an IC chip can be added to create a hybrid smart card, called an
OpticalSmart(TM) card. Companies that manufacture IC cards of various types aND
storage capacities include Gemplus, Axalto, Sharp, Orga Card Systems, Oberthur
Card Systems, and others.

        CONTACTLESS CHIPS. Sometimes referred to as "RFID", this technology has
a predominant background in transit fare token applications and facility access.
It has recently attracted a lot of attention for identity verification and
border inspection applications and has been seen as competition to optical
memory card in these markets.

        Contactless chips exhibit the same characteristics as the contact chips
used on smart cards - limited memory, volatile storage and a relative lack of
durability. However, the technology has proven itself effective in certain
markets, such as access control. One limitation of the typical contactless
access control card is that there is no control on who is carrying the card.
Thus, the system will grant access to anyone who finds or steals a genuine card.

        To address this, the Company has recently entered into a collaborative
development with HID Corporation to integrate HID's world leading contactless
access control system with the security of optical memory. With the
OpticalProximity card, the optical memory would be used to verify the
cardholder's ID using on-board biometrics BEFORE the cardholder's (contactless)
access privileges are confirmed for that day (or other period).

        The Company believes that this development illustrates that there are
often no absolutes in comparing one card technology with another. Rather, each
technology will either stand on its own merits when viewed against specific
application requirements or a hybrid combination of technologies will deliver
the "best of all worlds" solution.

        OTHER CARD PRODUCTS. Read/write magnetic-stripe cards and read-only
memory cards such as 2-dimensional bar code cards and symbology cards are lower
priced and compete with the Company's read/write optical memory cards for
certain markets, such as identification cards. However, the Company's cards have
significantly higher storage capacity and offer unique security features to
deter counterfeiting and data tampering. Commercial magnetic-stripe cards are
relatively easy to duplicate and, because they are erasable and rerecordable,
are highly susceptible to unauthorized erasure and alteration. Two-dimensional
bar codes on cards and other symbology cards store relatively small amounts of
data compared to the LaserCard and are not recordable/updatable after they are
issued. Moreover, alternative technologies--such as magnetic stripes, IC chips,
radio frequency (RF) circuitry, and bar codes/symbology--can be incorporated
into the Company's optical memory cards, thereby adding additional performance
features to the LaserCard. The Company believes that magnetic-based cards (which
are easily erasable) may not have the security and audit trail features required
for government ID cards or medical record cards.


                                       13
<PAGE>

Experimental card technologies probably are under development at other
companies.

        A small company in San Jose, California, has announced a flexible,
magnetic disk that rotates inside a plastic card body, with data claims of high
transfer speeds. The Company does not believe that this will lead to competition
in the secure identification field because of susceptibility of data to erasure
or corruption, unknown durability and the lack of international standards for
such a card.

        OTHER OPTICAL MEMORY CARDS AND EQUIPMENT. As described in the
"Licensing" section, the Company previously licensed its card patents to two
Japanese companies, Canon Inc. and Dai Nippon Printing, which the Company
believes are not manufacturing or selling such cards at this time. In addition,
in April 2004, the Company sold a card manufacturing license to Global
Investments Group for the manufacture of optical memory cards in Slovenia. Under
these royalty-bearing licenses, the licensees have the right to manufacture and
sell optical memory cards in competition with the LaserCard. The newly licensed
Slovenian operation under the Global Investments Group license is not yet
capable of manufacturing optical cards, but is expected to become a
second-source for the Company's cards over time. Global Investments Group could
become a competitor in certain Western European countries; however, exclusivity
provisions of the license preclude competition in certain markets. For example,
the Company is prohibited from competing in certain Eastern European countries,
and Global Investments Group is prohibited from competing outside European
countries.

        Recordable CD and DVD optical media are currently made in card shaped
form factors that function with standard CD and DVD players. These cards have
high-data capacity, storing hundreds of megabytes of data, and have high data
transfer rates. The typical purchase price is less than $1.00 each for a blank
card. The cards are typically 1.2-millimeter thick and therefore they do not
meet the ISO Standards for either credit cards or ID-1 identification cards.
These cards typically serve other markets such as advertising and promotional
applications.

OTHER MATTERS

RESEARCH AND ENGINEERING EXPENSES

        Research and engineering expenses were $3 million for fiscal 2005; $2.6
million for fiscal 2004; and $2.8 million for fiscal 2003. The Company is
continuing its efforts to develop new optical memory card features, including
the insertion of contactless chips with radio frequency (RF) capability, optical
memory card media, optical memory card read/write drives, read-only drives
(readers), OptiChip small form factor optical media, OpticalProximity systems,
and software products in an effort to provide new products that can stimulate
optical memory card sales growth. For example, the Company has developed a
prototype of a LaserCard portable reader. The Company anticipates that these
ongoing research and engineering efforts will result in new or enhanced card
capabilities, production-model read-only drives, or drives with advanced
security features and lower manufacturing costs; however, there is no assurance
that such product development efforts will be successful. These factors are
important for the Company's existing and future optical memory card markets.
Also see Item 7, "Management's Discussion and Analysis."

PATENTS AND TRADEMARKS

        OPTICAL DATA STORAGE. As of March 31, 2005, the Company owned
approximately 30 U.S. patents relating to optical data storage (including
optical storage media, optical cards, formats, equipment, systems, software, the
utilization of optical storage media, and e-commerce technology), and other U.S.
and foreign patent applications have been filed. Approximately 19 counterpart
patents of certain U.S. patents are issued in various foreign countries.
However, the Company owns certain U.S. patents as to which foreign counterparts
have either not been filed or the examination process has been terminated
without issuance of the foreign patents. From time to time, the Company elects
to allow some of its U.S. or foreign patents to expire when maintenance fees
become due, if the patents are deemed no longer relevant. In addition, the
Company protects as trade secrets some refinements to the optical media and
cards and know-how related to card production. Also, the Company's know-how and
experience in volume card production, system development and software
capabilities, brand-name recognition within its card markets, and
dominant-supplier status for optical-memory cards are of far greater importance
than the Company's patents. Therefore, at this time, the Company believes that
its patent portfolio is helpful but is no longer essential for maintaining the
LaserCard's market position.


                                       14
<PAGE>

        The Company's U.S. patents have expiration dates ranging from 2006 to
2022, with the majority expiring during the first part of this period.
Counterpart patents in foreign countries also expire during this period, usually
about two to three years after the U.S. patent expires.

        The Company cannot predict whether the expiration or invalidation of its
patents would result in the introduction of competitive products which would
affect its future revenues adversely. The Company presently intends to pursue
any infringement of its patents either by litigation, arbitration, or
negotiation. However, there can be no assurance that any of the Company's
patents will be sufficiently broad in scope to afford protection from products
with comparable characteristics that may be sold by competitors in the future.
There also can be no assurance that the validity of any patents actually granted
will not be challenged.

        LaserCard(R) and Drexon(R) are federally registered trademarks of
LaserCard Corporation. The Company believes that its LaserCARD brand name, trade
name, and other trademarks are important assets in marketing optical memory card
products.

EMPLOYEES

        As of March 31, 2005, the Company and its U.S. subsidiaries employed 122
persons (including four executive officers). This workforce consisted of 109
persons in administration, marketing/sales, manufacturing, and research and
engineering, plus 13 temporary personnel mainly engaged in the inspection of
cards for quality assurance. In addition, the two German subsidiaries acquired
by the Company on March 31, 2004 employed 76 people as of March 31, 2005. None
of the Company's employees is represented by a labor union.

DEPENDENCE ON GOVERNMENT SUBCONTRACTS THROUGH SOLE CONTRACTORS

        The largest purchaser of LaserCard products is Anteon International
Corporation, a value-added reseller (VAR) of the Company. Anteon is the
government contractor for LaserCard product sales to the U.S. Department of
Homeland Security (DHS), U.S. Department of State (DOS), U.S. Department of
Defense (DOD), and the government of Canada. Under government contracts with
Anteon, the DHS purchases U.S. Permanent Resident Cards (Green Cards) and DOS
Laser Visa Border Crossing Cards (BCCs); the DOD purchases Automated Manifest
System cards; and the Canadian government purchases Permanent Resident Cards.
Encompassing all of these programs, the Company's product sales to Anteon
represented 31% of total revenues for fiscal 2005; 72% of total revenues for
fiscal 2004; and 94% of total revenues for fiscal 2003. The proportion of
revenues represented by Anteon decreased in fiscal 2005 as compared to fiscal
2004, and is anticipated to continue to decrease as the Company generates
increased revenues from other sources. Since the ultimate customers are national
governments, the Company is not dependent upon any one specific contractor for
continued revenues from these programs. Although not anticipated, if Anteon were
to discontinue its participation as contractor, other qualified contractors
could be utilized by those governments for purchasing our products, although the
process of doing so could cause program delays.

        U.S. government subcontract release orders for DHS Green Cards and DOS
Laser Visa BCCs represented approximately 21% of the Company's revenue for
fiscal 2005; 44% of revenues for fiscal year 2004; and 82% of revenues for
fiscal 2003. The percentage declined during fiscal 2005 as revenues from other
sources increased and the Company included the results of the German
acquisitions for the first time in fiscal 2005.

        The Company's revenues derived from sales to the government of Italy for
its national ID card program, Carta d'Identita Elettronica (CIE), accounted for
26% of revenues for fiscal 2005 and 22% of revenues for fiscal 2004. The
revenues generated from this program were immaterial in fiscal 2003. Card orders
under this program are placed with the Company through a value-added reseller,
Laser Memory Card SPA of Italy. The Italian government successfully concluded
the experimental phase of National ID CIE program using LaserCard optical memory
cards and enacted a law to replace paper ID documents with electronic documents
starting January 2006. LaserCard's optical memory stripe is contained in CIE
national ID cards and new PSE foreign worker cards. If this program were to be
discontinued or interrupted by the Italian government, the Company would lose
one of its significant sources of optical memory card revenues.


                                       15
<PAGE>

BACKLOG

        As of March 31, 2005, the backlog for LaserCard optical memory cards
totaled $0.9 million scheduled for delivery in fiscal 2006. As of March 31,
2004, the backlog for LaserCard optical memory cards totaled $4.1 million. The
Company has only a few customers who generally place orders for a several-month
period so that variations in order placement from a single customer can
materially affect backlog. As of May 26, 2005, subsequent to year-end, the
Company had received additional orders bringing its optical memory card orders
from all customers scheduled for shipment during fiscal 2006 to approximately
$10 million.

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

        In addition, the backlog for Challenge Card Design Plastikkarten GmbH
and cards & more GmbH as of March 31, 2005 for specialty cards and printers
totaled 1.2 million euros (approximately $1.6 million) and for a contract to
develop a conventional non-optical card production facility totaled 0.8 million
euros ($1 million). Revenue on the contract for a conventional non-optical card
production facility contract is being booked on a zero profit margin basis as
discussed in revenue recognition under "Critical Accounting Polices". Therefore,
the total profit under this contract, if any, will be booked at completion on or
about December 2006. Total backlog for the German subsidiaries at March 31, 2004
was 2.1 million euros (approximately $2.6 million).

        The $1.1 million included in the March 31, 2004 backlog of the Company's
German operations for a partially completed contract for an amusement park gate
system has been canceled due to the insolvency of the customer. This does not
affect the financial position of the Company since we did not anticipate any
gross profit or loss from the contract because it was substantially completed
prior to the March 31, 2004 acquisition and all profit accrued to the prior
entity. In addition to cancellation of the backlog, we removed the $1.2 million
of deferred costs from inventory, $0.8 million from deferred revenue, and $0.3
million from accounts payable and accrued liabilities since the contract will
not be completed and the Company has been indemnified for potential losses.

FINANCIAL INFORMATION ABOUT GEOGRAPHIC AREAS

        Financial information about geographic areas is described in Note 4 to
Item 8, "Consolidated Financial Statements and Supplementary Data."


                                       16
<PAGE>

RISK FACTORS AND FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS

        OUR CURRENT AND FUTURE EXPECTED REVENUES ARE DERIVED FROM A SMALL NUMBER
OF ULTIMATE CUSTOMERS SO THAT THE LOSS OF OR REDUCTIONS IN PURCHASES BY ANY ONE
ULTIMATE CUSTOMER COULD MATERIALLY REDUCE OUR REVENUES AND LEAD TO LOSSES.
During fiscal 2005 and each of the previous two fiscal years, we have derived
more than 84% of our optical memory card and drive-related revenues from four
programs - two U.S. government programs and two foreign government programs. Due
to the lengthy sales cycles, we believe that these programs, with perhaps the
addition of one or two other foreign programs, will be the basis for a
substantial majority of our revenues in the near-term. The loss of or reductions
in purchases by any one customer due to program cutbacks, competition, or other
reasons would materially reduce our revenue base. Annual or quarterly losses
occur when there are material reductions, gaps or delays in card orders from our
largest U.S. or foreign government programs or if such programs were to be
reduced in scope, delayed, canceled, or not extended and not replaced by other
card orders or other sources of income.

        WE HAVE INCURRED NET LOSSES DURING THE PAST NINE QUARTERS AND MAY NOT BE
ABLE TO GENERATE SUFFICIENT REVENUE IN THE FUTURE TO ACHIEVE OR SUSTAIN
PROFITABILITY. As of March 31, 2005, we had an accumulated deficit of $27.1
million and we incurred losses of $8.9 million in fiscal 2005 and $12.4 in
fiscal 2004. Although we operated profitably for fiscal 1999 through fiscal
2003, we have incurred significant losses in the past, including in fiscal 1997
and 1998, and we incurred losses in fiscal 2004 and in fiscal 2005 due primarily
to delays in orders for our cards while we increased our manufacturing capacity
for expected future orders. Also, during fiscal 2005 we incurred approximately
$660,000 of incremental consulting and auditing expenses for implementation of
Sarbanes-Oxley Section 404. There can be no assurance that we will generate
enough card revenues in the near term or ever to become profitable. We are
relying upon our optical memory card technology to generate future product
revenues, earnings, and cash flows. If alternative technologies emerge or if we
are otherwise unable to compete, we may not be able to achieve or sustain
profitability on a quarterly or annual basis. Annual or quarterly losses would
also continue if increases in product revenues or license revenues do not keep
pace with increased selling, general, administrative, research and engineering
expenses and the depreciation and amortization expenses associated with capital
expenditures.

        OUR PRODUCT REVENUES WILL NOT GROW IF WE DO NOT WIN NEW BUSINESS IN THE
U.S. AND ABROAD. Fiscal 2005 revenues included sales of approximately $6 million
of Green Cards and Laser Visa BCCs, and we expect revenues of at least $8.5
million for these programs in fiscal 2006. The Company expects these revenues
could grow to up to $10 million annually thereafter if the government continues
to personalize cards at that rate and continues to maintain an inventory level
equal to six-months of usage. Other optical memory card programs that are
emerging programs or prospective applications in various countries include
identification cards for Italy and a Middle Eastern country; and motor vehicle
registration cards in India.

        For Italy, we delivered cards valued at $7.3 million in fiscal 2005 for
Phase 2 of the Italian CIE card program. We anticipate receiving orders during
fiscal 2006 for one of Italy's new programs, the Permesso di Soggiorno
Elettronico (PSE) card and further orders for the CIE card program. We do not
currently have orders for either of these programs. There is no assurance that
the foregoing government programs will be continued or implemented as
anticipated.

        For the ID program in a Middle Eastern country, we shipped $0.6 million
of cards during fiscal 2005 during the experimental phase of the program. A new
VAR has been chosen for the implementation phase and we have been negotiating
with the new prime contractor for us to continue in the program. There can be no
assurance that we will be able to successfully conclude such negotiations or
that sizable orders will follow even if we are successful.

        OUR PROGRAM WITH ITALY, WHICH WE BELIEVE WILL BE OUR LARGEST CUSTOMER
FOR THE NEXT FEW YEARS, MAY BE DELAYED OR CANCELLED FOR REASONS OUTSIDE OUR
CONTROL WHICH WOULD CAUSE US TO HAVE LESS REVENUE THAN PLANNED AND WOULD LEAD TO
CONTINUED LOSSES. The Company believes that the Italian CIE card program will be
our largest customer for the next few years, comprising a significant portion of
future revenues. We are increasing capacity to meet the anticipated demand.
However, there can be no assurance that demand will increase as anticipated by
the Company. Losses would


                                       17
<PAGE>

continue if Phase 3 of this program, which is full implementation, was to be
delayed, canceled, not extended, or not implemented at the level foreseen and
not be replaced by other card orders or other sources of income, or if the
government were to change its technology decisions. During Phase 2, selected
Italian cities have been issuing cards and testing the card issuing process. The
knowledge gained during Phase 2 has resulted in initiatives to improve the
issuing system and to improve the overall performance of the program. Overcoming
some of these issues may be difficult and complex and involve third parties,
which could be time consuming and expensive and lead to delays for
implementation of Phase 3.

        ONE VALUE ADDED RESELLER IS THE CONTRACTOR FOR OUR U.S. AND CANADIAN
GOVERNMENT CUSTOMERS AND ANOTHER VALUE ADDED RESELLER PURCHASES CARDS FROM US
FOR THE ITALIAN NATIONAL ID CARD PROGRAM. HAVING TO REPLACE EITHER OF THESE
VALUE ADDED RESELLERS COULD INTERRUPT OUR U.S., CANADIAN, OR ITALIAN GOVERNMENT
BUSINESS. The largest purchaser of LaserCard products has been Anteon
International Corporation, one of our value-added resellers (VARs). Anteon is
the government contractor for LaserCard product sales to the U.S. Department of
Homeland Security, U.S. Department of State, U.S. Department of Defense, and the
government of Canada. Under government contracts with Anteon, the U.S.
Department of Homeland Security purchases Green Cards and U.S. Department of
State purchases LaserVisa BCCs; the U.S. Department of Defense purchases
Automated Manifest System cards; and the Canadian government purchases Permanent
Resident Cards. Encompassing all of these programs, our product sales to Anteon
represented 31% of total revenues for fiscal 2005, 72% of total revenues for
fiscal 2004 and 94% of total revenues for fiscal 2003. However, since our
customers are national governments, we are not dependent upon any one specific
contractor for continued revenues from these programs. Although not anticipated,
if Anteon were to discontinue its participation as contractor, other qualified
contractors could be utilized by those governments for purchasing our products,
although the process of doing so could cause the U.S. program delays. Concerning
Italy, during fiscal 2005 and 2004, 26% and 22% of the Company's revenues were
derived from sales of cards and read/write drives for the government of Italy
for its CIE card program, respectively. The revenues generated from this program
were immaterial in fiscal 2003. Card orders under this program are placed with
the Company through a VAR, Laser Memory Card Srl, of Rome, Italy. According to
Italian government sources, the distribution of this new national ID card has
started in a number of the 56 Italian communities that were scheduled to be
activated under the program during 2004. If this program were to be discontinued
or interrupted by the Italian government, the Company would lose one of its
significant sources of optical memory card revenues.

        OUR CONTRACT WITH THE U.S. GOVERNMENT, ONE OF OUR LARGER ULTIMATE
CUSTOMERS MAY EXPIRE IN NOVEMBER 2005. EVEN IF RENEWED, THE U.S. GOVERNMENT HAS
THE RIGHT TO DELAY ITS ORDERS OR COULD CHANGE ITS TECHNOLOGY DECISIONS, WHICH
WOULD RESULT IN ORDER DELAYS OR LOSSES. Our U.S. government subcontract expires
on November 26, 2005. While we have received orders for $7.3 million in optical
memory cards deliverable through January 2006, further orders may require a new
contract. Based on events to date, the Company believes another extension to the
current contract or a follow-on contract will be issued prior to January 2006;
however, there is no assurance that the contract will be extended or a follow-on
contract will be issued by the U.S. government. Under U.S. government
procurement regulations, the government reserves certain rights, such as the
right to withhold releases, to reduce the quantities released, extend delivery
dates, reduce the rate at which cards are issued, and cancel all or part of its
unfulfilled purchase orders. Our U.S. government card deliveries depend upon the
issuance of corresponding order releases by the government to its prime
contractor and, in turn, to us, and we believe that these orders will continue.
Losses would continue if either of our largest U.S. government programs were to
be delayed, canceled, or not extended and not be replaced by other card orders
or other sources of income, or if the government were to change its technology
decisions, or if increases in product revenues or licenses do not keep pace with
increased marketing, research and engineering, and depreciation on capital
equipment. For example, the U.S. government acting through its prime contractor
delayed orders for Green Cards during fiscal 2004 due to a design change and
again in the first part of fiscal 2005 because of excess inventory, which
resulted in a gap in production of several months, and which in turn
significantly affected our operating results for the first half of fiscal 2005.
Any future excess inventory held by the U.S. government for example due to
delayed funding or a slower than anticipated program volume, or any future
changes to the design of the cards may result in future gaps in orders or
production which may negatively impact our operating results.

        SINCE THE SALES CYCLE FOR OUR PRODUCTS IS TYPICALLY LONG AND
UNPREDICTABLE, WE HAVE DIFFICULTY PREDICTING FUTURE REVENUE GROWTH. Obtaining
substantial orders usually involves


                                       18
<PAGE>

a lengthy sales cycle, requiring marketing and technical time and expense with
no guarantee that substantial orders will result. This long sales cycle results
in uncertainties in predicting operating results, particularly on a quarterly
basis. In addition, since our major marketing programs involve the U.S.
government and various foreign governments and quasi-governmental organizations,
additional uncertainties and extended sales cycles can result. Factors which
increase the length of the sales cycle include government regulations, bidding
procedures, budget cycles, and other government procurement procedures, as well
as changes in governmental policy-making.

        THE TIMING OF OUR U.S. GOVERNMENT REVENUES IS NOT UNDER OUR CONTROL AND
CANNOT BE PREDICTED BECAUSE WE REQUIRE A FIXED SHIPMENT SCHEDULE IN ORDER TO
RECORD REVENUE WHEN WE DELIVER CARDS TO A VAULT, OTHERWISE WE RECOGNIZE REVENUE
WHEN THE CARDS ARE SHIPPED OUT OF A VAULT OR WE RECEIVE A FIXED SHIPMENT
SCHEDULE FROM THE GOVERNMENT. We recognize revenue from product sales when the
following criteria are met: (a) persuasive evidence of an arrangement exists;
(b) delivery has occurred; (c) the fee is fixed or determinable; and (d)
collectibility is reasonably assured.

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

        WE COULD EXPERIENCE EQUIPMENT, RAW MATERIAL, QUALITY CONTROL, OR OTHER
PRODUCTION PROBLEMS ESPECIALLY IN PERIODS OF INCREASING VOLUME. There can be no
assurance that we will be able to meet our projected card manufacturing capacity
if and when customer orders reach higher levels. We have made and intend to
continue to make significant capital expenditures to expand our card
manufacturing capacity. However, since customer demand is difficult to predict,
we may be unable to ramp up our production quickly enough to timely fill new
customer orders. This could cause us to lose new business and possibly existing
business. In addition, if we overestimate customer demand, we could incur
significant costs from creating excess capacity which was the case during fiscal
2005. We may experience manufacturing complications associated with increasing
our manufacturing capacity of cards and drives, including the adequate
production capacity for sheet-lamination process cards to meet order
requirements and delivery schedules. We may also experience difficulties
implementing new manufacturing processes or outsourcing some of our
manufacturing. The addition of fixed overhead costs increases our breakeven
point and results in lower profit margins unless compensated for by increased
product sales. When purchasing raw materials for our anticipated optical card
demand, we take into consideration the order-to-delivery lead times of vendors
and the economic purchase order quantity for such raw materials. If we
over-estimate customer demand, excess raw material inventory can result.

        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 discontinue
manufacturing the film from which our optical media is made, we would endeavor
to establish an alternate supplier for such film, although the purchase price
could increase and reliability and quality could decrease from a new supplier.
No assurance can be given that there will be adequate demand to attract a second


                                       19
<PAGE>

source. In addition, an alternate supplier could encounter technical issues in
producing the film as there may be know-how and manufacturing expertise which
Kodak has developed over the years which an alternate supplier may have
difficulty to replicate. We have pre-purchased a long-term supply of the film
used to produce mastering loops for prerecording cards. With regard to the film
from which our optical media is made, we currently have an order which Kodak has
accepted with deliveries scheduled through December 2006. If Kodak announced
that it was no longer going to sell film, we would request that Kodak provide us
with a last-buy opportunity which we would plan to take maximum advantage of,
although no assurance can be given that Kodak would provide us with such an
opportunity. We have film on hand plus on order that we believe would provide us
with an adequate supply to meet anticipated demand until we could locate and
begin volume purchases from a second source.

        AN INTERRUPTION IN THE SUPPLY OF READ/WRITE DRIVE PARTS OR DIFFICULTIES
ENCOUNTERED IN READ/WRITE DRIVE ASSEMBLY COULD CAUSE A DELAY IN DELIVERIES OF
DRIVES AND OPTICAL MEMORY CARDS AND A POSSIBLE LOSS OF SALES, WHICH WOULD
ADVERSELY AFFECT OUR OPERATING RESULTS. Several major components of our
read/write drives are designed specifically for our read/write drive. For
example, the optical recording head for the current drive is a part obtained
from one supplier; and at current production volumes, it is not economical to
have more than one supplier for this custom component. The ability to produce
read/write drives in high-volume production, if required, will be dependent upon
maintaining or developing sources of supply of components that meet our
requirements for high volume, quality, and cost. In addition, we could encounter
quality control or other production problems at high-volume production of
read/write drives. We are also investing in research and engineering in an
effort to develop new drive products.

        IF WE ARE UNABLE TO DEVELOP UPGRADED READ/WRITE DRIVES THAT COST LESS TO
MANUFACTURE AND ALSO A READ-ONLY DRIVE, WE COULD LOSE POTENTIAL NEW BUSINESS.
The price of our standard read/write drive ranges from $1,800 to just under
$2,000 depending on quantity purchased. We believe the price of our drives is
competitive in applications requiring a large number of cards per each drive,
because the relatively low cost for our cards offsets the high cost per drive
when compared with our major competition, IC card systems. In addition, we have
undertaken a product development program for a portable read-only drive now
available in prototype, which we believe would increase our prospects for
winning future business. However, there can be no assurance that our development
program will be successful, that production of any new design will occur in the
near term, or that significantly lower manufacturing costs or increased sales
will result.

        WE MAY BE NOT BE ABLE TO ADAPT OUR TECHNOLOGY AND PRODUCTS TO COMMERCIAL
APPLICATIONS WHICH GENERATE MATERIAL AMOUNTS OF REVENUE AND PROFIT. THIS WOULD
LIMIT THE FUTURE GROWTH OF OUR BUSINESS TO THE GOVERNMENT SECTOR AND THE LACK OF
DIVERSIFICATION EXPOSES US TO ENHANCED RISK OF COMPETITION. We are seeking
commercial applications for our optical memory products in order to lessen our
dependence upon the government sector. Our efforts to develop OpticalProximity
with HID Corporation are but one example. We may be unsuccessful in these
efforts in which case we would not obtain the diversity of revenues we are
seeking for the future. If the use of our technology remains limited to secure
ID card applications for government use, then we are more susceptible to other
technologies and products making in-roads or to political pressures or changing
laws

        IF WE ARE UNABLE TO ADAPT TO TECHNOLOGICAL CHANGES IN THE DATA CARD
INDUSTRY AND IN THE INFORMATION TECHNOLOGY INDUSTRY GENERALLY, WE MAY NOT BE
ABLE TO EFFECTIVELY COMPETE FOR FUTURE BUSINESS. The information technology
industry is characterized by rapidly changing technology and continuing product
evolution. The future success and growth of our business will require the
ability to maintain and enhance the technological capabilities of the LaserCard
product line. There can be no assurance that the Company's products currently
sold or under development will remain competitive or provide sustained revenue
growth.

        SEVERAL OF OUR FOREIGN PROGRAMS INVOLVE OUR CARDS AS PART OF A SOLUTION
WHICH INCLUDES TECHNOLOGIES OF THIRD PARTIES THAT ARE INTEGRATED BY OUR SYSTEMS
INTEGRATOR CUSTOMER OR SUBCONTRACTOR. WE THEREFORE DO NOT HAVE CONTROL OVER THE
OVERALL SYSTEM WHICH COULD LEAD TO TECHNICAL AND COMPATIBILITY ISSUES WHICH ARE
DIFFICULT, EXPENSIVE, AND TIME CONSUMING TO SOLVE. THIS COULD CAUSE OUR


                                       20
<PAGE>

GOVERNMENT ULTIMATE CUSTOMERS TO FIND FAULT IN OPTICAL CARDS AND SWITCH TO OTHER
SOLUTIONS EVEN THOUGH OUR OPTICAL TECHNOLOGY IS NOT THE ROOT CAUSE. In certain
of our current foreign programs such as Italy and a Middle Eastern country, and
possibly in future other programs, various third party technologies such as
contact or contactless chips will be added to our cards. The embedding or
addition of other technologies to the LaserCard OMC, 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 the Company's technology or that of a
co-supplier. 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. The resulting loss of customers would
adversely affect our revenues.

        IF WE FAIL TO PROTECT OUR INTELLECTUAL PROPERTY RIGHTS, COMPETITORS MAY
BE ABLE TO USE OUR TECHNOLOGIES, WHICH COULD WEAKEN OUR COMPETITIVE POSITION,
REDUCE REVENUES, OR INCREASE COSTS. We use a combination of patent, trademark,
and trade secret laws, confidentiality procedures, and licensing arrangements to
establish and protect our proprietary rights. Our existing and future patents
may not be sufficiently broad to protect our proprietary technologies. Despite
our efforts to protect proprietary rights, we cannot be certain that the steps
we have taken will prevent the misappropriation or unauthorized use of our
technologies, particularly in foreign countries where the laws may not protect
proprietary rights as fully as U.S. law. Any patents we may obtain may not be
adequate to protect our proprietary rights. Our competitors may independently
develop similar technology, duplicate our products, or design around any of our
issued patents or other intellectual property rights. Litigation may be
necessary to enforce our intellectual property rights or to determine the
validity or scope of the proprietary rights of others. This litigation could
result in substantial costs and diversion of resources and may not ultimately be
successful. We cannot predict whether the expiration or invalidation of our
patents would result in the introduction of competitive products that would
affect our future revenues adversely. However, since our technology is now in
the commercial stage, our know-how and experience in volume card production,
system development and software capabilities, brand-name recognition within our
card markets, and dominant-supplier status for optical memory cards are of far
greater importance than our patents. At this time, we believe that our existing
patent portfolio is helpful but is no longer essential for maintaining the
LaserCard's market position.

        THE MARKETS FOR OUR PRODUCTS ARE COMPETITIVE, AND IF WE ARE UNABLE TO
COMPETE SUCCESSFULLY, REVENUES COULD DECLINE OR FAIL TO GROW. Our optical memory
cards may compete with optical memory cards that can be manufactured and sold by
three of our licensees (although none is currently doing so) and with other
types of portable data storage cards and technologies used for the storage and
transfer of digital information. These may include integrated circuit/chip
cards; 2-dimensional bar code cards and symbology cards; magnetic-stripe cards;
thick, rigid CD-read only cards or recordable cards; PC cards; radio frequency,
or RF, chip cards; and small, digital devices such as data-storage keys, tokens,
finger rings, and small cards and tags. The financial and marketing resources of
some of the competing companies are greater than our resources. Competitive
product factors include system/card portability, interoperability,
price-performance ratio of cards and associated equipment, durability,
environmental tolerance, and card security. Although we believe our cards offer
key technological and security advantages for certain applications, the current
price of optical card read/write drives is a competitive disadvantage in some of
our targeted markets. However, we believe the price of our drives is competitive
in applications requiring a large number of cards per each drive, because the
relatively low cost for our cards offsets the high cost per drive when compared
with our major competition, IC card systems. In countries where the
telecommunications infrastructure is extensive and low cost, centralized
databases and wide-area networks may limit the penetration of optical memory
cards. These trends toward Internet, intranet, and remote wireless networks will
in some cases preclude potential applications for our cards.

        THE PRICE OF OUR COMMON STOCK IS SUBJECT TO SIGNIFICANT VOLATILITY. The
price of our common stock is subject to significant volatility, which may be due
to fluctuations in revenues, earnings, liquidity, press coverage, financial
market interest, low trading volume, and stock market conditions, as well as
changes in technology and customer demand and preferences. As a result, our
stock price might be low at the time a stockholder wants to sell the stock.
Also, since we have a relatively low number of shares outstanding (approximately
11 million shares) there will be more volatility in our stock if one or two
major holders, for example, large institutional holders, attempt to sell a large
number of shares in the open market. There also is a large short position in our
stock, which can create volatility when borrowed shares are sold short and later
if shares are purchased to cover the short position.


                                       21
<PAGE>

Furthermore, our trading volume is often small, meaning that a few trades may
have disproportionate influence on our stock price. In addition, someone seeking
to liquidate a sizeable position in our stock may have difficulty doing so
except over an extended period or privately at a discount. Thus, if one or more
stockholders were to sell or attempt to sell a large number of its shares within
a short period of time, such sale or attempt could cause our stock price to
decline. There can be no guarantee that stockholders will be able to sell the
shares that they acquired at a price per share equal to the price they paid for
the stock.

        WE ARE SUBJECT TO RISKS ASSOCIATED WITH CHANGES IN FOREIGN CURRENCY
EXCHANGE RATES. Part of the manufacturing process of the LaserCard products that
we sell in Italy takes place in our operations in Germany. Also, some of the raw
materials we use to manufacture optical memory cards are sourced in Europe.
These costs are denominated in euros, the currency used in much of Europe.
However, when we sell our finished products the prices that we charge are
denominated in United States dollars. Accordingly, we are subject to exposure if
the exchange rate for euros increases in relation to the United States dollar.
As of March 31, 2005, we had not entered into a forward exchange contract to
hedge against or potentially minimize the foreign currency exchange risk. During
fiscal 2005, we experienced a $0.2 million loss on foreign currency exchange.

        WE ACQUIRED TWO CARD COMPANIES LOCATED IN GERMANY ON MARCH 31, 2004 AND
MAY ENCOUNTER DIFFICULTIES IN INTEGRATING THEM INTO OUR BUSINESS. We may
encounter unforeseen difficulties in managing Challenge Card Design GmbH (CCD)
and cards & more GmbH, in which case we may not obtain some of the hoped-for
benefits of these acquisitions, such as expanded manufacturing capacity and
establishment of a significant European presence. Further integration of these
acquired companies may result in problems related to integration of technology,
management, personnel, or products. If we fail to successfully integrate these
acquisitions or if they fail to perform as we anticipated, our operations and
business could be harmed. Likewise, if the due diligence and audit of these
operations performed by third parties on our behalf was inadequate or flawed, we
could later discover unforeseen financial or business liabilities. Additionally,
in the future we may evaluate other acquisition opportunities that could provide
additional product or services offerings or technologies. Any recent or future
acquisition could result in difficulties assimilating acquired operations and
products, diversion of capital and management's attention away from other
business issues and opportunities and may result in an expense if goodwill is
impaired or other intangible assets acquired are subsequently determined to be
impaired. Goodwill may become impaired if the acquired German companies cannot
demonstrate sufficient profitability over a reasonable forecast period. Such
profitability depends on the processing of a significant quantity of CIE cards
at CCD. One customer represents more than 10% of the revenue and margin of the
German companies so the loss of that customer could also lead to goodwill
impairment.

        WE SOLD A SECOND-SOURCE CARD MANUFACTURING LICENSE TO GLOBAL INVESTMENTS
GROUP (GIG), UNDER WHICH WE WILL PROVIDE CERTAIN FACTORY SET-UP AND TRAINING
SERVICES. IF WE ARE NOT SUCCESSFUL OR IF GIG IS UNABLE TO FINANCE THIS
OPERATION, THE SECOND-SOURCE SUPPLY OF OPTICAL CARDS WILL NOT MATERIALIZE. IF WE
AND GIG ARE SUCCESSFUL, THE SECOND-SOURCE WILL COMPETE WITH US FOR BUSINESS. If
GIG is not successful, but current and potential customers require a second
source of optical memory cards (which is a common business practice) they could
decide to use alternate technology cards, such as chip cards, that have
multiple-source suppliers. We are obligated to deliver approximately $12 million
worth of the required manufacturing equipment and installation support to GIG
for its to-be-built new card manufacturing facility in Slovenia, to provide a
targeted initial manufacturing capacity of 10 million optical cards annually. If
GIG is successful, this will supply a second source for optical memory cards. We
will also be assigning personnel to be on site during the license term to assist
with quality, security, and operational procedures, with a mutual goal that the
facility and the cards made in Slovenia conform to our standards. If cards are
not produced in conformance with our quality standards, the reputation and
marketability of optical memory card technology could be damaged. If the factory
does not become operational and produce quality cards in high volume, or if GIG
is unable to raise sufficient capital to build, equip and operate this facility,
we would not obtain the hoped-for benefits--including ongoing royalties, sales
of raw materials to GIG, expansion of the European market, and a bona fide
second source for optical memory cards. On the other hand, if and when the
factory is successfully manufacturing the cards in high volume, it will compete
against us for business in certain territories, which could reduce our potential
card revenues if the market does not expand. Revenue will be recognized over the
remaining term of the agreement beginning when operation of the factory
commences. The Company could incur greater expenses than it anticipates for the
purchase and installation of the required manufacturing equipment thereby


                                       22
<PAGE>

reducing cash and anticipated profits.

        WE MAY NOT BE ABLE TO ATTRACT, RETAIN OR INTEGRATE KEY PERSONNEL, WHICH
MAY PREVENT US FROM SUCCEEDING. We may not be able to retain our key personnel
or attract other qualified personnel in the future. Our success will depend upon
the continued service of key management personnel. The loss of services of any
of the key members of our management team, including our chief executive
officer, president, the managing directors of our German operations, vice
president of business development or our vice president of finance and
treasurer, or our failure to attract and retain other key personnel could
disrupt operations and have a negative effect on employee productivity and
morale, thus decreasing production and harming our financial results. In
addition, the competition to attract, retain and motivate qualified personnel is
intense.

        OUR CALIFORNIA FACILITIES ARE LOCATED IN AN EARTHQUAKE ZONE AND THESE
OPERATIONS COULD BE INTERRUPTED IN THE EVENT OF AN EARTHQUAKE, FIRE, OR OTHER
DISASTER. Our card manufacturing, corporate headquarters, and drive assembly
operations, administrative, and product development activities are located near
major earthquake fault lines. In the event of a major earthquake, we could
experience business interruptions, destruction of facilities and/or loss of
life, all of which could materially adversely affect us. Likewise, fires,
floods, or other events could similarly disrupt our operations and interrupt our
business.

        ACTS OF TERRORISM OR WAR MAY ADVERSELY AFFECT OUR BUSINESS. Acts of
terrorism, acts of war, and other events may cause damage or disruption to our
properties, business, employees, suppliers, distributors, resellers, and
customers, which could have an adverse effect on our business, financial
condition, and operating results. Such events may also result in an economic
slowdown in the United States or elsewhere, which could adversely affect our
business, financial condition, and operating results.

ITEM 2.   PROPERTIES

MOUNTAIN VIEW, CA

        As of March 31, 2005, approximately 70,000 square feet of floor space
are leased by the Company on a long-term basis for card manufacturing,
read/write drive production, administration, sales, and research and
engineering, in two buildings located in Mountain View, California. These
facilities have a current total annualized rental of approximately $885,000 on
leases that expire in October 2013 and in March 2014. One 27,000-square foot
building is used for optical memory card production and one 43,000 square-foot
building is used for optical card production, read/write drive production,
administration, sales, and research and engineering. In addition, one 5,000
square-foot building with an annual rent of $75,000 that was used for
administration will be vacated when the lease expires in July 2005.

GERMANY

        The Company leases a portion of a building in Ratingen, Germany, and a
building in Rastede, Germany totaling approximately 15,000 square feet, for
optical and specialty card manufacturing, distribution, administration and
sales, for a total annualized rental of 239,000 euros on leases that expire on
dates from February 2009 to August 2009. Also, the Company owns land and a
building in Rastede, Germany that is used in production of specialty cards and
research and engineering.

OTHER

        The Company also leases a small marketing office in New York.

        Management believes these leased and owned facilities to be satisfactory
for its present operations. Upon expiration of the leases, management believes
that these or other suitable buildings will be able to be leased on a reasonable
basis.


                                       23
<PAGE>

ITEM 3.   LEGAL PROCEEDINGS

        None.

ITEM 4.   SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

        None.



                                       24
<PAGE>

                                     PART II

ITEM 5.   MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
          ISSUER PURCHASES OF EQUITY SECURITIES

        The Company's only class of common stock, $.01 par value, is traded on
The Nasdaq Stock Market(R) under the symbol LCRD and iS quoted in THE WALL
STREET JOURNAL and other newspapers. Stock price information and other data also
can be obtained on the Internet directly from Nasdaq at: www.nasdaq.com. The
table below sets forth the high and low trade prices for the Company's common
stock (rounded to two decimal points) as reported by Nasdaq during the fiscal
periods indicated.

<TABLE>
<CAPTION>
                             Quarterly Stock Prices

                                Fiscal 2005                            Fiscal 2004
                        High Trade         Low Trade         High Trade         Low Trade
                        ----------         ---------         ----------         ---------
<S>                      <C>                <C>               <C>                <C>
First Quarter            $  21.37           $ 11.40           $  22.25           $ 13.03
Second Quarter              13.48              6.49              20.84             14.00
Third Quarter               11.75              7.86              17.14             13.00
Fourth Quarter              11.89              4.77              16.95             12.46
</TABLE>

        As of March 31, 2005, there were approximately 880 holders of record of
the Company's common stock. The total number of stockholders is believed by the
Company to be several thousand higher since many holders' shares are listed
under their brokerage firms' names.

        The Company has never paid cash dividends on its common stock. The
Company anticipates that for the foreseeable future, it will retain any earnings
for use and reinvestment in its business.

        The Company did not repurchase any of its outstanding shares or other
securities during its fourth quarter ended March 31, 2005.

        On August 2, 2004, our board of directors authorized a 350,000 share
repurchase program to acquire shares of our common stock in the open market for
up to an aggregate of $3 million for four-month period beginning August 2, 2004.
Purchases under this program, which has now expired, were only made between
August 17, 2004 and August 26, 2004. The following table provides information
with respect to our repurchases of the common stock under this program:

<TABLE>
<CAPTION>
                                                                  Total Number of       Total Dollar
                                                                 Shares Purchased      Value of Shares
                          Total Number                          as Part of Publicly    that May Yet Be
                           of Shares         Average Price          Announced          Purchased under
Period                     Purchased         Paid per Share         Programs           the Programs(1)
-------------------  -------------------- -------------------- -------------------- --------------------
<S>                          <C>                 <C>                 <C>                 <C>
August 2, 2004 -
August 31, 2004              91,630              $ 7.15              91,630              $2,345,000
                             ------                                  ------              ----------
Total                        91,630              $ 7.15              91,630                      $0
                             ======                                  ======                      ==
</TABLE>

(1)     On August 2, 2004, our board of directors authorized a 350,000 share
        repurchase program to acquire shares of our common stock in the open
        market for up to an aggregate of $3 million for four-month period
        beginning August 2, 2004. This program has now expired.


                                       25
<PAGE>

ITEM 6.   SELECTED FINANCIAL DATA

        The following selected consolidated financial information as of and for
each of the five years in the period ended March 31 is derived from the
consolidated financial statements of the Company. This financial data should be
read in conjunction with the consolidated financial statements and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
appearing in Item 7 of this report.

                     LASERCARD CORPORATION AND SUBSIDIARIES
                    (Formerly Drexler Technology Corporation)

             FIVE-YEAR SUMMARY OF CONSOLIDATED FINANCIAL INFORMATION
                    Fiscal Years Ended March 31, 2001 - 2005
                    (In thousands, except per share amounts)

<TABLE>
<CAPTION>

OPERATIONS DATA                                            2005(2)          2004          2003           2002        2001(1)
                                                          ---------      ---------     ---------      ---------     ---------
<S>                                                       <C>            <C>           <C>            <C>           <C>
   Revenues                                               $  28,544      $  16,963     $  26,331      $  20,889     $  24,906
   Cost of product sales                                     22,637         13,157        13,906         10,652        12,199
   Selling, general, and administrative expenses             11,891          6,700         6,202          5,165         4,134
   Research and engineering expenses                          3,018          2,620         2,818          3,045         2,370
   Interest and other income, net                               240            176           397            386           612
                                                          ---------      ---------     ---------      ---------     ---------
   Income (loss) before income taxes                         (8,762)        (5,338)        3,802          2,413         6,815
   Income tax (benefit) provision                               139          7,089         1,520         (2,786)       (1,097)
                                                          ---------      ---------     ---------      ---------     ---------
   Net income (loss)                                      $  (8,901)     $ (12,427)    $   2,282      $   5,199     $   7,912
                                                          =========      =========     =========      =========     =========
   Net income (loss) per share:
       Basic                                              $    (.78)     $   (1.15)    $     .22      $     .52     $     .80
                                                          =========      =========     =========      =========     =========
       Diluted                                            $    (.78)     $   (1.15)    $     .21      $     .50     $     .76
                                                          ---------      ---------     ---------      ---------     ---------
   Weighted average number of common
          and common equivalent shares:
       Basic                                                 11,362         10,761        10,356          9,961         9,897
       Diluted                                               11,362         10,761        10,842         10,468        10,446

BALANCE SHEET DATA
   Current assets                                         $  21,310      $  23,294     $  21,192      $  28,118     $  18,333
   Current liabilities                                        6,764         11,271         3,620          7,501         7,324
   Total assets                                              48,768         49,835        40,463         40,713        30,137
   Long-term liabilities                                     15,326          2,878            --             --            --
   Stockholders' equity                                      26,678         35,686        36,843         32,337        22,813
</TABLE>

(1) As more fully described in the Company's Report on Form 8-K dated May 15,
    2002, the financial statements for fiscal 2001 were restated due to changes
    in the timing of revenue recognition of LaserCard optical memory cards that
    have been delivered into a secure, government-funded vault built for the
    government on Company premises to comply with security regulations under the
    subcontract.
(2) Only fiscal 2005 operations data includes results of our German subsidiaries
    acquired on March 31, 2004.


                                       26
<PAGE>

ITEM 7.   MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
          FINANCIAL CONDITION

        The following discussion and analysis of the Company's financial
condition and results of operations should be read in conjunction with the
condensed consolidated financial statements and related notes included elsewhere
in this Form 10-K Report for the year ended March 31, 2005.

        FORWARD-LOOKING STATEMENTS. For a discussion of the risk factors related
to the Company's business operations, please refer to the "Forward-Looking
Statements" section starting at page 4 of this report and the section entitled
"Risk Factors and Factors that May Affect Future Operating Results" starting at
page 17 of this report.

CRITICAL ACCOUNTING POLICIES

        Our discussion and analysis of financial condition and results of
operations are based upon our consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States of America. Note 2 to the Consolidated Financial Statements
describes the significant accounting policies and methods used in the
preparation of the Consolidated Financial Statements. The preparation of these
financial statements requires us to make estimates and judgments that affect the
reported amounts of assets, liabilities, revenues and expenses. On an ongoing
basis, we evaluate our estimates, including those related to our revenues,
inventories, and income taxes. We base our estimates on historical experience
and on various other assumptions that are believed 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.

        We consider the accounting policies described below to be our critical
accounting policies. Our critical accounting policies are those that both (1)
are most important to the portrayal of the financial condition and results of
operations and (2) require management's most difficult, subjective, or complex
judgments, often requiring estimates about matters that are inherently
uncertain. These critical accounting policies reflect our significant judgments,
assumptions, and estimates used in the preparation of the Consolidated Financial
Statements. Our management has discussed the development and selection of these
critical accounting policies and estimates with the audit committee of our board
of directors and the audit committee has reviewed our disclosures relating to
them in this report

        REVENUE RECOGNITION. Product sales primarily consist of card sales,
sales of read/write drives, 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 warehousing
under a U.S. government subcontract or customer acceptance criteria. Where
appropriate, provision is made at the time of shipment for estimated warranty
costs and estimated returns. The total amount of actual warranty costs and
returns activity was $373,000 in fiscal 2005. Warranty costs and return activity
were immaterial in fiscal 2004 and 2003.

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

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


                                       27
<PAGE>

Arrangements with Multiple Deliverables," (EITF 00-21) which provides criteria
governing how to identify whether goods or services that are to be delivered
separately in a bundled sales arrangement should be accounted for separately.
Deliverables are accounted for separately if they meet all of the following
criteria: a) the delivered items have stand-alone value to the customer; b) the
fair value of any undelivered items can be reliably determined; and c) if the
arrangement includes a general right of return, delivery of the undelivered
items is probable and substantially controlled by the seller. In situations
where the deliverables fall within higher-level literature as defined by EITF
00-21, the Company applies the guidance in that higher-level literature.
Deliverables that do not meet these criteria are combined with one or more other
deliverables. The Company adopted EITF 00-21 for any new arrangements entered
into after July 1, 2003 and now assesses all revenue arrangements against the
criteria set forth in EITF 00-21.

        The Company applies the provisions of Statement of Position 81-1,
"Accounting for Performance of Construction-Type and Certain Production-Type
Contracts" (SOP 81-1) in applicable contracts. Revenues on time and materials
contracts are recognized as services are rendered at contract labor rates plus
material and other direct costs incurred. Revenues on fixed price contracts are
recognized on the percentage of completion method based on the ratio of total
costs incurred to date compared to estimated total costs to complete the
contract. Estimates of costs to complete include material, direct labor,
overhead and allowable general and administrative expenses. In circumstances
where estimates of costs to complete a project cannot be reasonably estimated,
but it is assured that a loss will not be incurred, the percentage-of-completion
method based on a zero profit margin, rather than the completed-contract method,
is used until more precise estimates can be made. The full amount of an
estimated loss is charged to operations in the period it is determined that a
loss will be realized from the performance of a contract. For the year ended
March 31, 2005, the Company recognized approximately $127,000 of revenues based
on a zero profit margin related to a long-term contract. The Company had no
revenues generated from this type of contract for the years ended March 31, 2004
and 2003.

        The Company applies the provisions of Statement of Position (SOP) No.
97-2, "Software Revenue Recognition," as amended by Statement of Position 98-9,
"Modification of SOP 97-2, Software Revenue Recognition, With Respect to Certain
Transactions" to all transactions involving the sale of software products.
Revenue from the license of the Company's software products is recognized when
persuasive evidence of an arrangement exists, the software product has been
delivered, the fee is fixed or determinable, and collectibility is probable,
and, if applicable, upon acceptance when acceptance criteria are specified or
upon expiration of the acceptance period. Software revenue was immaterial for
the fiscal 2005, 2004 and 2003, respectively.

        License revenue, which may consist of up-front license fees and royalty
payments, is recognized as revenue when earned. The second-source card
manufacturing license sold in April 2004 to Global Investments Group provides
for royalty payments to the Company for each card produced during the 20-year
term of the license agreement. This is a multi-element arrangement as described
in Emerging Issues Task Force (EITF) Issue No. 00-21; revenue derived from the
payments will be recognized from time to time over the term of the license.
Revenue will be recognized over the remaining term of the agreement beginning
when operation of the factory commences. There were no cost of license revenue
recorded in fiscal 2005, 2004 and 2003.

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

        Significant management judgment is required in determining the provision
for income taxes and, in particular, any valuation allowance recorded against
the Company's deferred tax assets. Due to the Company's recent cumulative tax
loss history for the three-year period ended March 31, 2004, income statement
loss history over the previous five quarters, and the difficulty in forecasting
the timing of future revenue as evidenced by the deviations in achieved revenues
from expected revenues during the previous few quarters and taking into account
the newness of certain


                                       28
<PAGE>

customer relationships, the Company determined in fiscal 2004 it was necessary
to increase the valuation allowance under SFAS No. 109 to the full amount of the
deferred tax asset. As a result, the Company determined that a full valuation
allowance was required to net against its deferred tax asset for fiscal 2004 and
increased the existing allowance by $2.4 million to $14.8 million. In addition,
the Company increased its a valuation allowance against its net deferred tax
asset in the amount of $3.7 million during fiscal 2005.

        The Company's methodology for determining the realizability of its
deferred tax assets involves estimates of future taxable income; the estimated
impact of future stock option deductions; and the expiration dates and amounts
of net operating loss carryforwards. These estimates are based on near-term
projections and assumptions which management believes to be reasonable. For
recent prior periods through second quarter fiscal 2004, the Company had been
estimating future taxable income from its core business, which assumed on-going
business under the U.S. government subcontract for Permanent Resident Cards
(Green Cards) and Laser Visa Border Crossing Cards and the Canadian government's
Permanent Resident Card program, as well as estimated operating expenses to
support that level of business, as offset by the estimated impact of future
stock option deductions. Starting with fiscal 2004, the Company estimated future
taxable income based upon its expectations for the current and next three years
because this past core business has not proven to be as stable as the Company
had believed it to be and because this past core business is expected to
represent an increasingly smaller part of the business. This is because the
Company expects revenues from these U.S. programs to stabilize at revenue levels
lower than had been expected in the past and because the Company expects new
foreign business, which has fluctuated considerably quarter to quarter, to
comprise a larger portion of the core business. The Company has had difficulty
in the past, and expects to have continued difficulty in the future, in reliably
forecasting its foreign business and the revenue to be received from it. This,
in combination with the anticipated three-year cumulative tax loss for the
period ended March 31, 2004, has resulted in the Company basing its estimates of
future income for these purposes to booked orders only. As circumstances change,
the Company may in the future be able to revert back to estimating future
revenue based upon its forecast revenues rather than only using booked orders,
although the Company cannot say when this will occur.

        In concluding that a valuation allowance was required at the end of
fiscal 2004 and is still required at the end of fiscal 2005, the Company
considered both the positive and negative evidence regarding its ability to
generate sufficient future taxable income to realize its deferred tax assets.
Positive evidence included having achieved profitability for financial reporting
purposes from fiscal 1999 through fiscal year 2003. Other positive evidence
included (1) the level of sales and business experienced under the contract with
the Canadian government's Permanent Resident Card program; (2) prospects in
Italy and a Middle Eastern country for national identification card programs;
(3) the heightened interest in border security initiatives following the events
of September 11, 2001; and (4) expected future orders. Negative evidence
included (1) the Company's reliance on a limited number of customers for a
substantial portion of its business; (2) the uncertainty in timing of
anticipated orders from customers; (3) the impact of future stock option
deductions on taxable income; and (4) recent experience of net operating loss
carryforwards expiring unused through fiscal 2004; (5) the financial statement
loss for the fourth quarter of fiscal 2003 through fiscal 2005; and (6) the
three years' cumulative tax net operating losses through fiscal 2004. In
weighing the positive and negative evidence above, the Company considered the
"more likely than not" criteria pursuant to SFAS No. 109 as well as the risk
factors related to its future business described under the subheadings:
"Dependence on VARs and on a Limited Number of Customers," "Lengthy Sales
Cycles," "Technological Change," and "Competition" as noted in the section
entitled "Risk Factors And Factors That May Affect Future Operating Results." As
described above, the Company concluded that the negative evidence outweighed the
positive evidence and as a result increased the valuation allowance to be equal
to the full amount of the deferred tax asset as of March 31, 2004 and again at
March 31, 2005.

        In the event that actual results differ from these estimates or that
these estimates are adjusted in future periods, the Company may need to adjust
the amount of the valuation allowance based on future determinations of whether
it is more likely than not that some or all of its deferred tax assets will be
realized. A decrease in the valuation allowance would be recorded as an income
tax benefit or a reduction of income tax expense or a credit to stockholders'
equity. The Company's net operating losses available to reduce future taxable
income expire on various dates from fiscal 2007 through fiscal 2024. To the
extent that the Company generates taxable income in jurisdictions where the
deferred tax asset relates to net operating losses that have been offset by a
full valuation allowance, the utilization of these net operating losses would
result in the reversal of the related valuation allowance.

        INVENTORIES. The Company values its inventory at the lower of the actual
cost to purchase and/or manufacture the


                                       29
<PAGE>

inventory or the current estimated market value of the inventory. Management
regularly reviews inventory quantities on hand and records a provision for
excess and obsolete inventory based primarily on forecasts of product demand.
Demand for read/write drives can fluctuate significantly. In order to obtain
favorable pricing, purchases of certain read/write drive parts are made in
quantities that exceed the booked orders. The Company purchases read/write drive
parts for its anticipated read/write drive demand and takes into consideration
the order-to-delivery lead times of vendors and the economic purchase order
quantity for such parts. In addition, the Company keeps a supply of card raw
materials it deems necessary for anticipated demand.

        Management's analysis of the carrying value of card and read/write drive
inventory is performed on a quarterly basis. With respect to inventory carrying
values, the Company follows the principles articulated in Accounting Research
Bulletin 43, Chapter 4, "Inventory Pricing," paragraphs 5 through 7 and 10 and
other authoritative guidance (SAB 100) as it relates to determining the
appropriate cost basis of inventory and determining whether firm, noncancelable
purchase commitments should be accrued as a loss if forecasted demand is not
sufficient to utilize all such committed inventory purchases. As part of the
Company's quarterly excess/obsolete analysis, management also determines whether
lower of cost or market adjustments (i.e., where selling prices less certain
costs are not sufficient to recover inventory carrying values) are warranted;
during fiscal 2005, the Company has not recorded any significant lower of cost
or market adjustments other than for read/write drives in the amount of about
$205,000. During fiscal 2004 and 2003, the Company has not recorded any
significant lower of cost or market adjustment. In those instances where the
Company has recorded charges for excess and obsolete inventory, management
ensures that such new cost basis is reflected in the statement of operations if
that inventory is subsequently sold. The Company's inventory reserves are based
upon the lower of cost or market for slow moving or obsolete items. As a result,
the Company believes a 10% increase or decrease of sales would not have a
material impact on such reserves. The Company is currently evaluating SFAS No.
151 "Inventory Costs - Amendment of ARB No. 43, Chapter 4"and does not expect
the adoption will have a material impact on its results of operations or
financial condition.

RESULTS OF OPERATIONS--FISCAL 2005 COMPARED WITH FISCAL 2004 AND FISCAL 2003

Overview

        Headquartered in Mountain View, California, LaserCard Corporation
(formerly known as Drexler Technology Corporation, until October 1, 2004)
manufactures LaserCard(R) optical memory cards, chip-ready OpticalSmart(TM)
cards, and other advanced-technology cards. In addition, the Company operates
two wholly owned subsidiaries acquired on March 31, 2004, Challenge Card Design
Plastikkarten GmbH, of Rastede, Germany, manufactures advanced-technology cards;
and cards & more GmbH, of Ratingen, Germany, markets cards, system solutions,
and thermal card printers.

        Fiscal 2005 is the first year that results of the German subsidiaries
are included in the Consolidated Statements of Operations, the German operations
contributed to the consolidated Company's revenue by $10 million and net loss by
$0.4 million. Low production volumes for Italian CIE cards partially
manufactured in Germany had a negative impact on the results. These acquisitions
provide the Company with an optical card manufacturing base to serve the
European, Middle Eastern, African, and Asian markets, supplementing the
Company's newly expanded manufacturing operations in California. The Company is
reviewing the viability of merging cards & more GmbH into Challenge Card Design
Plastikkarten GmbH during the next twelve months.

        In addition to using its own marketing staff in California, New York,
and Germany, the Company utilizes value added reseller (VAR) companies and card
distribution licensees for the development of markets and applications for
LaserCard products. Product sales to VARs and licensees consist primarily of the
Company's optical memory cards and optical card read/write drives. The Company
also offers for sale, its customized software applications and add-on
peripherals made by other companies (such as equipment for adding a digitized
photo, fingerprint, hand template, or signature to the cards). These peripherals
have not generated material revenue for the Company but have demonstrated
various system options. The VARs/licensees may add application software,
personal computers, and other peripherals, and then resell these products
integrated into data systems. The Company is continuing its efforts to recruit
new VARs and eliminate nonproductive VARs.


                                       30
<PAGE>

        Major near term growth potential for LaserCard optical memory cards are
in government-sponsored identification programs in several countries. Since
governmental card programs typically rely on policy-making, which in turn is
subject to technical requirements, budget approvals, and political
considerations, there is no assurance that these programs will be implemented as
expected or that they will include optical cards. Objectives for long-term
revenue growth include: (1) broaden the "Optical Memory" ("OM") products range
to address lower end applications characterized by higher price sensitivity, (2)
diversify OM products into, and effectively penetrate, industrial and commercial
markets, (3) expand hardware product offering to address new markets and add
value to current offering, (4) increase OM product revenues by selling more
application software and integrated solutions, such as personalization and kiosk
systems.

        LaserCard Corporation external revenue sourced in the United States
totaled approximately $18.6 million for fiscal 2005, $17 million for fiscal
2004, and $26.3 million for fiscal 2003. External revenue sourced in Germany by
the German subsidiaries totaled approximately $10 million for fiscal 2005, the
first year that results of the German subsidiaries are included in the
Consolidated Statements of Operations. Revenues sourced in the United States are
generally to a small number of government customers located throughout the
world, while revenues sourced in Germany are mainly for a relatively large
number of commercial customers.

        The largest purchaser of LaserCard products is Anteon International
Corporation (Anteon), a value-added reseller (VAR) of the Company. Anteon is the
government contractor for LaserCard product sales to the U.S. Department of
Homeland Security (DHS), U.S. Department of State (DOS), U.S. Department of
Defense (DOD), and the government of Canada. Under government contracts with
Anteon, the DHS purchases Green Cards and DOS LaserVisa BCCs; the DOD purchases
Automated Manifest System cards; and the Canadian government purchases Permanent
Resident Cards. Encompassing all of these programs, the Company's product sales
to Anteon represented 31%, 72% and 94% of the total revenues for fiscal 2005,
2004 and 2003. Another unaffiliated VAR, Laser Memory Card SPA of Italy,
accounted for 26% and 22% of the Company's total revenues for fiscal 2005 and
2004 for programs in Italy and Senegal.

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

                                                                Fiscal Year
                                                           2005    2004    2003
                                                           ----    ----    ----

        United States Green Cards and Laser Visa BCCs        21%     44%     82%
        Canadian Permanent Resident Cards                     6%     25%     10%
        Italian Carta d'Identita Elettronica (CIE) Cards     26%     22%     ---

        For the government of Italy, the Company has received orders for CIE
cards (Carta d'Identita Elettronica) and anticipates orders for a new program
for the PSE cards (Permesso di Soggiorno Elettronico). As of March 31, 2005, the
Company had no backlog for these programs. The Company has delivered about 2.5
million cards for the experimental Phases 1 and 2 of the CIE card program. The
Italian parliament has enacted a law that moves this program into full
implementation requiring the issuance of CIE cards beginning January 2006. The
PSE card program was also included in the legislation. The Company anticipates
orders for these programs this calendar year in preparation for the full
implementation. According to program descriptions released by the Italian
government, CIE card orders could potentially reach 8 to 10 million cards per
year when fully implemented.

        The Company's current five-year U.S. government subcontract, as extended
in May 2005, for Green Cards and Laser Visa BCCs was announced in June 2000 and
will expire on November 26, 2005 but is expected to be extended or replaced with
a new contract. This subcontract was received by the Company through Anteon, a
LaserCard VAR that is a U.S. government prime contractor, under a competitively
bid, government procurement contract. The Company believes that a new contract
will be issued before the expiration of the anticipated extension of the current
contract. U.S. Laser Visa Border Crossing Cards (BCCs) and U.S. Permanent
Resident Cards (Green Cards) for the U.S. Department of Homeland Security (DHS)
are an important part of the Company's revenue base. Therefore, when orders were
delayed at the beginning of fiscal 2004 while new artwork for the cards was
being designed by DHS and when the U.S. government decided to decrease the
number of cards they hold in their safety stock, the Company's revenues and
profits suffered. For these programs, the Company recorded card revenues of $6
million for fiscal 2005,


                                       31
<PAGE>

$4.8 million for fiscal 2004 and $21.2 million for fiscal 2003. The Company
believes that inventory levels have declined to the level desired by the
government and revenue levels will increase to the governments' rate of card
personalization. Subsequent to our fiscal year ended March 31, 2005, the Company
received orders totaling $7.3 million comprised of $5 million for Green Cards
with deliveries from April 2005 through January 2006 and $2.3 million for BCCs
with deliveries from May 2005 through October 2005. This represents an $8.7
million annualized run rate for the two programs assuming subsequent orders are
continuous and at the same delivery rate. At March 31, 2005, between the U.S.
government's own on-site inventory and the inventory the U.S. government owns
and maintains in its vault on Company premises, the U.S. government has
inventories of Laser Visa BCCs which would last approximately seven months and
Green Cards which would last approximately eight months at the U.S. government's
trailing twelve-month card-personalization rates. The Company believes that the
U.S. government wants to maintain an inventory which would last approximately 6
months. Over the past twelve months, the U.S. government has personalized $10
million of cards valued at the Company's selling price for the two programs.

        In 2003, the Company began shipments under a subcontract for Canada's
new Permanent Resident Cards. Cumulative shipments totaled $8.5 million as of
March 31, 2005. The backlog at that time was $300,000 deliverable through July
2005. Subsequent to year-end, the Company received an order in the amount of
$1.8 million which calls for deliveries over a thirteen-month period beginning
in July 2005 at the rate of approximately $135,000 per month.

        For a secure personal identification card program in the Middle East,
the Company has sold 120 read/write drives, most of which were shipped in the
fiscal 2004 second quarter, for installation of the infrastructure required for
card issuance, and also has shipped less than 200,000 optical memory cards over
the past two years for testing and sample purposes. A new prime contractor has
been selected for the program as it moves into implementation with whom the
Company is currently negotiating a new agreement which the Company anticipates
successfully concluding. The Company anticipates that it will ship 130,000 to
230,000 additional optical memory cards during the first quarter of fiscal 2006
in part under its old agreement and in part under an interim order with the new
prime contractor.

        Effective April 3, 2004, the Company sold a second-source
card-manufacturing license to the Global Investments Group, based in Auckland,
New Zealand, for card manufacturing in Slovenia. This agreement provides for
payments to the Company of $14 million for 20-year license and the initial
five-year training support package followed by $15 million paid $1 million
annually for ongoing support for an additional 15 years. Additionally, the
Company is to sell approximately $12 million worth of the required manufacturing
equipment and installation support for the to-be-built facility to provide a
targeted initial manufacturing capacity of 10 million optical cards annually.
The Company has purchased approximately $4 million worth of equipment for sale
to GIG, classified as equipment held for resale within the consolidated balance
sheets and plans to purchase the remainder of the equipment this calendar year.
As of March 31, 2005, the Company has received $15 million of payments called
for in the agreements, consisting of a partial payment for the equipment and
installation support of $13 million, recorded as advance payments from
customers, and $2 million for the license fee, recorded as deferred revenue,
which are classified as long-term liabilities within the consolidated balance
sheets. Additionally, Global Investments Group is to pay the Company royalties
for each card produced during the 20-year term of the license agreement. Start
up of the Global Investments Group facility is planned for early 2006. Revenue
will be recognized over the remaining term of the agreement beginning when
operation of the factory commences.

        The Company plans to invest approximately $7 million in additional
capital equipment and leasehold improvement expenditures if and as customer
orders justify the investment. These expenditures could occur during the next
twelve months, as more fully discussed under "Liquidity and Capital Resources."

Revenues

        For the 2005 fiscal year ended March 31, 2005 the Company's total
revenues were $28.5 million compared with $17 million for fiscal 2004 and $26.3
million for fiscal 2003.

        PRODUCT REVENUES. The Company's total revenues for fiscal 2005 consisted
of sales of optical memory cards, optical card read/write drives, drive
accessories, specialty cards and printers, maintenance, and other miscellaneous
items. Product revenues were $28.5 million for fiscal 2005; $17 million for
fiscal 2004; and $25.2 million for fiscal 2003. Fiscal 2005 was the first year
that the acquired German entities are included in the Company's Consolidated
Statements of Operations. The German companies had revenue of $10 million on
sales to external customers in fiscal 2005. The


                                       32
<PAGE>

increase in product revenues in fiscal 2005 as compared with fiscal 2004 was
mainly due to revenue from the acquired German entities, a $1.2 million increase
in optical memory card revenues for the U.S. government's Laser Visa BCC and
Green Card programs, a $3.8 million increase in optical memory card revenues for
the Carta d'Identita Elettronica (CIE) national ID card program for Italy,
partially offset by a $2.6 million decrease in read/write drive revenue.

        Revenue on optical memory cards totaled $17 million for fiscal 2005
compared with $13.4 million for fiscal 2004 and $24.2 million for fiscal 2003.
Optical memory card revenues for the U.S. government's Laser Visa BCC and Green
Card programs were $6 million for fiscal 2005; $4.8 million for fiscal 2004; and
$21.2 million for fiscal 2003. Optical memory card revenues for the Italian
government's Carta d'Identita Elettronica (CIE) national ID card program was
$7.3 million for fiscal 2005; $3.5 million for fiscal 2004; and immaterial in
fiscal 2003.

        For fiscal 2005, revenue on read/write drives, drive service, and
related accessories totaled $0.9 million compared with $3.4 million for fiscal
2004 and $0.7 million for fiscal 2003. During fiscal 2004, the Company delivered
1,000 optical memory card read/write drives and biometric verification system
software for a U.S. Department of Homeland Security program which accounts for
the difference between fiscal 2004 and both fiscal 2005 and fiscal 2003.
Read/write drives comprised 3% of total revenues during fiscal 2005; 20% for
fiscal 2004; and 3% for fiscal 2003.

        Fiscal 2005 revenue on specialty cards and printers was $10 million, the
first year the Company operated in this segment.

        LICENSE FEES AND OTHER REVENUES. There were no license revenues during
fiscal 2005 or fiscal 2004. Fiscal 2003 license and other revenue included
$875,000, representing the unamortized portion of a $1 million nonrefundable
distribution license fee received in 2000 from a licensee in Asia that had
committed to purchase a minimum number of optical memory cards for a program in
the licensee's country. The Company recorded this fee as deferred revenue and
had been amortizing it as revenue in proportion to the actual card purchases by
the licensee. During December 2002, the Company determined that, due to the
licensee's failure to meet the minimum contractual purchase commitment, the
licensee's distribution rights had become unenforceable and that the licensee
would no longer be acting as the sole supplier for that program. In addition, at
that time the Company decided it would no longer work with the licensee under
the terms of the license agreement. Since there were no further obligations, the
Company recognized the remaining $875,000 of revenue in the quarter ended
December 31, 2002. Fiscal 2003 license and other revenue also included $235,000
relating to a payment received in January 2002 from a third party that was
considering entering into a license agreement with the Company; the Company
originally recorded this payment as deferred revenue. The third party had
subsequently foregone its rights under the agreement due to non-performance and,
accordingly, the Company recognized revenue on this agreement in the fourth
quarter of fiscal 2003.

        Effective April 3, 2004, the Company sold a second-source
card-manufacturing license to the Global Investments Group, based in Auckland,
New Zealand, for card manufacturing in Slovenia discussed above in "Overview".

Backlog

        As of March 31, 2005, the backlog for LaserCard optical memory cards
totaled $0.9 million scheduled for delivery in fiscal 2006, compared with $4.1
million at March 31, 2004, and $1.9 million at March 31, 2003. The Company has
only a few customers who generally place orders for a several-month period so
that variations in order placement from a single customer can materially affect
backlog. As of May 26, 2005, subsequent to year-end, the Company received
additional orders bringing its optical memory card orders scheduled for shipment
during fiscal 2006 to approximately $10 million.

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

        In addition, the backlog for Challenge Card Design Plastikkarten GmbH
and cards & more GmbH as of March 31, 2005 for specialty cards and printers
totaled 1.2 million euros (approximately $1.6 million) and for a contract to
develop a conventional non-optical card production facility totaled 0.8 million
euros (approximately $1 million). Revenue on the contract for a conventional
non-optical card production facility contract is being booked on a zero profit
margin basis. Therefore, the total profit under this contract will be booked at
completion on or about December 2006.


                                       33
<PAGE>

        The $1.1 million included in the March 31, 2004 backlog of the Company's
German operations for a partially completed contract for an amusement park gate
system has been canceled due to the insolvency of the customer. This does not
affect the financial position of the Company since we did not anticipate any
gross profit or loss from the contract because it was substantially completed
prior to the March 31, 2004 acquisition and all profit accrued to the prior
entity. In addition to cancellation of the backlog, we removed the $1.2 million
of deferred costs from inventory, $0.8 million from deferred revenue, and $0.3
million from accounts payable and accrued liabilities since the contract will
not be completed and the Company has been indemnified for potential losses.

Gross Margin

        Gross margin on product sales was 21% for fiscal 2005; 22% for fiscal
2004; and 45% for fiscal 2003. The decrease in gross margin on product sales for
fiscal 2005 and 2004 compared with fiscal 2003 was due primarily to lower volume
of optical memory card sales.

        OPTICAL MEMORY CARDS. The gross margin on optical memory cards was 26%
for fiscal 2005 compared with 26% for fiscal 2004 and 50% for fiscal 2003. Prior
to fiscal 2004, optical memory card gross margins have approximated 50%. Optical
memory card gross profit and margins can vary significantly based on average
selling price, sales and production volume, mix of card types, production
efficiency and yields, and changes in fixed costs. The declines for fiscal 2005
and 2004 as compared with fiscal 2003 were primarily due to low sales and
production volume and the corresponding lower absorption of fixed costs and
about $1.5 million for increases in overhead costs due to the introduction of
cards made by a sheet-lamination process that produces premium cards with
selling prices from 20% to 45% higher than the typical roll-lamination process
card.

        READ/WRITE DRIVES. For fiscal 2005, the Company had a negative gross
profit on read/write drive sales of approximately $1.2 million, compared with a
fiscal 2004 gross profit on read/write drive sales, including biometric system
software, of approximately $0.4 million and a gross margin of 12%, compared with
a negative gross profit on read/write drive sales in fiscal 2003 of
approximately $0.9 million. Read/write drives gross profits increased by
$525,000 in fiscal 2004 due to the inclusion of biometric system software on a
per-drive basis on the 1,000 drive DHS purchase. During fiscal 2005, the Company
wrote off read/write drive inventory, including costs to convert model 780 to
model Q-600, in the amount of approximately $0.3 million. During fiscal 2003,
the Company wrote off read/write drive inventory totaling approximately $0.3
million. Read/write drive gross profit and margins can vary significantly based
upon sales and production volume, changes in fixed costs, and the inclusion of
optional features and software licenses on a per-drive basis. Except for the
large read/write drive order from the U.S. government in the third quarter of
fiscal 2004, read/write drive gross profits have been negative, inclusive of
fixed overhead costs, due to low sales volume. The Company anticipates that
quarterly negative gross profits will continue in the future unless sales volume
is sufficient to cover fixed costs. Also, unless per drive system software
licenses are included in future orders, the Company believes that margins will
be below 10% when sales volume is sufficient to result in positive gross profit.

        SPECIALTY CARDS AND PRINTERS. The gross margin on specialty cards and
printers was 25% for fiscal 2005, the first year the Company operated in this
segment.

Income and Expenses

        SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES (SG&A). SG&A expenses were
$11.9 million for fiscal 2005; $6.7 million for fiscal 2004; and $6.2 million
for fiscal 2003. The $5.2 million increase for fiscal 2005 as compared with
fiscal 2004 includes $2.8 million from the acquired German companies, $1 million
for additional costs for legal, accounting, auditing, and the cost of compliance
with assessing internal control over financial reporting mandated by Section 404
of the Sarbanes-Oxley Act of 2002, $0.4 million for increased marketing,
selling, and customer service expenditures, $0.2 million on exchange rate
fluctuations on debt that has subsequently been extinguished, $0.3 million for
occupancy costs, $0.2 million for increases in investor relations expenditures,
and $0.3 million in other miscellaneous expenses. The $0.5 million increase for
fiscal 2004 compared with fiscal 2003 was primarily due to a $0.2 million
increase in insurance premiums and an increase of $0.4 million in legal and
accounting fees. SG&A expenses for fiscal 2004 were higher than fiscal 2003
levels, mainly due to increases in accounting and legal fees related to the
costs of being a public company and the acquisition and integration of two
companies in Germany. The


                                       34
<PAGE>

Company believes that SG&A expenses for fiscal 2006 will be higher than fiscal
2005 levels, mainly due to increases in marketing and selling expenses,
partially offset by approximately $0.2 million of expected decreased expenses
associated with Sarbanes Oxley 404 compliance.

        RESEARCH AND ENGINEERING EXPENSES (R&E). The Company is continuing its
efforts to develop new optical memory card features and structures, including
various sheet-lamination card structures, the insertion of contactless chips
with radio frequency (RF) capability, OptiChip(TM), OVD (optically variable
device) products, and associated media development; enhanced optical memory caRD
read/write drives and read-only drives (readers); and new software products in
an effort to provide new products that can stimulate optical memory card sales
growth. For example, the Company recently has developed a prototype of a
LaserCard handheld reader. The Company anticipates that these ongoing research
and engineering efforts will result in new or enhanced card capabilities,
production-model read-only drives, or drives with advanced security features and
lower manufacturing costs; however, there is no assurance that such product
development efforts will be successful. These features are important for the
Company's existing and future optical memory card markets. Total R&E expenses
were $3 million for fiscal 2005; $2.6 million for fiscal 2004; and $2.8 million
for fiscal 2003. The increase in R&E spending for fiscal 2005 compared with
fiscal 2004 was mainly due to $0.3 million in R&E expenditures by the acquired
German entities. The decrease in R&E spending for fiscal 2004 compared with
fiscal 2003 was mainly due to the completion of the design for a new read/write
drive model and a $0.1 million reduction related to the completion in the
previous year of the amortization of design technology transfer costs. Increases
in R&E expenses are anticipated for fiscal 2006 for development of
production-model read-only drives, optical memory card media development, and
other card and hardware related programs.

        OTHER INCOME AND EXPENSE. Total net other income for fiscal 2005 was
$240,000 of interest income. Total net other income for fiscal 2004 was
$176,000, consisting of $269,000 of interest income, offset by $93,000 of
expense recorded to mark-to-market the fair value of common stock options and
warrants issued in December 2003. Total other income was $397,000 of interest
income for fiscal 2003. The decrease in interest income for fiscal 2005 compared
with fiscal 2004 was primarily due to the reduction in invested funds. The
decrease in interest income for fiscal 2004 compared with fiscal 2003 was
primarily due to the decline in interest rates.

        INCOME TAXES. The Company recorded an income tax expense of $139,000 for
fiscal 2005 and $7.1 million for fiscal 2004. For fiscal 2003, the income tax
expense was $1.5 million, for an effective tax rate of 40%. The Company's income
tax expense for fiscal 2005 was mainly due to alternative minimum taxes to the
U.S. government. The payments from GIG received during fiscal 2005 are recorded
as income on the tax return. This income has been offset by net operating loss
carryforwards generated in previous years. However, alternative minimum taxes
are due on this income. The Company's income tax expense for fiscal 2004 was due
to increasing the valuation allowance to be equal to the remaining balance of
the Company's deferred tax asset. The fiscal 2004 income tax expense was not a
cash item and did not mean that the Company owed income taxes, but rather that
it no longer could demonstrate that in the future it would likely be able to
utilize the tax benefits of previously generated net operating losses. The
methodology for determining the realizability of its deferred tax asset is a
critical accounting policy as described under the heading "Critical Accounting
Policies." In summary, this methodology considers positive and negative evidence
regarding the Company's ability to generate sufficient future taxable income to
realize its deferred tax assets. Due to the Company's cumulative tax loss
history for the three-year period ending March 31, 2004, income statement loss
history over the five quarters ended March 31, 2004, and the difficulty in
forecasting the timing of future revenue which could lead to positive income on
its financial statements and taxable income as evidenced by the deviations in
achieved revenues from expected revenues and taking into account the newness of
certain customer relationships, the Company determined it was necessary to
increase the valuation allowance under SFAS No. 109 to the full amount of the
deferred tax asset because its estimated future revenue taking into account only
booked orders would not generate sufficient taxable income to realize any of its
deferred tax assets. If the Company has taxable income in the future, any
unexpired net operating loss income tax carry-forward amounts will be utilized
to reduce otherwise required income tax payments, and future tax expense, up to
the full amount of the net deferred tax asset which is currently $18.5 million.
In future years, unless the valuation allowance is reduced, should the Company
be profitable for income tax purposes, the Company will utilize its available
Net Operating Loss carryforwards to reduce the income tax it would otherwise
owe, meaning that its federal effective tax rate will be zero except for
alternative minimum taxes of 2%.


                                       35
<PAGE>

LIQUIDITY AND CAPITAL RESOURCES

        As of March 31, 2005, the Company had cash, cash equivalents, and
short-term investments of $10.1 million and a current ratio of 3.2 to 1. The
Company also had $6.3 million in long-term investments with original maturities
from one year to two and one-half years. Cash, short-term investments, and
long-term investments were $16.4 million at March 31, 2005 and $20.9 million at
March 31, 2004.

        Net cash provided by operating activities was $3 million for fiscal 2005
compared with cash used in operating activities of $2 thousand for fiscal 2004
and $64 thousand for fiscal 2003.

        Cash increased during fiscal 2004 due to the proceeds from an equity
private placement of common stock, as described below. Cash will fluctuate based
upon the timing of advance payments from customers relative to shipments and the
timing of inventory purchases and subsequent manufacture and sale of products.

        The Company believes that the estimated level of revenues and customer
advance payments over the next 12 months will be sufficient to generate cash
from operating activities over the same period. However, quarterly fluctuations
are expected. Operating cash flow could be negatively impacted to a significant
degree if either of the Company's largest U.S. government programs were to be
delayed, reduced, canceled, or not extended, if the Italian CIE card program
does not grow as planned internally, and if these programs are not replaced by
other card orders or other sources of income, or if increases in product
revenues or licenses do not keep pace with increased marketing and R&E and
capital expenditures.

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

        As a result of the $8.9 million net loss recorded for fiscal 2005, the
Company's accumulated deficit increased to $27.1 million. Stockholders' equity
decreased to $26.7 million as a result of the net loss.

        Net cash provided by investing activities was $2.5 million for fiscal
2005 compared with cash used in investing activities of $10.5 million for fiscal
2004 and $4.6 million for fiscal 2003. Purchases of property and equipment
accounted for $3.3 million in fiscal 2005, $4 million in fiscal 2004, and $2.5
million in fiscal 2003. The purchase of the two German companies, Challenge Card
Design Plastikkarten GmbH and cards & more GmbH during fiscal 2004 accounted for
$3.1 million of cash used in investing activities. The balance of the changes
was mainly due to the maturities and purchases of investments.

        The Company considers all highly liquid investments, consisting
primarily of commercial paper, discount notes, and U.S. government bonds, with
original or remaining maturities of three months or less at the date of
purchase, to be cash equivalents. All investments with original or remaining
maturities of more than three months but not more than one year at the date of
purchase are classified as short-term. Investments with original or remaining
maturities of more than one year at the date of purchase are classified as
long-term. The Company determines the length of its investments after
considering its cash requirements and yields available for the type of
investment considered by the Company. Management also determines the appropriate
classification of debt and equity securities at the time of purchase and
reevaluates the classification of investments as of each balance sheet date. As
of March 31, 2005 the Company had $12.4 million classified as short-term and
long-term investments, compared with $18.6 million at March 31, 2004. All
auction rate securities are accounted for as available-for-sale and all other
interest-bearing securities are accounted for as held-to-maturity.

        The Company made capital equipment and leasehold improvement purchases
of approximately $3.3 million during fiscal 2005 compared with approximately $4
million during fiscal 2004 and $2.5 million during fiscal 2003. The Company's
current card capacity, assuming optimal card type mix, is estimated at
approximately 16 million cards per year. The Company plans to purchase
additional production equipment in a series of steps when deemed appropriate by
the Company. The Company is also increasing production capacity for cards with
new structures used by the programs in Canada, Italy, and a Middle Eastern
country. In addition to investment used for expansion, the Company expects to
make additional capital expenditures for cost savings, quality improvements, and
other purposes. The


                                       36
<PAGE>

Company plans to use cash on hand and cash generated from operations to fund
capital expenditures of approximately $7 million for equipment and leasehold
improvements for card production, read/write drive tooling and assembly, and
general support items as customer orders justify the investment.

        On March 31, 2004, the Company completed its acquisition of two related
German card companies, Challenge Card Design Plastikkarten GmbH of Rastede,
Germany, and cards & more GmbH of Ratingen, Germany (collectively, the Acquired
German Entities), including their sales operations in the United States and
Korea. The Company purchased the shares of the Acquired German Entities from
their five shareholders (the Shareholders) and purchased assets of the United
States sales operation from a partnership comprised of the Shareholders. In the
acquisition transaction, the Company agreed to assume 0.5 million euros of debt
and to pay approximately 4.8 million euros in cash, consisting of approximately
2.3 million euros payable at closing and the remaining approximately 2.5 million
euros payable in five equal annual installments for the business and certain
assets. Subsequently, in January 2005, the Company determined that it would be
in its best interest to eliminate this debt and pay the net present value of
this debt to the selling shareholders. The acquisition agreement specified that
the purchase price be adjusted based upon other assets purchased and additional
liabilities assumed. This resulted in a reduction in the purchase price of
approximately 0.4 million euros as of March 31, 2004. The present value of the
net total purchase price is $5.5 million. This purchase price was determined by
negotiation between the Company and the Shareholders, taking into account such
matters as the value of the tangible assets and the going concern value of the
business operations of the Acquired German Entities. Four of the Shareholders
entered into new employment agreements with the Acquired German Entities while
the fifth Shareholder, who is resident in the US, entered into an employment
agreement with registrant. In addition to salaries, these employment agreements
provide for commission based upon the future results of operations of the
Acquired German Entities, which could be as much as 3.8 million euros over the
next four years. The Company used a portion of its available cash to fund the
acquisition. The Shareholders had no previous material relationship with the
Company or its affiliate or subsidiaries, although the Company did substantial
business with the Acquired German Entities during recent years. One of the
Acquired German Entities owns a plant in Rastede, Germany together with
associated equipment which it has used to manufacture plastic cards featuring
contactless IC chip technology and high resolution printing. The Company intends
to continue to use the facility and equipment to produce such cards as well as
to enhance the facility to produce LaserCard optical memory cards in Germany.
This will enable that company to manufacture cards featuring four of the key ID
card technologies (optical memory, contact IC chip, contactless RF ID, and
magnetic stripe) either singly or in combination, along with other high-security
features.

        Net cash provided by financing activities was $3.9 million in fiscal
2005 versus $11.1 million provided by financing activities in fiscal 2004 and
$1.8 million for fiscal 2003. During fiscal 2005 the Company used cash in the
amount of $3.6 million to retire debt attributable to the acquisition of
Challenge Card Design GmbH and cards & more GmbH on March 31, 2004. Fiscal 2004
financing activities consisted of proceeds from the equity private placement
described below. Proceeds on sales of common stock through the Company's
stock-option and stock-purchase plans were $0.3 million for fiscal 2005; $1.7
million for fiscal 2004; and $1.8 million for fiscal 2003.

        The Company received net proceeds of $9.4 million (net of fees and
expenses) from the issuance and sale in December 2003 of 791,172 shares of
common stock, options to purchase 122,292 shares of common stock, and warrants
to purchase 174,057 shares of common stock for an aggregate purchase price of
$10.1 million in a private placement. The purchase price of the common stock was
$12.76 per share, which was a 15% discount from the five-day average price as of
December 23, 2003. The options have an exercise price of $16.51 per share and a
nine-month life. The warrants have an exercise price of $17.26 per share and a
life of five years. The options and warrants were valued at $245,000 and
$984,000, respectively, based on a Black-Scholes calculation as of December 23,
2003 and pursuant to the provisions of EITF Issue No. 00-19, "Accounting for
Derivative Financial Instruments Indexed to, and Potentially Settled in, a
Company's Own Stock," (EITF 00-19) were recorded at those values in long-term
liabilities. The balance of the net proceeds was accounted for as additional
paid in capital. Under EITF 00-19, the Company marks-to-market the fair value of
the options and warrants at the end of each accounting period. At the end of the
fiscal 2004 third quarter, this resulted in options and warrants valued at
$195,000 and $916,000, respectively. The decrease in valuation of the options
and warrants between December 23, 2003 and the quarter end of $118,000 was
recorded as other income in the accompanying Condensed Consolidated Statement of
Operations and resulted from a decrease in the Company's stock price. On
February 6, 2004, the Company and the investors entered into an amendment to
their original agreement that resulted in the reclassification of the options
and warrants to equity. The amendment clarified that the options and warrants
granted in the financing may be exercised at a time when a


                                       37
<PAGE>

registration statement covering the resale of the underlying shares is not
effective or available and that in such instance the Company would deliver to
the investors shares of common stock whose resale is not currently registered.
On the effective date of the amendment, the options and warrants were
reclassified to equity as additional paid-in-capital. As a result of the
increase in value of the options and warrants from the previous quarter end to
the amendment date, due to increases in the Company's stock price, the Company
recognized an expense of $211,000, which is included in other expense in the
Condensed Consolidated Statement of Operations in the fourth quarter of fiscal
2004.

        On January 23, 2004, the Company filed an S-3 Registration Statement
with the Securities and Exchange Commission covering the resale of the common
stock issued and issuable in such financing. The Securities and Exchange
Commission declared the registration statement effective on April 28, 2004. The
Company is subject to certain indemnity provisions included in the stock
purchase agreement entered into as part of the financing associated with this
registration. Morgan Keegan & Company, Inc. acted as the Company's exclusive
placement agent for this transaction. The Company used approximately $3 million
of the net proceeds from this private placement in connection with the purchase
of CCD and C&M and presently intends to use the balance of such proceeds (1) to
purchase capital equipment and make leasehold improvements to further expand the
Company's LaserCard optical memory card production capacity, (2) for additional
payments in connection with the purchase of CCD and C&M, and (3) for general
corporate purposes.

        During fiscal 2005, the Company commenced a share repurchase program
under which up to 350,000 shares of common stock could be purchased by the
Company from time to time in Nasdaq Stock Market transactions in an aggregate
amount not exceeding $3 million. During the second quarter of fiscal 2005, the
Company used cash of $655,000 for this purpose and has since terminated this
program without further activity.

        There were no debt financing activities for fiscal 2003. The Company
acquired bank debt in the amount of $1.4 million in the fiscal 2004 acquisition
of Challenge Card Design Plastikkarten GmbH and cards & more GmbH, of Germany.
The Company extinguished this debt during fiscal 2005. In addition, the Company
incurred debt with a net present value of future payments on this acquisition of
$2.2 million on this transaction as of March 31, 2004. The Company extinguished
this debt during fiscal 2005.

        The following table provides a summary of the effect on liquidity and
cash flows from the Company's contractual obligations as of March 31, 2005 (in
thousands):

<TABLE>
<CAPTION>
                                                                                 Fiscal Year
                                                                                                        2011 and
                                                2006        2007        2008        2009       2010     Thereafter     Total
                                                ----        ----        ----        ----       ----     ----------     -----
<S>                                            <C>         <C>         <C>         <C>        <C>         <C>         <C>
Contractual obligations:
    Noncancellable operating leases            $1,150      $1,072      $1,021      $  993     $1,382      $5,610      $11,228
    Noncancelable purchase orders               2,408          --          --          --         --          --        2,408
                                               ------      ------      ------      ------     ------      ------      -------
         Total                                 $3,558      $1,072      $1,021      $  993     $1,382      $5,610      $13,636
                                               ======      ======      ======      ======     ======      ======      =======
</TABLE>


                                       38
<PAGE>

ITEM 7A.   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS

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

        o       Commercial paper rated A1/P1 or debt instruments rated AAA, as
                rated by the major rating services
        o       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, the Company's 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.

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

        The following summarizes short-term and long-term investments at fair
value, weighted average yields and expected maturity dates as of March 31, 2005
(in thousands):

<TABLE>
<CAPTION>
                                                        2006        2007         Total
                                                        ----        ----         -----
<S>                                                    <C>         <C>          <C>
         Auction rate securities                       $ 5,150          --      $ 5,150
         Weighted Average Yield                          3.13%          --        3.13%
         U.S. Government and Agency Obligations            993       6,212        7,205
         Weighted Average Yield                          2.04%       2.67%        2.59%
                                                       -------     -------      -------
         Total Investments                             $ 6,143     $ 6,212      $12,355
                                                       -------     -------      -------
</TABLE>

        FOREIGN CURRENCY EXCHANGE RATE RISK. The Company's U.S. Operations sell
products in various international markets. To date an immaterial amount of sales
have been denominated in euros. In addition, some raw material purchases and
purchased services are denominated in euros. As of March 31, 2005, the
outstanding balance of a debt relating to the acquisition of Challenge Card
Design Plastikkarten GmbH and cards & more GmbH, of Germany was immaterial.
Accordingly, the exchange rate risk related to this debt is minimal.

        As of March 31, 2005, the Company had not entered into a forward
exchange contract to hedge against or potentially minimize the foreign currency
exchange risk. We will continue to evaluate our exposure to foreign currency
exchange rate risk on a regular basis.


                                       39
<PAGE>

ITEM 8.   FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

             REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of
LaserCard Corporation

        We have audited management's assessment, included in the accompanying
Management Report on Internal Controls Over Financial Reporting included in Item
9A that LaserCard Corporation and its subsidiaries (the "Company") maintained
effective internal control over financial reporting as of March 31, 2005, based
on criteria established in INTERNAL CONTROL--INTEGRATED FRAMEWORK issued by the
Committee of Sponsoring Organizations of the Treadway Commission (the COSO
criteria). The Company's management is responsible for maintaining effective
internal control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting. Our responsibility
is to express an opinion on management's assessment and an opinion on the
effectiveness of the Company's internal control over financial reporting based
on our audit.

        We conducted our audit in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether
effective internal control over financial reporting was maintained in all
material respects. Our audit included obtaining an understanding of internal
control over financial reporting, evaluating management's assessment, testing
and evaluating the design and operating effectiveness of internal control, and
performing such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable basis for our
opinion.

        A company's internal control over financial reporting is a process
designed to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles. A company's internal
control over financial reporting includes those policies and procedures that (1)
pertain to the maintenance of records that, in reasonable detail, accurately and
fairly reflect the transactions and dispositions of the assets of the company;
(2) provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.

        Because of the inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also, projections of any
evaluation of the effectiveness to future periods are subject to the risk that
the controls may become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may deteriorate.

        In our opinion, management's assessment that the Company maintained
effective internal control over financial reporting as of March 31, 2005, is
fairly stated, in all material respects, based on the COSO criteria. Also in our
opinion, the Company maintained, in all material respects, effective internal
control over financial reporting as of March 31, 2005, based on the COSO
criteria.

        We have also audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States), the consolidated balance
sheet of LaserCard Corporation and its subsidiaries as of March 31, 2005, and
the related consolidated statements of operations, stockholders' equity, and
cash flows for the year then ended and our report dated June 3, 2005, expressed
an unqualified opinion thereon.



/s/ Odenberg Ullakko Muranishi & Co. LLP
San Francisco, California
June 3, 2005


                                       40
<PAGE>

             REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM



The Board of Directors and Stockholders of
LaserCard Corporation

        We have audited the accompanying consolidated balance sheet of LaserCard
Corporation and its subsidiaries as of March 31, 2005, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
the year then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.

        We conducted our audit in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.

        In our opinion, the consolidated financial statements audited by us
present fairly, in all material respects, the financial position of LaserCard
Corporation and its subsidiaries as of March 31, 2005, and the results of their
operations and their cash flows for the year then ended, in conformity with
accounting principles generally accepted in the United States of America.

        We have also audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States), the effectiveness of
LaserCard Corporation's internal control over financial reporting as of March
31, 2005, based on criteria established in Internal Control--Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission and our report dated June 3, 2005 expressed an unqualified opinion
thereon.



/s/ Odenberg Ullakko Muranishi & Co. LLP
San Francisco, California
June 3, 2005


                                       41
<PAGE>

             REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM



The Board of Directors and Stockholders
LaserCard Corporation:

        We have audited the accompanying consolidated balance sheet of LaserCard
Corporation (formerly Drexler Technology Corporation) and subsidiaries as of
March 31, 2004, and the related consolidated statements of operations,
stockholders' equity and cash flows for the year then ended. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audit.

        We conducted our audit in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.

        In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of LaserCard
Corporation and subsidiaries as of March 31, 2004, and the results of their
operations and their cash flows for the year then ended in conformity with
accounting principles generally accepted in the United States of America.


/s/ KPMG LLP
Mountain View, California
June 9, 2004


                                       42
<PAGE>

             REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM



To the Board of Directors and Stockholders
of LaserCard Corporation:

        In our opinion, the consolidated statements of operations, stockholders'
equity and cash flows for the year ended March 31, 2003 present fairly, in all
material respects, the results of operations and cash flows of Lasercard
Corporation (formerly Drexler Technology Corporation) and its subsidiaries for
the year ended March 31, 2003, in conformity with accounting principles
generally accepted in the United States of America. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audit. We
conducted our audit of these statements in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.


/s/PricewaterhouseCoopers LLP
San Jose, California
April 28, 2003, except for
Note 4, as to which the date is January 22, 2004


                                       43
<PAGE>
<TABLE>
<CAPTION>

                                             LASERCARD CORPORATION AND SUBSIDIARIES
                                           (Formerly Drexler Technology Corporation)
                                                  CONSOLIDATED BALANCE SHEETS
                                                    March 31, 2005 and 2004
                                       (In thousands, except share and per share amounts)


                                                                                                        2005              2004
                                                                                                        ----              ----
<S>                                                                                               <C>               <C>
                                                             ASSETS
Current assets:
   Cash and cash equivalents                                                                      $    3,965        $    2,288
   Short-term investments                                                                              6,150            10,381
   Accounts receivable, net of allowances of $56 at March 31, 2005
      and $296 at March 31, 2004                                                                       1,934             2,550
   Inventories                                                                                         7,909             6,799
   Prepaid and other current assets                                                                    1,352             1,276
                                                                                                  ----------        ----------
      Total current assets                                                                            21,310            23,294
                                                                                                  ----------        ----------

Property and equipment, net                                                                           12,532            11,530
Long-term investments                                                                                  6,300             8,246
Equipment held for resale                                                                              4,061             2,419
Patents and other intangibles, net                                                                       923               978
Goodwill                                                                                               3,321             3,321
Note receivable                                                                                          220                --
Other non-current assets                                                                                 101                47
                                                                                                  ----------        ----------
           Total assets                                                                           $   48,768        $   49,835
                                                                                                  ==========        ==========

                                              LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
   Accounts payable                                                                               $    2,105        $    4,249
   Accrued liabilities                                                                                 2,312             2,035
   Deferred tax liability                                                                                641               608
   Advance payments from customers                                                                     1,167             3,102
   Deferred revenue                                                                                      539               111
   Bank borrowings                                                                                        --               726
   Current portion of long-term debt                                                                      --               440
                                                                                                  ----------        ----------
      Total current liabilities                                                                        6,764            11,271
                                                                                                  ----------        ----------

Advance payments from customers                                                                       13,000               500
Deferred revenue                                                                                       2,000                --
Deferred rent                                                                                            326                --
Long-term debt, net of current portion                                                                    --             2,378
                                                                                                  ----------        ----------
           Total liabilities                                                                          22,090            14,149
                                                                                                  ----------        ----------

Commitments and contingencies (Note 7)

Stockholders' equity:
     Preferred stock, $.01 par value:
      Authorized--2,000,000 shares
      Issued--none                                                                                        --                --
   Common stock, $.01 par value:
      Authorized--30,000,000 shares
      Issued and outstanding--11,436,794 shares at March 31, 2005
           and 11,399,764 shares at March 31, 2004                                                       114               114
   Additional paid-in capital                                                                         54,155            53,816
   Accumulated deficit                                                                               (27,145)          (18,244)
   Accumulated other comprehensive income                                                                209                --
   Treasury stock at cost -- 91,630 shares at March 31, 2005                                            (655)               --
                                                                                                  ----------        ----------
           Total stockholders' equity                                                                 26,678            35,686
                                                                                                  ----------        ----------

               Total liabilities and stockholders' equity                                         $   48,768        $   49,835
                                                                                                  ==========        ==========


                    The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>

                                                              44
<PAGE>
<TABLE>
<CAPTION>

                                           LASERCARD CORPORATION AND SUBSIDIARIES
                                          (Formerly Drexler Technology Corporation)
                                            CONSOLIDATED STATEMENTS OF OPERATIONS
                                      Fiscal Years Ended March 31, 2005, 2004, and 2003
                                          (In thousands, except per share amounts)


                                                                            2005                 2004                  2003
                                                                           -----                -----                  ----
<S>                                                                    <C>                  <C>                   <C>
Revenues:
    Product sales                                                      $   28,544           $  16,963             $  25,221
    License and other revenue                                                  --                  --                 1,110
                                                                       ----------           ---------             ---------
         Total revenues                                                    28,544              16,963                26,331
                                                                       ----------           ---------             ---------

Cost of product sales                                                      22,637              13,157                13,906
                                                                       ----------           ---------             ---------

       Gross profit                                                         5,907               3,806                12,425
                                                                       ----------           ---------             ---------

Operating expenses:
    Selling, general and administrative expenses                           11,891               6,700                 6,202
    Research and engineering expenses                                       3,018               2,620                 2,818
                                                                       ----------           ---------             ---------
       Total operating expenses                                            14,909               9,320                 9,020
                                                                       ----------           ---------             ---------

          Operating income (loss)                                          (9,002)             (5,514)                3,405
                                                                       ----------           ---------             ---------

Other income, net                                                             240                 176                   397
                                                                       ----------           ---------             ---------

          Income (loss) before income taxes                                (8,762)             (5,338)                3,802

Income tax expense                                                            139               7,089                 1,520
                                                                       ----------           ---------             ---------

          Net income (loss)                                            $   (8,901)          $ (12,427)            $   2,282
                                                                       ==========           =========             =========

Net income (loss) per share:
          Basic                                                        $    (.78)           $   (1.15)            $     .22
                                                                       ==========           =========             =========
          Diluted                                                      $    (.78)           $   (1.15)            $     .21
                                                                       ==========           =========             =========

Weighted-average shares used in
   computing net income (loss) per share:
          Basic                                                            11,362              10,761                10,356
          Diluted                                                          11,362              10,761                10,842


                   The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>

                                                             45
<PAGE>
<TABLE>
<CAPTION>

                                           LASERCARD CORPORATION AND SUBSIDIARIES
                                          (Formerly Drexler Technology Corporation)
                                       CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                                      Fiscal Years Ended March 31, 2003, 2004, and 2005
                                                       (In thousands)


                                                                           Accumulated
                                                Additional                    Other                               Total
                               Common Stock      Paid-in    Accumulated   Comprehensive    Treasury Stock     Stockholders'
                             Shares    Amount    Capital      Deficit         Income      Shares    Amount        Equity
                             ------    ------    -------      -------         ------      ------    ------        ------
<S>                          <C>       <C>       <C>         <C>              <C>                   <C>           <C>
Balance, March 31, 2002      10,241    $  102    $40,334     $ (8,099)        $   --        --      $   --        $32,337
   Shares issued under
     stock option and
     stock purchase plans       202         2      1,774           --             --        --          --          1,776
   Income tax benefit
     arising from stock
     options                     --        --        356           --             --        --          --            356
   Compensation related
     to stock plan               --        --         92           --             --        --          --             92
     activity
   Comprehensive income:
       Net income                --        --         --        2,282             --        --          --          2,282
                             ------    ------    -------    ---------         ------    ------     -------        -------

Balance, March 31, 2003      10,443       104     42,556       (5,817)            --        --          --         36,843
   Shares, warrants,
     and options sold in
     private placement,
     net of $706 in
     issuance costs and
     $93 for change in
     fair value of common
     stock warrants and
     options                    791         8      9,474           --             --        --          --          9,482
   Shares issued under
     stock option and
     stock purchase plans       166         2      1,689           --             --        --          --          1,691
   Compensation related
     to stock plan
     activity                    --        --         97           --             --        --          --             97
   Comprehensive loss:
       Net loss                  --        --         --      (12,427)            --        --          --        (12,427)
                             ------    ------    -------    ---------         ------    ------     -------        -------

Balance, March 31, 2004      11,400       114     53,816      (18,244)            --        --          --         35,686
   Purchase of treasury
     stock                       --        --         --           --             --       (92)       (655)          (655)
   Shares issued under
     stock option and
     stock purchase plans        37        --        252           --             --        --          --            252
   Compensation related
     to stock plan
     activity                    --        --         87           --             --        --          --             87
   Comprehensive loss:
     Foreign currency
     translation
     adjustments                 --        --         --           --            209        --          --            209
       Net loss                  --        --         --       (8,901)            --        --          --         (8,901)
                             ------    ------    -------    ---------         ------    ------     -------        -------
   Total comprehensive
     loss                                                                                                          (8,692)
                                                                                                                  -------

Balance, March 31, 2005      11,437    $  114    $54,155    $ (27,145)        $  209       (92)    $  (655)       $26,678
                             ======    ======    =======    =========         ======    ======     =======        =======


                       The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>

                                                             46
<PAGE>
<TABLE>
<CAPTION>

                                           LASERCARD CORPORATION AND SUBSIDIARIES
                                         (Formerly Drexler Technology Corporation)
                                           CONSOLIDATED STATEMENTS OF CASH FLOWS
                                     Fiscal Years Ended March 31, 2005, 2004, and 2003
                                                       (In thousands)


                                                                          2005                  2004                 2003
                                                                          ----                  ----                 ----
<S>                                                                    <C>                   <C>                   <C>
Cash flows from operating activities:
   Net income (loss)                                                   $  (8,901)            $(12,427)             $ 2,282
     Adjustments to reconcile net income (loss) to net cash
           provided by (used in) operating activities:
        Depreciation and amortization                                      2,640                2,123                1,829
        Loss on disposal of equipment                                         10                   --                   --
        Provision for doubtful accounts receivable                             3                    1                   11
        Provision for excess and obsolete inventory                          335                   97                  425
        Provision of product return reserve                                   62                   --                   --
        Decrease in deferred income tax assets                                --                7,086                1,326
        Stock-based compensation                                             111                   97                   92
        Tax benefit relating to the exercise of stock options                 --                   --                  356
        Loss associated with increase in fair value of
           common stock warrants and options                                  --                   93                   --
     Changes in operating assets and liabilities, net of assets
           acquired and liabilities assumed in business combination:
        Decrease (increase) in accounts receivable                           559                  346                  (11)
        Increase in inventories                                           (1,361)              (1,476)              (1,163)
        Decrease (increase) in other assets                                  (61)                  63                 (455)
        Increase in equipment for resale                                  (1,641)                  --                   --
        Increase (decrease) in accounts payable and accrued
           liabilities                                                    (1,751)               2,305                  664
        Increase (decrease) in deferred revenue                            2,413                  106               (3,965)
        Increase (decrease) in advance payments from customers            10,537                1,584               (1,455)
                                                                       ---------            ---------            ---------
           Net cash provided by (used in) operating activities             2,955                   (2)                 (64)
                                                                       ---------            ---------            ---------
Cash flows from investing activities:

     Purchases of property and equipment                                  (3,325)              (3,996)              (2,468)
     Proceeds from sale of equipment                                           2                   --                   --
     Acquisition of patents and other intangibles                           (117)                 (93)                (307)
     Loan receivable                                                        (214)                  --                   --
     Purchase of auction rate securities, net                                 --               (5,400)                  --
     Purchases of investments                                             (3,451)             (10,013)             (25,954)
     Proceeds from maturities of investments                               9,628               12,047               24,080
     Purchase of Challenge Card Design and
        cards & more, net of $12 cash acquired                                --               (3,089)                  --
                                                                       ---------            ---------            ---------
           Net cash provided  by (used in) investing activities            2,523              (10,544)              (4,649)
                                                                       ---------            ---------            ---------
Cash flows from financing activities:
        Proceeds from sale of common stock through stock plans               339                1,691                1,776
        Repayment of bank loan                                              (745)                  --                   --
        Decrease in short term and long term debt                         (2,835)                  --                   --
        Cash used to purchase common stock through an open market
        repurchase program                                                  (655)                  --                   --
        Net proceeds from sale of common stock, options and
           warrants through private placement                                 --                9,389                   --
                                                                       ---------            ---------            ---------
           Net cash provided by (used in) financing activities            (3,896)              11,080                1,776
                                                                       ---------            ---------            ---------
        Effect of exchange rate changes on cash                               95                   --                   --
                                                                       ---------            ---------            ---------
        Net increase (decrease) in cash and cash equivalents               1,677                  534               (2,937)

Cash and cash equivalents:
     Beginning of period                                                   2,288                1,754                4,691
                                                                       ---------            ---------            ---------
     End of period                                                     $   3,965            $   2,288            $   1,754
                                                                       =========            =========            =========

Supplemental disclosures--cash payments for:
     Income taxes                                                      $      82            $      --            $      --
                                                                       =========            =========            =========


                   The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>

                                                             47
<PAGE>

                     LASERCARD CORPORATION AND SUBSIDIARIES
                    (Formerly Drexler Technology Corporation)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


1.      ORGANIZATION AND OPERATIONS

        LaserCard Corporation, a Delaware Corporation, and its wholly owned
subsidiaries, LaserCard Corporation, a California Corporation, Challenge Card
Design Plastikkarten GmbH and cards & more GmbH (the "Company") develop,
manufacture and integrate LaserCard(R) optical memory cards, optical card
drives, peripherals and specialty cards and printers. Challenge Card DesigN
Plastikkarten GmbH and cards & more GmbH were acquired by LaserCard Corporation
on March 31, 2004. The Company's customers for optical memory card related
products are mainly value-added reseller (VAR) companies worldwide, that develop
commercial applications for LaserCard products. Target markets for these
products include government and commercial applications for portable,
recordable, secure, identification cards and other unitary-record cards. Current
applications include United States Permanent Resident Card ("Green Card") and
Laser Visa Border Crossing Cards, U.S. military cargo manifests, Canadian
Permanent Resident Cards, Italian national ID cards, biometric IDs and other
wallet-card applications. Challenge Card Design Plastikkarten GmbH and cards &
more GmbH supply other advanced-technology cards for various applications, card
printers and systems integration for gate-keeping and ticketing. The Company has
two additional subsidiaries that are dormant, Precision Photoglass, Inc. and
Microfab Systems Corporation.

        The Company is subject to certain risks including, but not limited to,
competition from substitute products and larger companies and dependence on
certain suppliers and customers.

2.      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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

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

        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. Fiscal 2005 ended on April 1, 2005, fiscal 2004 ended on April 2, 2004 and
fiscal 2003 ended on March 28, 2003.

RECLASSIFICATIONS

        Certain prior year amounts were reclassified to conform with current
year presentation.

        In connection with preparation of the accompanying consolidated
financial statements, the Company concluded that it was appropriate to classify
its investments in auction rate securities as short-term available-for-sale
investments. Previously, such investments were classified as cash and cash
equivalents. Accordingly, the Company has revised the classification to exclude
from cash and cash equivalents $9.4 million of auction rate securities at March
31, 2004 and to include such amount as short-term available-for-sale
investments. In addition, the Company has made corresponding revisions to the
accompanying consolidated statements of cash flows to reflect the gross
purchases and sales of these securities as investing activities. As a result,
cash used in investing activities increased by $5.4 million in 2004 and $498,000
in 2003. This revision in classification does not affect previously reported
cash flows from operations or from financing activities.


                                       48
<PAGE>

        FOREIGN CURRENCY TRANSACTIONS. The functional currency of the Company's
foreign subsidiaries is generally the local currency. The financial statements
of these subsidiaries are translated to United States dollars using period-end
rates of exchange for assets and liabilities and average rates of exchange for
the year for revenues and expenses. Translation gains (losses) are recorded in
accumulated other comprehensive income as a component of stockholders' equity.
Net gains and losses resulting from foreign exchange transactions are included
in other income, net and were not significant during the periods presented.

        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 balance sheet. As of March 31, 2005,
the Company has invested in short-term and long-term investments including
auction rate securities, discount notes and U.S. government bonds. Accounts
receivable are derived from revenue earned from customers primarily located in
the United States, Italy and Germany. The Company performs ongoing credit
evaluations of its customers' financial condition and generally does not require
collateral. The Company maintains reserves for potential credit losses and
historically, such losses have been immaterial.

        Major Customers. One customer accounted for 31% of revenues for fiscal
2005, 72% of revenues for fiscal 2004 and 94% of revenues for fiscal 2003.
Another customer accounted for 26% of revenues for fiscal 2005 and 22% of
revenues for fiscal 2004. The revenue from these customers was attributable to
both the optical memory card and the optical card drive segments. No other
customer accounted for more than 10% of revenues during the periods.

        One United States customer accounted for 27% of accounts receivable at
March 31, 2005. Two customers comprised 53% and 46%, respectively, of accounts
receivable at March 31, 2004.

        CASH AND CASH EQUIVALENTS, SHORT-TERM INVESTMENTS AND LONG-TERM
INVESTMENTS. The Company considers all highly liquid investments, consisting
primarily of commercial paper, discount notes and U.S. government bonds, with
maturities of three months or less at the date of purchase, to be cash
equivalents. Cash equivalents at March 31, 2005 and March 31, 2004 were $4
million and $2.3 million, respectively. As of March 31, 2005 and 2004, the
Company held auction rate securities which have been accounted for as
available-for-sale and classified as short term investments. The fair values of
the auction rate securities, based on quoted market prices, were substantially
equal to their carrying costs due to the frequency of the reset dates.
Short-term investments also include investments with maturities at date of
purchase of more than three months and up to one year. All investments with
maturities at date of purchase greater than one year are classified as long-term
investments. Management determines the appropriate classification of debt
securities at the time of purchase and reevaluates the classification of
investments as of each balance sheet date.

        All short-term investments, except for auction rate securities which are
recorded at fair value, and long-term investments are classified as held to
maturity and are stated in the balance sheet at amortized cost. As such
investments are classified as held to maturity, no unrealized gains or losses
are recorded. The carrying amounts of individual held to maturity securities are
reviewed at the balance sheet date for potential impairment. As of March 31,
2005 and 2004, the Company has determined that an impairment which was "other
than temporary" has not occurred. The carrying amounts of short-term and
long-term investments at March 31 are (in thousands):


                                       49
<PAGE>

                                                         2005           2004
                                                         ----           ----
Short-term investments (up to one year):
   U.S. government and agency obligations             $    1,000     $       --
   Auction rate securities                                 5,150          9,400
   Certificates of deposit                                    --            981
                                                      ----------     ----------
      Total short-term investments                         6,150         10,381
                                                      ----------     ----------

Long-term investments (one to two years):
   U.S. government and agency obligations                  6,300          7,300
   Certificates of deposit                                    --            946
                                                      ----------     ----------
      Total long-term investments                          6,300          8,246
                                                      ----------     ----------
Total investments                                     $   12,450     $   18,627
                                                      ==========     ==========

        FAIR VALUE OF FINANCIAL INSTRUMENTS. The carrying amounts of the
Company's financial instruments including cash and cash equivalents, short-term
investments, accounts receivable, accounts payable and accrued liabilities,
approximate their fair values due to their short maturities. The fair value of
long-term investments was $6.2 million at March 31, 2005 and $8.3 million at
March 31, 2004.

        INVENTORIES. Inventories are stated at the lower of cost or market, with
cost determined on a first-in, first-out basis and market based on the lower of
cost or estimated realizable value. The components of inventories as of March 31
are (in thousands):

                                                           2005           2004
                                                           ----           ----

Raw materials                                         $    4,891     $    3,243
Work-in-process                                              739          1,651
Finished goods                                             2,279          1,905
                                                      ----------     ----------
                                                      $    7,909     $    6,799
                                                      ==========     ==========

        The Company establishes lower of cost or market reserves, aged inventory
reserves and obsolescence reserves. Inventory reserves are generally recorded
when management determines that an item is not readily saleable. Inventory
reserves are not relieved until the related inventory has been sold or scrapped.
The Company recorded charges to write down inventory of $381,000 for fiscal
2005, $97,000 for fiscal 2004 and $425,000 for fiscal 2003.

        EQUIPMENT HELD FOR RESALE. Equipment held for resale primarily consists
of parts, labor costs and other deferred costs incurred to build equipment under
a contract with Global Investments Group. The components of equipment held for
resale as of March 31 are (in thousands):

                                                         2005           2004
                                                         ----           ----

Parts                                                 $    3,812     $    2,419
Labor cost                                                   212             --
Other                                                         37             --
                                                      ----------     ----------
                                                      $    4,061     $    2,419
                                                      ==========     ==========

        PROPERTY AND EQUIPMENT, NET. The components of property and equipment as
of March 31 are (in thousands):

                                                         2005           2004
                                                         ----           ----

Building and land                                     $      856     $      811
Equipment and furniture                                   23,267         21,754
Construction in progress, including
   purchased equipment                                     1,409          2,338
Leasehold improvements                                     4,505          2,706
                                                      ----------     ----------
                                                          30,037         27,609
      Less: accumulated depreciation                     (17,505)       (16,079)
                                                      ----------     ----------

   Total property and equipment, net                  $   12,532     $   11,530
                                                      ==========     ==========


                                       50
<PAGE>

        Property and equipment are recorded at cost. Depreciation is provided
over the estimated useful lives which is four to seven years for equipment and
furniture using the double-declining balance and straight-line methods and
twenty-five years for the building using the straight-line method. Leasehold
improvements are amortized over the shorter of the life of the asset or the life
of the lease using the straight-line method. Depreciation and leasehold
amortization expense for fiscal 2005, 2004 and 2003 was $2.5 million, $1.9
million and $1.5 million, respectively.

        GOODWILL AND 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. Goodwill is assigned
to reporting units, which are operating segments as defined by our current
segment reporting structure. As of March 31, 2005, the Company has one reporting
unit that contains goodwill. Acquisition-related intangible assets other than
goodwill include backlog, which was amortized on a straight-line basis over its
estimated useful life of six months; and brand, which has an indefinite useful
life. Legal expenses incurred in connection with patents are capitalized and
amortized over the estimated remaining useful lives of the patents of six to
seven years.

        Definite life intangible assets capitalized and accumulated amortization
as of March 31 are as follows (in thousands):

                                                         2005           2004
                                                         ----           ----

Patent expenditures                                   $    3,290     $    3,172
Technology transfer expenditures                             545            545
Backlog                                                       --             29
Other                                                         10             10
                                                      ----------     ----------
    Total patent and other intangible expenditures         3,845          3,756
                                                      ----------     ----------

Patent accumulated amortization                           (2,923)        (2,810)
Technology transfer accumulated amortization                (483)          (455)
Other                                                         (6)            (3)
                                                      ----------     ----------
    Accumulated amortization                              (3,412)        (3,268)
                                                      ----------     ----------

        Patents and other intangibles, net            $      433     $      488
                                                      ==========     ==========

        The weighted average remaining amortization periods as of March 31 are
as follows:

                                                         2005           2004
                                                         ----           ----

Backlog                                                       --      0.5 years
Patents                                                4.0 years      4.8 years
Technology transfer                                    2.2 years      3.2 years
     Total                                             3.7 years      4.2 years

        Amortization expense on intangible assets for fiscal 2005, 2004 and 2003
was $172,000, $201,000 and $352,000 respectively. There were no amounts relating
to goodwill or intangibles assets no longer being amortized included in these
amounts. The estimated amortization expense for the next five years on
intangible assets as of March 31, 2005 is as follows (in thousands):


                                       51
<PAGE>

                         Fiscal Year
                            2006                 $   129
                            2007                     112
                            2008                      75
                            2009                      53
                            2010                      36
                                                 -------
                               Total             $   405
                                                 =======

        Intangible assets capitalized that would not be amortized as of March 31
are as follows (in thousands):

                                                         2005           2004
                                                         ----           ----

      Brand                                           $      490     $      490
      Goodwill                                             3,321          3,321
                                                      ----------     ----------
      Total                                           $    3,811     $    3,811
                                                      ==========     ==========

        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, plant 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 over the
estimated useful life, the Company will record an impairment loss in the amount
by which the carrying value of the assets exceeds the fair value. If assets are
determined to be recoverable but the useful lives are shorter than originally
estimated, the Company depreciates or amortizes the net book value of the asset
over the newly determined remaining useful lives. To date, the Company has not
needed to record any impairment losses on long-lived assets.

        ACCRUED LIABILITIES. The components of accrued liabilities as of March
31 are (in thousands):

                                                         2005           2004
                                                         ----           ----

      Accrued payroll and fringe benefits             $    1,062     $    1,107
      Other accrued liabilities                            1,250            928
                                                      ----------     ----------
        Total                                         $    2,312     $    2,035
                                                      ==========     ==========

        SOFTWARE DEVELOPMENT COSTS. Development costs incurred in the research
and development of new software products are expensed as incurred until
technological feasibility in the form of a working model has been established.
To date, the Company's software development has been completed concurrent with
the establishment of technological feasibility and, accordingly, all software
development costs have been charged to research and engineering expenses in the
accompanying consolidated statements of operations.

        ADVANCE PAYMENTS FROM CUSTOMERS. The Company customarily receives
advance payments on orders placed by its customers. The advance payments are
recorded as a liability on the balance sheet until the related orders are
shipped.

        REVENUE RECOGNITION. Product sales primarily consist of optical card
sales, sales of optical card read/write drives 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 warehousing under a U.S. government
subcontract or customer acceptance criteria. Where appropriate, provision is
made at the time of shipment for estimated warranty costs and estimated returns.
The total amount of actual warranty costs and returns activity was $373,000 in
fiscal 2005.

        The Company's U.S. government subcontract requires delivery into a
secure vault located on Company premises. Shipments are made from the vault on a
shipment schedule provided by the prime contractor, which is subject to
revision, but generally not subject to cancellation, at the option of the prime
contractor. At the time the cards are delivered into the vault, title to the
cards is transferred to the government and all risks of ownership are
transferred as well. The prime contractor is invoiced, with payment due within
thirty days and the contract does not contain any return (other than for
warranty) or cancellation provisions. Pursuant to the provisions of SEC Staff
Accounting Bulletin No. 104 (SAB 104), revenue is recognized on delivery into
the vault as the Company has fulfilled its contractual obligations and the
earnings process is complete. If the Company does not receive a shipment
schedule for


                                       52
<PAGE>

shipment of cards from the vault, revenue is deferred and recognized upon
shipment from the vault. In addition, revenue recognition for future deliveries
into the vault would be affected if the U.S. government cancels the shipment
schedule. As a result, the Company's revenues may fluctuate from period to
period if the Company does not continue to obtain shipment schedules under this
subcontract or if the shipment schedules are cancelled.

        In May 2003, the Emerging Issues Task Force ("EITF") finalized the terms
of EITF Issue No. 00-21, "Revenue Arrangements with Multiple Deliverables,"
(EITF 00-21) which provides criteria governing how to identify whether goods or
services that are to be delivered separately in a bundled sales arrangement
should be accounted for separately. Deliverables are accounted for separately if
they meet all of the following criteria: a) the delivered items have stand-alone
value to the customer; b) the fair value of any undelivered items can be
reliably determined; and c) if the arrangement includes a general right of
return, delivery of the undelivered items is probable and substantially
controlled by the seller. In situations where the deliverables fall within
higher-level literature as defined by EITF 00-21, the Company applies the
guidance in that higher-level literature. Deliverables that do not meet these
criteria are combined with one or more other deliverables. The Company adopted
EITF 00-21 for any new arrangements entered into after July 1, 2003 and now
assesses all revenue arrangements with multiple deliverables against the
criteria set forth in EITF 00-21.

        The Company applies the provisions of Statement of Position 81-1,
"Accounting for Performance of Construction-Type and Certain Production-Type
Contracts" (SOP 81-1) in applicable contracts. Revenues on time and materials
contracts are recognized as services are rendered at contract labor rates plus
material and other direct costs incurred. Revenues on fixed price contracts are
recognized on the percentage of completion method based on the ratio of total
costs incurred to date compared to estimated total costs to complete the
contract. Estimates of costs to complete include material, direct labor,
overhead and allowable general and administrative expenses. In circumstances
where estimates of costs to complete a project cannot be reasonably estimated,
but it is assured that a loss will not be incurred, the percentage-of-completion
method based on a zero profit margin, rather than the completed-contract method,
is used until more precise estimates can be made. The full amount of an
estimated loss is charged to operations in the period it is determined that a
loss will be realized from the performance of a contract. For the year ended
March 31, 2005, the Company recognized approximately $127,000 of revenues based
on a zero profit margin related to a long-term contract. The Company had no
revenues generated from this type of contract for the years ended March 31, 2004
and 2003.

        The Company applies the provisions of Statement of Position (SOP) No.
97-2, "Software Revenue Recognition," as amended by Statement of Position 98-9,
"Modification of SOP 97-2, Software Revenue Recognition, With Respect to Certain
Transactions" to all transactions involving the sale of software products.
Revenue from the license of the Company's software products is recognized when
persuasive evidence of an arrangement exists, the software product has been
delivered, the fee is fixed or determinable and collectibility is probable, and,
if applicable, upon acceptance when acceptance criteria are specified or upon
expiration of the acceptance period. Software revenue was immaterial for fiscal
2005, 2004 and 2003.

        License revenue, which may consist of up-front license fees and
long-term royalty payments, is recognized as revenue when earned. There were no
cost of license revenue recorded for fiscal 2005, 2004 and 2003. License revenue
in the amount of $875,000 for fiscal 2003 represents the unamortized portion of
a $1 million nonrefundable distribution license fee received in 2000 from a
licensee in Asia that had committed to purchase a minimum number of optical
memory cards for a program in the licensee's country. The Company recorded this
fee as deferred revenue and had been amortizing it as revenue in proportion to
actual card purchases by the licensee. During the quarter ended December 31,
2002, the Company determined that, due to the licensee's failure to meet the
minimum contractual purchase commitment, the licensee's distribution rights had
become unenforceable and that the licensee would no longer be acting as the card
supplier for that program. Fiscal 2003 license revenue also included $235,000
relating to a payment received in January 2002 from a third party that was
considering entering into a license agreement with the Company; the Company
originally recorded this payment as deferred revenue. The third party had
subsequently foregone its rights under this agreement due to non-performance and
accordingly, the Company recognized revenue on this arrangement in the fourth
quarter of fiscal 2003. There was no license revenue for the fiscal years ended
March 31, 2005 and 2004.

        In the fiscal 2005 first quarter, the Company sold a card-manufacturing
license, effective April 3, 2004, to the


                                       53
<PAGE>

Global Investments Group (GIG), based in Auckland, New Zealand, for card
manufacturing in Slovenia. This agreement provides for payments to the Company
of $14 million for a 20-year license and five-year training support package,
followed by $15 million paid $1 million annually for ongoing support for an
additional 15 years. Additionally, the Company is to sell approximately $12
million worth of the required manufacturing equipment and installation support
for the new facility to be built by GIG to provide a targeted initial
manufacturing capacity of 10 million optical cards annually. As of March 31,
2005 the Company had $4.1 million of this equipment classified as equipment held
for resale on its balance sheet. The agreement provides options to increase
capacity to 30 million cards per year. The Company has received $15 million of
payments called for in the agreements, consisting of a partial payment for the
equipment of $3.5 million and $11.5 million for the license fee and support. For
the $15 million the Company received, $13 million was recorded as advance
payments from customers and $2 million for the licensing fee was recorded as
deferred revenue, which were both classified as long term liabilities within the
consolidated balance sheets. In addition to the $41 million discussed above, GIG
is to pay the Company royalties for each card produced under the license. The
territories covered by the license include most of the European Union and
eastern European regions. The GIG has exclusive marketing rights in certain
territories, with performance goals to maintain these rights. The Company will
assign a person on site during the license term to assist with quality, security
and operational procedures, with the mutual goal that the facility and the cards
made in the facility conform to the Company's standards. GIG anticipates start
up of the new facility will be in early 2006. The Company also retains rights to
utilize up to 20% of the new facility capacity as backup and capacity buffer to
augment its own card manufacturing facilities in Mountain View, California. The
granting of this license to GIG establishes a potential second source supplier
of optical memory cards for existing and prospective customers who may request
multiple sources for cards. Revenue will be recognized over the remaining term
of the agreement beginning when operation of the factory commences.

        RESEARCH AND ENGINEERING EXPENSES. Costs related to research, design and
development of products are charged to research and engineering expense as
incurred.

        SHIPPING AND HANDLING COSTS. Shipping and handling are recorded in cost
of sales.

        ADVERTISING COSTS. Advertising costs consist of development and
placement costs of the Company's advertising campaigns and are charged to
expense when incurred. Advertising expense was approximately $189,000 for fiscal
2005. No advertising costs were incurred in fiscal 2004 and 2003.

        STOCK-BASED COMPENSATION. On December 31, 2002, the Financial Accounting
Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS)
No. 148, "Accounting for Stock Based Compensation - Transition and Disclosure,"
which amends SFAS No. 123. SFAS No. 148 requires more prominent and frequent
disclosures about the effects of stock-based compensation, which the Company
adopted for the year ended March 31, 2003. The Company accounts for its
stock-based compensation plans using the intrinsic value method prescribed in
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees." Compensation cost for stock options, if any, is measured by the
excess of the quoted market price of the Company's stock at the date of grant
over the amount an employee must pay to acquire the stock. SFAS No. 123,
"Accounting for Stock-Based Compensation," established accounting and disclosure
requirements using a fair-value based method of accounting for stock-based
employee compensation plans. Had compensation expense for the Plans been
determined consistent with SFAS No. 123, the Company's net income (loss) and
basic and diluted net income (loss) per share would have been as follows
(dollars, in thousands, except per share amounts):


                                       54
<PAGE>
<TABLE>
<CAPTION>
                                                                                                    Fiscal Year
                                                                                      2005              2004            2003
                                                                                      ----              ----            ----
<S>                                                                                <C>              <C>              <C>
Net income (loss), as reported                                                     $  (8,901)       $  (12,427)      $   2,282

Add:  Stock-based employee compensation expense included in
    reported net income (loss), net of related tax effects                               111                97              55

Deduct: total stock-based employee compensation determined under
    fair-value based method for all awards, net of related tax effects                (1,842)           (1,925)         (1,408)
                                                                                   ---------        ----------       ---------
Pro forma net income (loss)                                                        $ (10,632)       $  (14,255)      $     929
                                                                                   =========        ==========       =========

Basic net income (loss) per common share:
    As reported                                                                    $    (.78)       $    (1.15)      $     .22
                                                                                   =========        ==========       =========
    Pro forma                                                                      $    (.94)       $    (1.32)      $     .09
                                                                                   =========        ==========       =========

Diluted net income (loss) per common share:
    As reported                                                                    $    (.78)       $    (1.15)      $     .21
                                                                                   =========        ==========       =========
    Pro forma                                                                      $    (.94)       $    (1.32)      $     .09
                                                                                   =========        ==========       =========

Shares used in computing basic and diluted pro forma net income (loss) per
       share:
    Basic                                                                             11,362            10,761          10,356
                                                                                   =========        ==========       =========
    Diluted                                                                           11,362            10,761          10,842
                                                                                   =========        ==========       =========
</TABLE>

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

<TABLE>
<CAPTION>
                                                                               Fiscal Year
                                                        2005                      2004                       2003
                                                        ----                      ----                       ----
<S>                                                     <C>                       <C>                        <C>
Risk-free interest rate                                 3.65% to 4.08%            2.74% to 3.85%             2.67% to 4.99%
Average expected life of option                         5 to 8 years              5 to 8 years               5 to 8 years
Dividend yield                                          0%                        0%                         0%
Volatility of common stock                              55%                       48% to 50%                 50%
Weighted average fair value of option grants            $5.38                     $8.35                      $8.59
</TABLE>

        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 fiscal years ended March 31, 2005, 2004 and 2003,
comprehensive income (loss) is as follows (in thousands):

<TABLE>
<CAPTION>
                                                                                 Fiscal Year
                                                           2005                      2004                      2003
                                                           ----                      ----                      ----
<S>                                                     <C>                       <C>                       <C>
Net income (loss)                                       $   (8,901)               $  (12,427)               $    2,282
Net change in cumulative foreign currency
     translation adjustments                                   209                        --                        --
                                                        ----------                ----------                ----------
Other comprehensive income (loss)                       $   (8,692)               $  (12,427)               $    2,282
                                                        ==========                ==========                ==========
</TABLE>

        RECENT ACCOUNTING PRONOUNCEMENTS. On October 22, 2004, the American Jobs
Creation Act of 2004 (the "Act") was


                                       55
<PAGE>

signed into law. The Act contains numerous changes to U.S. tax law, both
temporary and permanent in nature, including a potential tax deduction with
respect to certain qualified domestic manufacturing activities, changes in the
carryback and carryforward utilization periods for foreign tax credits and a
dividend received deduction with respect to accumulated income earned abroad.
The new law could potentially have an impact on the Company's effective tax
rate, future taxable income and cash and tax planning strategies, amongst other
affects. In December 2004, the FASB issued Staff Position No. 109-1 ("FSP
109-1"), Application of FASB Statement No. 109, Accounting for Income Taxes, to
the Tax Deduction on Qualified Production Activities Provided by the American
Jobs Creation Act of 2004 and Staff Position No. 109-2 ("FSP 109-2"), Accounting
and Disclosure Guidance for the Foreign Earnings Repatriation Provision within
the American Jobs Creation Act of 2004. FSP 109-1 clarifies that the
manufacturer's tax deduction provided for under the Act should be accounted for
as a special deduction in accordance with SFAS No. 109 and not as a tax rate
reduction. FSP 109-2 provides accounting and disclosure guidance for the
repatriation of certain foreign earnings to a U.S. taxpayer as provided for in
the Act. The Company is currently studying the impact of the one-time favorable
foreign dividend provision. Accordingly, the Company has not adjusted its income
tax expense or deferred tax liability to reflect the tax impact of any
repatriation of non-U.S. earnings it may make.

        In December 2004, the FASB issued SFAS No. 123R, "Share-Based Payment"
to revise SFAS No. 123, "Accounting for Stock-Based Compensation" and supersede
APB Opinion No. 25, "Accounting for Stock Issued to Employees" and its related
implementation guidance. It requires companies to recognize their compensation
costs related to share-based payment transactions in financial statements. These
costs are to be measured based on the fair value of the equity or liability
instruments issued. The Company will apply SFAS No. 123(R) in the first quarter
of the fiscal year ending March 31, 2007. The Company has not yet evaluated the
impact that the adoption of SFAS No. 123R will have on its financial statements.

        In December 2004, the FASB issued SFAS No. 153, "Exchanges of
Nonmonetary Assets -- an Amendment of APB Opinion No. 29," which eliminates the
exception for nonmonetary exchanges of similar productive assets and replaces it
with a general exception for exchanges of nonmonetary assets that do not have
commercial substance. A nonmonetary exchange has commercial substance if the
future cash flows of the entity are expected to change significantly as a result
of the exchange. SFAS No. 153 will be effective for nonmonetary asset exchanges
occurring in fiscal periods beginning after June 15, 2005. The Company is
currently evaluating SFAS No. 153 and does not expect the adoption will have a
material impact on its results of operations or financial condition.

        In November 2004, the FASB issued SFAS No. 151, "Inventory Costs -- an
Amendment of ARB No. 43, Chapter 4," which clarifies the accounting for abnormal
amounts of idle facility expense, freight, handling costs and wasted material
(spoilage) be recognized as current period charges. In addition, SFAS No. 151
requires that allocation of fixed production overheads to the costs of
conversion be based on the normal capacity of the production facilities. SFAS
No. 151 will be effective for inventory costs incurred in fiscal years beginning
after June 15, 2005. The Company has not evaluated the impact of SFAS No. 151 to
its overall result of operations or financial condition.

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

        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


                                       56
<PAGE>

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 indemnifications and as a
result the associated estimated fair value of the liability is not material. The
Company is required to indemnify the investors in the Company's December 2003,
financing from any third party claim based upon any untrue statement or alleged
untrue statement of a material fact contained in the Registration Statement
covering the resale of the shares purchased by such investors, or any failure by
the Company to fulfill any undertaking included in the Registration Statement.

3.      NET INCOME (LOSS) PER SHARE

        Basic net income (loss) per share is computed by dividing net income
(loss) by the weighted average number of shares of common stock outstanding.
Diluted net income (loss) per share is computed by dividing net income (loss) by
the weighted average number of shares of common stock and common stock
equivalents outstanding. Common stock equivalents consist of stock options and
warrants using the treasury stock method.

        The reconciliation of the denominators of the basic and diluted net
income (loss) per share computation for the fiscal years ended March 31, 2005,
2004 and 2003 is shown in the following table (in thousands, except per share
data):

<TABLE>
<CAPTION>
                                                                                             Fiscal Year
                                                                            2005                 2004              2003
                                                                            ----                 ----              ----
<S>                                                                      <C>                  <C>               <C>
Net income (loss)                                                        $  (8,901)           $  (12,427)       $    2,282
                                                                         =========            ==========        ==========

Basic net income (loss) per share:
    Weighted average common shares outstanding                              11,362                10,761            10,356
                                                                         ---------            ----------        ----------
Basic net income (loss) per share                                        $    (.78)           $    (1.15)       $      .22
                                                                         =========            ==========        ==========

Diluted net income (loss) per share:
    Weighted average common shares outstanding                              11,362                10,761            10,356
    Weighted average common shares from stock option grants                     --                    --               486
                                                                         ---------            ----------        ----------
    Weighted average common shares and common stock
       equivalents outstanding                                              11,362                10,761            10,842
                                                                         ---------            ----------        ----------
Diluted net income (loss) per share                                      $    (.78)           $    (1.15)       $      .21
                                                                         =========            ==========        ==========
</TABLE>

        Stock options having an exercise price greater than the average market
value for profitable periods are excluded from the calculation of diluted net
income per share, as their effect would be antidilutive. Therefore, stock
options to purchase 168,000 shares were excluded from the calculation of diluted
net income per share for the year ended March 31, 2003. As the effect of common
stock equivalents would be antidilutive since the Company incurred a loss, all
stock options and warrants were excluded from the calculation of diluted net
loss per share for the fiscal years ended March 31, 2004 and 2005.

4.      SEGMENTS

        SEGMENT REPORTING. Prior to the second fiscal quarter of 2004, the
Company reported its results as a single reportable segment. During the second
fiscal quarter of 2004, revenues increased for optical card drives and as a
result, the Company concluded that it had two reportable segments and began
reporting the results of each segment and other information pursuant to
Statement of Financial Accounting Standards No. 131, "Segment Reporting." The
new segment of specialty cards and cards printers was established after the
acquisition of the German subsidiaries.

        The Company's three reportable segments are: (1) optical memory cards,
(2) optical memory card drives, maintenance and related accessories ("optical
card drives") and (3) specialty cards and card printers. The segments were
determined based on the information used by the chief operating decision maker.
The optical memory cards and optical card drives reportable segments are not
strategic business units which offer unrelated products and services;


                                       57
<PAGE>

rather these reportable segments utilize compatible technology and are marketed
jointly. Specialty cards and printers is a strategic business unit offering at
times unrelated products and at times related products with the other reportable
segments.

        The accounting policies used to derive reportable segment results are
the same as those described in the "Summary of Significant Accounting Policies."
Resources are allocated to the optical memory card and optical card drive
segments in a manner that optimizes optical memory card revenues and to the
specialty card and printers segment in a manner that optimizes consolidated
income as determined by the chief operating decision maker. Segment revenues are
comprised of sales to external customers. Segment gross profit (loss) includes
all segment revenues less the related cost of sales. Accounts receivable, cash,
deferred income taxes, prepaid expenses, fixed assets and inventory are not
separately reported by segment to the chief operating decision maker. Therefore,
the amount of assets by segment is not meaningful. There are no inter-segment
sales or transfers. All of the Company's long-lived assets are attributable to
the United States except for $3.4 million in fiscal 2005 and $3.2 million in
fiscal 2004 that are attributable to Germany.

        The Company's chief operating decision maker is currently the Company's
Chief Executive Officer. The chief operating decision maker reviews financial
information presented on a consolidated basis that is accompanied by
disaggregated information about revenues and gross profit (loss) by segment.

        The table below presents information for optical memory cards, optical
card drives and specialty cards and card printers for the fiscal years ended
March 31, 2005, 2004 and 2003 (in thousands):

                                Fiscal Year Ended March 31, 2005

                              Optical        Optical      Specialty
                               Memory         Card       Cards & Card    Segment
                               Cards         Drives        Printers       Total
                               -----         ------        --------       -----

Revenue                       $17,364       $    933       $  10,235    $ 28,532
Cost of sales                  12,803          2,087           7,723      22,613
Gross profit (loss)             4,561         (1,154)          2,512       5,919
Depreciation and
   amortization expense         1,505            159             266       1,930


                                Fiscal Year Ended March 31, 2004

                              Optical        Optical
                               Memory         Card         Segment
                               Cards         Drives         Total
                               -----         ------         -----

Revenue                       $13,379       $  3,448       $16,827
Cost of sales                   9,965          3,039        13,004
Gross profit                    3,414            409         3 823
Depreciation and
   amortization expense         1,207            179         1,386


                                Fiscal Year Ended March 31, 2003

                              Optical        Optical
                               Memory         Card         Segment
                               Cards         Drives         Total
                               -----         ------         -----

Revenue                       $24,247       $    693       $24,940
Cost of sales                  12,120          1,579        13,699
Gross profit (loss)            12,127           (886)       11,241
Depreciation and
   amortization expense           995             81         1,076


                                       58
<PAGE>

        The following is a reconciliation of segment results to amounts included
in the Company's consolidated financial statements for the fiscal years ended
March 31, 2005, 2004 and 2003 (in thousands):

                                     Fiscal Year Ended March 31, 2005

                                   Segment
                                    Total        Other (a)        Total
                                    -----        ---------        -----

Revenue                            $28,532       $      12       $28,544
Cost of sales                       22,613              24        22,637
Gross profit (loss)                  5,919             (12)        5,907
Depreciation and
   amortization expense              1,930             710         2,640


                                     Fiscal Year Ended March 31, 2004

                                   Segment
                                    Total        Other (a)        Total
                                    -----        ---------        -----

Revenue                            $16,827       $     136       $16,963
Cost of sales                       13,004             153        13,157
Gross profit (loss)                  3,823             (17)        3,806
Depreciation and
   amortization expense              1,386             737         2,123


                                     Fiscal Year Ended March 31, 2003

                                   Segment
                                    Total        Other (a)        Total
                                    -----        ---------        -----

Revenue                            $24,940       $   1,391       $26,331
Cost of sales                       13,699             207        13,906
Gross profit                        11,241           1,184        12,425
Depreciation and
   amortization expense              1,076             753         1,829

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

        SALES BY GEOGRAPHIC REGION. Sales by geographic region are generally
determined based upon the ship-to address on the invoice. Revenues by geographic
region are as follows (in thousands):


                                       59
<PAGE>

                                                    Fiscal Year
                                      2005              2004              2003
                                      ----              ----              ----

United States                    $    7,900         $    8,461         $  22,205
Italy                                 7,617              3,720               334
Germany                               4,820                  7                12
Europe, other                         4,411                 49                92
Canada                                1,902              4,177             2,764
Middle East and Africa                1,397                478                33
Asia                                    280                 39               887
Rest of world                           217                 32                 4
                                 ----------         ----------         ---------
                                 $   28,544         $   16,963         $  26,331
                                 ==========         ==========         =========

        In fiscal 2005, sales to customers outside the United States in the
amount of $10.9 million were denominated in U.S. dollars and $9.7 million were
denominated in euros. In fiscal 2004 and 2003, sales to customers outside the
United States were denominated in U.S. dollars.

5.      RELATED-PARTY TRANSACTIONS

        Since October 21, 2001, the Company contracted with Wexler & Walker
Public Policy Associates, a unit of Hill and Knowlton, Inc., ("Wexler") to be
lobbyists on behalf of the Company. The Chairman of Wexler is Robert S. Walker,
a brother of director Walter F. Walker. In October 2002, the agreement was
extended for the period October 1, 2002 through September 2003 or until
terminated upon seven days' notice. The extended agreement provides for a
monthly retainer of $10,000 and there currently is a purchase order dated
November 12, 2004 valid through April 29, 2005 with the same terms and
conditions of the previous agreement. In addition, there is another purchase
order dated February 25, 2005 in the total of $35,000 to cover the consulting
services for the period from January 2005 to April 2005. The Company paid Wexler
$206,000 during fiscal 2005, $151,000 during the fiscal 2004 and $83,000 during
fiscal 2003. As of March 31, 2005, $35,000 was due to Wexler. There were no
significant amounts due to Wexler as of March 31, 2004.

6.      COMMON STOCK

        2004 EQUITY INCENTIVE COMPENSATION PLAN (THE "2004 PLAN"): In October
2004, the Company's shareholders approved 2004 Equity Incentive Compensation
Plan, which succeeded the existing Stock Option Plan. The 2004 Plan provides for
the grant of restricted share awards, options, stock units and stock
appreciation rights, any of which may or may not require the satisfaction of
performance objectives, with respect to shares of our common stock to directors,
officers, employees and consultants of the Company and its subsidiaries. The
2004 Plan may be administered by the Compensation Committee of the Board of
Directors, which has complete discretion to select the participants and to
establish the terms and conditions of each award, subject to the provisions of
the 2004 Plan. Options granted under the 2004 Plan may be "incentive stock
options" as defined in Section 422 of the Internal Revenue Code of 1986, as
amended, or the Code or nonqualified options. A total of 2,423,155 shares of
Common Stock were reserved for issuance under the 2004 Plan as of March 31,
2005. If any award granted under the 2004 Plan is forfeited or expires for any
reason, then the shares subject to that award will once again be available for
additional awards. If any outstanding option under the 1994 Plan expires or
terminates for any reason without having been exercised in full, then the
unpurchased shares subject to that option will be available for additional
awards under the 2004 Plan. Under the 2004 Plan, the exercise price of incentive
stock options may not be less than 100% of the fair market value of the Common
Stock as of the date of grant (110% of the fair market value if the grant is to
an employee who owns more than 10% of the total combined voting power of all
classes of the Company's capital stock). The Code currently limits to $100,000
the aggregate value of Common Stock for which incentive stock options may become
exercisable in any calendar year under the 2004 Plan or any other option plan
adopted by the Company. Nonstatutory stock options may be granted under the 2004
Plan at an exercise price of not less than 100% of the fair market value of the
Common Stock on the date of grant. There is no limitation on the amount of
common stock to which nonstatutory grants may first become exercisable in any
calendar year. Repricing a stock option or stock appreciation right is not
permitted


                                       60
<PAGE>

without shareholder approval. Subject to the limitations contained in the 2004
Plan, the Committee sets the terms of each option grant. Any options that were
not exercisable on the date of termination of employment immediately terminate
at that time. Options granted under the 2004 Plan may not be exercised more than
10 years after the date of grant (five years after the date of grant if the
grant is an incentive stock option to an employee who owns more than 10% of the
total combined voting power of all classes of the Company's capital stock). The
Board of Directors specifies the term of options and the vesting schedule for
exercise of options. No options were granted to consultants during fiscal 2005,
2004, or 2003. As of March 31, 2005, 475,871 shares were available for future
issuance under the 2004 Plan.

        In addition, as of March 31, 2005, 120,000 shares of stock have been
reserved outside of the Company's Stock Option Plan, for stock options issued
under Nasdaq Rule No. 4350(i)(1)(A), in connection with the CCD-C&M acquisition.
As an inducement to join the Company, each of six key employees of the acquired
companies were granted non-statutory stock options on March 31, 2004 with a term
of five years to purchase 20,000 common shares.

        The following table lists stock option activity from March 31, 2002
through March 31, 2005:

                               Options                              Weighted
                              Available        Outstanding           Average
                              For Grant           Options        Exercise Price
                              ---------           -------        --------------

Balance March 31, 2002           313,971          1,873,731        $   12.25
    Authorized                   275,000                 --
    Granted                     (394,000)           394,000        $   16.03
    Exercised                         --           (184,100)       $    8.67
    Expired                       23,833            (23,833)       $   16.11
                              ----------       ------------
Balance March 31, 2003           218,804          2,059,798        $   13.25
                              ----------       ------------
    Granted                      (35,000)           155,000        $   14.43
    Exercised                         --           (145,147)       $   10.34
    Expired                       40,592            (40,592)       $   15.12
                              ----------       ------------
Balance March 31, 2004           224,396          2,029,059        $   13.51
                              ----------       ------------
    Authorized                   300,000                 --
    Granted                      (69,000)            69,000        $    9.52
    Exercised                         --            (10,300)       $   10.68
    Expired                       20,475            (20,475)       $   15.47
                              ----------       ------------
Balance March 31, 2005           475,871          2,067,284        $   13.37
                               =========       ============

        The following table summarizes information about stock options
outstanding at March 31, 2005:

<TABLE>
<CAPTION>
                                               Options Outstanding                               Options Exercisable
                           ----------------------------------------------------------     ----------------------------------
                               Number            Weighted-Average        Weighted-            Number            Weighted-
       Range of            Outstanding at            Remaining            Average         Exercisable at         Average
   Exercise Prices         March 31, 2005        Contractual Life      Exercise Price     March 31, 2005      Exercise Price
   ---------------         --------------        ----------------      --------------     --------------      --------------
<S>                             <C>                <C>                   <C>                     <C>             <C>
$ 7.04  -  $10.91               366,950              4.1 years             $   9.66              336,950         $  9.73
$10.91  -  $12.69               507,334              3.1 years             $  11.86              485,834         $ 11.89
$13.06  -  $15.56               782,650              6.1 years             $  13.94              509,850         $ 13.97
$16.47  -  $22.75               410,350              6.4 years             $  17.46              328,600         $ 17.22
                            -----------                                                      -----------

          Totals              2,067,284                                                        1,661,234
                            ===========                                                      ===========
</TABLE>

        EMPLOYEE STOCK PURCHASE PLAN. The Company has an Employee Stock Purchase
Plan (Stock Purchase Plan), under which 87,478 shares are reserved as of March
31, 2005 for future purchases by employees. Under the Stock Purchase Plan,
eligible employees may designate from 2% to 6% of their compensation to be
withheld for the purchase of shares of common stock at 67% of a trailing average
price. The differential between fair market value and the


                                       61
<PAGE>

average price of the shares sold under the Stock Purchase Plan is charged to
operations as a compensation expense and is taxed to the employee as income.
Under the Stock Purchase Plan, employees purchased 26,730 shares for fiscal
2005, 20,253 shares for fiscal 2004 and 18,405 shares for fiscal 2003. The
average purchase price per share was $5.89 for fiscal 2005, $9.38 for fiscal
2004 and $9.74 for fiscal 2003. The weighted average market price per share for
shares purchased was $9.13 for fiscal 2005, $14.19 for fiscal 2004 and $14.76
for fiscal 2003.

OTHER EMPLOYEE BENEFIT PLAN:

        401(K) PLAN. The 401(k) Plan provides participating employees with an
opportunity to accumulate funds for retirement. The Company's contribution to
this Plan will not exceed the lesser of: (a) 25% of the maximum employee
contribution allowed by IRS, (b) 25% of an employee's contribution, or (c) 1.5%
of an employee's eligible earnings.

7.      COMMITMENTS AND CONTINGENCIES

        LEASE. The Company occupies its buildings under various operating
leases. Rent expense relating to these buildings was approximately $1.5 million
for fiscal 2005, approximately $1.1 million for fiscal 2004 and approximately
$1.2 million for fiscal 2003. As of March 31, 2005, future minimum rental
payments relating to these leases are (in thousands):

                        Fiscal Year
                           2006              $    1,150
                           2007                   1,072
                           2008                   1,021
                           2009                     993
                           2010                   1,382
                           Thereafter             5,610
                                             ----------
                              Total          $   11,228
                                             ==========

        By mutual agreement with the lessor, on November 1, 2003, a lease on a
27,000-square-foot building was modified and extended through October 2013. The
original lease had a remaining term through May 2006 with lease payments
totaling $2.1 million. The modified lease calls for payments totaling $1.3
million over the same period. Rent expense is recorded at the average of the
rent payments over the term of the lease. At the time the renegotiated lease was
signed, there was $139,000 of deferred rent associated with the original lease.
This amount is being amortized on a straight-line basis over the ten-year term
of the modified lease.

        PURCHASE COMMITMENT. The Company purchases services, software,
manufacturing equipment and facilities from a variety of vendors. As of March
31, 2005, the Company has non-cancelable purchase orders of $615,000 for
equipment for resale and $1.8 million for raw materials which will be delivered
over 12 months.

        PRODUCT WARRANTIES. The Company estimates its warranty costs based on
historical warranty claim experience and applies this estimate to the revenue
stream for products under warranty. The Company's product warranty claims are
settled through the returns of defective products and the shipment of
replacement products. Warranty returns are included in the allowance for sales
returns, which is based on historical returns. The allowance for sales returns
is reviewed quarterly to verify that it properly reflects the remaining
obligations based on the anticipated returns over the balance of the obligation
period. Adjustments are made when actual return claim experience differs from
estimates. As of March 31, 2005 and 2004, the allowance for sales returns was
$24,000 and $86,000, respectively.

        In the normal course of business, the Company is subject to various
claims and assertions. In the opinion of management, the ultimate disposition of
such claims and assertions will not have a material adverse impact on the
financial position of the Company.

8.      INCOME TAXES


                                       62
<PAGE>

     The provision for income taxes for fiscal 2005, 2004 and fiscal 2003
consists of the following (in thousands):

<TABLE>
<CAPTION>
                                                                                         Fiscal Year
                                                                         2005                 2004                 2003
                                                                         ----                 ----                 ----
<S>                                                                   <C>                 <C>                   <C>
           Current:
               Federal                                                $    109            $      --             $    261
               State                                                         3                    3                   98
               Foreign                                                      27                   --                   --
                                                                      --------            ---------             --------
                                                                           139                    3                  359
                                                                      --------            ---------             --------
           Deferred:
               Federal                                                      --                6,552                1,161
               State                                                        --                  534                   --
                                                                      --------            ---------             --------
                                                                            --                7,086                1,161
                                                                      --------            ---------             --------

           Income tax expense                                         $    139            $   7,089             $  1,520
                                                                      ========            =========             ========
</TABLE>

        The Company's effective tax rate differs from the statutory rate as
follows:

<TABLE>
<CAPTION>
                                                                                         Fiscal Year
                                                                         2005                 2004                 2003
                                                                         ----                 ----                 ----
<S>                                                                   <C>                 <C>                   <C>
           Tax reconciliation:
               Federal statutory rate                                     (34%)                (34%)                 34%
               State tax, net of federal benefit                           (6%)                  --                   6%
               Foreign provision differential                               2%                   --                   --
               Alternative minimum tax                                      2%                   --                   --
           Change in valuation allowance                                   38%                 166%                   --
                                                                      --------            ---------             --------
                                                                            2%                 132%                  40%
                                                                      ========            =========             ========
</TABLE>

        The major components of the net deferred tax asset/(liability) as of
March 31 are as follows (in thousands):

<TABLE>
<CAPTION>
                                                                                                    Fiscal Year
                                                                                              2005               2004
                                                                                              ----               ----
<S>                                                                                        <C>                  <C>
         Deferred tax asset:
           Net operating loss carryforwards:
               Federal                                                                     $  9,255             $ 12,252
               Foreign                                                                           --                   32
           Tax credits                                                                          738                  662
           Advance payments from customers and deferred revenue                               6,031                   --
           Reserves and accruals not currently deductible for tax purposes                      862                1,032
           Depreciation                                                                         759                  787
           Other                                                                                906                  141
                                                                                          ---------             --------
                  Total deferred tax asset                                                   18,551               14,906
           Valuation allowance                                                              (18,426)             (14,751)
                                                                                          ---------             --------
                  Net deferred tax asset                                                        125                  155
                                                                                          ---------             --------
         Deferred tax liability:
               German operations                                                               (641)                (640)
               Capitalized patent costs                                                        (125)                (123)
                                                                                          ---------             --------
                  Total deferred tax liability                                                 (766)                (763)
                                                                                          ---------             --------
         Net deferred tax asset/(liability)                                               $    (641)            $   (608)
                                                                                          =========             ========
</TABLE>

        The fiscal 2004 acquisition of Challenge Card Design GmbH and cards &
more GmbH resulted in a deferred tax liability of $641,000 at March 31, 2005 and
$608,000 at March 31, 2004.

        The Company analyzes its deferred tax assets with regard to potential
realization. The Company has established a full valuation allowance on its
deferred tax assets because management could not conclude that it was more
likely than not that such deferred tax assets would be realized. Beginning in
the third quarter of fiscal 2004 and throughout fiscal


                                       63
<PAGE>

2005, the Company's methodology for determining the realizability of its
deferred tax assets involves estimates of future taxable income; the estimated
impact of future stock option deductions; and the expiration dates and amounts
of net operating loss carryforwards. These estimates are based on near-term
projections and assumptions which management believes to be reasonable. For
recent periods prior to the third quarter of fiscal 2004, the Company had been
estimating future taxable income from its core business, which assumed on-going
business under the U.S. government subcontract for United States Permanent
Resident Card ("Green Card") and Laser Visa Border Crossing Cards and the
Canadian government's Permanent Resident Card program, as well as estimated
operating expenses to support that level of business, as offset by the estimated
impact of future stock option deductions. During the third quarter of fiscal
2004, the Company estimated future taxable income based upon its expectations
for the current and next three years because this past core business has not
proven to be as stable as the Company had believed it to be and because this
past core business is expected to represent an increasingly smaller part of the
business. The Company expects revenues from these U.S. programs to stabilize at
revenue levels lower than had been expected in the past and expects new foreign
business, which has fluctuated considerably quarter to quarter, to comprise a
larger portion of the core business. The Company has had difficulty in the past
and expects to have continued difficulty in the future, in reliably forecasting
its foreign business and the revenue to be received from it. This, in
combination with the three-year cumulative tax loss for the period ended March
31, 2004, has resulted in the Company basing its estimates of future income for
these purposes on orders in backlog at the end of each reporting period. As
circumstances change, the Company may in the future be able to estimate its
future revenue based upon our forecast revenues rather than only using booked
orders, although the Company cannot say if or when this will occur.

        In the event that actual results differ from these estimates or that
these estimates are adjusted in future periods, the Company may need to adjust
the amount of the valuation allowance based on future determinations of whether
it is more likely than not that some or all of its deferred tax assets will be
realized. A decrease in the valuation allowance would be recorded as an income
tax benefit or a reduction of income tax expense or a credit to stockholders'
equity. The Company's net operating losses available to reduce future taxable
income expire on various dates from fiscal 2007 through fiscal 2024. To the
extent that the Company generates taxable income in jurisdictions where the
deferred tax asset relates to net operating losses that have been offset by a
full valuation allowance, the utilization of these net operating losses would
result in the reversal of the related valuation allowance through the Company's
income expense (benefit).

        Significant management judgment is required in determining the provision
for income taxes and, in particular, any valuation allowance recorded against
the Company's deferred tax assets. Due to the Company's recent cumulative tax
loss history for the three-year period ending March 31, 2004, income statement
loss history over the previous five quarters and the difficulty in forecasting
the timing of future revenue as evidenced by the deviations in achieved revenues
from expected revenues during the previous few quarters and taking into account
the newness of certain customer relationships, the Company determined it was
necessary to increase the valuation allowance under SFAS No. 109 to the full
amount of the deferred tax asset. As a result, the Company determined that a
full valuation allowance was required to net against its deferred tax assets in
fiscal 2004 and increased the existing allowance by $2.4 million to $14.8
million. In addition, the Company increased its valuation allowance against its
net deferred tax asset in the amount of $3.7 million during fiscal 2005.

        The Company's federal net operating loss carryforwards as of March 31,
2005 of $27.2 million will expire at various dates from 2007 through 2024, if
not utilized. The tax effect of this amount is reflected above as federal net
operating loss carryforwards totaling $9.3 million. Of this amount, $5.7
million, representing tax benefits relating to stock-based compensation
programs, will be credited to stockholders' equity to the extent the Company
concludes that it is more likely than not that this amount will be realized.
Federal tax credits in the amount of $476,000 for alternative minimum taxes have
no expiration. Federal tax credits in the amount of $207,000 will expire on
various dates from 2013 through 2025, if not utilized. California tax credits in
the amount of $103,000 have no expiration date.

9.      ISSUANCE OF STOCK, OPTIONS AND WARRANTS

        In December 2003, the Company issued and sold 791,172 shares of common
stock, options to purchase 122,292 shares of common stock and warrants to
purchase 174,057 shares of common stock for an aggregate purchase price of $10.1
million in a private placement. The Company received net proceeds of $9.4
million (net of fees and expenses). The purchase price of the common stock was
$12.76 per share, which was at a 15% discount from the five-day average price as
of December 23, 2003. The options had an exercise price of $16.51 per share and
a nine-month life. The


                                       64
<PAGE>

warrants have an exercise price of $17.26 per share and a life of five years.
The options and warrants were valued at $245,000 and $984,000, respectively,
based on a Black-Scholes calculation as of December 23, 2003 and pursuant to the
provisions of EITF Issue No. 00-19, "Accounting for Derivative Financial
Instruments Indexed to, and Potentially Settled in, a Company's Own Stock,"
(EITF 00-19) were recorded at those values in short-term and long-term
liabilities. The balance of the net proceeds was accounted for as additional
paid-in capital. Under EITF 00-19, the Company marks-to-market the fair value of
the options and warrants at the end of each accounting period. At December 31,
2003, this resulted in options and warrants valued at $195,000 and $916,000,
respectively. The decrease in the valuation of the options and warrants, between
December 23, 2003 and December 31, 2003, of $118,000 was recorded as other
income in the accompanying consolidated statements of operations and resulted
from a decrease in the Company's stock price. On February 6, 2004, the Company
and the investors entered into an amendment to their original agreement that
resulted in the reclassification of the options and warrants to equity. The
amendment clarified that the options and warrants granted in the financing may
be exercised at a time when a registration statement covering the resale of the
underlying shares is not effective or available and that in such instance the
Company would deliver to the investors shares of common stock whose resale is
not currently registered. On the effective date of the amendment, the option and
warrant value was reclassified to equity as additional paid-in capital. As a
result of the increase in the value of the options and warrants from December
31, 2003 to the amendment date due to increases in the Company's stock price,
the Company recognized an expense of $211,000 which is included in other expense
in the consolidated statements of operations for the fourth quarter of fiscal
2004. The Company is subject to certain indemnity provisions included in the
stock purchase agreement entered into as part of the financing in connection
with its registration of the resale of the common stock issued and issuable in
the financing. Morgan Keegan & Company, Inc. acted as the Company's placement
agent for this transaction and was granted warrants to purchase 15,824 shares of
common stock. The option to purchase 122,292 shares of common stock expired on
September 30, 2004.

10.     STOCK REPURCHASES

        On August 2, 2004, the Company's Board of Directors approved a 350,000
share repurchase program pursuant to which the Company could make open market or
privately negotiated repurchase transactions for up to an aggregate of $3
million for a four-month period beginning August 2, 2004 and ending December 1,
2004. The Company repurchased 91,630 shares of common stock in the open market
amounting to $655,000 at an average price of $7.15 per share.

11.     ACQUISITION

        On March 31, 2004, the Company completed its acquisition of 100% of two
related German card companies, Challenge Card Design Plastikkarten GmbH of
Rastede, Germany and cards & more GmbH of Ratingen, Germany (collectively, the
Acquired German Entities), including their sales operations in the USA and
Korea. The Company purchased the shares of the Acquired German Entities from
their five shareholders (the Shareholders) and purchased the intangible assets
of the USA sales operation from a partnership comprised of the Shareholders. In
the acquisition transaction, the Company agreed to assume approximately 0.5
million euros of debt and to pay approximately 4.75 million euros in cash,
consisting of approximately 2.25 million euros payable at closing and the
remaining approximately 2.5 million euros payable to the shareholders of the
Acquired German Entities in five equal annual installments for the business and
certain assets. The acquisition agreement specified that the purchase price be
adjusted based upon other assets purchased and additional liabilities assumed.
This resulted in a reduction in the purchase price of approximately 0.4 million
euros as of March 31, 2004. This purchase price was determined by negotiation
between the Company and the Shareholders, taking into account such matters as
the value of the tangible assets and the going concern value of the business
operations of the Acquired German Entities. Four of the Shareholders entered
into new employment agreements with the Acquired German Entities while the fifth
Shareholder, who is resident in the U.S., entered into an employment agreement
with registrant. In addition to salaries, these employment agreements provide
for commission based upon the results of operations of the Acquired German
Entities which could be as much as 3.75 million euros over the next four years.
The Company used a portion of its available cash to fund the acquisition. The
Shareholders had no previous material relationship with the Company or its
affiliate or subsidiaries, although the Company did substantial business with
the Acquired German Entities during recent years. One of the Acquired German
Entities owns a plant in Rastede, Germany together with associated equipment
which it has used to manufacture plastic cards featuring contactless IC chip
technology and high resolution printing. The Company intends to continue to use
the facility and equipment to produce such cards as well as to enhance the
facility to produce LaserCard optical memory cards.


                                       65
<PAGE>

        On January 6, 2005, $2.2 million (1.6 million euros) was made to the
former shareholders (currently Managing Directors) of the Acquired German
Entities to settle in large part a loan related to the acquisition. As of March
31, 2005, the outstanding balance of $203,000 (150,000 euros) was maintained by
the Company in case the known contingent claim or other unknown claims develop
into actual claims. The payment was approved on December 2, 2004 by the
Company's Board of Directors.

        The primary reasons for the acquisition were to provide the Company with
(1) a strong card manufacturing base to serve the European, Middle Eastern,
African and Asian markets; (2) additional production capacity of up to 20
million advanced-technology cards per year; (3) an expanded product line;
namely, contact IC chip cards, contactless RF ID cards, magnetic stripe cards
and color thermal printers for printing on cards; and (4) future cooperation in
developing and marketing advanced, secure optical card solutions.

        Goodwill is derived when the purchase price is greater than the value of
the tangible and intangible assets acquired less the liabilities assumed.
Factors that contributed to a purchase price that resulted in goodwill were (1)
the assembled workforce, in particular the managing directors of the acquired
companies; (2) the proximity of the managing directors to the target customer
base; and (3) the ability of the managing directors to use their skills and
specific know-how to enhance the Company's product offerings in the advanced
technology card marketplace. Goodwill resulting from the purchase price
allocation in the amount of $3.3 million was recorded as a result of the
acquisition. None is expected to be deductible for income tax purposes.

        An intangible asset for backlog in the amount of $29,000 was recorded as
a result of the acquisition. This was amortized as the backlog was shipped,
which period was six months. There were no other amortizable intangible assets
recorded.

        The results of operations of the acquired entities from the acquisition
date to fiscal 2004 year-end have not been included in the Company's 2004
operating results, as the acquisition occurred at the end of the Company's
fiscal year and the acquired entities' results during this period were not
material. The cost of the acquired entities totaled $5.3 million, comprised of
$3.1 million paid up-front plus future payments specified in the purchase
agreement with a net present value of $2.2 million.

        The total purchase price of $5.3 million has been allocated to the net
assets acquired based on estimated fair values as follows (in thousands):

                Current assets                          $ 4,577
                Property and equipment                    2,094
                Goodwill and other intangibles            3,840
                                                        -------
                        Total assets acquired            10,511
                                                        -------

                Current liabilities                      (4,891)
                Long-term debt                             (369)
                                                        -------
                        Total liabilities assumed        (5,260)
                                                        -------

                Net assets acquired                     $ 5,251
                                                        =======

                Cash paid                               $ 3,101

                Future payments accrued                   2,150
                                                        -------

                        Total purchase price            $ 5,251
                                                        =======



                                       66
<PAGE>

        PRO FORMA FINANCIAL INFORMATION. Pro-forma financial information for the
impact of the acquisition on the Company's consolidated results of operations
has not been presented as the Acquired German Entities were foreign entities who
did not prepare financial statements in accordance with United States Generally
Accepted Accounting Principles (U.S. GAAP). Reported revenues, excluding sales
to the Company, for fiscal 2002 and 2003 for the entities on a local GAAP basis
were $8.7 million and $8.6 million, respectively. On a local GAAP basis, which
management believes does not materially differ from U.S. GAAP; results of
operations of the acquired entities would not be material to the Company's
consolidated results of operations.

12.     DEBT

        Debt at March 31 consisted of the following (in thousands):

<TABLE>
<CAPTION>
                                                                                      2004
                                                                                      ----
<S>                                                                              <C>
                Unsecured promissory notes at 7.5% - 10%                         $     726
                Notes secured by equipment at 4.04% - 7.4%                             668
                Notes secured by acquired companies at 6% discount rate              2,150
                                                                                 ---------
                     Total debt                                                      3,544
                Less current portion of long-term debt and bank borrowings           1,166
                                                                                 ---------
                     Long-term debt                                              $   2,378
                                                                                 =========
</TABLE>

        All debts is denominated in euros (2.9 million euros equals $3.5 million
as of March 31, 2004) and is related to the acquisition of Challenge Card Design
GmbH and cards & more GmbH. Managing Directors of cards & more GmbH have
personally guaranteed $188,000 of the unsecured promissory notes. In connection
with the acquisition, the Company agreed to take actions to eliminate this
guarantee. The total amount of this debt was repaid during fiscal 2005.

        Debt in the amount of $2.2 million arising from the acquisition of
Challenge Card Design GmbH and cards & more GmbH payable to the Managing
Directors of the acquired companies was paid during fiscal 2005.


                                       67
<PAGE>
<TABLE>
<CAPTION>

                                             LASERCARD CORPORATION AND SUBSIDIARIES
                                            (Formerly Drexler Technology Corporation)
                                          SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
                                            (In thousands, except per share amounts)


                                                      1st Quarter          2nd Quarter          3rd Quarter         4th Quarter
                                                      -----------          -----------          -----------         -----------]
<S>                                                    <C>                  <C>                  <C>                 <C>
Fiscal 2005:
   Total revenues                                      $   8,710            $    7,773           $   6,282           $   5,779
   Cost of product sales                                   6,366                 5,842               5,477               4,952
   Gross Profit                                            2,344                 1,931                 805                 827
   Net loss                                               (1,544)               (1,521)             (2,841)             (2,995)
   Net loss per share:
       Basic and Diluted                               $    (.14)           $     (.13)          $    (.25)          $    (.26)

   Weighted average number of common
       and common equivalent shares:
       Basic and Diluted                                  11,407                11,368              11,314              11,340

Fiscal 2004:

   Total revenues                                      $   2,446            $    2,708           $   5,467           $   6,342
   Cost of product sales                                   2,556                 2,526               3,905               4,170
   Gross Profit                                             (110)                  182               1,562               2,172
   Net loss                                               (1,456)               (1,744)             (8,864)               (363)
   Net loss per share:
       Basic and Diluted                               $    (.14)           $     (.17)          $    (.83)          $    (.03)

   Weighted average number of common
       and common equivalent shares:
       Basic and Diluted                                  10,478                10,553              10,631              11,381


                                                               68
</TABLE>
<PAGE>

ITEM 9.   CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
          FINANCIAL DISCLOSURE

        There have been no disagreements with our accountant on accounting and
financial disclosure. On January 6, 2005, we changed accountants and we
disclosed such change in a Form 8-K filed with the SEC on January 10, 2005.

ITEM 9A.  CONTROLS AND PROCEDURES

(a) EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES. The Company's principal
executive officer and principal financial officer have evaluated the Company's
disclosure controls and procedures (as defined in Exchange Act Rules 13a-14(c)
and 15d-14(c)) as of the end of the period covered by this Form 10-K and have
determined that they are reasonable taking into account the totality of the
circumstances.

(b) MANAGEMENT'S ANNUAL REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING: Our
management is responsible for establishing and maintaining adequate internal
control over our financial reporting. Management assessed the effectiveness of
our internal control over financial reporting as of March 31, 2005. In making
this assessment, management used the criteria set forth by the Committee of
Sponsoring Organizations of the Treadway Commission in INTERNAL
CONTROL-INTEGRATED FRAMEWORK. Based on the assessment using those criteria,
management concluded that, as of March 31, 2005, our internal control over
financial reporting is effective.

(c) ATTESTATION REPORT OF THE REGISTERED PUBLIC ACCOUNTING FIRM. Our independent
registered public accountants, Odenberg Ullakko Muranishi & Co., LLP, audited
the consolidated financial statements included in this Annual Report on Form
10-K and have issued an audit report on management's assessment of our internal
control over financial reporting as well as on the effectiveness of our internal
control over financial reporting. Each of the report on the audit of internal
control over financial reporting and the report on the audit of the consolidated
financial statements appear elsewhere in this Annual Report on Form 10-K

(d) CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING. There were no
significant changes in the Company's internal control over financial reporting
that occurred during the fourth quarter of fiscal 2005 that have materially
affected, or are reasonably likely to materially affect, such control.


ITEM 9B OTHER INFORMATION

None.




                                       69
<PAGE>

                                    PART III

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

A.      DIRECTORS AND EXECUTIVE OFFICERS

        The current members of the board of directors and executive officers of
the Company are as follows:

<TABLE>
<CAPTION>
                                       Officer or
                                        Director
            Name               Age        Since     Position with Registrant and, If Different, Principal Occupation
            ----               ---        -----     ----------------------------------------------------------------
<S>                            <C>        <C>       <C>
Richard M. Haddock              53         1997     Director (since 2001) and Chief Executive Officer (since November 2004).
                                                    Previously Co-Chief Executive Officer from August 2003 through November 2004
                                                    and President and Chief Operating Officer from 1997 through  November 2003.

Christopher J. Dyball           54         1992     Director (since 2001) and President and Chief Operating Officer (since November
                                                    2004). Formerly Co-Chief Executive Officer from August 2003 through November
                                                    2004 and Executive Vice President from 1992 through November 2003.

Steven G. Larson                55         1987     Vice President of Finance, Treasurer and Assistant Secretary of LaserCard
                                                    Corporation.

Stephen D. Price-Francis        58         2004     Vice President of Business Development (since November 2004) of LaserCard
                                                    Corporation. Previously Director of Business Development since 1999. Member of
                                                    the Board of Directors, North American Security Products Organization; Past
                                                    president, Advanced Card Technology Association of Canada (ACT Canada).

Arthur H. Hausman               81         1981     Director. Private investor. Retired Chairman, President and Chief Executive
                                                    Officer of Ampex Corporation (manufacturer of professional audio-video systems,
                                                    data/memory products and magnetic tape). Director of CalAmp Corp.(since 1987)
                                                    (direct broadcast satellite product).

Donald E. Mattson               73         2005     Director. Private investor. Retired Senior Vice President and Chief Operating
                                                    Officer of InVision Technologies, an explosives detection systems manufacturer,
                                                    until its acquisition by GE.

Dan Maydan                      69         1998     Director. President Emeritus (since April 2003), Director (since 1992) and
                                                    former President (December 1993 to April 2003) of Applied Materials, Inc.
                                                    (semiconductor manufacturing equipment). Director of Electronics for Imaging,
                                                    Inc. (software). Member of the National Academy of Engineering.

William E. McKenna              85         1970     Director. Private investor. Director of WMS Industries, Inc. (coin-operated
                                                    video and other games) (1974 - 2004). Certified Public Accountant (New York and
                                                    California).

Albert J. Moyer                 61         2005     Director. Private investor. Retired Executive Vice President and Chief Financial
                                                    Officer of QAD Inc. (a publicly held software company and subsequently served as
                                                    consultant to QAD). Director of QAD, Inc. (since 2000), Collectors' Universe
                                                    (collectibles markets), Inc. (since 2003), CalAmp Corp. (direct broadcast
                                                    satellite products) (since 2004) and Virco Manufacturing Corp. (a leading
                                                    supplier of education furniture) (since 2004).

Walter F. Walker                50         1999     Director. President, CEO and Director (since 2001) of The Basketball Club of
                                                    Seattle, LLC, which owns the Seattle Sonics & Storm Basketball teams (NBA and
                                                    WNBA basketball); formerly President (since 1994) of Seattle SuperSonics NBA
                                                    basketball team. Previously, was President (in 1994) of Walker Capital, Inc.
                                                    (money management firm) and Vice President (from 1987 to 1994) of Goldman Sachs
                                                    & Co. (investment banking firm). Director of Advanced Digital Information
                                                    Corporation (archival and backup data-storage peripherals). Member of the
                                                    Institute of Chartered Financial Analysts (CFAs).
</TABLE>

        Mr. McKenna has notified the Company that he does not intend to stand
for re-election as a member of the Board of Directors. The Company's Board of
Directors currently intends to appoint Mr. Moyer as Chairman of the Audit
Committee to replace Mr. McKenna when he retires. It is anticipated that each of
the remaining directors and executive officers will continue in his position,
although there is no understanding or arrangement to that effect. Each director


                                       70
<PAGE>

holds office until the next annual meeting of stockholders and until such
director's successor is elected and qualified. However, any of the above
directors or executive officers could resign and any of the officers could be
replaced or removed by the Board of Directors at any time. There are no family
relationships among any directors or executive officers of the Company.

B.      SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

        Section 16(a) of the Securities Exchange Act of 1934, as amended,
requires the Company's directors, executive officers and beneficial owners of
more than 10% of the Company's common stock to file with the Securities and
Exchange Commission (SEC) initial reports of ownership and reports of changes in
ownership of common stock and other equity securities of the Company. The
Company typically files these reports on behalf of its directors and officers,
based on information provided by them. The Company believes, based on its review
of Forms 3, 4, 5, if any, and periodic written representations from reporting
persons, that all other officers, directors and holders of more than 10% of the
Company's common stock complied with all Section 16(a) filing requirements for
the 2005 fiscal year. The Company's website at www.lasercard.com contains copies
of the fiscal 2005 and subsequent filings of Forms 3, 4 and 5 related to
beneficial ownership by the Company's directors and executive officers and the
SEC's EDGAR database website at
www.sec.gov/cgi-bin/browse-edgar?action=getcompany&CIK=30140&owner=only contains
this information as soon as it is posted by the SEC.

C.      AUDIT COMMITTEE

        The members of the Audit Committee of the Board of Directors are four
non-employee directors, William E. McKenna, Arthur H. Hausman, Albert J. Moyer,
and Walter F. Walker, each of whom has been determined to be independent in
accordance with the rules of The Nasdaq Stock Market and the Securities and
Exchange Commission. Messrs. Hausman, McKenna, and Moyer are each an "audit
committee financial expert" as defined by the Securities and Exchange
Commission.

D.      CODE OF ETHICS

        The Company has adopted a code of ethics that applies to all Company
employees. A copy of this code of ethics is accessible free of charge on the
Company's Internet website for investor relations (www.lasercard.com).
Information contained on the Company's website is not part of this report.


                                       71
<PAGE>

ITEM 11.  EXECUTIVE COMPENSATION

A.      COMPENSATION OF EXECUTIVE OFFICERS

        The Summary Compensation table below discloses the total compensation
paid to each of the five persons who have served as the Company's executive
officers for the three fiscal years ended March 31, 2005, for services rendered
in all capacities to the Company and its subsidiaries.

                           SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
                                                           Annual Compensation         Long-Term Compensation
                                         Fiscal                                         Securities Underlying        All Other
Name and Principal Position               Year          Salary ($)       Bonus ($)        Option Grants (#)        Compensation(1)
---------------------------               ----          ----------       ---------        -----------------        ---------------
<S>                                       <C>           <C>              <C>                 <C>                       <C>
Jerome Drexler                            2005          $  156,877          --                      --                       --
  Chairman of the Board (2)               2004             251,947          --                      --                       --
                                          2003             245,405          --                      --                       --

Richard M. Haddock                        2005          $  363,352          --                      --                 $  3,423
  Chief Executive Officer                 2004             318,176          --                      --                       --
  (since November 30, 2004)               2003             282,158          --                  50,000                    6,250

Christopher J. Dyball                     2005          $  364,475          --                      --                 $  3,423
  President & Chief Operating Officer     2004             314,408          --                      --                       --
  (since November 30, 2004)               2003             263,109          --                  50,000                    6,250

Steven G. Larson                          2005          $  265,453          --                      --                 $  3,293
  Vice President of Finance               2004             250,150          --                      --                 $     --
  and Treasurer                           2003             217,217          --                  35,000                    6,123

Steven D. Price-Francis                   2005          $   46,444          --                      --                 $    697
  Vice President of
  Business Development (3)
</TABLE>
---------------------

(1)     Represents the Company's matching contribution on behalf of these
        individuals in the Company's 401(k) Plan.

(2)     Effective November 29, 2004, Mr. Drexler resigned as a director and
        Chairman of the Board. His fiscal 2005 salary was $156,877 through that
        date. Since then he has served as Chairman emeritus and is paid $60,000
        annually.

(3)     Stephen D. Price-Francis was named Vice President, Business Development
        of LaserCard Corporation on December 2, 2004. His compensation shown is
        since that date.

STOCK OPTION GRANTS TO EXECUTIVE OFFICERS

        There were no stock options granted to the Company's four executive
officers under the Company's Stock Option Plan during the fiscal year ended
March 31, 2005.

AGGREGATED OPTION EXERCISES AND OPTIONS HELD BY EXECUTIVE OFFICERS

        The following table sets forth the value of options exercised by the
Company's executive officers during the fiscal year ended March 31, 2005 and
remaining options held at fiscal year end.


                                       72
<PAGE>

                 AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
                        AND FISCAL YEAR-END OPTION VALUES

<TABLE>
<CAPTION>
                                                              Number of Securities
                                                             Underlying Unexercised              Value of Unexercised
                                 Shares                            Options at                   In-the-Money Options at
                               Acquired on    Value            Fiscal Year-End (#)               Fiscal Year-End ($)(2)
                                Exercise     Realized          -------------------               ----------------------
             Name                  (#)        ($)(1)       Exercisable   Unexercisable        Exercisable   Unexercisable
             ----                  ---        ------       -----------   -------------        -----------   -------------
<S>                              <C>          <C>             <C>             <C>                   <C>              <C>
   Jerome Drexler                   --            --         155,000             --                 --                --
   Richard Haddock                  --            --         229,000         32,500                 --                --
   Christopher Dyball               --            --         215,200         32,500                 --                --
   Steven Larson                    --            --         149,167         20,500                 --                --
   Stephen Price-Francis         3,600        26,575          19,525          4,625                 --                --
</TABLE>
-----------------------

(1)     Market value of underlying securities (based on the fair market value of
        the Company's common stock on The Nasdaq Stock Market) at the time of
        their exercise, minus the exercise price.

(2)     Market value of securities underlying in-the-money options at fiscal
        year end (based on $5.075 per share, the average market price of the
        Company's common stock on The Nasdaq Stock Market on the last day of the
        Company's fiscal year) minus the exercise price.

B.      COMPENSATION OF DIRECTORS

        During fiscal 2005, each director received a fee of $1,500 per month for
serving as a director, the standard fee in effect since August 6, 2004. In
addition, Audit Committee members are paid an additional $5,000 per year,
prorated over 12 months, except for the Chairman of the Audit Committee, who is
paid an additional $10,000 per year, prorated over 12 months. The Company also
reimburses reasonable out-of-pocket expenses incurred by directors performing
services for the Company.

        The Company's Stock Option Plan provides for the automatic grant of an
option to purchase 15,000 shares of the Company's common stock on the date any
person first becomes a director. These grants to newly elected directors have
become exercisable in cumulative increments of one-fourth (1/4) each at the end
of 12 months, 24 months, 36 months and 48 months from the date of grant. The
Stock Option Plan further provides that on the date of the Company's annual
meeting, each non-employee director who has been a director of the Company for
the preceding six-month period and who is re-elected at the annual meeting, is
automatically granted an option to purchase 6,000 shares of the Company's common
stock. The option share grants to the re-elected directors are exercisable in
full at the time of grant. The exercise price for options granted to newly
elected directors and re-elected directors is the fair market value of the
Company's common stock on the date of grant.

C.      EMPLOYMENT CONTRACTS, TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL
        ARRANGEMENTS

        None of the Company's executive officers has employment or severance
arrangements with the Company. Under the terms of the Stock Option Plan, the
Board of Directors and/or Stock Option Committee retains discretion, subject to
certain limits, to modify the terms of outstanding options. In the event of a
merger or sale of assets or like event, the Board of Directors is empowered to
make appropriate adjustments to options under the Stock Option Plan. The Board
of Directors has adopted guidelines specifying the following as adjustments that
it would consider appropriate upon the occurrence of such an event:

        o       permitting optionees no less than 30 days to exercise the vested
                portion of their options;

        o       having the successor corporation either (a) issue to optionees
                replacement options for the unvested portions of options, or
                else (b) pay deferred compensation on the spread between the
                value of Company stock upon the occurrence of such event and the
                option exercise price at the time such unvested portion would
                have vested; and


                                       73
<PAGE>

        o       providing for vesting of 100% of the unvested portion for
                optionees employed by the Company for at least two years prior
                to such event if their employment is terminated within one year
                of such event by the successor corporation other than by
                resignation or for acts of moral turpitude.

D.      COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

        During fiscal 2005, none of the Company's executive officers served on
the board of directors of any entities whose directors or officers serve on the
Company's Compensation Committee. During fiscal 2005, Mr. McKenna, Dr. Maydan
and Mr. Hausman served as members of the Compensation Committee, which is
currently composed entirely of three outside directors who are not officers or
employees of the Company. As presently established, the Compensation Committee
approves the salary of executive officers, including the Chief Executive Officer
and certain other employees.

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
          RELATED STOCKHOLDER MATTERS

        The table below, based upon information supplied by the principal
stockholders, shows the name, address, number of shares held, nature of
ownership and percentage of shares held as of March 31, 2005 by the persons or
entities known to the Company to own beneficially more than 5% of the
outstanding common stock. Applicable percentages are based on 11,345,164 shares
outstanding on March 31, 2005.

                 BENEFICIAL OWNERSHIP BY PRINCIPAL STOCKHOLDERS

                                                       Common       Percent of
    Name and Address of Beneficial Owner              Shares (1)     Class (2)
    ------------------------------------              ----------     --------

Jerome Drexler, c/o LaserCard Corporation,            630,010 (3)      5.6%
1077 Independence Avenue, Mountain View, CA 94043

IronBridge Capital Management LLC
1 Parkview Plaza Suite 600
Oakbrook Terrace, IL  60181-4497 US                   824,574          7.3%

Franklin Advisers, Inc.
1 Franklin Parkway
San Mateo, CA  94403-1906 US                          722,600          6.4%

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

(1)     The stockholder named in this table has sole voting and investment power
        with respect to the shares indicated as beneficially owned, subject to
        community property laws, where applicable, and the information contained
        in the footnotes to this table.

(2)     For purposes of computing the percentage of outstanding shares held by
        each person or group of persons named above on a given date, shares
        which such person or group has the right to acquire within 60 days after
        such date are deemed to be outstanding, but are not deemed to be
        outstanding for the purposes of computing the percentage ownership of
        any other person.

(3)     Includes 155,000 shares purchasable by exercise of option within 60
        days. Does not include 7,700 shares owned by Mr. Drexler's wife, as to
        which shares Mr. Drexler disclaims any beneficial ownership. Includes
        7,700 shares held by The Drexler Foundation, the assets of which are
        perpetually dedicated to charity. The power to vote and to dispose of
        the shares held by The Drexler Foundation is shared by the Foundation's
        directors, consisting of Mr. Drexler and his wife. Mr. Drexler disclaims
        beneficial ownership with respect to these shares.


        The following table contains information as of March 31, 2005,
respecting the number of shares and percentage of the Company's common stock
beneficially owned by each of the Company's eight directors, by each executive
officer of the Company, and by all executive officers and directors as a group.
The address of each beneficial owner listed in


                                       74
<PAGE>

the table is c/o LaserCard Corporation, 1875 North Shoreline Boulevard, Mountain
View, California 94043. Applicable percentages are based on 11,345,164 shares
outstanding on March 31, 2005.

               STOCK OWNERSHIP BY DIRECTORS AND EXECUTIVE OFFICERS

<TABLE>
<CAPTION>
             Name                                     Common Shares (1)        Percent of Class (2)
             ----                                     -----------------        --------------------

<S>                                                       <C>                           <C>
Christopher J. Dyball                                     228,925 (3)                   2.0%
Richard M. Haddock                                        240,999 (4)                   2.1%
Arthur H. Hausman                                          68,392 (5)                   0.6%
Steven G. Larson                                          155,322 (6)                   1.4%
Donald E. Mattson                                              --                         --
Dan Maydan                                                 45,000 (7)                   0.4%
William E. McKenna                                         95,483 (8)                   0.8%
Albert J. Moyer                                                --                         --
Stephen Price-Francis                                      20,957 (9)                   0.2%
Walter F. Walker                                          106,639 (10)                  0.9%
All executive officers and directors as a group           961,717 (11)                  7.9%
</TABLE>
---------------------

(1)     To the Company's knowledge, the persons named in the table have sole
        voting and investment power with respect to all shares of common stock
        shown as beneficially owned by them, subject to community property laws,
        where applicable, and the information contained in the footnotes to this
        table.

(2)     For purposes of computing the percentage of outstanding shares held by
        each person or group of persons named above on a given date, shares
        which such person or group has the right to acquire within 60 days after
        such date are deemed to be outstanding, but are not deemed to be
        outstanding for the purposes of computing the percentage ownership of
        any other person.

(3)     Includes 215,200 shares purchasable by exercise of option within 60
        days.

(4)     Includes 229,000 shares purchasable by exercise of option within 60
        days.

(5)     Includes 48,000 shares purchasable by exercise of option within 60 days.

(6)     Includes 149,167 shares purchasable by exercise of option within 60
        days.

(7)     Includes 45,000 shares purchasable by exercise of option within 60 days.

(8)     Includes 60,000 shares purchasable by exercise of option within 60 days.

(9)     Includes 19,525 shares purchasable by exercise of option within 60 days.

(10)    Includes 43,000 shares purchasable by exercise of option within 60 days.
        Does not include 1,000 shares owned by Mr. Walker's wife, as to which
        shares Mr. Walker disclaims any beneficial ownership.

(11)    Includes 961,717 shares purchasable by exercise of option within 60
        days.


                      EQUITY COMPENSATION PLAN INFORMATION

        The table below shows information as of March 31, 2005, with respect to
equity compensation plans under which equity securities of the Company are
authorized for issuance. The Company's equity compensation plans, consisting of
the Stock Option Plan and Employee Stock Purchase Plan, are approved by security
holders.


                                       75
<PAGE>
<TABLE>
<CAPTION>
                                  Number of Securities to Be      Weighted-Average      Number of Securities Remaining Available
                                    Issued upon Exercise of      Exercise Price of         for Future Issuance under Equity
                                     Outstanding Options,       Outstanding Options,         Compensation Plans (Excluding
         Plan Category                Warrants and Rights       Warrants and Rights       Securities Reflected in Column (A))
         -------------                -------------------       -------------------       -----------------------------------
                                              (a)                       (b)                               (c)
<S>                                        <C>                         <C>                            <C>     <C>
Equity compensation plans
approved by security holders
                                           1,947,284                   $13.37                         563,349 (1)
Equity compensation plans not
approved by security holders
(Nasdaq exemption Rule No.                   135,824 (2)               $13.36                              --
4350(i)(1)(A))
</TABLE>
---------------------

(1)     Includes 87,478 shares reserved as of March 31, 2005 for future
        purchases by employees through payroll deductions under the Company's
        Employee Stock Purchase Plan, which is available to all regular
        employees who work a minimum of 30 hours per week and who have completed
        six months of employment with the Company, 466,234 shares under the 2004
        Equity Incentive Compensation Plan and 9,637 shares under the old Stock
        Option Plan.

(2)     Includes options to purchase 120,000 shares of common stock granted to
        six key employees of the acquired German subsidiaries and warrants to
        purchase 15,824 shares of common stock granted to the placement agent in
        our December, 2003, private placement. See Notes 6 and 9 of Notes to
        Financial Statements for a description of our equity compensation plans
        that do not require the approval of and have not been approved by, our
        shareholders. Excludes warrants outstanding as of March 31, 2005, to
        purchase 174,057 shares of common stock issued to investors in our
        December, 2003 private placement."

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

        Since October 21, 2001, the Company contracted with Wexler & Walker
Public Policy Associates, a unit of Hill and Knowlton, Inc., ("Wexler") to be
lobbyists on behalf of the Company. The Chairman of Wexler is Robert S. Walker,
a brother of director Walter F. Walker. In October 2002, the agreement was
extended for the period October 1, 2002 through September 2003 or until
terminated upon seven days' notice. The extended agreement provides for a
monthly retainer of $10,000 and there currently is a purchase order dated
November 12, 2004 valid through April 29, 2005 with the same terms and
conditions of the previous agreement. In addition, there is another purchase
order dated February 25, 2005 in the total of $35,000 to cover the consulting
services for the period from January 2005 to April 2005. The Company paid Wexler
$206,000 during fiscal 2005, $151,000 during the fiscal 2004 and $83,000 during
fiscal 2003. As of March 31, 2005, $35,000 was due to Wexler. There were no
significant amounts due to Wexler as of March 31, 2004 or 2003.


                                       76
<PAGE>

ITEM 14.  PRINCIPAL ACCOUNTANT FEES AND SERVICES

AUDIT AND NON-AUDIT FEES

        The following table shows the aggregate fees billed to the Company by
its previous independent accountants, KPMG LLP ("KPMG") and
PricewaterhouseCoopers LLP ("PwC") and by its current independent accountants,
Odenberg Ullakko Muranishi & Co. LLP "("OUM"), for services related to fiscal
years 2005 and 2004.

<TABLE>
<CAPTION>
                                             2005                             2004
        Description of Fees        KPMG/PwC         OUM              KPMG            PwC
        -------------------        --------         ---              ----            ---
<S>                                <C>            <C>              <C>              <C>
        Audit Fees                 $198,932       $ 37,237         $391,060         $107,400
        Audit-Related                66,471             --               --               --
        Tax Fees                     17,725             --           48,267               --
        All Other Fees                   --             --               --               --
</TABLE>

        o       Audit Fees: Includes fees associated with the annual audit of
                financial statements and internal control over financial
                reporting in compliance with regulatory requirements under the
                Sarbanes-Oxley Act of 2002, review of our quarterly reports on
                Form 10-Q, annual report on Form 10-K and periodic reports on
                Form 8-K, consents issued in connection with the our Form S-8
                and S-3 filings, assistance and review with other documents we
                filed with the SEC.

        o       Audit-Related Fees: Audit-related services principally include
                employee benefit plan audits and due diligence services.

        o       Tax Fees: Includes fees for tax compliance (tax return
                preparation assistance), general tax planning, tax-related
                services on acquisition, and international tax consulting.

        o       All Other Fees: The Company was not billed by OUM, KPMG or PwC
                for other services.

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

        All audit and non-audit fees were approved by the Audit Committee. The
Company's policy on auditor independence does not permit the employment of its
independent auditor for material non-audit related services, except for the
following: services which are incidental and directly related to audit
activities, tax related activities and tax planning on behalf of the Company.
The Audit Committee considered whether the provision of services other than the
audit services is compatible with maintaining the auditors' independence.

PRE-APPROVAL POLICIES AND PROCEDURES

        It is the Company's policy that all non-audit services to be performed
by the Company's independent auditor be approved in advance by the Audit
Committee. The Company's policy on auditor independence requires that, prior to
engaging the independent auditor in any non-audit related activity other than
that specifically authorized by the Company's policy on auditor independence,
Company management report to the Audit Committee the nature of the proposed
activity, including the reasons why (i) it is necessary or beneficial to the
Company to use the independent auditor to engage in such activity, and (ii) the
steps being taken to ensure that the engagement of the independent auditor in
such activity will not, among other things, violate applicable laws or
regulations of the United States and applicable states, or the rules and
regulations of the Nasdaq Stock Market, on which the Company's securities are
listed. In order for the Company to engage the independent auditor in the
proposed activity, the Company must obtain Audit Committee approval.


                                       77
<PAGE>

                                    PART IV

ITEM 15.  EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(A)     LIST OF DOCUMENTS FILED AS PART OF THIS REPORT

1.      The consolidated financial statements of the Company, filed herewith
        under Item 8, as follows:

<TABLE>
<CAPTION>
                                                                                                       Page
                                              Description                                             Number
                                              -----------                                             ------
<S>                                                                                                   <C>
        (1)     Reports of Independent Registered Public Accounting Firms                               40

        (2)     Consolidated Balance Sheets at March 31, 2005 and March 31, 2004                        44

        (3)     Consolidated Statements of Operations for Fiscal Years 2005, 2004 and 2003              45

        (4)     Consolidated Statements of Stockholders' Equity for Fiscal Years 2003, 2004 and 2005    46

        (5)     Consolidated Statements of Cash Flows for Fiscal Years 2005, 2004 and 2003              47

        (6)     Notes to Consolidated Financial Statements                                              48
</TABLE>

2.      Financial Statement Schedules:

        The schedule supporting the Company's Consolidated Financial Statements,
        filed herewith under Item 14(d), as follows:

<TABLE>
<CAPTION>
     Schedule                                                                                          Page
      Number                                Description                                               Number
      ------                                -----------                                               ------
<S>                                                                                                   <C>
        -       Report of Independent Registered Public Accounting Firms on Financial
                Statement Schedule                                                                      81

        II      Valuation and Qualifying Accounts                                                       84
</TABLE>

        Schedules not listed above are not applicable or not required, or the
        information required to be set forth therein is included in the
        consolidated financial statements or the notes thereto.

3.      Exhibits:

        The Exhibits to this Report, filed herewith under Item 14(c) or
        incorporated by reference from other documents previously filed with the
        Securities and Exchange Commission, as follows:

<TABLE>
<CAPTION>
     Exhibit                                                                      Filed Herewith or Incorporated
      Number                          Description                                     Herein by Reference to
      ------                          -----------                                     ----------------------
<S>             <C>                                                                 <C>
        3.1     Amended and Restated Certificate of Incorporation                   Filed herewith as page 88

        3.2     Amended and Restated By-Laws                                        Filed herewith as page 92
</TABLE>


                                                      78
<PAGE>
<TABLE>
<CAPTION>
<S>             <C>                                                                 <C>
     10.1       Building lease agreement with Renault & Handley       Exhibit 10.1 to Report on Form 10-Q for period
                Employees Investment Co. for 2644-2648 Bayshore       ended December 31, 2003
                Pkwy., Mountain View, CA

     10.2       Building Lease Agreement with Shoreline Park LLC      Exhibit 10.2 to Report on Form 10-K for fiscal
                for 1395 Charleston Road, Mountain View, CA           year ended March 31, 2004
                (mailing address 1875 North Shoreline Boulevard,
                Mountain View, CA)

     10.3*      Amended and Restated Stock Option Plan                Exhibit 10.4.1 to Report on Form 10-Q for period
                                                                      ended September 30, 2002

     10.4       Patent License Agreement with Nippon Conlux Co.,      Exhibit 10.6 to Report on Form 10-K for fiscal
                Ltd.                                                  year ended March 31, 1999

     10.5       U.S. Government subcontract with Information          Exhibit 10.6 to Report on Form 10-K for fiscal
                Spectrum Inc. (now Anteon International) dated June   year ended March 31, 2001
                2, 2000

     10.6       Engagement Letter with Morgan Keegan & Co., Inc.      Exhibit 99.1 to Report on Form 10-Q for period
                (as amended)                                          ended December 31, 2003

     10.7       Stock and Warrant Purchase Agreement (as amended)     Exhibit 99.2 to Report on Form 10-Q for period
                                                                      ended December 31, 2003

     10.8       Optical Card Manufacturing License Agreement with     Exhibit 10.8 to Report on Form 10-K for fiscal
                Global Investments Group (portions omitted pursuant   year ended March 31, 2004
                to a request for confidential treatment)

     16.1       Letter re Change in Certifying Accountants            Exhibit 16 to Report on Form 8-K dated
                                                                      April 8, 2002

     16.2       Letter re Change in Certifying Accountants            Exhibit 16.1 to Report on Form 8-K dated
                                                                      August 29, 2003

     16.3       Letter re Change in Certifying Accountants            Exhibit 16.1 to Report on Form 8-K dated
                                                                      December 14, 2004

     21         Subsidiaries of the Registrant                        Filed herewith as page 106

     23.1       Consent of Independent Registered Public Accounting   Filed herewith as page 107
                Firm (OUM)

     23.2       Consent of Independent Registered Public Accounting   Filed herewith as page 108
                Firm (KPMG)

     23.3       Consent of Independent Registered Public Accounting   Filed herewith as page 109
                Firm (PricewaterhouseCoopers)

     24         Power of attorney                                     Filed herewith as page 85

     31.1       Rule 13a-14(a) Certification of Richard M. Haddock,   Filed herewith as page 110
                principal executive officer
</TABLE>

                                                           79

<PAGE>
<TABLE>
<CAPTION>
<S>             <C>                                                                 <C>
     31.2       Rule 13a-14(a) Certification of Steven G. Larson,     Filed herewith as page 111
                principal financial officer

     32.1       Section 1350 Certification of Richard M. Haddock,     Filed herewith as page 112
                chief executive officers

     32.2       Section 1350 Certification of Steven G. Larson,       Filed herewith as page 113
                chief financial officer
</TABLE>
--------------------

*Indicates management contract or compensatory plan or arrangement.

(B)     EXHIBITS

        Exhibits 3.1, 3.2, 21, 23.1, 23.2, 23.3, 24, 31.1, 31.2, 32.1 and 32.2
        are filed herewith.

(C)     FINANCIAL STATEMENT SCHEDULE

        Schedule II to the Company's consolidated financial statements is on
        page 84.



                                       80
<PAGE>

             REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
                         ON FINANCIAL STATEMENT SCHEDULE


The Board of Directors and Stockholders
 LaserCard Corporation:

        The audit referred to in our report dated June 3, 2005, included the
related financial statement schedule as of March 31, 2005 and for the year then
ended, included in this Annual Report on Form 10-K. The financial statement
schedule is the responsibility of the Company's management. Our responsibility
is to express an opinion on the financial statement schedule based on our audit.
In our opinion, such financial statement schedule, when considered in relation
to the consolidated financial statements taken as a whole, presents fairly in
all material respects the information set forth therein.


/s/Odenberg Ullakko Muranishi & Co. LLP
San Francisco, California

June 3, 2005



                                       81
<PAGE>

             REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
                         ON FINANCIAL STATEMENT SCHEDULE


The Board of Directors and Stockholders
LaserCard Corporation:

        The audit referred to in our report dated June 9, 2004, included the
related financial statement schedule as of March 31, 2004, and for the year then
ended, included in this Annual Report on Form 10-K. The financial statement
schedule is the responsibility of the Company's management. Our responsibility
is to express an opinion on the financial statement schedule based on our audit.
In our opinion, such financial statement schedule, when considered in relation
to the consolidated financial statements taken as a whole, presents fairly in
all material respects the information set forth therein.



/s/ KPMG LLP
Mountain View, California
June 9, 2004




                                       82
<PAGE>

             REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
                         ON FINANCIAL STATEMENT SCHEDULE



The Board of Directors and Stockholders
 LaserCard Corporation:


        Our audit of the consolidated financial statements of Lasercard
Corporation (formerly Drexler Technology Corporation) referred to in our report
dated April 28, 2003, except for Note 4, as to which the date is January 22,
2004, which report and consolidated financial statements are included in this
Annual Report on Form 10-K, also included an audit of the financial statement
schedule for Fiscal 2003 listed in Item 15(a)(2) of this Form 10-K. In our
opinion, this financial statement schedule presents fairly, in all material
respects, the information set forth therein when read in conjunction with the
related consolidated financial statements.



/s/PricewaterhouseCoopers LLP
San Jose, California
April 28, 2003


                                       83
<PAGE>
<TABLE>
<CAPTION>

                                                                                                                     SCHEDULE II


                                              LASERCARD CORPORATION AND SUBSIDIARIES
                                             (Formerly Drexler Technology Corporation)
                                                 VALUATION AND QUALIFYING ACCOUNTS
                                     For the Fiscal Years Ended March 31, 2003, 2004 and 2005


                                     Balance at        Additions (Deletions)   Additions
                                     Beginning          Charged (Credited)     Charged to                            Balance at
       Description                   of Period          to Profit and Loss   Other Accounts       Deductions       End of Period
       -----------                   ---------          ------------------   --------------       ----------       -------------
<S>                                <C>                     <C>               <C>                  <C>              <C>
Fiscal 2003:

    Product return reserve         $    100,000            $          --     $           --       $     10,000     $      90,000
                                   ============            =============     ==============       ============     =============

    Deferred tax asset
       valuation allowance         $  5,318,000            $          --     $           --       $     64,000     $   5,254,000
                                   ============            =============     ==============       ============     =============

Fiscal 2004:

    Product return reserve         $     90,000            $          --                 --       $      4,000     $      86,000
                                   ============            =============     ==============       ============     =============

    Bad debt reserve               $         --            $          --     $      210,000 (1)   $         --     $     210,000
                                   ============            =============     ==============       ============     =============

    Deferred tax asset
       valuation allowance         $  5,254,000            $   8,940,000     $      557,000 (2)   $         --     $  14,751,000
                                   ============            =============     ==============       ============     =============

Fiscal 2005:

    Product return reserve         $     86,000            $     311,000     $           --       $    373,000     $      24,000
                                   ============            =============     ==============       ============     =============

    Bad debt reserve               $    210,000            $      22,000     $           --       $    200,000     $      32,000
                                   ============            =============     ==============       ============     =============

    Deferred tax asset
       valuation allowance         $ 14,751,000            $   3,675,000     $           --       $         --     $  18,426,000
                                   ============            =============     ==============       ============     =============
</TABLE>

(1)     This represents the amount of bad debt reserve recorded against the
        accounts receivable of the acquired entities at the date of acquisition.

(2)     This amount relates to stock option deductions to be credited to
        additional paid-in capital when realized.



                                       84
<PAGE>

SIGNATURES

        Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized:

        Dated:  June 14, 2005

        LASERCARD CORPORATION

By:             /s/ Richard M. Haddock
    ---------------------------------------------------
Richard M. Haddock, Chief Executive Officer

        KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Richard M. Haddock and Steven G. Larson
and each of them, acting individually, as his attorney-in-fact, each with full
power of substitution and resubstitution, for him and in his name, place and
stead, in any and all capacities, to sign any and all amendments to this Report
on Form 10-K, and to file the same, with all exhibits thereto, and other
documents in connection therewith, with the Securities and Exchange Commission,
granting unto said attorneys-in-fact and agents, and each of them, full power
and authority to do and perform each and every act and thing requisite and
necessary to be done in connection therewith and about the premises, as fully to
all intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents, or any of them, or their
or his substitute or substitutes, may lawfully do or cause to be done by virtue
hereof.

        Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated:

<TABLE>
<CAPTION>

                    Signature                                            Title                                     Date
                    ---------                                            -----                                     ----
<S>                                                   <C>                                                      <C>
/s/ Richard M. Haddock                                Chief Executive Officer                                  June 14, 2005
-----------------------------------------------       (Principal Executive Officer)
Richard M. Haddock


/s/ Steven G. Larson                                  Vice President of Finance and Treasurer                  June 14, 2005
-----------------------------------------------       (Principal Financial Officer and
Steven G. Larson                                      Principal Accounting Officer)


/s/ Christopher J. Dyball                             President and Chief Operating Officer                    June 14, 2005
-----------------------------------------------       Director
Christopher J. Dyball


/s/ Arthur H. Hausman                                 Director                                                 June 14, 2005
-----------------------------------------------
Arthur H. Hausman


/s/ Donald E. Mattson                                 Director                                                 June 14, 2005
-----------------------------------------------
Donald E. Mattson


/s/ Dan Maydan                                        Director                                                 June 14, 2005
-----------------------------------------------
Dan Maydan


/s/ William E. McKenna                                Director                                                 June 14, 2005
-----------------------------------------------
William E. McKenna


/s/ Albert J. Moyer                                   Director                                                 June 14, 2005
-----------------------------------------------
Albert J. Moyer


/s/ Walter F. Walker                                  Director                                                 June 14, 2005
-----------------------------------------------
Walter F. Walker
</TABLE>


                                       85
<PAGE>

                                INDEX TO EXHIBITS
                                  [ITEM 14(c)]
Exhibit
Number       Description
------       -----------

3.1          Amended and Restated Certificate of Incorporation; filed herewith
             as page 88

3.2          Amended and Restated By-Laws; filed herewith as page 92

10.1         Building lease agreement with Renault & Handley Employees
             Investment Co. for 2644-2648 Bayshore Parkway, Mountain View, CA;
             previously filed as Exhibit 10.1 to Report on Form 10-Q for period
             ending December 31, 2003 and incorporated herein by reference

10.2         Building lease agreement with Shoreline Park LLC for 1395
             Charleston Road, Mountain View, CA (mailing address 1875 North
             Shoreline Boulevard, Mountain View, CA) filed as Exhibit 10.2 to
             Report on Form 10-K for fiscal year ended March 31, 2004 and
             incorporated herein by reference.

10.3         Amended and Restated Stock Option Plan; previously filed as Exhibit
             10.4.1 to Report on Form 10-Q for period ended September 30, 2002
             and incorporated herein by reference

10.4         Patent License Agreement with Nippon Conlux Co., Ltd.; previously
             filed as Exhibit 10.6 to Report on Form 10-K for fiscal year ended
             March 31, 1999 and incorporated herein by reference

10.5         U.S. Government subcontract with Information Spectrum Inc. (now
             Anteon International) dated June 2, 2000; previously filed as
             Exhibit 10.6 to Report on Form 10-K for fiscal year ended March 31,
             2001 and incorporated herein by reference

10.6         Engagement Letter with Morgan Keegan & Co., Inc. (as amended);
             previously filed as Exhibit 99.1 to Report on Form 10-Q for period
             ended December 31, 2003

10.7         Stock and Warrant Purchase Agreement (as amended); previously filed
             as Exhibit 99.2 to Report on Form 10-Q for period ended December
             31, 2003

10.8         Optical Card Manufacturing License Agreement with Global
             Investments Group (portions omitted pursuant to a request for
             confidential treatment); filed as Exhibit as Exhibit 10.8 to Report
             on Form 10-K for fiscal year ended March 31, 2004 and incorporated
             herein by reference.

16.1         Letter re Change in Certifying Accountant; previously filed as
             Exhibit 16 to Current Report on Form 8-K dated April 8, 2002

16.2         Letter re Change in Certifying Accountant; previously filed as
             Exhibit 16.1 to Current Report on Form 8-K dated August 29, 2003

16.3         Letter re Change in Certifying Accountant; previously filed as
             Exhibit 16.1 to Current Report on Form 8-K dated December 14, 2004

21           Subsidiaries of the Registrant; filed herewith as page 106

23.1         Consent of Independent Registered Public Accounting Firm (OUM);
             filed herewith as page 107

23.2         Consent of Independent Registered Public Accounting Firm (KPMG);
             filed herewith as page 108

23.3         Consent of Independent Registered Public Accounting Firm
             (PricewaterhouseCoopers); filed herewith as page 109

                                       86
<PAGE>

24           Power of Attorney; filed herewith as page 85

31.1         Rule 13a-14(a) Certification of Richard M. Haddock, principal
             executive officer; filed herewith as 110

31.2         Rule 13a-14(a) Certification of Steven G. Larson, principal
             financial officer; filed herewith as page 111

32.1         Section 1350 Certification of Richard M. Haddock, chief executive
             officer; filed herewith as page 112

32.2         Section 1350 Certification of Steven G. Larson, chief financial
             officer; filed herewith as page 113


                                       87