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, 2007
 
 OR
 
 o
              TRANSITION
                  REPORT PURSUANT TO SECTION 13 OR 15(d) OFTHE
                  SECURITIES EXCHANGE ACT OF 1934
 For
        the
        Transition Period from _____ to
        _____
 
 Commission
        File Number: 0-6377
 
 LASERCARD
        CORPORATION
 (Exact
        name of registrant as specified in its charter)
 
 Delaware
              77-0176309(State
                  or other jurisdiction of incorporation or organization)
              (I.R.S.
                  Employer Identification No.)
 
 1875
                  North Shoreline Boulevard, Mountain View, CA
              94043-1601(Address
                  of principal executive offices)
              (Zip
                  Code)
 
 (650)
        969-4428
 (Registrant's
        telephone number, including area code)
 
 Securities
        registered pursuant to Section 12(b) of the Act:
  None
              None(Title
                  of each class so registered)
              (Name
                  of each exchange on which
                  registered)
 
 
 Securities
        registered pursuant to Section 12(g) of the Act:
 
 Common
        Stock, $0.01 Par Value
 (Title
        of
        class)
 
 Indicate
        by check mark if the registrant is a well-known seasoned issuer, as defined
        in
        Rule 405 of the Securities Act. o Yes   
 x
        No
 
 Indicate
        by check mark if the registrant is not required to file reports pursuant
        to
        Section 13 or Section 15(d) of the Act. o Yes     x
        No
 
 Indicate
        by check mark whether the registrant (1) has filed all reports required to
        be
        filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
        the
        preceding 12 months (or for such shorter period that the registrant was required
        to file such reports) and (2) has been subject to such filing requirements
        for
        the past 90 days. x
        Yes   
o No
 
 Indicate
        by check mark 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. o
 
 Indicate
        by check mark whether the registrant is a large accelerated filer, an
        accelerated filer, or a non-accelerated filer. See definition of “accelerated
        filer and large filer” in Rule 12b-2 of the Exchange Act. (Check
        one):
  Large
                  accelerated filer o
              Accelerated
                  filer x
              Non-accelerated
                  filer o
 
 Indicate
        by check mark whether the registrant is a shell company (as defined in Rule
        12b-2 of the Act). o
        Yes     x No
  1
 Based
        on
        the last trade price of our Common Stock on The Nasdaq Global Market on the
        last
        business day of the registrant’s most recently completed second fiscal quarter
        (September 30, 2006), the aggregate market value of the voting stock held
        by
        non-affiliates of the registrant is approximately $151,675,000. 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.
 
 Indicate
        the number of outstanding shares of Common Stock, $.01 par value, at May
        31,
        2007: 11,877,940
  DOCUMENTS
        INCORPORATED BY REFERENCE: NONE
 Exhibit
        Index is on page 80
 Total
        number of pages is 87
  2
  PART
                  IItem
                  1.
              Business
              
              4Forward-Looking
                  Statements
              
              4General
                  Development of Business
              
              5Financial
                  Information about Segments
              
              6Narrative
                  Description of Business
              
              6Item
                  1A.
              Risk
                  Factors
              
              16Item
                  1B.
              Unresolved
                  Staff Comments
              
              23Item
                  2.
              Properties
              
              23Item
                  3.
              Legal
                  Proceedings
              
              23Item
                  4.
              Submission
                  of Matters to a Vote of Security Holders
              
              23PART
                  IIItem
                  5.
              Market
                  for Registrant's Common Equity, Related Stockholder Matters and
                  Issuer
                  Purchases of Equity Securities
              
              24Item
                  6.
              Selected
                  Financial Data
              
              26Item
                  7.
              Management's
                  Discussion and Analysis of Financial Condition and Results of Operations
              
              27Critical
                  Accounting Policies
              
              27Results
                  of Operations
              
              32Liquidity
                  and Capital Resources
              
              39Item
                  7A.
              Quantitative
                  and Qualitative Disclosures about Market Risk
              
              42Item
                  8.
              Financial
                  Statements and Supplementary Data
              
              43Report
                  of Independent Registered Public Accounting Firm
              
              43Consolidated
                  Financial Statements
              
              45Notes
                  to Consolidated Financial Statements
              
              49Quarterly
                  Financial Information (Unaudited)
              
              69Item
                  9.
              Changes
                  in and Disagreements with Accountants on Accounting and Financial
                  Disclosure
              
              70Item
                  9A.
              Controls
                  and Procedures
              
              70Item
                  9B.
              Other
                  Information
              
              71PART
                  IIIItem
                  10.
              Directors,
                  Executive Officers and Corporate Governance
              
              72Item
                  11.
              Executive
                  Compensation
              
              72Item
                  12.
              Security
                  Ownership of Certain Beneficial Owners and Management and Related
                  Stockholder Matters
              
              72Item
                  13.
              Certain
                  Relationships and Related Transactions, and Director
                  Independence
              
              72Item
                  14.
              Principal
                  Accountant Fees and Services
              
              73PART
                  IVItem
                  15.
              Exhibits
                  and Financial Statement Schedules
              
              74Signatures
              
              
              
              79
  3
  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, our actual
        results may differ materially from the statements made.  Often such
        statements can be identified by their use of words such as “may,” “will,”
“intends,” “plans,” “believes,” “anticipates,” “visualizes,” “expects,” and
“estimates.”  Forward-looking statements made in this report include
        statements as to our beliefs as to current and potential market segments,
        customers, and applications for and deployment of our  products; the
        advantages of, potential income from, and duties to be performed under the
        sale
        of a second-source card manufacturing license to Prevent Global
        (Prevent);  our intent to retain the Prevent equipment
        until Prevent is ready to receive the equipment; future scheduled payments
        and contingent royalties under the Prevent contract, Prevent's planned
        production capacity, and that we will sell equipment to Prevent and
        provide Prevent with installation support; production quantities, delivery
        rates and expected delivery schedule, backlog, and revenue recognition for
        our
        products for U.S. or foreign government ID card programs, potential annual
        revenues being $40 to $50 million at full implementation from the Italy programs
        with expected revenues unable to be determined until the prime contractor
        issues
        follow-up orders; our expectation for no future growth from the U.S. Green
        Card
        and Laser Visa BCC program, with steady state revenue to average $10 million
        if
        the option years are elected; plans to increase card production capacity
        for
        anticipated increases in orders including $8 million in capital equipment
        and
        leasehold improvements during the next twelve to eighteen months; and expecting
        growth of less than 10% in the specialty card and printer segment and expecting
        negative gross profit from the optical card drive market; our intent to update
        our SFAS No. 123(R), “Shared-Based Payments,” assumptions at least annually; our
        intent to find another photographic film supplier should Kodak cease supplying
        such film and to take advantage of any last-buy opportunity which Kodak may
        choose to provide; our intent to pursue patent infringers by litigation,
        arbitration, or negotiation; the need for, expected success of, and potential
        benefits from our research and development efforts, including our attempts
        to
        develop other forms of optical recording media for use in optical memory
        cards
        and the potential benefits derived there from; expectations regarding revenues
        (overall and by segment and by customer), margins, profit (including likely
        losses in the future if full implementation of the Italian program is further
        delayed), and our deferred income tax asset and related valuation allowance;
        our
        belief that our current five major programs, plus maybe one or two others,
        will
        be the basis for a majority of our revenues in the near term; estimates of
        optical card production capacity, our ability to expand production capacity,
        and
        our plans and expectations regarding the growth and associated capital costs
        of
        such capacity; estimates that revenues and advance payments will be sufficient
        to generate cash from operating activities over the next twelve months and
        fund
        our planned capital expenditures despite expected quarterly fluctuations;
        expectations regarding market growth, product demand, and the continuation
        of
        current programs; and our long-term revenue growth objectives, and drive
        pricing
        strategy.
 
 These
        forward-looking statements are based upon our assumptions about and assessment
        of the future, which may or may not prove true, and involve a number of risks
        and uncertainties including, but not limited to, whether there is a market
        for
        cards for homeland security in the U.S. and abroad, and if so whether such
        market will utilize optical memory cards as opposed to other technology;
        customer concentration and reliance on continued U.S. and Italian government
        business; risks associated with doing business in and with foreign countries;
        whether we will be successful in assisting Prevent with factory startup and
        training; whether Prevent will have the financial resources to make the balance
        of its required payments to us and to operate the facility; whether the facility
        will efficiently produce high quality optical memory cards in volume and
        that
        meet our standards; lengthy sales cycles and changes in and dependence on
        government policy-making; reliance on value-added resellers and system
        integrators to generate sales, perform customer system integration, develop
        application software, integrate optical card systems with other technologies,
        test products, and work with governments to implement card programs; risks
        and
        difficulties associated with development, manufacture, and deployment of
        optical
        cards, drives, and systems; our ability or our customers’ ability to initiate
        and develop new programs utilizing our card products; risks and difficulties
        associated with development, manufacture, and deployment of optical cards,
        drives, and systems; potential manufacturing difficulties and complications
        associated with increasing manufacturing capacity of cards and drives,
        implementing new manufacturing processes, and outsourcing manufacturing;
        our
        ability to produce and sell read/write drives in volume; the unpredictability
        of
        customer demand for products and customer issuance and release of corresponding
        orders; government rights to withhold order releases, reduce the quantities
        released, and extend shipment dates; the impact of technological advances,
        general economic trends, and competitive products; the impact of changes
        in the
        design of the cards; and the possibility that optical memory cards will not
        be
        purchased for the full implementation of card programs in Italy, a Middle
        Eastern country and India, or for Department of Homeland Security (DHS) programs
        in the U.S., or will not be selected for other government programs in the
        U.S.
        and abroad; unanticipated delays in obtaining U.S. government approvals to
        extend or replace its expiring contract; whether we will be successful in
        developing alternative optical recording media; and the risks set forth in
        the
        section entitled “Risks” and elsewhere in this report; and other risks detailed
        from time to time in our SEC filings. These forward-looking statements speak
        only as to the date of this report, and, except as required by law, we undertake
        no obligation to publicly release updates or revisions to these statements
        whether as a result of new information, future events, or
        otherwise.
 
 4
 *Trademarks.* LaserCard ® is the
        Company’s registered trademark. Optical/Smart TM card,
        OpticalProximity TM card,
        ConciergeCard TM ,
        OptiChip TM ,
        LaserPass TM ,
        Embedded HologramHD TM ,
        Optical
        IDLock TM ,
        and
        LaserBadge TM are
        our
        trademarks. We 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,
        is
        primarily a holding company that conducts all its business operations through
        its two wholly owned subsidiaries, LaserCard Corporation, a California
        corporation, of Mountain View, manufactures LaserCard® optical memory cards and
        card related products, including chip-ready Optical/SmartTM cards, and Challenge
        Card Design Plastikkarten GmbH, acquired on March 31, 2004, with offices
        in
        Rastede and Ratingen, Germany, manufactures advanced-technology cards and
        markets cards, system solutions, and thermal card printers. We completed
        the
        merger of Cards & More GmbH (also acquired on March 31, 2004) into Challenge
        Card Design Plastikkarten GmbH in January 2006. References to Challenge Card
        Design Plastikkarten GmbH in this document include the pre-merger activities
        of
        Cards & More GmbH.
 
 Challenge
        Card Design Plastikkarten GmbH (“CCD”) provides us with advanced-technology
        specialty card manufacturing capabilities to serve the European, Middle Eastern,
        African, and Asian markets. While operating results of CCD since the acquisition
        are consolidated into the financial statements for fiscal years 2007, 2006
        and
        2005, the historic operating results have not been included in the financial
        statements for fiscal year 2004 and prior periods.
 
 LaserCard
        Corporation (formerly known as Drexler Technology Corporation, until October
        1,
        2004) 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. Our mailing address and executive offices are located at 1875 North
        Shoreline Boulevard, Mountain View, California 94043, and the telephone number
        is (650) 969-4428. Throughout this report, the “Company,” “we,” and “us” refer
        to LaserCard Corporation and subsidiaries, unless otherwise indicated.
 
 Our
        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 our
        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 our “Code of Ethics and Business Conduct for
        Employees, Officers, and Directors” are posted on our website.
 
 Our
        primary product is the LaserCard® optical memory card which is a credit-card
        sized, data storage card—invented, patented, developed, and manufactured by us.
        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.
 
 5
 Current
        applications for the LaserCard® include identification cards for citizens,
        non-citizen permanent residents, foreign workers, and border crossing, as
        well
        as vehicle registration.
 
 Major
        programs include:
 o
              United
                  States Permanent Resident Card (“Green Card”)o
              United
                  States Department of State Laser Visa Border Crossing Card
                  (BCC)o
              Canada
                  “Maple Leaf” Permanent Resident Cardo
              Italian
                  citizen ID cardo
              Italian
                  foreign resident cardo
              Middle
                  Eastern country national ID cardo
              Vehicle
                  registration in a few states in
                  India
 
 From
        time
        to time we have licensed third parties to our technology and know-how in
        optical
        memory card manufacturing and read/write card drive assembly. As more fully
        described under “ *Licensing* ”
in
        the
“Narrative  Description
        of Business” section below, we have granted Prevent Global (Prevent) of Slovenia
        a 20-year license for card manufacturing. The license began April 3, 2004
        and
        has certain exclusivities and restrictions. Also included are equipment
        purchase, training and support agreements.
 
 For
        a
        discussion of the risk factors related to the business operations, see the
        “Forward-Looking Statements” narrative at the beginning of this report, the
“Risk Factors” 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
 
 Our
        three
        reportable segments are: (1) Optical Memory Cards, (2) Optical Memory Card
        Drives, including read/write drives, maintenance, systems and enabling services
        (“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 of the notes to consolidated
        financial statements in Item 8, “Financial Statements and Supplementary Data,”
for additional industry segment information.
 
 NARRATIVE
        DESCRIPTION OF BUSINESS
 
 LaserCard
        Corporation develops, manufactures and sells optical memory cards, optical
        card
        drives, system software, card-related systems and specialty cards, and markets
        and sells peripherals and card printers. Our primary product is the LaserCard®
optical memory card (OMC).
 
 *LaserCard®;
        A Secure Counterfeit-resistant Credential*
 
 Our
        LaserCard® optical memory card is a secure, counterfeit-resistant credential
        whose current primary use is by national governments in secure identification
        applications.
 
 Digital
        data is recorded in an irreversible process so that ID information on a
        legitimate card cannot be fraudulently altered for criminal purposes. Each
        implementation for secure ID is customized to the issuer’s own specifications.
        Key characteristics of the card’s memory and the issuing and inspection hardware
        are matched. To date, LaserCard’s users have concluded that the hurdle for
        would-be card counterfeiters is so high that such persons instead would seek
        some other vulnerability points 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 by counterfeiters, are used by inspectors and forensic
        specialists for both unaided and aided visual card authentication.
  6
  We
        also
        can create a “laser-etched,” eye visible image in the media, irreversibly
        marking the digital recording media with the visible identity of the card
        holder
        - a unique security feature among all machine readable card technologies.
        This
        method of permanently “etching” a facial image in the media has been in use
        since 1997 and is used to verify the authenticity of the printed or laser
        engraved facial images on the card’s surfaces. We have recently released
        Embedded HologramHDTM that features a larger, high-definition photographic
        quality image, so the feature itself can be used for ID verification, while
        still serving the verification function. The feature is essentially impossible
        to copy or reproduce and cannot be altered thus providing a very high level
        of
        counterfeit resistance.
 
 Embedded
        HologramHD is a component of LaserCard’s unique document security package, known
        as Optical IDLockTM, a highly sophisticated layering and blending of overt,
        covert and forensic security and identity management features. These features
        collectively make each card uniquely counterfeit resistant, tamper evident
        and
        permanently locked to the identity of the cardholder. No other technology
        can
        deliver this level of security tied to the individual cardholder’s
        identity.
 
 Our
        Optical/SmartTM card offering combines the security and capacity of optical
        memory with the active transactional capability of an IC chip. The chip can
        be
        any ISO 7816 series standard module and is embedded into the optical card
        base
        stock using traditional milling and embedding techniques.
 
 Typical
        applications for the Optical/SmartTM card include the provision of e-government
        services via the chip while the optical memory acts as a visual and secure
        card
        authentication feature, backs up the chip in case of failure or tampering,
        and
        stores an audit trail of events in the card's life for security and forensic
        purposes. In addition, the optical memory can store a suite of original
        biometric images (for example, face, fingerprints and irises) to provide
        a means
        of ID verification across other government and private sector applications.
        Given that optical memory can be used securely off-line, it is not necessary
        to
        have access to Public Key Infrastructure that is necessary for smart cards,
        an
        extremely costly and complex system, at every transaction point thus enhancing
        the over-all cost-effectiveness of optical memory.
 
 We
        believe that the newly-introduced LaserPassTM is the most secure and flexible
        electronic ID solution available today. Combining the convenience and
        facilitation capabilities of Radio Frequency Identification (RFID) or
        contactless chip technology with the security and certain, automatic
        authentication of optical memory, the system can support a complete range
        of
        inspection and ID verification scenarios which can be set depending on perceived
        threat levels. For example, the combination of the technologies provides
        the
        following advantages:
 
 ·
              RFID
                  provides convenient access within a facility after cardholder ID
                  verification (one-to-one) with data stored on the optical
                  memory·
              RFID
                  can be used in high traffic environments as a “read ahead” data base
                  pointer allowing data to be retrieved and queued awaiting inspection·
              Optical
                  memory provides instant automatic card authentication, very rapid
                  one-to-one biometric ID verification, and display of digital facial
                  image
                  and other ID data directly from the optical memory·
              Optical
                  memory provides an attending inspector with unparalleled surety
                  in
                  visually verifying card, cardholder and displayed data·
              All
                  RFID data can be backed up on the optical media·
              Optical
                  memory can be used when the network is down or slow·
              Optical
                  memory can be used when the chip may have been compromised or there
                  is
                  suspicion about the cardholder’s match to the database image or tampering
                  with the card’s printed personal data·
              Optical
                  memory acts as forensic evidence in criminal prosecutions for tampering
                  or
                  counterfeiting of either the chip’s data or card personalized
                  data
 
 *LaserCard
        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 government applications:
  7
  o
              The
                  U.S. Permanent Resident Card (“Green Card”), 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
                  Laser Visa Border Crossing Card, issued by the United States Department
                  of
                  State, permits Mexican citizens to make an unlimited number of
                  visits to
                  the United States close to the U.S. border for up to 30
                  days.o
              The
                  Canadian “Maple Leaf” Permanent Resident Card, has been issued by the
                  Government of Canada to confirm Canadian permanent resident status.o
              The
                  electronic citizen ID card of Italy, identifies the holder as a
                  citizen
                  and confers upon the holder the rights and privileges to which
                  a citizen
                  is entitled. The card can also be used as an accepted document
                  for
                  crossing borders at over 32 different countries.o
              The
                  Italian electronic non-citizen resident permit card for non-EU
                  citizens
                  confirms the cardholder’s approval to reside in Italy.o
              In
                    a program for a Middle Eastern country, the LaserCard® is being issued as
                    a national identification card.o
              A
                  motor vehicle registration program in the States of Delhi, Maharashtra
                  and
                  Gujarat, India, in which the Optical/SmartTM LaserCard® is used for storing
                  the payment of road tax, vehicle registration, insurance, violations,
                  vehicle fitness, and owner/operator
                  information.
 
 *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 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®.
 
 *Durability*
 
 Since
        1993 the U.S. Defense Logistics Agency has used LaserCard® optical memory cards
        in conjunction with shipping goods all over the world, often in the most
        hazardous environments. Environmental testing done by the U.S. Army confirmed
        the optical memory card’s high durability, which also has been validated by the
        worldwide Army deployments where the card has demonstrated its ability to
        withstand some of the harshest conditions and still work reliably in this
        mission-critical application.
 
 *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.
        We
        participate 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.
  8
  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.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.o
              ISO/IEC
                  11694-5 describes a data format for information interchange (to
                  permit
                  interoperability). This international standard was first published
                  in
                  2006.o
              ISO/IEC
                  11694-6 describes the method for the use of biometrics on an optical
                  memory card. This standard was first published in
                  2006.
 
 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 driver’s license and interoperable ID documents, also
        exist.
 
 *LaserCard®
        Manufacturing*
 
 We
        have
        LaserCard® optical memory card manufacturing operations located in Mountain
        View, California, and such capabilities in Rastede, Germany. We produce optical
        memory cards using either a roll-lamination process or a newer sheet-lamination
        process. The sheet-lamination process allows the use of high security offset
        printing and other special features, resulting in a premium card. We have
        an
        annual production capacity of 10 million roll-process cards in conjunction
        with
        approximately 9 million sheet-process cards depending upon the optimum mix
        of
        features.
 
 *Raw
        Materials*
 
 We
        establish ongoing relationships with principal qualified suppliers to maintain
        adequate raw material supplies for the manufacture of optical memory cards
        and
        when commercially reasonable we utilize multiple suppliers and consider
        alternate suppliers. We maintain raw materials inventory levels that take
        into
        account current expected demand, order-to-delivery lead times, supplier
        production cycles, and minimum order quantities. If we are unable to buy
        raw
        materials in sufficient quantities and on a timely basis, we 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 (Kodak) 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 to meet our requirements. If Kodak were to discontinue
        manufacturing the film from which our optical media is made, we would endeavor
        to establish an alternate supplier for such film, although the purchase price
        could increase and reliability and quality could decrease from a new supplier.
        No assurance can be given that there will be adequate demand to attract a
        second
        source. In addition, an alternate supplier could encounter technical issues
        in
        producing the film as there may be know-how and manufacturing expertise which
        Kodak has developed over the years which an alternate supplier may have
        difficulty to replicate. We currently have on hand and on order enough of
        film inventory to produce cards for orders projected over the next nine to
        fifteen months. 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.
        In
        addition, we are researching other materials for use as optical memory card
        media.
 
 9
  *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.
        We
        maintain read/write drive manufacturing operations in our Mountain View,
        California facility. We continuously seek design and procurement changes
        to
        improve performance and reduce the drive selling price although much higher
        volumes would be required to significantly reduce the price
        further.
 
 To
        maintain adequacy of parts and components for the manufacture of read/write
        drives, we attempt to establish ongoing relationships with principal suppliers
        and obtain information about alternate suppliers. If we are unable to buy
        parts
        and components in sufficient quantities and on a timely basis, we would not
        be
        able to deliver products to customers on time. We purchase read/write drive
        parts for our 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. The optical recording head currently used is a custom part
        obtained from one supplier: Audio-Technica Corp., of Japan.
 
 *Application
        Programming Interface (APIs) and Application Software*
 
 *APIs* .
        As part
        of our read/write drive and system sales, we include a comprehensive set
        of APIs
        in order for our 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. We develop 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.* We offer
        contract services for purchase by customers that require custom programming
        in
        the development and integration of their LaserCard® applications. We also make
        software available for purchase 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, our
        value-added resellers (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.
        We
        market the BadgeMaker card personalization and issuing applications used
        for
        card issuance and data management; and the LaserBadgeTM derivative of BadgeMaker,
        and a Biometric ID Verification System application.
 
 API
        and
        application software sales have not been a significant portion of revenues
        thus
        far. To date, our software development has been completed concurrent with
        the
        establishment of technological feasibility and, accordingly, all software
        development costs have been charged to research and development expense in
        the
        accompanying consolidated statements of operations.
 
 *LaserCard
        Biometric ID Verification System*
 
 We
        have
        developed a LaserCard Biometric ID Verification System that can quickly confirm
        the authenticity and validity of optical memory card biometric ID cards sold
        to
        the U.S. Government, 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.
  We
        also
        are 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*
 
 Challenge
        Card Design Plastikkarten GmbH (“CCD”) was acquired by us on March 31, 2004 and
        is a recognized leader in Europe as a provider of advanced contactless card
        solutions, primarily in the consumer, special event, and access control sectors
        including gate systems for sporting events and student ID cards for German
        universities. CCD has the production capacity to manufacture up to 20 million
        advanced-technology specialty cards per year—including contact IC chip cards,
        contactless RFID cards, and magnetic stripe cards—and markets cards, thermal
        card printers, and system solutions worldwide under the Cards & More brand.
        The CCD card manufacturing plant in Rastede, Germany provides significant
        advanced-technology specialty card capacity and product flexibility to our
        product line. With expertise in contactless IC technology and high resolution
        security printing, the European factory positions us to move into new market
        areas.
 
 10
  *Sales
        and Marketing*
 
 We
        market
        our OMC products, primarily through Company-authorized VARs in the United
        States
        and other countries. We make available for sale optical memory cards, optical
        card read/write drives and software, and third-party peripherals to our VARs.
        VARs 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, licensees and systems integrators.
        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 government
        subcontractor General Dynamics Information Technology.
 
 Revenues
        by geographic region are shown in Note 4 of the “Notes to Consolidated Financial
        Statements” in Item 8, “Financial Statements and Supplementary Data.”
Substantially all foreign product sales have been made through VARs and
        licensees. We believe that international markets will be an important source
        of
        product sales and license revenue in the future.
 
 Our
        LaserCard® sales and marketing operations are conducted through our offices in
        California, New York, the Washington, D.C. area, and Germany. In addition,
        our
        website (www.lasercard.com) supports worldwide marketing activities. Our
        marketing and sales staff, general management, and technical personnel work
        closely with customers and provide pre-sales technical support to assist
        VARs
        and licensees.
 
 *European
        Operations.* Our
        German subsidiary, CCD, provides the marketing base for most of Europe, Middle
        East, and Africa (EMEA) and Asia and gives us an established position in
        the
        European Union in the advanced-technology card market. CCD is a recognized
        leader in Europe as a provider of advanced contactless card solutions, primarily
        in the consumer, special event, and access control sectors. CCD heads our
        European marketing effort in coordination with LaserCard Corporation. We
        believe
        that the European marketing base will accelerate EMEA acceptance of the use
        of
        optical memory products in EU government and business solutions.
 
 CCD
        serves and supports its existing customer base for advanced-technology specialty
        cards and thermal printers, while adding new resources to build the optical
        memory card business throughout the EMEA and Asia regions. We intend to focus
        principally on biometric ID solutions for national and regional governments
        in
        these regions, 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: Our principal objectives are to:*
 ·
                Maintain,
                    leverage and expand further the existing optical memory card
                    user
                    community of national and regional governments·
                Broaden
                    the optical memory-based range to address lower end applications
                    characterized by higher price sensitivity·
                Diversify
                    optical memory products into, and effectively penetrate, industrial
                    and
                    commercial markets·
                Expand
                    hardware product offerings to address new markets and add value
                    to the
                    current offering·
                Increase
                    revenues by selling more application software and integrated
                    solutions,
                    such as data capture, personalization, quality assurance and
                    kiosk
                    systems·
                Maintain
                    and, where possible, increase market share for specialized cards
                    and
                    printer products
 11
  *Licensing*
 
 We
        entered into license and optical memory card equipment purchase and support
        agreements, effective April 3, 2004, with Global Investments Group (GIG),
        based
        in Auckland, New Zealand, for optical memory card manufacturing in
        Slovenia.  GIG transferred the license and other agreements, with our
        approval, to Prevent Global of Slovenia (Prevent) in March 2007. The agreements
        provide for payments to us of about $25.6 million which were fully paid as
        of
        March 31, 2007, for a 20-year license, the required manufacturing equipment
        for
        a targeted initial manufacturing capacity of 10 million optical cards annually
        and installation support, and a four-year training and support package. For
        the
        $25.6 million we received, $23.6 million was recorded as advance payments
        from
        customer and $2 million for the licensing fee was recorded as deferred revenue.
        Both were classified as long term liabilities in the consolidated balance
        sheets. As of March 31, 2007, we had $6.3 million of acquired equipment,
        plus
        direct and incremental expenses, classified as equipment held for resale
        on our
        consolidated balance sheets. Beginning in the fifth year of the contract,
        Prevent is to pay $3 million for a three-year support package, and has the
        option for thirteen additional years of support for payments of $1 million
        annually.  In addition to the $41.6 million discussed above, Prevent is to
        pay us royalties of $0.60 per card for each card produced under the
        license.  The territories covered by the license include most of the
        European Union and eastern European regions.  Prevent has exclusive
        marketing rights in certain territories, with performance goals to maintain
        these rights. We retain rights to utilize up to 20% of the new facility capacity
        as backup and a capacity buffer to augment our own card manufacturing facilities
        in Mountain View, California and possibly at our German subsidiary. The granting
        of this license to Prevent establishes a potential second source supplier
        of
        optical memory cards for existing and prospective customers who may request
        multiple sources for cards.  The agreement contains various elements
        including a card manufacturing license, sale and installation of equipment,
        training, and ongoing support, and contingent payments for support, materials,
        and royalty payments for cards manufactured. In accordance with EITF 00-21
        “Revenue Arrangements with Multiple Deliverables,” the card manufacturing
        license, sale and installation of equipment, training, and support package,
        have
        been accounted for as one unit of accounting, since we were unable to determine
        evidence of the fair value of the undelivered items other than ongoing support.
        We are able to determine evidence of fair value for the predominant undelivered
        item, which is the ongoing annual support of the manufacturing equipment.
        Accordingly, revenues for the arrangement have been deferred and will be
        recognized when the equipment is installed and accepted, with the exception
        of
        the value of the ongoing annual support of the manufacturing equipment which
        will be recognized quarterly as earned, beginning when the equipment is accepted
        and training has been completed, which date is dependent on Prevent establishing
        a suitable facility in Slovenia. Pursuant to FTB 90-1, “Accounting for
        Separately Priced Extended Warranty and Product Maintenance Contracts” the
        support revenue will be recognized ratably over the remaining term of the
        agreement.
 
 Also
        from
        time to time, we have offered other 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, we also offered card distribution licenses
        to
        create distributors, in selected regions of the world that can buy cards
        wholesale from us at prices lower than those charged to VARs and other
        customers. During the past five years, there have been no material purchases
        of
        optical memory cards by the licensees. We conduct our 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 our licensing efforts will be successful.
 
 There
        were no license revenues earned during fiscal years 2007, 2006, and
        2005.
 
 *Competition*
 
 Our
        primary competition is other card products. Other card technologies that
        compete
        with optical memory cards include IC cards, 2-dimensional bar code cards
        and
        symbology cards, optical CD or DVD-read only cards and recordable cards,
        holographic data storage cards, and RFID cards. The financial and marketing
        resources of some of the competing companies are greater than our resources.
        We
        believe 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 where security is
        paramount.
 
 In
        addition, centralized on-line databases combined with wide-area networks
        may
        limit the penetration of optical memory cards in certain applications, and
        is a
        form of competition.
 
 *Smart
        Cards.* The
        LaserCard® optical memory card competes primarily with cards that contain an 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 similar to
        the
        cost of the 2.8 megabyte optical memory card, although adding applications
        to
        the smart card increases the cost significantly. The IC card is more vulnerable
        to tampering and can be more easily damaged in everyday use, whereas the
        card
        construction and the use of polycarbonate plastic make the LaserCard® more
        rugged. Companies
        that manufacture IC cards of various types and storage capacities include
        Gemalto, Giesecke & Devrient GmbH, Sharp, Sagem Orga, and Oberthur Card
        Systems, many of which are substantially larger and have more resources than
        we
        do. ****
 
 12
 *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.
 
 We
        believe 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. Currently, only we
        offer a hybrid card embodying the optical memory technology of the LaserCard®
with an embedded IC (Optical/SmartTM) or RFID chip (LaserPass TM) .
 
 *Other
        Card Products* .
        Read-only memory cards such as 2-dimensional bar code cards and symbology
        cards
        are lower priced and compete with our read/write optical memory cards for
        certain markets, such as identification cards. However, our cards have
        significantly higher storage capacity and offer unique security features
        to
        deter counterfeiting and data tampering. Two-dimensional bar codes on cards
        and
        other symbology cards store relatively small amounts of data compared to
        the
        LaserCard® and are not updatable after they are issued. Moreover, alternative
        technologies—such as IC chips, radio frequency (RF) circuitry, and bar
        codes/symbology—can be incorporated into our optical memory cards, thereby
        adding additional performance features to the LaserCard®. Experimental card
        technologies probably are under development at other companies.
 
 *Other
        Optical Memory Cards*  *and
        Equipment* .
        We
        previously licensed our card patents to two Japanese companies, Canon Inc.
        and
        Dai Nippon Printing Co., Ltd., which we believe are not manufacturing or
        selling
        such cards at this time. In addition, as described in the “Licensing” section,
        in April 2004, we sold a card-manufacturing license to Global Investments
        Group
        for the manufacture of optical memory cards in Slovenia. This license has
        since
        been transferred to Prevent. 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 Prevent license
        is not yet capable of manufacturing optical cards, but is expected to become
        a
        second-source for our cards over time. Prevent could become a competitor
        in
        certain Western European countries; however, exclusivity provisions of the
        license preclude competition in certain markets. For example, we are prohibited
        from competing in certain Eastern European countries, and Prevent is not
        authorized to market outside of 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 and do not exhibit the
        durability required of an ID card. These cards typically serve other markets
        such as advertising and promotional applications.
 
 Other
        Matters
 
 *Research
        and Development*
 
 Our
        research and development expenses were $3.1 million for fiscal year 2007;
        $2.3
        million for fiscal year 2006; and $3 million for fiscal year 2005. We are
        continuing our 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), OpticalProximity TM systems,
        card personalization systems, and software products in an effort to strengthen
        our existing products and provide new products that can stimulate optical
        memory
        card sales growth. For example, we have developed an Optical/RFID and
        Optical/Proximity card and system (“LaserPassTM”) to compete in the rapidly
        growing RFID marketplace. We anticipate that these ongoing research and
        development 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 our
        existing and future optical memory card markets. Also see Item 7, "Management's
        Discussion and Analysis.”
 
 13
  *Patents
        and Trademarks*
 
 *Optical
        Data Storage.* As of
        March 31, 2007, we owned approximately 23 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 21 counterpart patents of certain U.S. patents are issued in
        various foreign countries. However, we own 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,
        we
        elect to allow some of our U.S. or foreign patents to expire when maintenance
        fees become due, if the patents are deemed no longer relevant. In addition,
        we
        protect as trade secrets some refinements to the optical media and cards
        and
        know-how related to card production. Also, 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. Therefore,
        at this time, we believe that our patent portfolio is helpful but is no longer
        materially meaningful for maintaining the LaserCard®’s market
        position.
 
 Our
        U.S.
        patents have expiration dates ranging from the period 2007 to 2023, 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. ****
 
 We
        cannot
        predict whether the expiration or invalidation of our patents would result
        in
        the introduction of competitive products which would adversely affect our
        future
        revenues. We presently intend to pursue any infringement of our patents either
        by litigation, arbitration, or negotiation. However, there can be no assurance
        that any of our 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®
        is federally registered trademark of LaserCard Corporation. We believe that
        our
        LaserCard® brand name, trade name, and other trademarks are important assets in
        marketing optical memory card products.
 
 *Employees*
 
 As
        of
        March 31, 2007, we employed 219 personnel (including four executive officers).
        Our 135-person U.S. workforce consisted of 112 personnel in administration,
        marketing/sales, manufacturing, and research and development, plus 23 temporary
        personnel mainly engaged in manufacturing and the inspection of cards for
        quality assurance. In
        addition, the German subsidiary employed 84 full and part-time personnel
        as of
        March 31, 2007. The German workforce consisted of 80 personnel in
        administration, marketing/sales, manufacturing, and research and development,
        plus 4 temporary personnel mainly engaged in manufacturing and the inspection
        of
        cards for quality assurance. None of our employees is represented by a labor
        union.
 
 *Dependence
        on Government Subcontracts through Sole Contractors*
 
 The
        largest purchaser of LaserCard products is a government prime contractor,
        General Dynamics Information Technology (GDIT), previously Anteon International
        Corporation. GDIT is the government contractor for our 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 GDIT, 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, our product sales to
        GDIT
        represented 28% of total revenues for fiscal year 2007; 31% of total revenues
        for fiscal year 2006; and 31% of total revenues for fiscal year 2005. The
        proportion of revenues represented by GDIT decreased in fiscal year 2007
        as
        compared to fiscal year 2006, and is anticipated to decrease in the future
        as we
        generate increased revenues from other sources. Since the ultimate customers
        are
        national governments, we are not dependent upon any one specific contractor
        for
        continued revenues from these programs. Although not anticipated, if GDIT
        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.
 
 14
 Sales
        of
        DHS Green Cards and DOS Laser Visa BCCs represented approximately 23% of
        our
        revenue for fiscal year 2007; 24% of revenues for fiscal year 2006; and 21%
        of
        revenues for fiscal year 2005. We are currently delivering on orders placed
        under an up-to-five-year U.S. government subcontract received in March 2007.
        Backlog at March 31, 2007 for these programs, which is deliverable through
        September 2007, totaled $4.8 million.
 
 Our
        revenues derived from sales to the government of Italy for its citizen ID
        card
        program, Carta d’Identità Elettronica (CIE), accounted for 1% of revenues for
        fiscal year 2007, 18% of revenues for fiscal year 2006, and 26% of revenues
        for
        fiscal year 2005. Revenues on Italian Permesso di Soggiorno Elettronico cards
        and Italian Carta di Soggiorno Elettronica cards (combined PSE) accounted
        for 7%
        of Company revenues in fiscal year 2007 and 13% of Company revenues in fiscal
        year 2006. Card orders under these programs are placed with us through our
        value-added reseller, Laser Memory Card S.p.A of Italy during calendar 2005.
        The
        Italian government successfully concluded the experimental phase of CIE citizen
        ID program using LaserCard® optical memory cards and enacted a law to replace
        paper ID documents with electronic documents starting January 2006. The program
        then stalled and has yet to be fully implemented, although the Italian
        government did set the price citizens pay for the cards earlier in calendar
        year
        2007. If these programs were to be discontinued or interrupted by the Italian
        government, we would lose our largest identified potential significant source
        of
        optical memory card revenues.
 
 *Backlog*
 
 As
        of
        March 31, 2007, the backlog for LaserCard® optical memory cards totaled $5.7
        million scheduled for delivery in fiscal year 2008, compared with $8.3 million
        at March 31, 2006, and $0.9 million at March 31, 2005. We have 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 a result, the relative size of our backlog has not been a reliable
        indicator of our future sales revenue trends.
 
 In
        addition, the backlog for specialty cards and printers totaled 0.6 million
        euros
        (approximately $0.8 million) compared with 0.8 million euros (approximately
        $1
        million) at March 31, 2006 and 1.2 million euros (approximately $1.6 million)
        at
        March 31, 2005, and for a contract to develop a conventional non-optical
        card
        production facility totaled 0.7 million euros (approximately $0.9 million)
        at
        March 31, 2007 compared with 0.7 million euros (approximately $0.8 million)
        at
        March 31, 2006 and 0.8 million euros (approximately $1 million) at March
        31,
        2005. 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 probably during
        fiscal year 2008.
 
 We
        have
        no significant backlog for read/write drives.
 
 *Financial
        Information About Geographic Areas*
 
 Financial
        information about geographic areas is described in Note 4 of the “Notes to the
        Consolidated Financial Statements” in Item 8, “Financial Statements and
        Supplementary Data.”
  15
  
 ITEM
        1A.  RISK
        FACTORS
 
 OUR
        CURRENT AND FUTURE EXPECTED REVENUES ARE DERIVED FROM A SMALL NUMBER OF ULTIMATE
        CUSTOMERS SO THAT THE LOSS OF OR REDUCTIONS IN PURCHASES BY ANY ONE ULTIMATE
        CUSTOMER COULD MATERIALLY REDUCE OUR REVENUES AND LEAD TO LOSSES. During
        fiscal
        year 2007 and each of the previous three fiscal years, we derived more than
        60%
        of our optical memory card and drive-related revenues from five programs ― two U.S.
        government programs and three 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 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
        INCURRED NET LOSSES DURING THIRTEEN OF THE PREVIOUS SIXTEEN QUARTERS AND
        MAY NOT
        BE ABLE TO GENERATE SUFFICIENT REVENUE IN THE FUTURE TO REGAIN PROFITABILITY.
        Although we generated $3.3 million of profit during the three quarters from
        October 1, 2005, through June 30, 2006, we incurred a loss for our quarters
        ended September 30, and; December 31, 2006, and March 31, 2007. We incurred
        a
        loss for fiscal year 2007 aggregating $12.4 million, and we generated a profit
        of $0.8 million in fiscal year 2006 and incurred a loss of $8.9 million in
        fiscal year 2005, and had an accumulated deficit of $39 million at March
        31,
        2007. There can be no assurance that we will generate enough card revenues
        in
        the near term to achieve profitability. We are relying upon our optical memory
        card technology to generate future product revenues, earnings, and cash flows.
        If alternative technologies emerge or if we are otherwise unable to compete,
        we
        may not be able to achieve or sustain profitability on a quarterly or annual
        basis. Annual or quarterly losses would also continue if increases in product
        revenues or license revenues do not keep pace with increased selling, general,
        administrative, research and development expenses and the depreciation and
        amortization expenses associated with capital expenditures.
 
 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 LIKELY LEAD US
        TO
        CONTINUED OPERATING LOSSES. We believe that the Italian government will be
        our
        largest customer for the next few years for the CIE and PSE card programs
        which
        may comprise a significant portion of future revenues. Sales of cards and
        drives
        for the government of Italy for its CIE and PSE card programs represented
        8% of
        total revenue for fiscal year 2007, 31% for fiscal year 2006, and 26% for
        fiscal
        year 2005. During fiscal year 2006 and 2007, we increased card manufacturing
        capacity to meet the anticipated demand and we have expected a large order
        since
        the first quarter of fiscal year 2007. However, this order has not yet been
        placed and there can be no assurance that the order will be placed in the
        near-term or that demand will increase or be sustained as we anticipate. We
        would most likely incur losses if orders are further delayed, or if full
        implementation is canceled, not extended, or if the program is not implemented
        at the level foreseen or if the government was to change its technology decision
        and no longer use optical memory cards. While selected Italian cities have
        issued cards and tested the distributed card issuing process, full
        implementation is dependent upon regionalized and further decentralized card
        issuance infrastructure developments being successfully undertaken and the
        national ID card system functioning as designed, of which there can be no
        assurance. Also, if Laser Memory Card SpA of Italy, our VAR customer for
        this
        program, were to discontinue participation in this program or discontinue
        operations, interruptions could occur in orders or shipments for this program
        until a replacement could be found. Overcoming some of these issues may be
        difficult and complex and involve third parties, which could be time consuming
        and expensive and lead to further delays for implementation.
 
 THE
        U.S.
        GOVERNMENT, ONE OF OUR TWO LARGEST ULTIMATE CUSTOMERS, HAS THE RIGHT TO DELAY
        ITS ORDERS OR COULD CHANGE ITS TECHNOLOGY DECISIONS, WHICH WOULD RESULT IN
        ORDER
        DELAYS AND POSSIBLY IN OPERATING LOSSES. Our fiscal year 2007 revenues included
        sales of approximately $7.4 million of Green Cards and Laser Visa BCCs, and
        comprised 23% of our total revenue. We expect these revenues to continue
        at
        approximately $10 million annually ($8 million for Green Cards and $2 million
        for Laser Visa BCCs) if the U.S. government continues to use our cards in
        these
        programs, continues to personalize cards at that rate and continues to maintain
        an inventory level equal to six-months of usage. On April 2, 2007, we announced
        a subcontract with General Dynamics Information Technology (GDIT) for the
        manufacture and supply of Green Cards and Laser Visas. The subcontract is
        for an
        initial 12-month period with optional extensions up to a total of five years.
        The first purchase order received under the subcontract calls for delivery
        of
        $5.9 million in Green Cards and Laser Visas over the period from March through
        September 2007. Under U.S. government procurement regulations, even with
        a
        contract in place, the government reserves certain rights, such as the right
        to
        withhold releases, to reduce the quantities released, extend delivery dates,
        reduce the rate at which cards are issued, and cancel all or part of its
        unfulfilled purchase orders. We would most likely have reduced operating
        results
        if one or both of these U.S. government programs were to be delayed, canceled,
        or not extended or if the government were to change its technology decision
        and
        no longer use optical memory cards. We have been advised by the program prime
        contractor that the U.S. State Department, who is the customer for Laser
        Visa
        Border Crossing Cards, intends to introduce Radio Frequency Identification
        (RFID) technology into this program starting in 2008. We intend to offer
        a
        hybrid version of our optical memory card including such RFID capability.
        There
        is no assurance we will be able to successfully win new Laser Visa orders
        if
        this technology change occurs as projected. Our U.S. government card deliveries
        depend upon the issuance of corresponding order releases by the government
        to
        its prime contractor and then to us. If GDIT, our VAR customer, and the U.S.
        government prime contractor for this program, were to discontinue participation
        in this program or discontinue operations, interruptions could occur in orders
        or shipments for this program until a replacement could be found.
 
 16
 
 OUR
        PRODUCT REVENUES WILL NOT GROW IF WE DO NOT WIN NEW BUSINESS IN THE U.S.
        OR
        ABROAD AND IF THE ITALIAN NATIONAL ID PROGRAM IS NOT IMPLEMENTED AS ANTICIPATED.
        Although the U.S. government subcontract has been renewed, we do not expect
        future growth from the U.S. Green Card and Laser Visa BCC programs as we
        expect
        future revenue to average $10 million annually, about the same as their issuance
        rate in fiscal year 2007. We had revenues from Italian CIE and PSE cards
        of
        about $2 million during fiscal year 2007 and $12 million during fiscal year
        2006. During full implementation, we expect our revenues from the Italian
        programs to grow to reach approximately $40 to $50 million per year. In order
        for us to achieve our overall revenue growth goal, we will need not only
        for
        these programs to continue and reach their anticipated levels, of which there
        can be no assurance, but we will also need to win new business in the U.S.
        and
        abroad. Emerging optical memory card programs or prospective applications
        include motor vehicle registration cards in a few states in India, foreign
        resident identification cards in Costa Rica, a drivers license card in South
        Africa, and sports logbook cards. There can be no assurance that we will
        receive
        sizable future orders for any of these programs, nor any assurance that we
        will
        be able to win any other new business in the U.S. or abroad which is necessary
        to grow our business to the level we desire.
 
 SINCE
        THE
        SALES CYCLE FOR OUR PRODUCTS IS TYPICALLY LONG AND UNPREDICTABLE, WE HAVE
        DIFFICULTY PREDICTING WHEN NEW BUSINESS WILL CONTRIBUTE TO REVENUE GROWTH.
        Obtaining substantial orders usually involves a lengthy sales cycle, requiring
        marketing and technical time and expense with no guarantee that substantial
        orders will result. This long sales cycle results in uncertainties in predicting
        operating results, particularly on a quarterly basis. In addition, since
        our
        major marketing programs involve the U.S. 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.
 
 WE
        COULD
        EXPERIENCE EQUIPMENT, RAW MATERIAL, QUALITY CONTROL, OR OTHER PRODUCTION
        PROBLEMS ESPECIALLY IN PERIODS OF INCREASING VOLUME. There can be no assurance
        that we will be able to meet our projected card manufacturing capacity if
        and
        when customer orders reach higher levels. We have made and intend to continue
        to
        make significant capital expenditures to expand our card manufacturing capacity.
        For example, we plan on up to $8 million of capital expenditures during the
        next
        twelve to eighteen months assuming certain business developments. 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 year 2005 and 2007. We may
        experience manufacturing complications associated with increasing our
        manufacturing capacity of cards and drives, including the adequate production
        capacity for sheet-lamination process cards to meet order requirements and
        delivery schedules. We may also experience difficulties implementing new
        manufacturing processes, meeting customers’ quality or standards requirements,
        or outsourcing some of our manufacturing. The addition of fixed overhead
        costs
        increases our breakeven point and results in lower profit margins unless
        compensated for by increased product sales. When purchasing raw materials
        for
        our anticipated optical card demand, we take into consideration the
        order-to-delivery lead times of vendors and the economic purchase order quantity
        for such raw materials. If we over-estimate customer demand, excess raw material
        inventory can result.
 
 17
 WE
        ARE
        CURRENTLY OUR OWN SOLE SOURCE OF OPTICAL MEMORY CARDS AND SEVERAL OF THE
        STEPS
        IN OUR CARD MANUFACTURING PROCESS HAVE NO BUILT-IN REDUNDANCY. THEREFORE,
        WE ARE
        SUSCEPTIBLE TO SUPPLY INTERRUPTIONS, INCLUDING IF CERTAIN MACHINERY WERE
        TO
        BREAK DOWN. MUCH OF OUR MACHINERY IS COMPRISED OF CUSTOM VERSIONS OF MACHINERY
        SOME OF WHICH IS MORE THAN 20 YEARS OLD. Unless and until Prevent Global
        (previously GIG) comes on line as a second source, of which there can be
        no
        assurance, we are the only source of our optical memory cards, making them
        in
        our Mountain View facility using a proprietary manufacturing process, with
        our
        German subsidiary capable of performing a few key steps in certain instances.
        There is no assurance that the Prevent facility, if and when operational,
        will
        be an acceptable second source to some of our key government accounts. We
        are
        susceptible to supply interruptions or yield decreases, when our line goes
        down
        or malfunctions. Much of our machinery is comprised of customized versions
        of
        machinery which has long lead times to replace and may be difficult to maintain
        or repair, requiring us to be self-reliant. Some of the machinery we use
        is more
        than 20 years old and is no longer manufactured for others, which would require
        us to adapt a newer version to our needs, which would involve additional
        effort
        on our part.
 
 IF
        WE ARE
        UNABLE TO BUY RAW MATERIALS IN SUFFICIENT QUANTITIES AND ON A TIMELY BASIS,
        WE
        WILL NOT BE ABLE TO DELIVER PRODUCTS TO CUSTOMERS ON TIME WHICH COULD CAUSE
        US
        TO LOSE CUSTOMERS, AND OUR REVENUES COULD DECLINE. We depend on sole source
        and
        limited source suppliers for optical card raw materials. Such materials include
        plastic films used in optical memory card production, which are available
        from
        one supplier in the U.S. and from multiple foreign suppliers. Processing
        chemicals, inks, and bonding adhesives are obtained from various U.S. and
        foreign suppliers. Certain photographic films are commercially available
        solely
        from Eastman Kodak Company, of the United States. 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 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 currently have on hand and on order enough inventory of film
        to
        produce cards for orders projected over the next nine to fifteen months.
        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 development in an effort to develop new drive
        products.
 
 IF
        WE ARE
        UNABLE TO DEVELOP UPGRADED READ/WRITE DRIVES THAT COST LESS TO MANUFACTURE
        AND
        ALSO A READ-ONLY DRIVE, WE COULD LOSE POTENTIAL NEW BUSINESS. The price of
        our
        read/write drive product line ranges from $1,800 to approximately $2,500
        depending on features and quantity purchased. We believe the price of our
        drives
        is competitive in applications requiring a large number of cards per drive,
        because the relatively low cost for our cards offsets the high cost per drive
        when compared with our major competition, IC card systems. In addition, we
        have
        undertaken a product development program for a portable read-only drive that
        has
        been sampled in limited quantities at prices less than $1,000, which we believe
        would increase our prospects for winning future business. However, there
        can be
        no assurance that our development program will be successful, that volume
        production of any new design will occur in the near term, or that significantly
        lower manufacturing costs or increased sales will result.
 
 18
 WE
        MAY
        NOT BE ABLE TO ADAPT OUR TECHNOLOGY AND PRODUCTS TO COMMERCIAL APPLICATIONS
        WHICH GENERATE MATERIAL AMOUNTS OF REVENUE AND PROFIT. THIS WOULD LIMIT THE
        FUTURE GROWTH OF OUR BUSINESS TO THE GOVERNMENT SECTOR AND THE LACK OF
        DIVERSIFICATION EXPOSES US TO ENHANCED RISK OF COMPETITION. We are seeking
        commercial applications for our optical memory products in order to lessen
        our
        dependence upon the government sector. Our efforts to develop OpticalProximityTM
access cards are one example. We may be unsuccessful in these efforts in
        which
        case we would not obtain the diversity of revenues we are seeking for the
        future. If 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 SECURE ID CARD INDUSTRY AND
        IN
        THE INFORMATION TECHNOLOGY INDUSTRY GENERALLY, WE MAY NOT BE ABLE TO EFFECTIVELY
        COMPETE FOR FUTURE BUSINESS. The secure ID technology industry is characterized
        by rapidly changing technology and continuing product evolution. The future
        success and growth of our business will require the ability to maintain and
        enhance the technological capabilities of the LaserCard® product line. There can
        be no assurance that our products currently sold or under development will
        remain competitive or provide sustained revenue growth.
 
 SEVERAL
        OF OUR FOREIGN PROGRAMS INVOLVE OUR CARDS AS PART OF A SOLUTION WHICH INCLUDES
        TECHNOLOGIES OF THIRD PARTIES. SOMETIMES THESE THIRD PARTY TECHNOLOGIES ARE
        INTEGRATED WITH OUR CARDS BY OUR SYSTEMS INTEGRATOR CUSTOMER OR SUBCONTRACTOR.
        WE THEREFORE HAVE VARYING DEGREES OF CONTROL OVER THE OVERALL SYSTEM WHICH
        COULD
        LEAD TO TECHNICAL, QUALITY, AND SYSTEM COMPATIBILITY ISSUES WHICH ARE DIFFICULT,
        EXPENSIVE, AND TIME CONSUMING TO SOLVE. THIS COULD CAUSE OUR ULTIMATE CUSTOMERS,
        GENERALLY GOVERNMENTS, TO FIND FAULT IN OPTICAL CARDS AND SWITCH TO OTHER
        SOLUTIONS EVEN THOUGH OUR OPTICAL TECHNOLOGY IS NOT THE ROOT CAUSE. In certain
        of our current foreign programs such as Italy, India, and a Middle Eastern
        country, and possibly in future other programs, various third party technologies
        such as contact or contactless chips will be added to our cards. The embedding
        or addition of other technologies to the LaserCard® optical memory card,
        especially when contracted to independent third parties, could potentially
        lead
        to technical, compatibility and other issues. In such circumstances, it may
        be
        difficult to determine whether a fault originated with our technology or
        that of
        a co-supplier or the person embedding or adding the third party technology
        to
        our cards. If such faults occur, they could be difficult, expensive, and
        time-consuming to resolve. Such difficulties could lead to our ultimate
        customers, the foreign governments, switching to other technologies even
        though
        optical technology is not the root cause of the fault(s). The resulting loss
        of
        customers would adversely affect our revenues.
 
 WE
        ARE
        DEPENDENT ON SYSTEMS INTEGRATORS FOR IMPLEMENTATION OF CARD PROGRAMS AND
        THEIR
        METHOD OF IMPLEMENTATION MAY NOT BE SUCCESSFUL DUE TO QUALITY OR COST. We
        sell
        to VARs and system integrators who in turn sell solutions to the end customer.
        The integrators may not follow the recommendations we provide for the handling,
        possible incorporation of smart or RFID chips, processing, and/or printing
        on
        our cards and working with the end-user in the card issuing process. This
        could
        lead to low quality or high costs or both resulting in damage to our reputation
        and/or loss of the contract. We work to train the integrators to avoid such
        situations, but cannot control their work. Also, we can step in to demonstrate
        how to successfully implement an optical memory card issuing system. We plan
        to
        continue to offer this support then transition the card issuing process to
        local
        resources once the program is running successfully.
 
 OUR
        OPTICAL MEMORY CARDS HAVE A COMPLEX STRUCTURE THAT REQUIRES A HIGH DEGREE
        OF
        TECHNICAL KNOWLEDGE AND EXPERIENCE TO MEET INCREASINGLY STRINGENT PERFORMANCE
        REQUIREMENTS.  WE HAVE AND COULD IN THE FUTURE AGREE TO CERTAIN
        CHARACTERISTICS BEYOND THOSE REQUIRED IN INDEPENDENTLY PUBLISHED
        STANDARDS.  THIS COULD INCREASE OUR COST OF MANUFACTURING CARDS OR RESULT
        IN ACCEPTING RETURNS OR GIVING CREDITS TO THE CUSTOMER.  MANY CUSTOMERS
        MAINTAIN SIGNIFICANT ADVANCE INVENTORY WHICH INCREASES THIS RISK. There can
        be
        no assurance that we will be able to meet customers’ quality or standards
        requirements consistently.  This could lead to high manufacturing costs due
        to low product yields or unexpected product returns.  We employ a rigorous
        quality control procedure, are ISO 9000 certified and we strive to deliver
        product that meets published standards and customer expectations.  Even so,
        we can not give assurance that our products will meet customer expectations
        in
        all cases.  We have in the past, and may in the future, replace product
        held by the customer or give credit for products previously
        delivered.
  19
  IF
        WE
        FAIL TO PROTECT OUR INTELLECTUAL PROPERTY RIGHTS, COMPETITORS MAY BE ABLE
        TO USE
        OUR TECHNOLOGIES, WHICH COULD WEAKEN OUR COMPETITIVE POSITION, REDUCE REVENUES,
        OR INCREASE COSTS. We use a combination of patent, trademark, and trade secret
        laws, confidentiality procedures, and licensing arrangements to establish
        and
        protect our proprietary rights. Our existing and future patents may not be
        sufficiently broad to protect our proprietary technologies. Despite our efforts
        to protect proprietary rights, we cannot be certain that the steps we have
        taken
        will prevent the misappropriation or unauthorized use of our technologies,
        particularly in foreign countries where the laws may not protect proprietary
        rights as fully as U.S. law. Any patents we may obtain may not be adequate to
        protect our proprietary rights. Our competitors may independently develop
        similar technology, duplicate our products, or design around any of our issued
        patents or other intellectual property rights. Litigation may be necessary
        to
        enforce our intellectual property rights or to determine the validity or
        scope
        of the proprietary rights of others. This litigation could result in substantial
        costs and diversion of resources and may not ultimately be successful. We
        cannot
        predict whether the expiration or invalidation of our patents would result
        in
        the introduction of competitive products that would affect our future revenues
        adversely. However, since our technology is now in the commercial stage,
        our
        know-how and experience in volume card production, system development and
        software capabilities, brand-name recognition within our card markets, and
        dominant-supplier status for optical memory cards are of far greater importance
        than our patents. At this time, we believe that our existing patent portfolio
        is
        helpful but is no longer essential for maintaining the LaserCard®'s market
        position.
 
 THE
        MARKETS FOR OUR PRODUCTS ARE COMPETITIVE, AND IF WE ARE UNABLE TO COMPETE
        SUCCESSFULLY, REVENUES COULD DECLINE OR FAIL TO GROW. Our optical memory
        cards
        may compete with optical memory cards that can be manufactured and sold by
        three
        of our licensees (although none is currently doing so) and with other types
        of
        portable data storage cards and technologies used for the storage and transfer
        of digital information. These may include contact or contactless integrated
        circuit (IC) chip cards; holographic optical storage cards, 2-dimensional
        bar
        code cards and symbology cards; thick, rigid CD or DVD-read only cards or
        recordable cards; radio frequency, or RFID cards; and small, digital devices
        such as data-storage keys, tokens, and small cards and tags. The financial
        and
        marketing resources of some of the competing companies are greater than our
        resources. Competitive product factors include system/card portability,
        interoperability, price-performance ratio of cards and associated equipment,
        durability, environmental tolerance, and card security. Although we believe
        our
        cards offer key technological and security advantages for certain applications,
        the current price of optical card read/write drives is a competitive
        disadvantage in some of our targeted markets. However, we believe the price
        of
        our drives is competitive in applications requiring a large number of cards
        per
        drive, because the relatively low cost for our cards offsets the high cost
        per
        drive when compared with our major competition, IC card systems. In countries
        where the telecommunications infrastructure is extensive and low cost,
        centralized databases and wide-area networks may limit the penetration of
        optical memory cards. These trends toward Internet, intranet, and remote
        wireless networks will in some cases preclude potential applications for
        our
        cards.
 
 THE
        PRICE
        OF OUR COMMON STOCK IS SUBJECT TO SIGNIFICANT VOLATILITY. The price of our
        common stock is subject to significant volatility, which may be due to
        fluctuations in revenues, earnings, liquidity, press coverage, financial
        market
        interest, trading volume, and stock market conditions, as well as changes
        in
        technology and customer demand and preferences. As a result, our stock price
        might be low at the time a stockholder wants to sell the stock. Also, since
        we
        have a relatively low number of shares outstanding (approximately 12 million
        shares) there will be more volatility in our stock if one or two major holders,
        for example, large institutional holders, attempt to sell a large number
        of
        shares in the open market. Furthermore, our trading volume is often small,
        meaning that a few trades may have disproportionate influence on our stock
        price. In addition, someone seeking to liquidate a sizeable position in our
        stock may have difficulty doing so except over an extended period or privately
        at a discount. Thus, if one or more stockholders were to sell or attempt
        to sell
        a large number of its shares within a short period of time, such sale or
        attempt
        could cause our stock price to decline. There can be no guarantee that
        stockholders will be able to sell the shares that they acquired at a price
        per
        share equal to the price they paid for the stock.
 
 20
 WE
        ARE
        SUBJECT TO RISKS ASSOCIATED WITH CHANGES IN FOREIGN CURRENCY EXCHANGE RATES.
        Part of the manufacturing process of certain LaserCard products that we sell
        outside the U.S.A. takes place in our operations in Germany. Also, some of
        the
        raw materials we use to manufacture optical memory cards are sourced in Europe.
        These costs are denominated in euros, the currency used in much of Europe.
        However, when we sell our finished products the prices that we charge are
        denominated in United States dollars. Accordingly, we are subject to exposure
        if
        the exchange rate for euros increases in relation to the United States dollar.
        During fiscal year 2005, we experienced a $0.2 million loss on foreign currency
        exchange. The losses on foreign currency exchange for both fiscal years 2007
        and
        2006 were immaterial. As of March 31, 2007, we had not entered into a forward
        exchange contract to hedge against or potentially minimize the foreign currency
        exchange risk related to transactions other than those related to inter-company
        payables and receivables.
 
 WE
        SOLD A
        SECOND-SOURCE CARD MANUFACTURING LICENSE TO GLOBAL INVESTMENTS GROUP (GIG)
        THAT
        WAS SUBSEQUENTLY TRANSFERRED TO PREVENT GLOBAL (PREVENT), UNDER WHICH WE
        WILL
        PROVIDE CERTAIN FACTORY SET-UP AND TRAINING SERVICES. IF WE ARE NOT SUCCESSFUL
        OR IF PREVENT IS UNABLE TO FINANCE THIS OPERATION, THE SECOND-SOURCE SUPPLY
        OF
        OPTICAL CARDS WILL NOT MATERIALIZE. IF WE AND PREVENT ARE SUCCESSFUL, THE
        SECOND-SOURCE WILL COMPETE WITH US FOR BUSINESS. We will be obligated to
        deliver
        the required manufacturing equipment and installation support to Prevent
        for its
        to-be-built new card manufacturing facility in Slovenia, to provide a targeted
        initial manufacturing capacity of 10 million optical cards annually. If Prevent
        is successful, Prevent would become a second source for optical memory cards.
        We
        will also be assigning personnel to be on site during the license term, if
        such
        option is elected by Prevent, to assist with quality, security, and operational
        procedures, with a mutual goal that the facility and the cards made in Slovenia
        conform to our standards. If cards are not produced in conformance with our
        quality standards, the reputation and marketability of optical memory card
        technology could be damaged. If the factory does not become operational and
        produce quality cards in high volume, or if Prevent is unable to raise
        sufficient capital to build, equip and operate this facility, we would not
        obtain the hoped-for benefits--including ongoing royalties, sales of raw
        materials to Prevent, 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 the equipment has been accepted
        and training completed, which date is dependent on Prevent providing a facility
        in Slovenia. We could incur greater expenses than we anticipate for the purchase
        and installation of the required manufacturing equipment thereby reducing
        cash
        and anticipated profits. If Prevent is not successful, but current and potential
        customers require a second source of optical memory cards (which is a common
        business practice) they could decide to use alternate technology cards, such
        as
        chip cards, that have multiple-source suppliers.
 
 WE
        MAY
        NOT BE ABLE TO ATTRACT, RETAIN OR INTEGRATE KEY PERSONNEL, WHICH MAY PREVENT
        US
        FROM SUCCEEDING. We may not be able to retain our key personnel or attract
        other
        qualified personnel in the future. Our success will depend upon the continued
        service of key management personnel. The loss of services of any of the key
        members of our management team, including our chief executive officer, chief
        operating officer, the managing directors of our German operations, vice
        president of business development or our vice president of finance and CFO,
        or
        our failure to attract and retain other key personnel could disrupt operations
        and have a negative effect on employee productivity and morale, thus decreasing
        production and harming our financial results. In addition, the competition
        to
        attract, retain and motivate qualified personnel is intense.
 
 OUR
        CALIFORNIA FACILITIES ARE LOCATED IN AN EARTHQUAKE ZONE AND THESE OPERATIONS
        COULD BE INTERRUPTED IN THE EVENT OF AN EARTHQUAKE, FIRE, OR OTHER DISASTER.
        Our
        card manufacturing, corporate headquarters, and drive assembly operations,
        administrative, and product development activities are located near major
        earthquake fault lines. In the event of a major earthquake, we could experience
        business interruptions, destruction of facilities and/or loss of life, all
        of
        which could materially adversely affect us. Likewise, fires, floods, or other
        events could similarly disrupt our operations and interrupt our
        business.
 
 FOREIGN
        GOVERNMENT INTERVENTION COULD ADVERSELY AFFECT RESULTS OF OPERATIONS. Economic,
        political and other risks associated with foreign operations could adversely
        affect our international sales. We sell our products worldwide and therefore,
        our business could be subject to risks due to changes in a country’s or region’s
        political or economic conditions. Differing tax laws and changes in those
        laws
        may also affect future results of our operations.
 
 21
 PANDEMICS
        THROUGHOUT THE WORLD COULD ADVERSELY AFFECT OUR BUSINESS. The occurrence
        of a
        pandemic such as the Bird Flu coupled with the lack of government readiness
        and
        support in those countries where we do business could temporarily impede
        our
        revenue growth.
 
 ACTS
        OF
        TERRORISM OR WAR MAY ADVERSELY AFFECT OUR BUSINESS. Acts of terrorism, acts
        of
        war, and other events may cause damage or disruption to our properties,
        business, employees, suppliers, distributors, resellers, and customers, which
        could have an adverse effect on our business, financial condition, and operating
        results. Such events may also result in an economic slowdown in the United
        States or elsewhere, which could adversely affect our business, financial
        condition, and operating results.
 
 AS
        A
        RESULT OF OUR REQUIRED ANNUAL EVALUATION OF OUR INTERNAL CONTROLS OVER FINANCIAL
        REPORTING, WE MAY IDENTIFY INTERNAL CONTROL WEAKNESSES NEEDING REMEDIATION,
        WHICH COULD HARM OUR REPUTATION. We have completed the evaluation of our
        internal controls over financial reporting as required by Section 404 of
        the
        Sarbanes-Oxley Act of 2002 for the fiscal years ended March 31, 2007, 2006,
        and
        2005. Although our assessment, testing and evaluation resulted in our conclusion
        that as of March 31, 2007, 2006, and 2005, our internal controls over financial
        reporting were effective, we cannot predict the outcome of our testing in
        future
        periods. Because of the inherent limitation of disclosure controls, no
        evaluation of such controls can provide absolute assurance that all control
        issues and instances of fraud, if any, within our Company have been detected.
        If
        our internal controls are found to be ineffective in future periods, our
        reputation could be harmed. We may incur additional expenses and commitment
        of
        management’s time in connection with further evaluations, both of which could
        materially increase our operating expenses and accordingly reduce our net
        income.
 
 BEGINNING
        WITH OUR FISCAL YEAR 2007, WE ARE REQUIRED TO RECORD COMPENSATION EXPENSE
        FOR
        STOCK OPTIONS. AS A RESULT OF THE RESULTING SIGNIFICANT EXPENSES, IT WILL
        BE
        MORE DIFFICULT FOR US TO CONTINUE TO BE PROFITABLE AND ANY PROFITABILITY
        WE
        ACHIEVE WILL BE REDUCED SIGNIFICANTLY. In December 2004, the Financial
        Accounting Standards Board (“FASB”) issued Financial Accounting Standard 123(R)
        (SFAS No. 123(R)) that requires the fair value of all equity-based awards
        granted to employees be recognized in the statement of operations as
        compensation expense, for fiscal years beginning after December 15, 2005,
        rather
        than just to disclose such expense in a footnote as we have done in the previous
        years. The adoption of this accounting standard reduced our profitability
        as
        measured by generally accepted accounting principles (GAAP) due to our
        outstanding options and our current intention to continue to grant options
        in
        the future as an incentive and retention tool for our employees. This may
        adversely affect our stock price. For example, for the fiscal year 2007,
        we
        recognized approximately $1.7 million of additional expenses due to SFAS
        No. 123(R) which we would not otherwise have recognized. Such adoption
        could also lead us to reduce or otherwise alter our use of stock options
        which
        we believe help align our employees’ long-term interests with increasing our
        enterprise value. This could, in turn, hurt our ability to recruit employees
        and
        retain existing employees and directors.
 
  22
  
 ITEM
        1B.  UNRESOLVED
        STAFF COMMENTS
 
 Not
        applicable.
 
 ITEM
        2.  PROPERTIES
 
 *Mountain
        View, Ca*
 
 As
        of
        March 31, 2007, approximately 70,000 square feet of floor space are leased
        by us
        on a long-term basis for card manufacturing, read/write drive production,
        administration, sales, and research and development, 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
        development.
 
 *Germany*
 
 We
        lease
        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, we own land and a building in Rastede, Germany that is
        used
        in production of specialty cards and research and development.
 
 *Other*
 
 We
        also
        lease small marketing offices in New York and in the Washington DC
        area.
 
 We
        believe these leased and owned facilities to be satisfactory for our present
        operations. Upon expiration of the leases, we believe that these or other
        suitable buildings will be able to be leased on a reasonable basis.
 
 ITEM
        3.  LEGAL
        PROCEEDINGS
 
 From
        time
        to time we are a party to litigation matters and pending or threatened claims
        and assessments that are normal in the course of our operations. While we
        believe that the ultimate outcome of these matters will not have a material
        adverse effect on our financial position, results of operations or cash flows,
        the outcome of these matters is not determinable and negative outcomes may
        adversely affect our financial position, liquidity, or results of
        operations.
 
 ITEM
        4.  SUBMISSION
        OF MATTERS TO A VOTE OF SECURITY HOLDERS
 
 None.
 23
 PART
        II
 
 ITEM
        5.  MARKET
        FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES
        OF EQUITY SECURITIES
 
 Our
        only
        class of common stock, $0.01 par value, is traded on The Nasdaq Global Market®
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 our common stock (rounded
        to
        two decimal points) as reported by Nasdaq during the fiscal periods
        indicated.
  QUARTERLY
        STOCK PRICES
 
 Fiscal
                    Year 2007
                
                Fiscal
                    Year 2006High
                    Trade
                
                Low
                    Trade
                
                High
                    Trade
                
                Low
                    TradeFirst
                    Quarter
                
                $
                22.70
                
                $
                11.24
                
                $
                6.80
                
                $
                4.56Second
                    Quarter
                
                
                14.15
                
                
                9.40
                
                
                10.45
                
                
                5.77Third
                    Quarter
                
                
                13.92
                
                
                10.00
                
                
                15.25
                
                
                6.97Fourth
                    Quarter
                
                
                14.02
                
                
                9.51
                
                
                22.75
                
                
                12.71
 As
        of
        March 31, 2007, there were approximately 726 holders of record of our common
        stock. The total number of stockholders is believed by us to be several thousand
        higher since many holders’ shares are listed under their brokerage firms’
names.
 
 We
        have
        never paid cash dividends on our common stock. We anticipate that for the
        foreseeable future we will retain any earnings for use and reinvestment in
        our
        business.
 
 We
        did
        not repurchase any of our outstanding shares or other securities during our
        fourth quarter ended March 31, 2007.
 
 For
        information regarding securities authorized for issuance under equity
        compensation plans, see Part III, Item 12 below on page 72.
 
 **Stock
        Performance Graph**
 
 In
        the
        following stock performance graph, the cumulative total return on investment
        for
        the our common stock over the past five fiscal years is compared with the
        Russell 2000 Stock Index (“Russell 2000”) and the University of Chicago Center
        for Research in Security Prices (CRSP) Total Return Index for the Nasdaq
        Stock Market Electronic Components industry group (“Nasdaq Electronic
        Components”). The Russell 2000 is a benchmark index for small capitalization
        stocks. The Nasdaq Electronic Components index is used because the majority
        of
        our revenues currently are derived from the sale of optical recording media
        (optical memory cards). The chart assumes that the value of the investment
        in
        our stock and each index was $100 on March 31, 2002, and that any dividends
        were reinvested.
 
 24
  
 
 The
        stock
        performance graph was plotted using the following data:
  Fiscal
                      Year Ended March 31,2002
                  
                  2003
                  
                  2004
                  
                  2005
                  
                  2006
                  
                  2007LaserCard
                      Corporation
                  
                  $
                  100.00
                  
                  $
                  64.47
                  
                  $
                  59.23
                  
                  $
                  22.14
                  
                  $
                  100.04
                  
                  $
                  52.42Russell
                      2000
                  
                  
                  100.00
                  
                  
                  73.04
                  
                  
                  119.66
                  
                  
                  126.13
                  
                  
                  158.73
                  
                  
                  168.11CRSP
                      Nasdaq Electronic Components
                  
                  
                  100.00
                  
                  
                  51.88
                  
                  
                  87.71
                  
                  
                  72.78
                  
                  
                  80.12
                  
                  
                  72.63
 
  25
  ITEM
        6.  SELECTED
        FINANCIAL DATA
 
 The
        following selected consolidated financial information as of and for each
        of the
        five fiscal years in the period ended March 31, 2007 is derived from our
        consolidated financial statements. 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 SUBSIDIARIESFIVE-YEAR
                      SUMMARY OF CONSOLIDATED FINANCIAL INFORMATIONFiscal
                      Years Ended March 31, 2003 - 2007(In
                      thousands, except per share amounts)STATEMENT
                      OF OPERATION DATA
                  
                  2007(1)
                  
                  2006(1)
                  
                  2005(1)
                  
                  2004
                  
                  2003Revenue
                  
                  $
                  32,270
                  
                  $
                  39,857
                  
                  $
                  28,544
                  
                  $
                  16,963
                  
                  $
                  26,331Cost
                      of sales
                  
                  
                  25,406
                  
                  
                  24,804
                  
                  
                  22,637
                  
                  
                  13,157
                  
                  
                  13,906Selling,
                      general, and administrative expenses
                  
                  
                  13,575
                  
                  
                  11,949
                  
                  
                  11,891
                  
                  
                  6,700
                  
                  
                  6,202Research
                      and engineering expenses
                  
                  
                  3,095
                  
                  
                  2,338
                  
                  
                  3,018
                  
                  
                  2,620
                  
                  
                  2,818Impairment
                      of  goodwill and intangible assets
                  
                  
                  3,811
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —Interest
                      and other income, net
                  
                  
                  895
                  
                  
                  471
                  
                  
                  240
                  
                  
                  176
                  
                  
                  397Income
                      (loss) before income taxes
                  
                  
                  (12,722
                  )
                  
                  1,237
                  
                  
                  (8,762
                  )
                  
                  (5,338
                  )
                  
                  3,802Income
                      tax (benefit) provision
                  
                  
                  (351
                  )
                  
                  443
                  
                  
                  139
                  
                  
                  7,089
                  
                  
                  1,520Net
                      income (loss)
                  
                  $
                  (12,371
                  )
                  $
                  794
                  
                  $
                  (8,901
                  )
                  $
                  (12,427
                  )
                  $
                  2,282Net
                      income (loss) per share:Basic
                  
                  $
                  (1.05
                  )
                  $
                  0.07
                  
                  $
                  (0.78
                  )
                  $
                  (1.15
                  )
                  $
                  0.22Diluted
                  
                  $
                  (1.05
                  )
                  $
                  0.07
                  
                  $
                  (0.78
                  )
                  $
                  (1.15
                  )
                  $
                  0.21Weighted
                      average number of commonand
                      common equivalent shares:Basic
                  
                  
                  11,814
                  
                  
                  11,415
                  
                  
                  11,362
                  
                  
                  10,761
                  
                  
                  10,356Diluted
                  
                  
                  11,814
                  
                  
                  11,587
                  
                  
                  11,362
                  
                  
                  10,761
                  
                  
                  10,842BALANCE
                      SHEET DATACurrent
                      assets
                  
                  $
                  37,304
                  
                  $
                  39,574
                  
                  $
                  21,310
                  
                  $
                  23,294
                  
                  $
                  21,192Current
                      liabilities
                  
                  
                  9,083
                  
                  
                  9,228
                  
                  
                  6,764
                  
                  
                  11,271
                  
                  
                  3,620Total
                      assets
                  
                  
                  58,100
                  
                  
                  62,335
                  
                  
                  48,768
                  
                  
                  49,835
                  
                  
                  40,463Long‐term
                      liabilities
                  
                  
                  26,418
                  
                  
                  21,090
                  
                  
                  15,326
                  
                  
                  2,878
                  
                  
                  —Stockholders'
                      equity
                  
                  
                  22,599
                  
                  
                  32,017
                  
                  
                  26,678
                  
                  
                  35,686
                  
                  
                  36,843(1)
                      Only fiscal years 2007, 2006 and 2005 statement of operation
                      data includes
                      results of our German subsidiary acquired on
                      March 31, 2004.
  26
  ITEM
        7.MANAGEMENT'S
        DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
        OPERATIONS
 
 The
        following discussion and analysis of our financial condition and results
        of
        operations should be read in conjunction with the audited consolidated financial
        statements and related notes included elsewhere in this Form 10-K Report
        for the
        year ended March 31, 2007.
 
 *Forward-Looking
        Statements* .
        For a
        discussion of the risk factors related to our business operations, please
        refer
        to the “Forward-Looking Statements” section starting at page 4 of this report
        and the section entitled “Risk Factors” starting at page 16 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 U.S. generally accepted accounting principles. Note 2 of
        the
        notes to the consolidated financial statements describe 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, stock-based
        compensation, warranties, 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.
 
 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. We
        consider the accounting policies described below to be our critical accounting
        policies:
 
 *Revenue
        Recognition* .
        Product
        sales primarily consist of optical cards, optical card drives and specialty
        cards and card printers. We recognize 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. We recognize 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.
 
 Orders
        for Permanent Resident and Border Crossing Cards for the U.S. government
        require
        delivery into a secure Company-controlled vault. Shipments are made from
        the
        vault to a U.S. government site. The bill and hold procedure also provides
        that
        at the end of any one-year contract term when a renewal option is not exercised,
        the U.S. government is to take final delivery of any and all of its remaining
        inventory within six months. At the time the cards are delivered into the
        vault,
        title to the cards is transferred to the U.S. government and all risks of
        ownership are transferred as well. The prime contractor is invoiced, with
        payment due within thirty days and the purchase orders do not contain any
        return
        (other than for warranty) or cancellation provisions. Pursuant to the provisions
        of SEC Staff Accounting Bulletin No. 104 ―
        “Revenue Recognition” (“SAB
        104”), revenue is recognized on delivery into the vault as we have fulfilled
        our
        contractual obligations and the earnings process is complete.
 
 We
        apply
        the provisions of Emerging Issues Task Force No. 00-21, "Revenue Arrangements
        with Multiple Deliverables," (EITF 00-21) to revenue arrangements with multiple
        deliverables. EITF 00-21 provides criteria governing how to identify whether
        goods or services that are to be delivered separately in a bundled sales
        arrangement should be accounted for separately. Deliverables are accounted
        for
        separately if they meet all of the following criteria: a) the delivered items
        have stand-alone value to the customer; b) the fair value of any undelivered
        items can be reliably determined; and c) if the arrangement includes a general
        right of return, delivery of the undelivered items is probable and substantially
        controlled by the seller. In situations where the deliverables fall within
        higher-level literature as defined by EITF 00-21, we apply the guidance in
        that
        higher-level literature. Deliverables that do not meet these criteria are
        combined with one or more other deliverables.
 
 27
 We
        apply
        the provisions of Statement of Position (“SOP”) No. 81-1, "Accounting for
        Performance of Construction-Type and Certain Production-Type Contracts" (SOP
        No.
        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
        fiscal years ended March 31, 2007, 2006, and 2005, we recognized approximately
        $12,000, $77,000, and $127,000, respectively, of revenues based on a zero
        profit
        margin related to a long-term contract.
 
 In
        the
        fourth quarter of fiscal year 2006, we entered into a subcontract with a
        prime
        contractor for a Middle Eastern country to provide them with card
        personalization workstation integration for use in that country’s personalized
        national ID program which includes optical memory cards, hardware, and software.
        The contract covering an anticipated $11 million worth of products and services
        calls for multiple deliverables, installation, and certain client acceptance
        criteria, as defined in the agreement. In applying the guidance within EITF
        00-21, we determined the deliverables are not to be accounted for as separate
        units, but rather as a bundled arrangement as the fair value of the undelivered
        items cannot be readily determined. Therefore, revenue recognition on this
        new
        contract and the associated contract costs were deferred until the predominant
        undelivered element, the card personalization, is delivered and accepted,
        commencing with the installation and acceptance of the card personalization
        system. We determined that once the card personalization system is accepted,
        contract revenue would be recognized ratably based on actual cards personalized
        and accepted. We began recognizing revenue under this contract during the
        quarter ended March 31, 2007 as the card personalization system was accepted
        during that period. We recognized revenue totaling $4 million in fiscal year
        2007 based upon the total number of cards accepted through March 31, 2007.
        As of
        March 31, 2007 there remained $1 million of deferred revenue and $0.9 million
        of
        deferred contract costs relating to this contract.
 
 License
        revenue, which may consist of up-front license fees and royalty payments,
        is
        recognized as revenue when earned. There were no costs or license revenue
        recorded in fiscal years 2007, 2006, and 2005.
 
 We
        entered into license and optical memory card equipment purchase and support
        agreements, effective April 3, 2004, with Global Investments Group (GIG),
        based
        in Auckland, New Zealand, for optical memory card manufacturing in
        Slovenia.  GIG transferred the license and other agreements, with our
        approval, to Prevent Global of Slovenia (Prevent) in March 2007. The agreements
        provide for payments to us of about $25.6 million which were fully paid as
        of
        March 31, 2007, for a 20-year license, the required manufacturing equipment
        for
        a targeted initial manufacturing capacity of 10 million optical cards annually
        and installation support, and a four-year training and support package. For
        the
        $25.6 million we received, $23.6 million was recorded as advance payments
        from
        customer and $2 million for the licensing fee was recorded as deferred revenue.
        Both were classified as long term liabilities in the consolidated balance
        sheets. As of March 31, 2007, we had $6.3 million of acquired equipment,
        plus
        direct and incremental expenses, classified as equipment held for resale
        on our
        consolidated balance sheets. Beginning in the fifth year of the contract,
        Prevent is to pay $3 million for a three-year support package, then has the
        option for thirteen additional years of support for payments of $1 million
        annually.  In addition to the $41.6 million discussed above, Prevent is to
        pay us royalties of $0.60 per card for each card produced under the
        license.  The territories covered by the license include most of the
        European Union and eastern European regions.  Prevent has exclusive
        marketing rights in certain territories, with performance goals to maintain
        these rights. We retain rights to utilize up to 20% of the new facility capacity
        as backup and a capacity buffer to augment our own card manufacturing facilities
        in Mountain View, California and possibly at our German subsidiary. The granting
        of this license to Prevent establishes a potential second source supplier
        of
        optical memory cards for existing and prospective customers who may request
        multiple sources for cards.  The agreement contains various elements
        including a card manufacturing license, sale and installation of equipment,
        training, and ongoing support, and contingent payments for support, materials,
        and royalty payments for cards manufactured. In accordance with EITF 00-21
        “Revenue Arrangements with Multiple Deliverables,” the card manufacturing
        license, sale and installation of equipment, training, and support package,
        have
        been accounted for as one unit of accounting, since we were unable to determine
        evidence of the fair value for the undelivered items other than ongoing support.
        We are able to determine evidence of fair value for the predominant undelivered
        item, which is the ongoing annual support of the manufacturing equipment.
        Accordingly, revenues for the arrangement have been deferred and will be
        recognized when the equipment is installed and accepted, with the exception
        of
        the value of the ongoing annual support of the manufacturing equipment which
        will be recognized quarterly as earned, beginning when the equipment is accepted
        and training has been completed, which date is dependent on Prevent establishing
        a suitable facility in Slovenia. Pursuant to FTB 90-1, “Accounting for
        Separately Priced Extended Warranty and Product Maintenance Contracts” the
        support revenue will be recognized ratably over the remaining term of the
        agreement.
  28
  We
        apply
        the provisions of Statement of Position 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 our 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 years ended
        March
        2007, 2006, and 2005, respectively.
 
 *Product
        Warranty* .
        Where
        appropriate, provision is made at the time of shipment for estimated warranty
        costs and estimated returns. We provide a limited warranty for the replacement
        of defective products. Our limited warranty requires us to repair or replace
        defective products at no cost to the customer within a specified time period
        after sale. We estimate the costs that may be incurred under our limited
        warranty and records a liability in the amount of such costs at the time
        product
        revenue is recognized. Factors that affect our estimate of warranty liability
        include the number of units sold, and historical and anticipated rates of
        warranty claims. We assess the adequacy of our recorded warranty liability
        and
        adjusts the amount as necessary. We utilize historical trends and information
        received from our customers to assist in determining the appropriate estimated
        warranty accrual levels. The following table shows our warranty liability
        as of
        March 31 (in thousands):
 2007
                  
                  2006
                  
                  2005Beginning
                      balance
                  
                  $
                  648
                  
                  $
                  132
                  
                  $
                  46Accruals
                      for products sold
                  
                  
                  164
                  
                  
                  568
                  
                  
                  207Costs
                      incurred/Adjustments
                  
                  
                  (69
                  )
                  
                  (52
                  )
                  
                  (121
                  )Ending
                      balance
                  
                  $
                  743
                  
                  $
                  648
                  
                  $
                  132
 Significant
        judgment is inherent in the selection of assumptions and the interpretation
        of
        historical experience as well as the identification of external and internal
        factors affecting the estimates of our reserves for product returns. We believe
        that the assumptions used to estimate these product sales reserves are the
        most
        reasonably likely assumptions considering known facts and circumstances.
        However, our product return activity could differ significantly from our
        estimates. If actual product returns are significantly different from our
        estimates, such differences would be accounted for in the period in which
        they
        become known.
 
 *Accounting
        for Income Taxes* .
        The
        deferred income tax liability of $388,000 at March 31, 2007 and $568,000
        at
        March 31, 2006 is a result of the operations of our German subsidiary. As
        part
        of the process of preparing our consolidated financial statements, we are
        required to estimate income taxes in each of the jurisdictions in which we
        operate. 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 income tax assets and liabilities, which are
        included within the consolidated balance sheets. We must then assess the
        likelihood that the deferred income tax assets will be recovered from future
        taxable income and to the extent that management believes recovery is not
        likely, we must establish a valuation allowance.
 
 In
        fiscal
        year 2007 the valuation allowance decreased by $3.1 million. This decrease
        included a $6.3 million decrease related to U.S. income tax benefits of stock
        option deductions, the benefit of which will be credited to additional paid-in
        capital, when and if realized, that were derecognized as a result of the
        adoption of FAS 123(R). The remaining change in valuation allowance relates
        to
        other increases in our gross deferred income tax assets.
 
 29
 Our
        federal net operating loss carryforwards (“NOLs”) as of March 31, 2007 of $23.1
        million will expire at various dates from 2008 through 2027, if not utilized.
        Of
        this amount, $19.2 million represent NOL’s relating to windfall stock option
        deductions, the benefit of which will be credited to stockholders’ equity when
        realized. Federal tax credits in the amount of $540,000 for alternative minimum
        taxes have no expiration. Federal tax credits in the amount of $284,000 will
        expire on various dates from 2013 through 2026, if not utilized. California
        tax
        credits in the amount of $129,000 have no expiration date.
 
 Our
        methodology for determining the realizability of our deferred income tax
        assets
        involves estimates of future taxable income based upon booked orders; the
        estimated impact of future stock option deductions; and the expiration dates
        and
        amounts of net operating loss carryforwards. We have had difficulty in the
        past,
        and expect to have continued difficulty in the future, in reliably forecasting
        our foreign business and the revenue to be received from it. This resulted
        in
        our basing our estimates of future income for these purposes on booked orders
        only. As circumstances change, we may in the future be able to estimate future
        revenue based upon our forecast revenues rather than only using booked orders,
        although we cannot say when or if this will occur.
 
 In
        concluding that a full valuation allowance was required at the end of fiscal
        year 2005 and 2006 and continues to be required at the end of fiscal year
        2007,
        we considered both the positive and negative evidence regarding our ability
        to
        generate sufficient future taxable income to realize our deferred income
        tax
        assets. Positive evidence included (1) the level of sales and business
        experienced under the contracts for the U.S. Department of Homeland Security’s
        Permanent Resident card and Border Crossing card programs and for the Canadian
        government’s Permanent Resident Card program; (2) prospects in Italy and a
        Middle Eastern country for national identification card programs; and (3)
        expected future orders. Negative evidence included (1) our reliance on a
        limited
        number of customers for a substantial portion of our business; (2) the
        uncertainty in timing of anticipated orders from our customers; (3) the impact
        of future stock option deductions on taxable income; (4) our experience of
        net
        operating loss carryforwards expiring unused through fiscal year 2004; (5)
        the
        recent financial statement losses; and (6) the prior three years’ cumulative tax
        net operating losses exclusive of payments derived from the Prevent contract.
        In
        weighing the positive and negative evidence, we considered the “more likely than
        not” criteria pursuant to SFAS No. 109 as well as the following risks related
        to
        our business: “dependence on VARs and on a limited number of customers,”
“lengthy sales cycles,” “technological change,” and “competition”. As
        described, we concluded that the negative evidence outweighed the positive
        evidence and as a result we recorded a valuation allowance equal to the full
        amount of the deferred income tax asset as of March 31, 2005 and again at
        March
        31, 2006 and at March 31, 2007.
 
 In
        the
        event that actual results differ from these estimates or that these estimates
        are adjusted in future periods, we 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 our deferred income 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. The net operating losses available
        to
        reduce future taxable income expire on various dates from fiscal year 2008
        through fiscal year 2027. To the extent that we generate taxable income in
        jurisdictions where the deferred income 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* .
        We
        value our inventory at the lower of the actual cost to purchase and/or
        manufacture the inventory or market value with market value based on replacement
        cost or estimated realizable value less cost to sell. We regularly review
        inventory quantities on hand and records a provision for excess and obsolete
        inventory based primarily on forecasts of product demand. Demand for optical
        card 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. We purchase drive parts for our anticipated demand and
        takes
        into consideration the order-to-delivery lead times of vendors and the economic
        purchase order quantity for such parts. In addition, we keep a supply of
        card
        raw materials that we deem necessary for anticipated demand.
 
 We
        perform an analysis of the carrying value of card and read/write drive inventory
        on a quarterly basis. With respect to inventory carrying values, we follow
        the
        principles articulated in SFAS No. 151, “Inventory Costs — an Amendment of ARB
        No. 43, Chapter 4,” (“SFAS No. 151”), ARB No. 43, Chapter 4 “Inventory Pricing,”
paragraphs 5 through 7 and 10 and other authoritative guidance (e.g. 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 and the accounting for abnormal amounts of idle facility
        expense, freight, handling costs and wasted material (spoilage). Following
        SFAS
        No. 151, we allocate fixed production overheads to the costs of conversion
        based
        on the normal capacity of the production facilities. We applied SFAS No.
        151 to
        inventory costs incurred effective April 1, 2006. The provisions of this
        statement were applied prospectively.
  30
 Prior
        to
        the adoption of SFAS No. 151, full overhead absorption would only occur if
        we
        produced at full capacity at each operation. This resulted in the recording
        of
        the idle capacity, the difference between actual production and full capacity,
        as a period cost on the income statement for the period in which it arose.
        In
        applying SFAS No. 151, our analysis has shown that normal capacity is greater
        than actual production. Therefore, the amount of period cost for excess capacity
        is reduced, and the per-unit amount of overhead applied to production and
        inventory has increased. The SFAS No. 151 valuation applied on a FIFO basis
        resulted in an increase to the inventory value totaling $219,000 at the period
        of adoption in the first quarter of fiscal year 2007.
 
 We
        establish lower of cost or market reserves and inventory excess 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 excess and obsolete
        inventory reserves net change was a net increase of $334,000, a net relief
        of
        $145,000, and a net relief of $335,000 for the fiscal years ended March 31,
        2007, 2006, and 2005, respectively. The net change for fiscal year 2007 was
        due
        largely to work-in-process inventory of optical memory cards based on an
        old
        design. In
        those
        instances where we have recorded charges for excess and obsolete inventory,
        we
        ensure that such new cost basis is reflected in the statement of operations
        if
        that inventory is subsequently sold. The
        net
        relief for fiscal years 2006 and 2005 was due to disposition of reserved
        inventory of the optical memory cards and read/write drives. As
        part
        of our quarterly excess/obsolete inventory analysis, we also determine 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.
        We
        did not record any lower of cost or market adjustments in our consolidated
        statements of operations for fiscal years ended March 31, 2007 and 2006.
        During
        fiscal year 2005, we recorded a lower of cost or market adjustment for
        read/write drives in the amount of $205,000. Our inventory reserves are based
        upon the lower of cost or market for slow moving or obsolete items. As a
        result,
        we believe a 10% increase or decrease of sales would not have a material
        impact
        on such reserves.
 
 *Impairment
        of Goodwill and Intangible Assets* . 
        We perform an annual impairment testing of goodwill and other intangible
        assets
        to comply with SFAS No. 142. At March 31, 2007, we determined that estimated
        future cash flows were insufficient to justify the carrying value of these
        goodwill and intangible assets based on management’s decision to suspend optical
        memory card production in Germany.  As such in the fourth quarter of fiscal
        year 2007, we recorded a non-cash pre-tax impairment charge of approximately
        $3.8 million to write-off goodwill and other intangible assets acquired upon
        the
        purchase of Challenge Card Design Plastikkarten GmbH of Rastede, Germany,
        and
        Cards & More GmbH of Ratingen, Germany on March 31, 2004.   During
        fiscal years 2006 and 2005, the future cash flows had been determined to
        be
        sufficient based in part on planned production of a portion of our optical
        memory cards in our facility in Germany.
 
 We
        intend
        to continue to use the facility and equipment to produce specialty cards
        although plans to use the facility to produce LaserCard® optical memory cards in
        Germany have been suspended.
  *Share-Based
        Compensation* .
        As
        described in detail in Note 2, Share-Based Compensation, of the accompanying
        notes to the consolidated financial statements, effective April 1, 2006,
        we
        adopted the fair value recognition provisions of SFAS No. 123(R), using the
        modified-prospective transition method. Under the fair value recognition
        provisions of SFAS No. 123(R), share-based compensation cost is estimated
        at the
        grant date based on the fair value of the award and is recognized as expense,
        net of estimated forfeitures, ratably over the vesting period of the award.
        Calculating share-based compensation expense requires the input of highly
        subjective assumptions, including the expected term of the share-based awards,
        stock price volatility, and pre-vesting stock option forfeitures. We estimated
        the expected life of stock options granted during fiscal year ended March
        31,
        2007 based upon vesting provision and historical exercise, cancellation,
        and
        expiration patterns. We estimate the volatility of our common stock at the
        date
        of grant based on the historical volatility of our common stock. The assumptions
        used in calculating the fair value of stock-based awards represent our best
        estimates, but these estimates involve inherent uncertainties and the
        application of management judgment. As a result, if factors change and we
        use
        different assumptions, our share-based compensation expense could be materially
        different in the future. In addition, we are required to estimate the expected
        forfeiture rate and only recognize expense for those shares expected to vest.
        We
        estimate the forfeiture rate based on historical experience. If our actual
        forfeiture rate is materially different from our estimate, the stock-based
        compensation expense could be significantly different from what we have recorded
        in the current period.
 
 31
 As
        a
        result of adopting SFAS No. 123(R) using the modified prospective method,
        our
        net income applicable to common shareholders for the fiscal year ended March
        31,
        2007 includes $1.8 million of share based compensation expense including
        $0.1
        million of Employee Stock Purchase Plan expense included in the consolidated
        statements of operations. As of March 31, 2007, $4 million of total unrecognized
        compensation cost related to unvested share-based compensation arrangements
        is
        expected to be recognized over the remaining vesting period through December
        31,
        2010. Prior to the adoption of SFAS No. 123(R), we provided pro forma
        disclosures of net income (loss) as if the fair-value-based method had been
        applied. Our prior year’s consolidated financial statements have not been
        restated.
 
 RESULTS
        OF OPERATIONS
 
 Overview
 
 We
        are
        headquartered in Mountain View, California where we manufacture LaserCard®
optical memory cards and card related products, including chip-ready
        Optical/SmartTM cards. In addition, we operate a wholly owned German subsidiary
        acquired on March 31, 2004, Challenge Card Design Plastikkarten GmbH (“CCD”),
        with offices in Rastede and Ratingen, Germany, which manufactures
        advanced-technology cards, can provide manufacturing capacity for certain
        steps
        of optical memory card production, and markets cards, system solutions, and
        thermal card printers. We completed the merger of Cards & More GmbH (also
        acquired on March 31, 2004) into Challenge Card Design Plastikkarten GmbH
        in
        January 2006.
 
 We
        sell
        our products and services through partners such as value added resellers
        (VARs)
        and card distribution licensees, who generally have knowledge in specific
        markets, for the development of markets and applications for LaserCard products.
        We have sales staff located in California, New York, the Washington D.C.
        area,
        and Germany, whose principal role is developing and supporting the reseller
        channel. Revenue consists primarily of optical memory cards, optical card
        read/write drives including systems and enabling services, specialty cards,
        and
        card printers. Our VARs/licensees provide country-specific or market-specific
        services necessary for contract negotiation and also may add application
        software, personal computers, and other peripherals, and then resell these
        products as integrated solutions. We are continuing our efforts to recruit
        new
        VARs and eliminate nonproductive VARs.
 
 Major
        near term growth potential for LaserCard® optical memory cards is in
        government-sponsored identification programs in several countries. Since
        governmental card programs typically rely on policy-making, which in turn
        is
        subject to technical requirements, budget approvals, and political
        considerations, there is no assurance that these programs will be implemented
        as
        expected or that they will include optical cards. Our objectives for long-term
        revenue growth include: (1) broadening the Optical Memory (OM) product range
        to
        address lower-end applications characterized by higher price sensitivity,
        (2)
        diversifying OM products into, and effectively penetrating, industrial and
        commercial markets, (3) expanding our hardware product offering to address
        new
        markets and add value to current offerings, and (4) increasing OM product
        revenues with customized application software and enabling
        services.
 
 The
        table
        below presents consolidated revenues, excluding inter-company transactions,
        recorded by our U.S. and German operations for the fiscal years ended March
        31,
        (in thousands):
  2007
                  
                  2006
                  
                  2005U.S.
                      operations
                  
                  $
                  20,492
                  
                  $
                  29,419
                  
                  $
                  18,561German
                      operations
                  
                  
                  11,778
                  
                  
                  10,438
                  
                  
                  9,983$
                  32,270
                  
                  $
                  39,857
                  
                  $
                  28,544
 Revenues
        recorded by our U.S. operations are generally derived from a small number
        of
        government customers located throughout the world.  Revenues recorded by
        our German operations are mainly for a relatively large number of commercial
        customers, including universities in Germany for student identification cards
        and organizers of sporting events for secure access cards.
 
 32
 Historically,
        the largest purchaser of LaserCard products has been a U.S. Government
        contractor, General Dynamics Information Technology (GDIT), previously Anteon
        International Corporation. GDIT 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 GDIT, the DHS purchases Green Cards and DOS
        Laser Visa Border Crossing Cards; the DOD purchases Automated Manifest System
        cards; and the Canadian government purchases Permanent Resident Cards.
        Encompassing all of these programs, our product sales to GDIT represented
        28%,
        31% and 31% of the total revenues for fiscal years 2007, 2006 and 2005
        respectively. Another unaffiliated company, Laser Memory Card S.p.A., of
        Italy,
        accounted for 8%, 31%, and 26% of our total revenues for fiscal years 2007,
        2006, and 2005, respectively, mainly for secure government ID card programs
        in
        Italy. A third company, Omar K. Alesayi Communications & Space Services Co.,
        Ltd. (ACSS), accounted for 13% of revenue in fiscal 2007 for a national ID
        card
        program in the Middle East.
 
 Our
        major
        government programs are shown below as a percentage of total revenues for
        the
        fiscal years ended March 31, are:
 2007
                  
                  2006
                  
                  2005United
                      States Green Cards and Laser Visa BCCs
                  
                  
                  23
                  %
                  
                  24
                  %
                  
                  21
                  %Middle
                      East National ID Program
                  
                  
                  13
                  %
                  
                  4
                  %
                  
                  —Canadian
                      Permanent Resident Cards
                  
                  
                  4
                  %
                  
                  5
                  %
                  
                  6
                  %Vehicle
                      Registration in India
                  
                  
                  6
                  %
                  
                  3
                  %
                  
                  2
                  %Italian
                      Carta d’Identità Elettronica (CIE) Cards
                  
                  
                  1
                  %
                  
                  18
                  %
                  
                  26
                  %Italian
                      Permesso di Soggiorno Elettronico (PSE) Cardsand
                      Carta di Soggiorno Elettronico (CSE) Cards
                  
                  
                  7
                  %
                  
                  13
                  %
                  
                  —
 Regarding
        our Italian programs, the most recent purchase order for CIEs and PSEs was
        received in August 2005. The
        CIE
        program has been largely stalled since January 2006 following a change of
        government and the instigation of a review designed to reduce cost and improve
        efficiency of the program. In March 2007, we believe the last major hurdle
        to
        the reactivation of the CIE program was removed when a government decree
        was
        published establishing the fee each citizen will pay when issued a card.
        This
        clears the way to resume CIE issuance from their substantial card inventory
        and
        to implement the national ID card issuance infrastructure. If and as this
        occurs, and the national ID card system functions as designed, CIE and PSE
        card
        orders could ramp toward their full implementation level which could potentially
        result in annual revenues of $40 to $50 million. The issuance system for
        PSE
        cards is in place and operating and the government is in possession of a
        substantial card inventory. There was no backlog for these programs at March
        31,
        2007. We believe that for fiscal year ending March 31, 2008, follow-on orders
        for both programs will be received and significant card revenue will be realized
        although it remains unclear if and when the prime contractor will issue
        follow-on orders.
 
 U.S.
        Laser Visa Border Crossing Cards (BCCs) and Green Cards for the U.S. Department
        of Homeland Security (DHS) are an important part of our revenue base. For
        these
        programs, we recorded card revenues of $7.4 million for fiscal year 2007,
        $9.8
        million for fiscal year 2006 and $5.8 million for fiscal year 2005. We received
        a five-year follow-on U.S. government subcontract in March 2007 with an initial
        one-year term and four one-year extension options. Backlog at March 31, 2007
        for
        these programs, which is deliverable through September 2007, totaled $4.8
        million. We expect to receive follow-on purchase orders throughout the life
        of
        the subcontract although no assurance can be given.
 
 Under
        a
        subcontract for Canada’s Permanent Resident Cards, we recorded revenue of $1.2
        million in fiscal year 2007, $2 million in fiscal year 2006, and $1.8 million
        in
        fiscal year 2005. The backlog at March 31, 2007 was $0.7 million and will
        most
        likely be delivered in the first-half of fiscal year 2008. The delivery rate
        is
        subject to increase or decrease at customer request depending on varying
        Permanent Resident approval rates.
 
 In
        January 2006, we entered into a subcontract providing the framework for the
        supply of secure national ID cards to a Middle Eastern government and the
        supply, installation and support of associated card personalization equipment,
        consumables and software. This followed earlier deliveries of cards and card
        encoders under previous contracts and purchase orders.  The cards are being
        issued to adult citizens for national identity purposes and feature the latest
        advancements in identity fraud protection provided by Optical IDLockTM, a
        combination of the highly-secure LaserCard® optical memory technology and
        Embedded HologramHDTM, the new high-definition “photographic quality” etched
        image security feature.  The subcontract covered an anticipated $11 million
        worth of product and services and was the first time that we provided enabling
        services by assuming responsibility for both supplying and installing
        personalization hardware, the oversight of the card personalization process,
        and
        the quality of the fully personalized cards, including the printing of
        cardholder information and encoding of data and the Embedded HologramHD.
         In accordance with EITF 00-21, revenue on the contract and associated
        costs were deferred until the card system was installed and accepted.  This
        was completed in the quarter ended March 31, 2007.  Accordingly, we
        commenced recognizing the contract revenue on a pro-rated basis for the cards
        that were accepted, and such revenue totaling $4 million was recorded in
        fiscal
        year 2007. Although orders have been slower than originally expected under
        the
        subcontract, we now anticipate additional orders for delivery in our fiscal
        year
        ending March 31, 2008 beginning in the June quarter.
 
 33
 Effective
        April 3, 2004, we sold a second-source card-manufacturing license, including
        equipment, training, and support, to Global Investments Group (GIG), based
        in
        Auckland, New Zealand, for card manufacturing in Slovenia and began receiving
        associated cash payments. Recently, and with our approval, GIG transferred
        the
        license to Prevent Global of Slovenia. We will begin to recognize revenue
        on
        this arrangement over the remaining term of the agreement starting when the
        equipment has been accepted and the training has been completed, which date
        is
        in turn dependent on Prevent establishing a suitable facility in Slovenia
        as
        discussed below under “ *License
        Fees and Other Revenues.”*
 
 During
        the third quarter of fiscal year 2007, we implemented and activated a new
        ERP
        system designed to provide additional operational and financial reporting
        functionality in the US operations.  Thorough selection, planning, testing,
        and implementation processes were instituted to ensure that internal controls
        over financial reporting was in place. We followed Statement
        of Position (SOP) 98-1, “Accounting for the Costs of Computer Software Developed
        or Obtained for Internal ** Use”
,
        and EITF Issue No. 97-13, "Accounting for Costs Incurred in Connection with
        a
        Consulting Contract or an Internal Project That Combines Business Process
        Reengineering and Information Technology Transformation ," to address the
        accounting for this internal-use computer software. These pronouncements
        provide
        guidance for determining which costs should be accounted for as internal-use
        software and require that certain costs incurred during design and installation
        of internal-use software be capitalized, costs incurred in the preliminary
        project stage and system maintenance costs be expensed as incurred, and costs
        incurred in conjunction with business process reengineering activities (which
        are distinguished from software development costs) be expensed as incurred.
        We
        capitalized about $474,000 of software costs as of March 31, 2007 related
        to the
        ERP initiative and charged approximately $211,000 inclusive of labor in selling,
        general and administrative expenses during fiscal year 2007.
 
 Lastly , we plan
        to invest up to $8 million in additional capital equipment and leasehold
        improvement expenditures at our facilities when orders and forecasts justify
        the
        investment. These expenditures could occur throughout the next twelve to
        eighteen months, as more fully discussed under “Liquidity and Capital
        Resources.”
 
 Revenues
 
 *Product
        Revenues.* Our
        total revenues consisted of sales in our three segments of (1) optical memory
        cards, (2) optical card drives, drive accessories, maintenance, systems and
        enabling services, and (3) specialty cards and card printers, as well as
        in
        other miscellaneous items. Product revenues were $32.3 million for fiscal
        year
        2007; $39.9 million for fiscal year 2006; and $28.5 million for fiscal year
        2005. There were no license revenues earned in fiscal years 2006, 2005, and
        2004.
 
 34
 The
        following table presents our product revenue by segment for the fiscal years
        ended March 31, (in thousands, except for percentages):
  Change
                  
                  Change2007
                  
                  2006
                  
                  2005
                  
                  2007
                      vs 2006
                  
                  2006
                      vs 2005Optical
                      memory cards
                  
                  $
                  18,985
                  
                  $
                  28,200
                  
                  $
                  17,364
                  
                  $
                  (9,215
                  )
                  $
                  10,836%
                      of total revenues
                  
                  
                  59
                  %
                  
                  71
                  %
                  
                  61
                  %Optical
                      card drives
                  
                  
                  1,478
                  
                  
                  985
                  
                  
                  933
                  
                  
                  493
                  
                  
                  52%
                      of total revenues
                  
                  
                  4
                  %
                  
                  2
                  %
                  
                  3
                  %Specialty
                      cards and card printers
                  
                  
                  11,807
                  
                  
                  10,672
                  
                  
                  10,235
                  
                  
                  1,135
                  
                  
                  437%
                      of total revenues
                  
                  
                  37
                  %
                  
                  27
                  %
                  
                  36
                  %Other
                  
                  
                  —
                  
                  
                  —
                  
                  
                  12
                  
                  
                  —
                  
                  
                  (12
                  )%
                      of total revenues
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —Total
                      revenues
                  
                  $
                  32,270
                  
                  $
                  39,857
                  
                  $
                  28,544
                  
                  $
                  (7,587
                  )
                  $
                  11,313
  The following table presents our optical memory card
          revenue
          by major program for the fiscal years ended March 31, (in
          thousands):
 Change
                  
                  Change2007
                  
                  2006
                  
                  2005
                  
                  2007
                      vs 2006
                  
                  2006
                      vs 2005U.S.
                      Green Cards & Laser Visas
                  
                  $
                  7,409
                  
                  $
                  9,752
                  
                  $
                  5,763
                  
                  $
                  (2,343
                  )
                  $
                  3,989Italian
                      National ID Card Programs
                  
                  
                  2,408
                  
                  
                  12,191
                  
                  
                  7,227
                  
                  
                  (9,783
                  )
                  
                  4,964Canadian
                      Permanent Resident Cards
                  
                  
                  1,226
                  
                  
                  1,964
                  
                  
                  1,807
                  
                  
                  (738
                  )
                  
                  157National
                      ID Cards in a Middle Eastern country
                  
                  
                  3,512
                  
                  
                  1,477
                  
                  
                  621
                  
                  
                  2,035
                  
                  
                  856Vehicle
                      Registration in India
                  
                  
                  1,785
                  
                  
                  1,272
                  
                  
                  458
                  
                  
                  513
                  
                  
                  814All
                      other programs
                  
                  
                  2,645
                  
                  
                  1,544
                  
                  
                  1,488
                  
                  
                  1,101
                  
                  
                  56Total
                      optical memory card revenues
                  
                  $
                  18,985
                  
                  $
                  28,200
                  
                  $
                  17,364
                  
                  $
                  (9,215
                  )
                  $
                  10,836
 Optical
        memory card revenue decreased for fiscal year 2007 as compared with fiscal
        year
        2006 due mainly to the decrease in card unit volume for the Italian CIE program
        and increased for fiscal year 2006 as compared with fiscal year 2005 due
        mainly
        to an increase in card unit volume in the Italian program as well as increases
        in other programs.
 
 Revenue
        in the optical card drive segment, including systems and enabling services,
        grew
        about $0.5 million in fiscal year 2007 as compared with fiscal year 2006
        due
        mainly to activity in the national ID card program for a Middle Eastern
        government. There was no significant change in optical card drive revenue
        for
        fiscal year 2006 as compared with fiscal year 2005. We do not anticipate
        that we
        will derive significant profits on future drive sales as prices are set near
        the
        manufacturing cost in order to promote optical memory card sales.
 
 Specialty
        cards and printers revenue was $11.8 million in fiscal year 2007, $10.7 million
        in fiscal year 2006, and $10.2 million in fiscal year 2005. We anticipate
        growth
        of less than 10% in this segment in fiscal year 2008.
  *License
        Fees and Other Revenues* .  There
        were no license revenues during fiscal year 2007, 2006 or 2005. We entered
        into
        license and optical memory card equipment purchase and support agreements,
        effective April 3, 2004, with Global Investments Group (GIG), based in Auckland,
        New Zealand, for optical memory card manufacturing in Slovenia.  GIG
        transferred the license and other agreements, with our approval, to Prevent
        Global of Slovenia (Prevent) in March 2007. The agreements provide for payments
        to us of about $25.6 million which were fully paid as of March 31, 2007,
        for a
        20-year license, the required manufacturing equipment for a targeted initial
        manufacturing capacity of 10 million optical cards annually and installation
        support, and a four-year training and support package. For the $25.6 million
        we
        received, $23.6 million was recorded as advance payments from customer and
        $2
        million for the licensing fee was recorded as deferred revenue. Both were
        classified as long term liabilities in the consolidated balance sheets. As
        of
        March 31, 2007, we had $6.3 million of acquired equipment, plus direct and
        incremental expenses, classified as equipment held for resale on our
        consolidated balance sheets. Beginning in the fifth year of the contract,
        Prevent is to pay $3 million for a three-year support package, and has options
        for thirteen additional years of support for payments of $1 million
        annually.  In addition to the $41.6 million discussed above, Prevent is to
        pay us royalties of $0.60 per card for each card produced under the
        license.  The territories covered by the license include most of the
        European Union and eastern European regions.  Prevent has exclusive
        marketing rights in certain territories, with performance goals to maintain
        these rights. We retain rights to utilize up to 20% of the new facility capacity
        as backup and a capacity buffer to augment our own card manufacturing facilities
        in Mountain View, California and possibly at our German subsidiary. The granting
        of this license to Prevent establishes a potential second source supplier
        of
        optical memory cards for existing and prospective customers who may request
        multiple sources for cards.  The agreement contains various elements
        including a card manufacturing license, sale and installation of equipment,
        training, and ongoing support, and contingent payments for support, materials,
        and royalty payments for cards manufactured. In accordance with EITF 00-21
        “Revenue Arrangements with Multiple Deliverables,” the card manufacturing
        license, sale and installation of equipment, training and support package,
        have
        been accounted for as one unit of accounting, since we were unable to determine
        evidence of the fair value for the undelivered items other than ongoing support.
        We are able to determine evidence of fair value for the predominant
        undelivered item, which is the ongoing annual support of the manufacturing
        equipment. Accordingly, revenues for the arrangement have been deferred and
        will
        be recognized when the equipment is installed and accepted, with the exception
        of the value of the ongoing annual support of the manufacturing equipment
        which
        will be recognized quarterly as earned, beginning when the equipment is accepted
        and training has been completed, which date is dependent on Prevent establishing
        a suitable facility in Slovenia. Pursuant to FTB 90-1, “Accounting for
        Separately Priced Extended Warranty and Product Maintenance Contracts” the
        support revenue will be recognized ratably over the remaining term of the
        agreement.
  35
  Backlog
 
 As
        of
        March 31, 2007, the backlog for LaserCard® optical memory cards totaled $5.7
        million scheduled for delivery in fiscal year 2008, compared with $8.3 million
        at March 31, 2006, and $0.9 million at March 31, 2005. We have 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 a result, the relative size of our backlog has not been a reliable
        indicator of future sales revenue trends.
 
 In
        addition, the backlog for specialty cards and printers totaled 0.6 million
        euros
        (approximately $0.8 million) compared with 0.8 million euros (approximately
        $1
        million) at March 31, 2006 and 1.2 million euros (approximately $1.6 million)
        at
        March 31, 2005, and for a contract to develop a conventional non-optical
        card
        production facility totaled 0.7 million euros (approximately $0.9 million)
        at
        March 31, 2007 compared with 0.7 million euros (approximately $0.8 million)
        at
        March 31, 2006 and 0.8 million euros (approximately $1 million) at March
        31,
        2005. 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 probably during
        fiscal year 2008.
 
 We
        have
        no significant backlog for read/write drives.
 
 36
  Gross
        Margin
 
 The
        following table represents our gross margin in absolute amount and as a
        percentage of revenue by segment for the fiscal years ended March 31, (in
        thousands, except for percentages):
 Change
                  
                  Change2007
                  
                  2006
                  
                  2005
                  
                  2007
                      vs 2006
                  
                  2006
                      vs 2005Optical
                      memory cards
                  
                  $
                  4,795
                  
                  $
                  13,107
                  
                  $
                  4,561
                  
                  $
                  (8,312
                  )
                  $
                  8,546%
                      of optical memory card revenues
                  
                  
                  25
                  %
                  
                  46
                  %
                  
                  26
                  %Optical
                      card drives
                  
                  
                  (463
                  )
                  
                  (754
                  )
                  
                  (1,154
                  )
                  
                  291
                  
                  
                  400%
                      of optical card drive revenues
                  
                  
                  NM
                  
                  
                  NM
                  
                  
                  NMSpecialty
                      cards and card printers
                  
                  
                  2,532
                  
                  
                  2,700
                  
                  
                  2,512
                  
                  
                  (168
                  )
                  
                  188%
                      of specialty cards and card printers revenues
                  
                  
                  21
                  %
                  
                  25
                  %
                  
                  25
                  %Other
                  
                  
                  —
                  
                  
                  —
                  
                  
                  (12
                  )
                  
                  —
                  
                  
                  12%
                      of other revenues
                  
                  
                  NM
                  
                  
                  NM
                  
                  
                  NMTotal
                      gross margin
                  
                  $
                  6,864
                  
                  $
                  15,053
                  
                  $
                  5,907
                  
                  $
                  (8,189
                  )
                  $
                  9,146%
                      of product revenue
                  
                  
                  21
                  %
                  
                  38
                  %
                  
                  21
                  %
 *Optical
        Memory Cards.* Optical
        memory card gross margin can vary significantly based upon changes in average
        selling price, production and sales volumes, mix of card types, production
        efficiency and yields, and changes in fixed costs. Unit volume greatly affects
        gross margin due to the absorption of fixed manufacturing costs. The decrease
        in
        optical memory card gross margin to 25% of revenue for fiscal year 2007 as
        compared with 46% of revenue for fiscal year 2006 is mainly due to the 34%
        decrease in production and sales unit volume and the resultant loss of
        efficiencies and economies of scale. The increase in optical memory card
        gross
        margin to 46% of revenue for fiscal year 2006 as compared with 26% of revenue
        for fiscal year 2005 is mainly due to the 49% increase in production unit
        volume
        and 64% increase in sales unit volume with minimal increase in fixed costs
        augmented by increases in production efficiency and yields.
 
 *Optical
        Card Drives.* Read/write drive gross profits have been negative over the past three years,
        inclusive of fixed overhead costs, due to low sales volume and our policy
        to
        price drives close to manufacturing cost to promote card sales. This segment
        also includes enabling services, also with lower margins than optical memory
        cards. We anticipate that read/write drive negative gross margins will continue
        in the future unless sales volume is sufficient to cover fixed costs. During
        fiscal year 2005, we incurred approximately $0.3 million in costs to convert
        model 780 to model Q-600 drives. The negative gross profit decreased from
        year
        to year because there was no similar cost in fiscal year 2006.
 
 *Specialty
        Cards and Card Printers.* The
        gross margin on specialty cards and card printers was 21% in fiscal year
        2007
        and 25% in both fiscal years 2006 and 2005. Over the past three years, the
        quarterly gross margins have generally been in the low to mid 20%
        range.
 
 37
  Operating
        expenses
 
 The
        following table presents operating expenses for the fiscal years ended March
        31
        are (in thousands, except for percentage):
 2007
                  
                  2006
                  
                  2005Selling,
                      general and administrative expenses
                  
                  $
                  13,575
                  
                  $
                  11,949
                  
                  $
                  11,891Percent
                      of change from prior year
                  
                  
                  14
                  %
                  
                  0.5
                  %Research
                      and development expenses
                  
                  $
                  3,095
                  
                  $
                  2,338
                  
                  $
                  3,018Percent
                      of change from prior year
                  
                  
                  32
                  %
                  
                  (23
                  %)Impairment
                      of  goodwill and intangible assets
                  
                  $
                  3,811
                  
                  $
                  —
                  
                  $
                  —
 *Selling,
        General, and Administrative Expenses (SG&A).* SG&A
        expenses were up $1.6 million during fiscal year 2007 as compared with fiscal
        year 2006. About $1 million of the increase was the result of the adoption
        of
        SFAS No. 123(R) stock option expensing. The remaining increase was due to
        $0.4 million of consulting services for planning, and an increase in salaries
        related to additional personnel which was offset mainly by the decrease in
        management bonus of $0.7 million. Fiscal year 2006 SG&A expenses increased
        due to $0.7 million for management bonus, and decreased in almost every other
        spending category. In addition, the $0.2 million loss on exchange rate
        fluctuations on debt incurred in fiscal year 2005 was not repeated in fiscal
        year 2006 or 2007. We believe that SG&A expenses for fiscal year 2008 will
        be higher than fiscal year 2007 levels, mainly due to expected increases
        in
        marketing and selling expenses as well as due to a budgeted bonus in fiscal
        2008
        to executives and employees versus none to executives in fiscal
        2007.
 
 *Research
        and* *Development
        Expenses (R&D)* .
        R&D
        expenses increased $0.8 million during fiscal year 2007 as compared with
        fiscal
        year 2006. We are continuing our efforts
        to develop new optical memory card features and structures, including various
        composite card structures to allow the insertion of contactless chips with
        radio
        frequency (RF) capability, Dual-interface (contact-contactless) with optical
        memory, OVD
        (optically variable device) products, and other market-driven requirements.
        We
        are also performing optical media development to allow new form factors for
        more
        flexibility in card layouts and integrated security features; enhanced optical
        memory card read/write drives for both increased reliability and ease of
        use and
        integration, and new versions of read-only drives (readers) to meet various
        operational requirements such as office desktop units or handheld field units
        with integrated displays, biometrics, and RFID capability; along with new
        software products in an effort to provide new products that can stimulate
        optical memory card sales growth. For example, we recently have developed a new Green Card Authenticator application based on the
        LaserCard ® reader
        that is currently being evaluated in the market, which allows employers to
        immediate validate potential employees’ Green Cards during the hiring process. Additionally,
        after a year of in-house evaluation of our OpticalProximity system for building
        access control, we have starting installation at our first customer location,
        as
        a test and evaluation site. In our German subsidiary, we recently completed
        the
        development of a new integrated card personalization system and have shipped
        several systems to customers in the past year. We anticipate  that
        these ongoing research and development efforts
        should result in enhanced card features and capabilities, new versions of
        read-only drives, and drives with advanced security features and/or lower
        manufacturing costs; however, there is no assurance that such product
        development efforts will be successful. T hese
        features are important for our existing
        and future optical memory card markets. The decrease in R& D spending
        for fiscal year 2006 as compared with fiscal year 2005 was primarily due
        to the
        completion of major spending for the first prototype LaserCard ® portable
        reader, coupled with being between phases of the new card media development
        project and the completion of card material and other projects. Increases
        in R&D expenses
        were anticipated for fiscal year 2007 for development of production-model
        read-only drives, optical memory card media development, and other card and
        hardware related programs and systems.
 
 *Impairment
        of Goodwill and Intangible Assets* .
        We
        perform an annual impairment testing of goodwill and other intangible assets
        to
        comply with SFAS No. 142, “Goodwill and Other Intangible Assets.” At March 31,
        2007, we determined that estimated future cash flows were insufficient to
        justify the carrying value of goodwill and other intangible assets based
        on
        management’s decision to suspend optical memory card production in Germany. As
        such, in the fourth quarter of fiscal year 2007, we recorded a non-cash pre-tax
        impairment charge of approximately $3.8 million to write-off goodwill and
        other
        intangible assets acquired upon the purchase of Challenge Card Design
        Plastikkarten GmbH of Rastede, Germany, and Cards & More GmbH of Ratingen,
        Germany on March 31, 2004.  During fiscal years 2006 and 2005, the future
        cash flows had been determined to be sufficient based in part on planned
        production of a portion of our optical memory cards in our facility in
        Germany.
  38
 *Other
        Income, Net* .
        Total
        net other income for fiscal year 2007 was $895,000, consisting of $980,000
        of
        interest income, $45,000 of miscellaneous other income, partially offset
        by
        interest expense of $107,000 and $23,000 for other miscellaneous expenses.
        Total
        net other income for fiscal year 2006 was $471,000 including $583,000 of
        interest income, partially offset by interest expense of $80,000 and $32,000
        for
        other miscellaneous expenses net of other miscellaneous income. Total net
        other
        income for fiscal year 2005 was $240,000 of interest income. The increase
        in
        interest income for fiscal year 2006 compared with fiscal year 2005 was
        primarily due to an increase on investment rates on invested funds. The increase
        in interest income for fiscal year 2006 compared with fiscal year 2005 was
        primarily due to higher income from invested funds.
  *Income
        Taxes.* We
        recorded an income tax benefit of $351,000 for fiscal year 2007, and an income
        tax expense of $443,000 for fiscal year 2006 and $139,000 for fiscal year
        2005.
        The tax benefit for fiscal year 2007 was due mainly to the reduction of deferred
        income tax liabilities in Germany and a true up of the difference in the
        fiscal
        year 2006 current provision and that which resulted on the tax return for
        California taxes. The income tax expense for fiscal year 2006 was primarily
        due
        to federal and state alternative minimum taxes. ** The
        income tax expense for fiscal year 2005 was mainly due to federal alternative
        minimum tax. The payments from GIG/Prevent received during fiscal years 2007,
        2006 and 2005 are recorded as income on the federal tax return even though
        they
        are not recorded as income under U.S. generally accepted accounting principles.
        This income has been offset by net operating loss carryforwards generated
        in
        previous years. However, alternative minimum taxes are due when tax return
        income is offset by net operating loss carryforwards generated in previous
        years.
 
 LIQUIDITY
        AND CAPITAL RESOURCES
 
 The
        following table summarizes cash, cash equivalents and investments as of March
        31, (in thousands):
 2007
                  
                  2006Cash
                      and cash equivalents
                  
                  $
                  3,026
                  
                  $
                  2,121Cash,
                      cash equivalents and short-term investments
                  
                  $
                  20,526
                  
                  $
                  23,471
 
 Cash,
        cash equivalents, and investments decreased during fiscal year 2007 primarily
        due to $3.1 million in purchases of property and equipment partially offset
        by
        $1 million in proceeds from the exercise of employee stock options. Cash,
        cash
        equivalents, and investments increased during fiscal year 2006 primarily
        due to
        the $5 million generated by operating activities and the proceeds from the
        exercise of employee stock options in the amount of $4.3 million, partially
        offset by the purchase of property and equipment of $2.3 million.
 
 The
        following table displays the sources and uses of cash by activity for the
        fiscal
        years ended March 31, (in thousands):
 2007
                  
                  2006
                  
                  2005Net
                      cash provided by (used in) operating activities
                  
                  $
                  (471
                  )
                  $
                  5,048
                  
                  $
                  2,955Net
                      cash provided by (used in) investing activities
                  
                  $
                  553
                  
                  $
                  (11,318
                  )
                  $
                  2,523Net
                      cash provided by (used in) financing activities
                  
                  $
                  1,020
                  
                  $
                  4,432
                  
                  $
                  (3,896
                  )
 Cash
        used
        in operations of $0.5 million in fiscal year 2007 primarily consists of $3.3
        million used due to the loss, net of non-cash items; $4.6 million received
        from
        Prevent, net of equipment purchased for this contract; and $1.8 million used
        in
        changes in other working capital items. Cash provided by operations of $5
        million in fiscal year 2006 primarily consists of $3.7 million received from
        GIG, net of equipment purchased for this contract, plus $4.5 million from
        net
        income, plus non-cash items. Additionally, advance payments received from
        customers totaled $6.1 million, offset by changes in other working capital
        items
        of $5.6 million.
 
 Net
        cash
        provided by investing activities of $0.6 million during fiscal year 2007
        consisted primarily of $3.8 million from net proceeds of maturity of
        investments, less capital expenditures of approximately $3.1 million. Net
        cash
        used in investing activities of $11.3 million during fiscal year 2006 consisted
        of net purchases of investments of $8.9 million and capital expenditures
        of
        approximately $2.3 million.
 
 Net
        cash
        provided by financing activities during fiscal year 2007 was $1 million,
        which
        consisted of net proceeds from the sale of common stock under the stock plans.
        Net cash provided by financing activities during fiscal year 2006 was $4.4
        million, which consisted of net proceeds from the sale of common stock under
        the
        stock plans.
 
 39
 We
        believe that the estimated level of revenues and customer advance payments
        over
        the next twelve months will be sufficient to generate cash from operating
        activities over the same period. However, quarterly fluctuations are expected.
        Operating cash flows could be negatively impacted to a significant degree
        if
        either of our largest U.S. government programs were to be delayed, reduced,
        canceled, or not extended; 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&D and capital
        expenditures.
 
 We
        have
        not established a line of credit. We may negotiate a line of credit, although
        no
        assurance can be made that such financing would be available on favorable
        terms
        or at all, if needed.
 
 As
        a
        result of our net loss recorded for fiscal year 2007, our accumulated deficit
        increased from $26.4 million to $38.7 million. Stockholders’ equity decreased to
        $22.6 million from $32.0 million as a result of the net loss partially offset
        by
        the issuance of common stock under employee stock plans.
 
 We
        consider all highly liquid investments, consisting primarily of commercial
        paper, discount notes, and U.S. government bonds, with original or remaining
        maturities of three months or less at the date of purchase, to be cash
        equivalents. All investments with original or remaining maturities of more
        than
        three months but not more than one year at the date of purchase are classified
        as short-term. Investments with original or remaining maturities of more
        than
        one year at the date of purchase are classified as long-term. We determine
        the
        length of our investments after considering our cash requirements and yields
        available for the type of investment considered by our Company. We determine
        the
        appropriate classification of debt and equity securities at the time of purchase
        and reevaluate the classification of investments as of each balance sheet
        date.
        As of March 31, 2007 we had $17.5 million classified as short-term investments
        and had no long-term investments, compared with $21.4 million classified
        as
        short-term investments at March 31, 2006. All auction rate securities are
        accounted for as available-for-sale and all other interest-bearing securities
        are accounted for as held-to-maturity.
 
 We
        made
        capital equipment and leasehold improvement purchases of approximately $3.1
        million during fiscal year 2007 compared with approximately $2.3 million
        during
        fiscal year 2006 and $3.3 million during fiscal year 2005. We have an annual
        production capacity of 10 million roll-process cards in conjunction with
        approximately 9 million sheet-process cards depending upon the optimum mix
        of
        features. We plan to purchase additional production equipment in a series
        of
        steps when we deem appropriate based in part upon orders and forecasts. We
        plan
        to use cash on hand and cash generated from operations to fund capital
        expenditures of approximately $8 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. These
        expenditures could occur throughout the next twelve to eighteen
        months.
 
 On
        March
        31, 2004, we completed our acquisition of two related German card companies, Challenge
        Card Design Plastikkarten GmbH of Rastede, Germany, and Cards & More GmbH of
        Ratingen, Germany,
        that were later merged, (collectively, the Acquired German Entity), including
        their sales operations in the United States and Korea. The Acquired German
        Entity owns a plant in Rastede, Germany together with associated equipment
        that
        manufactures plastic cards featuring contactless IC chip technology and high
        resolution printing. We intend to continue to use the facility and equipment
        to
        produce such cards although plans to use the facility to produce LaserCard®
optical memory cards in Germany have been suspended.
 
 During
        fiscal year 2005, we commenced a share repurchase program under which up
        to
        350,000 shares of common stock could be purchased by us from time to time
        in
        Nasdaq Global Market transactions in an aggregate amount not exceeding
        $3 million. During the second quarter of fiscal year 2005, we used cash of
        $655,000 for this purpose and have since terminated this program without
        further
        activity.
 
 There
        were no debt financing activities for fiscal year 2007 or 2006.
 
 40
 *Contractual
        Obligations* .
        The
        following table provides a summary of the effect on liquidity and cash flows
        from our contractual obligations for the following years ended March 31,
        (in
        thousands):
 20132008
                  
                  2009
                  
                  2010
                  
                  2011
                  
                  2012
                  
                  Thereafter
                  
                  TotalContractual
                      obligations:Non-cancelable
                      operating leases
                  
                  $
                  1,064
                  
                  $
                  1,046
                  
                  $
                  1,599
                  
                  $
                  1,617
                  
                  $
                  1,573
                  
                  $
                  2,746
                  
                  $
                  9,645Non-cancelable
                      purchase orders
                  
                  
                  1,957
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  1,957Total
                  
                  $
                  3,021
                  
                  $
                  1,046
                  
                  $
                  1,599
                  
                  $
                  1,617
                  
                  $
                  1,573
                  
                  $
                  2,746
                  
                  $
                  11,602
 OFF-BALANCE
        SHEET ARRANGEMENTS
 
 We
        have
        no off-balance sheet arrangement as of March 31, 2007 and 2006 that has or
        is
        reasonably likely to have a current or future effect on our financial condition,
        changes in financial condition, revenues or expenses, results of operations,
        liquidity, capital expenditures, or capital resources that is material to
        investors.
 
 RECENT
        ACCOUNTING PRONOUNCEMENTS
 
 Recent
        accounting pronouncements are disclosed in Note 2 of the notes to consolidated
        financial statements.
  41
  ITEM
        7A.  QUANTITATIVE
        AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
 
 *Interest
        Rate Risk.* We
        invest our cash, beyond that needed for daily operations, in high quality
        debt
        securities. In doing so, we seek primarily to preserve the value and liquidity
        of our capital and, secondarily, to safely earn income from these investments.
        To accomplish these goals, we invest only in debt securities issued by (a)
        the
        U.S. Treasury and U.S. government agencies, state agencies and corporations
        and
        (b) debt instruments that meet the following criteria:
  o
              Commercial
                  paper rated A1/P1 or debt instruments rated AAA, as rated by the
                  major
                  rating serviceso
              Can
                  readily be sold for cash
 
 Investments
        in both fixed rate and floating rate interest earning instruments carry a
        degree
        of interest rate risk. Fixed rate securities may have their fair market value
        adversely impacted because of a rise in interest rates, while floating rate
        securities may produce less income than expected if interest rates fall.
        Due in
        part to these factors, our future investment income may fall short of
        expectations because of changes in interest rates or we may suffer losses
        in
        principal if forced to sell securities that have seen a decline in market
        value
        because of changes in interest rates.
 
 There
        were no material changes during fiscal year 2007 in our exposure to market
        risk
        for changes in interest rates.
 
 The
        following summarizes short-term investments at fair value, weighted average
        yields and expected maturity dates for the fiscal years ended March 31, (in
        thousands):
 2007
                
                2006Auction
                    rate securities
                
                $
                17,500
                
                $
                15,050Weighted
                    average yield
                
                
                5.29
                %
                
                4.74
                %U.S.
                    Government and agency obligations
                
                
                —
                
                
                6,264Weighted
                    average yield
                
                
                —
                
                
                2.67
                %Total
                    investments
                
                $
                17,500
                
                $
                21,314
 
 There
        were no long-term investments as of March 31, 2007 and 2006.
 
 *Foreign
        Currency Exchange Rate Risk.* Our
        U.S.
        operations sell products in various international markets.  During
        fiscal 2007, revenue by our German subsidiary of approximately $11.8
        million was denominated in foreign currency.  In addition, some raw
        material purchases and purchased services are denominated in foreign currency.
        Cash provided by/used in CCD operating activities has been
        immaterial.
 
 We
        use
        short-term foreign exchange forward contracts to mitigate foreign currency
        risk
        associated primarily with inter-company receivables and payables, and loans
        receivable (denominated in Euros) to our German subsidiary.  Our foreign
        exchange forward contracts are not designated for accounting purposes as
        hedging
        instruments under SFAS No. 133, “Accounting for Derivative Instruments and
        Hedging Activities,” as amended.  Accordingly, any gains or losses
        resulting from changes in the fair value of the forward contract are reported
        in
        other income, net expenses.  The gains and losses on these forward
        contracts generally offset gains and losses associated with the underlying
        foreign currency denominated inter-company receivables and payables, and
        loans
        receivable.  At March 31, 2007, we had a foreign exchange forward contract
        with a maturity of less than 30 days to purchase 2.3 million euros. The
        fair value of the forward contract was not material at March 31,
        2007.
  42
  ITEM
        8.  FINANCIAL
        STATEMENTS AND SUPPLEMENTARY DATA
  REPORT
        OF
        INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
 The
        Board
        of Directors and Stockholders of
 LaserCard
        Corporation
 
 We
        have
        audited management’s assessment, included in the Management Report on Internal
        Controls Over Financial Reporting included in Item 9A, that LaserCard
        Corporation and its subsidiaries maintained effective internal control over
        financial reporting as of March 31, 2007, 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 LaserCard Corporation and its subsidiaries
        maintained effective internal control over financial reporting as of March
        31,
        2007, 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, 2007,
        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 sheets of LaserCard
        Corporation and its subsidiaries at March 31, 2007 and 2006, and the related
        consolidated statements of operations, stockholders’ equity and comprehensive
        income (loss), and cash flows for each of the three years in the period ended
        March 31, 2007 and our report dated May 18, 2007, expressed an unqualified
        opinion thereon.
 
 /s/
        Odenberg, Ullakko, Muranishi & Co. LLP
 San
        Francisco, California
 May
        18,
        2007
  43
  
 REPORT
        OF
        INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
  The
        Board
        of Directors and Stockholders of
 LaserCard
        Corporation
 
 We
        have
        audited the accompanying consolidated balance sheets of LaserCard Corporation
        and its subsidiaries as of March 31, 2007 and 2006, and the related consolidated
        statements of operations, stockholders' equity and comprehensive income (loss),
        and cash flows for each of the three years in the period ended March 31,
        2007.
        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 audits.
 
 We
        conducted our audits in accordance with the standards of the Public Company
        Accounting Oversight Board (United States). Those standards require that
        we plan
        and perform the audits 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
        audits provide a reasonable basis for our opinion.
 
 In
        our
        opinion, the consolidated financial statements audited by us  present
        fairly, in all material respects, the consolidated financial position of
        LaserCard Corporation and its subsidiaries at March 31, 2007 and 2006, and
        the
        consolidated results of their operations and their cash flows for each of
        the
        three years in the period ended March 31, 2007 , in
        conformity with U.S. generally accepted accounting principles.
 
 As
        discussed in Note 2 to the consolidated financial statements, the Company
        adopted the provisions of Statement of Financial Accounting Standard No.
        123(R),
“Share-Based Payment” and Statement of Financial Accounting Standard No. 151,
“Inventory Costs, an Amendment of ARB No. 43, Chapter 4” as of April 1,
        2006.
 
 We
        also
        have audited, in accordance with the standards of the Public Company Accounting
        Oversight Board (United States), the effectiveness of LaserCard Corporation
        and
        its subsidiaries’ internal control over financial reporting as of March 31,
        2007, based on criteria established in *Internal
        Control—Integrated Framework* issued
        by the Committee of Sponsoring Organizations of the Treadway Commission and
        our
        report dated May 18, 2007, expressed an unqualified opinion
        thereon.
 
 
 /s/
        Odenberg, Ullakko, Muranishi & Co. LLP
 San
        Francisco, California
 May
        18,
        2007
  44
  LASERCARD
        CORPORATION AND SUBSIDIARIES
 CONSOLIDATED
        BALANCE SHEETS
 March
        31,
        2007 and 2006
 (In
        thousands, except share and per share amounts)
 2007
                
                2006ASSETSCurrent
                    assets:Cash
                    and cash equivalents
                
                $
                3,026
                
                $
                2,121Short-term
                    investments
                
                
                17,500
                
                
                21,350Accounts
                    receivable, net of allowances of $144 at March 31, 2007and
                    $142 at March 31, 2006
                
                
                3,489
                
                
                4,920Inventories,
                    net of reserves of $837 at March 31, 2007and
                    $503 at March 31, 2006
                
                
                11,462
                
                
                8,874Deferred
                    contract costs
                
                
                233
                
                
                1,041Prepaid
                    and other current assets
                
                
                1,594
                
                
                1,268Total
                    current assets
                
                
                37,304
                
                
                39,574Property
                    and equipment, net
                
                
                12,988
                
                
                12,306Deferred
                    long-term contract costs
                
                
                721
                
                
                —Equipment
                    held for resale
                
                
                6,340
                
                
                5,877Patents
                    and other intangibles, net
                
                
                411
                
                
                889Goodwill
                
                
                —
                
                
                3,321Notes
                    receivable
                
                
                227
                
                
                205Other
                    non-current assets
                
                
                109
                
                
                163Total
                    assets
                
                $
                58,100
                
                $
                62,335LIABILITIES
                    AND STOCKHOLDERS' EQUITYCurrent
                    liabilities:Accounts
                    payable
                
                $
                2,284
                
                $
                3,311Accrued
                    liabilities
                
                
                2,989
                
                
                3,118Deferred
                    income tax liabilities
                
                
                388
                
                
                568Advance
                    payments from customers
                
                
                1,838
                
                
                1,772Deferred
                    revenue
                
                
                1,584
                
                
                459Total
                    current liabilities
                
                
                9,083
                
                
                9,228Advance
                    payments from customers
                
                
                23,554
                
                
                18,500Deferred
                    revenue
                
                
                2,000
                
                
                2,000Deferred
                    rent
                
                
                864
                
                
                590Total
                    liabilities
                
                
                35,501
                
                
                30,318Commitments
                    and contingencies (Note 7)Stockholders'
                    equity:Preferred
                    stock, $0.01 par value:Authorized
                    - 2,000,000 sharesIssued
                    - none
                
                
                —
                
                
                —Common
                    stock, $0.01 par value:Authorized
                    - 30,000,000 sharesIssued
                    and outstanding - 11,857,542 shares at March 31, 2007and
                    11,734,255 shares at March 31, 2006
                
                
                119
                
                
                117Additional
                    paid-in capital
                
                
                61,068
                
                
                58,255Accumulated
                    deficit
                
                
                (38,722
                )
                
                (26,351
                )Accumulated
                    other comprehensive income (loss)
                
                
                134
                
                
                (4
                )Total
                    stockholders' equity
                
                
                22,599
                
                
                32,017Total
                    liabilities and stockholders' equity
                
                $
                58,100
                
                $
                62,335The
                    accompanying notes are an integral part of these consolidated
                    financial
                    statements.
 
 45
 
  LASERCARD
        CORPORATION AND SUBSIDIARIES
 CONSOLIDATED
        STATEMENTS OF OPERATIONS
 Fiscal
        Years Ended March 31, 2007, 2006, and 2005
 (In
        thousands, except per share amounts)
  2007
                
                2006
                
                2005Revenue
                
                $
                32,270
                
                $
                39,857
                
                $
                28,544Cost
                    of sales (includes $325 stock-basedcompensation
                    in the fiscal year ended March 31, 2007)
                
                
                25,406
                
                
                24,804
                
                
                22,637Gross
                    profit
                
                
                6,864
                
                
                15,053
                
                
                5,907Operating
                    expenses:Selling,
                    general, and administrative expenses (includes$1,116
                    stock-based compensation in thefiscal
                    year ended March 31, 2007)
                
                
                13,575
                
                
                11,949
                
                
                11,891Research
                    and development expenses (includes $354stock-based
                    compensation in the fiscal year endedMarch
                    31, 2007)
                
                
                3,095
                
                
                2,338
                
                
                3,018Impairment
                    of goodwill and intangible assets
                
                
                3,811
                
                
                —
                
                
                —Total
                    operating expenses
                
                
                20,481
                
                
                14,287
                
                
                14,909Operating
                    income (loss)
                
                
                (13,617
                )
                
                766
                
                
                (9,002
                )Other
                    income, net
                
                
                895
                
                
                471
                
                
                240Income
                    (loss) before income taxes
                
                
                (12,722
                )
                
                1,237
                
                
                (8,762
                )Income
                    tax expense (benefit)
                
                
                (351
                )
                
                443
                
                
                139Net
                    income (loss)
                
                $
                (12,371
                )
                $
                794
                
                $
                (8,901
                )Net
                    income (loss) per share:Basic
                
                $
                (1.05
                )
                $
                0.07
                
                $
                (0.78
                )Diluted
                
                $
                (1.05
                )
                $
                0.07
                
                $
                (0.78
                )Weighted-average
                    shares of common stockused
                    in computing net income (loss) per share:Basic
                
                
                11,814
                
                
                11,415
                
                
                11,362Diluted
                
                
                11,814
                
                
                11,587
                
                
                11,362The
                    accompanying notes are an integral part of these consolidated
                    financial
                    statements.
  46
 LASERCARD
                      CORPORATION AND SUBSIDIARIESCONSOLIDATED
                      STATEMENTS OF STOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOME
                      (LOSS)Fiscal
                      Years Ended March 31, 2005, 2006, and 2007(In
                      thousands)AccumulatedAdditional
                  
                  Accumulated
                  
                  Other
                  
                  
                  
                  TotalCommon
                      Stock
                  
                  Paid-in
                  
                  Income
                  
                  Comprehensive
                  
                  Treasury
                      Stock
                  
                  Stockholders'
                  
                  ComprehensiveShares
                  
                  Amount
                  
                  Capital
                  
                  (Deficit)
                  
                  Income
                      (loss)
                  
                  Shares
                  
                  Amount
                  
                  Equity
                  
                  Income
                      (loss)Balance,
                      March 31, 2004
                  
                  
                  11,400
                  
                  $
                  114
                  
                  $
                  53,816
                  
                  $
                  (18,244
                  )
                  $
                  —
                  
                  
                  —
                  
                  $
                  —
                  
                  $
                  35,686Purchase
                      of treasury stock
                  
                  
                  ―
                  
                  
                  ―
                  
                  
                  ―
                  
                  
                  ―
                  
                  
                  ―
                  
                  
                  (92
                  )
                  
                  (655
                  )
                  
                  (655
                  )Shares
                      issued under stock option and stock purchase plans
                  
                  
                  37
                  
                  
                  —
                  
                  
                  252
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  252Compensation
                      related to stock plan activity
                  
                  
                  —
                  
                  
                  —
                  
                  
                  87
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  87Comprehensive
                      loss:Foreign
                      currency translation adjustments
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  209
                  
                  
                  —
                  
                  
                  —
                  
                  
                  209
                  
                  $
                  209Net
                      loss
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  (8,901
                  )
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  (8,901
                  )
                  
                  (8,901
                  )Total
                      comprehensive loss
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  $
                  (8,692
                  )Balance,
                      March 31, 2005
                  
                  
                  11,437
                  
                  $
                  114
                  
                  $
                  54,155
                  
                  $
                  (27,145
                  )
                  $
                  209
                  
                  
                  (92
                  )
                  $
                  (655
                  )
                  $
                  26,678Shares
                      issued under stock option and stock purchase plans and related
                      income tax
                      benefits
                  
                  
                  297
                  
                  
                  3
                  
                  
                  3,977
                  
                  
                  ―
                  
                  
                  ―
                  
                  
                  92
                  
                  
                  655
                  
                  
                  4,635Compensation
                      related to stock plan activity
                  
                  
                  ―
                  
                  
                  ―
                  
                  
                  123
                  
                  
                  ―
                  
                  
                  ―
                  
                  
                  ―
                  
                  
                  ―
                  
                  
                  123Comprehensive
                      loss:Foreign
                      currency translation adjustments
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  (213
                  )
                  
                  —
                  
                  
                  —
                  
                  
                  (213
                  )
                  $
                  (213
                  )Net
                      income
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  794
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  794
                  
                  
                  794Total
                      comprehensive income
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  $
                  581Balance,
                      March 31, 2006
                  
                  
                  11,734
                  
                  $
                  117
                  
                  $
                  58,255
                  
                  $
                  (26,351
                  )
                  $
                  (4
                  )
                  
                  —
                  
                  $
                  —
                  
                  $
                  32,017Shares
                      issued under stock option and stock purchase plans
                  
                  
                  124
                  
                  
                  2
                  
                  
                  1,018
                  
                  
                  ―
                  
                  
                  ―
                  
                  
                  ―
                  
                  
                  ―
                  
                  
                  1,020Compensation
                      related to stock plan activity
                  
                  
                  ―
                  
                  
                  ―
                  
                  
                  1,795
                  
                  
                  ―
                  
                  
                  ―
                  
                  
                  ―
                  
                  
                  ―
                  
                  
                  1,795Comprehensive
                      loss:Foreign
                      currency translation adjustments
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  ―
                  
                  
                  138
                  
                  
                  ―
                  
                  
                  ―
                  
                  
                  138
                  
                  $
                  138Net
                      loss
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  (12,371
                  )
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  (12,371
                  )
                  
                  (12,371
                  )Total
                      comprehensive loss
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  $
                  (12,233
                  )Balance,
                      March 31, 2007
                  
                  
                  11,858
                  
                  $
                  119
                  
                  $
                  61,068
                  
                  $
                  (38,722
                  )
                  $
                  134
                  
                  
                  —
                  
                  $
                  —
                  
                  $
                  22,599The
                      accompanying notes are an integral part of these consolidated
                      financial
                      statements.
  47
 LASERCARD
                      CORPORATION AND SUBSIDIARIESCONSOLIDATED
                      STATEMENTS OF CASH FLOWSFiscal
                      Years Ended March 31, 2007, 2006, and 2005(In
                      thousands)2007
                  
                  2006
                  
                  2005Cash
                      flows from operating activities:Net
                      income (loss)
                  
                  $
                  (12,371
                  )
                  $
                  794
                  
                  $
                  (8,901
                  )Adjustments
                      to reconcile net income (loss) to net cashprovided
                      by (used in) operating activities:Depreciation
                      and amortization
                  
                  
                  2,749
                  
                  
                  2,515
                  
                  
                  2,640Loss
                      on disposal of equipment
                  
                  
                  52
                  
                  
                  21
                  
                  
                  10Impairment
                      of goodwill and intangible assets
                  
                  
                  3,811
                  
                  
                  -
                  
                  
                  -Provision
                      for (recovery of) doubtful accounts receivable
                  
                  
                  (4
                  )
                  
                  34
                  
                  
                  3Provision
                      for excess and obsolete inventory
                  
                  
                  483
                  
                  
                  194
                  
                  
                  335Provision
                      for product return reserve
                  
                  
                  -
                  
                  
                  78
                  
                  
                  62Provision
                      for warranty reserve
                  
                  
                  162
                  
                  
                  516
                  
                  
                  -Stock-based
                      compensation
                  
                  
                  1,795
                  
                  
                  130
                  
                  
                  111Tax
                      benefit relating to the exercise of stock options
                  
                  
                  -
                  
                  
                  196
                  
                  
                  -Changes
                      in operating assets and liabilities:Decrease
                      (increase) in accounts receivable
                  
                  
                  1,658
                  
                  
                  (3,216
                  )
                  
                  559Increase
                      in inventories
                  
                  
                  (2,944
                  )
                  
                  (1,238
                  )
                  
                  (1,361
                  )Decrease
                      (increase) in deferred contract costs
                  
                  
                  87
                  
                  
                  (1,041
                  )
                  
                  -Decrease
                      (increase) in prepaid and other current assets
                  
                  
                  (294
                  )
                  
                  47
                  
                  
                  (61
                  )Increase
                      in equipment held for resale
                  
                  
                  (463
                  )
                  
                  (1,816
                  )
                  
                  (1,641
                  )Decrease
                      (increase) in other non-current assets
                  
                  
                  54
                  
                  
                  (62
                  )
                  
                  -Increase
                      (decrease) in accounts payable and accrued liabilities
                  
                  
                  (1,484
                  )
                  
                  1,587
                  
                  
                  (1,751
                  )Decrease
                      in deferred income tax liabilities
                  
                  
                  (230
                  )
                  
                  (30
                  )
                  
                  -Increase
                      (decrease) in deferred revenue
                  
                  
                  1,095
                  
                  
                  (46
                  )
                  
                  2,413Increase
                      in deferred rent
                  
                  
                  274
                  
                  
                  265
                  
                  
                  -Increase
                      in advance payments from customers
                  
                  
                  5,099
                  
                  
                  6,120
                  
                  
                  10,537Net
                      cash provided by (used in) operating activities
                  
                  
                  (471
                  )
                  
                  5,048
                  
                  
                  2,955Cash
                      flows from investing activities:Purchases
                      of property and equipment
                  
                  
                  (3,143
                  )
                  
                  (2,314
                  )
                  
                  (3,325
                  )Proceeds
                      from sale of equipment
                  
                  
                  2
                  
                  
                  -
                  
                  
                  2Acquisition
                      of patents
                  
                  
                  (155
                  )
                  
                  (104
                  )
                  
                  (117
                  )Payment
                      of note receivable
                  
                  
                  -
                  
                  
                  -
                  
                  
                  (214
                  )Purchases
                      of short-term investments
                  
                  
                  (20,600
                  )
                  
                  (27,200
                  )
                  
                  (3,451
                  )Proceeds
                      from maturities of short-term investments
                  
                  
                  24,449
                  
                  
                  18,300
                  
                  
                  9,628Net
                      cash provided by (used in) investing activities
                  
                  
                  553
                  
                  
                  (11,318
                  )
                  
                  2,523Cash
                      flows from financing activities:Proceeds
                      from sale of common stock through stock plans
                  
                  
                  1,020
                  
                  
                  4,432
                  
                  
                  339Payment
                      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
                      cash provided by financing activities
                  
                  
                  1,020
                  
                  
                  4,432
                  
                  
                  (3,896
                  )Effect
                      of exchange rate changes on cash and cash equivalents
                  
                  
                  (197
                  )
                  
                  (6
                  )
                  
                  95Net
                      increase (decrease) in cash and cash equivalents
                  
                  
                  905
                  
                  
                  (1,844
                  )
                  
                  1,677Cash
                      and cash equivalents:Beginning
                      of period
                  
                  
                  2,121
                  
                  
                  3,965
                  
                  
                  2,288End
                      of period
                  
                  $
                  3,026
                  
                  $
                  2,121
                  
                  $
                  3,965Supplemental
                      disclosures - cash payments for:Income
                      taxes
                  
                  $
                  163
                  
                  $
                  233
                  
                  $
                  82Interest
                      expense
                  
                  $
                  107
                  
                  $
                  80
                  
                  $
                  128The
                      accompanying notes are an integral part of these consolidated
                      financial
                      statements.
 48
  **LASERCARD
          CORPORATION AND SUBSIDIARIES**
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 **1.**
              **Organization
                  and Operations**
 
 LaserCard
        Corporation, a Delaware Corporation, and its wholly owned subsidiaries,
        LaserCard Corporation, a California Corporation, and Challenge Card Design
        Plastikkarten GmbH of Germany (collectively the “Company”) develop, manufacture
        and integrate LaserCard Ò optical
        memory cards, optical card drives, peripherals and specialty cards and printers.
        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, Canadian Permanent Resident Cards, Italian national
        ID
        cards, biometric IDs and other wallet-card applications. Challenge Card Design
        Plastikkarten GmbH supplies other advanced-technology cards for various
        applications, card printers and systems integration for gate-keeping and
        ticketing.
 
 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**
 
 *(1.)
        Principles of Consolidation and Basis of Presentation.* The
        accompanying consolidated financial statements have been prepared in accordance
        with U. S. generally accepted accounting principles. 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.
 
 *(2.)
        Use of Estimates* .
        The
        preparation of consolidated financial statements in conformity with U. S.
        generally accepted accounting principles requires management to make estimates
        and assumptions that affect the reported amounts of assets and liabilities
        and
        disclosure of contingent assets and liabilities at the date of the financial
        statements and the reported amounts of revenues and expenses during the
        reporting period. Actual results could differ from those estimates.
 
 *(3.)
        Fiscal Period* .
        For
        purposes of presentation, the Company labels its annual accounting period
        end as
        March 31 and its quarterly accounting period ends as June 30, September 30
        and December 31. The Company, in fact, operates and reports based on quarterly
        periods ending on the Friday closest to month end. Fiscal year 2007 ended
        on
        March 30, 2007, fiscal year 2006 ended on March 31, 2006, and fiscal year
        2005
        ended on April 1, 2005.
 
 (4.) ** *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 (loss) as a component of stockholders' equity. Net gains
        and losses resulting from foreign exchange transactions are included in selling,
        general and administrative expenses and were not significant during the periods
        presented .
 
 *(5.)
        Derivative Financial Instruments.* The
        Company uses short-term foreign exchange forward contracts to mitigate foreign
        currency risk associated primarily with inter-company receivables and payables,
        and loans receivable (denominated in Euros) with its German subsidiary. 
Our foreign exchange forward contracts are not designated for accounting
        purposes as hedging instruments under SFAS No. 133, “Accounting for Derivative
        Instruments and Hedging Activities,” as amended.  Accordingly, any gains or
        losses resulting from changes in the fair value of the forward contracts
        are
        reported in other income.  The gains and losses on these forward contracts
        generally offset gains and losses associated with the underlying foreign
        currency denominated inter-company receivables and payables,  and loans
        receivable.  At March 31, 2007 and 2006, we had foreign exchange forward
        contracts with a maturity of less than 30 days to purchase 2.3 million euros
        and
        1.9 million euros, respectively. The fair value of the forward contracts
        were
        not material at March 31, 2007 and 2006.
 
 49
 
  **LASERCARD
            CORPORATION AND SUBSIDIARIES**
 **NOTES
            TO CONSOLIDATED FINANCIAL STATEMENTS**
 *(6.)
        Concentrations of Risk.* Financial instruments that potentially subject the Company to significant
        concentrations of credit risk consist principally of cash, cash equivalents,
        short-term investments, long-term investments and accounts receivable. The
        Company places its cash, cash equivalents, short-term and long-term investments
        in high-credit quality financial institutions. The Company is exposed to
        credit
        risk in the event of default by these institutions to the extent of the amount
        recorded on the consolidated balance sheet. As of March 31, 2007, the
        Company’s short-term investments consists of auction
        rate securities and there were no long-term investments .
        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.
 
 *(7.)
        Major Customers.* The
        following customers accounted for more than 10% of revenue for the fiscal
        years
        ended March 31 are:
 2007
                  
                  2006
                  
                  2005Customer
                      A
                  
                  
                  28
                  %
                  
                  31
                  %
                  
                  31
                  %Customer
                      B
                  
                  
                  ―
                  
                  
                  31
                  %
                  
                  26
                  %Customer
                      C
                  
                  
                  13
                  %
                  
                  ―
                  
                  
                  ―
 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.
 
 Two
        customers accounted for 31% and 17%, respectively, of accounts receivable
        as of
        March 31, 2007. Two customers accounted for 48% and 14%, respectively, of
        accounts receivable at March 31, 2006.
 
 *(8.)
        Cash and Cash Equivalents, Short-term Investments and Long-term
        Investments* .
        The
        Company considers all highly liquid investments, consisting primarily of
        commercial paper, discount notes and U.S. government bonds, with maturities
        of
        three months or less at the date of purchase, to be cash equivalents. Cash
        and
        cash equivalents at March 31, 2007 and 2006 were $3 million and $2.1 million,
        respectively. As of March 31, 2007 and 2006, 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 investments with remaining maturities of less than
        one
        year. All investments with maturities at date of purchase greater than one
        year
        are classified as long-term investments. Management determines the appropriate
        classification of debt securities at the time of purchase and re-evaluates
        the
        classification of investments as of each balance sheet date.
 
 All
        short-term investments, except for auction rate securities which are recorded
        at
        fair value, and long-term investments are classified as held to maturity
        and are
        stated in the consolidated balance sheets at amortized cost. As such investments
        are classified as held to maturity, no unrealized gains or losses are recorded.
        The carrying amounts of individual held to maturity securities are reviewed
        at
        the consolidated balance sheet date for potential impairment. As of March
        31,
        2007 and 2006, the Company has determined that an impairment which was “other
        than temporary” has not occurred. The carrying amounts of short-term investments
        for the fiscal years ended March 31 are (in thousands):
 2007
                  
                  2006U.S.
                      government and agency obligations
                  
                  $
                  ―
                  
                  $
                  6,300Auction
                      rate securities
                  
                  
                  17,500
                  
                  
                  15,050Total
                      short-term investments(up
                      to one year)
                  
                  $
                  17,500
                  
                  $
                  21,350
 The
        Company had no long-term investment at March 31, 2007 and 2006.
 
 *(9.)
        Fair Value of Financial Instruments* .
        The
        carrying amounts of the Company’s financial instruments including cash and cash
        equivalents, short-term investments, accounts receivable, accounts payable
        and
        accrued liabilities, approximate their fair values due to their short-term
        maturities.
 
 50
 
  **LASERCARD
          CORPORATION AND SUBSIDIARIES**
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 *(10.)
        Accounts Receivable.* Accounts
        receivable are net of allowance for doubtful accounts and product return
        reserves of $144,000 and $142,000 as of March 31, 2007 and 2006, respectively.
        We maintain allowances for doubtful accounts and product return reserves
        for
        anticipated losses resulting from the inability of our customers to make
        required payments and in-process product returns. We generally compute our
        allowances based on specifically identified accounts that are past due that
        are
        likely not collectible. Interest receivable is accrued from investments in
        auction rate securities and other interest-bearing securities. Other receivables
        comprise of value added tax refunds and miscellaneous items. The components
        of
        accounts receivable as of March 31 are (in thousands):
 2007
                  
                  2006Trade
                      receivables
                  
                  $
                  3,383
                  
                  $
                  4,897Allowance
                      for doubtful accounts
                  
                  
                  (66
                  )
                  
                  (64
                  )Product
                      return reserves
                  
                  
                  (78
                  )
                  
                  (78
                  )Interest
                      receivable
                  
                  
                  34
                  
                  
                  93Other
                      receivables
                  
                  
                  216
                  
                  
                  72Total
                      accounts receivable, net
                  
                  $
                  3,489
                  
                  $
                  4,920
 *(11.)
        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 replacement cost or estimated realizable value less cost to
        sell. The components of inventories as of March 31 are (in
        thousands):
 2007
                  
                  2006Raw
                      materials
                  
                  $
                  7,763
                  
                  $
                  5,662Work-in-process
                  
                  
                  860
                  
                  
                  1,453Finished
                      goods
                  
                  
                  2,839
                  
                  
                  1,759Total
                      net inventories
                  
                  $
                  11,462
                  
                  $
                  8,874
  The
        Company establishes lower of cost or market reserves, aged inventory reserves
        and obsolescence reserves. Inventory reserves are generally recorded when
        management determines that an item is not readily saleable. Inventory reserves
        are not relieved until the related inventory has been sold or scrapped. For
        the
        fiscal years ended March 31, 2007, 2006 and 2005, the Company recorded inventory
        reserve expense of $483,000, $274,000, and $381,000, respectively.
  In
        November 2004, the FASB issued SFAS No. 151, “Inventory Costs ― an Amendment of
        ARB No. 43, Chapter 4,” ("SFAS No. 151")  which clarifies that
        costs 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 overhead to the
        costs
        of conversion be based on the normal capacity of the production facilities.
        SFAS
        No. 151 is effective for inventory costs incurred in fiscal years beginning
        after June 15, 2005. The Company applied SFAS No. 151 to inventory costs
        as of
        April 1, 2006. The provisions of this statement were applied prospectively.
        The
        adoption of SFAS No. 151 increased the cost of inventory by $219,000 and
        increased net income by the same amount for the first quarter of fiscal year
        2007.
 
 *(12.)
        Equipment held for resale.* Equipment
        held for resale primarily consists of parts, labor costs and other costs
        incurred to build equipment under a contract with Global Investments Group
        which
        was assigned to Prevent Global in March 2007. Direct incremental costs
        associated with the purchase or construction of these items are deferred
        until
        the related deferred revenue is recognized. The components of equipment held
        for
        resale as of March 31 are (in thousands):
  2007
                
                2006Parts
                
                $
                5,297
                
                $
                5,187Labor
                
                
                931
                
                
                591Other
                
                
                112
                
                
                99Total
                    equipment held for resale
                
                $
                6,340
                
                $
                5,877
   51
 
  **LASERCARD
              CORPORATION AND SUBSIDIARIES**
 **NOTES
              TO CONSOLIDATED FINANCIAL STATEMENTS**
 *(13.)
        Property and Equipment, Net* .
        The
        components of property and equipment as of March 31 are (in
        thousands):
 2007
                    
                    2006Building
                        and land
                    
                    $
                    885
                    
                    $
                    803Equipment
                        and furniture
                    
                    
                    24,334
                    
                    
                    22,464Construction
                        in progress, includingpurchased
                        equipment
                    
                    
                    774
                    
                    
                    802Leasehold
                        improvements
                    
                    
                    4,701
                    
                    
                    4,40930,694
                    
                    
                    28,478Less:
                        accumulated depreciation and amortization
                    
                    
                    (17,706
                    )
                    
                    (16,172
                    )Total
                        property and equipment, net
                    
                    $
                    12,988
                    
                    $
                    12,306
 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
        straight-line method and twenty-five years for the building using the
        straight-line method. Leasehold improvements are amortized over the shorter
        of
        the life of the asset or the life of the lease using the straight-line method.
        Depreciation and leasehold amortization expense for fiscal years 2007, 2006,
        and
        2005 was $2.7 million, $2.4 million and $2.5 million, respectively. Maintenance
        and minor repairs and replacements are expensed when incurred. Disposition
        or
        retirement of property and equipment related gains and losses are charged
        to
        other income and expense.
 
 Certain
        costs incurred in connection with acquisition of software for internal use
        are
        capitalized following Statement of Position (SOP) 98-1, “Accounting for the
        Costs of Computer Software Developed or Obtained for Internal Use” and EITF
        Issue No. 97-13, “Accounting for Costs Incurred in Connection with a Consulting
        Contract or an Internal Project That Combines Business Process Reengineering
        and
        Information Technology Transformation.” Capitalized software costs are included
        in the equipment and furniture account and are amortized over four to seven
        years. Software costs that do not meet capitalization criteria are expensed
        immediately. In fiscal year 2007, the Company capitalized $474,000 of software
        costs related to its new Enterprise Resource Planning system and charged
        $211,000 inclusive of labor to selling, general and administrative
        expenses.
 
 *(14.)
        Goodwill and Other Intangible Assets.* Goodwill
        represents the excess of the purchase price over the fair value of identifiable
        net tangible and intangible assets acquired in a business combination.  In
        accordance with SFAS No. 142, “Goodwill and Other Intangible Assets,” the
        Company does not amortize goodwill.  Instead, the Company evaluates
        goodwill for impairment annually in the fourth quarter and whenever events
        or
        changes in circumstances indicate that it is more likely than not that an
        impairment loss has been incurred.  At March 31, 2007, the Company
        determined that estimated future cash flows were insufficient to justify
        the
        carrying value of goodwill and other intangible assets based on management’s
        decision to suspend optical memory card production in Germany. As such, in
        the
        fourth quarter of fiscal year 2007, the Company recorded a non-cash impairment
        charge of approximately $3.8 million in connection with the Company’s goodwill
        and other intangible assets acquired upon the purchase of its subsidiary,
        Challenge Card Design Plastikkarten GmbH of Rastede, Germany, and Cards &
More GmbH of Ratingen, Germany on March 31, 2004.  During fiscal years 2006
        and 2005, the future cash flows were determined to be sufficient based on
        planned production of optical memory cards in Germany.
  52
 
  **LASERCARD
            CORPORATION AND SUBSIDIARIES**
 **NOTES
            TO CONSOLIDATED FINANCIAL STATEMENTS**
 Definite
        life intangible assets capitalized and accumulated amortization as of
        March 31 are (in thousands):
  2007
                
                2006Patent
                    expenditures
                
                $
                3,554
                
                $
                3,399Technology
                    transfer expenditures
                
                
                545
                
                
                545Total
                    patent and other intangible expenditures
                
                
                4,099
                
                
                3,944Patent
                    accumulated amortization
                
                
                (3,149
                )
                
                (3,034
                )Technology
                    transfer accumulated amortization
                
                
                (539
                )
                
                (511
                )(3,688
                )
                
                (3,545
                )Amortizable
                    patents and other intangibles, net
                
                $
                411
                
                $
                399


The
      weighted average remaining amortization periods for the fiscal years ended
      March
      31 are (in years):




2007
                
                2006Patents
                
                
                3.6
                
                
                3.3Technology
                    transfer
                
                
                0.3
                
                
                1.3Total
                
                
                3.1
                
                
                3.0


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.
      Amortization expense on intangible assets for fiscal years 2007, 2006 and 2005
      was $143,000, $139,000 and $172,000, respectively. The estimated amortization
      expense for each of the next five years on patents and other intangible assets
      with definite lives for the years ended March 31, is as follows (in
      thousands):




Fiscal
                    Year
                
                Expense2008
                
                $
                1212009
                
                
                972010
                
                
                782011
                
                
                612012
                
                
                46


Intangible
      assets with indefinite lives as of March 31 are (in thousands):




2007
                
                2006Goodwill
                
                $
                3,321
                
                $
                3,321Less:
                    Goodwill impairment charge
                
                
                (3,321
                )
                
                ――
                
                
                3,321Brand
                
                
                490
                
                
                490Less: Intangible
                    asset impairment charge
                
                
                (490
                )
                
                ――
                
                
                490Total
                    intangible assets with indefinite lives
                
                $
                ―
                
                $
                3,811
  53
  **LASERCARD
          CORPORATION AND SUBSIDIARIES**
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**





(15.) *Assessment of Impairment of Tangible and Intangible Long-Lived
      Assets* .
      In
      accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of
      Long-Lived Assets,” the Company assesses the impairment of long-lived assets
      whenever events or changes in circumstances indicate that their carrying value
      may not be recoverable from the estimated future cash flows expected to result
      from their use and eventual disposition. The Company’s long-lived assets subject
      to this evaluation include property and equipment and amortizable intangible
      assets. If the Company’s estimate of future undiscounted net cash flows is
      insufficient to recover the carrying value of the assets, the Company will
      record an impairment loss in the amount by which the carrying value of the
      assets exceeds the fair value. If assets are determined to be recoverable but
      the useful lives are shorter than originally estimated, the Company depreciates
      or amortizes the net book value of the asset over the newly determined remaining
      useful lives. As of March 31, 2007, the fair value of long-lived assets exceeds
      their book value. Therefore, no impairment loss has been
      recognized.





*(16.)
      Accrued Liabilities.* The
      components of accrued liabilities as of March 31 are (in
      thousands):




2007
                
                2006Accrued
                    payroll and benefits
                
                $
                497
                
                $
                1,218Accrued
                    compensated absences
                
                
                855
                
                
                622Warranty
                    reserves
                
                
                743
                
                
                648Other
                    accrued liabilities
                
                
                894
                
                
                630Total
                    accrued liabilities
                
                $
                2,989
                
                $
                3,118


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 return
      of defective products and the shipment of replacement products. The warranty
      returns were immaterial for fiscal years 2007, 2006 and 2005. The warranty
      reserve 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.





*(17.)
      Software Development Costs* .
      Development costs incurred in the research and development of new software
      products are expensed as incurred until technological feasibility in the form
      of
      a working model has been established. To date, the Company’s software
      development has been completed concurrent with the establishment of
      technological feasibility and, accordingly, all software development costs
      have
      been charged to research and development expenses in the accompanying
      consolidated statements of operations.





*(18.)
      Advance Payments from Customers* .
      The
      Company routinely receives advance payments on orders placed by its customers.
      The advance payments are recorded as a liability in the consolidated balance
      sheets until the related orders are shipped.





*(19.)
      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.





Orders
      for Permanent Resident and Border Crossing Cards for the U.S. government require
      delivery into a secure Company-controlled vault. Shipments are made from the
      vault to a U.S. government site. The bill and hold procedures also provide
      that
      at the end of any one-year contract term when a renewal option is not exercised,
      the U.S. government is to take final delivery of any and all of its remaining
      inventory within six months. At the time the cards are delivered into the vault,
      title to the cards is transferred to the U.S. government and all risks of
      ownership are transferred as well. The prime contractor is invoiced, with
      payment due within thirty days and the purchase orders do not contain any return
      (other than for warranty) or cancellation provisions. Pursuant to the provisions
      of SEC Staff Accounting Bulletin No. 104 ―
      “Revenue Recognition” (“SAB
      104”), revenue is recognized on delivery into the vault as the Company has
      fulfilled its contractual obligations and the earnings process is complete.




54
 
  **LASERCARD
          CORPORATION AND SUBSIDIARIES**
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**


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





The
      Company applies the provisions of Statement of Position 81-1, "Accounting for
      Performance of Construction-Type and Certain Production-Type Contracts" (“SOP
      81-1”) in applicable contracts. Revenues on time and materials contracts are
      recognized as services are rendered at contract labor rates plus material and
      other direct costs incurred. Revenues on fixed price contracts are recognized
      on
      the percentage of completion method based on the ratio of total costs incurred
      to date compared to estimated total costs to complete the contract. Estimates
      of
      costs to complete include material, direct labor, overhead and allowable general
      and administrative expenses. In circumstances where estimates of costs to
      complete a project cannot be reasonably estimated, but it is assured that a
      loss
      will not be incurred, the percentage-of-completion method based on a zero profit
      margin, rather than the completed-contract method, is used until more precise
      estimates can be made. The full amount of an estimated loss is charged to
      operations in the period it is determined that a loss will be realized from
      the
      performance of a contract. For the fiscal years ended March 31, 2007, 2006,
      and
      2005, the Company recognized approximately $12,000, $77,000, and $127,000,
      respectively, of revenues based on a zero profit margin related to a long-term
      contract.





In
      the
      fourth quarter of fiscal year 2006, the Company entered into a subcontract
      covering an anticipated $11 million worth of product and services with a prime
      contractor for a Middle Eastern country to provide them with card
      personalization workstation integration for use in that country’s personalized
      national ID program which includes optical memory cards, hardware, and
      software.  The contract calls for multiple deliverables, installation, and
      certain client acceptance criteria, as defined in the agreement.  In
      applying the guidance within EITF 00-21, the Company determined the deliverables
      are not to be accounted for as separate units, but rather as a bundled
      arrangement as the fair value of the undelivered items cannot be readily
      determined.  Therefore, revenue recognition on this contract and the
      associated contract costs were deferred until the predominant undelivered
      element, the card personalization, is delivered and accepted, commencing with
      the installation and acceptance of the card personalization system.  The
      Company determined that once the card personalization system is accepted,
      contract revenue would be recognized ratably based on actual cards personalized
      and accepted.  The Company began recognizing revenue under this contract
      during the quarter ended March 31, 2007 as the card personalization system
      was
      accepted during that period.  Revenue was recognized based upon the total
      number of cards accepted up to that time.  We recognized revenue totaling
      $4 million in fiscal year 2007 based upon the total number of cards accepted
      through March 31, 2007. As of March 31, 2007 there remained $1 million of
      deferred revenue and $0.9 million of deferred contract costs relating to this
      contract.  The components of the deferred contract costs as of March 31 are
      (in thousands):


2007
                
                2006Optical
                    memory cards and freight
                
                $
                ―
                
                $
                592Hardware
                    and other costs
                
                
                954
                
                
                449Total
                    deferred contract costs
                
                $
                954
                
                $
                1,041





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
      years 2007, 2006 and 2005.





55
 
  **LASERCARD
          CORPORATION AND SUBSIDIARIES**
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**


License
      revenue, which may consist of up-front license fees and long-term royalty
      payments, is recognized as revenue when earned. There were no license revenues
      or costs recorded for fiscal years 2007, 2006 and 2005.





The
      Company entered into license and optical memory card equipment purchase and
      support agreements, effective April 3, 2004, with Global Investments Group
      (GIG), based in Auckland, New Zealand, for optical memory card manufacturing
      in
      Slovenia.  GIG transferred the license and other agreements, with our
      approval, to Prevent Global of Slovenia (Prevent) in March 2007. The agreements
      provide for payments to the Company of about $25.6 million which were fully
      paid as of March 31, 2007, for a 20-year license, the required manufacturing
      equipment for a targeted initial manufacturing capacity of 10 million optical
      cards annually and installation support, and a four-year training and support
      package. For the $25.6 million we received, $23.6 million was recorded as
      advance payments from customer and $2 million for the licensing fee was recorded
      as deferred revenue. Both were classified as long term liabilities in the
      consolidated balance sheets. As of March 31, 2007, the Company had $6.3 million
      of acquired equipment, plus direct and incremental expenses, classified as
      equipment held for resale on our consolidated balance sheets. Beginning in
      the
      fifth year of the contract, Prevent is to pay $3 million for a three-year
      support package, and has options for thirteen additional years of support for
      payments of $1 million annually.  In addition to the $41.6 million
      discussed above, Prevent is to pay us royalties of $0.60 per card for each
      card
      produced under the license.  The territories covered by the license include
      most of the European Union and eastern European regions.  Prevent has
      exclusive marketing rights in certain territories, with performance goals to
      maintain these rights. The Company retains rights to utilize up to 20% of the
      new facility capacity as backup and a capacity buffer to augment our own card
      manufacturing facilities in Mountain View, California and possibly at the
      Company’s German subsidiary. The granting of this license to Prevent establishes
      a potential second source supplier of optical memory cards for existing and
      prospective customers who may request multiple sources for cards.  The
      agreement contains various elements including a card manufacturing license,
      sale
      and installation of equipment, training, and ongoing support, and contingent
      payments for support, materials, and royalty payments for cards manufactured.
      In
      accordance with EITF 00-21 “Revenue Arrangements with Multiple Deliverables,”
the card manufacturing license, sale and installation of equipment, training
      and
      support package, have been accounted for as one unit of accounting, since we
      were unable to determine evidence of the fair value for the undelivered
      items other than ongoing support. The Company is able to determine evidence
      of
      fair value on the predominant undelivered item, which is the ongoing annual
      support of the manufacturing equipment. Accordingly, revenues for the
      arrangement have been deferred and will be recognized when the equipment is
      installed and accepted, with the exception of the value of the ongoing annual
      support of the manufacturing equipment which will be recognized quarterly as
      earned, beginning when the equipment is accepted and training has been
      completed, which date is dependent on Prevent establishing a suitable facility
      in Slovenia. Pursuant to FTB 90-1, “Accounting for Separately Priced Extended
      Warranty and Product Maintenance Contracts” the support revenue will be
      recognized ratably over the remaining term of the agreement.





*(20.)
      Research and Development Expenses* .
      Costs
      related to research, design and development of products are charged to research
      and development expense as incurred. Research and development costs include
      salaries, contractor fees, building and utility costs, and
      depreciation.





*(21.)
      Shipping and Handling Costs* .  Shipping
      and handling costs are recorded in cost of sales.





*(22.)
      Advertising Costs.* Advertising costs consist of development and placement costs of the Company’s
      advertising campaigns and are charged to expense when incurred. Advertising
      expense was approximately $188,000 for fiscal year 2007, $183,000 for fiscal
      year 2006, and $189,000 for fiscal year 2005.





*(23.)
      Stock-based Compensation* .
      Effective April 1, 2006, the Company adopted Statement of Financial Accounting
      Standard (“SFAS”) No. 123(R), *Share-Based
      Payment* ,
      which
      requires share-based payment transactions to be accounted for using a fair
      value
      based method and the recognition of the related expense in the results of
      operations. Prior to the adoption of SFAS No. 123(R), as permitted by SFAS
      No. 123, *Accounting
      for Stock-Based Compensation* ,
      the
      Company accounted for share-based payments to employees in accordance with
      Accounting Principles Board Opinion No. (“APB”) 25, *Accounting
      for Stock Issued to Employees* ,
      utilizing the intrinsic value method. Therefore, the Company did not recognize
      compensation cost for employee and director stock options because there was
      no
      intrinsic value. SFAS No. 123(R) allows companies to choose one of two
      transition methods: the modified prospective transition method or the modified
      retrospective transition method.





56
 
  **LASERCARD
          CORPORATION AND SUBSIDIARIES**
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**


The
      Company adopted SFAS No. 123(R) using the modified prospective method of
      transition which requires compensation expense related to share based payments
      to be recognized beginning on the adoption date over the requisite service
      period, generally the vesting period, for awards granted after April 1,
      2006 and over the remaining service period for the unvested portion of awards
      granted prior to April 1, 2006. The consolidated financial statements for
      prior fiscal years have not been restated to reflect the impact of adopting
      SFAS
      No. 123(R).





Prior
      to
      April 1, 2006, the Company accounted for its stock-based compensation plans
      using the intrinsic value method prescribed in Accounting Principles Board
      Opinion No. 25, “Accounting for Stock Issued to Employees.” Accordingly,
      compensation cost for stock options, if any, was measured at the excess of
      the quoted market price of the Company’s stock at the date of grant over the
      amount an employee must pay to acquire the stock. SFAS No. 123 (R), “Accounting
      for Stock-Based Compensation,” established accounting and disclosure
      requirements using a fair-value based method of accounting for stock-based
      employee compensation plans. The following table illustrates the effect on
      net
      income (loss) and net income (loss) per share as if the Company had applied
      the
      fair value recognition provisions of SFAS No. 123 (R) for fiscal years
      ended March 31, (in thousands except per share amounts):





2006
              
              2005Net
                  income (loss), as reported
              
              $
              794
              
              $
              (8,901
              )Add:
                  stock-based employee compensation expenseincluded
                  in reported net income (loss), net of tax
              
              
              105
              
              
              111Deduct:
                  stock-based compensation expensedetermined
                  using fair value based method for all awards, net of tax
              
              
              (1,317
              )
              
              (1,842
              )Net
                  loss, pro forma
              
              $
              (418
              )
              $
              (10,632
              )Net
                  income (loss) per common share:Basic
                  and diluted, as reported
              
              $
              0.07
              
              $
              (0.78
              )Basic
                  and diluted, pro forma
              
              $
              (0.04
              )
              $
              (0.94
              )Shares
                  used in computuing basic and diluted pro formanet
                  income (loss) per share:Basic
                  and Diluted
              
              
              11,415
              
              
              11,362


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 for
      fiscal years ended March 31:




2006
                
                2005Expected
                    volatility
                
                
                54%
                
                
                55%Risk-free
                    interest rate
                
                
                3.81%
                    to 4.68%
                
                
                3.65%
                    to 4.08%Average
                    expected life of option
                
                
                5
                    to 6 years
                
                
                5
                    to 8 yearsExpected
                    annual dividend
                
                
                0%
                
                
                0%Weighted
                    average fair value of option grants
                
                
                $3.91
                
                
                $5.38


*2004
      Equity Incentive Compensation Plan (the “2004 Plan”):* The
      2004
      Plan provides for the grant of restricted share awards, options, stock units
      and
      stock appreciation rights, any of which may or may not require the satisfaction
      of performance objectives, with respect to shares of our common stock to
      directors, officers, employees and consultants of the Company and its
      subsidiaries. The exercise price of stock options may not be less than 100%
      of
      the fair market value of the common stock as of the date of grant (110% of
      the
      fair market value if the grant is of an incentive stock option to an employee
      who owns more than 10% of the total combined voting power of all classes of
      the
      Company’s capital stock). Options granted may not be exercised more than 10
      years after the date of grant (five years after the date of grant if the grant
      is an incentive stock option to an employee who owns more than 10% of the total
      combined voting power of all classes of the Company’s capital stock). The Board
      of Directors specifies the term of options (prior to fiscal year 2006 typically
      10 years and thereafter typically 7 years) and the vesting schedule for exercise
      of options, generally 25% after one year and 6.25% quarterly for the next 3
      years.




57


**LASERCARD
        CORPORATION AND SUBSIDIARIES**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**


*Stock
      Options* :
      Under
      the provisions of SFAS No. 123(R), stock-based compensation cost is
      estimated at the grant date based on the fair value of the award and
      compensation cost is recognized as an expense over the requisite service period
      of the award, generally the vesting period. The fair value of non-vested stock
      awards was determined by reference to the fair market value of the Company’s
      common stock on the date of grant. Consistent with the valuation method the
      Company used for disclosure-only purposes under the provisions of SFAS No.
      123(R), the Company uses the Black-Scholes valuation model to estimate the
      fair
      value of option awards. Determining the appropriate fair value model and related
      assumptions requires judgment, including estimating stock price volatility,
      forfeiture rates and expected terms. The following assumptions were utilized
      to
      estimate the fair value of the Company’s stock option awards for the fiscal year
      ended March 31, 2007:




Expected stock price volatility
            55%Risk free interest rates
            4.40%
                to 4.96%Expected life of options
            4.4
                to 5 yearsExpected annual dividends
            0%




The
      expected volatility rate was based on the historical volatility of the Company’s
      common stock. The expected life represents the average time options that vest
      are expected to be outstanding based on the vesting provisions and the Company’s
      historical exercise, cancellation and expiration patterns. The Company estimated
      forfeitures based on historical rates when recognizing compensation expense.
      Forfeitures were estimated based on voluntary termination behavior, as well
      as
      an analysis of actual option forfeitures.





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





With
      the
      adoption of SFAS No. 123(R), the Company recorded stock-based employee
      compensation expense related to stock options of approximately $1.7 million
      for
      the fiscal year ended March 31, 2007, net of estimated forfeitures. The Company
      recognized the full amount of the stock-based employee compensation expense
      of
      its equity incentive plans in the consolidated statements of operations for
      the
      fiscal year ended March 31, 2007 and did not capitalize any such costs in the
      consolidated balance sheets.





Stock-based
      compensation expense related to stock options was recorded in the Company’s
      consolidated statement of operations for the fiscal year ended March 31, 2007
      as
      follows (in thousands):




Cost
                  of sales
              
              $
              324Selling,
                  general and administrative expense
              
              
              1,009Research
                  and development expense
              
              
              354Stock-based
                  compensation expense before income tax
              
              
              1,687Less:
                  income tax benefit
              
              
              -Net
                  stock-based compensation expense after income tax
              
              $
              1,687
  We
          recorded no income tax benefit on stock based compensation expense for
          the
          fiscal year ended March 31, 2007, as we have cumulative operating loss
          carryovers, for which a full valuation allowance has been
          established.


The
      FASB
      Staff Position ("FSP") No. 123R-3, "Transition Election Related to Accounting
      for the Tax Effects of Share-Based Payment Awards," requires an entity to follow
      either the transition guidance for the additional-paid-in-capital pool as
      prescribed in SFAS No. 123(R) or the alternative transition method described
      in
      FSP No. 123R-3. An entity that adopts SFAS No. 123(R) using the modified
      prospective application may make a one-time election to adopt the transition
      method described in the FSP No. 123R-3, and may take up to one year from the
      latter of its initial adoption of SFAS No. 123(R) or the effective date of
      the
      FSP No. 123R-3 to evaluate the available transition alternatives and make its
      one-time election. The Company is currently evaluating the available transition
      alternatives for calculating the tax effects of stock-based compensation under
      SFAS No. 123(R).





58
 
  **LASERCARD
          CORPORATION AND SUBSIDIARIES**
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**





*Employee
      Stock Purchase Plan* .
      The
      Company has an Employee Stock Purchase Plan (ESPP), under which eligible
      employees may designate from 2% to 6% of their compensation to be withheld
      for
      the purchase of shares of common stock at 67% of the average price over the
      three-day period prior to the purchase date. The differential between fair
      market value and the average price of the shares sold under the ESPP is charged
      to operations as a compensation expense and is taxed to the employee as income.
      The Company had stock based compensation expense of $108,000, $123,000, $111,000
      relating to the ESPP which was included in the Company’s consolidated statements
      of operations for the fiscal years ended March 31, 2007, 2006, and 2005,
      respectively.





*(24.)
      Comprehensive Income (Loss)* .
      Under
      SFAS No. 130, “Reporting Comprehensive Income,” comprehensive income (loss) is
      defined as the changes in equity of an enterprise except for those resulting
      from stockholders’ transactions. Comprehensive income (loss) for the fiscal
      years ended March 31 are (in thousands):


2007
                
                2006
                
                2005Net
                    income (loss)
                
                $
                (12,371
                )
                $
                794
                
                $
                (8,901
                )Net
                    change in cumulative foreigncurrency
                    translation adjustments
                
                
                138
                
                
                (213
                )
                
                209Comprehensive
                    income (loss)
                
                $
                (12,233
                )
                $
                581
                
                $
                (8,692
                )


*(25.)
      Recent Accounting Pronouncements:* In June
      2006, the Financial Accounting Standards Board (“FASB”) issued Interpretation
      No. 48, “Accounting for Uncertainty in Income Taxes—an interpretation of
      FASB Statement No. 109” (“FIN 48”). This Interpretation clarifies the
      accounting for uncertainty in income taxes recognized in the Company’s financial
      statements in accordance with FASB Statement No. 109, Accounting for Income
      Taxes. FIN 48 prescribes a recognition threshold and measurement attribute
      for
      the financial statement recognition and measurement of a tax position taken
      or
      expected to be taken in a tax return. This Interpretation also provides guidance
      on derecognition, classification, interest and penalties, accounting in interim
      periods, disclosure, and transition. The evaluation of a tax position in
      accordance with FIN 48 is a two-step process. The first step is recognition:
      The
      Company determines whether it is “more-likely-than-not” that a tax position will
      be sustained upon examination, including resolution of any related appeals
      or
      litigation processes, based on the technical merits of the position. In
      evaluating whether a tax position has met the “more-likely-than-not” recognition
      threshold, the Company presumes that the position will be examined by the
      appropriate taxing authority that would have full knowledge of all relevant
      information. The second step is measurement: A tax position that meets the
      “more-likely-than-not” recognition threshold is measured to determine the amount
      of benefit to recognize in the financial statements. The tax position is
      measured at the largest amount of benefit that is greater than 50 percent likely
      to be realized upon ultimate settlement. FIN 48 is effective for fiscal years
      beginning after December 15, 2006. The Company has not yet determined what
      effect, if any, adoption of FIN 48 will have on its results of operations or
      financial position.




In
      September 2006, the FASB issued Statement No. 157, “Fair Value
      Measurements” (“SFAS No. 157”). SFAS No. 157 defines fair value, establishes a
      framework for measuring fair value in generally accepted accounting principles,
      and expands disclosures about fair value measurements. SFAS No. 157 is intended
      to be applied in conjunction with other accounting pronouncements that require
      or permit fair value measurements. Although SFAS No. 157 does not require any
      new fair value measurements, its application may change current practice for
      some entities. The definition of fair value contained in SFAS No. 157 retains
      the exchange price notion inherent in earlier definitions of fair value. SFAS
      No. 157 clarifies that the exchange price is the price in an orderly transaction
      between market participants to sell an asset or transfer a liability in the
      principal (or most advantageous) market for the asset or liability. Accordingly,
      the definition focuses on the price that would be received to sell the asset
      or
      paid to transfer the liability at the measurement date (an exit price), not
      the
      price that would be paid to acquire the asset or received to assume the
      liability at the measurement date (an entry price). SFAS No. 157 emphasizes
      that
      fair value is a market-based measurement, not an entity-specific measurement.
      Therefore, SFAS No. 157 prescribes that a fair value measurement be
      determined based on the assumptions that market participants would use in
      pricing the asset or liability. The Company has not yet determined what the
      impact this statement will have on its consolidated financial
      statements.




59
 
  **LASERCARD
          CORPORATION AND SUBSIDIARIES**
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**


In
      February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
      Financial Assets and Financial Liabilities” (“SFAS No. 159”). SFAS No. 159
      provides entities with an option to report selected financial assets and
      liabilities at fair value, with the objective to reduce both the complexity
      in
      accounting for financial instruments and the volatility in earnings caused
      by
      measuring related assets and liabilities differently. SFAS No. 159 is effective
      for fiscal years beginning after November 15, 2007. The Company has not yet
      determined what the impact this statement will have on its consolidated
      financial statements.




*(26.)
      Indemnification* .
      The
      Company’s major sales agreements provide remedies to customers, such as defense,
      settlement, or payment of judgment for intellectual property claims related
      to
      the use of the Company’s products. The Company also has indemnified various
      vendors for certain potential claims. The Company has also entered into
      indemnification agreements with its directors and officers and the Company’s
      bylaws contain similar indemnification obligations. To date, there have been
      no
      claims made under such indemnification provisions and as a result the associated
      estimated fair value of the liability is not material.





**3.**
            **Net
                Income (Loss) per Share**





Basic
      net
      income (loss) per share and diluted net loss per share is computed by dividing
      net income (loss) by the weighted average number of shares of common stock
      outstanding during the fiscal year. Diluted net income per share is computed
      by
      dividing net income by the weighted average number of shares of common stock
      and
      common stock equivalents outstanding during the fiscal year. 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 are (in
      thousands, except per share data):


2007
                
                2006
                
                2005Net
                    income (loss)
                
                $
                (12,371
                )
                $
                794
                
                $
                (8,901
                )Basic
                    net income (loss) per share:Weighted
                    average common shares outstanding
                
                
                11,814
                
                
                11,415
                
                
                11,362Basic
                    net income (loss) per share
                
                $
                (1.05
                )
                $
                0.07
                
                $
                (0.78
                )Diluted
                    net income (loss) per share:Weighted
                    average common shares outstanding
                
                
                11,814
                
                
                11,415
                
                
                11,362Weighted
                    average common shares from stock option grants
                
                
                —
                
                
                172
                
                
                —Weighted
                    average common shares and common stockequivalents
                    outstanding
                
                
                11,814
                
                
                11,587
                
                
                11,362Diluted
                    net income (loss) per share
                
                $
                (1.05
                )
                $
                0.07
                
                $
                (0.78
                )


Stock
      options and warrants 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 1,554,000 shares were excluded from the calculation of
      diluted net income per share for the fiscal year ended March 31, 2006. As
      the effect of common stock equivalents would be antidilutive since the Company
      incurred a loss in fiscal years ended March 31, 2007 and 2005, all stock options
      and warrants were excluded from the calculation of diluted net loss per share
      for those fiscal years.




60




**LASERCARD
        CORPORATION AND SUBSIDIARIES**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**




**4.**
            **Segments**





*Segment
      Reporting.*





The
      Company operates in three reportable segments: (1) optical memory cards, (2)
      optical memory card drives, including read/write drives, maintenance, systems
      and enabling services (“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; 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 $3.7 million in fiscal year 2007 and $3.5 million
      in
      fiscal year 2006.  These long-lived assets were attributable to the
      operations in Germany, including long-lived assets owned by the U.S. operations
      located in Germany.





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





61
 
  **LASERCARD
          CORPORATION AND SUBSIDIARIES**
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**


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


F
                    i
                    s c a l   Y e a r   E n d e d   M a r c
                    h  31, 2007Optical
                
                Optical
                
                SpecialtyMemory
                
                Card
                
                Cards
                    &
                
                SegmentCards
                
                Drives
                
                Printers
                
                Total
                
                Other
                
                TotalRevenue
                
                $
                18,985
                
                $
                1,478
                
                $
                11,807
                
                $
                32,270
                
                $
                —
                
                $
                32,270Cost
                    of sales
                
                
                14,190
                
                
                1,941
                
                
                9,275
                
                
                25,406
                
                
                —
                
                
                25,406Gross
                    profit (loss)
                
                
                4,795
                
                
                (463
                )
                
                2,532
                
                
                6,864
                
                
                —
                
                
                6,864Depreciation
                    andamortization
                    expense
                
                
                1,677
                
                
                177
                
                
                341
                
                
                2,195
                
                
                554
                
                
                2,749F
                    i
                    s c a l  Y e a r   E n d e d   M a r c
                    h   31, 2006Optical
                
                
                Optical
                
                
                SpecialtyMemory
                
                
                Card
                
                
                Cards
                    &
                
                
                SegmentCards
                
                
                Drives
                
                
                Printers
                
                
                Total
                
                
                Other
                
                
                TotalRevenue
                
                $
                28,200
                
                $
                985
                
                $
                10,672
                
                $
                39,857
                
                $
                —
                
                $
                39,857Cost
                    of sales
                
                
                15,093
                
                
                1,739
                
                
                7,972
                
                
                24,804
                
                
                —
                
                
                24,804Gross
                    profit (loss)
                
                
                13,107
                
                
                (754
                )
                
                2,700
                
                
                15,053
                
                
                —
                
                
                15,053Depreciation
                    andamortization
                    expense
                
                
                1,517
                
                
                137
                
                
                292
                
                
                1,946
                
                
                569
                
                
                2,515F
                    i
                    s c a l   Y e a r   E n d e d   M a r c
                    h   31, 2005Optical
                
                
                Optical
                
                
                SpecialtyMemory
                
                
                Card
                
                
                Cards
                    &
                
                
                SegmentCards
                
                
                Drives
                
                
                Printers
                
                
                Total
                
                
                Other
                
                
                TotalRevenue
                
                $
                17,364
                
                $
                933
                
                $
                10,235
                
                $
                28,532
                
                $
                12
                
                $
                28,544Cost
                    of sales
                
                
                12,803
                
                
                2,087
                
                
                7,723
                
                
                22,613
                
                
                24
                
                
                22,637Gross
                    profit (loss)
                
                
                4,561
                
                
                (1,154
                )
                
                2,512
                
                
                5,919
                
                
                (12
                )
                
                5,907Depreciation
                    andamortization
                    expense
                
                
                1,505
                
                
                159
                
                
                266
                
                
                1,930
                
                
                710
                
                
                2,640





62




**LASERCARD
      CORPORATION AND SUBSIDIARIES**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**





*Sales
      by Geographic Region.* Sales
      by
      geographic region are generally determined based upon the ship-to address on
      the
      invoice, or the Company’s knowledge of program location. Revenues by geographic
      region for the fiscal years ended March 31 are as follows (in thousands):


2007
                
                2006
                
                2005United
                    States
                
                $
                8,377
                
                $
                11,011
                
                $
                7,900Germany
                
                
                6,395
                
                
                5,123
                
                
                4,820Europe,
                    other
                
                
                6,054
                
                
                4,568
                
                
                4,411Middle
                    East and Africa
                
                
                4,717
                
                
                3,499
                
                
                1,397Asia
                
                
                2,819
                
                
                405
                
                
                280Italy
                
                
                2,514
                
                
                12,547
                
                
                7,617Canada
                
                
                1,281
                
                
                2,068
                
                
                1,902Rest
                    of world
                
                
                113
                
                
                636
                
                
                217$
                32,270
                
                $
                39,857
                
                $
                28,544


In
      fiscal
      years 2007, 2006 and 2005, sales to customers outside the United States in
      the
      amount of $12.1 million, $18.5 million and $10.9 million, respectively, were
      denominated in U.S. dollars and $11.8 million, $10.4 million and $9.7 million,
      respectively, were denominated in euros.





**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
      Walter F. Walker, member of the Company’s Board of Directors. The contract has
      been extended through fiscal year 2008 on the same terms and conditions with
      a
      monthly retainer of $10,000 and reimbursement of related expenses.





The
      Company paid Wexler $116,000
      during fiscal year 2007 ,
      $142,082 during fiscal year 2006, and $206,000 during fiscal year 2005. As
      of
      March 31, 2007, $10,000 was due to Wexler and is included as part of current
      liabilities in the accompanying consolidated balance sheet.





**6.**
            **Common
                Stock**




*The*  *2004
      Equity Incentive Compensation Plan (the “2004 Plan”):* In
      October 2004, the Company’s stockholders approved the 2004 Equity Incentive
      Compensation Plan, which replaced the existing 1991 Stock Option Plan. The
      2004
      Plan provides for the grant of restricted share awards, options, stock units
      and
      stock appreciation rights, any of which may or may not require the satisfaction
      of performance objectives, with respect to shares of our common stock to
      directors, officers, employees and consultants of the Company and its
      subsidiaries. The 2004 Plan is administered by the Compensation Committee of
      the
      Board of Directors, which has complete discretion to select the participants
      and
      to establish the terms and conditions of each award, subject to the provisions
      of the 2004 Plan. Options granted under the 2004 Plan may be “incentive stock
      options” as defined in Section 422 of the Internal Revenue Code of 1986, as
      amended, or nonqualified options. A total of 2,838,426 shares of common stock
      were reserved for issuance under the 1991 and 2004 Plans as of March 31, 2007.
      If any award granted under the 2004 Plan is forfeited or expires for any reason,
      then the shares subject to that award will once again be available for
      additional awards. If any outstanding option issued under the 1991 Plan expires
      or terminates for any reason without having been excerised in full, then
      the unpurchased shares for 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 for which nonstatutory grants may first become exercisable in
      any
      calendar year. Repricing a stock option or stock appreciation right is not
      permitted without stockholder approval. Subject to the limitations contained
      in
      the 2004 Plan, the Committee sets the terms of each option grant. Any options
      that were not exercisable on the date of termination of employment immediately
      terminate at that time. Options granted under the 2004 Plan may not be exercised
      more than 10 years after the date of grant (five years after the date of grant
      if the grant is an incentive stock option to an employee who owns more than
      10%
      of the total combined voting power of all classes of the Company’s capital
      stock). The Board of Directors specifies the term of options and the vesting
      schedule for exercise of options. No options were granted to consultants during
      fiscal years 2007, 2006, and 2005.





63
 
  **LASERCARD
          CORPORATION AND SUBSIDIARIES**
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**


In
      addition, as of March 31, 2007, 113,000 shares of stock have been reserved
      outside of the Company’s Stock Option Plan, for issuance upon exercise of stock
      options granted 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 for the fiscal years ended March
      31,
      (in thousands, except for weighted average exercise price):


2007
                
                2006
                
                2005Number
                    of
                  Shares
                
                Weighted
                  Average
                  Exercise
                    Price
                
                Number
                    of
                  Shares
                
                Weighted
                  Average
                  Exercise
                    Price
                
                Number
                    of
                  Shares
                
                Weighted
                  Average
                  Exercise
                    PriceOutstanding
                    at beginning of year
                
                
                2,064
                
                $
                12.27
                
                
                2,067
                
                $
                13.37
                
                
                2,029
                
                $
                13.51Granted
                
                
                480
                
                
                15.11
                
                
                470
                
                
                7.18
                
                
                68
                
                
                9.52Exercised
                
                
                (109
                )
                
                10.12
                
                
                (373
                )
                
                12.02
                
                
                (10
                )
                
                10.68Canceled
                
                
                (222
                )
                
                12.56
                
                
                (100
                )
                
                12.07
                
                
                (20
                )
                
                15.47Outstanding
                    at end of year
                
                
                2,213
                
                $
                12.96
                
                
                2,064
                
                $
                12.27
                
                
                2,067
                
                $
                13.37Options
                    vested and exercisable at end of year
                
                
                1,352
                
                $
                13.54
                
                
                1,448
                
                $
                13.54
                
                
                1,661
                
                $
                13.14


The
      weighted-average grant-date fair value per share of options granted during
      fiscal years 2007, 2006, and 2005 were $7.69, $3.91 and $5.38,
      respectively.





The
      weighted average remaining contractual term for outstanding options at March
      31,
      2007 and 2006 is 5.04 years and 5.34 years, respectively, and 3.87 years for
      options vested and exercisable at March 31, 2007. The aggregate intrinsic value
      of outstanding options and options vested and exercisable is approximately
      $2.8
      million and $1 million, respectively, at March 31, 2007.





Aggregate
      intrinsic value is the sum of the amounts by which the closing market price
      of
      our stock at March 30, 2007 (last trading day), $11.79 per share, exceeded
      the
      exercise price of the options, for those options for which the quoted market
      price was in excess of the exercise price (“in-the-money-options”). The
      aggregate intrinsic value of options exercised on the dates the options were
      exercised was approximately $0.8 million and $1.9 million for the fiscal year
      ended March 31, 2007 and 2006, respectively.





As
      of
      March 31, 2007 there was approximately $4 million of total unrecognized
      compensation cost related to non-vested share-based compensation arrangements
      granted under our stock plans which is expected to be recognized over the
      remaining vesting period through December 31, 2010, adjusted for any future
      changes in estimated forfeitures.





64
 
  **LASERCARD
          CORPORATION AND SUBSIDIARIES**
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**


The
      following table summarizes information about stock options outstanding at March
      31, 2007:




Options
                    Outstanding
                
                ExercisableRange
                    of Exercise Prices
                
                Number
                    of
                  Outstanding
                    Vested/Unvested at March 31, 2007
                
                Weighted
                  Average
                  Exercise
                    Price
                
                Weighted
                  Average
                  Remaining
                  Contractual
                    Life
                
                Number
                    of Shares Exercisable at
                  March
                    31, 2007
                
                Weighted
                  Average
                    Exercise
                  Price$6.05
                    - $7.05
                
                
                348,446
                
                $
                6.06
                
                
                8.07
                
                
                66,030
                
                $
                6.13$7.50
                    - $10.91
                
                
                197,824
                
                
                9.82
                
                
                3.07
                
                
                190,324
                
                
                9.88$10.99
                    - $12.69
                
                
                441,534
                
                
                11.72
                
                
                4.00
                
                
                281,909
                
                
                11.55$13.12
                    - $15.34
                
                
                515,717
                
                
                14.03
                
                
                4.45
                
                
                435,719
                
                
                14.15$16.30
                    - $22.75
                
                
                709,375
                
                
                17.23
                
                
                5.19
                
                
                378,250
                
                
                17.452,212,896
                
                $
                12.96
                
                
                5.04
                
                
                1,352,232
                
                $
                13.54


*Employee
      Stock Purchase Plan* .
      The
      Company has an Employee Stock Purchase Plan (Stock Purchase Plan), under which
      31,099 shares are reserved as of March 31, 2007 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 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 30,418
      shares for fiscal year 2007, 25,961 shares for fiscal year 2006, and 26,730
      shares for fiscal year 2005. The weighted average purchase price per share
      was
      $7.61 for fiscal year 2007, $6.53 for fiscal year 2006, and $5.89 for fiscal
      year 2005. The weighted average market price per share for shares purchased
      was
      $11.44 for fiscal year 2007, $11.26 for fiscal year 2006, and $9.13 for fiscal
      year 2005.




*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. The Company contributed $79,000, $73,000, and $59,000, for fiscal
      years 2007, 2006, and 2005, respectively.





*Issuance
      of Warrants*





At
      March
      31, 2007 the Company has warrants outstanding to purchase 174,057
      shares of its common stock.  The warrants were issued in connection
      with the December 2003 sale of common stock in a private
      placement.  The warrants have an exercise price of $17.26 per share and a
      life of five years.




65




**LASERCARD
        CORPORATION AND SUBSIDIARIES**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**




**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 each of the
      fiscal years 2007, 2006, and 2005. As of March 31, 2007, future minimum rental
      payments relating to these leases are (in thousands):




Fiscal
                    Year2008
                
                $
                1,0642009
                
                
                1,0462010
                
                
                1,5992011
                
                
                1,6172012
                
                
                1,573Thereafter
                
                
                2,746Total
                
                $
                9,645


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, and manufacturing equipment from a variety
      of vendors. As
      of
      March 31, 2007, the Company has non-cancelable purchase orders of $2 million
      for
      raw materials which will be delivered over 12 months.





*Other
      Contingencies* .
      In the
      normal course of business, the Company is subject to various claims. In the
      opinion of management, the ultimate disposition of such claims will not have
      a
      material adverse impact on the financial position and results of operation
      or
      cash flows of the Company.





**8.**
            **Income
                Taxes**





The
      provision for income taxes for the fiscal years ended March 31 are (in
      thousands):


2007
              
              2006
              
              2005Current:Federal
              
              $
              3
              
              $
              139
              
              $
              109State
              
              
              (94
              )
              
              261
              
              
              3Foreign
              
              
              (29
              )
              
              72
              
              
              27(120
              )
              
              472
              
              
              139Deferred:Federal
              
              
              -
              
              
              -
              
              
              -State
              
              
              -
              
              
              -
              
              
              -Foreign
              
              
              (231
              )
              
              (29
              )
              
              -(231
              )
              
              (29
              )
              
              -Income
                  tax expense (benefit)
              
              $
              (351
              )
              $
              443
              
              $
              139




66
 
  **LASERCARD
          CORPORATION AND SUBSIDIARIES**
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**


The
      Company’s effective tax rate differs from the statutory rate for the fiscal
      years ended March 31 as follows:





2007
                
                2006
                
                2005Tax
                    reconciliation:Federal
                    statutory rate
                
                
                34.0
                %
                
                34.0
                %
                
                34.0
                %State
                    tax, net of federal benefit
                
                
                0.7
                %
                
                (3.0
                %)
                
                6.0
                %Foreign
                    provision differential
                
                
                (8.5
                %)
                
                (2.0
                %)
                
                (2.0
                %)Alternative
                    minimum tax
                
                
                ―
                
                
                3.0
                %
                
                (2.0
                %)Change
                    in valuation allowance
                
                
                (20.5
                %)
                
                7.0
                %
                
                (38.0
                %)FAS
                    123R ISOs
                
                
                (2.6
                %)
                
                ―
                
                
                ―Other
                
                
                (0.4
                %)
                
                (3.0
                %)
                
                ―2.7
                %
                
                36.0
                %
                
                (2.0
                %)





The
      domestic and foreign component of pretax income (loss) for the fiscal years
      ended March 31 as follows, (in thousands):


2007
                
                2006
                
                2005Income
                    (loss) before taxes:Domestic
                
                $
                (8,780
                )
                $
                1,041
                
                $
                (8,314
                )Foreign
                
                
                (3,942
                )
                
                196
                
                
                (448
                )Total
                
                $
                (12,722
                )
                $
                1,237
                
                $
                (8,762
                )





The
      major
      components of the net deferred income tax assets/(liabilities) as of March
      31,
      (in thousands):





2007
                
                2006Deferred
                    income tax assets:Depreciation
                    and amortization
                
                $
                1,169
                
                $
                803Reserves
                    and accruals
                
                
                1,516
                
                
                877Advanced
                    payments and deferred revenue
                
                
                10,178
                
                
                8,230Research
                    credit
                
                
                909
                
                
                803Other
                
                
                1,105
                
                
                1,247Net
                    operating loss carryforward
                
                
                1,500
                
                
                7,513Gross
                    deferred income tax assets
                
                
                16,377
                
                
                19,473Valuation
                    allowance
                
                
                (16,216
                )
                
                (19,328
                )Net
                    deferred income tax assets
                
                
                161
                
                
                145Deferred
                    income tax liabilities:German
                    operations
                
                
                (388
                )
                
                (568
                )Capitalized
                    patent costs
                
                
                (161
                )
                
                (145
                )Total
                    deferred income tax liabilities
                
                
                (549
                )
                
                (713
                )Net
                    deferred income tax liabilities
                
                $
                (388
                )
                $
                (568
                )


The
      net
      deferred income tax liabilities of $388,000 at March 31, 2007 and $568,000
      at
      March 31, 2006 are a result of the German subsidiary operations. 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 income tax assets and liabilities, which are
      included within the consolidated balance sheets. The Company must then assess
      the likelihood that the deferred income 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.





67
 
  **LASERCARD
          CORPORATION AND SUBSIDIARIES**
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**


In
      fiscal
      year 2007 the valuation allowance decreased by $3.1 million. This decrease
      included a $6.3 million decrease related to U.S. income tax benefits of stock
      option deductions, the benefit of which will be credited to additional paid-in
      capital, when and if realized, that were derecognized as a result of the
      adoption of FAS 123(R). The remaining change in valuation allowance relates
      to
      other increases in the Company’s gross deferred income tax assets. In addition,
      the Company increased its valuation allowance in the amount of $0.9 million
      during fiscal year 2006 and $3.7 million during fiscal 2005.





The
      Company's federal net operating loss carryforwards (NOLs) as of March 31, 2007
      of $23.1 million will expire at various dates from fiscal year 2008 through
      fiscal year 2027, if not utilized. Of this amount, $19.2 million represent
      NOL’s
      relating to stock option deductions, the benefit of which will be credited
      to
      stockholders’ equity when realized. Federal tax credits in the amount of
      $540,000 for alternative minimum taxes have no expiration. Federal tax credits
      in the amount of $284,000 will expire on various dates from fiscal year 2013
      through fiscal year 2026, if not utilized. California tax credits in the amount
      of $129,000 have no expiration date.





The
      Company's methodology for determining the realizability of its deferred income
      tax assets involves estimates of future taxable income based upon booked orders,
      the estimated impact of future stock option deductions, and the expiration
      dates
      and amounts of net operating loss carryforwards. 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
      has resulted in the Company basing its estimates of future income for these
      purposes on booked orders only. As circumstances change, the Company may in
      the
      future be able to estimate future revenue based upon its forecast revenues
      rather than only using booked orders, although the Company cannot say if or
      when
      this will occur.





In
      concluding that a valuation allowance was required at the end of fiscal year
      2005 and 2006 and is still required at the end of fiscal year 2007, the Company
      considered both the positive and negative evidence regarding its ability to
      generate sufficient future taxable income to realize its deferred income tax
      assets. Positive evidence included (1) the level of sales and business
      experienced under the contracts for the U.S. Department of Homeland Security’s
      Permanent Resident Card and Border Crossing Card programs and for the Canadian
      government’s Permanent Resident Card program; (2) prospects in Italy and a
      Middle Eastern country for national identification card programs; and (3)
      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; (4) experience of net
      operating loss carryforwards expiring unused through fiscal year 2004; (5)
      the
      recent financial statement losses; and (6) the prior three years’ cumulative tax
      net operating losses exclusive of payments derived from the GIG contract. 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
      following risks related to the Company’s business: “dependence on VARs and on a
      limited number of customers,” “lengthy sales cycles,” “technological change,”
and “competition”. As
      described above, the Company concluded that the negative evidence outweighed
      the
      positive evidence and as a result the Company recorded a valuation allowance
      equal to the full amount of the deferred income tax assets as of March 31,
      2005
      and again at March 31, 2006 and at March 31, 2007.





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 income 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. The Company’s net operating losses
      available to reduce future taxable income expire on various dates from fiscal
      year 2008 through fiscal year 2027. To the extent that the Company generates
      taxable income in jurisdictions where the deferred income 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.




68




LASERCARD
      CORPORATION AND SUBSIDIARIES


SELECTED
      QUARTERLY FINANCIAL DATA (UNAUDITED)


(In
      thousands, except per share amounts)


1st
                    Quarter
                
                2nd
                    Quarter
                
                3rd
                    Quarter
                
                4th
                    QuarterFiscal
                    year 2007:Revenue
                
                $
                10,554
                
                $
                6,294
                
                $
                6,184
                
                $
                9,238Cost
                    of sales
                
                
                6,389
                
                
                5,466
                
                
                5,397
                
                
                8,154Gross
                    profit
                
                
                4,165
                
                
                828
                
                
                787
                
                
                1,084Net
                    income (loss)
                
                
                212
                
                
                (2,672
                )
                
                (2,978
                )
                
                (6,933
                )Net
                    income (loss) per share:Basic
                
                $
                0.02
                
                $
                (0.23
                )
                $
                (0.25
                )
                $
                (0.59
                )Diluted
                
                $
                0.02
                
                $
                (0.23
                )
                $
                (0.25
                )
                $
                (0.59
                )Weighted
                    average number of commonand
                    common equivalent shares:Basic
                
                
                11,768
                
                
                11,816
                
                
                11,827
                
                
                11,846Diluted
                
                
                12,280
                
                
                11,816
                
                
                11,827
                
                
                11,846
  Fiscal
                    year 2006:Revenue
                
                $
                6,994
                
                $
                8,699
                
                $
                10,077
                
                $
                14,087Cost
                    of sales
                
                
                5,154
                
                
                6,206
                
                
                5,890
                
                
                7,554Gross
                    profit
                
                
                1,840
                
                
                2,493
                
                
                4,187
                
                
                6,533Net
                    income (loss)
                
                
                (1,694
                )
                
                (564
                )
                
                1,154
                
                
                1,898Net
                    income (loss) per share:Basic
                
                $
                (0.15
                )
                $
                (0.05
                )
                $
                0.10
                
                $
                0.16Diluted
                
                $
                (0.15
                )
                $
                (0.05
                )
                $
                0.10
                
                $
                0.15Weighted
                    average number of commonand
                    common equivalent shares:Basic
                
                
                11,345
                
                
                11,355
                
                
                11,375
                
                
                11,584Diluted
                
                
                11,345
                
                
                11,355
                
                
                11,577
                
                
                12,251





69








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.





ITEM
      9A.  CONTROLS
      AND PROCEDURES





(a)  *Evaluation
      of Disclosure Controls and Procedures* .
      We
      maintain disclosure controls and procedures that are designed to ensure that
      information required to be disclosed by us in reports that we file or submit
      under the Securities Exchange Act of 1934 is recorded, processed, summarized,
      and reported within the time periods specified in Securities and Exchange
      Commission rules and forms, and that such information is accumulated and
      communicated to our management, including our Chief Executive Officer and Chief
      Financial Officer, as appropriate, to allow timely decisions regarding required
      disclosure. In designing and evaluating our disclosure controls and procedures,
      management recognized that disclosure controls and procedures, no matter how
      well conceived and operated, can provide only reasonable, not absolute,
      assurance that the objectives of the disclosure controls and procedures are
      met.  Our disclosure controls and procedures have been designed to meet,
      and management believes that they meet, reasonable assurance standards. 
Additionally, in designing disclosure controls and procedures, our management
      necessarily was required to apply its judgment in evaluating the cost-benefit
      relationship of possible disclosure controls and procedures. The design of
      any
      disclosure controls and procedures also is based in part upon certain
      assumptions about the likelihood of future events, and there can be no assurance
      that any design will succeed in achieving its stated goals under all potential
      future conditions.





Based
      on
      their evaluation as of the end of the period covered by this Form 10-K, our
      Chief Executive Officer and Chief Financial Officer have concluded that, subject
      to the limitations noted above, as of such dates, our disclosure controls and
      procedures were effective at the reasonable assurance level.





(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, which is designed to provide reasonable
      assurance regarding the reliability of our financial reporting and the
      preparation of financial statements for external purposes in accordance with
      U.S. generally accepted accounting principles. Internal control over financial
      reporting includes those policies and procedures that: (i) pertain to the
      maintenance of records that, in reasonable detail, accurately and fairly reflect
      the transactions and dispositions of our assets; (ii) provide reasonable
      assurance that transactions are recorded as necessary to permit preparation
      of
      financial statements in accordance with U.S. generally accepted accounting
      principles, and that receipts and expenditures of our Company are being made
      only in accordance with authorizations of our management and directors; and
      (iii) provide reasonable assurance regarding prevention or timely detection
      of unauthorized acquisition, use or disposition of our assets that could have
      a
      material effect on the financial statements. Management assessed the
      effectiveness of our internal control over financial reporting as of March
      31,
      2007. 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,
      2007, our internal control over financial reporting is effective.





(c)  *Attestation
      Report of the Independent 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 reports 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.* During
      the third quarter of fiscal year 2007, we tested, implemented and activated
      a
      new ERP system designed to provide additional operational and financial
      reporting functionality in the U.S. operations. There were no significant
      changes in our internal control over financial reporting that occurred during
      the fourth quarter of fiscal year 2007 ** that
      have
      materially affected, or are reasonably likely to materially affect, our internal
      control over financial reporting.




70





ITEM
      9B.
      OTHER INFORMATION





None.







71


PART
      III





ITEM
      10.  DIRECTORS,
      EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE





The
      information required to be disclosed by this Item pursuant to Item 401 of
      Regulation S-K with respect to our executive officers is contained in Part
      I of
      this annual report on Form 10-K under the caption, “Executive Officers of the
      Registrant.” The remaining information required to be disclosed by the Item
      pursuant to Item 401 and Item 407 of Regulation S-K is contained in
      the proxy statement for our annual meeting of stockholders to be held on
      September 21, 2007 that will be filed within 120 days of the end of our fiscal
      year 2007, or the Proxy Statement, under the captions “Proposal No. 1
      Election of Directors”; “Information Relating to Our Board of Directors and Its
      Committees—Board of Directors Meetings and Committees—Audit Committee”;
“Information Relating to Our Board of Directors and Its Committees—Director
      Candidates” and “Other Matters-Shareholder Proposals for 2008 Annual Meeting of
      Shareholders” and is incorporated in this annual report on Form 10-K by
      reference.




The
      information required to be disclosed by this Item pursuant to Item 405 of
      Regulation S-K is contained in the Proxy Statement under the caption “Section
      16(a) Beneficial Ownership Reporting Compliance,” and is incorporated in this
      annual report on Form 10-K by reference.




We
      have
      adopted a code of ethics, our Standards of Business Conduct, that applies to
      all
      of our employees, including our principal executive officer, principal financial
      officer, principal accounting officer or controller and persons performing
      similar functions. Our Standards of Business Conduct, as well as our corporate
      governance guidelines and the charters for the audit, compensation and benefits,
      nominating and corporate governance, executive and finance committees of our
      Board of Directors, are each accessible under the “Corporate Governance” heading
      of the “Investor Relations” section of our website, www.lasercard.com. This
      information is also available in print to any stockholder who requests it by
      writing to LaserCard Corporation., 1875 N. Shoreline Blvd. Mountain View, CA
      94043 USA, Attention: Investor Relations. We also intend to disclose in the
      same
      location on our website, any amendments to, or waivers from, our Standards
      of
      Business Conduct that are required to be disclosed pursuant to the disclosure
      requirements of Item 5.05 of Form 8-K.




ITEM
      11.  EXECUTIVE
      COMPENSATION





The
      information required to be disclosed by this Item pursuant to Item 402 and
      Item 407(e) of Regulation S-K is contained in the Proxy Statement under the
      captions “Information Relating to Our Board of Directors and Its
      Committees—Director Compensation” and “—Compensation Committee Interlocks and
      Insider Participation,” “Compensation Committee Report” and “Executive
      Compensation,” and is incorporated in this annual report on Form 10-K by
      reference.




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





The
      information required to be disclosed by this Item pursuant to Item 403 of
      Regulation S-K is contained in the Proxy Statement under the caption “Beneficial
      Ownership of Common Stock”, and is incorporated in this annual report on Form
      10-K by reference.




The
      information required to be disclosed by this Item pursuant to Item 201(d)
      of Regulation S-K is contained in the Proxy Statement under the caption
“Executive Compensation-Equity Compensation Plan Information,” and is
      incorporated in this annual report on Form 10-K by reference.




ITEM
          13. CERTAIN
          RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTORS
          INDEPENDENCE





The
      information required to be disclosed by this Item pursuant to Item 404 of
      Regulation S-K is contained in the Proxy Statement under the caption
“Information Related to our Board of Directors and Its Committees—Certain
      Relationships and Policies on Related Transactions,” and is incorporated in this
      annual report on Form 10-K by reference.




72


The
      information required to be disclosed by this Item pursuant to Item 407(a)
      of Regulation S-K is contained in the Proxy Statement under the caption
“Information Relating to Our Board of Directors and Its Committees—Determination
      of Independence” and is incorporated in this annual report on Form 10-K by
      reference.




**** ITEM
      14.  PRINCIPAL
      ACCOUNTANT FEES AND SERVICES





The
      information required to be disclosed by this Item pursuant to Item 9(e) of
      Schedule 14A is contained in the Proxy Statement under the caption “Independent
      Auditors Fees and Other Matters”, and is incorporated in this annual report on
      Form 10-K by reference.










73





PART
      IV





ITEM
      15.  EXHIBITS
      AND FINANCIAL STATEMENT SCHEDULES





**(a)**
            
            **List
                of Documents Filed as Part of this Report**1.
            
            Our
                consolidated financial statements filed herewith under Item 8 are
                as
                follows:





Description
            Page
              Number(1)
            Reports
                of Independent Registered Public Accounting Firm
            43(2)
            Consolidated
                Balance Sheets at March 31, 2007 and March 31, 2006
            45(3)
            Consolidated
                Statements of Operations for Fiscal Years 2007, 2006 and
                2005
            46(4)
            Consolidated
                Statements of Stockholders' Equity and Comprehensive Income (Loss)
                forFiscal
                Years 2007, 2006 and 2005
            47(5)
            Consolidated
                Statements of Cash Flows for Fiscal Years 2007, 2006 and
                2005
            48(6)
            Notes
                to Consolidated Financial Statements
            49


2.
              
              Financial
                  Statement Schedules:


The
      schedule supporting our Consolidated Financial Statements, filed herewith under
      Item 14(d), is as follows:


Schedule
                Number
              Description
              Page
                Number―
              
              Report
                  of Independent Registered Public Accounting Firms on Financial
                  Statement
                  Schedule
              77II
              
              Valuation
                  and Qualifying Accounts
              78Schedules
                  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 15(b) or incorporated
                  by reference from other documents previously filed with the Securities
                  and
                  Exchange Commission, as follows:
 Exhibit
                
                
                
                Filed
                    Herewith or IncorporatedNumber
                
                Description
                
                Herein
                    by Reference to3.1
                
                Amended
                    and Restated Certificate of Incorporation
                
                Exhibit
                    3.1 to Report on Form 10-K for the fiscal year ended March 31,
                    20053.2
                
                Amended
                    and Restated By-Laws
                
                Exhibit
                    3.2 to Report on Form 10-K for the fiscal year ended March 31,
                    200510.1
                
                Building
                    lease agreement with Renault & Handley Employees Investment Co. for
                    2644-2648 Bayshore Pkwy., Mountain View, CA
                
                Exhibit
                    10.1 to Report on Form 10-Q for period ended December 31,
                    2003
  74
  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)
                
                Exhibit
                    10.2 to Report on Form 10-K for fiscal year ended March 31, 200410.3*
                
                Amended
                    and Restated Stock Option Plan
                
                Exhibit
                    10.4.1 to Report on Form 10-Q for period ended September 30,
                    200210.7
                
                Stock
                    and Warrant Purchase Agreement (as amended)
                
                Exhibit
                    99.2 to Report on Form 10-Q for period ended December 31, 200310.8
                
                Optical
                    Card Manufacturing License Agreement with Global Investments
                    Group
                
                Exhibit
                    10.8 to Report on Form 10-K for fiscal year ended March 31, 2004**10.9*
                
                2004
                    Equity Incentive Compensation Plan (as Amended)
                
                Appendix
                    A to Schedule 14A Proxy Statement for 2005Annual Stockholders
                    Meeting10.10
                
                June
                    29, 2006 Amendment to License and Equipment Agreement with Global
                    Investments Group
                
                Exhibit
                    10.10 to Report on Form 10-Q for period ended June 30,
                    2006**10.11
                
                October
                    27, 2006 Modified Third Amendment to License and Equipment Agreement
                    with
                    Global Investments Group and Prevent LOK
                
                Exhibit
                    10.11 to Report on Form 8-K dated October 30, 200616.3
                
                Letter
                    re Change in Certifying Accountants
                
                Exhibit
                    16.1 to Report on Form 8-K dated
                  December
                    14, 200421
                
                Subsidiaries
                    of the Registrant
                
                Filed
                    herewith as page 8223.1
                
                Consent
                    of Odenberg, Ullakko, Muranishi & Co. LLP, Independent Registered
                    Public Accounting Firm
                
                Filed
                    herewith as page 8324
                
                Power
                    of attorney
                
                Filed
                    herewith as page 7931.1
                
                Rule
                    13a-14(a)/15d-14(a) Certificationof
                    Richard M. Haddock, principal executive officer
                
                Filed
                    herewith as page 8431.2
                
                Rule
                    13a-14(a)/15d-14(a) Certification of Steven G. Larson, principal
                    financial
                    officer
                
                Filed
                    herewith as page 8532.1
                
                Section
                    1350 Certification of Richard M. Haddock, chief executive
                    officers
                
                Filed
                    herewith as page 8632.2
                
                Section
                    1350 Certification of Steven G. Larson, chief financial
                    officer
                
                Filed
                    herewith as page 87
  ___________________


*Indicates
      management contract or compensatory plan or arrangement.


**Portions
      were omitted pursuant to request for confidential treatment.




75





**(b)**
            **Exhibits**Exhibits 21,
              23.1, 24,
              31.1, 31.2, 32.1 and 32.2 are filed
              herewith.







**(c)**
            **Financial
                Statement Schedule**Schedule
                II to our consolidated financial statements is on page
                78.























76








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 May 18, 2007, included the related financial
      statement schedule for the fiscal years ended March 31, 2007, 2006 and 2005,
      included in this Annual Report on Form 10-K. The financial statement schedule
      is
      the responsibility of management. Our responsibility is to express an opinion
      on
      the financial statement schedule based on our audits. 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


May
      18,
      2007





77


SCHEDULE
      II


LASERCARD
                    CORPORATION AND SUBSIDIARIESVALUATION
                    AND QUALIFYING ACCOUNTSFor
                    the Fiscal Years Ended March 31, 2005, 2006 and 2007(In
                    thousands)
  Balance
                    at
                
                Additions
                    (Deletions)
                
                Additions
                
                
                
                
                
                Balance
                    atBeginning
                
                Charged
                    (Credited)
                
                Charged
                    to
                
                
                
                Deductions/
                
                End
                    ofDescription
                
                of
                    Period
                
                to
                    Profit & Loss
                
                Other
                    Accounts
                
                
                
                Write-off
                
                of
                    PeriodFiscal
                  year 2005:Product
                    return reserve
                
                $
                86
                
                $
                311
                
                $
                -
                
                
                
                $
                373
                
                $
                24Bad
                    debt reserve
                
                $
                210
                
                $
                22
                
                $
                -
                
                
                
                $
                200
                
                $
                32Inventory
                    reserves
                
                $
                983
                
                $
                381
                
                $
                -
                
                
                
                $
                716
                
                $
                648Warranty
                    reserve
                
                $
                46
                
                $
                207
                
                $
                -
                
                
                
                $
                120
                
                $
                132Deferred
                    income tax asset valuation allowance
                
                $
                14,751
                
                $
                3,675
                
                $
                -
                
                
                
                $
                -
                
                $
                18,426Fiscal
                  year 2006:Product
                    return reserve
                
                $
                24
                
                $
                78
                
                $
                -
                
                
                
                $
                24
                
                $
                78Bad
                    debt reserve
                
                $
                32
                
                $
                34
                
                $
                (2
                )
                (1
                )
                $
                -
                
                $
                64Inventory
                    reserves
                
                $
                648
                
                $
                274
                
                $
                -
                
                
                
                $
                418
                
                $
                503Warranty
                    reserve
                
                $
                132
                
                $
                569
                
                $
                (1
                )
                (1
                )
                $
                52
                
                $
                648Deferred
                    income tax asset valuation allowance
                
                $
                18,426
                
                $
                901
                
                $
                -
                
                
                
                $
                -
                
                $
                19,327Fiscal
                    year 2007:Product
                    return reserve
                
                $
                78
                
                $
                -
                
                $
                -
                
                
                
                $
                -
                
                $
                78Bad
                    debt reserve
                
                $
                64
                
                $
                24
                
                $
                6
                
                (1
                )
                $
                28
                
                $
                66Inventory
                    reserves
                
                $
                503
                
                $
                483
                
                $
                17
                
                (1
                )
                $
                166
                
                $
                837Warranty
                    reserve
                
                $
                648
                
                $
                164
                
                $
                5
                
                (1
                )
                $
                74
                
                $
                743Deferred
                    income tax asset valuation allowance
                
                $
                19,327
                
                $
                3,172
                
                $
                -
                
                
                
                $
                6,283
                
                $
                16,216
  Notes:(1)
                    Due
                    to Foreign Exchange rate translation


78





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 12, 2007








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:





Signature
            
            Title
            
            Date/s/Richard
                M. Haddock
            
            President
                and Chief Executive Officer
            
            June
                12, 2007Richard
                M. Haddock
            
            (Principal
                Executive Officer)Director/s/Steven
                G. Larson
            
            Vice
                President of Finance and Treasurer
            
            June
                12, 2007Steven
                G. Larson
            
            (Principal
                Financial Officer andPrincipal
                Accounting Officer)/s/Bernard
                C. Bailey
            
            Director
            
            June
                12, 2007Bernard
                C. Bailey/s/Arthur
                H. Hausman
            
            Director
            
            June
                12, 2007Arthur
                H. Hausman/s/Donald
                E. Mattson
            
            Director
            
            June
                12, 2007Donald
                E. MattsonDirectorDan
                Maydan/s/Albert
                J. Moyer
            
            Director
            
            June
                12, 2007Albert
                J. Moyer/s/Walter
                F. Walker
            
            Director
            
            June
                12, 2007Walter
                F. Walker








79




INDEX
      TO
      EXHIBITS


[ITEM
      14(c)]




ExhibitNumber
            
            Description3.1
            
            Amended
                and Restated Certificate of Incorporation; Exhibit 3.1 to Report
                on Form
                10-K for the fiscal year ended March 31, 20053.2
            
            Amended
                and Restated By-Laws; Exhibit 3.2 to Report on Form 10-K for the
                fiscal
                year ended March 31, 200510.1
            
            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 reference10.2
            
            Building
                lease agreement with Shoreline Park LLC for 1395 Charleston Road,
                Mountain
                View, CA (mailing address 1875 North Shoreline Boulevard, Mountain
                View,
                CA) filed as Exhibit 10.2 to Report on Form 10-K for fiscal year
                ended
                March 31, 2004 and incorporated herein by reference10.3
            
            Amended
                and Restated Stock Option Plan; previously filed as Exhibit 10.4.1
                to
                Report on Form 10-Q for period ended September 30, 2002 and
                incorporated herein by reference10.7
            
            Stock
                and Warrant Purchase Agreement (as amended); previously filed as
                Exhibit
                99.2 to Report on Form
                10-Q for period ended December 31, 200310.8
            
            Optical
                Card Manufacturing License Agreement with Global Investments Group;
                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**10.9*
            
            2004
                Equity Incentive Compensation Plan, as Amended; previously filed
                as
                Appendix A to Schedule 14A Proxy Statement for 2005 Annual Stockholders
                Meeting filed with the SEC on September 6, 2005, and incorporated
                herein
                by reference10.10
            
            June
                29, 2006 Amendment to License and Equipment Agreement with Global
                Investments Group and Prevent LOK; previously filed as Exhibit 10.10
                to
                Report on Form 10-Q for period ending June 30, 2006, and incorporated
                herein by reference**10.11
            
            October
                27, 2006 Modified Third Amendment to License and Equipment Agreements
                with
                Global Investments Group and Prevent LOK; previously filed as Exhibit
                10.11 to Form 8-K dated October 30, 2006, which was filed with the
                SEC on
                November 1, 2006, and incorporated herein by reference16.3
            
            Letter
                re Change in Certifying Accountant; previously filed as Exhibit 16.1
                to
                Current Report on Form 8-K
                dated December 14, 200421
            
            Subsidiaries
                  of the Registrant; filed herewith as page 8223.1
            
            Consent
                of Odenberg, Ullakko, Muranishi & Co. LLP, Independent Registered
                Public Accounting Firm; filed herewith as page 8324
            
            Power
                of Attorney; filed herewith as page 7931.1
            
            Rule
                13a-14(a)/15d-14(a) Certificationof
                Richard M. Haddock, principal executive officer; filed herewith as
                page
                8431.2
            
            Rule
                13a-14(a)/15d-14(a) Certification of Steven G. Larson, principal
                financial
                officer; filed herewith as page 85






80






32.1
            
            Section
                1350 Certification of Richard M. Haddock, chief executive officer
                and
                president; filed herewith as page 8632.2
            
            Section
              1350 Certification of Steven G. Larson, chief financial officer; filed
              herewith as page 87





*Indicates
      management contract or compensatory plan or arrangement.


** Portions
      were omitted pursuant to a request for confidential treatment.














81