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) OFTHE
      SECURITIES EXCHANGE ACT OF 1934For
      the Fiscal Year Ended March 31, 2009ORo
              TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OFTHE
      SECURITIES EXCHANGE ACT OF 1934For
      the Transition Period from _______ to _______Commission
      File Number: 0-6377LASERCARD
      CORPORATION(Exact
      name of registrant as specified in its
charter)




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




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




(650)
      969-4428(Registrant’s
      telephone number, including area code)




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


Common
      Stock, $0.01 Par Value
                        
                        The
      NASDAQ Stock Market LLC(Title
      of each class so registered)
                        
                        (Name
      of each exchange on which
registered)




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


None(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 whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§ 229.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files). o
Yes   o
No




Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K (§ 229.405 of this chapter) 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




1




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


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




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




Based on
the last trade price of our Common Stock on The Nasdaq Stock Market, Inc. on the
last business day of the registrant’s most recently completed second fiscal
quarter (September 30, 2008), the aggregate market value of the voting stock
held by non-affiliates of the registrant was approximately $46,782,000. 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 June 15,
2009: 12,113,985




DOCUMENTS
INCORPORATED BY REFERENCE: Portions of the Registrant’s Definitive Proxy
Statement in connection with its September 15, 2009 Annual Meeting of
Stockholders are incorporated by reference into Part III of this Annual Report
on Form 10-K.


2




PART
      IItem
      1.
                    
                    Business
                    
                    4Forward-Looking
      Statements
                    
                    4General
      Development of Business
                    
                    5Financial
      Information about Segments
                    
                    5Narrative
      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
                    
                    27Consolidated
      Results of Operations
                    
                    29Liquidity
      and Capital Resources
                    
                    36Contractual
      Obligations
                    
                    37Off-Balance
      Sheet Arrangements
                    
                    38Application
      of Critical Accounting Policies and Estimates
                    
                    38Recently
      Adopted Accounting Pronouncements
                    
                    41Recently
      Issued Accounting Pronouncements
                    
                    42Item
      7A.
                    
                    Quantitative
      and Qualitative Disclosures about Market Risk
                    
                    44Item
      8.
                    
                    Financial
      Statements and Supplementary Data
                    
                    46Report
      of Independent Registered Public Accounting Firm
                    
                    46Consolidated
      Financial Statements
                    
                    48Notes
      to Consolidated Financial Statements
                    
                    52Quarterly
      Financial Information (Unaudited)
                    
                    79Item
      9.
                    
                    Changes
      in and Disagreements with Accountants on Accounting and Financial
      Disclosure
                    
                    80Item
      9A.
                    
                    Controls
      and Procedures
                    
                    80Item
      9B.
                    
                    Other
      Information
                    
                    81PART
      IIIItem
      10.
                    
                    Directors,
      Executive Officers and Corporate Governance
                    
                    82Item
      11.
                    
                    Executive
      Compensation
                    
                    82Item
      12.
                    
                    Security
      Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters
                    
                    82Item
      13.
                    
                    Certain
      Relationships and Related Transactions, and Director
      Independence
                    
                    82Item
      14.
                    
                    Principal
      Accountant Fees and Services
                    
                    82PART
      IVItem
      15.
                    
                    Exhibits
      and Financial Statement Schedules
                    
                    83Signatures
                    
                    89


3




PART
I


ITEM
      1.
                  BUSINESS


FORWARD-LOOKING
STATEMENTS. All statements contained in this report that are not
historical facts are forward-looking statements within the meaning of the
federal securities laws. Forward-looking statements are not facts or guarantees
of future performance or events. Rather, they are based on current expectations,
estimates, beliefs, assumptions, and goals and objectives and are subject to
risks and uncertainties that are difficult to predict. As a result, our actual
results may differ materially from the statements made. Often such
forward-looking statements can be identified by their use of words such as
“may,” “will,” “intends,” “plans,” “believes,” “anticipates,” “visualizes,”
“expects,” “estimates,” or similar language. Forward-looking statements made in
this report include but are not limited to statements regarding our beliefs as
to current and potential market segments, customers, and applications for and
deployment of our products; the advantages of, potential income from, and duties
to be performed under the sale of a second-source card manufacturing license to
Prevent Global; our expectations as to the continuation, production quantities,
delivery rates and requested and actual delivery schedule, backlog, revenue,
margins, and profit for our products for U.S. or foreign government ID card
programs; plans to increase card production capacity for anticipated increases
in orders including possibly $2 million in capital equipment and leasehold
improvements during fiscal year 2010; our expectation of negative gross profit
from the drive, system and enabling services market; the need for, expected
success of, expense and potential benefits from our research and development
efforts; estimates that revenues and advance payments will be sufficient to
generate cash from operating activities during fiscal 2010 and fund our actual
capital expenditures despite expected quarterly fluctuations; our projected
liquidity in light of the issues surrounding our investments in auction rate
securities (“ARS”) and our ability to secure more contracts; and our belief as
to the credit quality of our ARS and the changes in the fair value of these
securities and our belief that the Put Option will not significantly impact our
future earnings.




These
forward-looking statements are based upon our assumptions about and assessment
of the future, which may or may not prove true, and involve a number of risks
and uncertainties including, but not limited to, whether there is a market for
cards for homeland security in the U.S. and abroad, and if so, whether such
market will utilize optical memory cards as opposed to other technologies;
customer concentration and reliance on continued U.S. and Saudi Arabian
government business and potential Angolan and Italian business; risks associated
with doing business in and with foreign countries; whether we will be successful
in assisting Prevent Global with factory startup and training; whether Prevent
Global will obtain the financial resources to make the balance of its required
payments to us and to operate the facility; whether the facility will
efficiently produce high quality optical memory cards in volume and that meet
our standards; lengthy sales cycles and changes in and dependence on government
policy-making; reliance on value-added resellers and system integrators to
generate sales, perform customer system integration, develop application
software, integrate optical card systems with other technologies, test products,
and work with governments to implement card programs; potential manufacturing
difficulties and complications associated with increasing manufacturing capacity
of cards and drives, implementing new manufacturing processes, and outsourcing
manufacturing; our ability to produce and sell read/write drives in volume; the
unpredictability of customer demand for products and customer issuance and
release of corresponding orders; the possibility that optical memory cards will
not be purchased for the full implementation of card programs in Italy, the
Kingdom of Saudi Arabia and India, or for Department of Homeland Security
(“DHS”) programs in the U.S., or will not be selected for other government
programs in the U.S. and abroad; whether UBS AG will purchase our ARS, and the
risks set forth in the section entitled “Risk Factors” and elsewhere in this
report. These forward-looking statements speak only as of the date of this
report, and, except as required by law, we undertake no obligation to publicly
release updates or revisions to these statements whether as a result of new
information, future events, or otherwise.




GENERAL
DEVELOPMENT OF BUSINESS




LaserCard
Corporation is a leading provider of secure ID solutions to governments and
commercial clients around the world, and also manufactures a wide range of
advanced, secure identity documents. These ID documents include a broad set of
contact and contactless technologies in combination with optical memory.
LaserCard Corporation’s wholly-owned German subsidiary, Challenge Card Design
Plastikkarten GmbH (“CCD”), with offices in Rastede and Ratingen, Germany,
manufactures and offers a wide range of high quality specialty cards, plus card
personalization and ID management solutions under the CCD and Cards & More
brands. CCD provides advanced-technology specialty card manufacturing
capabilities to serve the European, Middle Eastern, African and Asian markets.
Our cards and systems are used in countries around the world, such as the United
States, Germany, United Kingdom, Switzerland, Angola, Italy, India, Costa Rica
and the Kingdom of Saudi Arabia, for demanding applications including government
service provision and facility access.


4




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. LaserCard Corporation, a Delaware corporation, is primarily a holding
company that conducts all its business operations through its two wholly-owned
subsidiaries, Challenge Card Design Plastikkarten GmbH (“CCD”) and LaserCard
Corporation, a California corporation. Our mailing address and executive offices
are located at 1875 North Shoreline Boulevard, Mountain View, California 94043
and our telephone number is (650) 969-4428. Throughout this report, the
“Company,” “LaserCard,” “we,” and “us” refer to LaserCard Corporation and our
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.




Trademarks.
LaserCard® is the Company’s registered trademark. Optical/SmartTM card,
OpticalProximityTM card,
ConciergeCardTM,
OptiChipTM,
LaserPassTM,
Embedded HologramHDTM,
Optical IDLockTM and
LaserBadgeTMare our
trademarks. We may also refer to trademarks of other corporations and
organizations in this document.




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.




Current
applications for the LaserCard include identification cards for citizens,
non-citizen permanent residents, foreign workers, and border crossings, as well
as vehicle registration.




Programs
include:


o
                United
      States Permanent Resident Card (“Green Card”)o
                Italian
      citizen ID cardo
                Italian
      foreign resident cardo
                Government
      ID cards in Italyo
                Kingdom
      of Saudi Arabia national ID cardo
                Vehicle
      registration in a few states in Indiao
                Foreign
      Resident ID Card program in Costa Ricao
                A
      developing program in Angola for national ID
  cards




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 “Revenue Recognition,” of Note 2 of the Notes to
Consolidated Financial Statements in Item 8, “Financial Statements and
Supplementary Data,” section, we have granted Prevent Global družba za
upravljanje, investicije in razvoj d.d. of Slovenia (“Prevent Global”) 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. In March 2008, Ritel S.p.A. (“Ritel”) became our
exclusive licensee to manufacture in Italy and distribute world-wide our optical
memory drives. Ritel, an Italian telecommunications and technology contract
manufacturer, brings significant manufacturing know-how, new production
processes and new product development which could lead to lower cost
drives.




FINANCIAL
INFORMATION ABOUT SEGMENTS




Our
three reportable segments are: (1) optical memory cards, (2) drives, systems and
enabling services (which we formerly called the “optical memory card drives”
segment), including read/write drives, maintenance, systems and enabling
services, and (3) specialty cards and printers. The segments were determined
based on the information used by the chief operating decision maker. The optical
memory cards and drives, systems and enabling services reportable segments are
not strategic business units which offer unrelated products and services;
rather, these reportable segments utilize compatible technology and are marketed
jointly. Specialty cards and 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.


5




NARRATIVE
DESCRIPTION OF BUSINESS




LaserCard
Corporation is a leading provider of secure ID solutions to governments and
commercial clients around the world and also manufactures a wide range of
advanced, secure identity documents. These ID documents include a broad set of
contact and contactless technologies in combination with optical memory.
LaserCard’s wholly-owned German subsidiary, CCD, with offices in Rastede and
Ratingen, Germany, manufactures and offers a wide range of high quality
specialty cards, plus card personalization and ID management solutions under the
CCD and Cards & More brands. Our cards and systems are used in countries
around the world, such as the United States, Germany, United Kingdom,
Switzerland, Angola, Italy, India, Costa Rica and the Kingdom of Saudi Arabia,
for demanding applications including government service provision and facility
access.




LaserCard;
A Secure Counterfeit-resistant Credential




Our
LaserCard optical memory card is a secure, counterfeit-resistant credential
which is currently used by national governments primarily 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 believe 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 be permanently marked with
visible, high-resolution micro images and security patterns in the optical media
itself at resolutions up to 24,000 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.




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 is used to verify
the authenticity of other printed or laser engraved facial images on the card’s
surfaces enabling a method to determine tampering of these images. We have
recently released Personalized 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.




Personalized
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. We believe
that 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.


6




We
believe that LaserPassTM is the most secure and flexible electronic ID solution
available today. Combining the convenience and facilitation capabilities of
Radio Frequency Identification tags (“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:




o
              Contactless
      (proximity) chip provides convenient access through a control point after
      cardholder ID verification (one-to-one) with data stored on the optical
      memory




o
              RFID
      can be used in high traffic environments as a “read ahead” data base
      pointer allowing data to be retrieved and queued awaiting
      inspection




o
              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




o
              Optical
      memory provides an attending inspector with unparalleled surety in
      visually verifying card, cardholder and displayed
  data




o
              All
      RFID tag/contactless chip data can be backed up on the optical
      media




o
              Optical
      memory can be used offline when the network is down or
  slow




o
              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




o
              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,
including immigration, border entry and citizenship. The counterfeit-resistant
cards are typically replaced every five or ten years. The following are examples
of these government applications:




o
              The
      Green Card, issued by the DHS, evidences that a non-US citizen is approved
      to reside and be employed in the United
States




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 the Kingdom of Saudi Arabia, 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, traffic and
      vehicle violations, vehicle fitness and owner/operator
      information




o
              The
      Foreign Resident ID Card program in Costa
Rica




o
                A
      developing program in Angola for national ID cards identifies the holder
      as a citizen


7




Data
Storage Capacity




The
gross data storage capacity of the standard LaserCard is 4.1 megabytes on a 35mm
optical stripe, 2.56 megabytes on a 24mm stripe and 1.5 megabytes on a 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 (“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, 1.78 megabytes of
“user” capacity for the standard 2.56 megabyte optical stripe and 1.1 megabytes
of “user” capacity for the 1.5 megabyte optical stripe.




Durability




Since
1993, the U.S. Defense Logistics Agency has used LaserCard optical memory cards
as a paperless freight manifest when 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 the International Organization for Standardization/International
Electrotechnical Committee (“ISO/IEC”). The LaserCard optical memory card
system, complies with all of the standards listed.




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




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




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




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




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 international standard was first published in
      2006.




o
              ISO/IEC
      10373-5 describes test methods for optical memory cards. This
      international standard was first published in
  1998




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


8




Other
standards defining the use of optical memory cards in certain application areas,
such as driver’s licenses and interoperable ID documents, also
exist.




LaserCard
Manufacturing




We
have LaserCard optical memory card manufacturing operations located in Mountain
View, California and a subset of these 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 16 million sheet-process cards depending upon the
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. We are researching other materials for use as optical memory
card media.




LaserCard
Read/Write Drives; Manufacturing and Parts/Components




Optical
memory cards are used in conjunction with a card read/write device (drive) that
connects to a personal computer. The price, performance and availability of
read/write drives are factors in the commercialization of optical cards. We
maintain read/write drive manufacturing operations in our Mountain View,
California facility and have licensed Ritel of Italy for drive manufacturing. 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. If Audio-Technica
were to discontinue doing business with us, alternate suppliers may be found but
the technology transfer could delay production of read/write
drives.




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 dynamic link libraries (“DLLs”) and
custom software tools to enhance read/write drive
integration.


9




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 been immaterial for fiscal years 2009, 2008,
and 2007. To date, our software development, unless part of a contract, has been
completed concurrent with the establishment of technological feasibility has
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. and other governments, read and display facial, fingerprint or
other images and other digital data from the card’s optical memory, and
biometrically verify the cardholders’ live-scan fingerprints against 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
restricted government cards) is available in customized form to other customers
for other government, industrial, and commercial applications.




Other
Advanced-Technology Cards




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
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 contactless RFID cards,
and magnetic stripe cards—and markets cards, 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.




We
also offer turnkey non-optical card manufacturing facilities which include the
supply and installation of state-of-the-art card production equipment, transfer
of manufacturing know-how, training, and production support.




Sales
and Marketing




We
market our LaserCard products around the world, primarily through an indirect
distribution channel comprised of authorized VARs and System Integrators
(“SIs”). We offer for sale through the channel optical memory cards, optical
card read/write drives and software, plus third-party peripherals,
application-specific software, and increasingly, enabling services to assist in
successful project implementation. These enabling services include custom
software development, installation, training and support and ID Management
System modules such as integrated personalization solutions, and data capture
modules.




VARs
and SIs typically add value in the form of application software development and
system integration. Sales to national governments, our largest market by volume
and value, are almost exclusively indirect, through VARs and SIs. For example,
products are sold indirectly to the government of Italy by our Rome-based VAR,
Laser Memory Card S.p.A.




Revenues
by geographic region are shown in Note 4 of the “Notes to Consolidated Financial
Statements” in Item 8, “Financial Statements and Supplementary
Data.”


10




Our
LaserCard optical memory cards sales and marketing activities are conducted
through our offices in Mountain View, California, Huntington, New York and
Ratingen, 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 SIs.




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 footing 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 also heads our EMEA optical memory card and systems sales
efforts. We believe that our European marketing base will accelerate EMEA
acceptance of optical memory products in government and commercial
solutions.




CCD
serves and supports its existing customer base for advanced-technology specialty
cards and card printers, while adding dedicated 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 areas of the world, 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:




o
              Maintain,
      leverage and expand the existing optical memory card user community of
      national and regional governments
worldwide;




o
              Increase
      revenues by offering enabling services, such as consulting, custom
      software development, and the development of integrated secure ID
      solutions, which can include data capture, personalization, and quality
      assurance modules; and




o
              Increase
      market share for specialized cards and associated ID management solutions,
      such as major event badging and access control and university student
      ID.




Licensing




In
March 2004, we sold Prevent Global an optical memory card manufacturing package
including roll process optical card manufacturing equipment, an intellectual
property rights license, and support for establishing an optical memory card
manufacturing facility in Slovenia, as described under Note 2, of the “Notes to
Consolidated Financial Statements” in Item 8, “Financial Statements and
Supplementary Data.”




At
March 31, 2009 there were $24.5 million in advance payments and $3.3 million in
deferred revenue for the Prevent Global contract shown on our consolidated
balance sheet as noncurrent liabilities as further described in Management’s
Discussion and Analysis of Financial Condition and Results of
Operations—Consolidated Results of Operation.




In
March 2008, Ritel, an Italian telecommunications and technology contract
manufacturer, became our non-exclusive licensee to manufacture in Italy and
distribute world-wide our optical memory drives. Ritel brings significant
manufacturing know-how, new production processes, and new product development
which could lead to lower cost drives




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 select 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 these licensees. We conduct our licensing effort 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.


11




Competition




Government
Market. Our primary application is in government-sponsored national level
identity credential programs, specifically citizen and foreign resident
identity, and secondarily in state level vehicle registration programs. We
compete for business in these markets at two levels:




o
              Primarily,
      at the level of card technology where our own optical memory is generally
      in competition with IC chips, either contact or RF-enabled,
      and




o
              Secondarily,
      at the level of the credential issuance system where competition comes
      from other companies that provide secure ID
  solutions.




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 may deliver the “best of all worlds” solution. In fact, our
customers are increasingly demanding optical memory in combination with chip
technologies and we have partnered successfully with otherwise competitive chip
suppliers to satisfy these requirements. Currently, only we offer hybrid cards
combining the optical memory technology of the LaserCard with an embedded IC
Chip (Optical/SmartTM) or RF-enabled chip (LaserPassTM).
Nevertheless, competition for credential programs featuring a single technology
is intense and the geographical coverage, financial and marketing resources of
our major competitors are significantly greater than ours. To our advantage, the
security of government credentials is generally an imperative and the
combination of visual, physical and digital security offered by optical memory
is unequalled by any other single credential technology.




A
competitive disadvantage of optical memory is the cost of reader technology.
This is often compared directly to that of chip readers which are significantly
less expensive. However, a more realistic price comparison involves analyzing
cost of ownership of the credential, its infrastructure and support
requirements. In this case, we believe that optical memory can demonstrate an
advantage because of the technology’s greater durability and less frequent
replacement, plus the technology’s inherent ability to work securely off-line
removes the need for high cost networks supported by complex and costly Public
Key Infrastructures. Nevertheless, centralized on-line databases combined with
wide-area networks may limit the penetration of optical memory cards in certain
applications.




There
are many competitors offering credential issuance systems, ranging from those
that specialize in the field, as we do, to generalized system integrators. Our
core skills in the implementation of optical memory card issuance systems are
second to none and we are increasingly involved in this aspect of the overall
system. We believe that the value of these skills, which we call “Enabling
Services” and which can be applied to other technologies, are being increasingly
recognized by customers and industrial partners alike, increasing our
opportunity to capture a greater share of the project value beyond the core card
technology.




Commercial
Market. Our commercial business is divided between Specialty Cards and
Printers. Our specialty card business competes on the basis of added value in
the form of high quality printing and manufacturing, strict quality assurance
and high levels of customer service, which tends to differentiate us from the
conventional card manufacturing company. Therefore, we do not primarily compete
on the basis of price which only inevitably may lead to reduced margins. This
has proven to be a successful approach attested to by our many loyal repeat
customers.




Our
printer business has historically focused on distribution of card printer
products, which then provided an entrée to customers for the sale of cards. The
pure printer distribution business has become extremely price competitive, with
many competitors trading via the internet, and our volumes are not sufficient to
generate a sufficient profit. Therefore, we are deliberately moving to higher
priced, value added sales where our implementation and support resources are
valued. This has reinforced the symbiotic relationship between printer and card
sales so that we are increasingly selling a total solution.




Other
Card Technologies. Experimental card technologies probably are under
development at other companies.




Other
Optical Memory Cards and
Equipment. We previously licensed our card patents to Canon Inc. of
Japan, which is not manufacturing or selling such cards at this time. In
addition, as described in the “Licensing” section, Prevent Global holds a
royalty-bearing card-manufacturing license. Under these licenses, the licensees
have the right to manufacture and sell optical memory cards in competition with
the LaserCard. Prevent Global is not yet capable of manufacturing optical cards
and their plans to become operational have been stalled for financial reasons.
Prevent Global could become a competitor in certain European countries, but is
not authorized to market elsewhere. Ritel of Italy is also licensed to
manufacture our optical memory drives and to distribute them
world-wide.


12




OTHER
MATTERS




Research
and Development




Our
research and development expenses were $2.4 million for fiscal year 2009; $2.9
million for fiscal year 2008; and $3.1 million for fiscal year 2007. During
fiscal 2009, various R&D projects were realigned and cost reductions were
implemented consistent with a ‘milestone’- based R&D strategy. We are
continuing our effort to develop new optical memory card and non-optical card
features and structures, including various composite card structures to allow
the insertion of contactless chips with RF capability, dual-interface
(contact-contactless) with optical memory, optically variable device (“OVD”)
products, and other market-driven requirements. We are also developing enhanced
optical memory card read/write drives for both increased reliability and ease of
use and integration; and new software products and services in an effort to
provide new products that can stimulate optical memory card sales growth. We
anticipate that these ongoing research and development efforts should result in
enhanced card features and capabilities and drives with enhanced reliability,
advanced security features and/or lower manufacturing costs; however, there is
no assurance that such product development effort will be successful. These
features are important for our existing and future optical memory card
markets.




Patents
and Trademarks




Optical
Data Storage. As of March 31, 2009, we owned approximately 20 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 17 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
leading-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 LaserCard’s
market position.




Our
U.S. patents have expiration dates ranging from 2009 to 2023, with the majority
expiring during the first part of this period. Since 1998, both U.S and foreign
patents expire 20 years from their priority date.




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 a 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, 2009, LaserCard employed 232 full-time, part-time, and agency
personnel (including four executive officers). Our 146-person U.S. workforce
consisted of 114 personnel in administration, marketing/sales, manufacturing,
and research and development, plus 32 temporary personnel mainly engaged in
manufacturing and the inspection of cards for quality assurance. CCD employed 86
full and part-time personnel as of March 31, 2009. None of our employees is
represented by a labor union.


13




Executive
Officers of the Registrant


Name,
      Principal Occupation, and Other Directorships
                        
                        
                        AgeROBERT
      T. DEVINCENZI, Director and Executive Officer
                        
                        50President
      and Chief Executive Officer (since June 2008). Previously Senior Vice
      President of Corporate Development of Solectron Inc. (electronics
      manufacturing) from January 2005 to December 2007. Former President and
      Chief Executive Officer of Inkra Networks Inc. (Internet Protocol Network
      Equipment) from January 2004 to January 2005) and Ignis Optics Inc.
      (fiber-optic transceiver packaging) from January 2003 to January 2004).
      From 2000 to 2003, Mr. DeVincenzi was Senior Vice President of Ditech
      Communications, which acquired Atmosphere Networks Inc., where he was Vice
      President of Global Sales, Service and Field Marketing from 1999 to
      2000.CHRISTOPHER
      J. DYBALL, Executive Officer
                        
                        58Chief
      Operating Officer (since November 2004). Formerly President from November
      2004 through September 2005, Co-Chief Executive Officer from August 2003
      through November 2004 and Executive Vice President from 1992 through
      November 2003.STEVEN
      G. LARSON, Executive Officer
                        
                        59Vice
      President of Finance and Treasurer since 1987.STEPHEN
      D. PRICE-FRANCIS, Executive Officer
                        
                        62Vice
      President of Marketing (since May 2008). Previously Vice President of
      Business Development (since November 2004) of LaserCard Corporation.
      Previously Vice President of Business Development of LaserCard Systems
      Corporation since 1999. Past President, Advanced Card Technology
      Association of Canada (ACT Canada).




Dependence
on Government Subcontracts through Sole Contractors




General
Dynamics Information Technology (“GDIT”), a government prime contractor and
previously known as Anteon International Corporation, is one of LaserCard’s
major customers. GDIT is the government contractor for our LaserCard product
sales to the 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. 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. Our revenues derived from sales to GDIT represented
19%, 29% and 28% of our total revenue during fiscal years 2009, 2008 and 2007,
respectively. The table below presents percentages of consolidated revenues by
major programs derived from our customer, GDIT, for the fiscal years ended March
31:


2009
                  
                  
                  2008
                  
                  
                  2007U.S.
      Green Cards
                  
                  
                  13.3
                  %
                  
                  
                  17.4
                  %
                  
                  
                  19.7
                  %U.S.
      Department of State Border Crossing Cards
                  
                  
                  0.4
                  %
                  
                  
                  2.7
                  %
                  
                  
                  3.3
                  %Canada’s Permanent
      Resident Card Program
                  
                  
                  3.7
                  %
                  
                  
                  7.5
                  %
                  
                  
                  3.8
                  %Automated
      Manifest Program
                  
                  
                  0.7
                  %
                  
                  
                  0.8
                  %
                  
                  
                  1.1
                  %




Discontinued
use of optical memory cards in the BCC and Canada’s Permanent Resident Card
programs will have an adverse impact on our future revenue unless we find other
similarly-sized government programs. Although not anticipated, if GDIT were to
discontinue its participation as a contractor, other qualified contractors could
be utilized by those governments for purchasing our products, although the
process of doing so could cause program delays and there can be no assurance
that we will successfully develop relationships with any new
contractors.




Our
revenues derived from sales of the Kingdom of Saudi Arabia for their National ID
Card program represented 26%, 23% and 13% of total revenue during fiscal years
2009, 2008 and 2007, respectively. The prime contractor for the first phase of
this contract, Omar K. ACSSS Communications and Space Services Company Ltd.
(“ACSS”), accounted for 25%, 17%, and 13% of total revenue for fiscal years
ended March 31, 2009, 2008 and 2007, respectively. We have successfully
implemented the regionalized model for this program and we are currently
implementing its second phase through our partner customer, Gemalto. If Gemalto
were to discontinue its implementation effort, we believe that we would be able
to continue our commitment to the program through other qualified
contractors.


14




Backlog




Some
of our customers generally place orders for a period of several months to a year
or more, and others place orders for immediate or fast turn delivery. Variations
in order placement from a single customer can materially affect backlog. As a
result, the relative size of our backlog has not been a reliable indicator of
future revenue trends. Our backlog for optical memory cards as of March 31, 2009
was $21.4 million and $1.2 million for specialty cards and card printers. There
was no significant backlog for optical card drives, systems and enabling
services as of March 31, 2009.




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 the
fiscal year 2009 and each of the previous two fiscal years, we derived, on
average, 59% of our revenues from seven programs. Due to the lengthy sales
cycles, we believe that these programs, with perhaps the addition of a few other
programs, will be the basis for a majority of our revenues in the near-term. The
loss of or reductions in purchases by any one of our largest customers due to
program cutbacks, competition, or other reasons could materially reduce our
revenue base. Annual or quarterly losses have occurred when there are material
reductions, gaps or delays in card orders from our largest U.S. or foreign
government programs or if such programs were to be reduced in scope, delayed,
canceled, or not extended and not replaced by other card orders or other sources
of income. We had three customers during fiscal year 2009 that accounted for
25%, 19% and 10%, respectively, of our total revenue.




WE
INCURRED NET LOSSES DURING ALL BUT ONE OF THE PREVIOUS FIVE YEARS AND WE MAY NOT
BE ABLE TO GENERATE SUFFICIENT REVENUE IN THE FUTURE TO OBTAIN PROFITABILITY ON
AN ANNUAL BASIS. In the past five years, only fiscal year 2006 generated a net
income. There can be no assurance that we will generate enough revenues in the
near term to attain annual profitability. We are relying principally upon our
optical memory card technology to generate future product revenues, earnings,
and cash flows. If alternative technologies emerge or if we are otherwise unable
to compete, we may not be able to sustain profitability on a quarterly or annual
basis. Annual or quarterly losses would also occur if product revenues do not
keep pace with increases in expenses.




OUR
CONTRACTS WITH OUR LARGEST CUSTOMERS PROVIDE FOR AN INDEFINITE
DELIVERY/INDEFINITE QUANTITY OF SUPPLIES OR SERVICES. We typically receive
purchase orders where customers have the right to delay or cancel at any time.
We have no long-term firm order commitments from any of our largest customers.
Therefore delays in orders, contract cancellations or changes in technology
decisions could result in decreased revenues and operating losses. Our revenue
is predominantly dependent on the receipt of purchase orders on a recurring
basis. We do not have contracts with firm commitments for deliveries over an
extended period of time. This can create volatility in revenues and earnings.
Also, customers may change their technology decisions which could cause further
delays or possibly loss of business. As an example, the Border Crossing Card, a
U.S. government program, accounted for approximately $1.0 million in revenue
during each of the past two fiscal years. However, DHS discontinued the use of
optical memory cards for the Border Crossing Card program during fiscal year
2009 in keeping with the requirements of the Western Hemisphere Travel
Initiative.




OUR
OPTICAL MEMORY CARD PRODUCT REVENUES WILL NOT GROW IF WE DO NOT WIN NEW BUSINESS
IN THE U.S. OR ABROAD AND IF PROGRAMS SUCH AS THE ANGOLAN NATIONAL ID PROGRAM OR
THE ITALIAN NATIONAL ID PROGRAM ARE NOT IMPLEMENTED AS ANTICIPATED. There can be
no assurance that these programs will be implemented as planned or that we will
receive sizable future orders for any of these programs, nor any assurance that
we will be able to win any other new business in the U.S. or abroad which is
necessary to grow our business to the level we desire.




SINCE
THE SALES CYCLE FOR OUR PRODUCTS IS TYPICALLY LONG AND UNPREDICTABLE, WE HAVE
DIFFICULTY PREDICTING WHEN NEW BUSINESS WILL CONTRIBUTE TO REVENUE GROWTH.
Because our customers are large government entities, obtaining substantial
orders usually involves a lengthy sales cycle, requiring marketing and technical
time and expense with no guarantee that substantial orders will result. This
long sales cycle results in uncertainties in predicting operating results,
particularly on a quarterly basis. In addition, the equipment supply and
consulting work we undertake on occasion for the set up of card manufacturing
facilities involves substantial time from start to finish, with the potential
for obstacles to intervene outside our control such as delays in the
construction and readying of the building and site by the customer and the
potential for our customer to request changed specifications for the facility’s
throughput, so there can be substantial lags between when we sign a contract and
receive a deposit and when we complete a project and recognize
revenue.


16




WE
COULD EXPERIENCE EQUIPMENT, RAW MATERIAL, QUALITY CONTROL, OR OTHER PRODUCTION
PROBLEMS ESPECIALLY IN PERIODS OF INCREASING VOLUME. There can be no assurance
that we will be able to meet our projected card manufacturing capacity if and
when customer orders grow significantly. We have made and may continue to make
significant capital expenditures to expand our card manufacturing capacity
dependant upon projected volume. However, since customer demand is difficult to
predict and can be terminated at any time, and we generally wait for such demand
to materialize prior to making capital expenditure commitments, we may be unable
to ramp up our production quickly enough to fill new customer orders in a timely
fashion. This could cause us to lose new business and possibly existing
business. In addition, if we overestimate customer demand, we could incur
significant costs, including inventory write-offs, from creating excess capacity
such as was the case during fiscal years 2007 and 2008. When purchasing raw
materials for our anticipated optical card demand, we take into consideration
the order-to-delivery lead times of vendors and the economic purchase order
quantity for such raw materials. If we over-estimate customer demand, excess raw
material inventory and inventory write-offs can result. We may experience
manufacturing complications associated with increasing our manufacturing
capacity of cards and drives. We may also experience difficulties implementing
new manufacturing processes, meeting customers’ quality or international
standards requirements, or outsourcing some of our manufacturing. The addition
of fixed overhead costs increases our breakeven point and results in lower gross
margins unless compensated for by increased product sales.




WE
ARE CURRENTLY OUR OWN SOLE SOURCE OF OPTICAL MEMORY CARDS AND SEVERAL OF THE
STEPS IN OUR CARD MANUFACTURING PROCESS HAVE NO BUILT-IN REDUNDANCY. THEREFORE,
WE ARE SUSCEPTIBLE TO SUPPLY INTERRUPTIONS, INCLUDING IF CERTAIN MACHINERY WERE
TO BREAK DOWN. MUCH OF OUR MANUFACTURING EQUIPMENT IS COMPRISED OF CUSTOM
VERSIONS OF MACHINERY, SOME OF WHICH IS MORE THAN 20 YEARS OLD. IN ADDITION, WE
ARE AT RISK OF LOSING OR NOT OBTAINING CERTAIN PROGRAMS SHOULD THEY REQUIRE A
SECOND SOURCE. We use a proprietary manufacturing process with custom machinery
and several of the steps in our card manufacturing process have no built-in
redundancy, or in some cases have the redundancy located in Germany. We are
susceptible to supply interruptions when our line goes down or yield decreases
when our line malfunctions. Much of our machinery is comprised of customized
versions of machinery which has long lead times to replace and may be difficult
to maintain or repair, requiring us to be self-reliant. Some of the machinery we
use is more than 20 years old and is no longer produced by its manufacturer,
requiring us to adapt a newer version to our needs, which would involve
additional delay, effort and expense on our part. If current or potential
customers require a second source for their card programs (which is a common
business practice) they could decide to use one of our competitors that may have
multiple sources of supply. This would harm our business and financial
results.




IF
WE ARE UNABLE TO BUY RAW MATERIALS IN SUFFICIENT QUANTITIES AND ON A TIMELY
BASIS, WE WILL NOT BE ABLE TO DELIVER PRODUCTS TO CUSTOMERS ON TIME WHICH COULD
CAUSE US TO LOSE CUSTOMERS, AND OUR REVENUES COULD DECLINE. 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 replicating. We currently have on hand and on order enough film
inventory to produce cards for orders projected over the next nine to fifteen
months. If Kodak announced that it would no longer offer film, we would request
that Kodak provide us with a last-buy opportunity which we would plan to take
maximum advantage of, although no assurance can be given that Kodak would
provide us with such an opportunity. There can be no assurance that we would be
able to procure an alternate source of supply of these films on reasonable terms
or at all, which could force us to design new cards using different materials.
This could be very disruptive to our business, result in increased costs and
lower quality products, and could cause us to lose sales. Further, we are
researching other materials for use as optical memory card media.




THE
VOLATILITY IN THE COST OF PETROLEUM CAN NEGATIVELY IMPACT OUR OPERATING INCOME
AND GROSS MARGIN IF THIS RESULTS IN INCREASES IN THE COST OF OUR PRODUCTION
MATERIALS SUCH AS THE POLYCARBONATE-BASED PRODUCTS. The polycarbonate raw
material for our cards is petroleum based. The volatility in the cost of
petroleum could impact our costs for such raw material and also lead to higher
energy bills for running our manufacturing facilities. Long-term increases in
petroleum prices could lead to a decline in our gross margins and income unless
we are able to adjust our selling prices.


17




AN
INTERRUPTION IN THE SUPPLY OF READ/WRITE DRIVE PARTS OR DIFFICULTIES ENCOUNTERED
IN READ/WRITE DRIVE ASSEMBLY COULD CAUSE A DELAY IN DELIVERIES OF DRIVES AND
OPTICAL MEMORY CARDS AND A POSSIBLE LOSS OF SALES, WHICH WOULD ADVERSELY AFFECT
OUR OPERATING RESULTS. Several major components of our read/write drive are
designed specifically for our products. For example, the optical recording head
for the current drive is a part obtained from one supplier; and at current
production volumes, it is not economical to have more than one supplier for this
custom component. While we carry a large inventory of safety stock for this
item, any delays in or inability to obtain parts from this supplier could cause
us to lose revenues while we source a second supplier. The ability to produce
read/write drives in high-volume, if required, will be dependent upon
maintaining or developing sources of supply of components that meet our
requirements for high volume, quality, and cost. In addition, we could encounter
quality control or other production problems at high-volume production of
read/write drives.




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 PROGRAMS INVOLVE OUR CARDS AS PART OF A SOLUTION WHICH INCLUDES
TECHNOLOGIES OF THIRD PARTIES. DIFFICULTIES ENCOUNTERED BY THESE THIRD PARTIES
COULD CAUSE OUR ULTIMATE CUSTOMERS, GENERALLY GOVERNMENTS, TO FIND FAULT IN
OPTICAL CARDS AND SWITCH TO OTHER SOLUTIONS EVEN IF OUR OPTICAL TECHNOLOGY IS
NOT THE ROOT CAUSE OF ANY FAULT. In certain of our current programs various
third-party technologies such as contact or contactless chips are added to our
cards. The embedding or addition of other technologies to the LaserCard optical
memory card, especially when contracted to independent third parties, could
potentially lead to technical, compatibility and other issues. In such
circumstances, it may be difficult to determine whether a fault originated with
our technology or that of a co-supplier or the person embedding or adding the
third party technology to our cards. If such faults occur, they could be
difficult, expensive, and time-consuming to resolve. Such difficulties could
lead to our ultimate customers, the foreign governments, switching to other
technologies even if optical technology is not the root cause of the fault(s).
The resulting loss of customers would adversely affect our
revenues.




WE
ARE LARGELY DEPENDENT ON SYSTEMS INTEGRATORS FOR IMPLEMENTATION OF CARD PROGRAMS
AND THEIR METHOD OF IMPLEMENTATION MAY NOT BE SUCCESSFUL DUE TO QUALITY OR COST.
We mainly sell to VARs and system integrators who in turn sell solutions to the
end customer. The integrators may not follow the recommendations we provide for
the handling, processing, and printing on our cards and working with the
end-user in the card issuing process. This could lead to low quality, high
costs, or both resulting in damage to our reputation and loss of the contract.
In order to mitigate this risk, we work to train the integrators to avoid such
situations but cannot control their work and may not always be successful in our
training. We plan to continue to offer this support and then transition the card
issuing process to local resources once the program is running successfully.
There can be no assurance that issues with our systems integrators in the future
will not damage our reputation, reduce our revenues, or cause us to lose various
governmental programs.




OUR
OPTICAL MEMORY CARDS HAVE A COMPLEX STRUCTURE THAT REQUIRES A HIGH DEGREE OF
TECHNICAL KNOWLEDGE AND EXPERIENCE TO MEET INCREASINGLY STRINGENT PERFORMANCE
REQUIREMENTS. WE HAVE AND COULD IN THE FUTURE AGREE TO CERTAIN CHARACTERISTICS
BEYOND THOSE REQUIRED IN INDEPENDENTLY PUBLISHED STANDARDS. THIS COULD INCREASE
OUR COST OF MANUFACTURING CARDS OR RESULT IN ACCEPTING RETURNS OR GIVING CREDITS
TO THE CUSTOMER IF WE FAIL TO COMPLY WITH THESE CHARACTERISTICS. MANY CUSTOMERS
MAINTAIN SIGNIFICANT ADVANCE INVENTORY WHICH INCREASES THIS RISK. There can be
no assurance that we will be able to meet customers’ quality or standards
requirements consistently. This could lead to high manufacturing costs due to
low product yields or unexpected product returns. We employ a rigorous quality
control procedure, are ISO 9001:2000 certified and we strive to deliver product
that meets published standards and customer expectations. Even so, we cannot
give assurance that our products will meet customer expectations in all cases.
We have in the past, and we may in the future, replace product held by the
customer or give credit for products previously delivered. Any failure to meet
our customers’ standards may harm our reputation, result in product returns and
inventory write downs, and may cause us to lose sales and
customers.


18




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




THE
MARKETS FOR OUR PRODUCTS ARE COMPETITIVE, AND IF WE ARE UNABLE TO COMPETE
SUCCESSFULLY, REVENUES COULD DECLINE OR FAIL TO GROW. Our optical memory cards
may compete with optical memory cards that can be manufactured and sold by three
of our licensees (although none is currently doing so) and with other types of
portable data storage technologies applied to ID cards. These may include RF
enabled chip and RFID tags. Financial, personnel and marketing resources of some
of the competing companies are significantly greater than our resources.
Competitive product factors include system/card portability, interoperability,
price-performance ratio of cards and associated equipment, durability,
environmental tolerance, and card security. Although we believe our cards offer
key technological and security advantages for certain applications, the current
price of optical card read/write drives could be a competitive disadvantage in
some of our targeted markets. Nevertheless, we believe the cost of ownership of
an optical card system is competitive in applications requiring large
populations of cards because of the relatively high overall cost to implement a
system based on our major competition, IC cards.




THE
PRICE OF OUR COMMON STOCK IS SUBJECT TO SIGNIFICANT VOLATILITY. The price of our
common stock is subject to significant volatility, which may be due to
fluctuations in revenues, earnings, liquidity, press coverage, analyst
recommendations, financial market interest, trading volume, and stock market
conditions, as well as changes in technology and customer demand and
preferences. As a result, our stock price might be low at the time a stockholder
wants to sell the stock. For example, during fiscal year 2009 our stock price
fluctuated from a high of $9.73 per share to a low of $2.05 per share. Also,
since we have a relatively low number of shares outstanding (approximately 12
million shares) there will be more volatility in our stock if one or two major
holders, for example, large institutional holders, attempt to sell a large
number of shares in the open market. Furthermore, our trading volume is often
small, meaning that a few trades may have disproportionate influence on our
stock price. In addition, someone seeking to liquidate a sizeable position in
our stock may have difficulty doing so except over an extended period or
privately at a discount. Thus, if one or more stockholders were to sell or
attempt to sell a large number of its shares within a short period of time, such
sale or attempt could cause our stock price to decline. There can be no
guarantee that stockholders will be able to sell the shares that they acquired
at a price per share equal to or greater than the price they paid for the
stock.




WE
ARE SUBJECT TO RISKS ASSOCIATED WITH CHANGES IN FOREIGN CURRENCY EXCHANGE RATES.
Part of the manufacturing process of certain LaserCard products that we sell
outside the U.S. takes place in our operations in Germany. Also, some of the raw
materials we use to manufacture optical memory cards are sourced in Europe.
These costs are denominated in Euros, the currency used in much of Europe.
However, when we sell our finished products, the prices that we charge are
denominated in U.S. dollars. Accordingly, we are subject to exposure when the
exchange rate for Euros increases in relation to the U.S. dollar. As of March
31, 2009, we had not entered into a forward exchange contract to hedge against
or potentially minimize the foreign currency exchange risk related to
transactions other than those related to inter-company payables and receivables.
The losses on foreign currency exchange related to purchase transactions and
intercompany receivables for both fiscal years 2009 and 2008 were immaterial,
but we give no assurance that such losses will not be significant in the
future.


19




WE
HAVE INVESTED A SIGNIFICANT PORTION OF OUR CASH IN AUCTION RATE SECURITIES
(“ARS”), WHICH BECAME ILLIQUID IN FEBRUARY 2008. WE COULD RECORD FURTHER
IMPAIRMENT CHARGES IF THE FAIR VALUE OF THESE INVESTMENTS DECLINES FURTHER. As
of March 31, 2009, we held $13.5 million par value (with a fair value of
approximately $12.2 million), of marketable securities consisting of ARS. Given
the disruptions in the credit markets and the fact that the liquidity for these
types of securities remains uncertain, as of March 31, 2009, we classified all
of our ARS as noncurrent assets in our consolidated balance sheets as our
ability to liquidate such securities in the next twelve months is uncertain. We
accepted a rights offering by UBS in December 2008. The Company elected to adopt
Statement of Financial Accounting Standards (“SFAS”) No. 159, The
Fair Value Option for Financial Assets and Financial Liabilities (“SFAS
No. 159”) on the Put Option received in the rights offering and elected to
treat our ARS portfolio from available-for-sale to trading securities. The
transfer resulted in the reversal of prior unrealized losses, net of taxes, on
the ARS from accumulated other comprehensive income and the recording of an
other-than temporary impairment of approximately $1.3 million on the $13.5
million (par value) portion of our ARS portfolio and the recognition of a
benefit of approximately $1 million related to the Put Option provided by the
settlement. The transfer to trading securities reflects management’s intent to
exercise its Put Option during the period June 30, 2010 through July 3, 2012. We
will analyze the fair value of the ARS at each balance sheet date. In order to
validate the fair value estimate of these securities, we incorporated
assumptions such as credit quality or financial standing of the issuer, final
stated maturities, estimates on the probability of the issue being called prior
to final maturity, impact due to extended periods of maximum auction rates,
liquidity risk premium, and broker quotes from independent valuators using
widely accepted financial models. We believe that these are reasonable estimates
reflecting the unique circumstances of the subject SLARS and the method of
valuing the put as a forward contract is reasonable. However, due to the
unprecedented issues surrounding the global credit market, these assumptions may
change considerably and may result in further impairment charges. If UBS is
insolvent on June 30, 2010 or otherwise unable to fulfill its obligations
described in the October 7, 2008 prospectus, we may incur additional losses on
the ARS especially if we would need to liquidate them over a short period of
time.




THE
AMOUNT OF OUR NET OPERATING LOSS CARRYFORWARDS (“NOLS”) IS UNCERTAIN AND PRIOR
TRANSACTIONS TO WHICH WE HAVE BEEN A PARTY AND FUTURE TRANSACTIONS TO WHICH WE
MAY BECOME A PARTY, INCLUDING STOCK ISSUANCES AND CERTAIN SHAREHOLDER STOCK
TRANSACTIONS, MAY JEOPARDIZE OUR ABILITY TO USE SOME OR ALL OF OUR
NOLS. In
addition, California and certain states have recently suspended or are
considering suspending, the ability to use NOLs in future years and this could
adversely affect future operating results. Based on current tax law, we believe
we have certain NOLs for U.S. federal and state income tax purposes to offset
future taxable income. As of March31, 2009, we had incurred significant losses
in the U.S. Our ability to utilize these NOLs may be subject to significant
limitations under Section 382 of the Internal Revenue Code if we have
undergone, or undergo in the future, an ownership change. An ownership change
occurs for purposes of Section 382 of the Internal Revenue Code if, among
other things, stockholders who own or have owned, directly or indirectly, 5% or
more of our common stock (with certain groups of less-than-5% stockholders
treated as a single stockholder for this purpose) increase their aggregate
percentage ownership of our common stock by more than fifty percentage points
above the lowest percentage of the stock owned by these stockholders at any time
during the relevant three-year testing period. In the event of an ownership
change, Section 382 imposes an annual limitation, based upon the value of
the Company at the time of the ownership change, on the amount of taxable income
a corporation may offset with NOLs. Any unused annual limitation may be carried
over to later years until the applicable expiration date for the respective
NOLs. To the extent that these NOLs become significantly limited, we expect to
be taxed on our income, if any, at the U.S. federal and state statutory rates.
As a result, any inability to utilize these NOLs would adversely affect future
operating results by the amount of the federal or state taxes that would not
have otherwise been payable, having an adverse impact on our operating results
and financial condition. In addition, the inability to use NOLs would adversely
affect our financial condition relative to our financial condition had the NOLs
been available. In addition, California and certain states have suspended use of
NOLs, and other states are considering similar measures. As a result, we may
incur higher state income tax expense in the future. Depending on our future tax
position, continued suspension of our ability to use state NOLs could have an
adverse impact on our operating results and financial
condition.


20




WE
SOLD A CARD MANUFACTURING LICENSE UNDER WHICH WE WILL PROVIDE CERTAIN FACTORY
SET-UP AND TRAINING SERVICES TO PREVENT GLOBAL OF SLOVENIA. IF WE AND PREVENT
GLOBAL ARE SUCCESSFUL, THEY COULD COMPETE WITH US FOR BUSINESS. We are obligated
to deliver the contracted manufacturing equipment and installation support to
Prevent Global for its to-be-built new card manufacturing facility in Slovenia,
to provide a targeted initial manufacturing capacity of 10 million optical cards
annually. Our obligation arises under an agreement with Global Investment Group
Ltd (“GIG”) which was assumed by Prevent Global in 2007. GIG has recently
claimed that it has rights to the agreement, which Prevent Global disputes. It
is possible that we, Prevent Global or GIG will commence litigation to enforce
rights under this agreement in England, the venue for disputes under the
agreement. Any such litigation may be expensive to us and distracting to our
management even if we ultimately prevail. In addition, if either Prevent Global
or GIG does not perform under the agreement, we may not receive the expected
benefits under the agreement, including profits and payment of past due
amount.




Even
if Prevent Global is able to maintain its position as contractual counterparty,
no assurance can be given that Prevent Global will make a plant site ready to
accept equipment deliveries; that Prevent Global will arrange for pick-up of the
equipment; that the equipment will be able to be successfully installed so that
the plant becomes operational; or that Prevent Global will raise the financing
required to complete the project and commence operations. Assuming the plant
becomes operational, we will also be assigning a person to be on site through
March 31, 2011, and throughout the license term if the option is elected by
Prevent Global, to monitor quality, security, and operational procedures, with a
mutual goal that the facility and the cards made in Slovenia conform to our
standards. If cards are not produced in conformance with our quality standards,
the reputation and marketability of optical memory card technology could be
damaged. If the factory does not become operational and produce quality cards in
high volume, or if Prevent Global is unable to raise sufficient capital to
build, equip and operate this facility, we would not obtain the hoped-for
benefits--including ongoing royalties, sales of raw materials to Prevent Global,
and expansion of the European market. On the other hand, if and when the factory
is successfully manufacturing the cards in high volume, it could compete against
us for business in certain territories, which could reduce our potential card
revenues if the market does not expand. Revenue on the contract will begin to be
recognized when the equipment has been installed and is operating according to
specification and training completed, which date is dependent in part on Prevent
Global providing a facility in Slovenia.




WE
MAY NOT BE ABLE TO ATTRACT, RETAIN OR INTEGRATE KEY PERSONNEL, WHICH MAY PREVENT
US FROM SUCCEEDING. We may not be able to retain our key personnel or attract
other qualified personnel in the future. Our success will depend upon the
continued service of key management personnel. The loss of services of any of
the key members of our management team, including our chief executive officer,
chief operating officer, vice president of finance and chief financial officer,
the managing directors of our German operations, or our vice president of
marketing, or our failure to attract and retain other key personnel could
disrupt operations and have a negative effect on employee productivity and
morale, thus decreasing production and harming our financial results. In
addition, the competition to attract, retain and motivate qualified personnel 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 REGULATIONS COULD ADVERSELY AFFECT RESULTS OF OPERATIONS. We sell our
products worldwide and, therefore, our products must comply with various
domestic and international laws, regulations and standards and our business
could be subject to risks due to changes in a country’s or region’s political,
regulatory or economic conditions. We may experience difficulty in securing
required approvals, licenses or permits on commercially reasonable terms, or at
all. Differing tax laws and changes in those laws may also affect our future
results of operations. The implementation of unfavorable regulations or industry
standards, or unfavorable interpretations of existing regulations by courts or
regulatory bodies, could require us to incur significant compliance costs, cause
the development of the affected products to become impractical or otherwise
adversely affect our ability to produce or market our products. Failure to
comply with existing or new laws or regulations, including export and import
restrictions and barriers, or to obtain timely domestic or foreign regulatory
approvals, licenses or permits could result in lost sales or increased
costs.


21




PANDEMICS
THROUGHOUT THE WORLD COULD ADVERSELY AFFECT OUR BUSINESS. The occurrence of a
pandemic such as the Swine 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, 2009 and
2008. Although our assessment, testing and evaluation resulted in our conclusion
that as of March 31, 2009 and 2008, 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.




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




WE
MAY FACE RISKS FROM OUR FOREIGN OPERATIONS AND SUBSTANTIAL INTERNATIONAL SALES.
Our LaserCard products are used in countries around the world in addition to the
United States, such as Germany, United Kingdom, Switzerland, Angola, Italy,
India, Costa Rica and the Kingdom of Saudi Arabia. International sales accounted
for approximately 84% of our revenues for the year ended March 31, 2009, 78% for
the year ended March 31, 2008 and 74% for the year ended March 31, 2007. We also
operate a German subsidiary. Our international operations are subject to the
following risks, among others: difficulty with staffing and managing
international operations; transportation and supply chain disruptions and
increased transportation expense as a result of epidemics, terrorist activity,
acts of war or hostility, increased security and less developed infrastructure;
political and economic uncertainty caused by changes in governments, epidemics,
terrorism or acts of war or hostility; difficulties in collecting receivables
and longer accounts receivable payment cycles; and potentially adverse tax
consequences. For example, our German subsidiary, CCD, entered into a contract
to provide consulting services and equipment to the Golden Chip Company (“GCC”)
of Saudi Arabia to enable GCC to establish a card manufacturing facility in
Saudi Arabia. After many delays on the part of GCC, GCC has alleged that CCD
failed to perform under this contract and has demanded payment of damages. CCD
has disputed this claim and reserved the right to terminate the contract and
claim damages against GCC for lost profits. GCC has threatened to bring
arbitration proceedings in London, United Kingdom, to enforce its rights under
the agreement. Litigation, including arbitration, can be expensive, especially
in the United Kingdom, and can cause significant management distraction, even if
we ultimately prevail.


22




ITEM
      1B.
                UNRESOLVED
      STAFF COMMENTS




Not
applicable.


ITEM
      2.
              PROPERTIES




As
of March 31, 2009, 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. 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. These leases will expire in October 2013 and in March
2014. Upon expiration of the leases, we believe that these or other suitable
buildings will be available to be leased on a reasonable basis. 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 on leases one of which
will expire within a six-month notice and the other in March 2012. Also, we own
land and an approximately 14,000 square foot building in Rastede, Germany that
is used in production of specialty cards and research and development. We also
lease a small office in Huntington, New York for marketing activities. We
believe these leased and owned facilities to be satisfactory for our present
operations.


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 consolidated financial position, consolidated results of
operations or consolidated cash flows, the outcome of these matters is not
determinable and negative outcomes may adversely affect our consolidated
financial position, liquidity, or consolidated 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. The table below sets forth the high and low sale
prices for our common stock (rounded to two decimal points) as reported by
Nasdaq during the fiscal periods indicated.




QUARTERLY
STOCK PRICES


Fiscal
      Year 2009
                        
                        
                        Fiscal
      Year 2008High
      Price
                        
                        
                        Low
      Price
                        
                        
                        High
      Price
                        
                        
                        Low
      PriceFirst
      Quarter
                        
                        $
                        9.73
                        
                        
                        $
                        4.55
                        
                        
                        $
                        13.30
                        
                        
                        $
                        9.96Second
      Quarter
                        
                        
                        6.19
                        
                        
                        
                        3.55
                        
                        
                        
                        12.74
                        
                        
                        
                        9.75Third
      Quarter
                        
                        
                        6.10
                        
                        
                        
                        2.54
                        
                        
                        
                        11.54
                        
                        
                        
                        8.80Fourth
      Quarter
                        
                        
                        4.40
                        
                        
                        
                        2.05
                        
                        
                        
                        12.94
                        
                        
                        
                        7.37




As
of March 31, 2009, there were approximately 677 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
fiscal year ended March 31, 2009 and fiscal year ended March 31,
2008.




For
information regarding securities authorized for issuance under equity
compensation plans, see Part III, Item 12 below.




Stock
Performance Graph




In
the following stock performance graph, the cumulative total return on investment
for 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, 2004, and that any dividends were
reinvested.


24









*
      $100 invested on 3/31/04 in stock or index-including reinvestment of
      dividend.Fiscal
      year ending March 31.




The stock
performance graph was plotted using the following data:




Fiscal
      Years Ended March 31,2004
                                                      
                                                      
                                                      2005
                                                      
                                                      
                                                      2006
                                                      
                                                      
                                                      2007
                                                      
                                                      
                                                      2008
                                                      
                                                      
                                                      2009LaserCard
      Corp.
                                                      
                                                      $
                                                      100.00
                                                      
                                                      
                                                      $
                                                      37.29
                                                      
                                                      
                                                      $
                                                      168.14
                                                      
                                                      
                                                      $
                                                      91.28
                                                      
                                                      
                                                      $
                                                      63.91
                                                      
                                                      
                                                      $
                                                      17.11Russell
      2000
                                                      
                                                      
                                                      100.00
                                                      
                                                      
                                                      
                                                      105.41
                                                      
                                                      
                                                      
                                                      132.66
                                                      
                                                      
                                                      
                                                      140.50
                                                      
                                                      
                                                      
                                                      122.23
                                                      
                                                      
                                                      
                                                      76.39NASDAQ
      Electronic Components
                                                      
                                                      
                                                      100.00
                                                      
                                                      
                                                      
                                                      79.99
                                                      
                                                      
                                                      
                                                      90.87
                                                      
                                                      
                                                      
                                                      89.00
                                                      
                                                      
                                                      
                                                      86.75
                                                      
                                                      
                                                      
                                                      58.81


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, 2009 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 SUBSIDIARIES


FIVE-YEAR
SUMMARY OF CONSOLIDATED FINANCIAL INFORMATION


Fiscal
Years Ended March 31, 2005 - 2009


(In
thousands, except per share amounts)


STATEMENT
      OF OPERATION DATA
                  
                  2009
                  
                  
                  2008
                  
                  
                  2007
                  
                  
                  2006
                  
                  
                  2005Revenue
                  
                  $
                  49,771
                  
                  
                  $
                  37,008
                  
                  
                  $
                  32,270
                  
                  
                  $
                  39,857
                  
                  
                  $
                  28,544Cost
      of sales
                  
                  
                  32,600
                  
                  
                  
                  27,009
                  
                  
                  
                  25,406
                  
                  
                  
                  24,804
                  
                  
                  
                  22,637Gross
      profit
                  
                  
                  17,171
                  
                  
                  
                  9,999
                  
                  
                  
                  6,864
                  
                  
                  
                  15,053
                  
                  
                  
                  5,907Selling,
      general, and administrative expenses
                  
                  
                  15,424
                  
                  
                  
                  15,253
                  
                  
                  
                  13,575
                  
                  
                  
                  11,949
                  
                  
                  
                  11,891Research
      and development expenses
                  
                  
                  2,366
                  
                  
                  
                  2,878
                  
                  
                  
                  3,095
                  
                  
                  
                  2,338
                  
                  
                  
                  3,018Impairment
      of goodwill and intangible assets
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  3,811
                  
                  
                  
                  —
                  
                  
                  
                  —Interest
      and other income, net
                  
                  
                  (235
                  )
                  
                  
                  812
                  
                  
                  
                  895
                  
                  
                  
                  471
                  
                  
                  
                  240Income
      (loss) before income taxes
                  
                  
                  (854
                  )
                  
                  
                  (7,320
                  )
                  
                  
                  (12,722
                  )
                  
                  
                  1,237
                  
                  
                  
                  (8,762
                  )Income
      tax (benefit) provision
                  
                  
                  86
                  
                  
                  
                  (114
                  )
                  
                  
                  (351
                  )
                  
                  
                  443
                  
                  
                  
                  139Net
      income (loss)
                  
                  $
                  (940
                  )
                  
                  $
                  (7,206
                  )
                  
                  $
                  (12,371
                  )
                  
                  $
                  794
                  
                  
                  $
                  (8,901
                  )Net
      income (loss) per share:Basic
                  
                  $
                  (0.08
                  )
                  
                  $
                  (0.60
                  )
                  
                  $
                  (1.05
                  )
                  
                  $
                  0.07
                  
                  
                  $
                  (0.78
                  )Diluted
                  
                  $
                  (0.08
                  )
                  
                  $
                  (0.60
                  )
                  
                  $
                  (1.05
                  )
                  
                  $
                  0.07
                  
                  
                  $
                  (0.78
                  )Weighted
      average number of common and common equivalent shares:Basic
                  
                  
                  12,052
                  
                  
                  
                  11,929
                  
                  
                  
                  11,814
                  
                  
                  
                  11,415
                  
                  
                  
                  11,362Diluted
                  
                  
                  12,052
                  
                  
                  
                  11,929
                  
                  
                  
                  11,814
                  
                  
                  
                  11,587
                  
                  
                  
                  11,362BALANCE
      SHEET DATACurrent
      assets
                  
                  $
                  41,814
                  
                  
                  $
                  23,625
                  
                  
                  $
                  37,304
                  
                  
                  $
                  39,574
                  
                  
                  $
                  21,310Current
      liabilities
                  
                  
                  22,886
                  
                  
                  
                  9,866
                  
                  
                  
                  9,083
                  
                  
                  
                  9,228
                  
                  
                  
                  6,764Total
      assets
                  
                  
                  74,290
                  
                  
                  
                  56,306
                  
                  
                  
                  58,100
                  
                  
                  
                  62,335
                  
                  
                  
                  48,768Long-term
      liabilities
                  
                  
                  31,556
                  
                  
                  
                  28,714
                  
                  
                  
                  26,418
                  
                  
                  
                  21,090
                  
                  
                  
                  15,326Stockholders’
      equity
                  
                  
                  19,848
                  
                  
                  
                  17,726
                  
                  
                  
                  22,599
                  
                  
                  
                  32,017
                  
                  
                  
                  26,678


26




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




This
annual report on Form 10-K, including the following management’s discussion and
analysis, contains forward-looking information that you should read in
conjunction with the consolidated financial statements and notes to consolidated
financial statements that we have included elsewhere in this annual report on
Form 10-K. For this purpose, any statements contained in this report that are
not statements of historical facts may be deemed to be forward-looking
statements. Words such as “believes,” “plans,” “anticipates,” “expects,” “will”
and similar expressions are intended to identify forward-looking statements. Our
actual results may differ materially from the plans, intentions, or expectations
we disclose in the forward-looking statements we make. We have included
important factors under the heading “Risk Factors” in Item 1A above that we,
among other factors, believe could cause actual results to differ materially
from the forward-looking statements we make. We are not obligated to publicly
update any forward-looking statements, whether as a result of new information,
future events or otherwise.




Overview




Headquartered
in Mountain View, California, LaserCard Corporation, together with its
subsidiaries, is a leading provider of secure ID solutions to governments and
commercial clients worldwide. We develop, manufacture, and integrate LaserCard®
optical memory cards (“OMCs”), encoders, peripherals, smart and specialty cards,
biometrics, and modular software. Our cards and systems are used in various
applications, including citizen identification, government service delivery and
facility access. Our cards and systems are used in countries around the world,
such as the United States, Germany, United Kingdom, Switzerland, Angola, Italy,
India, Costa Rica and the Kingdom of Saudi Arabia, for demanding applications
including government service provision and facility access. LaserCard’s
wholly-owned German subsidiary, CCD, with offices in Rastede and Ratingen,
Germany, manufactures and offers a wide range of high quality specialty cards,
plus card personalization and ID management solutions under the CCD and Cards
& More brands.




The
majority of our revenue is from sales of products and services through partners
such as value added resellers (“VARs”) and system integrators (“SIs”) who
generally have specific experience in the development of markets and
applications for LaserCard products. We have sales staff located in California,
the Washington D.C. area and Germany, whose principal role is developing and
supporting our VARs and SIs reseller channel.




Our
revenues are derived mainly from advanced technology cards used in government
identity programs, such as optical memory, contact, contactless and RFID cards,
and from high quality specialty cards for applications such as major event
badging and access control. The remainder of our revenues comes from the sale of
enabling services, such as consulting, custom application development and the
integration of ID Management Solution modules, such as data capture, card
personalization and quality assurance; and from equipment sales, knowledge
transfer and licensing.




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




We
emphasize selling secure credentials into government programs for individual
identification. We offer a range of products including cards that contain
magnetic stripe, contactless Radio Frequency Identification (“RFID”), contact IC
chip, optical memory, holograms, biometric identification, or a combination of
such features. This allows us to sell to a wide range of customers around the
world.




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




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


27




We
provide Enabling Services as a strategy to promote card sales. Examples include
the furnishing of equipment, training and management of a card issuance system
for the Kingdom of Saudi Arabia national ID card program, and a complete data
collection, data base, and card issuing system for the Costa Rica Foreign
Resident ID Card program and the National ID Card program in
Angola.




The
major near term growth potential for LaserCard optical memory cards is in
government-sponsored identification programs in several countries. Since
governmental card programs typically rely on policy-making, which in turn is
subject to technical requirements, budget approvals, and political
considerations, there is no assurance that these programs will be implemented as
expected, that they will include optical cards or our products.




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


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




Currently
our optical memory card segment revenues are mainly derived from the following
programs; the U.S. DHS Green Card programs, a National ID Card for the Kingdom
of Saudi Arabia, three state-level vehicle registration card programs in India,
a Foreign Resident ID Card program in Italy, and the Foreign Resident ID card
program in Costa Rica. Also there are emerging programs such as the National
Citizen ID Card program in Italy, a government agency card program in Italy, and
the recently announced National ID Card program in Angola.




We
may invest up to $2 million during fiscal year 2010 in additional capital
equipment and leasehold improvement expenditures for optical memory card and
specialty card production capacity and manufacturing enhancement at our
facilities as necessary for increased volumes and for manufacturing
efficiency.




Accounting
Period




For
purposes of presentation, we label our annual accounting period end as March 31
and our quarterly accounting period ends as June 30, September 30 and December
31. In fact, we operate and report based on quarterly periods ending on the
Friday closest to month end. Fiscal year 2009 ended on April 3, 2009, fiscal
year 2008 ended on March 28, 2008, and fiscal year 2007 ended on March 30,
2007.


28




CONSOLIDATED
RESULTS OF OPERATIONS




Revenues




The table below presents
consolidated revenues recorded by our U.S. and German operations for the fiscal
years ended March 31 (in thousands):


2009
                
                2008
                
                2007U.S.
      operations
                
                $
                33,978
                
                $
                23,778
                
                $
                20,492German
      operations
                
                
                15,793
                
                
                13,230
                
                
                11,778$
                49,771
                
                $
                37,008
                
                $
                32,270




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 from a relatively large number of commercial
customers in EMEA, including universities in Germany for student identification
cards and organizers of sporting events for secure access cards.




Our major customers are
shown below as a percentage of total revenues for the fiscal years ended March
31:


2009
                                              
                                              
                                              2008
                                              
                                              
                                              2007Omar
      K. ACSS Communications and Space ServicesCompany Ltd.
      (“ACSS”)
                                              
                                              
                                              25
                                              %
                                              
                                              17
                                              %
                                              
                                              13
                                              %General
      Dynamics Information Technology (“GDIT”)
                                              
                                              
                                              19
                                              %
                                              
                                              29
                                              %
                                              
                                              28
                                              %Gemalto
      S.A. (“Gemalto”)
                                              
                                              
                                              10
                                              %
                                              
                                              14
                                              %
                                              
                                              <10
                                              %




Our
major government card programs are shown below as a percentage of total
revenues for the fiscal years ended March 31:


2009
                                                  
                                                  
                                                  2008
                                                  
                                                  
                                                  2007Kingdom
      of Saudi Arabia National ID Program
                                                  
                                                  
                                                  26
                                                  %
                                                  
                                                  23
                                                  %
                                                  
                                                  13
                                                  %United
      States Green Cards
                                                  
                                                  
                                                  14
                                                  %
                                                  
                                                  17
                                                  %
                                                  
                                                  23
                                                  %Other
      programs (each less than 10%):Foreign
      Resident ID Card program in Costa RicaVarious
      card programs in ItalyCanadian
      Permanent Resident CardsNational
      ID Card in Angola




The
U.S. Green Card program for the DHS has been an important part of our revenue
base. We recorded revenues of $5.8 million during fiscal year 2009 and
approximately $6.4 million in each of the prior two fiscal years. DHS has been
gradually reducing its inventory of current cards that had been designed in 1997
as it transitions its infrastructure to issue the newly designed Green Cards.
This attributed to the 9% decrease in revenue during fiscal year 2009 as
compared to fiscal year 2008. In January, 2009, we received a purchase order for
approximately $8 million for the supply of new advanced U.S. Permanent Resident
Cards (the “Green Card”). Deliveries on this order are expected to be completed
during fiscal 2010.




Another
U.S. government program, the BCC, which accounted for approximately $0.2 million
in revenue during the past fiscal year was redesigned in keeping with the
requirements of the Western Hemisphere Travel Initiative and is now supplied by
another manufacturer. Revenues for this program totaled $1 million in each of
the prior two fiscal years.




We
also supply secure national ID cards to the Kingdom of Saudi Arabia. We recorded
revenues of $13.2 million, $8.6 million, and $4.4 million for this program
during fiscal years 2009, 2008, and 2007, respectively. We anticipate ongoing
revenues to be in the range of $5.0 to $10.0 million per year. Our backlog at
March 31, 2009 for this program totaled $0.9 million.


29




We
supply optical memory cards for vehicle registration programs for three states
in India. Revenues for these programs totaled $4.4 million, $3.5 million, and
$1.8 million during fiscal years 2009, 2008, and 2007, respectively. We expect
ongoing orders to be in the range of $3.0 million to $4.0 million per
year.




For
Costa Rica’s new Foreign Resident ID card, introduced in June 2008, their
Department of Immigration (DGME) selected LaserCard’s tamper-proof optical
memory technology featuring layered security. The move was designed to bring
Costa Rica’s DGME closer to its vision of a “regional standard” in identity
credentials to facilitate cross border travel and strengthened security across
multiple countries in the Americas. We were also instrumental to the
introduction of their new nationwide data capture facilities designed to
accelerate use of the new, highly secure ID card by the country’s 200,000+ legal
foreign residents. We recorded revenue of $3.2 million during fiscal year 2009
for this program.




In
Italy, we are the supplier of optical card stock for secure government
identification programs, starting with the citizen ID card, Italian CIE cards,
the Italian PSE cards, the CSE cards, and Italian’s Ministry of Justice ID
cards. The CIE cards are currently being issued in low volume. We believe that
conflicts over the cards’ validity period continues to be the main hurdle for
initiation of volume issuance. In March 2009, we received an order from our VAR,
Laser Memory Card S.p.A. for approximately $2.5 million for foreign resident ID
cards and for special bi-lingual versions of the CIE cards which we partially
delivered during the quarter ended March 31, 2009. Meanwhile, the Italian
Ministry of Justice ID cards continue to be personalized and issued to Ministry
employees by Italy’s state printer and prime contractor, Istituto Poligrafico e
Zucca dello Stato S.p.A. (“Poligrafico”). We recorded revenue of $2.9 million,
$0.5 million, and $2.4 million during fiscal years 2009, 2008, and 2007,
respectively, for all of these Italian programs. Our backlog at March 31, 2009
for the various programs in Italy totaled $0.9 million.




Under
a subcontract for Canada’s Permanent Resident Cards, we recorded revenue of $1.8
million, $2.8 million, and $1.2 million during fiscal years 2009, 2008, and
2007, respectively. This subcontract expired on March 31, 2009. A small final
order valued at $0.3 million will be delivered by June 2009.




In
January 2008, the government of Angola announced a contract award to
DGM-Sistemas (“DGM”), of Luanda, Angola, for the delivery of a complete ID
management system. The contract calls for an initial 8 million optical memory
cards for the country’s new national citizen ID program to be issued as the
infrastructure is built. Up to an additional 12 million cards could be issued
later. We teamed with DGM as the exclusive supplier of cards for the project.
Other team members include Unisys Corporation (NYSE: UIS) which is responsible
for systems integration and our value-added reseller, Identicard S.A. of
Portugal, which developed the system architecture. The indefinite
delivery-indefinite quantity subcontract includes $103 million of products and
services to be provided by LaserCard including optical memory cards, card
personalization systems, and printer consumables over five years. We recorded
revenue of $2.7 million for card personalization equipment and consumables
during fiscal year 2009. Our backlog at March 31, 2009 for this order includes
$8.8 million for optical memory cards. Card deliveries for this order are
expected to begin in the second quarter of fiscal year 2010 and continue
throughout the fiscal year.




Revenues.
Our total revenues consisted of sales in our three segments of (1) optical
memory cards, (2) drives, systems and enabling services, and (3) specialty cards
and card printers, as well as, at times, other miscellaneous items. Total
revenues for fiscal years 2009, 2008, and 2007 were $49.8 million, $37 million
and $32.3 million, respectively.


30




The
following table presents our consolidated revenues by segment for the fiscal
years ended March 31 (in thousands, except for percentages):


2009
                  
                  
                  2008
                  
                  
                  2007
                  
                  
                  Change
                    2009
      vs 2008
                  
                  
                  Change
                    2008
      vs 2007Optical
      memory cards
                  
                  $
                  30,920
                  
                  
                  $
                  22,139
                  
                  
                  $
                  18,985
                  
                  
                  $
                  8,781
                  
                  
                  $
                  3,154%
      of total revenues
                  
                  
                  62
                  %
                  
                  
                  60
                  %
                  
                  
                  59
                  %Optical
      card drives, systems, and enabling services
                  
                  
                  3,306
                  
                  
                  
                  1,639
                  
                  
                  
                  1,478
                  
                  
                  
                  1,667
                  
                  
                  
                  161%
      of total revenues
                  
                  
                  7
                  %
                  
                  
                  4
                  %
                  
                  
                  4
                  %Specialty
      cards and card printers
                  
                  
                  15,789
                  
                  
                  
                  13,230
                  
                  
                  
                  11,807
                  
                  
                  
                  2,559
                  
                  
                  
                  1,423%
      of total revenues
                  
                  
                  32
                  %
                  
                  
                  36
                  %
                  
                  
                  37
                  %Elimination
      of Intersegment revenue
                  
                  
                  (244
                  )
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  (244
                  )
                  
                  
                  —%
      of total revenues
                  
                  
                  (1
                  %
      )
                  
                  
                  —
                  
                  
                  
                  —Total
      revenues
                  
                  $
                  49,771
                  
                  
                  $
                  37,008
                  
                  
                  $
                  32,270
                  
                  
                  $
                  12,763
                  
                  
                  $
                  4,738%
      increase year over year
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  34
                  %
                  
                  
                  15
                  %




The
following table presents our optical memory card revenues by major program for
the fiscal years ended March 31 (in thousands):


2009
                  
                  
                  2008
                  
                  
                  2007
                  
                  
                  Change
                    2009
      vs 2008
                  
                  
                  Change
                    2008
      vs 2007National
      ID Cards in the Kingdom of Saudi Arabia
                  
                  $
                  12,429
                  
                  
                  $
                  7,650
                  
                  
                  $
                  3,512
                  
                  
                  $
                  4,779
                  
                  
                  $
                  4,138U.S.
      Green Cards & Laser Visas
                  
                  
                  6,827
                  
                  
                  
                  7,432
                  
                  
                  
                  7,409
                  
                  
                  
                  (605
                  )
                  
                  
                  23Vehicle
      Registration in India
                  
                  
                  4,342
                  
                  
                  
                  3,487
                  
                  
                  
                  1,785
                  
                  
                  
                  855
                  
                  
                  
                  1,702Italian
      government ID Card Programs
                  
                  
                  2,694
                  
                  
                  
                  208
                  
                  
                  
                  2,408
                  
                  
                  
                  2,486
                  
                  
                  
                  (2,200
                  )Foreign
      Resident ID Card in Costa Rica
                  
                  
                  2,240
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  2,240
                  
                  
                  
                  —Canadian
      Permanent Resident Cards
                  
                  
                  1,836
                  
                  
                  
                  2,792
                  
                  
                  
                  1,226
                  
                  
                  
                  (956
                  )
                  
                  
                  1,566All
      other programs
                  
                  
                  552
                  
                  
                  
                  570
                  
                  
                  
                  2,645
                  
                  
                  
                  (18
                  )
                  
                  
                  (2,075
                  )Total
      optical memory card revenues
                  
                  $
                  30,920
                  
                  
                  $
                  22,139
                  
                  
                  $
                  18,985
                  
                  
                  $
                  8,781
                  
                  
                  $
                  3,154%
      increase year over year
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  40
                  %
                  
                  
                  17
                  %




Optical
memory card revenues for fiscal year 2009 increased by $8.8 million or 40% as
compared to fiscal year 2008 due to increased volume for the Kingdom of Saudi
Arabia’s national ID card program, the Italian government’s foreign resident
card program and the Costa Rican permanent resident card program. While we will
no longer supply cards for the U.S. government’s BCC program and the Canadian
government’s Permanent Resident card program, we expect growth in fiscal year
2010 due to the implementation of Angola’s national ID card program, the
redesigned green card in the U.S. and other new programs.




Optical
memory card revenues for fiscal year 2008 increased by $3.2 million or 17% as
compared to fiscal year 2007 due to the increased card sales volume for the
Kingdom of Saudi Arabia’s national ID card program, the Canadian Permanent
Resident card program and the vehicle registration program in India which offset
the decreased card unit volume in the Italian and other card
programs.




Revenues
in the drives, systems and enabling services segment for fiscal year 2009
increased by $1.7 million or 102% as compared to fiscal year 2008 due to the
implementation of the credential issuance system in Costa Rica on the
comprehensive end-to-end solutions that we developed, the implementation of the
regionalized model for the national ID card program in the Kingdom of Saudi
Arabia, and the delivery of the card personalization equipment and consumables
for a complete ID management system in Angola.




Revenues
in the drives, systems and enabling services segment for fiscal year 2008
increased by $0.1 million or 11% as compared to fiscal year 2007 due to delivery
of drives and systems for the national ID card program in the Kingdom of Saudi
Arabia, and the ID programs in Italy.




Specialty
cards and card printers revenues for fiscal year 2009 increased by $2.6 million
or 20% as compared to fiscal year 2008 due to our subsidiary’s focus on
innovations in accreditation and access control applications for our core
customers, including a major sporting event operator and our partners serving
the majority of German universities. We also delivered equipment and consumables
for a complete ID management system in Angola. The weakening world economy will
probably have a negative effect on some portions of the specialty cards and card
printers segment.


31




Specialty
cards and card printers revenues for fiscal year 2008 increased by $1.4 million
or 12% as compared to fiscal year 2007 attributable to a favorable effect of
Euro/Dollar exchange rate of approximately 11% and increased orders from a major
sporting event operator.




Backlog




Some
of our customers generally place orders for a period of several months to a year
or more, and others place orders for immediate or fast turn delivery. Variations
in order placement from a single customer can materially affect backlog. As a
result, the relative size of our backlog has not been a reliable indicator of
future revenue trends. Our backlog for optical memory cards as of March 31, 2009
was $21.4 million and $1.2 million for specialty cards and card printers. There
was no significant backlog for optical card drives, systems and enabling
services as of March 31, 2009.




Gross
Margin




The
following table presents our gross margin in absolute dollar amounts and as a
percentage of revenue by segment for the fiscal years ended March 31 (in
thousands, except for percentages):


2009
                
                
                2008
                
                
                2007
                
                
                Change
                  2009
      vs 2008
                
                
                Change
                  2008
      vs 2007Optical
      memory cards
                
                $
                13,268
                
                
                $
                7,991
                
                
                $
                4,795
                
                
                $
                5,277
                
                
                $
                3,196%
      of optical memory card revenues
                
                
                43
                %
                
                
                35
                %
                
                
                25
                %Optical
      card drives, systems and services
                
                
                (301
                )
                
                
                (633
                )
                
                
                (463
                )
                
                
                332
                
                
                
                (170
                )%
      of optical card drive revenues
                
                NM
                
                
                NM
                
                
                NMSpecialty
      cards and card printers
                
                
                4,204
                
                
                
                2,641
                
                
                
                2,532
                
                
                
                1,563
                
                
                
                109%
      of specialty cards and card printers
                
                
                27
                %
                
                
                20
                %
                
                
                25
                %Total
      gross margin
                
                $
                17,171
                
                
                $
                9,999
                
                
                $
                6,864
                
                
                $
                7,172
                
                
                $
                3,135%
      of total revenue
                
                
                35
                %
                
                
                27
                %
                
                
                21
                %




OMCs.
OMC gross margin can vary significantly based upon changes in average selling
price, production and sales volumes, mix of card types, production efficiency
and yields, and changes in fixed costs. Production unit volume greatly affects
gross margin due to the absorption of fixed manufacturing costs. OMC gross
margin for fiscal year 2009 was 43% of OMC revenue as compared to 35% of OMC
revenue for fiscal year 2008. The combined favorable impact of increased sales
volume in several major ID card programs, productivity improvements, and
manufacturing cost reduction initiatives attributed to the increased gross
margin. Depreciation and amortization was $1.7 million and $1.8 million for
fiscal years 2009 and 2008, respectively. The non-cash charge for the reserve of
obsolete inventory was $0.3 million and $0.05 million for fiscal years 2009 and
2008, respectively.




Optical
memory card gross margin for fiscal year 2008 was 35% of OMC revenue as compared
to 25% of OMC revenue for fiscal year 2007. The increase in OMC gross margin was
mainly due to a 17% increase in sales volume in several major ID card programs
and product mix. Depreciation and amortization was $1.8 million and $1.7 million
for fiscal years 2008 and 2007, respectively.




Drives,
Systems and Enabling Services. Except for the quarter ended June 30,
2008, drives, systems and enabling services gross margin has been negative over
the past three years, inclusive of fixed overhead costs, due to low sales volume
and our policy to price drives close to direct manufacturing cost to promote
card sales resulting in the inability to cover fixed costs at current sales
volumes. This segment also includes enabling services, which also have lower
margins than optical memory cards. The increased costs associated with the
implementation of enabling services capabilities, the non-cash charges of
approximately $0.1 million for obsolete inventory and the $0.2 million write-off
of obsolete equipment further attributed to the negative gross margin for this
segment albeit revenue increased by 102% during fiscal year 2009 as compared to
fiscal year 2008. Depreciation and amortization was approximately $0.2 million
for each of the fiscal years 2009 and 2008. We anticipate that drives, systems
and enabling services negative gross margins will continue in the future unless
equipment sales volume is sufficient to cover fixed costs or there is material
amount of Enabling Services revenue.


32




Gross
margin decreased by approximately $0.2 million despite improved sales during
fiscal year 2008 as compared to fiscal year 2007 due to our policy to price
drives close to direct manufacturing cost to promote card sales. Depreciation
and amortization was approximately $0.2 million for each of the fiscal years
2008 and 2007.




Specialty
Cards and Card Printers. The gross margin on specialty cards and card
printers was 27% of revenue for fiscal year 2009 as compared with 20% for fiscal
year 2008. Our long-term time and material contract in Serbia concluded during
the quarter ended March 31, 2009 contributing approximately 11% to the overall
gross margin in this segment. Productivity improvements and manufacturing cost
reduction initiatives also attributed to the increase. Due to the current
economic conditions, we anticipate pressure on selling prices for specialty
cards leading to lower margins in this segment unless offset by the continuation
of increased revenues of the higher value printer and systems products. Our
gross margins in this segment will also be harmed in the future as compared to
fiscal year 2009 by the conclusion of our Serbia contract. We may not be able to
mitigate fluctuations in foreign exchange through our forward contracts. This
may cause adverse impact on our foreign operations.




The
gross margin on specialty cards and card printers was 20% for fiscal year 2008
as compared to gross margin of 21% for fiscal year 2007.




Operating
Expenses




The
following table presents operating expenses for the fiscal years ended March 31
(in thousands, except for percentages):


2009
                
                
                2008
                
                
                2007
                
                
                Change
                  2009
      vs 2008
                
                
                Change
                  2008
      vs 2007Selling,
      general and administrative expenses
                
                $
                15,424
                
                
                $
                15,253
                
                
                $
                13,575
                
                
                $
                171
                
                
                $
                1,678%
      of change from prior year
                
                
                1
                %
                
                
                12
                %
                
                
                14
                %%
      of Revenue
                
                
                31
                %
                
                
                41
                %
                
                
                42
                %Research
      and development expenses
                
                
                2,366
                
                
                
                2,878
                
                
                
                3,095
                
                
                
                (512
                )
                
                
                (217
                )%
      of change from prior year
                
                
                (18
                %)
                
                
                (7
                %)
                
                
                32
                %%
      of Revenue
                
                
                5
                %
                
                
                8
                %
                
                
                10
                %Impairment
      of goodwill and intangible assets
                
                
                —
                
                
                
                —
                
                
                
                3,811
                
                
                
                —
                
                
                
                (3,811
                )Total
      operating expenses
                
                $
                17,790
                
                
                $
                18,131
                
                
                $
                20,481
                
                
                $
                (341
                )
                
                $
                (2,350
                )




Selling,
General, and Administrative Expenses (“SG&A”). SG&A expenses for
fiscal year 2009 increased by approximately $0.2 million, or 1% as compared to
fiscal year 2008. As a percentage of revenue, SG&A expenses were 31% in
fiscal year 2009, compared to 41% in fiscal year 2008. Selling and marketing
expenses related to sales commissions for new programs increased by $1 million
during fiscal year 2009 as compared to fiscal year 2008. This increase was
offset by decreases in consulting, professional services, and approximately $0.9
million of a non-recurring severance expense related to our retiring CEO during
fiscal year 2008. Depreciation and amortization was approximately $0.8 million
and $0.6 million for fiscal years 2009 and 2008, respectively. We anticipate the
total SG&A expenses, net of incentive expenses, for fiscal year 2010 will be
about the same as those incurred in fiscal year 2009.




SG&A
expenses for fiscal year 2008 increased by $1.7 million, or 12% as compared to
fiscal year 2007. As a percentage of revenue, SG&A expenses were 41% in
fiscal year 2008, compared to 42% in fiscal year 2007. Approximately $0.9
million of the increase was due to expenses relating to the retirement agreement
with the CEO. Depreciation and amortization was approximately $0.6 million and
$0.5 million for fiscal years 2008 and 2007, respectively.


33




Research
and Development Expenses (“R&D”). R&D expenses for fiscal year
2009 decreased by $0.5 million, or 18% as compared to fiscal year 2008. As a
percentage of revenue, R&D expenses were 5% in fiscal year 2009, compared to
8% in fiscal year 2008. During fiscal 2009, various R&D projects were
realigned and cost reductions were implemented consistent with a ‘milestone’-
based R&D strategy. We are continuing our effort to develop new optical
memory card and non-optical card features and structures, including various
composite card structures to allow the insertion of contactless chips with RF
capability, dual-interface (contact-contactless) with optical memory, OVD
products, and other market-driven requirements. We are also developing enhanced
optical memory card read/write drives for both increased reliability and ease of
use and integration; and new software products and services in an effort to
provide new products that can stimulate optical memory card sales growth. We
anticipate that these ongoing research and development efforts should result in
enhanced card features and capabilities and drives with advanced security
features and/or lower manufacturing costs; however, there is no assurance that
such product development effort will be successful. These features are important
for our existing and future optical memory card markets. We anticipate R&D
expenditures of about $0.4 million per quarter during fiscal year
2010.




R&D
expenses for fiscal year 2008 decreased by $0.2 million, or 7% as compared to
fiscal year 2007. As a percentage of revenue, R&D expenses were 8% in fiscal
year 2008, compared to 10% in fiscal year 2007.




Impairment
of Goodwill and Other Intangible Assets. On March 31, 2007, upon review
of our annual impairment evaluation of goodwill and other intangible assets, we
determined that estimated future cash flows from our purchase of CCD were
insufficient to justify the carrying value of our goodwill based on management’s
decision to suspend significant optical memory card production in Germany. As
such, we recorded a non-cash, pre-tax impairment charge of approximately $3.8
million to write-off the goodwill and indefinite-lived other intangible assets
to comply with SFAS No. 142, Goodwill and other Intangible
Assets.




Other
Income (Expense), Net




The
following table presents other income (expense), net, for the fiscal years ended
March 31 (in thousands):


2009
              
              2008
              
              2007Interest
      income
              
              $
              365
              
              $
              888
              
              $
              980Interest
      expense
              
              
              (141
              )
              
              (72
              )
              
              (107
              )Loss
      due to fair value of investments
              
              
              (261
              )
              
              —
              
              
              —Other
      income (expense)
              
              
              (198
              )
              
              (4
              )
              
              22$
              (235
              )
              $
              812
              
              $
              895




Other
Income (Expense), Net. Interest income for fiscal year 2009 decreased by
$0.5 million, or 59% as compared to fiscal year 2008 due to a decline in
interest rates from a weighted-average of 2.18% for fiscal 2008 down to 1.57%
for fiscal 2009. The increase of interest expense for fiscal year 2009 by $0.07
million, or 96% as compared to fiscal year 2009 was largely due to the effects
on premiums from our forward currency contracts. The loss on fair value of the
ARS’ investments, net of gain on the fair value of the Put Option, resulted in
approximately $0.3 million non-cash charge during fiscal year 2009. We believe
that if the assumptions that we used for UBS’ credit risk remain unchanged
through June 30, 2010, we will recover this loss in future periods up to the
quarter ended June 30, 2010. The other income and expense was mainly due to
losses or gains on foreign exchange fluctuations.




Interest
income for fiscal year 2008 decreased by $0.09 million, or 9% as compared to
fiscal year 2007 due to a 2% decrease in invested funds and a decline in
interest rates from a weighted-average of 5.29% for fiscal 2007 down to 2.18%
for fiscal 2008. The decrease in interest expense during fiscal year 2008 as
compared to fiscal year 2007 was mainly due to improved management of the
forward contracts. The other income and expense during fiscal year 2009 as
compared to fiscal year 2007 was immaterial.


34




Income
Taxes




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”),
which was effective for fiscal years beginning after December 15, 2006 which for
us was the fiscal year commencing on April 1, 2007. 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: We determine
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, we
presume 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. Upon adoption of FIN 48 on April 1, 2007, we recognized a cumulative
effect adjustment of $62,000, decreasing its income tax liability for
unrecognized tax benefits, and decreasing the March 31, 2007 accumulated deficit
balance. We continually monitor the need for tax reserves under FIN 48. During
fiscal years 2009 and 2008, we did not identify any new reserve requirements.




As of March 31, 2009, the total amount of gross unrecognized tax benefits,
inclusive of interest and penalties, was approximately $277,000 and the entire
amount, if recognized, would affect the effective tax rate. We do not currently
anticipate that any significant increase or decrease to unrecognized tax
benefits will be recorded during the next 12 months.




As
of March 31, 2008, the total amount of gross unrecognized tax benefits,
inclusive of interest and penalties, was approximately $263,000 and the entire
amount, if recognized, would affect the effective tax rate.




A
reconciliation of the beginning and ending amount of unrecognized tax benefit is
as follows:


Balance
      as of March 31, 2007
                  
                  $
                  (229,000
                  )Interest
      and penalties
                  
                  $
                  (34,000
                  )Balance
      as of March 31, 2008
                  
                  $
                  (263,000
                  )Interest
      and penalties
                  
                  $
                  (14,000
                  )Balance
      as of March 31, 2009
                  
                  $
                  (277,000
                  )




We
recorded an income tax expense of approximately $86,000 for fiscal year 2009.
The book pre-tax loss for the U.S. operations was approximately $1.3 million.
Taxable income for federal income tax purposes for the fiscal year ended March
31, 2009 was approximately $3.2 million. A portion of our net operating loss
carryover (“NOL”) was used to offset our taxable income. However, we were only
allowed to offset 90% of our taxable income with NOL and we were subject to
alternative minimum tax. California also suspended the utilization of net
operating losses for the tax years 2009 and 2008. Additionally, California
limited the utilization of R&D credits to 50% of the tax liability without
consideration for net operating losses. Our Germany operations showed taxable
income of approximately $0.4 million. We recorded an income tax benefit of
$13,000 for our German operations as a majority of our German GAAP profit was
offset by net operating losses.




We
recorded an income tax benefit of $114,000 and $351,000 for fiscal years 2008
and 2007, respectively. The tax benefit for fiscal year 2008 was due mainly to
the reduction of deferred income tax liabilities in Germany offset by an
adjustment related to a tax reserve for FIN 48. The payments from Prevent Global
received through fiscal year ended March 31, 2008 were recorded as income on the
federal tax return even though they were not recorded as income under U.S.
generally accepted accounting principles. This income was offset by net
operating loss carryforwards (“NOLs”) generated in previous years. However,
alternative minimum taxes were due when tax return income was offset by NOLs
generated in previous years.




A
full valuation allowance was required at the end of fiscal years 2009, 2008, and
2007 considering both the positive and negative evidence regarding our ability
to generate sufficient future taxable income to realize our deferred income tax
assets.


35




LIQUIDITY
AND CAPITAL RESOURCES




The
following table summarizes cash, cash equivalents and investments as of March 31
(in thousands):


2009
              
              2008Cash
      and cash equivalents
              
              $
              16,086
              
              $
              5,583Long-term
      Investments
              
              $
              13,239
              
              $
              12,875




As
of March 31, 2009, we held $13.5 million par value (with a fair value of
approximately $12.2 million), of marketable securities consisting of ARSs that
were classified as long-term investments in our consolidated balance sheet. UBS
offered and we accepted a “Rights” offering whereby UBS offered to purchase
certain ARSs it placed, including those we hold, at par or face value. Also
included in our long-term investment is the Put Option received in this rights
offering from UBS. The transfer resulted in the reversal of prior unrealized
losses, net of taxes, on the ARS from accumulated other comprehensive income and
the recording of an other-than temporary impairment of approximately $1.3
million on the $13.5 million (par value) portion of our ARS portfolio and the
recognition of a benefit of approximately $1 million related to the Put Option
provided by the settlement. Refer to Note 2, caption 8, Cash and Cash
Equivalents, Short-term Investments and Long-term Investments of the
consolidated financial statement for further discussion of our noncurrent
investments.




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


2009
              
              2008
              
              2007Net
      cash provided by (used in) operating activities
              
              $
              4,097
              
              $
              (336
              )
              $
              (471
              )Net
      cash provided by (used in) investing activities
              
              $
              (2,797
              )
              $
              2,580
              
              $
              553Net
      cash provided by financing activities
              
              $
              8,831
              
              $
              694
              
              $
              1,020




Net
cash provided by operating activities was $4.1 million for fiscal year 2009,
compared to net cash used by operating activities of $0.3 million for fiscal
year 2008. The $4.1 million in cash provided by operating activities for fiscal
year 2009 was due to $4.9 million provided by the net loss adjusted by non-cash
charges of depreciation and amortization, stock-based compensation expense, the
net effect of the loss due to fair value of the ARS investment and the gain on
the put option and other miscellaneous items; all partially offset by the $0.9
million cash used in changes in operating assets and liabilities.




Cash
used in operating activities of $0.3 million in fiscal year 2008 consists of
$1.8 million used due to the net loss, net of non-cash items, partially offset
by the $1.5 million of cash provided by changes in operating assets and
liabilities. Cash used in operations of $0.5 million in fiscal year 2007
primarily consists of $3.3 million used due to the loss in operations, net of
non-cash items; $4.6 million received from Prevent Global, net of equipment
purchased for this contract; and $1.8 million used in changes in other operating
assets and liabilities.




Net
cash used in investing activities was $2.8 million for fiscal year 2009,
compared to $2.6 million of cash provided by investing activities in fiscal year
2008. Capital expenditures for fiscal year 2009 were $2.5 million, mainly due to
addition of new and improved production equipment in our optical memory card
business. Acquisition of patents and changes in the restricted cash balance
contributed $0.3 million to the net balance.




We
may further invest $2 million in additional capital equipment and leasehold
improvement expenditures for optical memory card and specialty card production
capacity and manufacturing enhancement at our facilities through March 31,
2010.




Net
cash provided by investing activities of $2.6 million during fiscal year 2008
consisted of $4 million from net proceeds of maturity of investments, less
capital expenditures and changes in noncurrent assets of $1.4 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 provided by financing activities was $8.8 million for fiscal year 2009,
compared to $0.7 million of cash provided by financing activities in fiscal year
2008. The increase in cash in financing activities for fiscal year 2009 was
mainly due to the $8.7 million drawn from the UBS credit line and the $0.2 net
proceeds from the sale of common stock under our employee stock
plans.


36




Net
cash provided by financing activities in fiscal years 2008 and 2007 consisted of
net proceeds from the sale of common stock under our employee stock
plans.




Current
Borrowing Arrangements




As
of March 31, 2009, we held $13.5 million par value (with a fair value of
approximately $12.2 million), of marketable securities consisting of ARSs that
were classified as noncurrent assets in our consolidated balance sheet. UBS
offered and we accepted a “Rights” offering whereby UBS offered to purchase
certain ARSs it placed, including those we hold, at par or face value. As part
of the offering, we obtained a line of credit in the amount of $8.7 million that
was collateralized by the SLARSs. We drew down the full amount as of March 31,
2009.




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




The
UBS Credit Line also provides, among other things, that:


o
              UBS
      may demand full or partial payment of the credit line at its sole
      discretion and without cause at any time; ando
              UBS
      may at any time in its sole discretion terminate and cancel the credit
      line; provided, however, that UBS is required to provide to us alternative
      financing on substantially similar terms, unless the demand right was
      exercised as a result of certain specified events or the customer
      relationship between UBS and LaserCard is terminated for cause by
      UBS.




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




We
believe that we have sufficient available cash to execute our business plan for
fiscal year 2010 as we expect the estimated level of revenues to be sufficient
to generate cash from operating activities over the same period. We expect to
recover the par value of the ARSs based on our “Rights” agreement with UBS.
Operating cash flows could be negatively impacted to a significant degree if our
largest U.S. government program were to be delayed, reduced, canceled, or not
extended; if the Angolan national ID card program does not materialize as
planned internally; and if these programs are not replaced by other card orders
or other sources of income.




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):


2010
                        
                        
                        2011
                        
                        
                        2012
                        
                        
                        2013
                        
                        
                        2014
                        
                        
                        Thereafter
                        
                        
                        TotalNon-cancelable
      operating leases
                        
                        $
                        1,757
                        
                        
                        $
                        1,925
                        
                        
                        $
                        1,852
                        
                        
                        $
                        1,503
                        
                        
                        $
                        1,275
                        
                        
                        $
                        2
                        
                        
                        $
                        8,314Non-cancelable
      purchase orders (1)
                        
                        
                        2,222
                        
                        
                        
                        115
                        
                        
                        
                        48
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        2,385Net
      Borrowing on revolving credit with UBS (2)
                        
                        
                        8,681
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        8,681Total
                        
                        $
                        12,660
                        
                        
                        $
                        2,040
                        
                        
                        $
                        1,900
                        
                        
                        $
                        1,503
                        
                        
                        $
                        1,275
                        
                        
                        $
                        2
                        
                        
                        $
                        19,380




(1)
Includes capitalized leases


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


37




OFF-BALANCE
SHEET ARRANGEMENTS




There
were no off-balance sheet arrangements as of March 31, 2009 and March 31,
2008.




APPLICATION
OF CRITICAL ACCOUNTING POLICIES AND ESTIMATES




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 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 sales of optical cards;
drives, systems and services; 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) collectability 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 customer
acceptance criteria or, in the case of a U.S. government contract, warehousing.
Where appropriate, provision is made at the time of shipment for estimated
warranty costs and estimated returns.




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




For
sales that include customer-specified acceptance criteria, we recognize revenue
only after the acceptance criteria have been met and presuming that all other
revenue criteria have been met. We defer revenue from services and recognize it
over the contractual period, or as we render services and the customer accepts
them.




We
apply 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, we apply the
guidance in that higher-level literature. Deliverables that do not meet these
criteria are combined with one or more other deliverables.


38




We
apply the provisions of Statement of Position 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. Our
long-term program accounted for under SOP 81-1 concluded during the last quarter
of fiscal year 2009 with revenue of approximately $540,000 during fiscal year
2009. For the year ended March 31, 2008 and 2007, we recognized revenue of
approximately $249,000 and $12,000, respectively, based on a zero profit
margin.




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 collectability 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 2009, 2008, and 2007, 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 adjust the amount as necessary. We utilize historical
trends and information received from our customers to assist in determining the
appropriate estimated warranty accrual levels.




Accounting
for Income Taxes. Significant judgment is required in determining our
worldwide provision for income taxes and recording the related tax assets and
liabilities. In the ordinary course of business, there are operational
decisions, transactions, facts and circumstances, and calculations for which the
ultimate tax determination is not certain and is subject to challenge by taxing
authorities in the United States, California, and in Germany. Tax years 1993
through 2008 remain subject to examination by the appropriate governmental
agencies, mainly the United States, due to tax loss carryovers from those years.
Our tax provision contemplates tax rates currently in effect to determine both
our current and deferred tax provisions. Any significant fluctuation in rates or
changes in tax laws could cause our estimates of taxes we anticipate either
paying or recovering in the future to change. Such changes could lead to either
increase or decreases in our effective tax rate.




In
June 2006, the FASB issued Interpretation No. 48, Accounting
for Uncertainty
in Income Taxes – an interpretation of FASB Statement No. 109 (“FIN 48”),
which was effective for fiscal years beginning after December 15, 2006 which for
us was the fiscal year commencing on April 1, 2007. 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: We determine
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, we
presume 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. Upon adoption of FIN 48 on April 1, 2007, we recognized a cumulative
effect adjustment of $62,000, decreasing its income tax liability for
unrecognized tax benefits, and decreasing the March 31, 2007 accumulated deficit
balance. We continually monitor the need for tax reserves under FIN 48. During
fiscal years 2009 and 2008, we did not identify any new reserve
requirements.


39




Additionally,
in accordance with SFAS No. 109, Accounting
for Income Taxes,we have established valuation allowances against a
variety of deferred tax assets, including NOLs, foreign tax credits, and other
income tax credits. Valuation allowances take into consideration our ability to
use these deferred tax assets and reduce the value of such items to the amount
that is deemed more likely than not to be recoverable. Improvements or other
changes in our operations, domestically and internationally, could increase our
ability to utilize these tax attributes in the future. If and when we release
the valuation allowances in periods when these tax attributes become realizable
would reduce our effective tax rate. We evaluate the need for a valuation or a
change thereto, on a quarterly basis.




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 record 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 use standard
costs which approximate the first-in, first-out costing
method.




We
perform an analysis of the carrying value of 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.




We
establish 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. 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.




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
the goodwill and intangible assets related to the March 31, 2004, acquisition of
our German operations based on management’s decision to suspend significant
optical memory card production in Germany. As such, we recorded a non-cash
pre-tax impairment charge of approximately $3.8 million to write-off these
goodwill and other intangible assets. 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.
There was no impairment charge during fiscal year 2008 or 2009. We intend to
continue to use the facility and equipment in Germany to produce specialty cards
although plans to use the facility to produce LaserCard® optical memory cards in
Germany were suspended during fiscal year 2007.


40




Share-Based
Compensation. As described in detail in Note 2, Stock-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, 2009 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.




As
a result of adopting SFAS No. 123(R) using the modified prospective method, our
net income applicable to common stockholders for the fiscal year ended March 31,
2009 includes $2.3 million of share-based compensation expense from stock
options and approximately $0.1 million of Employee Stock Purchase Plan expense
included in the consolidated statements of operations. During the fiscal year
ended March 31, 2008 our share-based compensation expense included $2 million
from stock options and $0.1 million of Employee Stock Purchase Plan expensed in
the consolidated statements of operations. As of March 31, 2009, $4.3 million of
total unrecognized compensation cost related to unvested share-based
compensation arrangements is expected to be recognized over the remaining
vesting period through August 2012. As of March 31, 2008, about $3.7 million of
total unrecognized compensation cost related to unvested stock options,
restricted share awards and restricted stock units is expected to be recognized
over the remaining vesting period through December 2011.




Short
and Long-term Investments. Short-term investments include securities with
maturities at date of purchase of more than three months and investments with
remaining maturities of less than one year. All investments with maturities at
date of purchase greater than one year are classified as long-term investments.
Management determines the appropriate classification of debt securities at the
time of purchase and re-evaluates the classification of investments as of each
balance sheet date.




We
account for short-term marketable securities in accordance with SFAS No. 115,
Accounting for Certain Investments in Debt and Equity Securities (“SFAS No.
115”). We consider all highly liquid investments, consisting primarily of
commercial paper, discount notes, U.S. government bonds, and ARSs, with original
or remaining maturities of three months or less at the date of purchase, to be
cash equivalents. All investments with original or remaining maturities of more
than three months but not more than one year at the date of purchase are
classified as short-term. Investments with original or remaining maturities of
more than one year at the date of purchase are classified as noncurrent assets.
We determine the length of our investments after considering our cash
requirements and yields available for the type of investment considered by us.
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. We had classified all of our ARSs as noncurrent assets in
our consolidated balance sheets as our ability to liquidate such securities in
the next twelve (12) months is uncertain and these investments had been
designated as trading securities. Trading securities are carried at fair value
with unrealized gains and losses reported our consolidated Statement of
Operations under “Other income (expense), net”. We had no investments in
marketable securities designated as available for sale as of March 31,
2009.




As
of March 31, 2008, our ARS investments had been accounted for as
available-for-sale and classified as long-term securities. Securities available
for sale are carried at fair value with the unrealized gains and losses reported
in “Accumulated Other Comprehensive Income,” a component of stockholders’
equity. We held no short-term investments as of March 31, 2008.




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




RECENTLY
ADOPTED ACCOUNTING PRONOUNCEMENTS




In
September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS
No. 157”), which clarifies the principle that fair value should be based on the
assumptions market participants would use when pricing an asset or liability,
establishes a fair value hierarchy that prioritizes the information used to
develop those assumptions, and expands the related disclosure requirements.
Under the standard, fair value measurements are to be separately disclosed by
level within the fair value hierarchy. SFAS No. 157 applies under other
accounting pronouncements that require or permit fair value measurements. SFAS
No. 157 defines fair value based upon an exit price model. The FASB also issued
FSP No. 157-2 in February 2008 (“FSP No. 157-2”). FSP No. 157-2 delays the
effective date of the application of SFAS No. 157 to fiscal years beginning
after November 15, 2008 for all nonfinancial assets and nonfinancial liabilities
that are recognized at fair value in the financial statements on a nonrecurring
basis. We adopted SFAS No. 157 as of April 1, 2008, with the exception of the
application of the statement to non-recurring nonfinancial assets and
nonfinancial liabilities. See Note 2, caption 9 below, Fair
Value of Measurements, for additional details.


41




In
February 2007, the FASB issued SFAS No. 159,The Fair Value Option for Financial Assets and Financial Liabilities
(“SFAS No. 159”). SFAS No. 159 provides entities with an option to report
selected financial assets and liabilities at fair value, with the objective to
reduce both the complexity in accounting for financial instruments, and the
volatility in earnings caused by measuring related financial assets and
liabilities differently. Unrealized gains and losses on items for which the fair
value option is elected would be reported in earnings. We adopted SFAS No. 159
as of April 1, 2008, but we have not elected to measure financial instruments
and other items at fair value except for the Company’s long-term investments on
ARS during fiscal year ended March 31, 2009. See Note 2, caption 8 below, Cash
and Cash Equivalents, Short-term Investments and Long-term Investments,
for additional details. Other material financial assets and liabilities not
carried at fair value, such as our short-term debt obligations and trade
accounts receivable and accounts payable, are still reported at their carrying
values. Any other future transacted financial asset or liability will be
evaluated for the fair value election as prescribed by SFAS No. 159. The
adoption of SFAS No. 159 resulted in a $0.3 million net impact on our
consolidated financial position, results of operations and cash
flows.




In
June 2007, EITF Issue No. 07-3, Accounting
for Nonrefundable Advance Payments for Goods or Services to Be Used in Future
Research and Development Activities, (“EITF 07-3”), was issued that
requires companies to defer and capitalize prepaid, nonrefundable research and
development payments to third parties and recognize such amounts over the period
that the research and development activities are performed or the services are
provided, subject to an assessment of recoverability. The guidance is effective
for new contracts entered into in fiscal years beginning after December 15,
2007, including interim periods within those fiscal years. We adopted EITF No.
07-3, on a prospective basis, as of April 1, 2008 and the adoption did not have
an impact on our consolidated financial statements.




RECENTLY
ISSUED ACCOUNTING PRONOUNCEMENTS




In
December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business
Combinations” (“SFAS No. 141(R)”). SFAS No. 141(R) establishes principles
and requirements for how an acquirer recognizes and measures in its financial
statements significant aspects of a business combination. Under SFAS No. 141(R),
acquisition costs will generally be expensed as incurred; non-controlling
interests will be valued at fair value at the acquisition date; in-process
research and development will be recorded at fair value as an indefinite-lived
intangible asset at the acquisition date; restructuring costs associated with a
business combination will generally be expensed subsequent to the acquisition
date; and changes in deferred tax asset valuation allowances and income tax
uncertainties after the acquisition date generally will affect income tax
expense. SFAS No. 141(R) amends SFAS No. 109, “Accounting
for Income Taxes,” such that adjustments made to valuation allowances on
deferred taxes and acquired tax contingencies associated with acquisitions that
closed prior to the effective date of SFAS No. 141(R) would also apply the
provisions of SFAS No. 141(R). SFAS No. 141(R) also establishes disclosure
requirements to enable the evaluation of the nature and financial effects of the
business combination. Early adoption of SFAS No. 141(R) is not permitted. SFAS
No. 141(R) is effective on a prospective basis for all business combinations for
which the acquisition date is on or after the beginning of the first annual
period subsequent to December 15, 2008, with the exception of the accounting for
valuation allowances on deferred taxes and acquired tax contingencies. We will
assess the potential impact of the adoption of SFAS 141R if and when a future
acquisition occurs.




In December 2007, the FASB issued SFAS No. 160, “Non-controlling
Interests in Consolidated Financial Statements—an Amendment of Accounting
Research Bulletin No. 51” (“SFAS No. 160”). SFAS No. 160 establishes
accounting and reporting standards for ownership interests in subsidiaries held
by parties other than the parent, the amount of consolidated net income
attributable to the parent and to the non-controlling interest, changes in a
parent’s ownership interest, and the valuation of retained non-controlling
equity investments when a subsidiary is deconsolidated. SFAS No. 160 also
establishes disclosure requirements that clearly identify and distinguish
between the interests of the parent and the interests of the non-controlling
owners. We will be required to adopt SFAS No. 160 on or after the beginning of
the first annual period subsequent to December 15, 2008. We are currently
evaluating the requirements of SFAS No. 160 and we do not believe that our
adoption will have a material impact, if any, on its consolidated financial
statements.


42




In
March 2008, the FASB issued SFAS No. 161,“Disclosures about Derivative Instruments and Hedging Activities—an amendment of
FASB Statement No. 133” (“SFAS No. 161”). SFAS No. 161 is intended to
improve transparency in financial reporting by requiring enhanced disclosures of
an entity’s derivative instruments and hedging activities and their effects on
the entity’s financial position, financial performance, and cash flows. SFAS No.
161 applies to all derivative instruments within the scope of SFAS No. 133,
“Accounting
for Derivative Instruments and Hedging Activities,” as well as related
hedged items, bifurcated derivatives, and nonderivative instruments that are
designated and qualify as hedging instruments. SFAS No. 161 establishes
principles and requirements for how an entity identifies derivative instruments
and related hedged items that affect its financial position, financial
performance, and cash flows. SFAS No. 161 also establishes disclosure
requirements that the fair values of derivative instruments and their gains and
losses are disclosed in a tabular format and that derivative features which are
credit-risk related be disclosed to provide clarification to an entity’s
liquidity and cross-referencing within footnotes. We will be required to adopt
SFAS No. 160 on or after the beginning of the first annual period subsequent to
December 15, 2008. We are currently evaluating the requirements of SFAS No. 161
and we have not yet determined the impact of the adoption on our consolidated
financial statements.




In
April 2008, the FASB issued FSP No. 142-3, “Determination
of the Useful Life of Intangible Assets” (“FSP No. 142-3”). FSP No. 142-3
amends the factors that should be considered in developing renewal or extension
assumptions used to determine the useful life of a recognized intangible asset
under SFAS No. 142, “Goodwill
and Other Intangible Assets” (“SFAS No. 142”). The objective of FSP No.
142-3 is to improve the consistency between the useful life of a recognized
intangible asset under SFAS No. 142 and the period of expected cash flows used
to measure the fair value of the asset under SFAS No. 141(R), and other
accounting principles. FSP No. 142-3 applies to all intangible assets, whether
acquired in a business combination or otherwise, and early adoption is
prohibited. We will be required to adopt FSP No. 142-3 in the first quarter of
fiscal year 2010. We are currently evaluating the requirements of FSP No. 142-3
and we have not yet determined the impact of the adoption on our consolidated
financial statements.


43




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.




We
are subject to interest rate risk on our short-term borrowings under our Credit
Line Agreement with UBS wherein we drew down an aggregate of $8.7 million as of
fiscal year ended March 31, 2009; secured by the ARSs we currently hold.
However, the credit line provides a no-cost loan where the interest rate charged
on the credit line is equal to the interest rate earned on the ARS. We entered
into a Rights settlement whereby UBS offered to purchase certain ARSs it placed,
including those we hold, at par or face value. UBS has the “Right” to purchase
its ARSs at par at any time through July 3, 2012 and we have the “Right” to sell
our ARSs at par to UBS beginning June 30, 2010 through July 3, 2012. We have no
other short or long-term borrowings other than the credit line with UBS and
capitalized lease agreements that would give rise to significant interest rate
risk. Although our interest income is sensitive to changes in the general level
of U.S. interest rates, particularly since some portion of our investments are
in money market funds, we do not expect our operating results or cash flows to
be affected to any significant degree by the effects of a change in market
interest rates on our investments.




We
do not enter into investments for speculative purposes. Although our ARS
investments had been designated as trading securities as of March 31, 2009, we
expect to recover the par value of the ARSs based on our “Rights” agreement with
UBS. We believe that we have sufficient available cash to execute our business
plan for fiscal year 2010 as we expect the estimated level of revenues to be
sufficient to generate cash from operating activities over the same
period.




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




Fair
Value Fluctuation Risk: At March 31, 2009, there was insufficient
observable ARS market information available to determine the fair value of our
ARS investments, or the Put Option. Therefore, in order to validate the fair
value estimate of these securities, we incorporated assumptions such as credit
quality or financial standing of the issuer, final stated maturities, estimates
on the probability of the issue being called prior to final maturity, impact due
to extended periods of maximum auction rates, liquidity risk premium, and broker
quotes from independent valuators using widely accepted financial models.
Management believes that these are reasonable estimates reflecting the unique
circumstances of the subject SLARS and the method of valuing the Put Option as
forward contracts is reasonable.




The
loss on fair value of the ARSs investment, net of gain on the fair value of the
Put Option resulted in approximately $0.3 million non-cash charge during fiscal
year 2009. We believe that if the assumptions that we used for UBS’ credit risk
remain unchanged through June 30, 2010, we will recover this loss in future
periods up to the quarter ended June 30, 2010.


44




The
following summarizes investments at fair value, weighted average yields and
expected maturity dates for the fiscal years ended March 31 (in
thousands):


March
      31, 2009
                  
                  March
      31, 2008Auction
      rate securities, long-term
                  
                  $
                  13,500
                  
                  $
                  13,500Gross
      unrealized losses
                  
                  
                  (1,267
                  )
      (1)
                  
                  (625
                  ) (2)Put
      option
                  
                  
                  1,006
                  (3)
                  
                  —Estimated
      fair market value
                  
                  $
                  12,233
                  
                  $
                  12,875Weighted
      average yield
                  
                  
                  1.57
                  %
                  
                  2.18
                  %Maturity
      dates
                  
                  July
      15, 2029 through
                    January
      25, 2047
                  
                  July
      15, 2029 through
                    January
      25, 2047




(1)
Unrealized loss in income


(2)
Unrealized loss included in accumulated other comprehensive income


(3)
Unrealized gain in income




Foreign
Currency Exchange Rate Risk.Our U.S. operations sell products in various
international markets. During fiscal year 2009, revenue by our German subsidiary
of approximately $15.8 million and net income of $0.4 million was denominated in
foreign currency (Euro). In addition, some raw material purchases and purchased
services were denominated in foreign currency.




We
use short-term foreign exchange forward contracts to mitigate foreign currency
risk associated primarily with inter-company receivables and payables, and loans
receivable (denominated in Euros) to our German subsidiary. Our foreign exchange
forward contracts are not designated for accounting purposes as hedging
instruments under SFAS No. 133, Accounting
for Derivative Instruments and Hedging Activities, as amended.
Accordingly, any gains or losses resulting from changes in the fair value of the
forward contract are reported in other income, net expenses. The gains and
losses on these forward contracts generally offset gains and losses associated
with the underlying foreign currency denominated inter-company receivables and
payables, and loans receivable. At March 31, 2009, we had a foreign exchange
forward contract with a maturity of less than 30 days to purchase 1.3 million
Euros. The fair value of the forward contract was not material at March 31,
2009.


45




ITEM
      8.
              FINANCIAL
      STATEMENTS AND SUPPLEMENTARY
DATA




REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM


ON
FINANCIAL STATEMENT SCHEDULE




To the
Board of Directors and Stockholders


LaserCard
Corporation




We have
audited the accompanying consolidated balance sheets of LaserCard Corporation
and subsidiaries (collectively, the “Company”) as of March 31, 2009, and the
related consolidated statements of operations, stockholders’ equity, and cash
flows for the year ended March 31, 2009. Our audit also included the financial
statement schedule of LaserCard Corporation listed in Item 15(a). These
financial statements and financial statement schedule are the responsibility of
the Company’s management. Our responsibility is to express an opinion on these
financial statements based on our audit.




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




In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of LaserCard Corporation and
subsidiaries as of March 31, 2009, and the results of their operations and their
cash flows for the year ended March 31, 2009, in conformity with U.S. generally
accepted accounting principles. Also, in our opinion, the related financial
statement schedule, when considered in relation to the basic consolidated
financial statements taken as a whole, presents fairly in all material respects
the information set forth therein.




As
discussed in Note 2 to the consolidated financial statements, the Company has
adopted the provisions of Statement of Financial Standards No. 157, “Fair Value
Measurements” and Statement of Financial Standards No. 159, “The Fair Value
Option for Financial Assets and Liabilities – Including an Amendment to FASB
Statement No. 115” on April 1, 2008.




We have
also audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), LaserCard Corporation’s and subsidiaries’
internal control over financial reporting as of March 31, 2009, based on
criteria established in Internal
Control — Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission, and our report dated June 15, 2009
expressed an unqualified opinion on the effectiveness of LaserCard Corporation
and subsidiaries’ internal control over financial reporting.




/s/SingerLewak
LLP




San Jose, California


June 15,
2009


46




REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM




The Board
of Directors and Stockholders


LaserCard
Corporation:




We
have audited the accompanying consolidated balance sheet of LaserCard
Corporation and subsidiaries as of March 31, 2008, and the related consolidated
statements of operations, stockholders’ equity and cash flows for each of the
two years in the period ended March 31, 2008. These consolidated financial
statements are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our 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 audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.




In
our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of LaserCard
Corporation and subsidiaries as of March 31, 2008, and the results of their
operations and their cash flows for each of the two years in the period ended
March 31, 2008, in conformity with accounting principles generally accepted in
the United States of America.




As
discussed in Note 2 of the Notes to Consolidated Financial Statements, on April
1, 2007, the Company adopted Financial Accounting Standards Board Interpretation
No. 48, Accounting
for Uncertainty in Income Taxes, an Interpretation of FAS 109. Also as
discussed in Note 2 of the Notes to Consolidated Financial Statements, on April
1, 2006, the Company adopted the provisions of Statement of Financial Accounting
Standards No. 123 (revised), Share-Based
Payment.




/s/
Odenberg, Ullakko, Muranishi & Co. LLP




San
Francisco, California


June 4,
2008


47




LASERCARD
CORPORATION AND SUBSIDIARIES


CONSOLIDATED
BALANCE SHEETS


March 31,
2009 and 2008


(In
thousands, except share and per share amounts)


2009
                                            
                                            
                                            2008ASSETSCurrent
      assets:Cash
      and cash equivalents
                                            
                                            $
                                            15,912
                                            
                                            
                                            $
                                            5,583Short-term
      investments
                                            
                                            
                                            174
                                            
                                            
                                            
                                            —Accounts
      receivable, net of allowance of $59 at March 31, 2009 and $35 at March 31,
      2008
                                            
                                            
                                            10,217
                                            
                                            
                                            
                                            2,952Inventories,
      net of reserves of $863 at March 31, 2009 and $913 at March 31,
      2008
                                            
                                            
                                            14,232
                                            
                                            
                                            
                                            13,080Deferred
      contract costs
                                            
                                            
                                            345
                                            
                                            
                                            
                                            303Equipment
      held for resale
                                            
                                            
                                            —
                                            
                                            
                                            
                                            89Prepaid
      and other current assets
                                            
                                            
                                            934
                                            
                                            
                                            
                                            1,618Total
      current assets
                                            
                                            
                                            41,814
                                            
                                            
                                            
                                            23,625Property
      and equipment, net of accumulated depreciation of $21,555 at March 31,
      2009 and $20,294 at March 31, 2008
                                            
                                            
                                            10,872
                                            
                                            
                                            
                                            11,700Long-term
      investments
                                            
                                            
                                            13,239
                                            
                                            
                                            
                                            12,875Deferred
      contract costs, net of current portion
                                            
                                            
                                            568
                                            
                                            
                                            
                                            561Equipment
      held for resale, net of current portion
                                            
                                            
                                            7,062
                                            
                                            
                                            
                                            6,599Patents
      and other intangibles, net
                                            
                                            
                                            400
                                            
                                            
                                            
                                            402Notes
      receivable
                                            
                                            
                                            227
                                            
                                            
                                            
                                            269Other
      non-current assets
                                            
                                            
                                            108
                                            
                                            
                                            
                                            275Total
      assets
                                            
                                            $
                                            74,290
                                            
                                            
                                            $
                                            56,306LIABILITIES
      AND STOCKHOLDERS’ EQUITYCurrent
      liabilities:Accounts
      payable
                                            
                                            $
                                            1,698
                                            
                                            
                                            $
                                            2,561Accrued
      liabilities
                                            
                                            
                                            3,397
                                            
                                            
                                            
                                            3,221Deferred
      income tax liability
                                            
                                            
                                            234
                                            
                                            
                                            
                                            405Advance
      payments from customers
                                            
                                            
                                            7,958
                                            
                                            
                                            
                                            3,060Short-term
      debt
                                            
                                            
                                            8,681
                                            
                                            
                                            
                                            —Deferred
      revenue
                                            
                                            
                                            589
                                            
                                            
                                            
                                            589Deferred
      rent
                                            
                                            
                                            257
                                            
                                            
                                            
                                            —Capital
      lease obligation
                                            
                                            
                                            72
                                            
                                            
                                            
                                            30Total
      current liabilities
                                            
                                            
                                            22,886
                                            
                                            
                                            
                                            9,866Capital
      lease obligation, net of current portion
                                            
                                            
                                            166
                                            
                                            
                                            
                                            76Advance
      payments from customers, net of current portion
                                            
                                            
                                            26,122
                                            
                                            
                                            
                                            23,770Deferred
      revenue, net of current portion
                                            
                                            
                                            3,788
                                            
                                            
                                            
                                            3,437Deferred
      rent, net of current portion
                                            
                                            
                                            1,203
                                            
                                            
                                            
                                            1,168Income
      tax payable
                                            
                                            
                                            277
                                            
                                            
                                            
                                            263Total
      liabilities
                                            
                                            
                                            54,442
                                            
                                            
                                            
                                            38,580Commitments
      and contingencies (Note 7)Stockholders’
      equity:Preferred
      stock, $0.01 par value:Authorized
      - 2,000,000 sharesIssued
      - noneCommon
      stock, $0.01 par valueAuthorized
      - 30,000,000 sharesIssued
      and outstanding - 12,113,985 shares at March 31, 2009 and 11,979,420
      shares at March 31, 2008
                                            
                                            
                                            121
                                            
                                            
                                            
                                            120Additional
      paid-in capital
                                            
                                            
                                            66,422
                                            
                                            
                                            
                                            63,868Accumulated
      deficit
                                            
                                            
                                            (46,807
                                            )
                                            
                                            
                                            (45,867
                                            )Accumulated
      other comprehensive income (loss)
                                            
                                            
                                            112
                                            
                                            
                                            
                                            (395
                                            )Total
      stockholders’ equity
                                            
                                            
                                            19,848
                                            
                                            
                                            
                                            17,726Total
      liabilities and stockholders’ equity
                                            
                                            $
                                            74,290
                                            
                                            
                                            $
                                            56,306




The
accompanying notes are an integral part of these consolidated financial
statements.


48




LASERCARD
CORPORATION AND SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF OPERATIONS


Fiscal
Years Ended March 31, 2009, 2008, and 2007


(In
thousands, except per share amounts)




2009
                  
                  
                  2008
                  
                  
                  2007Revenue
                  
                  $
                  49,771
                  
                  
                  $
                  37,008
                  
                  
                  $
                  32,270Cost
      of product sales
                  
                  
                  32,600
                  
                  
                  
                  27,009
                  
                  
                  
                  25,406Gross
      profit
                  
                  
                  17,171
                  
                  
                  
                  9,999
                  
                  
                  
                  6,864Operating
      expenses:Selling,
      general, and administrative expenses
                  
                  
                  15,424
                  
                  
                  
                  15,253
                  
                  
                  
                  13,575Research
      and development expenses
                  
                  
                  2,366
                  
                  
                  
                  2,878
                  
                  
                  
                  3,095Impairment
      of goodwill and intangible assets
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  3,811Total
      operating expenses
                  
                  
                  17,790
                  
                  
                  
                  18,131
                  
                  
                  
                  20,481Operating
      loss
                  
                  
                  (619
                  )
                  
                  
                  (8,132
                  )
                  
                  
                  (13,617
                  )Other
      income (expense), net
                  
                  
                  (235
                  )
                  
                  
                  812
                  
                  
                  
                  895Loss
      before income taxes
                  
                  
                  (854
                  )
                  
                  
                  (7,320
                  )
                  
                  
                  (12,722
                  )Provision
      for income tax (benefit)
                  
                  
                  86
                  
                  
                  
                  (114
                  )
                  
                  
                  (351
                  )Net
      loss
                  
                  $
                  (940
                  )
                  
                  $
                  (7,206
                  )
                  
                  $
                  (12,371
                  )Net
      loss per share:Basic
                  
                  $
                  (0.08
                  )
                  
                  $
                  (0.60
                  )
                  
                  $
                  (1.05
                  )Diluted
                  
                  $
                  (0.08
                  )
                  
                  $
                  (0.60
                  )
                  
                  $
                  (1.05
                  )Weighted-average
      shares of common stock used in computing net income (loss) per
      share:Basic
                  
                  
                  12,052
                  
                  
                  
                  11,929
                  
                  
                  
                  11,814Diluted
                  
                  
                  12,052
                  
                  
                  
                  11,929
                  
                  
                  
                  11,814




The
accompanying notes are an integral part of these consolidated financial
statements.


49




LASERCARD
CORPORATION AND SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY AND COMPREHENSIVE LOSS


Fiscal
Years Ended March 31, 2007, 2008, and 2009


(In
thousands)


Additional
                      Paid-in
                      Capital
                    
                    
                    Accumulated
                      Deficit
                    
                    
                    Accumulated
                      Other
                      Comprehensive
                      Income
      (loss)
                    
                    
                    
                    
                    
                    Total
                      Stockholders’
                      Equity
                    
                    
                    Comprehensive
                      LossCommon
      Stock
                    
                    
                    Treasury
      StockShares
                    
                    
                    Amount
                    
                    
                    Shares
                    
                    
                    AmountBalance,
      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
                    
                    
                    
                    —
                    
                    
                    $
                    —
                    
                    
                    $
                    22,599Adjustment
      due to FIN48
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    $
                    61
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    61Shares
      issued under stock option and stock purchase plans
                    
                    
                    121
                    
                    
                    
                    1
                    
                    
                    
                    711
                    
                    
                    
                    ―
                    
                    
                    
                    ―
                    
                    
                    
                    ―
                    
                    
                    
                    ―
                    
                    
                    
                    712Compensation
      related to stock plan activity
                    
                    
                    ―
                    
                    
                    
                    ―
                    
                    
                    
                    2,089
                    
                    
                    
                    ―
                    
                    
                    
                    ―
                    
                    
                    
                    ―
                    
                    
                    
                    ―
                    
                    
                    
                    2,089Comprehensive
      loss:Foreign
      currency translation adjustments
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    ―
                    
                    
                    
                    96
                    
                    
                    
                    ―
                    
                    
                    
                    ―
                    
                    
                    
                    96
                    
                    
                    $
                    96Unrealized
      loss
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    (625
                    )
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    (625
                    )
                    
                    
                    (625
                    )Net
      loss
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    (7,206
                    )
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    (7,206
                    )
                    
                    
                    (7,206
                    )Total
      comprehensive loss
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    $
                    (7,735
                    )Balance,
      March 31, 2008
                    
                    
                    11,979
                    
                    
                    $
                    120
                    
                    
                    $
                    63,868
                    
                    
                    $
                    (45,867
                    )
                    
                    $
                    (395
                    )
                    
                    
                    —
                    
                    
                    $
                    —
                    
                    
                    $
                    17,726Adjustment
      due to FIN48
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    —Shares
      issued under stock option and stock purchase plans
                    
                    
                    135
                    
                    
                    
                    1
                    
                    
                    
                    197
                    
                    
                    
                    ―
                    
                    
                    
                    ―
                    
                    
                    
                    ―
                    
                    
                    
                    ―
                    
                    
                    
                    198Compensation
      related to stock plan activity
                    
                    
                    ―
                    
                    
                    
                    ―
                    
                    
                    
                    2,357
                    
                    
                    
                    ―
                    
                    
                    
                    ―
                    
                    
                    
                    ―
                    
                    
                    
                    ―
                    
                    
                    
                    2,357Comprehensive
      loss:Foreign
      currency translation adjustments
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    ―
                    
                    
                    
                    (118
                    )
                    
                    
                    ―
                    
                    
                    
                    ―
                    
                    
                    
                    (118
                    )
                    
                    $
                    (118
                    )Unrealized
      loss
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    625
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    625
                    
                    
                    
                    625Net
      loss
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    (940
                    )
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    (940
                    )
                    
                    
                    (940
                    )Total
      comprehensive loss
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    $
                    (433
                    )Balance,
      March 31, 2009
                    
                    
                    12,114
                    
                    
                    $
                    121
                    
                    
                    $
                    66,422
                    
                    
                    $
                    (46,807
                    )
                    
                    $
                    112
                    
                    
                    
                    —
                    
                    
                    $
                    —
                    
                    
                    $
                    19,848




The
accompanying notes are an integral part of these consolidated financial
statements.


50




LASERCARD
CORPORATION AND SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF CASH FLOWS


Fiscal
Years Ended March 31, 2009, 2008, and 2007


(In
thousands)


2009
                
                
                2008
                
                
                2007Cash
      flows from operating activities:Net
      loss
                
                $
                (940
                )
                
                $
                (7,206
                )
                
                $
                (12,371
                )Adjustments
      to reconcile net loss to net cash provided by (used in) operating
      activities:Depreciation
      and amortization
                
                
                2,877
                
                
                
                2,993
                
                
                
                2,749Fixed
      Asset disposal
                
                
                302
                
                
                
                (6
                )
                
                
                52Impairment
      of goodwill and intangible assets
                
                
                —
                
                
                
                —
                
                
                
                3,811Provision
      for (recovery of) doubtful accounts receivable
                
                
                34
                
                
                
                (39
                )
                
                
                (4
                )Provision/(write-off)
      for excess and obsolete inventory
                
                
                (35
                )
                
                
                57
                
                
                
                483Provision
      for warranty reserve
                
                
                27
                
                
                
                143
                
                
                
                162Decrease
      in income tax payable and deferred tax asset
                
                
                92
                
                
                
                181
                
                
                
                —Stock-based
      compensation
                
                
                2,357
                
                
                
                2,090
                
                
                
                1,795Put
      option Gain
                
                
                (1,006
                )
                
                
                —
                
                
                
                —Mark
      to market, trading
                
                
                1,267
                
                
                
                —
                
                
                
                —Changes
      in operating assets and liabilities:Decrease
      (increase) in accounts receivable
                
                
                (7,549
                )
                
                
                901
                
                
                
                1,658Increase
      in inventories
                
                
                (1,458
                )
                
                
                (1,347
                )
                
                
                (2,944
                )Decrease
      (increase) in deferred contract costs
                
                
                (83
                )
                
                
                91
                
                
                
                87Decrease
      (increase) in prepaid and other current assets
                
                
                520
                
                
                
                155
                
                
                
                (294
                )Increase
      in equipment held for resale
                
                
                (373
                )
                
                
                (339
                )
                
                
                (463
                )Decrease
      in other non-current assets
                
                
                168
                
                
                
                —
                
                
                
                54Increase
      (decrease) in accounts payable and accrued liabilities
                
                
                (252
                )
                
                
                163
                
                
                
                (1,484
                )Decrease
      in deferred income tax liabilities
                
                
                (128
                )
                
                
                (49
                )
                
                
                (230
                )Increase
      in deferred revenue
                
                
                380
                
                
                
                371
                
                
                
                1,095Increase
      in deferred rent
                
                
                291
                
                
                
                304
                
                
                
                274Increase
      in advance payments from customers
                
                
                7,606
                
                
                
                1,201
                
                
                
                5,099Net
      cash provided by (used in) operating activities
                
                
                4,097
                
                
                
                (336
                )
                
                
                (471
                )Cash
      flows from investing activities:Increase
      in non-current assets
                
                
                —
                
                
                
                (167
                )
                
                
                —Purchases
      of property and equipment
                
                
                (2,496
                )
                
                
                (1,167
                )
                
                
                (3,143
                )Proceeds
      from sale of equipment
                
                
                —
                
                
                
                29
                
                
                
                2Acquisition
      of patents
                
                
                (127
                )
                
                
                (115
                )
                
                
                (155
                )Purchases
      of short-term investments
                
                
                —
                
                
                
                (7,000
                )
                
                
                (20,600
                )Proceeds
      from maturities of short-term investments
                
                
                —
                
                
                
                11,000
                
                
                
                24,449Changes
      in restricted cash balances
                
                
                (174
                )
                
                
                —
                
                
                
                —Net
      cash provided by (used in) investing activities
                
                
                (2,797
                )
                
                
                2,580
                
                
                
                553Cash
      flows from financing activities:Proceeds
      from sale of common stock through stock plans
                
                
                198
                
                
                
                712
                
                
                
                1,020Net
      borrowing on revolving credit agreement
                
                
                8,681
                
                
                
                —
                
                
                
                —Principal
      payments on capital lease obligation
                
                
                (48
                )
                
                
                (18
                )
                
                
                —Net
      cash provided by financing activities
                
                
                8,831
                
                
                
                694
                
                
                
                1,020Effect
      of exchange rate changes on cash and cash equivalents
                
                
                198
                
                
                
                (381
                )
                
                
                (197
                )Net
      increase in cash and cash equivalents
                
                
                10,329
                
                
                
                2,557
                
                
                
                905Cash
      and cash equivalents:Beginning
      of period
                
                
                5,583
                
                
                
                3,026
                
                
                
                2,121End
      of period
                
                $
                15,912
                
                
                $
                5,583
                
                
                $
                3,026Supplemental
      disclosures - cash payments for:Income
      taxes
                
                $
                —
                
                
                $
                —
                
                
                $
                163Interest
      expense
                
                $
                141
                
                
                $
                71
                
                
                $
                107Supplemental
      schedule of non-cash investing activities:Equipment
      acquired under capital lease
                
                $
                198
                
                
                $
                113
                
                
                $
                —Unrealized
      loss in fair value of investments
                
                $
                (625
                )
                
                $
                625
                
                
                $
                —




The
accompanying notes are an integral part of these consolidated financial
statements.


51




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 (“CCD,” and, collectively, the “Company”) develop,
manufacture and integrate LaserCard optical memory cards (“OMCs”), optical card
drives, peripherals and specialty cards and printers.




The
Company’s customers for OMC related products are mainly value-added reseller
(VAR) companies worldwide, that develop 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 Green Card, Italian national
and other government ID card programs, Kingdom of Saudi Arabia’s national ID
card, India’s vehicle registration card in three states, Foreign Resident ID
program of Costa Rica, biometric IDs and other card applications.




The
Company supplies other advanced-technology cards, manufactured by CCD, for
various applications, card printers and systems integration for gate-keeping and
ticketing. The Company recently introduced a new secure, laser engravable
passport data page product, which features a unique hinge system designed to
maximize durability when the polycarbonate page is incorporated into a
traditional passport book. The data page can include a range of security
features and an ICAO-compliant e-passport chip. The passport issuer personalizes
the data page by laser engraving the passport holder’s facial image,
demographics and ICAO-compliant machine readable data onto the data page. The
Company is offering the data page both with and without the ICAO standard
e-passport chip through partners to several countries in the process of
upgrading their passports. The Company is also in the business of delivering
turnkey card manufacturing facilities which include the supply and installation
of state-of-the-art card production equipment, transfer of manufacturing
know-how, training, and production support.




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 2009 ended on April 3, 2009, fiscal year 2008 ended on March
28, 2008, and fiscal year 2007 ended on March 30,
2007.




(4.)
Foreign Currency Transactions. The functional currency of the Company’s
foreign subsidiary 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.


52




LASERCARD
CORPORATION AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS




(5.)
Derivative Financial Instruments.The Company uses short-term foreign
exchange forward contracts to mitigate foreign currency risk associated
primarily with inter-company receivables and payables, and loan receivables
(denominated in Euros) with its German subsidiary. The Company’s foreign
exchange forward contracts are not designated for accounting purposes as hedging
instruments under SFAS No. 133, Accounting
for Derivative Instruments and Hedging Activities, as amended.
Accordingly, any gains or losses resulting from changes in the fair value of the
forward contracts are reported in other income (expense), net. The gains and
losses on these forward contracts generally offset gains and losses associated
with the underlying foreign currency denominated inter-company receivables and
payables, and loans receivable. At March 31, 2009 and 2008, the Company had
foreign exchange forward contracts with a maturity of less than 30 days to
purchase 1.3 million Euros and 1.2 million Euros, respectively. The fair value
of the forward contracts was not material at March 31, 2009 and
2008.




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




(6.)
Concentrations of Risk. Financial instruments that potentially subject
the Company to significant concentrations of credit risk consist principally of
cash, cash equivalents, short-term investments, long-term investments and
accounts receivable. The Company places its cash, cash equivalents, short-term
and long-term investments in high-credit quality financial institutions. The
Company is exposed to credit risk in the event of default by these institutions
to the extent of the amount recorded on the consolidated balance sheets. As of
March 31, 2009, the Company held $13.5 million par value (with a fair value of
approximately $12.2 million), of marketable securities consisting of auction
rate securities (“ARSs”), that are structured with short-term interest rate
reset dates of generally 28 to 35 days but with contractual maturities that are
in some cases well in excess of ten years. Ninety-six and 3/10 percent (96.3%)
of the Company’s investments represent SLARSs, of which 95% of principal and
interest is guaranteed under the FFELP and AAA rated. The remaining balance is
privately financed and consists of an over-collateralized pool of graduate
student loans. The Company believes that the credit quality of these securities
is high based on the guarantees and collateralization. At the end of each reset
period, the Company can sell or continue to hold the securities at par value.
This auction process has historically provided a liquid market for ARSs. In
February 2008, however, auctions failed due to sell orders exceeding buy orders.
The funds associated with failed auctions will not be accessible until a
successful auction occurs, a buyer is found outside of the auction process, or
the underlying securities have matured or are recalled by the issuer. Given the
disruptions in the credit markets and the fact that the liquidity for these
types of securities remains uncertain, as of March 31, 2009, the Company has
classified all of its ARSs as noncurrent assets in its consolidated balance
sheets as its ability to liquidate such securities in the next twelve (12)
months is uncertain and these investments had been designated as trading
securities. The Company had no investments in marketable securities designated
as available for sale as of March 31, 2009. More detailed information about the
reasons behind the designation and the risks the Company faces with regard to
its investment in the ARS can be found under Cash and Cash Equivalents,
Short-term Investments and Long-Term Investments
below.




As
of March 31, 2008, the Company had $12.9 million of ARSs, net of $0.6 million of
unrealized loss under “Accumulated Other Comprehensive Income” of the
stockholders’ equity, accounted for as available-for-sale and classified as
long-term securities due to the underlying events surrounding the failed
auctions. The Company held no short-term investments as of March 31, 2008. The
Company continues to earn interest at the maximum contractual rate on the
ARS.




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




(7.)
Major Customers.The following customers accounted for more than 10% of
revenue for the fiscal years ended March 31
are:


2009
                                            
                                            
                                            2008
                                            
                                            
                                            2007Omar
      K. ACSS Communications and Space Services Company Ltd.
      (“ACSS”)
                                            
                                            
                                            25
                                            %
                                            
                                            17
                                            %
                                            
                                            13
                                            %General
      Dynamics Information Technology (“GDIT”)
                                            
                                            
                                            19
                                            %
                                            
                                            29
                                            %
                                            
                                            28
                                            %Gemalto
      S.A. (“Gemalto”)
                                            
                                            
                                            10
                                            %
                                            
                                            14
                                            %
                                            <10
                                            %




The
revenue from these customers was attributable to both the OMC and the optical
card drive, systems, and enabling services segments. No other customer accounted
for more than 10% of revenue during the periods.


53


LASERCARD
CORPORATION AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS




Three
customers accounted for 45%, 18%, and 10%, respectively, of accounts receivable
at March 31, 2009. One customer accounted for 37% of accounts receivable as of
March 31, 2008.




(8.)
Cash and Cash Equivalents, Short-term Investments and Long-term
Investments. The Company considers all highly liquid investments,
consisting primarily of commercial paper, discount notes and U.S. government
bonds, with maturities of three months or less at the date of purchase, to be
cash equivalents. Short-term investments include securities with maturities at
date of purchase of more than three months and investments with remaining
maturities of less than one year. All investments with maturities at date of
purchase greater than one year are classified as long-term investments.
Management determines the appropriate classification of debt securities at the
time of purchase and re-evaluates the classification of investments as of each
balance sheet date.




The
Company accounts for its short-term marketable securities in accordance with
SFAS No. 115, Accounting
for Certain Investments in Debt and Equity Securities (“SFAS No. 115”).
The Company considers all highly liquid investments, consisting primarily of
commercial paper, discount notes, U.S. government bonds, and ARSs, with original
or remaining maturities of three months or less at the date of purchase, to be
cash equivalents. All investments with original or remaining maturities of more
than three months but not more than one year at the date of purchase are
classified as short-term. Investments with original or remaining maturities of
more than one year at the date of purchase are classified as noncurrent assets.
The Company determines the length of its investments after considering its cash
requirements and yields available for the type of investment considered by the
Company. The Company determines the appropriate classification of debt and
equity securities at the time of purchase and reevaluates the classification of
investments as of each balance sheet date. The Company owns investments in
marketable securities that have been designated as “available for sale” or
“trading securities”. Securities available for sale are carried at fair value
with the unrealized gains and losses reported in “Accumulated Other
Comprehensive Income,” a component of stockholders’ equity. Trading securities
are carried at fair value with unrealized gains and losses reported in the
Company’s consolidated Statement of Operations under “Other income (expense),
net”.




As
of March 31, 2009, the Company held $13.5 million par value (with a fair value
of approximately $12.2 million), of marketable securities consisting of ARSs,
that are structured with short-term interest rate reset dates of generally 28 to
35 days but with contractual maturities that are in some cases well in excess of
ten years. Ninety-six and 3/10 percent (96.3%) of the Company’s investments
represent SLARSs, of which 95% of principal and interest is guaranteed under the
FFELP and AAA rated. The remaining balance is privately financed and consists of
an over-collateralized pool of graduate student loans. The Company believes that
the credit quality of these securities is high based on the guarantees and
collateralization. At the end of each reset period, the Company can sell or
continue to hold the securities at par value. This auction process has
historically provided a liquid market for ARSs. In February 2008, however,
auctions failed due to sell orders exceeding buy orders. The funds associated
with failed auctions will not be accessible until a successful auction occurs, a
buyer is found outside of the auction process, or the underlying securities have
matured or are recalled by the issuer. Given the disruptions in the credit
markets and the fact that the liquidity for these types of securities remains
uncertain, as of March 31, 2009, the Company has classified all of its ARSs as
noncurrent assets in its consolidated balance sheets as its ability to liquidate
such securities in the next twelve (12) months is uncertain and these
investments had been designated as trading securities. As of March 31, 2008, the
Company had $12.9 million of ARSs, net of $0.6 million of unrealized loss under
“Accumulated Other Comprehensive Income” of the stockholders’ equity, accounted
for as available-for-sale and classified as long-term securities. The Company
held no short-term investments as of March 31, 2008. The Company continues to
earn interest at the maximum contractual rate on the ARS.




UBS
AG issued a prospectus dated October 7, 2008 for a “Rights” offering whereby UBS
offered to purchase certain ARSs it placed, including those the Company holds,
at par or face value. On October 29, 2008 (“Acceptance Date”), the Company
submitted the acceptance form to participate in the “Rights” offering. UBS has
the “Right” to purchase its ARSs at par at any time through July 3, 2012 and the
Company has the “Right” to sell its ARSs at par to UBS beginning June 30, 2010
through July 3, 2012. As part of the offering, UBS offered a line of credit of
about 75% of the fair value of the ARSs, as calculated by UBS, until they are
purchased by UBS. The line of credit has certain restrictions described in the
prospectus. In December 2008, the Company obtained a line of credit from UBS in
the amount of $8.7 million that is collateralized by the SLARS. The Company drew
down the entire amount on this credit line.


54




LASERCARD
CORPORATION AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS




The
Rights represent a firm agreement in accordance with SFAS No. 133, Accounting
for Derivative Instruments and Hedging Activities (“SFAS No. 133”), which
defines a firm agreement as an agreement with an unrelated party, binding on
both parties and usually legally enforceable, with the following
characteristics: a) the agreement specifies all significant terms, including the
quantity to be exchanged, the fixed price, and the timing of the transaction,
and b) the agreement includes a disincentive for nonperformance that is
sufficiently large to make performance probable. The enforceability of the
Rights results in a Put Option and should be recognized as a free standing
derivative separate from the ARS. By electing to participate in the rights
offering, the Company granted UBS the right, exercisable at any time prior to
July 3, 2012, to purchase or cause the sale of its ARSs (the “Call Right”). UBS
has agreed to pay us the par value of their ARS within one day of settlement of
any Call Right transaction. Notwithstanding the Call Right, the Company is
permitted to sell ARSs to other parties other than UBS, in which case the Put
Rights attached to the ARSs that are sold would be extinguished. The Company
elected to adopt SFAS No. 159, The Fair Value Option for Financial Assets and
Financial Liabilities (“SFAS No. 159”) on December 31, 2008 on the Put Option
and elected to treat its ARS portfolio from available-for-sale to trading
securities. The transfer resulted in the reversal of prior unrealized losses,
net of taxes, on the ARSs from accumulated other comprehensive income to an
other-than temporary impairment of approximately $1.3 million on the $13.5
million (par value) portion of the Company’s ARS portfolio and the recognition
of a benefit of approximately $1 million related to the Put Option provided by
the settlement. The transfer to trading securities reflects management’s intent
to exercise its Put Option during the period June 30, 2010 through July 3,
2012.




At
March 31, 2009, there was insufficient observable ARS market information
available to determine the fair value of the Put Option. Therefore, in order to
validate the fair value estimate of these securities, the Company incorporated
assumptions such as credit quality or financial standing of the issuer, final
stated maturities, estimates on the probability of the issue being called prior
to final maturity, impact due to extended periods of maximum auction rates,
liquidity risk premium, and broker quotes from independent valuators using
widely accepted financial models. Management believes that these are reasonable
estimates reflecting the unique circumstances of the subject SLARS and the
method of valuing the Put Option as forward contracts is
reasonable.




The
long-term investments in fiscal year 2008 represent ARS primarily consisting of
student loan debt obligations whose underlying assets are primarily Federal
Family Education Loan Program (“FFELP”) guaranteed. As a result of recent
auction failures during fiscal 2008, actual market prices or relevant observable
inputs were not readily available to determine the fair value of the Company’s
ARS. At March 31, 2008, the Company valued the ARS using the fair value supplied
by the Company’s brokerage firm derived from the brokerage firm’s internal
valuation methodology using a discounted cash flow model and our own analysis.
Based on the estimated fair value at March 31, 2008, the Company recorded an
unrealized other comprehensive loss of $625,000 in the quarter ended March 31,
2008. Also, the Company reclassified the ARS of $13.5 million to long-term
investments from short-term investments as the Company has the ability and
intentto
hold the securities until anticipated recovery of fair value
occurs.


55




LASERCARD
CORPORATION AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS




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


March
      31, 2009Cost
                                                
                                                
                                                Gross
                                                  Unrealized
                                                  Gains
                                                
                                                
                                                Gross
                                                  Unrealized
                                                  Losses
                                                
                                                
                                                Estimated
                                                  Fair
      ValueCash
      equivalents
                                                
                                                $
                                                14,400
                                                
                                                
                                                $
                                                —
                                                
                                                
                                                $
                                                —
                                                
                                                
                                                $
                                                14,400Long-term
      investments-ARS
                                                
                                                
                                                13,500
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                (1,267
                                                )
                                                
                                                
                                                12,233Put
      option
                                                
                                                
                                                —
                                                
                                                
                                                
                                                1,006
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                1,006$
                                                27,900
                                                
                                                
                                                $
                                                1,006
                                                
                                                
                                                $
                                                (1,267
                                                )
                                                
                                                $
                                                27,639




March
      31, 2008Cost
                                                                          
                                                                          
                                                                          Gross
                                                                            Unrealized
                                                                            Gains
                                                                          
                                                                          
                                                                          Gross
                                                                            Unrealized
                                                                            Losses
                                                                          
                                                                          
                                                                          Estimated
                                                                            Fair
      ValueCash
      equivalents
                                                                          
                                                                          $
                                                                          4,581
                                                                          
                                                                          
                                                                          $
                                                                          —
                                                                          
                                                                          
                                                                          $
                                                                          —
                                                                          
                                                                          
                                                                          $
                                                                          4,581Long-term
      investments
                                                                          
                                                                          
                                                                          13,500
                                                                          
                                                                          
                                                                          
                                                                          —
                                                                          
                                                                          
                                                                          
                                                                          (625
                                                                          )
                                                                          
                                                                          
                                                                          12,875$
                                                                          18,081
                                                                          
                                                                          
                                                                          $
                                                                          —
                                                                          
                                                                          
                                                                          $
                                                                          (625
                                                                          )
                                                                          
                                                                          $
                                                                          17,456




(9.)
Fair Value of Measurements. Effective April 1, 2008, the Company adopted
SFAS No. 157, Fair
Value Measurements (“SFAS 157”), except as it applies to the nonfinancial
assets and nonfinancial liabilities subject to FSP 157-2. SFAS 157 clarifies
that fair value is an exit price, representing the amount that would be received
to sell an asset or paid to transfer a liability in an orderly transaction
between market participants. As such, fair value is a market-based measurement
that is determined based on assumptions that market participants would use in
pricing an asset or a liability. As a basis for considering such assumptions,
SFAS 157 establishes a three-tier value hierarchy, which prioritizes the inputs
used in the valuation methodologies in measuring fair
value:




Level
1 - Observable inputs that reflect quoted prices (unadjusted) for identical
assets or liabilities in active markets.




Level
2 - Include other inputs that are directly or indirectly observable in the
marketplace.




Level
3 - Unobservable inputs which are supported by little or no market
activity.




The
fair value hierarchy also requires an entity to maximize the use of observable
inputs and minimize the use of unobservable inputs when measuring fair
value.




In
accordance with SFAS 157, the Company measures its cash equivalents and
marketable securities at fair value. The Company’s cash equivalents and
marketable securities are primarily classified within Level 1 with the exception
of its investments in ARSs, which are classified within Level 3. Cash
equivalents and marketable securities are valued primarily using quoted market
prices utilizing market observable inputs. The Company’s investments in ARSs are
classified within Level 3 because there are no active markets for the ARSs and
therefore the Company is unable to obtain independent valuations from market
sources. Therefore, the ARSs were valued using a discounted cash flow model.
Some of the inputs to the cash flow model are unobservable in the market. The
total amount of assets measured using Level 3 valuation methodologies
represented 20% of total assets as of March 31, 2009.


56




LASERCARD
CORPORATION AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS




The
table below shows, by level, the Company’s financial assets that were accounted
for at fair value as of March 31, 2009. The table does not include assets and
liabilities which are measured at historical cost or any basis other than fair
value (in thousands):


March
      31, 2009Items
      measured at fair value on a recurring basis:
                                      
                                      Portion
      of
                                        Carrying
      Value
                                        Measured
      at Fair
                                        Value
                                      
                                      
                                      Level
      1
                                      
                                      
                                      Level
      3Cash
      equivalents: Money Market funds
                                      
                                      $
                                      14,400
                                      
                                      
                                      $
                                      14,400
                                      
                                      
                                      $
                                      —Restricted
      Cash
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —Long-term
      investments: Auction Rate Securities
                                      
                                      
                                      12,233
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      12,233Put
      option
                                      
                                      
                                      1,006
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      1,006$
                                      27,639
                                      
                                      
                                      $
                                      14,400
                                      
                                      
                                      $
                                      13,239




March
      31, 2008Items
      measured at fair value on a recurring basis:
                                    
                                    Portion
      of
                                      Carrying
      Value
                                      Measured
      at Fair
                                      Value
                                    
                                    
                                    Level
      1
                                    
                                    
                                    Level
      3Cash
      equivalents: Money Market funds
                                    
                                    $
                                    4,581
                                    
                                    
                                    $
                                    4,581
                                    
                                    
                                    $
                                    —Restricted
      Cash
                                    
                                    
                                    173
                                    
                                    
                                    
                                    173
                                    
                                    
                                    
                                    —Long-term
      investments: Auction Rate Securities
                                    
                                    
                                    12,875
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    12,875$
                                    17,629
                                    
                                    
                                    $
                                    4,754
                                    
                                    
                                    $
                                    12,875




The
table below shows, by level, the Company’s financial assets that were accounted
for at fair value as of March 31, 2009. The table does not include assets and
liabilities which are measured at historical cost or any basis other than fair
value (in thousands):


Auction
      Rate Securities2009
                    
                    
                    2008Balance
      at beginning of period
                    
                    $
                    12,875
                    
                    
                    $
                    13,500Put
      option
                    
                    
                    1,006
                    
                    
                    
                    —Reversal
      of unrealized loss associated with transfer of securities to
      trading
                    
                    
                    625
                    
                    
                    
                    —Unrealized
      loss in accumulated other comprehensive income
                    
                    
                    —
                    
                    
                    
                    (625
                    )Unrealized
      loss included in income
                    
                    
                    (1,267
                    )
                    
                    
                    —Ending
      Balance at March 31
                    
                    $
                    13,239
                    
                    
                    $
                    12,875


57




LASERCARD
CORPORATION AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS




(10.)
Accounts Receivable. Accounts receivable are net of allowance for
doubtful accounts of $59,000 and $35,000 as of March 31, 2009 and 2008,
respectively. The Company maintains allowances for doubtful accounts and product
return reserves for anticipated losses resulting from the inability of its
customers to make required payments and in-process product returns. The Company
generally computes its allowances based on specifically identified accounts that
are past due that are likely not collectible. Interest receivable represents
accruals on investments in ARSs and other interest-bearing securities. Other
receivables are comprised of value added tax refunds and miscellaneous items.
The components of accounts receivable as of March 31 are (in
thousands):


2009
                  
                  
                  2008Trade
      receivables
                  
                  $
                  10,193
                  
                  
                  $
                  2,899Allowance
      for doubtful accounts
                  
                  
                  (59
                  )
                  
                  
                  (35
                  )Interest
      receivable
                  
                  
                  6
                  
                  
                  
                  12Other
      receivables
                  
                  
                  77
                  
                  
                  
                  76Total
      net receivables
                  
                  $
                  10,217
                  
                  
                  $
                  2,952




(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):


2009
                
                
                2008Raw
      materials
                
                $
                6,996
                
                
                $
                7,675Work-in-process
                
                
                1,444
                
                
                
                1,518Finished
      goods
                
                
                5,792
                
                
                
                3,887Total
      net inventories
                
                $
                14,232
                
                
                $
                13,080




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, 2009, 2008 and 2007, the Company recorded inventory
reserve expense of $352,000, $53,000, and $483,000, respectively.




(12.)
Equipment Held for Resale.Equipment held for resale consists primarily
of parts, labor costs and other costs incurred to build equipment under
contracts from which the Company has received $29.5 million in non-refundable
advance payments. Direct incremental costs associated with the purchase or
construction of these items is deferred until the related deferred revenue is
recognized. The components of equipment held for resale as of March 31 are (in
thousands):


2009
                
                
                2008Parts
                
                $
                5,463
                
                
                $
                5,417Labor
                
                
                1,485
                
                
                
                1,158Other
                
                
                114
                
                
                
                113Total
      equipment held for resale
                
                $
                7,062
                
                
                $
                6,688


58




LASERCARD
CORPORATION AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS




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


2009
                  
                  
                  2008Building
      and land
                  
                  $
                  887
                  
                  
                  $
                  1,052Equipment
      and furniture
                  
                  
                  26,001
                  
                  
                  
                  25,438Construction
      in progress, including purchased equipment
                  
                  
                  338
                  
                  
                  
                  282Leasehold
      improvements
                  
                  
                  5,201
                  
                  
                  
                  5,22232,427
                  
                  
                  
                  31,994Less:
      accumulated depreciation and amortization
                  
                  
                  (21,555
                  )
                  
                  
                  (20,294
                  )Total
      property and equipment, net
                  
                  $
                  10,872
                  
                  
                  $
                  11,700




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 2009, 2008, and
2007 was $2.8 million, $2.9 million and $2.7 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.




(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. There is no goodwill
remaining in the consolidated balance sheets at March 31, 2009 and
2008.




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


2009
                  
                  
                  2008Patent
      expenditures
                  
                  $
                  3,795
                  
                  
                  $
                  3,669Technology
      transfer expenditures
                  
                  
                  545
                  
                  
                  
                  545Total
      patent and other intangible expenditures
                  
                  
                  4,340
                  
                  
                  
                  4,214Patent
      accumulated amortization
                  
                  
                  (3,395
                  )
                  
                  
                  (3,267
                  )Technology
      transfer accumulated amortization
                  
                  
                  (545
                  )
                  
                  
                  (545
                  )(3,940
                  )
                  
                  
                  (3,812
                  )Amortizable
      patents and other intangibles, net
                  
                  $
                  400
                  
                  
                  $
                  402




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


2009
                    
                    2008Patents
                    
                    3.3
                    
                    3.2


59




LASERCARD
CORPORATION AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS




Legal
expenses incurred in connection with patents are capitalized and amortized over
the estimated remaining useful lives of the patents to seven years. Amortization
expense on intangible assets for fiscal years 2009, 2008 and 2007 was $128,000,
$125,000 and $143,000, 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 (in thousands):


2010
                        
                        2011
                        
                        2012
                        
                        2013
                        
                        2014
      &
                          ThereafterPatent
      amortization expense
                        
                        88
                        
                        71
                        
                        58
                        
                        43
                        
                        34




(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, 2009, the fair value of
long-lived assets exceeds their book value. Therefore, no impairment loss has
been recognized. The Company disposed of obsolete equipment totaling
approximately $1.5 million and recorded a loss of $0.3 million for parts tooling
for a discontinued device recorded in costs of goods sold in fiscal year 2009.
At March 31, 2008, based on the Company’s estimated future cash flow analysis
and having had no triggering events such as a significant disposal of a portion
of such assets, an adverse change in the market involving the business employing
the related asset or a significant decrease in the benefits realized from an
acquired business, management has determined that the fair value of long-lived
assets exceeded their book
value.




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


2009
                
                
                2008Accrued
      payroll and benefits
                
                $
                297
                
                
                $
                449Deferred
      compensation
                
                
                340
                
                
                
                713Warranty
      reserves
                
                
                561
                
                
                
                655Accrued
      compensated absences
                
                
                625
                
                
                
                846Other
      accrued liabilities
                
                
                1,574
                
                
                
                558Total
      accrued liabilities
                
                $
                3,397
                
                
                $
                3,221




Where
appropriate, provision is made at the time of shipment for estimated warranty
costs. The Company provides a limited warranty for the replacement of defective
products. The Company’s limited warranty requires them to repair or replace
defective products at no cost to the customer within a specified time period
after sale. The Company estimates the costs that may be incurred under its
limited warranty and record a liability in the amount of such costs at the time
product revenue is recognized. Factors that affect the estimate of warranty
liability include the number of units sold, and historical and anticipated rates
of warranty claims. The Company assesses the adequacy of its recorded warranty
liability quarterly and adjusts the amount as necessary. The Company utilizes
historical trends and information received from its customers to assist in
determining the appropriate estimated warranty accrual levels. The Company’s
product warranty claims are settled through the return of defective products and
the shipment of replacement products. The adequacy of the warranty reserve is
reviewed quarterly to verify that it properly reflects the remaining obligations
based on the anticipated warranty costs over the balance of the obligation
period. Adjustments are made when actual return claim experience differs from
estimates. The Company recorded deferred compensation of $0.7 million related to
the Planned Retirement Agreement with the former Chief Executive Officer and
President at March 31, 2008 and a balance of approximately $0.3 million remained
at March 31, 2009.


60




LASERCARD
CORPORATION AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS




Warranty
activities for the fiscal years ended March 31 are (in thousands):


2009
                
                
                2008
                
                
                2007Beginning
      balance
                
                $
                655
                
                
                $
                743
                
                
                $
                648Accruals
      for products sold
                
                
                67
                
                
                
                147
                
                
                
                164Costs
      incurred/Adjustments
                
                
                (161
                )
                
                
                (235
                )
                
                
                (69
                )Ending
      balance
                
                $
                561
                
                
                $
                655
                
                
                $
                743




(17.)
Software Development Costs. Development costs incurred in the research
and development of new software products for general distribution are expensed
as incurred until technological feasibility in the form of a working model has
been established. To date, the Company’s software development has been completed
concurrent with the establishment of technological feasibility and, accordingly,
all software development costs that do not meet capitalization criteria are
charged to research and development expenses in the accompanying condensed
consolidated statements of operations. Software development costs incurred in
the execution of contract obligations are capitalized and charged to cost of
goods sold at the time the related revenue is
recorded.




(18.)
Advance Payments from Customers. The Company routinely receives advance
payments on orders placed by its customers. The advance payments are recorded as
a liability on the consolidated balance sheets until the related orders are
shipped or services are performed or revenue would otherwise be recognized.
Advance payments of approximately $24.5 million from Prevent Global and the
advance payments of approximately $1.7 million from the contract to deliver a
turnkey non-optical card manufacturing facility in the Kingdom of Saudi Arabia
were classified as noncurrent liabilities in the condensed consolidated balance
sheet at March 31, 2009 as these projects are no longer expected to be completed
within twelve months.




(19.)
Revenue Recognition. Product sales primarily consist of optical card
sales, sales of drives, systems and enabling services and sales of specialty
cards and card printers. The Company recognizes revenue from product sales when
the following criteria are met: (1) persuasive evidence of an arrangement
exists; (2) delivery has occurred; (3) the fee is fixed or determinable; and (4)
collectibility is reasonably assured. The Company recognizes revenue on product
sales at the time of shipment when shipping terms are F.O.B. shipping point,
orders are placed pursuant to a pre-existing sales arrangement and there are no
post-shipment obligations other than customer acceptance criteria or, in the
case of a U.S. government contract, warehousing. Where appropriate, provision is
made at the time of shipment for estimated warranty costs and estimated
returns.




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




For
contracts that include customer-specified acceptance criteria, the Company
recognizes revenue only after the acceptance criteria have been met and
presuming that all other revenue criteria have been met. The Company defers
revenue from services and recognizes it over the contractual period or as the
Company renders services and the customer accepts them.




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


61




LASERCARD
CORPORATION AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS




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. Our
long-term program accounted for under SOP 81-1 concluded during the last quarter
of fiscal year 2009 with revenue of approximately $540,000 during fiscal year
2009. For the year ended March 31, 2008 and 2007, the Company recognized revenue
of approximately $249,000 and $12,000, respectively, based on a zero profit
margin.




In
the fourth quarter of fiscal year 2006, the Company entered into a subcontract
covering product and services with a prime contractor for the Kingdom of Saudi
Arabia to provide them with card personalization workstation integration for use
in that country’s personalized national ID card program with decentralized card
issuance which includes OMCs, hardware, and software. The contract called for
multiple deliverables, installation, and certain client acceptance criteria, as
defined in the agreement. In applying the guidance within EITF 00-21, the
Company determined the deliverables are not to be accounted for as separate
units, but rather as a bundled arrangement as the fair value of the undelivered
items cannot be readily determined. Therefore, revenue recognition on this
contract and the associated contract costs were deferred until the predominant
undelivered element, the card personalization, was delivered and accepted,
commencing when the installation and acceptance of the card personalization
system was complete. The Company determined that once the card personalization
system was accepted, contract revenue would be recognized ratably based on
actual cards personalized and acceptance. As the card personalization system was
accepted during the quarter ended March 31, 2007, the Company began recognizing
revenue under this contract during that period on cards that had been accepted
by customer through that date. On June 23, 2007, the Company and the prime
contractor entered into an agreement amending the terms of the provision of
cards and supplies according to a delivery schedule for the balance of fiscal
year 2008. In addition, the Company no longer has obligations pertaining to the
installation of equipment, card personalization workstation integration or card
personalization. The Company then began recognizing revenue upon receipt of the
customer’s certificate of acceptance of cards delivered. Now, the Company
recognizes revenue upon the transfer of title as the acceptance criteria are
perfunctory. The Company recognized revenue totaling $12.2 million, $6.3
million, and $4.3 million in fiscal years 2009, 2008, and 2007, respectively,
under this contract.




As
of March 31, 2009, there remained $0.5 million of deferred revenue and about
$0.4 million of deferred contact costs associated with this contract. As of
March 31, 2008 there remained $0.6 million of deferred revenue and about the
same amount of deferred contract costs relating to this contract.




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 collectability 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 2009, 2008 and 2007.


62




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. License revenue for fiscal year
2009 was immaterial. There were no license revenue or cost recorded for fiscal
years 2008 and 2007.




The
Company entered into license and OMC equipment purchase and support agreements,
effective April 3, 2004, with Global Investments Group (“GIG”), based in
Auckland, New Zealand, for OMC manufacturing in Slovenia. GIG transferred the
license and other agreements, with our approval, to Prevent Global družba za
upravljanje, investicije in razvoj d.d. (“Prevent Global”) in March 2007. The
agreements provide for payments (other than interest on late payments) to the
Company of about $28.5 million, for a 20-year license, the required
manufacturing equipment for a targeted initial manufacturing capacity of 10
million optical cards annually and installation support, and a four-year
training and support package. Of the $27.8 million the Company has received,
$24.5 million was recorded as advance payments from the customer and $3.3
million for the licensing and other fees was recorded as deferred revenue. Both
were classified as long term liabilities in the consolidated balance sheets. As
of March 31, 2009, the Company held $7 million of acquired equipment, including
direct and incremental expenses, classified as equipment held for resale on our
consolidated balance sheets related to this contract as compared with $6.6
million on March 31, 2008. The Company is to ship this equipment to Prevent
Global upon their request after a suitable facility is established by Prevent
Global. The Company will inspect the facility when requested to assure it has
the necessary services available for installation of the equipment. At this
time, the Company does not know when Prevent Global will initiate such a
request. Beginning April 1, 2008, the agreement provide for payments by Prevent
Global of $3 million for a three-year support package, and options for thirteen
additional years of support for payments of $1 million annually. In addition,
Prevent Global is to pay royalties of $0.60 per card for each card produced
under the license. The non-exclusive territories covered by the license include
most of the European Union and Eastern European regions. The Company retains
rights to utilize up to 20% of the new facility capacity as backup and a
capacity buffer to augment our own card manufacturing facilities in Mountain
View, California and possibly at the Company’s German subsidiary. The granting
of this license to Prevent Global establishes a potential manufacturing facility
supplier of OMCs 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 the Company was unable to determine evidence of the fair value
for the undelivered items other than ongoing support. The Company is able to
determine evidence of fair value for the last predominant item to be delivered,
which is the ongoing annual support. Accordingly, revenues for the arrangement
have been deferred and will be recognized when the equipment is installed and
accepted, with the exception of the value of the ongoing annual support of the
manufacturing equipment which will be recognized quarterly as earned, beginning
when the equipment is accepted and training has been completed, which date is
dependent on Prevent Global establishing a suitable facility in Slovenia.
Pursuant to FTB 90-1, Accounting for Separately Priced Extended Warranty and
Product Maintenance Contracts, the support revenue will be recognized ratably
over the remaining term of the agreement. During the fourth quarter of calendar
year 2008, the Company began the training of employees prior to the expected
transfer of the manufacturing equipment to a to-be-built facility in Slovenia.
Since that time, Prevent Global has been reviewing this project to determine
their next steps. Refer to risk factor, “We
Sold a Card Manufacturing License Under Which We Will Provide Certain Factory
Set-Up and Training Services to Prevent Global of Slovenia. If We and Prevent
Global Are Successful, They Could Compete with Us for Business” for more
details.




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




(21.)
Shipping and Handling Costs. The Company reports shipping and handling
costs in both the sales and the related cost of goods sold to the extent that
they are billed to customers. In all other instances, they are reflected as a
component of cost of goods
sold.




(22.)
Advertising Costs. Advertising costs consist of development and placement
costs of the Company’s advertising campaigns and are charged to expense when
incurred. Advertising expense was approximately $250,000 for fiscal year 2009,
$212,000 for fiscal year 2008, and $188,000 for fiscal year
2007.


63


LASERCARD
CORPORATION AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS




(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.




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).




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




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




In
fiscal year 2009, the Company granted its new chief executive officer and his
staff non-statutory stock options (the “Market-Based Option”) to purchase a
total of 715,000 shares of Common Stock with an exercise price of $7.12 and
$4.84 per share, respectively, which was market price at the date of grant. The
Market-Based Options have a term of ten years and vest if, prior to five years
from the Grant date, the closing trading price of Common Stock for twenty
consecutive days is greater than or equal to $10, $13, $16, $19, and $22 per
share with different vesting points. For the Market Based Options and options
granted to Company officers with similar vesting schedules, the Company has used
the Lattice-model with the stated assumptions to value the stock-based employee
compensation expenses.


64




LASERCARD
CORPORATION AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS




The
following assumptions were utilized to estimate the fair value of the Company’s
stock option awards for the fiscal years ended March 31:


2009
                      
                      2008
                      
                      2007Expected
      stock price volatility
                      
                      55%
                      
                      55%
                      
                      55%Risk-free
      interest rates
                      
                      2.44%
      to 3.35%
                      
                      2.65%
      to 4.93%
                      
                      4.40%
      to 4.96%Average
      expected life of options
                      
                      4.4
      to 5 years
                      
                      4.4
      to 5 years
                      
                      4.4
      to 5 yearsExpected
      annual dividends
                      
                      ―
                      
                      ―
                      
                      ―




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




The
risk-free interest rate was based on U.S. Treasury zero-coupon issues with a
maturity approximating the expected life as of the week of the grant date. There
was no annual dividend rate assumed as a cash dividend is not expected to be
declared and paid in the foreseeable future. The Company updates these
assumptions at least annually 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 and restricted shares of
approximately $2.3 million in fiscal year 2009, $2 million in fiscal year 2008,
and $1.7 million in fiscal year 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, 2008 and 2007.




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


2009
                  
                  
                  2008
                  
                  
                  2007Cost
      of sales
                  
                  $
                  670
                  
                  
                  $
                  336
                  
                  
                  $
                  324Selling,
      general and administrative expense
                  
                  
                  1,482
                  
                  
                  
                  1,369
                  
                  
                  
                  1,009Research
      and development expense
                  
                  
                  121
                  
                  
                  
                  256
                  
                  
                  
                  354Stock-based
      compensation expense before income tax
                  
                  
                  2,273
                  
                  
                  
                  1,961
                  
                  
                  
                  1,687Less:
      income tax benefit
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —Net
      stock-based compensation expense after income tax
                  
                  $
                  2,273
                  
                  
                  $
                  1,961
                  
                  
                  $
                  1,687




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




Restricted
Shares and Restricted Stock Units:Beginning September 21, 2007,
restricted shares and restricted stock units were awarded to certain Company
employees and directors under the provisions of the 2004 Plan. These shares and
units are subject to time-based vesting provisions, and were awarded at no cost
to the recipients, and cannot be sold, assigned, transferred, or pledged during
the restriction period. Recipients of the restricted shares have the right to
vote such shares and receive dividends, whereas the recipients of restricted
stock units do not have these same
benefits.




On
June 2, 2008, the Company’s CEO was granted 20,000 restricted shares (the
“Restricted Stock”) outside the 2004 Plan at no charge to the CEO. The
Restricted Stock vests over four years, with vesting to be 25% on each of the
first four one-year anniversaries of June 2, 2008. The Company committed to
register the Restricted Stock with the SEC on Form S-8 since they were issued
outside of the 2004 Plan in compliance Nasdaq Rule No. 4350(i)(1)(A). On
September 19, 2008, restricted shares were awarded to directors of the Company.
For directors, the restricted shares will vest in full on the eleventh month
after the date of their award. The fair value of restricted shares, including
the Restricted Stock, at the time of the award is expensed on a straight-line
basis, primarily in selling, general and administrative expenses over the
vesting period.


65




LASERCARD
CORPORATION AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS




Restricted
stock units were awarded to certain employees of the Company on September 22,
2008. The fair value at the time of the award is expensed on a straight-line
basis over the vesting period. Subject to the employee’s continuous common-law
employment with the Company, 25% of these restricted units vest on each of the
first, second, third, and fourth anniversaries of the date of their award or
earlier upon a change in control. As the units vest, shares will be issued in
settlement, net of shares retained to satisfy withholding
obligations.




As
of March 31, 2009, about $4.3 million of total unrecognized compensation cost
related to unvested stock options, restricted share awards and restricted stock
units is expected to be recognized over the remaining vesting period through
August 2012. As of March 31, 2008, about $3.7 million of total unrecognized
compensation cost related to unvested stock options, restricted share awards and
restricted stock units is expected to be recognized over the remaining vesting
period through December 2011.




The
Company did not record an income tax benefit on stock based compensation expense
for the fiscal years ended March 31, 2009 and 2008, as the Company has
cumulative operating loss carryovers, for which a full valuation allowance has
been established.




The
FSP No. 123R-3, Transition
Election Related to Accounting for the Tax Effects of Share-Based Payment
Awards, requires an entity to follow either the transition guidance for
the additional-paid-in-capital (“APIC”) pool as prescribed in SFAS No. 123(R) or
the alternative transition method described in FSP No. 123R-3. An entity that
adopts SFAS No. 123(R) using the modified prospective application may make a
one-time election to adopt the transition method described in the FSP No.
123R-3, and may take up to one year from the latter of its initial adoption of
SFAS No. 123(R) or the effective date of the FSP No. 123R-3 to evaluate the
available transition alternatives and make its one-time election. The Company
has elected to use the simplified method provided for in FSP FAS 123R-3 to
calculate its APIC pool effective April 1, 2007. The adoption of the FSP did not
have a material impact on our consolidated financial position, results of
operations or cash flows.




Employee
Stock Purchase Plan. The Company has an Employee Stock Purchase Plan (the
“ESPP”), under which 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
$84,000, $129,000, and $108,000 relating to the ESPP which was included in the
Company’s consolidated statements of operations for the fiscal years ended March
31, 2009, 2008, and 2007, respectively. Effective February, 2009, the Company
has decided to discontinue the
ESPP.




(24.)
Income Taxes.Income taxes are accounted for in accordance with Financial
Accounting Standards Board (“FASB”) Statement No. 109, Accounting
for Income Taxes,which requires the use of the asset and liability
method. Under this method, deferred tax assets and liabilities are determined
based upon the differences between the financial reporting and the tax bases of
assets and liabilities and are measured using enacted tax rules and laws that
are anticipated to be in effect when the differences are expected to reverse.
Our net deferred tax assets are reduced by a valuation allowance to the extent
that realization of the related deferred tax asset is not assured. We recorded a
valuation allowance for the full amount of our calculated deferred tax asset as
of March 31, 2009 and 2008. (See Note
8.)


66




LASERCARD
CORPORATION AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS




In
June 2006, the FASB issued Interpretation No. 48, Accounting
for Uncertainty in Income Taxes—an interpretation of FASB Statement No.
109 (“FIN 48”). FIN 48 clarifies the accounting for uncertainty in income
taxes recognized in the Company’s financial statements in accordance with FASB
Statement No. 109, Accounting
for Income Taxes.FIN 48 prescribes a recognition threshold and
measurement attribute for the financial statement recognition and measurement of
a tax position taken or expected to be taken in a tax return. FIN 48 also
provides guidance on derecognition, classification, interest and penalties,
accounting in interim periods, disclosure, and transition. The evaluation of a
tax position in accordance with FIN 48 is a two-step process. The first step is
recognition: The Company determines whether it is “more-likely-than-not” that a
tax position will be sustained upon examination, including resolution of any
related appeals or litigation processes, based on the technical merits of the
position. In evaluating whether a tax position has met the
“more-likely-than-not” recognition threshold, the Company presumes that the
position will be examined by the appropriate taxing authority that would have
full knowledge of all relevant information. The second step is measurement: A
tax position that meets the “more-likely-than-not” recognition threshold is
measured to determine the amount of benefit to recognize in the financial
statements. The tax position is measured at the largest amount of benefit that
is greater than 50 percent likely to be realized upon ultimate settlement. FIN
48 is effective for fiscal years beginning after December 15, 2006, which for
the Company was the fiscal year commencing on April 1, 2007. Upon adoption of
FIN 48 on April 1, 2007, the Company recognized a cumulative effect adjustment
of $62,000, decreasing its income tax liability for unrecognized tax benefits,
and decreasing the March 31, 2007 accumulated deficit balance. We continually
monitor the need for tax reserves under FIN 48. During fiscal years 2009 and
2008, we have not identified any new reserve requirements.




(25.)
Comprehensive Income (Loss). Under SFAS No. 130, Reporting
Comprehensive Income, comprehensive income (loss) is defined as the
changes in equity of an enterprise except for those resulting from stockholders’
transactions. Comprehensive income (loss) for the fiscal years ended March 31
(in thousands):


2009
              
              
              2008
              
              
              2007Net
      loss
              
              $
              (940
              )
              
              $
              (7,206
              )
              
              $
              (12,371
              )Net
      change in cumulative foreign currency translation
    adjustments
              
              
              (118
              )
              
              
              96
              
              
              
              138Reversal
      of unrealized loss associated with transfer of securities to
      trading
              
              
              625
              
              
              
              (625
              )
              
              
              —Comprehensive
      loss
              
              $
              (433
              )
              
              $
              (7,735
              )
              
              $
              (12,233
              )




(26.)
Recent Accounting Pronouncements: In December 2007, the FASB issued SFAS
No. 141 (revised 2007), “Business
Combinations” (“SFAS No. 141(R)”). SFAS No. 141(R) establishes principles
and requirements for how an acquirer recognizes and measures in its financial
statements significant aspects of a business combination. Under SFAS No. 141(R),
acquisition costs will generally be expensed as incurred; non-controlling
interests will be valued at fair value at the acquisition date; in-process
research and development will be recorded at fair value as an indefinite-lived
intangible asset at the acquisition date; restructuring costs associated with a
business combination will generally be expensed subsequent to the acquisition
date; and changes in deferred tax asset valuation allowances and income tax
uncertainties after the acquisition date generally will affect income tax
expense. SFAS No. 141(R) amends SFAS No. 109, “Accounting
for Income Taxes,” such that adjustments made to valuation allowances on
deferred taxes and acquired tax contingencies associated with acquisitions that
closed prior to the effective date of SFAS No. 141(R) would also apply the
provisions of SFAS No. 141(R). SFAS No. 141(R) also establishes disclosure
requirements to enable the evaluation of the nature and financial effects of the
business combination. Early adoption of SFAS No. 141(R) is not permitted. SFAS
No. 141(R) is effective on a prospective basis for all business combinations for
which the acquisition date is on or after the beginning of the first annual
period subsequent to December 15, 2008, with the exception of the accounting for
valuation allowances on deferred taxes and acquired tax contingencies. The
Company will assess the potential impact of the adoption of SFAS 141R if and
when a future acquisition
occurs.




In
December 2007, the FASB issued SFAS No. 160, “Non-controlling
Interests in Consolidated Financial Statements—an amendment of Accounting
Research Bulletin No. 51” (“SFAS No. 160”). SFAS No. 160 establishes
accounting and reporting standards for ownership interests in subsidiaries held
by parties other than the parent, the amount of consolidated net income
attributable to the parent and to the non-controlling interest, changes in a
parent’s ownership interest, and the valuation of retained non-controlling
equity investments when a subsidiary is deconsolidated. SFAS No. 160 also
establishes disclosure requirements that clearly identify and distinguish
between the interests of the parent and the interests of the non-controlling
owners. The Company will be required to adopt SFAS No. 160 on or after the
beginning of the first annual period subsequent to December 15, 2008. The
Company is currently evaluating the requirements of SFAS No. 160 and does not
believe that its adoption will have a material impact, if any, on its
consolidated financial statements.


67




LASERCARD
CORPORATION AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS




In
March 2008, the FASB issued SFAS No. 161,“Disclosures about Derivative Instruments and Hedging Activities—an amendment of
FASB Statement No. 133” (“SFAS No. 161”). SFAS No. 161 is intended to
improve transparency in financial reporting by requiring enhanced disclosures of
an entity’s derivative instruments and hedging activities and their effects on
the entity’s financial position, financial performance, and cash flows. SFAS No.
161 applies to all derivative instruments within the scope of SFAS No. 133,
“Accounting
for Derivative Instruments and Hedging Activities,” as well as related
hedged items, bifurcated derivatives, and nonderivative instruments that are
designated and qualify as hedging instruments. SFAS No. 161 establishes
principles and requirements for how an entity identifies derivative instruments
and related hedged items that affect its financial position, financial
performance, and cash flows. SFAS No. 161 also establishes disclosure
requirements that the fair values of derivative instruments and their gains and
losses are disclosed in a tabular format and that derivative features which are
credit-risk related be disclosed to provide clarification to an entity’s
liquidity and cross-referencing within footnotes. The Company will be required
to adopt SFAS No. 160 on or after the beginning of the first annual period
subsequent to December 15, 2008. The Company is currently evaluating the
requirements of SFAS No. 161 and has not yet determined the impact of its
adoption on its consolidated financial statements.




In
April 2008, the FASB issued FSP No. 142-3, “Determination
of the Useful Life of Intangible Assets” (“FSP No. 142-3”). FSP No. 142-3
amends the factors that should be considered in developing renewal or extension
assumptions used to determine the useful life of a recognized intangible asset
under SFAS No. 142, “Goodwill
and Other Intangible Assets” (“SFAS No. 142”). The objective of FSP No.
142-3 is to improve the consistency between the useful life of a recognized
intangible asset under SFAS No. 142 and the period of expected cash flows used
to measure the fair value of the asset under SFAS No. 141(R), and other
accounting principles. FSP No. 142-3 applies to all intangible assets, whether
acquired in a business combination or otherwise, and early adoption is
prohibited. The Company will be required to adopt FSP No. 142-3 in the first
quarter of fiscal year 2010. The Company is currently evaluating the
requirements of FSP No. 142-3 and has not yet determined the impact of its
adoption on its consolidated financial statements.




(27.)
Indemnification. The Company’s major sales agreements provide remedies to
customers, such as defense, settlement, or payment of judgment for intellectual
property claims related to the use of the Company’s products. The Company also
has indemnified various vendors for certain potential claims. The Company has
also entered into indemnification agreements with its directors and officers and
the Company’s bylaws contain similar indemnification obligations. To date, there
have been no claims made under such indemnification provisions and as a result
the associated estimated fair value of the liability is not
material.


3.
              Net
      Loss per Share




Basic
net loss per share and diluted net loss per share was computed by dividing net
loss by the weighted average number of shares of common stock outstanding during
the fiscal year.




The
reconciliation of the denominators of the basic and diluted net loss per share
computation for the fiscal years ended March 31, (in thousands, except per share
data):


2009
                
                
                2008
                
                
                2007Net
      loss
                
                $
                (940
                )
                
                $
                (7,206
                )
                
                $
                (12,371
                )Basic
      net loss per share:Weighted
      average common shares outstanding
                
                
                12,052
                
                
                
                11,929
                
                
                
                11,814Basic
      net loss per share
                
                $
                (0.08
                )
                
                $
                (0.60
                )
                
                $
                (1.05
                )Diluted
      net loss per share:Weighted
      average common shares and common stock equivalents
    outstanding
                
                
                12,052
                
                
                
                11,929
                
                
                
                11,814Diluted
      net loss per share
                
                $
                (0.08
                )
                
                $
                (0.60
                )
                
                $
                (1.05
                )


68




LASERCARD
CORPORATION AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


4.
              Segments




Segment
Reporting.




The
Company operates in three reportable segments: (1) OMCs, (2) drives, systems and
enabling services (which the Company formerly called the “optical memory card
drives” segment), including read/write drives, maintenance, systems and enabling
services, and (3) specialty cards and card printers. The segments were
determined based on the information used by the chief operating decision maker.
The OMCs and drives, systems and enabling services reportable segments are not
strategic business units which offer unrelated products and services; rather
these reportable segments utilize compatible technology and are marketed
jointly. Specialty cards and printers is a strategic business unit offering at
times unrelated products and at times related products with the other reportable
segments.




The
accounting policies used to derive reportable segment results are the same as
those described in the “Summary of Significant Accounting Policies.” Resources
are allocated to the OMC and optical card drive segments in a manner that
optimizes OMC revenues and to the specialty card and printers segment in a
manner that optimizes consolidated income as determined by the chief operating
decision maker. Segment revenues are comprised of sales to external customers.
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. The company reported inter-segment sales of $244,000 in fiscal year
2009. There were no inter-segment sales or transfers in fiscal years 2008 and
2007. All of the Company’s long-lived assets are attributable to the United
States except for $2.2 million in fiscal year 2009 and $3.3 million in fiscal
year 2008. The fluctuation in foreign exchange caused a $323,000 decrease in
long-lived assets at March 31, 2009 as compared to March 31, 2008. 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.


69




LASERCARD
CORPORATION AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS




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


F i
      c s a l  Y e a r  E n d e d  M a r c h  3 1 ,  2
      0 0 9Optical
                                                                    Memory
                                                                    Cards
                                                                  
                                                                  
                                                                  Drives,
                                                                    Systems
      &
                                                                    Enabling
                                                                    Services
                                                                  
                                                                  
                                                                  Specialty
                                                                    Cards
      &
                                                                    Printers
                                                                  
                                                                  
                                                                  Segment
                                                                    Total
                                                                  
                                                                  
                                                                  Intersegment
                                                                  
                                                                  
                                                                  Other
      (a)
                                                                  
                                                                  
                                                                  TotalRevenues
                                                                  
                                                                  $
                                                                  30,920
                                                                  
                                                                  
                                                                  $
                                                                  3,306
                                                                  
                                                                  
                                                                  $
                                                                  15,789
                                                                  
                                                                  
                                                                  $
                                                                  50,015
                                                                  
                                                                  
                                                                  $
                                                                  (244
                                                                  )
                                                                  
                                                                  $
                                                                  —
                                                                  
                                                                  
                                                                  $
                                                                  49,771Cost
      of sales
                                                                  
                                                                  
                                                                  17,652
                                                                  
                                                                  
                                                                  
                                                                  3,607
                                                                  
                                                                  
                                                                  
                                                                  11,585
                                                                  
                                                                  
                                                                  
                                                                  32,844
                                                                  
                                                                  
                                                                  
                                                                  (244
                                                                  )
                                                                  
                                                                  
                                                                  —
                                                                  
                                                                  
                                                                  
                                                                  32,600Gross
      profit (loss)
                                                                  
                                                                  
                                                                  13,268
                                                                  
                                                                  
                                                                  
                                                                  (301
                                                                  )
                                                                  
                                                                  
                                                                  4,204
                                                                  
                                                                  
                                                                  
                                                                  17,171
                                                                  
                                                                  
                                                                  
                                                                  —
                                                                  
                                                                  
                                                                  
                                                                  —
                                                                  
                                                                  
                                                                  
                                                                  17,171Depreciation
      and amortization expenses
                                                                  
                                                                  
                                                                  1,724
                                                                  
                                                                  
                                                                  
                                                                  155
                                                                  
                                                                  
                                                                  
                                                                  344
                                                                  
                                                                  
                                                                  
                                                                  2,223
                                                                  
                                                                  
                                                                  
                                                                  —
                                                                  
                                                                  
                                                                  
                                                                  654
                                                                  
                                                                  
                                                                  
                                                                  2,877
  F i
      c s a l  Y e a r  E n d e d  M a r c h  3 1 ,  2
      0 0 8Optical
                                                                      Memory
                                                                      Cards
                                                                    
                                                                    
                                                                    Drives,
                                                                      Systems
      &
                                                                      Enabling
                                                                      Services
                                                                    
                                                                    
                                                                    Specialty
                                                                      Cards
      &
                                                                      Printers
                                                                    
                                                                    
                                                                    Segment
                                                                      Total
                                                                    
                                                                    
                                                                    Intersegment
                                                                    
                                                                    
                                                                    Other
      (a)
                                                                    
                                                                    
                                                                    TotalRevenues
                                                                    
                                                                    $
                                                                    22,139
                                                                    
                                                                    
                                                                    $
                                                                    1,639
                                                                    
                                                                    
                                                                    $
                                                                    13,230
                                                                    
                                                                    
                                                                    $
                                                                    37,008
                                                                    
                                                                    
                                                                    $
                                                                    —
                                                                    
                                                                    
                                                                    $
                                                                    —
                                                                    
                                                                    
                                                                    $
                                                                    37,008Cost
      of sales
                                                                    
                                                                    
                                                                    14,148
                                                                    
                                                                    
                                                                    
                                                                    2,272
                                                                    
                                                                    
                                                                    
                                                                    10,589
                                                                    
                                                                    
                                                                    
                                                                    27,009
                                                                    
                                                                    
                                                                    
                                                                    —
                                                                    
                                                                    
                                                                    
                                                                    —
                                                                    
                                                                    
                                                                    
                                                                    27,009Gross
      profit (loss)
                                                                    
                                                                    
                                                                    7,991
                                                                    
                                                                    
                                                                    
                                                                    (633
                                                                    )
                                                                    
                                                                    
                                                                    2,641
                                                                    
                                                                    
                                                                    
                                                                    9,999
                                                                    
                                                                    
                                                                    
                                                                    —
                                                                    
                                                                    
                                                                    
                                                                    —
                                                                    
                                                                    
                                                                    
                                                                    9,999Depreciation
      andamortization
      expenses
                                                                    
                                                                    
                                                                    1,852
                                                                    
                                                                    
                                                                    
                                                                    188
                                                                    
                                                                    
                                                                    
                                                                    312
                                                                    
                                                                    
                                                                    
                                                                    2,352
                                                                    
                                                                    
                                                                    
                                                                    —
                                                                    
                                                                    
                                                                    
                                                                    641
                                                                    
                                                                    
                                                                    
                                                                    2,993
  F i
      c s a l  Y e a r  E n d e d  M a r c h  3 1 ,  2
      0 0 7Optical
                                                                                                                Memory
                                                                                                                Cards
                                                                                                              
                                                                                                              
                                                                                                              Drives,
                                                                                                                Systems
      &
                                                                                                                Enabling
                                                                                                                Services
                                                                                                              
                                                                                                              
                                                                                                              Specialty
                                                                                                                Cards
      &
                                                                                                                Printers
                                                                                                              
                                                                                                              
                                                                                                              Segment
                                                                                                                Total
                                                                                                              
                                                                                                              
                                                                                                              Intersegment
                                                                                                              
                                                                                                              
                                                                                                              Other
      (a)
                                                                                                              
                                                                                                              
                                                                                                              TotalRevenues
                                                                                                              
                                                                                                              $
                                                                                                              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
      expenses
                                                                                                              
                                                                                                              
                                                                                                              1,677
                                                                                                              
                                                                                                              
                                                                                                              
                                                                                                              177
                                                                                                              
                                                                                                              
                                                                                                              
                                                                                                              341
                                                                                                              
                                                                                                              
                                                                                                              
                                                                                                              2,195
                                                                                                              
                                                                                                              
                                                                                                              
                                                                                                              —
                                                                                                              
                                                                                                              
                                                                                                              
                                                                                                              554
                                                                                                              
                                                                                                              
                                                                                                              
                                                                                                              2,749




(a)
Represents expense recorded in Selling, General & Administrative and
Research & Development


70




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, (in thousands):


2009
                
                
                2008
                
                
                2007Middle
      East and Africa
                
                $
                16,099
                
                
                $
                9,244
                
                
                $
                4,717United
      States
                
                
                7,879
                
                
                
                8,300
                
                
                
                8,377Germany
                
                
                6,760
                
                
                
                6,763
                
                
                
                6,395Europe,
      other
                
                
                5,787
                
                
                
                5,255
                
                
                
                6,054Asia
                
                
                4,730
                
                
                
                3,763
                
                
                
                2,819Italy
                
                
                3,385
                
                
                
                596
                
                
                
                2,514Central
      America
                
                
                3,214
                
                
                
                —
                
                
                
                —Canada
                
                
                1,885
                
                
                
                2,927
                
                
                
                1,281Rest
      of world
                
                
                32
                
                
                
                160
                
                
                
                113$
                49,771
                
                
                $
                37,008
                
                
                $
                32,270




In
fiscal years 2009, 2008 and 2007, sales to customers outside the United States
in the amount of $34 million, $15.6 million and $12.1 million, respectively,
were denominated in U.S. dollars and $15.8 million, $13.1 million and $11.8
million, respectively, were denominated in Euros.


5.
              Related-Party
      Transactions




Since
October 21, 2001, we have contracted with Wexler & Walker Public Policy
Associates, a unit of Hill and Knowlton, Inc., (“Wexler”) to be lobbyists on
behalf of us. The Chairman of Wexler is Robert S. Walker, a brother of Walter F.
Walker, member of our Board of Directors. The contract was terminated on
December 1, 2008.




The
Company paid Wexler $240,000 during fiscal year 2009, $161,000 during fiscal
year 2008, and $116,000 during fiscal year 2007.


6.
              Common
      Stock




The
2004
Equity Incentive Compensation Plan, as amended, (the “2004 Plan”):In
October 2004, the Company’s stockholders approved the 2004 Equity Incentive
Compensation Plan, which replaced the existing 1991 Stock Option Plan. The 2004
Plan provides for the grant of restricted share awards, options, stock units and
stock appreciation rights, any of which may or may not require the satisfaction
of performance objectives, with respect to shares of the Company’s common stock
to directors, officers, employees and consultants of the Company and its
subsidiaries. The 2004 Plan is administered by the Compensation Committee of the
Board of Directors, which has complete discretion to select the participants and
to establish the terms and conditions of each award, subject to the provisions
of the 2004 Plan. Options granted under the 2004 Plan may be “incentive stock
options” as defined in Section 422 of the Internal Revenue Code of 1986 (“The
Code”), as amended, or nonqualified options. A total of 2,592,668 shares of
common stock were reserved for issuance under the 1991 and 2004 Plans as of
March 31, 2009. If any award granted under the 2004 Plan is forfeited or expires
for any reason, then the shares subject to that award will once again be
available for additional awards. If any outstanding option issued under the 1991
Plan expires or terminates for any reason without having been exercised in full,
then the unpurchased shares subject to that option will be available for
additional awards under the 2004 Plan. Under the 2004 Plan, the exercise price
of incentive stock options may not be less than 100% of the fair market value of
the common stock as of the date of grant (110% of the fair market value if the
grant is to an employee who owns more than 10% of the total combined voting
power of all classes of the Company’s capital stock). The Code currently limits
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 2009, 2008, and
2007.


71




LASERCARD
CORPORATION AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS




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




As
of March 31, 2008, 73,000 shares of common stock have been reserved outside of
the Company’s Stock Option Plan compared with 113,000 as of March 31, 2007, 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 the 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. Some shares have expired under this
category during fiscal year 2008.




The
following table lists stock option activity for the fiscal years ended March 31,
(in thousands, except for weighted average exercise price):


2009
                                                                
                                                                
                                                                2008
                                                                
                                                                
                                                                2007Number
      of
                                                                  Shares
                                                                
                                                                
                                                                Weighted
                                                                  Average
                                                                  Exercise
      Price
                                                                
                                                                
                                                                Number
      of
                                                                  Shares
                                                                
                                                                
                                                                Weighted
                                                                  Average
                                                                  Exercise
      Price
                                                                
                                                                
                                                                Number
      of
                                                                  Shares
                                                                
                                                                
                                                                Weighted
                                                                  Average
                                                                  Exercise
      PriceOutstanding
      at beginning of year
                                                                
                                                                
                                                                2,152
                                                                
                                                                
                                                                $
                                                                12.75
                                                                
                                                                
                                                                
                                                                2,213
                                                                
                                                                
                                                                $
                                                                12.96
                                                                
                                                                
                                                                
                                                                2,064
                                                                
                                                                
                                                                $
                                                                12.27Granted
                                                                
                                                                
                                                                1,049
                                                                
                                                                
                                                                
                                                                6.09
                                                                
                                                                
                                                                
                                                                299
                                                                
                                                                
                                                                
                                                                10.49
                                                                
                                                                
                                                                
                                                                480
                                                                
                                                                
                                                                
                                                                15.11Exercised
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                (52
                                                                )
                                                                
                                                                
                                                                9.40
                                                                
                                                                
                                                                
                                                                (109
                                                                )
                                                                
                                                                
                                                                10.12Canceled
                                                                
                                                                
                                                                (688
                                                                )
                                                                
                                                                
                                                                12.59
                                                                
                                                                
                                                                
                                                                (308
                                                                )
                                                                
                                                                
                                                                12.70
                                                                
                                                                
                                                                
                                                                (222
                                                                )
                                                                
                                                                
                                                                12.56Outstanding
      at end of year
                                                                
                                                                
                                                                2,513
                                                                
                                                                
                                                                $
                                                                10.01
                                                                
                                                                
                                                                
                                                                2,152
                                                                
                                                                
                                                                $
                                                                12.74
                                                                
                                                                
                                                                
                                                                2,213
                                                                
                                                                
                                                                $
                                                                12.96Options
      vested and exercisable at end of year
                                                                
                                                                
                                                                1,188
                                                                
                                                                
                                                                $
                                                                13.13
                                                                
                                                                
                                                                
                                                                1,541
                                                                
                                                                
                                                                $
                                                                13.45
                                                                
                                                                
                                                                
                                                                1,352
                                                                
                                                                
                                                                $
                                                                13.54




The
weighted-average grant-date fair value per share of options granted during
fiscal years 2009, 2008, and 2007 were $3.03, $5.29 and $7.69,
respectively.




The
weighted average remaining contractual term for outstanding options at March 31,
2009 and 2008 is 6.3 years and 8.6 years, respectively, and 4.1 years and 3.5
years for options vested and exercisable at March 31, 2009 and 2008,
respectively.




Aggregate
intrinsic value is the sum of the amounts by which the closing market price of
the Company’s stock at April 3, 2009 (last trading day), $2.58 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”). At March 31, 2009, the quoted market price was below
the exercise price (“out-of-the-money-options”) for outstanding options and
options vested and exercisable. Consequently, there was no aggregate intrinsic
value of outstanding options, options vested and exercisable, and no options
were exercised.


72




LASERCARD
CORPORATION AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS




The
closing market price of the Company’s stock at March 31, 2008 (last trading day)
was $8.50 per share. The aggregate intrinsic value of outstanding options and
options vested and exercisable was approximately $1.8 million at March 31, 2008.
The aggregate intrinsic value of options exercised on the dates the options were
exercised was approximately $0.1 million for the fiscal years ended March 31,
2008.




The
following table summarizes information about stock options outstanding for the
fiscal year ended March 31, (in thousands, except for weighted average exercise
price and contractual life):


2009Options
      Outstanding
                                                          
                                                          
                                                          ExercisableRange
      of Exercise Price
                                                          
                                                          
                                                          Number
      of
                                                            Outstanding
                                                            Vested/Unvested
      at
                                                            March
      31, 2009
                                                          
                                                          
                                                          Weighted
                                                            Average
                                                            Exercise
      Price
                                                          
                                                          
                                                          Weighted
                                                            Average
                                                            Remaining
                                                            Contractual
                                                            Life
                                                          
                                                          
                                                          Number
      of
                                                            Shares
                                                            Exercisable
      at
                                                            March
      31, 2009
                                                          
                                                          
                                                          Weighted
                                                            Average
                                                            Exercise
                                                            Price$4.84
      - $5.56
                                                          
                                                          
                                                          
                                                          476
                                                          
                                                          
                                                          $
                                                          4.85
                                                          
                                                          
                                                          
                                                          8.90
                                                          
                                                          
                                                          $
                                                          —
                                                          
                                                          
                                                          $
                                                          —$6.05
      - $6.05
                                                          
                                                          
                                                          
                                                          228
                                                          
                                                          
                                                          
                                                          6.05
                                                          
                                                          
                                                          
                                                          6.14
                                                          
                                                          
                                                          
                                                          161
                                                          
                                                          
                                                          
                                                          6.05$7.11
      - $7.26
                                                          
                                                          
                                                          
                                                          560
                                                          
                                                          
                                                          
                                                          7.12
                                                          
                                                          
                                                          
                                                          9.11
                                                          
                                                          
                                                          
                                                          —
                                                          
                                                          
                                                          
                                                          —$7.50
      - $10.71
                                                          
                                                          
                                                          
                                                          284
                                                          
                                                          
                                                          
                                                          9.87
                                                          
                                                          
                                                          
                                                          5.11
                                                          
                                                          
                                                          
                                                          184
                                                          
                                                          
                                                          
                                                          9.58$10.99
      - $12.43
                                                          
                                                          
                                                          
                                                          168
                                                          
                                                          
                                                          
                                                          11.94
                                                          
                                                          
                                                          
                                                          5.12
                                                          
                                                          
                                                          
                                                          119
                                                          
                                                          
                                                          
                                                          11.93$13.13
      - $15.34
                                                          
                                                          
                                                          
                                                          313
                                                          
                                                          
                                                          
                                                          13.91
                                                          
                                                          
                                                          
                                                          3.52
                                                          
                                                          
                                                          
                                                          313
                                                          
                                                          
                                                          
                                                          13.91$16.31
      - $22.75
                                                          
                                                          
                                                          
                                                          484
                                                          
                                                          
                                                          
                                                          17.20
                                                          
                                                          
                                                          
                                                          3.40
                                                          
                                                          
                                                          
                                                          411
                                                          
                                                          
                                                          
                                                          17.252,513
                                                          
                                                          
                                                          $
                                                          10.01
                                                          
                                                          
                                                          
                                                          6.28
                                                          
                                                          
                                                          $
                                                          1,188
                                                          
                                                          
                                                          $
                                                          13.13
  2008Options
      Outstanding
                                                                                  
                                                                                  
                                                                                  ExercisableRange
      of Exercise Price
                                                                                  
                                                                                  
                                                                                  Number
      of
                                                                                    Outstanding
                                                                                    Vested/Unvested
      at
                                                                                    March
      31, 2008
                                                                                  
                                                                                  
                                                                                  Weighted
                                                                                    Average
                                                                                    Exercise
      Price
                                                                                  
                                                                                  
                                                                                  Weighted
                                                                                    Average
                                                                                    Remaining
                                                                                    Contractual
                                                                                    Life
                                                                                  
                                                                                  
                                                                                  Number
      of
                                                                                    Shares
                                                                                    Exercisable
      at
                                                                                    March
      31, 2008
                                                                                  
                                                                                  
                                                                                  Weighted
                                                                                    Average
                                                                                    Exercise
                                                                                    Price$6.05
      - $7.05
                                                                                  
                                                                                  
                                                                                  
                                                                                  314
                                                                                  
                                                                                  
                                                                                  $
                                                                                  6.06
                                                                                  
                                                                                  
                                                                                  
                                                                                  5.95
                                                                                  
                                                                                  
                                                                                  
                                                                                  147
                                                                                  
                                                                                  
                                                                                  $
                                                                                  6.08$7.50
      - $10.91
                                                                                  
                                                                                  
                                                                                  
                                                                                  359
                                                                                  
                                                                                  
                                                                                  
                                                                                  10.03
                                                                                  
                                                                                  
                                                                                  
                                                                                  5.51
                                                                                  
                                                                                  
                                                                                  
                                                                                  154
                                                                                  
                                                                                  
                                                                                  
                                                                                  9.62$10.99
      - $12.69
                                                                                  
                                                                                  
                                                                                  
                                                                                  378
                                                                                  
                                                                                  
                                                                                  
                                                                                  11.61
                                                                                  
                                                                                  
                                                                                  
                                                                                  3.47
                                                                                  
                                                                                  
                                                                                  
                                                                                  281
                                                                                  
                                                                                  
                                                                                  
                                                                                  11.51$13.12
      - $15.34
                                                                                  
                                                                                  
                                                                                  
                                                                                  455
                                                                                  
                                                                                  
                                                                                  
                                                                                  14.05
                                                                                  
                                                                                  
                                                                                  
                                                                                  3.46
                                                                                  
                                                                                  
                                                                                  
                                                                                  455
                                                                                  
                                                                                  
                                                                                  
                                                                                  14.05$16.30
      - $22.75
                                                                                  
                                                                                  
                                                                                  
                                                                                  646
                                                                                  
                                                                                  
                                                                                  
                                                                                  17.23
                                                                                  
                                                                                  
                                                                                  
                                                                                  3.73
                                                                                  
                                                                                  
                                                                                  
                                                                                  504
                                                                                  
                                                                                  
                                                                                  
                                                                                  17.302,152
                                                                                  
                                                                                  
                                                                                  $
                                                                                  12.74
                                                                                  
                                                                                  
                                                                                  
                                                                                  4.25
                                                                                  
                                                                                  
                                                                                  
                                                                                  1,541
                                                                                  
                                                                                  
                                                                                  $
                                                                                  13.45




The
Company had 93,000 of unvested restricted stock units issued to certain
employees outstanding at March 31, 2009 all of which were granted in September
2008.




The
Company had 113,000 unvested restricted shares issued to certain employees
outstanding at March 31, 2008 all of which were granted in September
2007.




As
of March 31, 2009, there was approximately $4.3 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 August 2012, adjusted for any future changes in
estimated forfeitures.


73




LASERCARD
CORPORATION AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS




As
of March 31, 2008, there was approximately $3.7 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 2011, adjusted for any future changes
in estimated forfeitures.




Employee
Stock Purchase Plan




The
Company has an Employee Stock Purchase Plan (the “Stock Purchase Plan”), under
which 29,300 and 94,185 shares were reserved as of March 31, 2009 and 2008,
respectively, 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 64,885 shares for fiscal year 2009, 36,914
shares for fiscal year 2008, and 30,418 shares for fiscal year 2007. The
weighted average purchase price per share was $3.36 for fiscal year 2009, $7.09
for fiscal year 2008, and $7.61 for fiscal year 2007. The weighted average
market price per share for shares purchased was $5.01 for fiscal year 2009,
$10.37 for fiscal year 2008, and $11.44 for fiscal year 2007. Effective
February, 2009, the Company has decided to discontinue the ESPP.




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 approximately
$90,000, $94,000, and $79,000, for fiscal years 2009, 2008, and 2007,
respectively. Effective March 5, 2009, the Company has decided to make a modest
reduction in the employer discretionary matching contribution from 25% of the
first 6% of deferred funds to
20%.




Issuance
of Warrants




At
March 31, 2008, the Company had 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. These warrants expired in
December 2008.


7.
              Commitments
      and Contingencies




Lease.The Company occupies its buildings under various operating leases. Rent
expense relating to these buildings was approximately $1.4 million, $1.4
million, and $1.5 million for fiscal years 2009, 2008, and 2007,
respectively.




As
of March 31, 2009, approximately 70,000 square feet of floor space are leased by
the Company on a long-term basis for card manufacturing, read/write drive
production, administration, sales, and research and development, in two
buildings located in Mountain View, California. One 27,000-square foot building
is used for OMC production and one 43,000 square-foot building is used for
optical card production, read/write drive production, administration, sales, and
research and development. Upon expiration of the leases, the Company believes
that these or other suitable buildings will be available to be leased on a
reasonable basis. These leases will expire in October 2013 and in March 2014.
The Company leases a portion of a building in Ratingen, Germany, and a building
in Rastede, Germany totaling approximately 15,000 square feet, for optical and
specialty card manufacturing, distribution, administration and sales, one of
which will expire within a six-month notice and the other in March 2012. Also,
the Company owns land and approximately 14,000 square foot building in Rastede,
Germany that is used in production of specialty cards and research and
development. The Company also leases a small office in Huntington, New York for
marketing activities. The Company believes these leased and owned facilities to
be satisfactory for its present operations.


74




LASERCARD
CORPORATION AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS




As
of March 31, 2009, future minimum rental payments relating to these leases are
(in thousands):


2010
                                                
                                                2011
                                                
                                                2012
                                                
                                                2013
                                                
                                                2014
                                                
                                                Thereafter
                                                
                                                TotalNon-cancelable
      operating leases
                                                
                                                $
                                                1,757
                                                
                                                $
                                                1,925
                                                
                                                $
                                                1,852
                                                
                                                $
                                                1,503
                                                
                                                $
                                                1,275
                                                
                                                $
                                                2
                                                
                                                $
                                                8,314




The
Company entered into a lease arrangement in fiscal year 2009 for $0.2 million
and $0.1 million in fiscal year 2008 that expire on dates from July 2011 and
September 2011. This was recorded as a capitalized lease in accordance with SFAS
13, Accounting
for Leases.




Purchase
Commitment. The Company purchases services, software, and manufacturing
equipment from a variety of vendors. As of March 31, 2009, the Company has
non-cancelable purchase orders of $2.4 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.




Employment
Agreements.On November 28, 2007, the Company entered into a Planned
Retirement Agreement and an Age Discrimination Release Agreement with its Chief
Executive Officer (“CEO”) and President for his retirement on March 31, 2008.
These agreements provided for the CEO to receive two years of separation pay at
the per annum rate of $350,000; consulting retainer of $18,000 for nine months
of consulting availability and services; and bonus of up to $100,000. The
Company continued to pay its portion of his health care insurance premium under
the COBRA coverage for up to 18 months. His stock options ceased vesting on the
retirement date, other than the 18,750 options which vested on May 24, 2008
since he remained a consultant to the Company. He held 3,125 restricted shares
which vested on September 21, 2008 but his other restricted shares had
forfeited. LaserCard allocated the costs of the postretirement payments and the
bonus using the discounted cash-flow basis over the remaining months of the
total expected service. The stock options were remeasured using the
Black-Scholes method.




In
addition, the Company has employment agreements with two individuals that
provide for severance payments for a period of twelve (12) months following the
employee’s termination of employment. The Company shall continue to pay the
employee on a monthly basis one-twelfth of the employee’s per annum base salary
as determined on the employee’s last day of employment. Specific provisions were
also made for continued health insurance coverage and stock options. Certain
conditions of severance payments were included, the details of which can be
found in the Company’s Form 8-K filed on January 10, 2008 and Form 10-Q filed on
August 5, 2008.


8.
              Income
      Taxes




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


2009
                
                
                2008
                
                
                2007Current:Federal
                
                $
                50
                
                
                $
                —
                
                
                $
                3State
                
                
                49
                
                
                
                15
                
                
                
                (94
                )Foreign
                
                
                (13
                )
                
                
                —
                
                
                
                (29
                )86
                
                
                
                15
                
                
                
                (120
                )Deferred:Federal
                
                
                —
                
                
                
                —
                
                
                
                —State
                
                
                —
                
                
                
                —
                
                
                
                —Foreign
                
                
                —
                
                
                
                (129
                )
                
                
                (231
                )—
                
                
                
                (129
                )
                
                
                (231
                )Income
      tax expense (benefit)
                
                $
                86
                
                
                $
                (114
                )
                
                $
                (351
                )


75




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:


2009
                    
                    
                    2008
                    
                    
                    2007Tax
      reconciliation:Federal
      statutory rate
                    
                    
                    34.0
                    %
                    
                    
                    34.0
                    %
                    
                    
                    34.0
                    %State
      tax, net of federal benefit
                    
                    
                    (109.9
                    %)
                    
                    
                    0.0
                    %
                    
                    
                    0.7
                    %Foreign
      provision differential
                    
                    
                    17.4
                    %
                    
                    
                    (2.3
                    %)
                    
                    
                    (8.5
                    %)Change
      in valuation allowance
                    
                    
                    97.0
                    %
                    
                    
                    (25.5
                    %)
                    
                    
                    (20.5
                    %)FAS
      123R ISOs
                    
                    
                    (32.8
                    %)
                    
                    
                    (4.2
                    %)
                    
                    
                    (2.6
                    %)Change
      on deferred taxes
                    
                    
                    (13.7
                    %)
                    
                    
                    —
                    
                    
                    
                    —Other
                    
                    
                    (2.9
                    %)
                    
                    
                    (0.4
                    %)
                    
                    
                    (0.4
                    %)(11.0
                    %)
                    
                    
                    1.5
                    %
                    
                    
                    2.7
                    %




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


2009
                    
                    
                    2008
                    
                    
                    2007Income
      (loss) before taxes:Domestic
                    
                    $
                    (1,253
                    )
                    
                    $
                    (6,442
                    )
                    
                    $
                    (8,780
                    )Foreign
                    
                    
                    399
                    
                    
                    
                    (878
                    )
                    
                    
                    (3,942
                    )Total
                    
                    $
                    (854
                    )
                    
                    $
                    (7,320
                    )
                    
                    $
                    (12,722
                    )




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


2009
                    
                    
                    2008Deferred
      tax assetsAdvanced
      payments and deferred revenue
                    
                    $
                    10,257
                    
                    
                    $
                    10,306Net
      operating loss carryforward
                    
                    
                    1,055
                    
                    
                    
                    2,582Reserves
      and accruals
                    
                    
                    2,119
                    
                    
                    
                    1,938Stock
      Compensation
                    
                    
                    1,188
                    
                    
                    
                    607Depreciation
      and amortization
                    
                    
                    1,176
                    
                    
                    
                    1,317Research
      credit
                    
                    
                    891
                    
                    
                    
                    712Other
                    
                    
                    885
                    
                    
                    
                    950German
      operations
                    
                    
                    —
                    
                    
                    
                    92Gross
      deferred tax asset
                    
                    
                    17,571
                    
                    
                    
                    18,504Valuation
      allowance
                    
                    
                    (17,424
                    )
                    
                    
                    (18,252
                    )Net
      deferred tax assets
                    
                    
                    147
                    
                    
                    
                    252Deferred
      income tax liabilityGerman
      operations
                    
                    
                    (234
                    )
                    
                    
                    (405
                    )Capitalized
      patent costs
                    
                    
                    (147
                    )
                    
                    
                    (160
                    )Total
      deferred income tax liability
                    
                    
                    (381
                    )
                    
                    
                    (565
                    )Net
      deferred income tax liability
                    
                    $
                    (234
                    )
                    
                    $
                    (313
                    )


76




LASERCARD
CORPORATION AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS




The
net deferred income tax liability of $234,000 at March 31, 2009 and $313,000 at
March 31, 2008, was a result of the operations of our German subsidiary. As part
of the process of preparing the Company’s consolidated financial statements, the
Company is required to estimate income taxes in each of the jurisdictions in
which the company 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.




In
fiscal year 2009, the valuation allowance decreased by $0.9 million. The change
in valuation allowance related to the decrease in net operating loss
carry-forwards (“NOLs”) of $1.5 million offset by other increases in our gross
deferred income tax assets. In fiscal year 2008 the valuation allowance
increased by $2 million. The change in valuation allowance related to the
increase in NOLs of $1.1 million and other increases in our gross deferred
income tax assets.




The
Company’s federal NOLs as of March 31, 2009 were $19.2 million as compared to
$26.2 million as of March 31, 2008. The NOLs will expire at various dates from
2009 through 2027, if not utilized. Of this amount as of March 31, 2009, $16.7
million represent NOLs relating to windfall stock option deductions as compared
to $19.3 million as of March 31, 2008, the benefit of which will be credited to
stockholders’ equity when realized. Federal tax credits in the amount of
$336,000 for alternative minimum taxes have no expiration. Federal R&D tax
credits in the amount of $344,000 will expire on various dates from 2013 through
2027, if not utilized. The Company’s state NOLs as of March 31, 2009 were $3.8
million as compared to $4.3 million as of March 31, 2008. The NOLs will expire
at various dates from 2019 through 2020, if not utilized. Of this amount as of
March 31, 2009, $333,000 represents NOLs relating to windfall stock option
deductions as compared to $333,000 as of March 31, 2008, the benefit of which
will be credited to stockholders’ equity when realized. California tax credits
related to R&D and alternative minimum taxes as of March 31, 2009 in the
amount of $214,000 have no expiration date. However, California has suspended
the utilization of NOLs for the tax years 2009 and 2008. Also, California has
limited the utilization of R&D credits to 50% of the tax liability without
consideration for NOLs.




As
of March 31, 2008, federal tax credits were $272,000 for alternative minimum
taxes, federal R&D tax credits were $330,000, and California tax credits
related to R&D and alternative minimum taxes were $166,000.




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 NOLs. The Company has had difficulty in the past, and expects to
have continued difficulty in the future, in reliably forecasting our foreign
business and the revenue to be received from it. This resulted in the Company’s
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 predict when or if this will
occur.




In
concluding that a full valuation allowance was required at the end of fiscal
year 2009, 2008 and 2007, respectively, the Company considered both the positive
and negative evidence regarding its ability to generate sufficient future
taxable income to realize their deferred income tax assets. Positive evidence
included (1) the level of sales and business experienced under the contracts for
the U.S. Green Card; (2) prospects in Italy and the Kingdom of Saudi Arabia for
their national identification card programs; (3) orders of OMCs for the National
ID card program in Angola, and (4) 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 the Company’s customers; (3) the impact of future stock option deductions
on taxable income; (4) the Company’s experience of net NOLs expiring unused
through fiscal year 2027; (5) the recent financial statement losses; and (6) the
prior three years’ cumulative tax net operating losses exclusive of payments
derived from the Prevent Global 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, the Company 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, 2009, March 31, 2008 and at March 31, 2007.


77




LASERCARD
CORPORATION AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS




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 the Company’s 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 2010 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.




Upon
adoption of FIN 48 on April 1, 2007, the Company recognized a cumulative effect
adjustment of $62,000, decreasing our income tax liability for unrecognized tax
benefits, and decreasing the March 31, 2007 accumulated deficit balance. We
continually monitor the need for tax reserves under FIN 48. During fiscal years
2009 and 2008, we did not identify any new reserve requirements.




As
of March 31, 2009, the total amount of gross unrecognized tax benefits,
inclusive of interest and penalties, was approximately $277,000 and the entire
amount, if recognized, would affect the effective tax rate. We do not currently
anticipate that any significant increase or decrease to unrecognized tax
benefits will be recorded during the next 12 months.




As
of March 31, 2008, the total amount of gross unrecognized tax benefits,
inclusive of interest and penalties, was approximately $263,000.




A
reconciliation of the beginning and ending amount of unrecognized tax benefit is
as follows:


Balance
      as of March 31, 2007
                
                $
                (229,000
                )Interest
      and penalties
                
                $
                (34,000
                )Balance
      as of March 31, 2008
                
                $
                (263,000
                )Interest
      and penalties
                
                $
                (14,000
                )Balance
      as of March 31, 2009
                
                $
                (277,000
                )




The
Company recognizes interest and penalties accrued on any unrecognized tax
benefits as a component of its provision for income taxes. As of March 31 2009,
the Company accrued $14,000 for payment of interest and penalties related to
unrecognized tax benefits. As of March 31, 2008, the Company accrued $34,000 for
payment of interest and penalties related to unrecognized tax
benefits.




Although
the Company files U.S. federal, various state, and foreign tax returns, the
Company’s only major tax jurisdictions are the United States, California and
Germany. Tax years 1993 through 2008 remain subject to examination by the
appropriate governmental agencies, mainly the United States, due to tax loss
carryovers from those years.


78




LASERCARD
CORPORATION AND SUBSIDIARIES


SELECTED
QUARTERLY FINANCIAL DATA (UNAUDITED)


(In
thousands, except per share amounts)


1st
      Quarter
                
                
                2nd
      Quarter
                
                
                3rd
      Quarter
                
                
                4th
      QuarterFiscal
      year 2009:Revenue
                
                $
                10,722
                
                
                $
                13,467
                
                
                $
                10,906
                
                
                $
                14,676Cost
      of sales
                
                
                7,255
                
                
                
                8,902
                
                
                
                7,314
                
                
                
                9,129Gross
      profit
                
                
                3,467
                
                
                
                4,565
                
                
                
                3,592
                
                
                
                5,547Net
      income (loss)
                
                
                (1,274
                )
                
                
                239
                
                
                
                (849
                )
                
                
                944Net
      income (loss) per share:Basic
                
                $
                (0.11
                )
                
                $
                0.02
                
                
                $
                (0.07
                )
                
                $
                0.08Diluted
                
                $
                (0.11
                )
                
                $
                0.02
                
                
                $
                (0.07
                )
                
                $
                0.08Weighted
      average number of common and common equivalent shares:Basic
                
                
                11,991
                
                
                
                12,027
                
                
                
                12,085
                
                
                
                12,104Diluted
                
                
                11,991
                
                
                
                12,029
                
                
                
                12,085
                
                
                
                12,114Fiscal
      year 2008:Revenue
                
                $
                7,855
                
                
                $
                10,739
                
                
                $
                11,159
                
                
                $
                7,255Cost
      of sales
                
                
                6,194
                
                
                
                7,550
                
                
                
                7,670
                
                
                
                5,595Gross
      profit
                
                
                1,661
                
                
                
                3,189
                
                
                
                3,489
                
                
                
                1,660Net
      loss
                
                
                (2,359
                )
                
                
                (498
                )
                
                
                (1,080
                )
                
                
                (3,269
                )Net
      loss per share:Basic
                
                $
                (0.20
                )
                
                $
                (0.04
                )
                
                $
                (0.09
                )
                
                $
                (0.27
                )Diluted
                
                $
                (0.20
                )
                
                $
                (0.04
                )
                
                $
                (0.09
                )
                
                $
                (0.27
                )Weighted
      average number of common and common equivalent shares:Basic
                
                
                11,866
                
                
                
                11,899
                
                
                
                11,971
                
                
                
                11,981Diluted
                
                
                11,866
                
                
                
                11,899
                
                
                
                11,971
                
                
                
                11,981


79




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 SEC rules and forms, and that such information is
accumulated and communicated to our management, including our Chief Executive
Officer and Chief Financial Officer, as appropriate, to allow timely decisions
regarding required disclosure. In designing and evaluating our disclosure
controls and procedures, management recognized that disclosure controls and
procedures, no matter how well conceived and operated, can provide only
reasonable, not absolute, assurance that the objectives of the disclosure
controls and procedures are met. Our disclosure controls and procedures have
been designed to meet, and management believes that they meet, reasonable
assurance standards. Additionally, in designing disclosure controls and
procedures, our management 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, as of
such dates, our disclosure controls and procedures were effective.




(b) Management’s
Annual Report on Internal Control Over Financial Reporting: Internal
control over financial reporting refers to the process designed by, or under the
supervision of, our principal executive and principal financial officers, or
persons performing similar functions, and effected by our board of directors,
management and other personnel, 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, and 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 our assets;




(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 our receipts and expenditures are being made
only in accordance with the authorization of our management and directors;
and




(3)
Provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisitions, use or disposition of our assets that could have a
material effect on the financial statements.




Internal
control over financial reporting cannot provide absolute assurance of achieving
financial reporting objectives because of its inherent limitations. Internal
control over financial reporting is a process that involves human diligence and
compliance and is subject to lapses in judgment and breakdowns resulting from
human failures. Internal control over financial reporting also can be
circumvented by collusion or improper management override. Because of such
limitations, there is a risk that material misstatements may not be prevented or
detected on a timely basis by internal control over financial reporting.
However, these inherent limitations are known features of the financial
reporting process. Therefore, it is possible to design into the process
safeguards to reduce, though not eliminate, this risk. Management is responsible
for establishing and maintaining adequate internal control over financial
reporting for the Company.


80




Management
has used the framework set forth in the report entitled Internal
Control—Integrated Frameworkpublished by the Committee of Sponsoring
Organizations of the Treadway Commission, to assess the effectiveness of the
Company’s internal control over financial reporting as of March 31, 2009. Based
on this assessment, management has concluded that our internal control over
financial reporting was effective as of March 31, 2009. SingerLewak LLP, the
independent registered public accounting firm that audited the consolidated
financial statements included in the Annual Report on Form 10-K, also audited,
and expressed an unqualified opinion on the effectiveness of our internal
control over financial reporting as of March 31, 2009 which is presented under
Item 8 of the Annual Report on Form 10-K.




(c)Changes in Internal Control over Financial Reporting. There were no
significant changes in our internal control over financial reporting that
occurred during the fourth quarter of fiscal year 2009 that have materially
affected, or are reasonably likely to materially affect, our internal control
over financial reporting.


ITEM
      9B.
              OTHER
      INFORMATION




None.


81




PART
III


ITEM
      10.
              DIRECTORS,
      EXECUTIVE OFFICERS AND CORPORATE
GOVERNANCE




The
information required to be disclosed by this Item pursuant to Item 401(b) 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, Item 405 and Item 407 of Regulation S-K is contained in
the definitive proxy statement for our annual meeting of stockholders to be held
on September 15, 2009 (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”; “Section 16(a) Beneficial Ownership Reporting Compliance” and
“Other Matters-Stockholder Proposals for 2009 Annual Meeting of Stockholders”
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 directors and 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”; “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 201(d) and
Item 403 of Regulation S-K is contained in the Proxy Statement under the
captions “Executive compensation-Equity Compensation Plan Information” and
“Beneficial Ownership of Common Stock” 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 and Item
407(a) 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.


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.


82




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 Firms
                        
                        46(2)
                        Consolidated
      Balance Sheets at March 31, 2009 and March 31, 2008
                        
                        48(3)
                        Consolidated
      Statements of Operations for Fiscal Years 2009, 2008 and
    2007
                        
                        49(4)
                        Consolidated
      Statements of Stockholders’ Equity and Comprehensive Loss for Fiscal Years
      2009, 2008 and 2007
                        
                        50(5)
                        Consolidated
      Statements of Cash Flows for Fiscal Years 2009, 2008 and
    2007
                        
                        51(6)
                        Notes
      to Consolidated Financial Statements
                        
                        52




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 Firm on Internal Control over
      Financial Reporting
                            
                            86―
                            
                            Report
      of Odenberg, Ullakko, Muranishi & Co. LLP, Independent Registered
      Public Accounting Firm on Financial Statement Schedule for Fiscal 2008 and
      2007
                            
                            87II
                            
                            Valuation
      and Qualifying Accounts
                            
                            88




Schedules
      not listed above are not applicable or not required, or the information
      required to be set forth therein is included in the consolidated financial
      statements or the notes thereto.3.
                Exhibits:The
      Exhibits to this Report, filed herewith under Item 15(b) or incorporated
      by reference from other documents previously filed with the SEC, as
      follows:




Exhibit
                              Number
                            
                            
                            Description
                            
                            
                            
                            Filed
      Herewith or Incorporated

                              Herein
      by Reference to3(I)
                            
                            Amended
      and Restated Certificate of Incorporation
                            
                            Exhibit
      3.1 to Report on Form 10-K for the fiscal year ended March 31,
      20053(II)
                            
                            Amended
      and Restated By-Laws (to add new Section 4.6.5 re Vice
      Chairman)
                            
                            Exhibit
      3(II) to Report on Form 10-Q for the period ended December 31,
      200710.1
                            
                            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




83




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,
      200210.4
                        
                        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**10.5
                        *
                        2004
      Equity Incentive Compensation Plan (as Amended)
                        
                        Appendix
      A to Schedule 14A Proxy Statement for 2005Annual Stockholders
      Meeting10.6
                        
                        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**10.7
                        
                        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, 200610.8
                        *
                        Employee
      Stock Purchase Plan (as Amended)
                        
                        Appendix
      A to Schedule 14A Proxy Statement For 2007 Annual Stockholders
      Meeting10.9
                        *
                        Planned
      Retirement Agreement and Age Discrimination Release Agreement with Richard
      M. Haddock
                        
                        Exhibit
      10.13 to Report on Form 10-Q for period ended December 31,
      200710.10
                        *
                        Executive
      Employment Agreements with Christopher J. Dyball and Steven G.
      Larson
                        Exhibit
      10.14 to Report on Form 10-Q for period ended December 31,
      200710.11
                        
                        UBS
      AG Credit Line Agreement and Approval dated December 5,
    2008
                        
                        Exhibit
      10.1 to Report on Form 10-Q for period ended December 31,
    200810.12
                        *
                        June
      2, 2008, Executive Employment Agreement with Robert T.
      DeVincenzi
                        
                        Exhibit
      10.1 to Report on Form 10-Q for period ended June 30,
  200810.13
                        *
                        June
      2, 2008, Restricted Stock Award of Robert T. DeVincenzi
                        
                        Exhibit
      10.2 to Report on Form 10-Q for period ended June 30,
  200810.14
                        *
                        June
      2, 2008, Non-Statutory Stock Option Agreements of Robert T.
      DeVincenzi
                        Exhibit
      10.3 to Report on Form 10-Q for period ended June 30,
  200810.15
                        *
                        2004
      Equity Incentive Compensation Plan (as Amended)
                        
                        Exhibit
      10.18 to Report on Form 8-K dated Septemeber 19, 200816.1
                        
                        Letter
      re Change in Certifying Accountants
                        
                        Exhibit
      16.1 to Report on Form 8-K dated June 9, 2008 and amended on June 23,
      200821
                        
                        Subsidiaries
      of the Registrant
                        
                        Filed
      herewith23.1
                        
                        Consent
      of SingerLewak LLP, Independent Registered Public Accounting
      Firm
                        
                        Filed
      herewith
  84




23.2
              
              Consent
      of Odenberg, Ullakko, Muranishi & Co. LLP, Independent Registered
      Public Accounting Firm
              
              Filed
      herewith24
              
              Power
      of attorney
              
              Filed
      herewith31.1
              
              Rule
      13a-14(a)/15d-14(a) Certification of Robert T. DeVincenzi, principal
      executive officer
              
              Filed
      herewith31.2
              
              Rule
      13a-14(a)/15d-14(a) Certification of Steven G. Larson, principal financial
      officer
              
              Filed
      herewith32.1
              
              Section
      1350 Certification of Robert T. DeVincenzi, principal executive
      officer
              
              Filed
      herewith32.2
              
              Section
      1350 Certification of Steven G. Larson, principal financial
      officer
              
              Filed
      herewith







*Indicates
management contract or compensatory plan or arrangement.


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


(b)
                Financial
      Statement ScheduleSchedule
      II to our consolidated financial statements and the Report of our
      Independent Registered Public Accounting Firms relating to the Financial
      Statement Schedule is
below.


85


REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM




To the
Board of Directors and Stockholders


LaserCard
Corporation




We have
audited LaserCard Corporation and subsidiaries’ internal control over financial
reporting as of March 31, 2009, based on criteria established in Internal
Control — Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission. LaserCard Corporation and
subsidiaries’ management is responsible for maintaining effective internal
control over financial reporting and for its assessment of the effectiveness of
internal control over financial reporting included in Management’s Report on
Internal Control over Financial Reporting under Item 9A. Our responsibility is
to express an opinion on 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, assessing the risk that a material weakness
exists, and testing and evaluating the design and operating effectiveness of
internal control based on the assessed risk. Our audit also included 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 (a)
pertain to the maintenance of records that, in reasonable detail, accurately and
fairly reflect the transactions and dispositions of the assets of the company;
(b)
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 (c)
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 its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that 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, LaserCard Corporation and subsidiaries maintained, in all material
respects, effective internal control over financial reporting as of March 31,
2009, based on criteria established in Internal
Control — Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission.




We have
also audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated financial statements and
financial statement schedule of LaserCard Corporation and subsidiaries and our
report dated June 15, 2009 expressed an unqualified opinion.




/s/SingerLewak
LLP




San Jose,
California


June 15,
2009


86




REPORT OF
ODENBERG, ULLAKKO, MURANISHI & CO. LLP,  INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM


ON
FINANCIAL STATEMENT SCHEDULE FOR FISCAL 2008 AND 2007




The Board
of Directors and Stockholders


LaserCard
Corporation:




The
audits referred to in our report dated June 4, 2008 included the related
financial statement schedule for each of the two years in the period ended March
31, 2008, included in this Annual Report on Form 10-K. The financial statement
schedule is the responsibility of the Company’s management. Our responsibility
is to express an opinion on the financial statement schedule based on our
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


June 4,
2008


87




SCHEDULE
II
  LASERCARD
CORPORATION AND SUBSIDIARIES
 VALUATION
AND QUALIFYING ACCOUNTS
 For the
Fiscal Years Ended March 31, 2007, 2008 and 2009
 (In
thousands)
 Description
                                                        
                                                        
                                                        Balance
      at
                                                          Beginning
                                                          of
      Period
                                                        
                                                        Additions
      (Deletions)
                                                          Charged
      (Credited)
                                                          to
      Profit & Loss
                                                        
                                                        Additions
                                                          Charged
      to
                                                          Other
      Accounts
                                                        
                                                        Deductions/
                                                          Write-off
                                                        
                                                        Balance
      at
                                                          End
      of
                                                          of
      PeriodFiscal
      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
                                                        
                                                        $
                                                        16,216Fiscal
      year 2008:Product
      return reserve
                                                        
                                                        $
                                                        78
                                                        
                                                        $
                                                        —
                                                        
                                                        $
                                                        —
                                                        
                                                        $
                                                        78
                                                        
                                                        $
                                                        —Bad
      debt reserve
                                                        
                                                        $
                                                        66
                                                        
                                                        $
                                                        30
                                                        
                                                        $
                                                        15
                                                        (1)
                                                        $
                                                        76
                                                        
                                                        $
                                                        35Inventory
      reserves
                                                        
                                                        $
                                                        837
                                                        
                                                        $
                                                        53
                                                        
                                                        $
                                                        94
                                                        (2)
                                                        $
                                                        71
                                                        
                                                        $
                                                        913Warranty
      reserve
                                                        
                                                        $
                                                        743
                                                        
                                                        $
                                                        147
                                                        
                                                        $
                                                        2
                                                        (1)
                                                        $
                                                        237
                                                        
                                                        $
                                                        655Deferred
      income tax asset valuation allowance
                                                        
                                                        $
                                                        16,216
                                                        
                                                        $
                                                        2,509
                                                        
                                                        $
                                                        —
                                                        
                                                        $
                                                        473
                                                        
                                                        $
                                                        18,252Fiscal
      year 2009:Product
      return reserve
                                                        
                                                        $
                                                        —
                                                        
                                                        $
                                                        —
                                                        
                                                        $
                                                        —
                                                        
                                                        $
                                                        —
                                                        
                                                        $
                                                        —Bad
      debt reserve
                                                        
                                                        $
                                                        35
                                                        
                                                        $
                                                        32
                                                        
                                                        $
                                                        (10
                                                        )
      (1)
                                                        $
                                                        (2
                                                        )
                                                        $
                                                        59Inventory
      reserves
                                                        
                                                        $
                                                        913
                                                        
                                                        $
                                                        352
                                                        
                                                        $
                                                        (12
                                                        )
      (1)
                                                        $
                                                        390
                                                        
                                                        $
                                                        863Warranty
      reserve
                                                        
                                                        $
                                                        655
                                                        
                                                        $
                                                        24
                                                        
                                                        $
                                                        (9
                                                        )
      (1)
                                                        $
                                                        109
                                                        
                                                        $
                                                        561Deferred
      income tax asset valuation allowance
                                                        
                                                        $
                                                        18,252
                                                        
                                                        $
                                                        703
                                                        
                                                        $
                                                        —
                                                        
                                                        $
                                                        1,531
                                                        
                                                        $
                                                        17,424
  Notes:
 (1)
                    Due
      to Foreign Exchange rate translation(2)
                    FIFO
      adjustment for standard change of previously reserved obsolete
      inventory
  88
  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 15, 2009
  LASERCARD
CORPORATION
  By:
                  /s/Robert
      T. DeVincenziRobert
      T. DeVincenzi, Chief Executive
Officer
  KNOW
ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below
constitutes and appoints Robert T. DeVincenzi 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 Annual 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/Robert
      T. DeVincenzi
                
                Chief
      Executive Officer
                
                June
      15, 2009Robert
      T. DeVincenzi
                
                (Principal
      Executive Officer)Director/s/Steven
      G. Larson
                
                Vice
      President of Finance and Treasurer
                
                June
      15, 2009Steven
      G. Larson
                
                (Principal
      Financial Officer andPrincipal
      Accounting Officer)/s/Bernard
      C. Bailey
                
                Director
                
                June
      9, 2009Bernard
      C. Bailey/s/Arthur
      H. Hausman
                
                Director
                
                June
      9, 2009Arthur
      H. Hausman/s/Donald
      E. Mattson
                
                Director
                
                June
      11, 2009Donald
      E. Mattson/s/Albert
      J. Moyer
                
                Director
                
                June
      15, 2009Albert
      J. Moyer/s/Walter
      F. Walker
                
                Director
                
                June
      12, 2009Walter
      F. Walker
  89
  INDEX TO
EXHIBITS
 [ITEM
14(c)]
 ExhibitNumber
                                
                                Description3(I)
                                
                                Amended
      and Restated Certificate of Incorporation; Exhibit 3.1 to Report on Form
      10-K for the fiscal year ended March 31, 20053(II)
                                
                                Amended
      and Restated By-Laws; Exhibit 3(II) to Report on Form 10-Q for the period
      ended December 31, 200710.1
                                
                                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 reference10.4
                                
                                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**10.5*
                                
                                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 reference10.6
                                
                                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**10.7
                                
                                October
      27, 2006 Modified Third Amendment to License and Equipment Agreements with
      Global Investments Group and Prevent LOK; previously filed as Exhibit
      10.11 to Form 8-K dated October 30, 2006, which was filed with the SEC on
      November 1, 2006, and incorporated herein by reference10.8*
                                
                                Employee
      Stock Purchase Plan, as Amended; previously filed as Appendix A to amended
      Schedule 14A Proxy Statement for 2007 Annual Stockholders Meeting filed
      with the SEC on August 3, 2007, and incorporated herein by
      reference10.9*
                                
                                November
      28, 2007, Planned Retirement Agreement and Age Discrimination Release
      Agreement with Richard M. Haddock, and incorporated herein by
      reference10.10*
                                
                                January
      4, 2008, Executive Employment Agreements with Christopher J. Dyball and
      Steven G. Larson, and incorporated herein by reference10.11
                                
                                UBS
      AG Credit Line Agreement and Approval dated December 5,
    200810.12*
                                
                                June
      2, 2008, Executive Employment Agreement with Robert T.
      DeVincenzi10.13*
                                
                                June
      2, 2008, Restricted Stock Award of Robert T. DeVincenzi10.14*
                                
                                June
      2, 2008, Non-Statutory Stock Option Agreements of Robert T.
      DeVincenzi
  90
  10.15*
                          
                          2004
      Equity Incentive Compensation Plan, as Amended, previously filed as
      Exhibit 10.18 to Form 8-K dated September 19, 200816.1
                          
                          Letter
      re Change in Certifying Accountant; previously filed as Exhibit 16.1 to
      Current Report on Form 8-K dated June 9, 2008 and amended on June 23,
      200821
                          
                          Subsidiaries
      of the Registrant; filed herewith23.1
                          
                          Consent
      of SingerLewak LLP, Independent Registered Public Accounting Firm; filed
      herewith23.2
                          
                          Consent
      of Odenberg, Ullakko, Muranishi & Co. LLP, Independent Registered
      Public Accounting Firm; filed herewith24
                          
                          Power
      of Attorney; filed herewith31.1
                          
                          Rule
      13a-14(a)/15d-14(a) Certification of Robert T. DeVincenzi principal
      executive officer; filed herewith31.2
                          
                          Rule
      13a-14(a)/15d-14(a) Certification of Steven G. Larson, principal financial
      officer; filed herewith32.1
                          
                          Section
      1350 Certification of Robert T. DeVincenzi, principal executive officer
      and president; filed herewith32.2
                          
                          Section
      1350 Certification of Steven G. Larson, principal financial officer; filed
      herewith
  *
                    Indicates
      management contract or compensatory plan or
arrangement.**
                    Portions
      were omitted pursuant to a request for confidential
    treatment.
  91