Lasercard (LCRD) 10-Q 2008 Q1 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended June 30, 2007

LASERCARD CORPORATION

(Exact name of registrant as specified in its charter)

Delaware	0-6377	77-0176309
(State or other jurisdiction of incorporation or organization)	(Commission File Number)	(I.R.S. Employer Identification No.)

1875 North Shoreline Boulevard, Mountain View, California 94043-1319

(Address of principal executive offices) (Zip Code)

(650) 969-4428

(Registrant's telephone number, including area code)

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

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

Large accelerated filer o Accelerated filer x Non-accelerated filer o

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

Number of outstanding shares of common stock, $.01 par value, at August 6, 2007: 11,877,940

Exhibit Index is on Page 42

Total number of pages is 47

TABLE OF CONTENTS

PART I.	FINANCIAL INFORMATION		Page Number
	Item 1.	Condensed Consolidated Financial Statements (Unaudited)	2
		Condensed Consolidated Balance Sheets (Unaudited)	3
		Condensed Consolidated Statements of Operations (Unaudited)	4
		Condensed Consolidated Statements of Cash Flows (Unaudited)	5
		Notes to Condensed Consolidated Financial Statements (Unaudited)	6
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	21
	Item 3.	Quantitative and Qualitative Disclosures about Market Risk	30
	Item 4.	Controls and Procedures	31
PART II.	OTHER INFORMATION
	Item 1.	Legal Proceedings	31
	Item 1A.	Risk Factors	31
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	39
	Item 3.	Defaults Upon Senior Securities	39
	Item 4.	Submission of Matters to a Vote of Security Holders	39
	Item 5.	Other Information	39
	Item 6.	Exhibits	39
SIGNATURES			41
EXHIBIT INDEX			42

PART I.FINANCIAL INFORMATION

ITEM 1.CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

2

LASERCARD CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands)

	(Unaudited)
	June			March
	30, 2007			31, 2007*
ASSETS
Current assets:
Cash and cash equivalents	$	1,991		$	3,026
Short-term investments		15,600			17,500
Accounts receivable, net of allowances of $75 at June 30, 2007 and $144 at March 31, 2007		3,655			3,489
Inventories, net of reserve of $864 at June 30, 2007 and $837 at March 31, 2007		11,494			11,462
Deferred contract costs		100			233
Prepaid and other current assets		1,669			1,594
Total current assets		34,509			37,304
Property and equipment, net		12,557			12,988
Deferred long-term contract costs		873			721
Equipment held for resale		6,433			6,340
Patents and other intangibles, net		403			411
Notes receivable		229			227
Other non-current assets		109			109
Total assets	$	55,113		$	58,100
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable	$	1,603		$	2,284
Accrued liabilities		2,712			2,989
Deferred income tax liabilities		376			388
Advance payments from customers		1,352			1,838
Deferred revenue		1,718			1,584
Total current liabilities		7,761			9,083
Advance payments from customers		23,554			23,554
Deferred revenue		2,000			2,000
Deferred rent		947			864
Total liabilities		34,262			35,501
Stockholders' equity:
Common stock		119			119
Additional paid-in capital		61,611			61,068
Accumulated deficit		(41,019	)		(38,722	)
Accumulated other comprehensive income		140			134
Total stockholders' equity		20,851			22,599
Total liabilities and stockholders' equity	$	55,113		$	58,100
*Amounts derived from audited consolidated financial statements at the date indicated.
The accompanying notes are an integral part of these condensed consolidated financial statements.

3

LASERCARD CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

(In thousands, except per share amounts)

	Three Months Ended
	June 30,
	2007			2006
Revenues	$	7,855		$	10,554
Cost of sales (includes $66 and $87 stock-based compensation in
the three month period ended June 30, 2007 and 2006, respectively)		6,194			6,389
Gross profit		1,661			4,165
Operating expenses:
Selling, general, and administrative expenses (includes
$311 and $240 stock-based compensation in the three
months ended June 30, 2007 and 2006, respectively)		3,489			3,420
Research and development expenses (includes $60 and $106
stock-based compensation in the three months ended
June 30, 2007 and 2006, respectively)		788			745
Total operating expenses		4,277			4,165
Operating loss		(2,616	)		-
Other income, net		241			206
Income (loss) before income taxes		(2,375	)		206
Income tax benefit		(16	)		(6	)
Net income (loss)	$	(2,359	)	$	212
Net income (loss) per share:
Basic	$	(0.20	)	$	0.02
Diluted	$	(0.20	)	$	0.02
Weighted-average shares of common stock
used in computing net income (loss) per share:
Basic		11,866			11,768
Diluted		11,866			12,280
The accompanying notes are an integral part of these condensed consolidated financial statements.

4

LASERCARD CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

(In thousands)

	Three Months Ended
	June 30,
	2007			2006
Cash flows from operating activities:
Net income (loss)	$	(2,359	)	$	212
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization		731			637
Loss on disposal of equipment		2			-
Provision for doubtful accounts receivable		8			16
Provision for excess and obsolete inventory		37			90
Provision for warranty reserve		39			77
Stock-based compensation		437			433
Changes in operating assets and liabilities:
Decrease (increase) in accounts receivable		(155	)		1,521
Decrease (increase) in inventories		(51	)		489
Increase in deferred contract costs		(18	)		(807	)
Increase in prepaid and other current assets		(71	)		(174	)
Increase in equipment held for resale		(93	)		(145	)
Increase in other non-current assets		-			(2	)
Decrease in accounts payable and accrued liabilities		(953	)		(2,485	)
Decrease in deferred income tax liabilities		(16	)		(12	)
Increase in deferred revenue		132			19
Increase in long-term deferred rent		83			58
Increase (decrease) in advance payments from customers		(488	)		413
Net cash provided by (used in) operating activities		(2,735	)		340
Cash flows from investing activities:
Purchases of property and equipment		(246	)		(1,073	)
Acquisition of patents and other intangibles		(26	)		(45	)
Purchases of short-term investments		-			(5,900	)
Proceeds from maturities of short-term investments		1,900			7,550
Net cash provided by investing activities		1,628			532
Cash flows from financing activities:
Proceeds from sale of common stock through stock plans		106			691
Payment of bank loan		-			60
Net cash provided by financing activities		106			751
Effect of exchange rate changes on cash and cash equivalents		(34	)		(41	)
Net increase (decrease) in cash and cash equivalents		(1,035	)		1,582
Cash and cash equivalents:
Beginning of period		3,026			2,121
End of period	$	1,991		$	3,703
The accompanying notes are an integral part of these condensed consolidated financial statements.

5

LASERCARD CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

1. Basis of Presentation

The unaudited condensed consolidated financial statements contained herein include the accounts of LaserCard Corporation (the “Company” and “we”) and its wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. The consolidated balance sheet data as of March 31, 2007 was derived from audited financial statements, but does not include all disclosures required by U.S. generally accepted accounting principles.

The condensed consolidated financial statements included herein have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations, although the Company believes the disclosures which are made herein are adequate to make the information presented not misleading. Further, the condensed consolidated financial statements reflect, in the opinion of management, all adjustments (which include only normal recurring adjustments) necessary to present fairly the financial position and results of operations as of and for the periods indicated.

These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto for the fiscal year ended March 31, 2007, included in the Company's Annual Report on Form 10-K, filed with the SEC on June 12, 2007.

The results of operations for the three months ended June 30, 2007 are not necessarily indicative of results to be expected for the entire fiscal year ending March 31, 2008.

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

Upon adoption of FIN 48 on April 1, 2007, the Company recognized a cumulative effect adjustment of $61,000, decreasing its income tax liability for unrecognized tax benefits, and decreasing the March 31, 2007 accumulated deficit balance. At June 30, 2007, the Company has recorded unrecognized tax benefits of $202,000. The Company does not expect any material change in its unrecognized tax benefits over the next twelve months.

The Company recognizes interest and penalties accrued on any unrecognized tax benefits as a component of its provision for income taxes. As of June 30, 2007, the Company has accrued $48,000 for payment of interest and penalties related to unrecognized tax benefits.

6

LASERCARD CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

The table below shows the changes in the accumulated deficit as of June 30, 2007 (in thousands):

Balance at March 31, 2007, as reported	$	(38,722	)
FIN 48 adjustments to beginning balance		62
Net loss during the period		(2,359	)
Balance at June 30, 2007	$	(41,019	)

Although the Company files U.S. federal, various state, and foreign tax returns, the Company’s only major tax jurisdictions are the United States, California and Germany.  Tax years 1993 - 2007 remain subject to examination by the appropriate governmental agencies due to tax loss carryovers from those years.

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

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

2. Summary of Significant Accounting Policies

(1.) Principles of Consolidation and Basis of Presentation. The accompanying condensed consolidated financial statements have been prepared in accordance with U. S. generally accepted accounting principles. The condensed consolidated financial statements include the accounts of LaserCard Corporation and its wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.

(2.) Use of Estimates. The preparation of condensed consolidated financial statements in conformity with U. S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

(3.) Fiscal Period. For purposes of presentation, the Company labels its annual accounting period end as March 31 and its quarterly accounting period ends as June 30, September 30 and December 31. The Company, in fact, operates and reports based on quarterly periods ending on the Friday closest to month end. The 13-week first quarter of fiscal year 2008 ended on June 29, 2007, and the 13-week first quarter of fiscal year 2007 ended on June 30, 2006.

7

LASERCARD CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

(4.) Foreign Currency Transactions. The functional currency of the Company's foreign subsidiary is generally the local currency. The financial statements of this subsidiary are translated to United States dollars using period-end rates of exchange for assets and liabilities and average rates of exchange for the year for revenues and expenses. Translation gains (losses) are recorded in accumulated other comprehensive income (loss) as a component of stockholders' equity. Net gains and losses resulting from foreign exchange transactions are included in selling, general and administrative expenses and were not significant during the periods presented.  

(5.) Derivative Financial Instruments. The Company uses short-term foreign exchange forward contracts to mitigate foreign currency risk associated primarily with inter-company receivables and payables, and loan receivables (denominated in Euros) with its German subsidiary.  Our foreign exchange forward contracts are not designated for accounting purposes as hedging instruments under SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended.  Accordingly, any gains or losses resulting from changes in the fair value of the forward contracts are reported in other income.  The gains and losses on these forward contracts generally offset gains and losses associated with the underlying foreign currency denominated inter-company receivables and payables, and loans receivable.  At June 30, 2007 and March 31, 2007, we had foreign exchange forward contracts with a maturity of less than 30 days to purchase 2.3 million euros. The fair value of the forward contracts was not material at June 30, 2007 and March 31, 2007.

(6.) Concentrations of Risk. Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of cash, cash equivalents, short-term investments, long-term investments and accounts receivable. The Company places its cash, cash equivalents, and short-term and long-term investments in high-credit quality financial institutions. The Company is exposed to credit risk in the event of default by these institutions to the extent of the amount recorded on the condensed consolidated balance sheet. As of June 30, 2007 and March 31, 2007, the Company’s short-term investments consist of auction rate securities and there were no long-term investments. Accounts receivable are derived from revenue earned from customers primarily located in the United States, Italy and Germany. The Company performs ongoing credit evaluations of its customers’ financial condition and generally does not require collateral. The Company maintains reserves for potential credit losses and historically, such losses have been immaterial.

(7.) Major Customers. The following customers accounted for more than 10% of revenues for the periods shown below. The revenue from these customers was attributable to both the optical memory card and the optical card drive segments. No other customer accounted for more than 10% of revenues during these periods.

	Three Months Ended
	June 30,
	2007		2006
Customer A		38%		27%
Customer B		<10%		20%
Customer C		―		20%
Customer D		14%		―

Two customers accounted for 28% and 26%, respectively, of accounts receivable at June 30, 2007. Two customers accounted for 31% and 17%, respectively, of accounts receivable at March 31, 2007.

(8.) Cash and Cash Equivalents, Short-term Investments and Long-term Investments. The Company considers all highly liquid investments, consisting primarily of commercial paper, discount notes and U.S. government bonds, with maturities of three months or less at the date of purchase, to be cash equivalents. Cash and cash equivalents at June 30, 2007 and March 31, 2007 were $2.0 million and $3.0 million, respectively. As of June 30, 2007 and March 31, 2007, the Company held auction rate securities which had been accounted for as available-for-sale and classified as short-term investments. The fair values of the auction rate securities, based on quoted market prices, were substantially equal to their carrying costs due to the frequency of the reset dates. Short-term investments also include investments with maturities at date of purchase of more than three months and investments with remaining maturities of less than one year. All investments with maturities at date of purchase greater than one year are classified as long-term investments. Management determines the appropriate classification of debt securities at the time of purchase and re-evaluates the classification of investments as of each balance sheet date.

8

LASERCARD CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

All short-term investments, except for auction rate securities which are recorded at fair value, and long-term investments are classified as held to maturity and are stated in the condensed consolidated balance sheet at amortized cost. As such investments are classified as held to maturity, no unrealized gains or losses are recorded. The carrying amounts of individual held to maturity securities are reviewed at the condensed consolidated balance sheet date for potential impairment. As of June 30, 2007 and March 31, 2007, the Company had determined that an impairment which was “other than temporary” had not occurred.

The carrying amounts of short-term investments in the form of auction rate securities as of June 30, 2007 and March 31, 2007 are $15.6 million and $17.5 million, respectively.

The Company had no long-term investment as of June 30, 2007 and March 31, 2007.

(9.) Fair Value of Financial Instruments. The carrying amounts of the Company’s financial instruments including cash and cash equivalents, short-term investments, accounts receivable, accounts payable and accrued liabilities, approximate their fair values due to their short maturities.

(10.) Accounts Receivable. We maintain allowances for doubtful accounts and product return reserves for anticipated losses resulting from the inability of our customers to make required payments and in-process product returns. We generally compute our allowances based on specifically identifying accounts that are past due and that are likely not collectible. Interest receivable is accrued from investments in auction rate securities and other interest-bearing securities. Other receivables are comprised of value added tax refunds and miscellaneous items. The components of accounts receivable as of June 30, 2007 and March 31, 2007 are (in thousands):

	June 30,			March 31,
	2007			2007
Trade receivables	$	3,510		$	3,383
Allowance for doubtful accounts		(75	)		(66	)
Product return reserves		0			(78	)
Interest receivable		22			34
Other receivables		198			216
Total accounts receivable, net	$	3,655		$	3,489

(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 June 30, 2007 and March 31, 2007 are (in thousands):

	June 30,		March 31,
	2007		2007
Raw materials	$	7,531	$	7,763
Work-in-process		790		860
Finished goods		3,173		2,839
Total inventory, net	$	11,494	$	11,462

The Company establishes lower of cost or market reserves, aged inventory reserves and obsolescence reserves. Inventory reserves are generally recorded when management determines that an item is not readily saleable. Inventory reserves are not relieved until the related inventory has been sold or scrapped. For the three months ended June 30, 2007 and 2006, the Company recorded inventory reserve expense of $50,000 and $90,000, respectively. We did not record any lower of cost or market adjustment in our condensed consolidated statements of operations for the three months ended June 30, 2007 and 2006.

9

LASERCARD CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

In November 2004, the FASB issued SFAS No. 151, “Inventory Costs ― an Amendment of ARB No. 43, Chapter 4,” (“SFAS No. 151”) which clarifies that costs for abnormal amounts of idle facility expense, freight, handling costs and wasted material (spoilage) be recognized as current period charges. In addition, SFAS No. 151 requires that allocation of fixed production overhead to the costs of conversion be based on the normal capacity of the production facilities. SFAS No. 151 is effective for inventory costs incurred in fiscal years beginning after June 15, 2005. The Company applied SFAS No. 151 to inventory costs as of April 1, 2006. The provisions of this statement were applied prospectively. The adoption of SFAS No. 151 increased the cost of inventory by $219,000 and increased net income by the same amount for the three months ended June 30, 2006.

(12.) Equipment Held for Resale. Equipment held for resale primarily consists of parts, labor costs and other costs incurred to build equipment under a contract with Global Investments Group (Prevent). The contract was assigned to Prevent in March 2007. Direct incremental costs associated with the purchase or construction of these items are deferred until revenue is recognized. The components of equipment held for resale as of June 30, 2007 and March 31, 2007 are (in thousands):

	June 30,		March 31,
	2007		2007
Parts	$	5,309	$	5,297
Labor costs		1,011		931
Other		113		112
Total equipment held for resale	$	6,433	$	6,340

(13.) Property and Equipment, Net. The components of property and equipment as of June 30, 2007 and March 31, 2007 are (in thousands):

	June 30,			March 31,
	2007			2007
Building and land	$	896		$	885
Equipment and furniture		24,532			24,334
Construction in progress, including
purchased equipment		621			774
Leasehold improvements		4,882			4,701
		30,931			30,694
Less: accumulated depreciation and amortization		(18,374	)		(17,706	)
Total property and equipement, net	$	12,557		$	12,988

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 the three months ended June 30, 2007 and 2006 was $731,000 and $637,000, respectively. Maintenance and minor repairs and replacements are expensed when incurred. Disposition or retirement of property and equipment related gains and losses are charged to other income and expenses.

Certain costs incurred in connection with acquisition of software for internal use are capitalized following Statement of Position (SOP) 98-1, “Accounting for the Costs of Computer Software Developed or Obtained for Internal Use” and EITF Issue No. 97-13, “Accounting for Costs Incurred in Connection with a Consulting Contract or an Internal Project That Combines Business Process Reengineering and Information Technology Transformation.” Capitalized software costs are included in the equipment and furniture account and are amortized over four to seven years. Software costs that do not meet capitalization criteria are expensed immediately.

10

LASERCARD CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

(14.) Goodwill and Other Intangible Assets. Goodwill represents the excess of the purchase price over the fair value of identifiable net tangible and intangible assets acquired in a business combination.  In accordance with SFAS No. 142, “Goodwill and Other Intangible Assets,” the Company does not amortize goodwill.  Instead, the Company evaluates goodwill for impairment annually in the fourth quarter and whenever events or changes in circumstances indicate that it is more likely than not that an impairment loss has been incurred.  At March 31, 2007, the Company determined that estimated future cash flows were insufficient to justify the carrying value of goodwill and other intangible assets based on management’s decision to suspend optical memory card production in Germany. As such, in the fourth quarter of fiscal year 2007, the Company recorded a non-cash impairment charge of approximately $3.8 million for the full amount of remaining goodwill and other intangible assets related to the Company’s purchase of Challenge Card Design Plastikkarten GmbH of Rastede, Germany, and Cards & More GmbH of Ratingen, Germany on March 31, 2004.  As of June 30, 2007 and March 31, 2007, goodwill was fully charged to impairment. We intend to continue to use the facility and equipment to produce specialty cards although plans to use the facility to produce LaserCard® optical memory cards in Germany have been suspended.

Definite life intangible assets capitalized and accumulated amortization as of June 30, 2007 and March 31, 2007 are as follows (in thousands):

	June 30,			March 31,
	2007			2007
Patent expenditures	$	3,580		$	3,554
Technology transfer expenditures		545			545
Total patent and other intangible expenditures		4,125			4,099
Patent accumulated amortization		(3,177	)		(3,149	)
Technology transfer accumulated amortization		(545	)		(539	)
		(3,722	)		(3,688	)
Amortizable patents and other intangible, net	$	403		$	411

(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 June 30, 2007 and March 31, 2007, the fair value of long-lived assets exceeds their book value. Therefore, no impairment loss has been recognized.

(16.) Accrued Liabilities. The components of accrued liabilities as of June 30, 2007 and March 31, 2007 are (in thousands):

	June 30,		March 31,
	2007		2007
Accrued payroll and fringe benefits	$	279	$	497
Accrued compensated absences		602		855
Warranty reserves		672		743
Other accrued liabilities		1,159		894
Total accrued liabilities	$	2,712	$	2,989

11

LASERCARD CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

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 record a liability in the amount of such costs at the time product revenue is recognized. Factors that affect our estimate of warranty liability include the number of units sold, and historical and anticipated rates of warranty claims. We assess the adequacy of our recorded warranty liability and adjust the amount as necessary. We utilize historical trends and information received from our customers to assist in determining the appropriate estimated warranty accrual levels. The Company’s product warranty claims are settled through the return of defective products and the shipment of replacement products. The costs of warranty returns for the three months ended June 30, 2007 were approximately $109,000 mainly due to a credit issued to a customer. The costs of warranty returns for the three months ended June 30, 2006 were approximately $58,000. The adequacy of the warranty reserve is reviewed quarterly to verify that it properly reflects the remaining obligations based on the anticipated returns over the balance of the obligation period. Adjustments are made when actual return claim experience differs from estimates. Warranty activities for the three months ended June 30, 2007 and 2006 are as follow (in thousands):

	Three Months Ended
	June 30,
		2007			2006
Beginning balance	$	743		$	648
Accruals for products sold		38			77
Costs incurred		(109	)		(58	)
Ending balance	$	672		$	667

Significant judgment is inherent in the selection of assumptions and the interpretation of historical experience as well as the identification of external and internal factors affecting the estimates of our reserves for product returns. We believe that the assumptions used to estimate these product sales reserves are the most reasonably likely assumptions considering known facts and circumstances. However, our product return activity could differ significantly from our estimates. If actual product returns are significantly different from our estimates, such differences would be accounted for in the period in which they become known.

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

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

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

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

12

LASERCARD CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

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

The Company applies the provisions of Statement of Position 81-1, "Accounting for Performance of Construction-Type and Certain Production-Type Contracts" (“SOP 81-1”) in applicable contracts. Revenues on time and materials contracts are recognized as services are rendered at contract labor rates plus material and other direct costs incurred. Revenues on fixed price contracts are recognized on the percentage of completion method based on the ratio of total costs incurred to date compared to estimated total costs to complete the contract. Estimates of costs to complete include material, direct labor, overhead and allowable general and administrative expenses. In circumstances where estimates of costs to complete a project cannot be reasonably estimated, but it is assured that a loss will not be incurred, the percentage-of-completion method based on a zero profit margin, rather than the completed-contract method, is used until more precise estimates can be made. The full amount of an estimated loss is charged to operations in the period it is determined that a loss will be realized from the performance of a contract. The Company recognized approximately $13,000 and $1,000 of revenues for the three months ended June 30, 2007 and June 30, 2006, respectively, based on a zero profit margin related to a long-term contract.

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

On June 23, 2007, the Company and the prime contractor entered into an amendment agreement whereby the Company will provide cards and supplies according to a fixed delivery schedule for the balance of this year. In addition, the Company no longer has obligations pertaining to the installation of equipment, card personalization workstation integration or card personalization. As a result of this amendment, the Company will ratably recognize revenue upon receipt of the customer’s certificate of acceptance. Also under the amendment and associated sales incentives, new prices per card have been established. The subcontract continued to allow for optional orders at customer request over a four-year period, valued at up to another approximately $37 million in cards based on the new agreed upon price per card under the amendment.

13

LASERCARD CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

During the three months ended June 30, 2007, we recognized revenue of approximately $0.9 million in addition to the $4 million recognized in fiscal year 2007 and as of June 30, 2007, there remained $0.9 million of deferred revenue and $0.9 million of deferred contract costs relating to this contract. The deferred contract costs consist of hardware and integration costs. At June 30, 2007, there was $4.4 million of backlog under this subcontract agreement.

The Company applies the provisions of Statement of Position (“SOP”) No. 97-2, “Software Revenue Recognition,” as amended by Statement of Position 98-9, “Modification of SOP 97-2, Software Revenue Recognition, With Respect to Certain Transactions” to all transactions involving the sale of software products. Revenue from the license of the Company’s software products is recognized when persuasive evidence of an arrangement exists, the software product has been delivered, the fee is fixed or determinable and collectibility is probable, and, if applicable, upon acceptance when acceptance criteria are specified or upon expiration of the acceptance period. There was no software revenue recognized for the three months ended June 30, 2007. Software revenue was immaterial for the three months ended June 30, 2006.

License revenue, which may consist of up-front license fees and long-term royalty payments, is recognized as revenue when earned. There were no license revenues recorded for the three months ended June 30, 2007 and 2006.

The Company entered into license and optical memory card equipment purchase and support agreements, effective April 3, 2004, with Global Investments Group (GIG), based in Auckland, New Zealand, for optical memory card manufacturing in Slovenia.  GIG transferred the license and other agreements, with our approval, to Prevent Global of Slovenia (Prevent) in March 2007. The agreements provide for payments (other than interest on late payments) to the Company of about $25.6 million which were fully paid as of March 31, 2007, for a 20-year license, the required manufacturing equipment for a targeted initial manufacturing capacity of 10 million optical cards annually and installation support, and a four-year training and support package. Of the $25.6 million we received, $23.6 million was recorded as advance payments from customer and $2 million for the licensing fee was recorded as deferred revenue. Both were classified as long term liabilities in the condensed consolidated balance sheets. As of June 30, 2007, the Company had $6.4 million of acquired equipment, plus direct and incremental expenses, classified as equipment held for resale on our condensed consolidated balance sheets. Beginning in the fifth year of the contract, Prevent is to pay $3 million for a three-year support package, and has options for thirteen additional years of support for payments of $1 million annually.  In addition to the $41.6 million discussed above, Prevent is to pay royalties of $0.60 per card for each card produced under the license.  The territories covered by the license include most of the European Union and Eastern European regions.  Prevent has exclusive marketing rights in certain territories, with performance goals to maintain these rights. The Company retains rights to utilize up to 20% of the new facility capacity as backup and a capacity buffer to augment our own card manufacturing facilities in Mountain View, California and possibly at the Company’s German subsidiary. The granting of this license to Prevent establishes a potential second source supplier of optical memory cards for existing and prospective customers who may request multiple sources for cards.  The agreement contains various elements including a card manufacturing license, sale and installation of equipment, training and ongoing support, and contingent payments for support, materials, and royalty payments for cards manufactured. In accordance with EITF 00-21 “Revenue Arrangements with Multiple Deliverables,” the card manufacturing license, sale and installation of equipment, training and support package, have been accounted for as one unit of accounting, since we were unable to determine evidence of the fair value for the undelivered items other than ongoing support. The Company is able to determine evidence of fair value for the predominant undelivered item, which is the ongoing annual support of the manufacturing equipment. Accordingly, revenues for the arrangement have been deferred and will be recognized when the equipment is installed and accepted, with the exception of the value of the ongoing annual support of the manufacturing equipment which will be recognized quarterly as earned, beginning when the equipment is accepted and training has been completed, which date is dependent on Prevent establishing a suitable facility in Slovenia. Pursuant to FTB 90-1, “Accounting for Separately Priced Extended Warranty and Product Maintenance Contracts” the support revenue will be recognized ratably over the remaining term of the agreement.

14

LASERCARD CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

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

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

(22.) Advertising Costs. Advertising costs consist of development and placement costs of the Company’s advertising campaigns and are charged to expense when incurred. Advertising expense was approximately $202,000 and $188,000 for the three months ended June 30, 2007 and 2006, respectively.

(23.) Stock-based Compensation. Effective April 1, 2006, the Company adopted Statement of Financial Accounting Standard (“SFAS”) No. 123(R), Share-Based Payment, which requires share-based payment transactions to be accounted for using a fair value based method and the recognition of the related expense in the results of operations.

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

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

Stock Options: Under the provisions of SFAS No. 123(R), stock-based compensation cost is estimated at the grant date based on the fair value of the award and compensation cost is recognized as an expense over the requisite service period of the award, generally the vesting period. The fair value of non-vested stock awards was determined by reference to the fair market value of the Company’s common stock on the date of grant. Consistent with the valuation method the Company used for disclosure-only purposes under the provisions of SFAS No. 123(R), the Company uses the Black-Scholes valuation model to estimate the fair value of option awards. Determining the appropriate fair value model and related assumptions requires judgment, including estimating stock price volatility, forfeiture rates and expected terms. The following assumptions were utilized to estimate the fair value of the Company’s stock option awards during the three months ended June 30, 2007 and 2006:

	Three Months Ended
	June 30,
	2007		2006
Expected stock price volatility		55%		55%
Risk-free interest rates		4.93%		5%
Expected life of options		4.4 years		4.4 to 5 years
Expected 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.

15

LASERCARD CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

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

The Company recognized the full amount of the stock-based employee compensation expense of its equity incentive plans in the condensed consolidated statements of operations for the three months ended June 30, 2007 and 2006, and did not capitalize any such costs in the condensed consolidated balance sheets.

Stock-based compensation expense related to stock options was recorded in the Company’s condensed consolidated statements of operations was allocated as follows (in thousands):

	Three Months Ended
	June 30,
	2007		2006
Cost of sales	$	66	$	87
Selling, general and administrative expense		283		221
Research and development expense		60		106
Stock-based compensation expense before income tax		409		414
Less: income tax benefit		―		―
Net stock-based compensation expense after income tax	$	409	$	414

As of June 30, 2007, about $4 million of total unrecognized compensation cost related to unvested share-based compensation arrangements is expected to be recognized over the remaining vesting period through June 30, 2011. As of June 30, 2006, there was approximately $7.6 million of total unrecognized compensation cost related to unvested share-based compensation arrangements granted under our stock incentive plans which is expected to be recognized over the remaining vesting period through June 30, 2010.

We recorded no income tax benefit on stock based compensation expense for the three months ended June 30, 2007 and 2006, as we have cumulative operating loss carryovers, for which a full valuation allowance has been established.

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

Employee Stock Purchase Plan. The Company has an Employee Stock Purchase Plan (ESPP), under which eligible employees may designate from 2% to 6% of their compensation to be withheld for the purchase of shares of common stock at 67% of the average price over the three-day period prior to the purchase date. The differential between fair market value and the average price of the shares sold under the ESPP is charged to operations as a compensation expense and is taxed to the employee as income. The Company had stock based compensation expense of approximately $28,000 and $19,000 relating to the ESPP which was included in the Company’s condensed consolidated statements of operations for the three months ended June 30, 2007 and 2006, respectively.

16

LASERCARD CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

(24) Comprehensive Income (Loss). Under SFAS No. 130, “Reporting Comprehensive Income,” comprehensive income (loss) is defined as the changes in equity of an enterprise except for those resulting from stockholders’ transactions. For the three months ended June 30, 2007 and 2006, comprehensive income (loss) is as follows (in thousands):

	Three Months Ended
	June 30,
	2007			2006
Net income (loss)	$	(2,359	)	$	212
Net change in cumulative foreign
currency transaltion adjustments		6			71
Comprehensive income (loss)	$	(2,353	)	$	283

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

3.Net Income (Loss) per Share

Basic net income (loss) per share and diluted net loss per share are computed by dividing net income (loss) by the weighted average number of shares of common stock outstanding during the three months ended June 30, 2007. Diluted net income per share is computed by dividing net income by the weighted average number of shares of common stock and common stock equivalents outstanding during the three months ended June 30, 2007. Common stock equivalents consist of stock options and warrants using the treasury stock method.

17

LASERCARD CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

The reconciliation of the denominators of the basic and diluted net income (loss) per share computation for the three months ended June 30, 2007 and 2006 is shown in the following table (in thousands, except per share data):

	Three Months Ended
	June 30,
	2007			2006
Net income (loss)	$	(2,359	)	$	212
Basic net income (loss) per share:
Weighted average common shares outstanding		11,866			11,768
Basic net income (loss) per share	$	(0.20	)	$	0.02
Diluted net income (loss) per share:
Weighted average common shares outstanding		11,866			11,768
Weighted average common shares from stock option grants		—			512
Weighted average common shares and common stock
equivalents outstanding		11,866			12,280
Diluted net income (loss) per share	$	(0.20	)	$	0.02

Stock options and warrants having an exercise price greater than the average market value for profitable periods are excluded from the calculation of diluted net income per share, as their effect would be antidilutive. Therefore, stock options to purchase 188,000 shares and warrants to purchase 174,057 shares were excluded from the calculation of diluted net income per share for the three months ended June 30, 2006. As the effect of common stock equivalents would be antidilutive since the Company incurred a loss in the three months ended June 30, 2007, all stock options and warrants were excluded from the calculation of diluted net loss per share for that period.

18

LASERCARD CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

4.Segments

Segment Reporting.

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

The accounting policies used to derive reportable segment results are the same as those described in the "Summary of Significant Accounting Policies." Resources are allocated to the optical memory card and optical card drive segments in a manner that optimizes optical memory card revenues and to the specialty card and printers segment in a manner that optimizes consolidated income as determined by the chief operating decision maker. Segment revenues are comprised of sales to external customers. Segment gross profit (loss) includes all segment revenues less the related cost of sales. Accounts receivable, cash, deferred income taxes, prepaid expenses, fixed assets and inventory are not separately reported by segment to the chief operating decision maker. Therefore, the amount of assets by segment is not meaningful. There are no inter-segment sales or transfers. All of the Company’s long-lived assets are attributable to the United States except for $3.5 million at June 30, 2007 and $3.7 million at March 31, 2007 that are located in Germany.

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

19

LASERCARD CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

The table below presents information for optical memory cards, optical card drives and specialty cards and card printers and a reconciliation of segment results to amounts included in the Company’s condensed consolidated financial statements for the three months ended June 30, 2007 and 2006 (in thousands):

	T h r e e  M o n t h s  E n d e d  J u n e  3 0 ,  2 0 0 7
	Optical		Optical			Specialty
	Memory		Card			Cards &		Segment
	Cards		Drives			Printers		Total		Other (a)		Total
Revenue	$	4,562	$	355		$	2,938	$	7,855	$	-	$	7,855
Cost of sales		3,522		438			2,234		6,194		-		6,194
Gross profit (loss)		1,040		(83	)		704		1,661		-		1,661
Depreciation and
amortization expense		454		46			77		577		154		731
	T h r e e  M o n t h s  E n d e d  J u n e  3 0 ,  2 0 0 6
		Optical		Optical			Specialty
		Memory		Card			Cards &		Segment
		Cards		Drives			Printers		Total		Other		Total
Revenue	$	7,495	$	184		$	2,875	$	10,554	$	-	$	10,554
Cost of sales		3,851		362			2,176		6,389		-		6,389
Gross profit (loss)		3,644		(178	)		699		4,165		-		4,165
Depreciation and
amortization expense		394		44			81		519		118		637

(a) Other depreciation and amortization expense represents amounts charged to selling, general and administrative expense and research and development expense.

20

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of the Company's financial condition, results of operations and critical accounting policies should be read in conjunction with the condensed consolidated financial statements and related notes included elsewhere in this Form 10-Q Report and the consolidated financial statements and notes thereto for the year ended March 31, 2007, included in the Company's fiscal 2007 Annual Report on Form 10-K.

FORWARD-LOOKING STATEMENTS

All statements contained in this report that are not historical facts are forward-looking statements.  The forward-looking statements in this report are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995.  They are not historical facts or guarantees of future performance or events. Rather, they are based on current expectations, estimates, beliefs, assumptions, and goals and objectives and are subject to uncertainties that are difficult to predict.  As a result, our actual results may differ materially from the statements made.  Often such statements can be identified by their use of words such as “may,” “will,” “intends,” “plans,” “believes,” “anticipates,” “visualizes,” “expects,” and “estimates.”  Forward-looking statements made in this report include statements as to our beliefs as to current and potential market segments, customers, and applications for and deployment of our  products; the advantages of, potential income from, and duties to be performed under the sale of a second-source card manufacturing license to Prevent Global (Prevent);  our intent to retain the Prevent equipment until Prevent is ready to receive the equipment; future scheduled payments and contingent royalties under the Prevent contract, Prevents’ planned production capacity, and that we will sell equipment to Prevent and provide Prevent with installation support; production quantities, delivery rates and expected delivery schedule, backlog, and revenue recognition for our products for U.S. or foreign government ID card programs, potential annual revenues being $40 to $50 million at full implementation from the Italy programs with expected revenues unable to be determined until the prime contractor issues follow-on orders; our expectation for no future growth from the U.S. Green Card and Laser Visa BCC program, with steady state revenue to average $10 million if the option years are elected; plans to increase card production capacity for anticipated increases in orders including possibly $8 million in capital equipment and leasehold improvements during the next twelve to eighteen months; and expecting growth of less than 10% in the specialty card and printer segment and expecting negative gross profit from the optical card drive market; our intent to update our SFAS No. 123(R), “Shared-Based Payments,” assumptions at least annually; that the prime contractor for a Middle Eastern country will accept future shipments of cards and supplies or the customer will exercise the optional orders over a four-year period of up-to another approximately $37 million in cards under the amended contract; our intent to find another photographic film supplier should Kodak cease supplying such film and to take advantage of any last-buy opportunity which Kodak may choose to provide; our intent to pursue patent infringers by litigation, arbitration, or negotiation; the need for, expected success of, and potential benefits from our research and development efforts, including our attempts to develop other forms of optical recording media for use in optical memory cards and the potential benefits derived there from; expectations regarding revenues (overall and by segment and by customer), margins, profit (including likely losses in the future if full implementation of the Italian program is further delayed), and our deferred income tax asset and related valuation allowance; that we do not expect any material change in our unrecognized tax benefits over the next twelve months; our expectations that examination of open tax years by the appropriate governmental agencies due to the tax loss carryovers from those years will pose no material change in our tax position; our belief that our current five major programs, plus maybe one or two others, will be the basis for a majority of our revenues in the near term; estimates of optical card production capacity, our ability to expand production capacity, and our plans and expectations regarding the growth and associated capital costs of such capacity; estimates that revenues and advance payments will be sufficient to generate cash from operating activities over the next twelve months and fund our actual capital expenditures despite expected quarterly fluctuations; expectations regarding market growth, product demand, and the continuation of current programs; and our long-term revenue growth objectives, and drive pricing strategy.

21

These forward-looking statements are based upon our assumptions about and assessment of the future, which may or may not prove true, and involve a number of risks and uncertainties including, but not limited to, whether there is a market for cards for homeland security in the U.S. and abroad, and if so whether such market will utilize optical memory cards as opposed to other technology; customer concentration and reliance on continued U.S. and Italian government business; risks associated with doing business in and with foreign countries; whether we will be successful in assisting Prevent with factory startup and training; whether Prevent will have the financial resources to make the balance of its required payments to us and to operate the facility; whether the facility will efficiently produce high quality optical memory cards in volume and that meet our standards; lengthy sales cycles and changes in and dependence on government policy-making; reliance on value-added resellers and system integrators to generate sales, perform customer system integration, develop application software, integrate optical card systems with other technologies, test products, and work with governments to implement card programs; risks and difficulties associated with development, manufacture, and deployment of optical cards, drives, and systems; our ability or our customers’ ability to initiate and develop new programs utilizing our card products; risks and difficulties associated with development, manufacture, and deployment of optical cards, drives, and systems; potential manufacturing difficulties and complications associated with increasing manufacturing capacity of cards and drives, implementing new manufacturing processes, and outsourcing manufacturing; our ability to produce and sell read/write drives in volume; the unpredictability of customer demand for products and customer issuance and release of corresponding orders; government rights to withhold order releases, reduce the quantities released, and extend shipment dates; the impact of technological advances, general economic trends, and competitive products; the impact of changes in the design of the cards; and the possibility that optical memory cards will not be purchased for the full implementation of card programs in Italy, a Middle Eastern country and India, or for Department of Homeland Security (DHS) programs in the U.S., or will not be selected for other government programs in the U.S. and abroad; whether we will be successful in developing alternative optical recording media; and the risks set forth in the section entitled “Risks” and elsewhere in this report; and other risks detailed from time to time in our SEC filings. These forward-looking statements speak only as to the date of this report, and, except as required by law, we undertake no obligation to publicly release updates or revisions to these statements whether as a result of new information, future events, or otherwise.

CRITICAL ACCOUNTING POLICIES

Except for the adoption of the Financial Accounting Standards Board (“FASB”) issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109” (“FIN 48”) as described in Note 1 of the Notes to Condensed Consolidated Financial Statements our critical accounting policies in our Annual Report on Form 10-K for the fiscal year ended March 31, 2007 have not changed materially.

RESULTS OF OPERATIONS

Overview

We are headquartered in Mountain View, California where we manufacture LaserCard® optical memory cards and card related products, including chip-ready Optical/Smart™ cards. In addition, we operate a wholly owned German subsidiary, Challenge Card Design Plastikkarten GmbH (“CCD”), with offices in Rastede and Ratingen, Germany, which manufactures advanced-technology cards, can provide manufacturing capacity for certain steps of optical memory card production, and markets cards, system solutions, and thermal card printers. We completed the merger of Cards & More GmbH into Challenge Card Design Plastikkarten GmbH in January 2006.

We sell our products and services through partners such as value added resellers (VARs) and card distribution licensees, who generally have knowledge in specific markets, for the development of markets and applications for LaserCard products. We have sales staff located in California, New York, the Washington D.C. area, and Germany, whose principal role is developing and supporting the reseller channel. Revenue consists primarily of optical memory cards, optical card read/write drives including systems and enabling services, specialty cards, and card printers. Our VARs/licensees provide country-specific or market-specific services necessary for contract negotiation and also may add application software, personal computers, and other peripherals, and then resell these products as integrated solutions. We are continuing our efforts to recruit new VARs and eliminate nonproductive VARs.

Major near term growth potential for LaserCard® optical memory cards is in government-sponsored identification programs in several countries. Since governmental card programs typically rely on policy-making, which in turn is subject to technical requirements, budget approvals, and political considerations, there is no assurance that these programs will be implemented as expected or that they will include optical cards. Our objectives for long-term revenue growth include: (1) broadening the Optical Memory (OM) product range to address lower-end applications characterized by higher price sensitivity, (2) diversifying OM products into, and effectively penetrating, industrial and commercial markets, (3) expanding our hardware product offering to address new markets and add value to current offerings, and (4) increasing OM product revenues with customized application software and enabling services.

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The table below presents condensed consolidated revenues, excluding inter-company transactions, recorded by our U.S. and German operations (in thousands):

	Three Months Ended
	June 30,
	2007		2006
U.S. operations	$	4,917	$	7,679
German operations		2,938		2,875
	$	7,855	$	10,554

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

Historically, the largest purchaser of LaserCard products has been a U.S. Government contractor, General Dynamics Information Technology (GDIT), previously Anteon International Corporation. GDIT is the government contractor for LaserCard product sales to the U.S. Department of Homeland Security (DHS), U.S. Department of State (DOS), U.S. Department of Defense (DOD), and the government of Canada. Under government contracts with GDIT, the DHS purchases Green Cards and DOS Laser Visa Border Crossing Cards; the DOD purchases Automated Manifest System cards; and the Canadian government purchases Permanent Resident Cards. Encompassing all of these programs, our product sales to GDIT represented 38% and 27% of the total revenues during the three months ended June 30, 2007 and 2006, respectively. Another unaffiliated company, Laser Memory Card S.p.A., of Italy, accounted for 20% of our total revenues during the three months ended June 30, 2006 mainly for secure government ID card programs in Italy. The revenue for this customer during the three months ended June 30, 2007 was immaterial. A third company, Prevent LOK, accounted for 20% of the total revenue during the three months ended June 30, 2006 for sports logbook cards in Slovenia. A fourth company, Omar K. Alesayi Communications & Space Services Co., Ltd. (ACSS), accounted for 14% of total revenue during the three months ended June 30, 2007 for a national ID card program in a Middle Eastern country.

Our major government programs are shown below as a percentage of total revenues:

	Three Months Ended
	June 30,
	2007		2006
U.S. Green Cards & Laser Visas		35%		22%
National ID Cards in a Middle Eastern Country		14%		―
Vehicle Registration in India		8%		4%
Canadian Permanent Resident Cards		2%		4%
Italian Carta d'Identita Elettonica (CIE) Cards		<1%		1%
Italian Permesso di Soggiorno Elettronico (PSE) Cards
and Carta di Soggiorno Elettronico (CSE) Cards		―		20%

The CIE program has been largely stalled since January 2006 following a change of government and the instigation of a review designed to reduce cost and improve efficiency of the program. In March 2007, we believe a major hurdle to the reactivation of the CIE program was removed when a government decree was published establishing the fee each citizen will pay when issued a card. This cleared the way to resume CIE issuance from the government’s substantial card inventory and to implement the national ID card issuance infrastructure. If and as this occurs, and assuming the national ID card system functions as designed, CIE and PSE card orders could ramp toward their full implementation level which could potentially result in annual revenues of $40 to $50 million. We received and shipped a small order for foreign language versions of the CIE card during the three months ended June 30, 2007. The issuance system for PSE cards is in place and operating and the government is in possession of a substantial card inventory. There was no backlog for these programs at June 30, 2007. We believe that for the fiscal year ending March 31, 2008, follow-on orders for both programs will be received and significant card revenue will be realized although it remains unclear when the prime contractor will issue follow-on orders.

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U.S. Laser Visa Border Crossing Cards (BCCs) and Green Cards for the U.S. Department of Homeland Security (DHS) are an important part of our revenue base. For these programs, we recorded card revenues of $2.7 million and $2.3 million for the three months ended June 30, 2007 and 2006, respectively. We received a five-year follow-on U.S. government subcontract in March 2007 with an initial one-year term and four one-year extension options. Backlog at June 30, 2007, for these programs, which is deliverable through September 2007, totaled $2.1 million. We expect to receive follow-on purchase orders throughout the life of the subcontract although no assurance can be given.

Under a subcontract for Canada’s Permanent Resident Cards, we recorded revenue of $0.2 million and $0.4 million for the three months ended June 30, 2007 and 2006, respectively. The backlog at June 30, 2007, was $0.5 million and will most likely be delivered in the three months ending September 30, 2007. The delivery quantity is subject to fluctuation at customer request depending on varying Permanent Resident approval rates.

During the three months ended June 30, 2007, we recognized revenue under a subcontract for the supply of secure national ID cards to a Middle Eastern government of approximately $0.9 million in addition to the $4 million recognized in fiscal year 2007. This followed earlier deliveries of cards and card encoders under previous contracts and purchase orders.  The cards are being issued to adult citizens for national identity purposes and feature the latest advancements in identity fraud protection provided by Optical IDLock™, a combination of the highly-secure LaserCard® optical memory technology and Embedded HologramHD™, the new high-definition “photographic quality” etched image security feature.

At June 30, 2007, there was $4.4 million of backlog under this subcontract agreement. The subcontract continues to allow for optional orders at customer request over a four-year period, valued at up to another approximately $37 million in cards based on the new agreed upon price per card under the amendment. See Notes 2, Item 19 of the notes to condensed consolidated financial statements for a full discussion of the subcontract.

Effective April 3, 2004, we sold a second-source card-manufacturing license, including equipment, training, and support, to Global Investments Group (GIG), based in Auckland, New Zealand, for card manufacturing in Slovenia and began receiving associated cash payments. Recently, and with our approval, GIG transferred the license to Prevent Global of Slovenia (Prevent). We will begin to recognize revenue on this arrangement over the remaining term of the agreement starting when the equipment has been accepted and the training has been completed, which date is in turn dependent on Prevent establishing a suitable facility in Slovenia. Refer to Notes 2, Item 19 of the notes to condensed consolidated financial statements for a full disclosure of the Prevent agreement.

During the third quarter of fiscal year 2007, we implemented and activated a new ERP system designed to provide additional operational and financial reporting functionality in the US operations.  Thorough selection, planning, testing, and implementation processes were instituted to ensure that internal control over financial reporting was in place. We followed Statement of Position (SOP) 98-1, “Accounting for the Costs of Computer Software Developed or Obtained for InternalUse,” and EITF Issue No. 97-13, "Accounting for Costs Incurred in Connection with a Consulting Contract or an Internal Project That Combines Business Process Reengineering and Information Technology Transformation," to address the accounting for this internal-use computer software. These pronouncements provide guidance for determining which costs should be accounted for as internal-use software and require that certain costs incurred during design and installation of internal-use software be capitalized, costs incurred in the preliminary project stage and system maintenance costs be expensed as incurred, and costs incurred in conjunction with business process re-engineering activities (which are distinguished from software development costs) be expensed as incurred. We capitalized about $474,000 of software costs as of March 31, 2007 related to the ERP initiative and charged approximately $211,000 inclusive of labor in selling, general and administrative expenses during fiscal year 2007. There were no material software costs incurred during the first three months ended June 30, 2007.

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Lastly, we may invest up to $8 million in additional capital equipment and leasehold improvement expenditures at our facilities when orders and forecasts justify the investment. These expenditures could occur throughout the next twelve to eighteen months, as more fully discussed under “Management’s Discussion and Analysis--Liquidity and Capital Resources,” of the Form 10-K for the fiscal year ended March 31, 2007.

Revenues

Product Revenues. Our total revenues consisted of sales in our three segments of (1) optical memory cards, (2) optical card drives, drive accessories, maintenance, systems and enabling services, and (3) specialty cards and card printers, as well as in other miscellaneous items. Product revenues were $7.9 million for the three months ended June 30, 2007 versus $10.6 million for the three months ended June 30, 2006.

The following table presents our product revenue by segment (in thousands, except for percentages):

	Three Months Ended
	June 30,
	2007			2006
Optical memory cards	$	4,562		$	7,495
% of total revenues		58	%		71	%
Optical cards drives		355			184
% of total revenues		5	%		2	%
Specialty cards and card printers		2,938			2,875
% of total revenues		37	%		27	%
Total revenues	$	7,855		$	10,554

The following table presents our optical memory card revenue by major program (in thousands):

	Three Months Ended
	June 30,
	2007		2006
U.S. Green Cards & Laser Visas	$	2,730	$	2,343
Italian National ID Card Programs		29		2,131
Canadian Permanent Resident Cards		182		418
National ID Cards in a Middle Eastern Country		865		-
Vehicle Registration in India		599		388
All other programs		157		2,215
Total optical memory card revenues	$	4,562	$	7,495

Optical memory card revenue decreased for the first quarter of fiscal year 2008 as compared with first quarter of fiscal year 2007 due mainly to the decrease in card unit volume for the Italian CIE program and a sport membership card program included in “All other programs” above.

Revenue in the optical card drive segment, including systems and enabling services, grew about $0.2 million in the first quarter of fiscal year 2008 as compared with first quarter of fiscal year 2007 due mainly to activity in the national ID card program for a Middle Eastern government. We do not anticipate that we will derive significant profits in the near term on drive sales as prices are set near the manufacturing cost in order to promote optical memory card sales.

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Specialty cards and printers revenue was approximately $2.9 million for the first quarter of both fiscal year 2008 and fiscal year 2007. We anticipate growth of less than 10% in this segment through the remainder of fiscal year 2008.

License Fees and Other Revenues. There were no license revenues during the first quarter of either fiscal year 2008 and fiscal year 2007. We entered into license and optical memory card equipment purchase and support agreements, effective April 3, 2004, with GIG, for optical memory card manufacturing in Slovenia.  GIG transferred the license and other agreements, with our approval, to Prevent in March 2007. Refer to Notes 2, Item 19 of the notes to condensed consolidated financial statements for a full disclosure of the Prevent agreement.

Backlog

As of June 30, 2007, the backlog for LaserCard® optical memory cards totaled $7 million scheduled for delivery in fiscal year 2008, compared with $5.7 million at March 31, 2007. We have only a few customers who generally place orders for a period of several months to a year or more so that variations in order placement from a single customer can materially affect backlog.  As a result, the relative size of our backlog has not been a reliable indicator of future sales revenue trends.

In addition, the backlog as of June 30, 2007, for specialty cards and printers totaled 0.8 million euros (approximately $1.0 million) compared with 0.6 million euros (approximately $0.8 million) at March 31, 2007 and for a contract to develop a conventional non-optical card production facility totaled 0.7 million euros (approximately $0.9 million) at both June 30, 2007 and March 31, 2007.

We have backlog of $0.4 million for read/write drives at June 30, 2007. We had no significant backlog for read/write drives at March 31, 2007.

Gross Margin

The following table represents our gross margin in absolute amount and as a percentage of revenue by segment (in thousands, except for percentages):

	Three Months Ended
	June 30,
	2007			2006
Optical memory cards	$	1,040		$	3,644
% of optical memory card revenues		23	%		49	%
Optical cards drives		(83	)		(178	)
% of optical card drive revenues		NM			NM
Specialty cards and card printers		704			699
% of specialty cards and card printers revenues		24	%		24	%
Total gross margin	$	1,661		$	4,165
% of product revenue		21	%		39	%

Optical Memory Cards. Optical memory card gross margin can vary significantly based upon changes in average selling price, production and sales volumes, mix of card types, production efficiency and yields, and changes in fixed costs. Unit volume greatly affects gross margin due to the absorption of fixed manufacturing costs. The decrease in optical memory card gross margin to 23% of revenue for the three months ended June 30, 2007, as compared with 49% of revenue for the three months ended June 30 2006, is mainly due to the 37% decrease in production and sales unit volume and the resultant loss of efficiencies and economies of scale.

Optical Card Drives. Read/write drive gross profits have been negative over the past three years, inclusive of fixed overhead costs, due to low sales volume and our policy to price drives close to manufacturing cost to promote card sales. This segment also includes enabling services, also with lower margins than optical memory cards. We anticipate that read/write drive negative gross margins will continue in the future unless sales volume is sufficient to cover fixed costs.

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Specialty Cards and Card Printers. The gross margin on specialty cards and card printers was 24% in the three months ended June 30, 2007 and 2006. Over the past three years, the quarterly gross margins have generally been in the low to mid 20% range.

Operating Expenses

The following table presents operating expenses for the three months ended June 30, 2007 and 2006 (in thousands, except for percentage):

	Three Months Ended
	June 30,
	2007			2006
Selling, general and administrative expenses	$	3,489		$	3,420
Percent of change from prior year		2	%
Research and development expenses	$	788		$	745
Percent of change from prior year		6	%

Selling, General, and Administrative Expenses (SG&A). Increase in SG&A expenses was immaterial during the three months ended June 30, 2007, as compared with the three months ended June 30, 2006. However, we believe that SG&A expenses for fiscal year 2008 will be higher than fiscal year 2007 levels, mainly due to expected increases in marketing and selling expenses as well as due to a budgeted bonus in fiscal year 2008 to executives and employees compared to no bonus to executives in fiscal year 2007.

Research and Development Expenses (R&D). R&D expenses increased by $43,000, or 6%, during the three months ended June 30, 2007 as compared with the three months ended June 30, 2006. We are continuing our efforts to develop new optical memory card features and structures, including various composite card structures to allow the insertion of contactless chips with radio frequency (RF) capability, dual-interface (contact-contactless) with optical memory, OVD (optically variable device) products, and other market-driven requirements. We are also performing optical media development to allow new form factors for more flexibility in card layouts and integrated security features; enhanced optical memory card read/write drives for both increased reliability and ease of use and integration, and new versions of read-only drives (readers) to meet various operational requirements such as office desktop units or handheld field units with integrated displays, biometrics, and RFID capability; along with new software products in an effort to provide new products that can stimulate optical memory card sales growth. For example, we recently have developed a new Green Card Authenticator application based on the LaserCard® reader that is currently being evaluated in the market, which allows employers to quickly validate potential employees’ Green Cards in real time during the hiring process. Additionally, after a year of in-house evaluation of our OpticalProximity system for building access control, we have completed installation at our first customer location, as a test and evaluation site. In our German subsidiary, we recently completed the development of a new integrated card personalization system and have shipped several systems to customers in the past year. We anticipate that these ongoing research and development efforts should result in enhanced card features and capabilities, new versions of read-only drives, and drives with advanced security features and/or lower manufacturing costs; however, there is no assurance that such product development efforts will be successful. These features are important for our existing and future optical memory card markets.

Other Income, Net. Total net other income for the three months ended June 30, 2007 was $241,000, consisting of $239,000 of interest income and $17,000 of miscellaneous other income, partially offset by interest and other expenses of $15,000. Total net other income for the first three months ended June 30, 2006 was $206,000 including $252,000 of interest and other income, partially offset by interest expense of $46,000.

Income Taxes. We recorded an income tax benefit of approximately $16,000 for the three months ended June 30, 2007, due to our foreign subsidiary’s loss that is expected to be refunded in its jurisdiction. For the three months ended June 30, 2006, we recorded an income tax benefit, net of $6,000 consisting of a tax benefit in the amount of $52,000 primarily due to our foreign subsidiary’s loss that is expected to be refunded in its jurisdiction, and a U.S. income tax expense of $46,000.

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LIQUIDITY AND CAPITAL RESOURCES

The following table summarizes cash, cash equivalents and investments as of June 30, 2007 and March 31, 2007 (in thousands):

	June 30,		March 31,
	2007		2007
Cash and cash equivalents	$	1,991	$	3,026
Cash, cash equivalents and short-term investments	$	17,591	$	20,526

The following table displays the sources and uses of cash by activity (in thousands):

	Three Months Ended
	June 30,
	2007			2006
Net cash provided by (used in) operating activities	$	(2,735	)	$	340
Net cash provided by investing activities	$	1,628		$	532
Net cash provided by financing activities	$	106		$	751

Cash used in operations of $2.7 million during the three months ended June 30, 2007 consisted of $1.1 million used due to the net loss, net of non-cash items, a $1.0 million decrease in accounts payable and accrued liabilities, a decrease of $0.5 million in advance payments from customers, and $0.1 million due to changes in other working capital items. Cash provided by operations of $0.3 million during the three months ended June 30, 2006 consisted of $1.5 million provided by the net income, net of non-cash items, a $2.5 million decrease in accounts payable and accrued liabilities, a $0.4 million increase in advance payments from customers, and $0.9 million increase in other working capital items.

Net cash provided by investing activities of $1.6 million during the three months ended June 30, 2007, was due to $1.9 million from net proceeds of maturity of investments, partially offset by capital and patent expenditures of approximately $0.3 million. Net cash provided by investing activities of $0.5 million during the three months ended June 30, 2006, consisted of a net provided from investments of $1.6 million less capital equipment expenditures of $1 million.

Net cash provided by financing activities during the three months ended June 30, 2007 was $0.1 million, which primarily consisted of net proceeds from the sale of common stock under our employee stock plans. Net cash provided by financing activities during the three months ended June 30, 2006 was $0.8 million, which primarily consisted of net proceeds from the sale of common stock under our employee stock plans.

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

We have not established a line of credit. We may negotiate a line of credit, although no assurance can be made that such financing would be available on favorable terms or at all, if needed.

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As a result of our net loss for the three months ended June 30, 2007, our accumulated deficit increased from $38.7 million to $41.0 million. Upon adoption of FIN No. 48, the Company recognized a cumulative effect adjustment of $61,000, decreasing its income tax liability for unrecognized tax benefits, and decreasing the March 31, 2007 accumulated deficit balance. Stockholders’ equity decreased to $20.9 million from $22.6 million as a result of the net loss partially offset by the the cumulative effect upon adoption of FIN 48 and issuance of common stock under our employee stock plans.

We consider all highly liquid investments, consisting primarily of commercial paper, discount notes, and U.S. government bonds, with original or remaining maturities of three months or less at the date of purchase, to be cash equivalents. All investments with original or remaining maturities of more than three months but not more than one year at the date of purchase are classified as short-term. Investments with original or remaining maturities of more than one year at the date of purchase are classified as long-term. We determine the length of our investments after considering our cash requirements and yields available for the type of investment considered by our Company. We determine the appropriate classification of debt and equity securities at the time of purchase and reevaluate the classification of investments as of each balance sheet date. As of June 30, 2007, we had $15.6 million classified as short-term investments and had no long-term investments, compared with $17.5 million classified as short-term investments and no long-term investments at March 31, 2007. All auction rate securities are accounted for as available-for-sale and all other interest-bearing securities are accounted for as held-to-maturity.

We made capital equipment and leasehold improvement purchases of approximately $0.2 million during thre three months ended June 30, 2007 compared with approximately $1.0 million during the three months ended June 30, 2006. We have an annual production capacity of 10 million roll-process cards in conjunction with approximately 9 million sheet-process cards depending upon the optimum mix of features. We plan to purchase additional production equipment in a series of steps when we deem appropriate based in part upon orders and forecasts. We may use cash on hand and cash generated from operations or debt financing to fund possible capital expenditures of possibly $8 million for equipment and leasehold improvements for card production, read/write drive tooling and assembly, and general support items as customer orders justify the investment. These expenditures could occur throughout the next twelve to eighteen months.

There were no debt financing activities for the three months ended June 30, 2007 and 2006.

OFF-BALANCE SHEET ARRANGEMENTS

We have no off-balance sheet arrangement as of June 30, 2007 and March 31, 2007, that has or is reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures, or capital resources that is material to investors.

RECENT ACCOUNTING PRONOUNCEMENTS

Recent accounting pronouncements are disclosed in Note 1 of the notes to condensed consolidated financial statements.

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ITEM 3.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS

Interest Rate Risk. We invest our cash, beyond that needed for daily operations, in high quality debt securities. In doing so, we seek primarily to preserve the value and liquidity of our capital and, secondarily, to safely earn income from these investments. To accomplish these goals, we invest only in debt securities issued by (a) the U.S. Treasury and U.S. government agencies, state agencies and corporations and (b) debt instruments that meet the following criteria:

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

o Can readily be sold for cash

Investments in both fixed rate and floating rate interest earning instruments carry a degree of interest rate risk. Fixed rate securities may have their fair market value adversely impacted because of a rise in interest rates, while floating rate securities may produce less income than expected if interest rates fall. Due in part to these factors, our future investment income may fall short of expectations because of changes in interest rates or we may suffer losses in principal if forced to sell securities that have seen a decline in market value because of changes in interest rates.

There were no material changes during the first quarter of fiscal year 2008 in our exposure to market risk for changes in interest rates.

The following summarizes short-term investments at fair value, weighted average yields and expected maturity dates (in thousands):

	June 30, 2007
Auction rate securities	$	15,600
Weighted average yield		5.32	%
Total investments	$	15,600

There were no long-term investments as of June 30, 2007.

Foreign Currency Exchange Rate Risk.  Our U.S. operations sell products in various international markets.  During the three months ended June 30, 2007, revenue by our German subsidiary of approximately $3.0 million was denominated in foreign currency.  In addition, some raw material purchases and purchased services are denominated in foreign currency. Cash provided by/used in CCD operating activities has been immaterial.

We use short-term foreign exchange forward contracts to mitigate foreign currency risk associated primarily with inter-company receivables and payables, and loans receivable (denominated in Euros) to our German subsidiary.  Our foreign exchange forward contracts are not designated for accounting purposes as hedging instruments under SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended.  Accordingly, any gains or losses resulting from changes in the fair value of the forward contract are reported in other income, net of expenses.  The gains and losses on these forward contracts generally offset gains and losses associated with the underlying foreign currency denominated inter-company receivables and payables, and loans receivable.  At June 30, 2007, we had a foreign exchange forward contract with a maturity of less than 30 days to purchase 2.3 million euros. The fair value of the forward contract was not material at June 30, 2007.

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ITEM 4.CONTROLS AND PROCEDURES

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

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

(b)      Changes in Internal Control over Financial Reporting. There were no significant changes in our internal control over financial reporting that occurred during the three months ended June 30, 2007that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II.  OTHER INFORMATION

Item 1. - Legal Proceedings

From time to time we are a party to litigation matters and pending or threatened claims and assessments that are normal in the course of our operations. While we believe that the ultimate outcome of these matters will not have a material adverse effect on our financial position, results of operations or cash flows, the outcome of these matters is not determinable and negative outcomes may adversely affect our financial position, liquidity, or results of operations.

Item 1A. - Risk Factors

A revised description of the risk factors associated with our business is set forth below. This description includes any material changes to and supersedes the description of the risk factors associated with our business previously disclosed in Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year ended March 31, 2007, and in Part II, Item 1A of our Quarterly Report on Form 10-Q for the fiscal quarter ended December 30, 2006. Because of these risk factors, as well as other factors affecting the Company’s business and operating results and financial condition, including those set forth elsewhere in this report, our actual future results could differ materially from the results contemplated by the forward-looking statements contained in this report and our past financial performance should not be considered to be a reliable indicator of future performance, so that investors should not use historical trends to anticipate results or trends in future periods.

RISK FACTORS

OUR CURRENT AND FUTURE EXPECTED REVENUES ARE DERIVED FROM A SMALL NUMBER OF ULTIMATE CUSTOMERS SO THAT THE LOSS OF OR REDUCTIONS IN PURCHASES BY ANY ONE ULTIMATE CUSTOMER COULD MATERIALLY REDUCE OUR REVENUES AND LEAD TO LOSSES. During our three months ended June 30, 2007 and each of the previous three fiscal years, we derived more than 60% of our optical memory card and drive-related revenues from five programs ― two U.S. government programs and three foreign government programs. Due to the lengthy sales cycles, we believe that these programs, with perhaps the addition of one or two other foreign programs, will be the basis for a majority of our revenues in the near-term. The loss of or reductions in purchases by any one customer due to program cutbacks, competition, or other reasons would materially reduce our revenue base. Annual or quarterly losses occur when there are material reductions, gaps or delays in card orders from our largest U.S. or foreign government programs or if such programs were to be reduced in scope, delayed, canceled, or not extended and not replaced by other card orders or other sources of income.

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WE INCURRED NET LOSSES DURING FOURTEEN OF THE PREVIOUS SEVENTEEN QUARTERS AND MAY NOT BE ABLE TO GENERATE SUFFICIENT REVENUE IN THE FUTURE TO REGAIN PROFITABILITY. Although we generated $3.3 million of profit during the three quarters from October 1, 2005, through June 30, 2006, we incurred a loss for our last four quarters and we had incurred losses as well for the ten quarters preceding the quarter ended October 1, 2005. Our loss for the quarter ended June 30, 2007, was $2.4 million and for our fiscal year 2007 our loss was $12.4 million, and we had an accumulated deficit of $41 million at June 30, 2007. There can be no assurance that we will generate enough revenues in the near term to achieve profitability. We are relying upon our optical memory card technology to generate future product revenues, earnings, and cash flows. If alternative technologies emerge or if we are otherwise unable to compete, we may not be able to achieve or sustain profitability on a quarterly or annual basis. Annual or quarterly losses would also continue if increases in product revenues or license revenues do not keep pace with increased selling, general, administrative, research and development expenses and the depreciation and amortization expenses associated with capital expenditures.

OUR PROGRAM WITH ITALY, WHICH WE BELIEVE WILL BE OUR LARGEST CUSTOMER FOR THE NEXT FEW YEARS, MAY BE DELAYED OR CANCELLED FOR REASONS OUTSIDE OUR CONTROL WHICH WOULD CAUSE US TO HAVE LESS REVENUE THAN PLANNED AND WOULD LIKELY LEAD US TO CONTINUED OPERATING LOSSES. We believe that the Italian government will be our largest customer for the next few years for the CIE and PSE card programs which may comprise a significant portion of future revenues. Sales of cards and drives for the Italian governments’ CIE and PSE card programs were minimal in the three months ended June 30, 2007, but represented 21% of total revenue for the three months ended June 30, 2006. During fiscal year 2007, we increased card manufacturing capacity to meet the anticipated demand and we have expected a large order since the first quarter of fiscal year 2007. However, this order has not yet been placed and there can be no assurance that the order will be placed in the near-term or that demand will increase or be sustained as we anticipate. We would most likely incur losses if orders are further delayed, or if full implementation is canceled, not extended, or if the program is not implemented at the level foreseen or if the government was to change its technology decision and no longer use optical memory cards. While selected Italian cities have issued cards and tested the distributed card issuing process, full implementation is dependent upon regionalized and further decentralized card issuance infrastructure developments being successfully undertaken and the national ID card system functioning as designed, of which there can be no assurance. Also, if Laser Memory Card SpA of Italy, our VAR customer for this program, were to discontinue participation in this program or discontinue operations, interruptions could occur in orders or shipments for this program until a replacement could be found. Overcoming some of these issues may be difficult and complex and involve third parties, which could be time consuming and expensive and lead to further delays for implementation.

THE U.S. GOVERNMENT, ONE OF OUR TWO LARGEST ULTIMATE CUSTOMERS, HAS THE RIGHT TO DELAY ITS ORDERS OR COULD CHANGE ITS TECHNOLOGY DECISIONS, WHICH WOULD RESULT IN ORDER DELAYS AND POSSIBLY IN OPERATING LOSSES. During the three months ended June 30, 2007 revenues included sales of approximately $2.7 million of Green Cards and Laser Visa BCCs, and comprised 35% of our total revenue. Our fiscal year 2007 revenues included sales of approximately $7.4 million of Green Cards and Laser Visa BCCs, and comprised 23% of our total revenue. We expect these revenues to continue at approximately $10 million annually ($8 million for Green Cards and $2 million for Laser Visa BCCs) if the U.S. government continues to use our cards in these programs, continues to personalize cards at that rate and continues to maintain an inventory level equal to six-months of usage. On April 2, 2007, we announced a subcontract with General Dynamics Information Technology (GDIT) for the manufacture and supply of Green Cards and Laser Visas. The subcontract is for an initial 12-month period with optional extensions up to a total of five years. The first purchase order received under the subcontract calls for delivery of $5.9 million in Green Cards and Laser Visas over the period from March through September 2007. Under U.S. government procurement regulations, even with a contract in place, the government reserves certain rights, such as the right to withhold releases, to reduce the quantities released, extend delivery dates, reduce the rate at which cards are issued, and cancel all or part of its unfulfilled purchase orders. We would most likely have reduced operating results if one or both of these U.S. government programs were to be delayed, canceled, or not extended or if the government were to change its technology decision and no longer use optical memory cards. We have been advised by the program prime contractor that the U.S. State Department, who is the customer for Laser Visa Border Crossing Cards, intends to introduce Radio Frequency Identification (RFID) technology into this program starting in 2008. We intend to offer a hybrid version of our optical memory card including such RFID capability. There is no assurance we will be able to successfully win new Laser Visa orders if this technology change occurs as projected. Our U.S. government card deliveries depend upon the issuance of corresponding order releases by the government to its prime contractor and then to us. If GDIT, our VAR customer, and the U.S. government prime contractor for this program, were to discontinue participation in this program or discontinue operations, interruptions could occur in orders or shipments for this program until a replacement could be found.

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OUR PRODUCT REVENUES WILL NOT GROW IF WE DO NOT WIN NEW BUSINESS IN THE U.S. OR ABROAD OR IF THE ITALIAN NATIONAL ID PROGRAM IS NOT IMPLEMENTED AS ANTICIPATED. Although the U.S. government subcontract has been renewed, we do not expect future growth from the U.S. Green Card and Laser Visa BCC programs as we expect future revenue to average $10 million annually, in line with last year’s issuance rates. There were minimal revenues recorded from these programs in the three months ended June 30, 2007. We had revenues from Italian CIE and PSE cards of about $2.3 million during the three months ended June 30, 2006. During full implementation, we expect our revenues from the Italian programs to grow to reach approximately $40 to $50 million per year. In order for us to achieve our overall revenue growth goal, we will need not only for these programs to continue and reach their anticipated levels, of which there can be no assurance, but we will also need to win new business in the U.S. and abroad. Emerging optical memory card programs or prospective applications include motor vehicle registration cards in a few states in India, foreign resident identification cards in Costa Rica, a drivers license card in South Africa, and sports logbook cards. There can be no assurance that we will receive sizable future orders for any of these programs, nor any assurance that we will be able to win any other new business in the U.S. or abroad which is necessary to grow our business to the level we desire.

SINCE THE SALES CYCLE FOR OUR PRODUCTS IS TYPICALLY LONG AND UNPREDICTABLE, WE HAVE DIFFICULTY PREDICTING WHEN NEW BUSINESS WILL CONTRIBUTE TO REVENUE GROWTH. Obtaining substantial orders usually involves a lengthy sales cycle, requiring marketing and technical time and expense with no guarantee that substantial orders will result. This long sales cycle results in uncertainties in predicting operating results, particularly on a quarterly basis. In addition, since our major marketing programs involve the U.S. and various foreign governments and quasi-governmental organizations, additional uncertainties and extended sales cycles can result. Factors which increase the length of the sales cycle include government regulations, bidding procedures, budget cycles, and other government procurement procedures, as well as changes in governmental policy.

WE COULD EXPERIENCE EQUIPMENT, RAW MATERIAL, QUALITY CONTROL, OR OTHER PRODUCTION PROBLEMS ESPECIALLY IN PERIODS OF INCREASING VOLUME. There can be no assurance that we will be able to meet our projected card manufacturing capacity if and when customer orders reach higher levels. We have made and intend to continue to make significant capital expenditures to expand our card manufacturing capacity. For example, we may invest up to $8 million of capital expenditures during the next twelve to eighteen months assuming certain business developments. However, since customer demand is difficult to predict, we may be unable to ramp up our production quickly enough to fill new customer orders in a timely fashion. This could cause us to lose new business and possibly existing business. In addition, if we overestimate customer demand, we could incur significant costs from creating excess capacity which was the case during fiscal year 2005 and 2007. We may experience manufacturing complications associated with increasing our manufacturing capacity of cards and drives, including the adequate production capacity for sheet-lamination process cards to meet order requirements and delivery schedules. We may also experience difficulties implementing new manufacturing processes, meeting customers’ quality or standards requirements, or outsourcing some of our manufacturing. The addition of fixed overhead costs increases our breakeven point and results in lower profit margins unless compensated for by increased product sales. When purchasing raw materials for our anticipated optical card demand, we take into consideration the order-to-delivery lead times of vendors and the economic purchase order quantity for such raw materials. If we over-estimate customer demand, excess raw material inventory can result.

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WE ARE CURRENTLY OUR OWN SOLE SOURCE OF OPTICAL MEMORY CARDS AND SEVERAL OF THE STEPS IN OUR CARD MANUFACTURING PROCESS HAVE NO BUILT-IN REDUNDANCY. THEREFORE, WE ARE SUSCEPTIBLE TO SUPPLY INTERRUPTIONS, INCLUDING IF CERTAIN MACHINERY WERE TO BREAK DOWN. MUCH OF OUR MACHINERY IS COMPRISED OF CUSTOM VERSIONS OF MACHINERY SOME OF WHICH IS MORE THAN 20 YEARS OLD. Unless and until Prevent Global (Prevent), (previously GIG), comes on line as a second source, of which there can be no assurance, we are the only source of our optical memory cards, making them in our Mountain View facility using a proprietary manufacturing process, with our German subsidiary capable of performing a few key steps in certain instances. There is no assurance that the Prevent facility, if and when operational, will be an acceptable second source to some of our key government accounts. We are susceptible to supply interruptions or yield decreases, when our line goes down or malfunctions. Much of our machinery is comprised of customized versions of machinery which has long lead times to replace and may be difficult to maintain or repair, requiring us to be self-reliant. Some of the machinery we use is more than 20 years old and is no longer manufactured for others, which would require us to adapt a newer version to our needs, which would involve additional effort on our part.

IF WE ARE UNABLE TO BUY RAW MATERIALS IN SUFFICIENT QUANTITIES AND ON A TIMELY BASIS, WE WILL NOT BE ABLE TO DELIVER PRODUCTS TO CUSTOMERS ON TIME WHICH COULD CAUSE US TO LOSE CUSTOMERS, AND OUR REVENUES COULD DECLINE. We depend on sole source and limited source suppliers for optical card raw materials. Such materials include plastic films used in optical memory card production, which are available from one supplier in the U.S. and from multiple foreign suppliers. Processing chemicals, inks, and bonding adhesives are obtained from various U.S. and foreign suppliers. Certain photographic films are commercially available solely from Eastman Kodak Company, of the United States. No assurance can be given that Kodak will continue to supply such photographic films on a satisfactory basis and in sufficient quantities. If Kodak were to discontinue manufacturing the film from which our optical media is made, we would endeavor to establish an alternate supplier for such film, although the purchase price could increase and reliability and quality could decrease from a new supplier. No assurance can be given that there will be adequate demand to attract a second source. In addition, an alternate supplier could encounter technical issues in producing the film as there may be know-how and manufacturing expertise which Kodak has developed over the years which an alternate supplier may have difficulty to replicate. We currently have on hand and on order enough inventory of film to produce cards for orders projected over the next nine to fifteen months. If Kodak announced that it was no longer going to sell film, we would request that Kodak provide us with a last-buy opportunity which we would plan to take maximum advantage of, although no assurance can be given that Kodak would provide us with such an opportunity. We have film on hand plus on order that we believe would provide us with an adequate supply to meet anticipated demand until we could locate and begin volume purchases from a second source.

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

IF WE ARE UNABLE TO DEVELOP UPGRADED READ/WRITE DRIVES THAT COST LESS TO MANUFACTURE AND ALSO A READ-ONLY DRIVE, WE COULD LOSE POTENTIAL NEW BUSINESS. The price of our read/write drive product line ranges from $1,800 to approximately $2,500 depending on features and quantity purchased. We believe the price of our drives is competitive in applications requiring a large number of cards per drive, because the relatively low cost for our cards offsets the high cost per drive when compared with our major competition, IC card systems. In addition, we have undertaken a product development program for a portable read-only drive that has been sampled in limited quantities at prices less than $1,000, which we believe would increase our prospects for winning future business. However, there can be no assurance that our development program will be successful, that volume production of any new design will occur in the near term, or that significantly lower manufacturing costs or increased sales will result.

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

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

SEVERAL OF OUR FOREIGN PROGRAMS INVOLVE OUR CARDS AS PART OF A SOLUTION WHICH INCLUDES TECHNOLOGIES OF THIRD PARTIES. SOMETIMES THESE THIRD PARTY TECHNOLOGIES ARE INTEGRATED WITH OUR CARDS BY OUR SYSTEMS INTEGRATOR CUSTOMER OR SUBCONTRACTOR. WE THEREFORE HAVE VARYING DEGREES OF CONTROL OVER THE OVERALL SYSTEM WHICH COULD LEAD TO TECHNICAL, QUALITY, AND SYSTEM COMPATIBILITY ISSUES WHICH ARE DIFFICULT, EXPENSIVE, AND TIME CONSUMING TO SOLVE. THIS COULD CAUSE OUR ULTIMATE CUSTOMERS, GENERALLY GOVERNMENTS, TO FIND FAULT IN OPTICAL CARDS AND SWITCH TO OTHER SOLUTIONS EVEN THOUGH OUR OPTICAL TECHNOLOGY IS NOT THE ROOT CAUSE. In certain of our current foreign programs such as Italy, India, and a Middle Eastern country, and possibly in future other programs, various third party technologies such as contact or contactless chips will be added to our cards. The embedding or addition of other technologies to the LaserCard® optical memory card, especially when contracted to independent third parties, could potentially lead to technical, compatibility and other issues. In such circumstances, it may be difficult to determine whether a fault originated with our technology or that of a co-supplier or the person embedding or adding the third party technology to our cards. If such faults occur, they could be difficult, expensive, and time-consuming to resolve. Such difficulties could lead to our ultimate customers, the foreign governments, switching to other technologies even though optical technology is not the root cause of the fault(s). The resulting loss of customers would adversely affect our revenues.

WE ARE DEPENDENT ON SYSTEMS INTEGRATORS FOR IMPLEMENTATION OF CARD PROGRAMS AND THEIR METHOD OF IMPLEMENTATION MAY NOT BE SUCCESSFUL DUE TO QUALITY OR COST. We sell to VARs and system integrators who in turn sell solutions to the end customer. The integrators may not follow the recommendations we provide for the handling, possible incorporation of smart or RFID chips, processing, and/or printing on our cards and working with the end-user in the card issuing process. This could lead to low quality or high costs or both resulting in damage to our reputation and/or loss of the contract. We work to train the integrators to avoid such situations, but cannot control their work. Also, we can step in to demonstrate how to successfully implement an optical memory card issuing system. We plan to continue to offer this support then transition the card issuing process to local resources once the program is running successfully.

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OUR OPTICAL MEMORY CARDS HAVE A COMPLEX STRUCTURE THAT REQUIRES A HIGH DEGREE OF TECHNICAL KNOWLEDGE AND EXPERIENCE TO MEET INCREASINGLY STRINGENT PERFORMANCE REQUIREMENTS.  WE HAVE AND COULD IN THE FUTURE AGREE TO CERTAIN CHARACTERISTICS BEYOND THOSE REQUIRED IN INDEPENDENTLY PUBLISHED STANDARDS.  THIS COULD INCREASE OUR COST OF MANUFACTURING CARDS OR RESULT IN ACCEPTING RETURNS OR GIVING CREDITS TO THE CUSTOMER.  MANY CUSTOMERS MAINTAIN SIGNIFICANT ADVANCE INVENTORY WHICH INCREASES THIS RISK. There can be no assurance that we will be able to meet customers’ quality or standards requirements consistently.  This could lead to high manufacturing costs due to low product yields or unexpected product returns.  We employ a rigorous quality control procedure, are ISO 9000 certified and we strive to deliver product that meets published standards and customer expectations.  Even so, we can not give assurance that our products will meet customer expectations in all cases.  We have in the past, and may in the future, replace product held by the customer or give credit for products previously delivered.

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

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

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

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WE ARE SUBJECT TO RISKS ASSOCIATED WITH CHANGES IN FOREIGN CURRENCY EXCHANGE RATES. Part of the manufacturing process of certain LaserCard products that we sell outside the U.S.A. takes place in our operations in Germany. Also, some of the raw materials we use to manufacture optical memory cards are sourced in Europe. These costs are denominated in euros, the currency used in much of Europe. However, when we sell our finished products the prices that we charge are denominated in United States dollars. Accordingly, we are subject to exposure if the exchange rate for euros increases in relation to the United States dollar. The losses on foreign currency exchange for both fiscal year 2007 and the three months ended June 30, 2007 were immaterial. As of June 30, 2007, we had not entered into a forward exchange contract to hedge against or potentially minimize the foreign currency exchange risk related to transactions other than those related to inter-company payables and receivables.

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

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

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

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FOREIGN GOVERNMENT INTERVENTION COULD ADVERSELY AFFECT RESULTS OF OPERATIONS. Economic, political and other risks associated with foreign operations could adversely affect our international sales. We sell our products worldwide and therefore, our business could be subject to risks due to changes in a country’s or region’s political or economic conditions. Differing tax laws and changes in those laws may also affect future results of our operations.

PANDEMICS THROUGHOUT THE WORLD COULD ADVERSELY AFFECT OUR BUSINESS. The occurrence of a pandemic such as the Bird Flu coupled with the lack of government readiness and support in those countries where we do business could temporarily impede our revenue growth.

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

AS A RESULT OF OUR REQUIRED ANNUAL EVALUATION OF OUR INTERNAL CONTROLS OVER FINANCIAL REPORTING, WE MAY IDENTIFY INTERNAL CONTROL WEAKNESSES NEEDING REMEDIATION, WHICH COULD HARM OUR REPUTATION. We have completed the evaluation of our internal controls over financial reporting as required by Section 404 of the Sarbanes-Oxley Act of 2002 for the fiscal years ended March 31, 2007 and 2006. Although our assessment, testing and evaluation resulted in our conclusion that as of March 31, 2007 and 2006, our internal controls over financial reporting were effective, we cannot predict the outcome of our testing in future periods. Because of the inherent limitation of disclosure controls, no evaluation of such controls can provide absolute assurance that all control issues and instances of fraud, if any, within our Company have been detected. If our internal controls are found to be ineffective in future periods, our reputation could be harmed. We may incur additional expenses and commitment of management’s time in connection with further evaluations, both of which could materially increase our operating expenses and accordingly reduce our net income.

BEGINNING WITH OUR FISCAL YEAR 2007, WE WERE REQUIRED TO RECORD COMPENSATION EXPENSE FOR STOCK OPTIONS. AS A RESULT OF THE RESULTING SIGNIFICANT EXPENSES, IT WILL BE MORE DIFFICULT FOR US TO CONTINUE TO BE PROFITABLE AND ANY PROFITABILITY WE ACHIEVE WILL BE REDUCED SIGNIFICANTLY. In December 2004, the Financial Accounting Standards Board (“FASB”) issued Financial Accounting Standard 123(R) (SFAS No. 123(R)) that requires the fair value of all equity-based awards granted to employees be recognized in the statement of operations as compensation expense, for fiscal years beginning after December 15, 2005, rather than just to disclose such expense in a footnote as we have done in the previous years. The adoption of this accounting standard reduced our profitability as measured by generally accepted accounting principles (GAAP) due to our outstanding options and our current intention to continue to grant options in the future as an incentive and retention tool for our employees. This may adversely affect our stock price. For example, for the three months ended June 30, 2007 and fiscal year 2007, we recognized approximately $0.4 million and $1.7 million, respectively, of additional expenses due to SFAS No. 123(R) which we would not otherwise have recognized. Such adoption could also lead us to reduce or otherwise alter our use of stock options which we believe help align our employees’ long-term interests with increasing our enterprise value. This could, in turn, hurt our ability to recruit employees and retain existing employees and directors. 

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Item 2. - Unregistered Sales of Equity Securities and Use of Proceeds

None

Item 3. - Defaults Upon Senior Securities

None

Item 4. - Submission of Matters to a Vote of Security Holders

There were no matters submitted to a vote of security holders during the period for which this report is filed.

Item 5. - Other Information

None.

Item 6. - Exhibits

Exhibit No.	Exhibit Description
3(I)	Certificate of Incorporation; previously filed as Exhibit 3.1 to Annual Report on Form 10-K for the fiscal year ended March 31, 2005, filed with the SEC on June 15, 2005, and incorporated herein by reference
3(II)	Amended Bylaws; previously filed as Exhibit 3(II) to Report on Form 10-Q for period ended September 30, 2006 and incorporated herein by reference
10.1	Building lease agreement with Renault & Handley Employees Investment Co. for 2644-2648 Bayshore Parkway, Mountain View, CA; previously filed as Exhibit 10.1 to Report on Form 10-Q for period ended December 31, 2003 and incorporated herein by reference
10.2	Building lease agreement with Shoreline Park LLC for 1395 Charleston Road, Mountain View, CA (mailing address 1875 North Shoreline Boulevard, Mountain View, CA); previously filed as Exhibit 10.2 to Report on Form 10-K for fiscal year ended March 31, 2004 and incorporated herein by reference
10.3*	Amended and Restated Stock Option Plan; previously filed as Exhibit 10.4.1 to Report on Form 10-Q for period ended September 30, 2002 and incorporated herein by reference
10.7	Stock and Warrant Purchase Agreement (as amended); previously filed as Exhibit 99.2 to Report on Form 10-Q for period ended December 31, 2003 and incorporated herein by reference
10.8	Optical Card Manufacturing License Agreement with Global Investments Group ; previously filed as Exhibit 10.8 to Report on Form 10-K for fiscal year ended March 31, 2004 and incorporated herein by reference.**
10.9*	2004 Equity Incentive Compensation Plan, as Amended; previously filed as Appendix C to Schedule 14A Proxy Statement for 2006 Annual Stockholders Meeting filed with the SEC on August 11, 2006, and incorporated herein by reference.
10.10	June 29, 2006 Amendment to License and Equipment Agreement with Global Investments Group and Prevent LOK; previously filed as Exhibit 10.10 to Report on Form 10-Q for period ending June 30, 2006, and incorporated herein by reference**

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10.11	October 27, 2006 Modified Third Amendment to License and Equipment Agreements with Global Investments Group and Prevent LOK; previously filed as Exhibit 10.11 to Form 8-K dated October 30, 2006, which was filed with the SEC on November 1, 2006, and incorporated herein by reference
10.12*	Employee Stock Purchase Plan, as Amended; previously filed as Appendix A to amended Schedule 14A Proxy Statement for 2007 Annual Stockholders Meeting filed with the SEC on August 3, 2007, and incorporated herein by reference.
31.1	Rule 13a-14(a) Certification of Richard M. Haddock, chief executive officer is filed herewith.
31.2	Rule 13a-14(a) Certification of Steven G. Larson, chief financial officer is filed herewith.
32.1	Section 1350 Certification of Richard M. Haddock, chief executive officer is filed herewith.
32.2	Section 1350 Certification of Steven G. Larson, chief financial officer is filed herewith.

Exhibits 31.1, 31.2, 32.1, and 32.2 are filed herewith while the other exhibits are incorporated by reference. No other exhibits are included in this report as the contents of the required exhibits are either not applicable to Registrant, to be provided only if Registrant desires, or contained elsewhere in this report.

* Indicates management contract or compensatory plan or arrangement.

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

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SIGNATURES

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

LASERCARD CORPORATION

(Registrant)

Signature	Title	Date
/s/Richard M. Haddock	Chief Executive Officer	August 6, 2007
Richard M. Haddock
/s/Steven G. Larson	Chief Financial Officer	August 6, 2007
Steven G. Larson

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INDEX TO EXHIBITS

[ITEM 14(c)]

Exhibit
Number	Description
3(I)	Certificate of Incorporation; previously filed as Exhibit 3.1 to Annual Report on Form 10-K for the fiscal year ended March 31, 2005, filed with the SEC on June 15, 2005, and incorporated herein by reference
3(II)	Amended Bylaws; previously filed as Exhibit 3(II) to Report on Form 10-Q for period ended September 30, 2006 and incorporated herein by reference
10.1	Building lease agreement with Renault & Handley Employees Investment Co. for 2644-2648 Bayshore Parkway, Mountain View, CA; previously filed as Exhibit 10.1 to Report on Form 10-Q for period ended December 31, 2003 and incorporated herein by reference
10.2	Building lease agreement with Shoreline Park LLC for 1395 Charleston Road, Mountain View, CA (mailing address 1875 North Shoreline Boulevard, Mountain View, CA); previously filed as Exhibit 10.2 to Report on Form 10-K for fiscal year ended March 31, 2004 and incorporated herein by reference
10.3*	Amended and Restated Stock Option Plan; previously filed as Exhibit 10.4.1 to Report on Form 10-Q for period ended September 30, 2002 and incorporated herein by reference
10.7	Stock and Warrant Purchase Agreement (as amended); previously filed as Exhibit 99.2 to Report on Form 10-Q for period ended December 31, 2003 and incorporated herein by reference
10.8	Optical Card Manufacturing License Agreement with Global Investments Group; previously filed as Exhibit 10.8 to Report on Form 10-K for fiscal year ended March 31, 2004 and incorporated herein by reference.**
10.9*	2004 Equity Incentive Compensation Plan, as Amended; previously filed as Appendix C to Schedule 14A Proxy Statement for 2006 Annual Stockholders Meeting filed with the SEC on August 11, 2006, and incorporated herein by reference.
10.10	June 29, 2006 Amendment to License and Equipment Agreement with Global Investments Group and Prevent LOK; previously filed as Exhibit 10.10 to Report on Form 10-Q for period ending June 30, 2006, and incorporated herein by reference**

10.11	October 27, 2006 Modified Third Amendment to License and Equipment Agreements with Global Investments Group and Prevent LOK; previously filed as Exhibit 10.11 to Form 8-K dated October 30, 2006, which was filed with the SEC on November 1, 2006, and incorporated herein by reference
10.12*	The Employee Stock Purchase, as Amended; previously filed as Appendix A to Schedule 14A Proxy Statement for 2007 Annual Stockholders Meeting filed with the SEC on August 3, 2007, and incorporated herein by reference.
31.1	Rule 13a-14(a) Certification of Richard M. Haddock, chief executive officer is filed herewith.
31.2	Rule 13a-14(a) Certification of Steven G. Larson, chief financial officer is filed herewith.
32.1	Section 1350 Certification of Richard M. Haddock, chief executive officer is filed herewith.

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32.2 Section 1350 Certification of Steven G. Larson, chief financial officer is filed herewith.

*	Indicates management contract or compensatory plan or arrangement.
**	Portions were omitted pursuant to a request for confidential treatment.

43