Exhibit 99.1

ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

REPORT OF INDEPENDENT AUDITORS

To the Board of Directors and Stockholders
of Drexler Technology Corporation:

In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of income, of stockholders' equity and of cash
flows present fairly, in all material respects, the financial position of
Drexler Technology Corporation and its subsidiaries at March 31, 2003 and March
31, 2002, and the results of their operations and their cash flows for the years
then ended in conformity with accounting principles generally accepted in the
United States of America. These financial statements are the responsibility of
the Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with auditing standards generally accepted in the
United States of America, which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion. The financial statements of
the Company as of March 31, 2001 and for the year then ended were audited by
other independent accountants who have ceased operations. Those independent
accountants expressed an unqualified opinion on those financial statements in
their report dated May 13, 2002.

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

THIS REPORT IS A CONFORMED COPY OF THE REPORT PREVIOUSLY ISSUED BY
ARTHUR ANDERSEN LLP AND HAS NOT BEEN REISSUED BY THAT FIRM. THE CHANGES MADE
RELATED TO SEGMENT REPORTING FOR THE YEAR ENDED MARCH 31, 2001
IN NOTE 4 WERE NOT SUBJECT TO AUDIT BY ARTHUR ANDERSEN LLP.

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Board of Directors and Stockholders of Drexler Technology Corporation:

We have audited the accompanying consolidated balance sheet of Drexler
Technology Corporation (a Delaware corporation) and subsidiaries as of March 31,
2001, and the related consolidated statements of income, stockholders' equity
and cash flows for each of the two years in the period ended March 31, 2001 (as
restated). These consolidated financial statements and the schedule referred to
below are the responsibility of the Company's management. Our responsibility is
to express an opinion on these consolidated financial statements and schedule
based on our audits.

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

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Drexler
Technology Corporation and subsidiaries as of March 31, 2001, and the results of
their operations and their cash flows for each of the two years in the period
ended March 31, 2001 in conformity with accounting principles generally accepted
in the United States of America.

Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The Schedule II included in this Form
10-K is presented for purposes of complying with the Securities and Exchange
Commission's rules and is not a part of the basic financial statements. This
schedule has been subjected to the auditing procedures applied in our audits of
the basic financial statements and, in our opinion, fairly states in all
material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.

/s/Arthur Andersen LLP

San Jose, California
May 13, 2002

DREXLER TECHNOLOGY CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
March 31, 2002 and 2003
(In thousands, except share and par value amounts)

2002 2003
---- ----

ASSETS

Current assets:
Cash and cash equivalents ............................................................... $ 8,193 $ 5,754
Short-term investments .................................................................. 8,883 4,363
Accounts receivable, net of product return reserve of $100 in 2002 and $90 in 2003 ...... 1,659 1,659
Inventories ............................................................................. 4,973 5,711
Deferred tax asset ...................................................................... 3,849 2,689
Prepaid and other current assets ........................................................ 561 1,016
-------- --------
Total current assets ................................................................. 28,118 21,192
-------- --------

Property and equipment, at cost ............................................................ 20,979 23,204
Less--accumulated depreciation and amortization ......................................... (14,561) (15,795)
-------- --------
Property and equipment, net .......................................................... 6,418 7,409

Long-term investments ...................................................................... 1,002 6,898
Patents and other intangibles, net ......................................................... 612 567
Deferred tax asset, net .................................................................... 4,563 4,397
-------- --------

Total assets .................................................................... $ 40,713 $ 40,463
======== ========

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
Accounts payable ........................................................................ $ 738 $ 1,085
Accrued liabilities ..................................................................... 1,117 1,434
Advance payments from customers ......................................................... 2,551 1,096
Deferred revenue ........................................................................ 235 5
Deferred gross profit ................................................................... 2,860 --
-------- --------
Total current liabilities ............................................................ 7,501 3,620

Deferred revenue, long-term ............................................................. 875 --
-------- --------
Total liabilities ............................................................... $ 8,376 $ 3,620
-------- --------
Commitments and contingencies (Note 6)

Stockholders' equity:
Preferred stock, $.01 par value:
Authorized--2,000,000 shares
Issued--none ......................................................................... -- --
Common stock, $.01 par value:
Authorized--30,000,000 shares
Issued--10,240,687 shares at March 31, 2002 and 10,443,192 shares at March 31, 2003 .. 102 104
Additional paid-in capital .............................................................. 40,334 42,556
Accumulated deficit ..................................................................... (8,099) (5,817)
-------- --------
Total stockholders' equity ........................................................... 32,337 36,843
-------- --------

Total liabilities and stockholders' equity ...................................... $ 40,713 $ 40,463
======== ========

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

DREXLER TECHNOLOGY CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME
Fiscal Years Ended March 31, 2001, 2002, and 2003
(In thousands, except per share amounts)

2001 2002 2003
---- ---- ----

Revenues:
Product sales ............................................. $ 22,690 $ 19,562 $ 25,221
License and other revenue ................................. 2,216 1,327 1,110
-------- -------- --------
Total revenues ....................................... 24,906 20,889 26,331
-------- -------- --------

Cost of product sales ......................................... 12,199 10,652 13,906
-------- -------- --------

Gross profit .............................................. 12,707 10,237 12,425
-------- -------- --------

Operating expenses:
Selling, general, and administrative expenses ............. 4,134 5,165 6,202
Research and engineering expenses ......................... 2,370 3,045 2,818
-------- -------- --------
Total operating expenses ............................. 6,504 8,210 9,020
-------- -------- --------

Operating income ................................. 6,203 2,027 3,405

Other income:
Interest income ........................................... 612 386 397
-------- -------- --------
Total other income, net .......................... 612 386 397
-------- -------- --------

Income before income taxes ....................... 6,815 2,413 3,802

Income tax expense (benefit) .................................. (1,097) (2,786) 1,520
-------- -------- --------

Net income ....................................... $ 7,912 $ 5,199 $ 2,282
======== ======== ========

Net income per share:
Basic ............................................ $ .80 $ .52 $ .22
Diluted .......................................... $ .76 $ .50 $ .21

Weighted average number of common and common
equivalent shares:
Basic ............................................ 9,897 9,961 10,356
Diluted .......................................... 10,446 10,468 10,842

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

DREXLER TECHNOLOGY CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Fiscal Years Ended March 31, 2001, 2002, and 2003
(In thousands)

Common Stock Additional Treasury Accumulated
Shares Amount Paid-In Capital Stock Deficit Total
------ ------ --------------- ----- ------- -----

Balance, March 31, 2000....................... 9,864 $ 99 $ 37,168 $ -- $ (21,210) $ 16,057
Shares purchased through an
open market repurchase program......... -- -- -- (2,813) -- (2,813)
Shares issued under stock option
and stock purchase plans............... 87 -- 513 973 -- 1,486
Income tax benefit arising from
stock options.......................... -- -- 100 -- -- 100
Compensation related to
stock plan activity.................... -- -- 71 -- -- 71
Net income................................ -- -- -- -- 7,912 7,912
------- ------- ---------- -------- ----------- ---------

Balance, March 31, 2001....................... 9,951 99 37,852 (1,840) (13,298) 22,813
Shares purchased through an
open market repurchase program......... -- -- -- (175) -- (175)
Shares issued under stock option
and stock purchase plans............... 290 3 2,079 2,015 -- 4,097
Income tax benefit arising from
stock options.......................... -- -- 307 -- -- 307
Compensation related to
stock plan activity.................... -- -- 96 -- -- 96
Net income................................ -- -- -- -- 5,199 5,199
------- ------- ---------- -------- ----------- ---------

Balance, March 31, 2002....................... 10,241 102 40,334 -- (8,099) 32,337
Shares issued under stock option
and stock purchase plans............... 202 2 1,774 -- -- 1,776
Income tax benefit arising from
stock options.......................... -- -- 356 -- -- 356
Compensation related to
stock plan activity.................... -- -- 92 -- -- 92
Net income................................ -- -- -- -- 2,282 2,282
------- ------- ---------- -------- ----------- ---------

Balance, March 31, 2003....................... 10,443 $ 104 $ 42,556 $ -- $ (5,817) $ 36,843
======= ======= ========== ======== =========== =========

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

DREXLER TECHNOLOGY CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
Fiscal Years Ended March 31, 2001, 2002, and 2003
(In thousands)

2001 2002 2003
---- ---- ----

Cash flows from operating activities:
Net income..................................................................... $ 7,912 $ 5,199 $ 2,282
Adjustments to reconcile net income to net cash
(used in) provided by operating activities:
Depreciation and amortization.............................................. 2,449 1,556 1,829
Provision for doubtful accounts receivable................................. (15) (14) 11
Provision for product return reserve....................................... -- (127) --
Provision for excess and obsolete inventory................................ (1) 276 425
Decrease (increase) in deferred tax asset.................................. (1,903) (3,484) 1,326
Compensation from stock plan activity...................................... 71 96 92
Tax benefit for stock options.............................................. 100 307 356

Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable................................. 172 (240) (11)
Decrease in notes receivable............................................... 150 -- --
Increase in inventories.................................................... (461) (368) (1,163)
(Increase) decrease in other assets........................................ (413) 116 (455)
Increase (decrease) in accounts payable and accrued liabilities............ 426 (45) 664
Increase (decrease) in deferred revenue.................................... 597 116 (1,105)
Increase (decrease) in advance payments from customers..................... 157 1,276 (1,455)
Decrease in deferred gross profit.......................................... (2,161) (295) (2,860)
--------- --------- ---------

Net cash provided by (used in) operating activities.................... 7,080 4,369 (64)
--------- --------- ---------

Cash flows from investing activities:
Purchases of property and equipment............................................ (2,202) (1,723) (2,468)
Investments in patents and other intangibles................................... (164) (98) (307)
Purchases of investments....................................................... (18,938) (13,964) (16,453)
Maturities of investments...................................................... 18,954 9,466 15,077
--------- --------- ---------

Net cash used in investing activities.................................. (2,350) (6,319) (4,151)
--------- --------- ---------

Cash flows from financing activities:
Proceeds from sale of common stock through stock plans......................... 1,486 4,097 1,776
Cash used to purchase common stock through an open market
repurchase program......................................................... (2,813) (175) --
--------- --------- ---------

Net cash provided by (used in) financing activities.................... (1,327) 3,922 1,776
--------- --------- ---------

Net increase (decrease) in cash and cash equivalents................... 3,403 1,972 (2,439)

Cash and cash equivalents:
Beginning of year.............................................................. 2,818 6,221 8,193
--------- --------- ---------
End of year ................................................................... $ 6,221 $ 8,193 $ 5,754
========= ========= =========

Supplemental disclosures--cash payments for:
Income taxes................................................................... $ 320 $ 182 $ --
========= ========= =========

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

DREXLER TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. ORGANIZATION AND OPERATIONS

Drexler Technology Corporation and its wholly owned subsidiary, LaserCard
Systems Corporation, (the "Company") develop and manufacture optical data
storage products featuring LaserCard(R) optical memory cards and chip-ready
Smart/Optical(TM) cards used with personal computers for information recording,
storage, and retrieval. These optical data storage products include optical
memory cards, optical card read/write drives, and related systems and
peripherals. The Company's customers are mainly value-added reseller (VAR)
companies and licensees, in the United States and other countries, that develop
commercial applications for LaserCard products. Target markets for these
products include government and commercial applications for portable,
recordable, secure, identification cards and other unitary-record cards.
Applications include U.S. immigration Green Cards and Laser Visa Border Crossing
Cards, U.S. military cargo manifests, Canadian Permanent Resident Cards,
biometric IDs, access cards, and other wallet-card applications.

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

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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

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

FISCAL PERIOD. For purposes of presentation, the Company labels its annual
accounting period end as March 31. The Company, in fact, operates and reports
based on quarterly periods ending on the Friday closest to month end. Fiscal
2001 ended on March 30, 2001; fiscal 2002 ended on March 29, 2002; and fiscal
2003 ended on March 28, 2003.

CASH AND CASH EQUIVALENTS, SHORT-TERM INVESTMENTS, AND LONG-TERM
INVESTMENTS. The Company considers all highly liquid investments, consisting
primarily of commercial paper, taxable notes, and U.S. government bonds, with
maturities of three months or less at the date of purchase, to be cash
equivalents. All investments with original or remaining maturities at date of
purchase of more than three months and up to one year, are classified as
short-term investments. All investments with original maturities greater than
one year are classified as long-term investments. Management determines the
appropriate classification of debt and equity securities at the time of purchase
and reevaluates the classification of investments as of each balance sheet date.

All short-term investments are classified as held to maturity. The carrying
amounts of short-term investments at March 31, 2002 and 2003 are (in thousands):

2002 2003
---- ----
Corporate bonds................................ $ 5,199 $ --
U.S. government and agency obligations......... 1,900 401
Certificates of deposit........................ 1,784 3,962
---------- ---------
$ 8,883 $ 4,363
========== =========

At March 31, 2003, scheduled maturities of held-to-maturity investments are
(in thousands):

Up to one year................................. $ 4,363
After one year through five years ............ 6,898
---------
$ 11,261
=========

FAIR VALUE OF FINANCIAL INSTRUMENTS. The carrying amounts of the Company's
financial instruments including cash and cash equivalents, accounts receivable,
accounts payable and accrued liabilities, approximate their fair values due to
their short maturities.

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

2002 2003
---- ----
Raw materials..................... $ 3,063 $ 3,209
Work-in-process................... 479 220
Finished goods.................... 1,338 2,257
Systems and components
held for resale................ 93 25
--------- ---------
$ 4,973 $ 5,711
========= =========

During fiscal 2003, the Company recorded a $425,000 charge to write down
excess inventory.

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

2002 2003
---- ----
Equipment and furniture........... $ 18,425 $ 20,523
Leasehold improvements............ 2,554 2,681
--------- ---------
$ 20,979 $ 23,204
========= =========

Property and equipment are recorded at cost. Depreciation is provided over
the estimated useful lives (four to seven years) of equipment and furniture
using the double-declining balance and straight-line methods. Leasehold
improvements are amortized over the shorter of the life of the asset or the life
of the lease using the straight-line method. Depreciation and leasehold
amortization expense for fiscal 2001, 2002, and 2003 was $974,000, $1,082,000,
and $1,477,000, respectively.

PATENT COSTS. Legal expenses incurred in connection with patents are
capitalized and amortized over the estimated remaining useful lives of the
patents of six to seventeen years. Costs incurred in connection with other
intangibles are amortized using the straight-line method over three to five
years.

Gross patent expenditures capitalized and accumulated amortization as of
March 31 are as follows (in thousands):

2002 2003
---- ----
Gross patent and other
intangible expenditures........ $ 3,327 $ 3,634
Accumulated amortization.......... (2,715) (3,067)
--------- ---------
$ 612 $ 567
========= =========

ASSESSMENT OF IMPAIRMENT OF LONG-LIVED ASSETS. The Company periodically
evaluates whether events and circumstances have occurred which indicate that the
carrying value of its long-lived assets may not be recoverable. If the Company
determines an asset has been impaired, the impairment charge is recorded based
on the excess of the carrying value over the fair value of the impaired asset,
with the reduction in value charged to expense. To date, the Company has not
needed to record any impairment losses on long-lived assets.

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

2002 2003
---- ----
Accrued payroll and fringe benefits...... $ 525 $ 605
Other accrued liabilities................ 592 829
--------- ---------
$ 1,117 $ 1,434
========= =========

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

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

REVENUE RECOGNITION. Product sales primarily consist of card sales and
sales of read/write drives. 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 or customer acceptance criteria. Where appropriate,
provision is made at the time of shipment for estimated warranty costs and
estimated returns. Product sales primarily consist of card sales and sales of
read/write drives.

The Company's U.S. government subcontract requires delivery to a secure,
government-funded vault built on Company premises. Deliveries are made into the
vault on a fixed schedule specified by the prime contractor. At the time the
cards are delivered to the vault, title to the cards transfers to the
government, the prime contractor is invoiced, and payment is due according to
normal trade payment terms. However, revenue is recognized when the cards are
shipped from the vault to the government unless the Company receives a fixed
schedule, notification, or plan for shipments out of the vault to the
government, in which case revenue is recognized upon the latter of receipt of
such fixed shipment schedule or delivery of the cards into the vault.

The Company applies the provisions of Statement of Position SOP 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 reasonably
assured, and, if applicable, upon acceptance when acceptance criteria are
specified or upon expiration of the acceptance period. Software sales have not
been significant to the Company's business for all periods presented.

License revenue, which may consist of up-front license fees and long-term
royalty payments, is recognized as revenue when realized. The cost of license
revenue, unless patent litigation was involved, is not material and is included
in selling, general, and administrative expenses.

The Company entered into a read/write drive kits assembly license with a
customer in Italy which generated license revenue of $712,000 during fiscal 2001
and $119,000 during fiscal 2002. The arrangement was structured whereby the
customer agreed to pay the Company a contractually agreed upon fee in exchange
for the transfer of technical knowledge and know-how and training in the
assembly of read/write drives. The training period extended over 16 months,
which is the period over which the Company recognized the fee as revenue. The
Company recorded revenue of $1,465,000 during fiscal 2001 and $1,206,000 in
fiscal 2002 relating to digital sound patent licenses sold to Sony Corporation
and Dolby Laboratories, Inc. The revenues were net of legal costs and third
party contingency (success) fees. There are no ongoing royalty payments.

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

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

Fiscal Year
-----------

2001 2002 2003
---- ---- ----

Net income, as reported............................................................ $ 7,912 $ 5,199 $ 2,282
========= ========= =========

Deduct: Total stock-based employee compensation determined under
fair value based method for all awards, net of related tax effects.............. (1,823) (2,245) (1,353)
--------- --------- ---------

Pro forma net income............................................................... $ 6,089 $ 2,954 $ 929
========= ========= =========

Basic net income per common share:
As reported..................................................................... $ .80 $ .52 $ .22
========= ========= =========
Pro forma ...................................................................... $ .62 $ .30 $ .09
========= ========= =========

Diluted net income per common share:
As reported..................................................................... $ .76 $ .50 $ .21
========= ========= =========
Pro forma ...................................................................... $ .58 $ .28 $ .09
========= ========= =========

Shares used in computing basic and diluted and pro forma net income per share:
Basic. ...................................................................... 9,897 9,961 10,356
Diluted ...................................................................... 10,446 10,468 10,842

Stock-based employee compensation expense included
in reported net income, net of related tax effects.............................. 78 91 55

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

Fiscal Year
-----------

2001 2002 2003
---- ---- ----

Risk-free interest rate........................ 5% 5% 2.67% to 4.99%
Average expected years life of option.......... 6 to 8 years 6 to 8 years 5 to 8 years
Dividend yield................................. 0% 0% 0%
Volatility of common stock..................... 50% 50% 50%
Weighted average fair
values of option grants..................... $8.58 $7.54 $8.59

COMPREHENSIVE INCOME (LOSS). Under SFAS No. 130, "Reporting Comprehensive
Income," comprehensive income (loss) is defined as the changes in equity of an
enterprise except those resulting from stockholders' transactions. For the
fiscal years ended March 31, 2000, 2001, and 2002, comprehensive income equaled
net income.

RECENT ACCOUNTING PRONOUNCEMENTS.

In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statement
No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections" which eliminates inconsistencies between the required accounting
for sale-leaseback transactions and the required accounting for certain lease
modifications that have economic effects that are similar to sale-leaseback
transactions. SFAS No. 145 also amends other existing authoritative
pronouncements to make various technical corrections, clarify meanings, or
describe their applicability under changed conditions. The provisions of SFAS
No. 145 are effective for fiscal years beginning after May 15, 2002 and for
transactions occurring after May 15, 2002. The Company does not expect adoption
of SFAS No. 145 to have a material impact on its financial statements.

In June 2002, the FASB issued SFAS No. 146, "Accounting for Exit or
Disposal Activities" which addresses the recognition, measurement, and reporting
of costs that are associated with exit and disposal activities, including
restructuring activities that are currently accounted for pursuant to the
guidance that the Emerging Issues Task Force (EITF) has set forth in EITF Issue
No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and
Other Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring)." SFAS No. 146 will be effective for exit or disposal activities
that are initiated after December 31, 2002. The Company does not expect adoption
of SFAS No. 146 to have a material impact on its financial statements.

In November 2002, the FASB issued FASB Interpretation No. 45 ("FIN 45"),
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others." FIN 45 requires that a liability
be recorded in the guarantor's balance sheet upon issuance of a guarantee. In
addition, FIN 45 requires disclosures about the guarantees that an entity has
issued, including a reconciliation of changes in the entity's product warranty
liabilities. The initial recognition and initial measurement provisions of FIN
45 are applicable on a prospective basis to guarantees issued or modified after
December 31, 2002, irrespective of the guarantor's fiscal year-end. The
disclosure requirements of FIN 45 are effective for financial statements of
interim or annual periods ending after December 15, 2002. The adoption of this
standard had no material impact on the Company's financial statements, although
the Company has complied with the disclosure requirements of this standard.

In November 2002, the Emerging Issues Task Force ("EITF") reached a
consensus on Issue No. 00-21, "Revenue Arrangements with Multiple Deliverables."
EITF Issue No. 00-21 provides guidance on how to account for arrangements that
involve the delivery or performance of multiple products, services and/or rights
to use assets. The provisions of EITF Issue No. 00-21 will apply to revenue
arrangements entered into in fiscal periods beginning after June 15, 2003. The
Company believes that the adoption of this standard will have no material impact
on its consolidated financial statements.

In January 2003, the FASB issued Financial Interpretation No. 46,
"Consolidation of Variable Interest Entities" (FIN 46). FIN 46 addresses
consolidation by business enterprises of variable interest entities. Under that
interpretation, certain entities known as Variable Interest Entities (VIEs) must
be consolidated by the primary beneficiary of the entity. The primary
beneficiary is generally defined as having the majority of the risks and rewards
arising from the VIE. For VIEs in which a significant (but not majority)
variable interest is held, certain disclosures are required. It applies
immediately

to variable interest entities created after January 31, 2003, and applies in the
first year or interim period beginning after June 15, 2003 to variable interest
entities in which an enterprise holds a variable interest that it acquired
before February 1, 2003. The Company does not believe that the adoption of this
interpretation will have a material effect on its consolidated financial
position, results of operations, or cash flows.

In May 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." SFAS No. 149 amends and
clarifies accounting for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities under SFAS
No. 133. SFAS No. 149 is effective for contracts entered into or modified after
June 30, 2003 and for hedging relationships designated after June 30, 2003. The
Company is currently analyzing the provisions of SFAS No. 149 to determine if
there will be any impact of adoption, but does not believe that there will be
any material impact on its consolidated financial statements.

In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity." SFAS
No. 150 establishes standards for how companies classify and measure certain
financial instruments with characteristics of both liabilities and equity. It
requires companies to classify a financial instrument that is within its scope
as a liability (or an asset in some circumstances). SFAS No. 150 is effective
beginning with the second quarter of fiscal 2004; the Company is currently
analyzing the provisions of SFAS No. 150 to determine its impact, but does not
believe that there will be any material impact on its consolidated financial
statements.

RECLASSIFICATIONS. Certain reclassifications were made to the prior year
financial data to conform with the current year presentation.

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 has
also entered into indemnification agreements with its directors and officers and
the Company's bylaws contain similar indemnification obligations. Claims made
under such indemnifications are rare and the associated estimated fair value of
the liability is not material.

3. NET INCOME PER SHARE

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

The reconciliation of the numerators and denominators of the basic and
diluted net income per share computation for fiscal years 2001, 2002, and 2003
is shown below (in thousands, except per share data):

Fiscal Year
-----------

2001 2002 2003
---- ---- ----

Net income ................................................................................. $ 7,912 $ 5,199 $ 2,282
======== ========= =========

Basic net income per share:
Weighted average common shares outstanding................................................. 9,897 9,961 10,356
-------- --------- ---------
Basic net income per share.................................................................... $ .80 $ .52 $ .22
======== ========= =========

Diluted net income per share:
Weighted average common shares outstanding................................................. 9,897 9,961 10,356
Weighted average common shares from stock option grants.................................... 549 507 486
-------- --------- ---------
Weighted average common shares and common stock equivalents outstanding.................... 10,446 10,468 10,842
-------- --------- ---------

Diluted net income per share.................................................................. $ .76 $ .50 $ .21
======== ========= =========

Stock options having an exercise price greater than the average market
value for the periods are excluded from the calculation of diluted net income
per share, as their effect would be antidilutive. Stock options to purchase
321,400, 280,950, and 168,000 shares were excluded from the calculation of
diluted net income per share for the years ended March 31, 2001, 2002, and 2003,
respectively.

4. SEGMENTS

SEGMENT REPORTING. In the Company's Quarterly Report on Form 10-Q for the
second fiscal quarter of 2004, which ended on October 3, 2003, the Company
concluded that it had two reportable segments, optical memory cards and optical
card drives, and began reporting the results of each segment and other
information pursuant to Statement of Financial Accounting Standards No. 131
"Segment Reporting." This footnote has been amended to include the presentation
and discussion of segment information on a comparable basis. The disclosures for
the year ended March 31, 2001 are unaudited.

The Company has two reportable segments: (1) optical memory cards and (2)
optical memory card drives, maintenance, and related accessories ("optical card
drives"). The segments were determined based on the information used by the
chief operating decision maker. The segments reported though are not strategic
business units which offer unrelated products and services, but utilize
compatible technology and are marketed jointly.

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 segments in a manner that optimizes optical
memory card revenues 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.
Fixed assets and inventory are not separately reported by segment to the chief
operating decision maker. Accounts receivable, cash, deferred income taxes,
prepaid expenses, certain fixed assets, and other assets are not separately
identifiable to segments. 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.

The Company's chief operating decision maker is currently the Company's
Co-Chief Executive Officers, prior to which the Company's Chairman and Chief
Executive Officer was considered to be the chief operating decision maker. The
chief operating decision maker reviews financial information presented on a
consolidated basis that is accompanied by disaggregated information about
revenues and gross profit (loss) by segment.

The table below presents information for optical memory cards and optical
card drives for the following periods (in thousands):

- ---------------------------------------- -------------------------------------------------------------------------------------
Fiscal Year Ended March 31, 2001 (UNAUDITED)
- ---------------------------------------- -------------------- --------------------- -------------------- --------------------
Depreciation and
Amortization
Revenue Cost of Sales Gross Profit Expense
------- ------------- ------------ -------

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

Optical memory cards $ 18,483 $ 8,661 $ 9,822 $ 760
- ---------------------------------------- -------------------- --------------------- -------------------- --------------------
Optical card drives 3,868 3,465 403 29
-------- -------- --------- -----
- ---------------------------------------- -------------------- --------------------- -------------------- --------------------
Total for segments $ 22,351 $ 12,126 $ 10,225 $ 789
======== ======== ========= =====
- ---------------------------------------- -------------------- --------------------- -------------------- --------------------

- ---------------------------------------- -------------------------------------------------------------------------------------
Fiscal Year Ended March 31, 2002
- ---------------------------------------- -------------------- --------------------- -------------------- --------------------
Depreciation and
Gross Profit Amortization
Revenue Cost of Sales (Loss) Expense
------- ------------- ------ -------

- ---------------------------------------- -------------------- --------------------- -------------------- --------------------
Optical memory cards $ 18,201 $ 8,717 $ 9,484 $ 798
- ---------------------------------------- -------------------- --------------------- -------------------- --------------------
Optical card drives 1,279 1,918 (639) 61
-------- -------- --------- -----
- ---------------------------------------- -------------------- --------------------- -------------------- --------------------
Total for segments $ 19,480 $ 10,635 $ 8,845 $ 859
======== ======== ========= =====
- ---------------------------------------- -------------------- --------------------- -------------------- --------------------

- ---------------------------------------- -------------------------------------------------------------------------------------
Fiscal Year Ended March 31, 2003

- ---------------------------------------- -------------------- --------------------- -------------------- --------------------
Depreciation and
Gross Profit Amortization
Revenue Cost of Sales (Loss) Expense
------- ------------- ------ -------

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

Optical memory cards $ 24,247 $ 12,120 $ 12,127 $ 995
- ---------------------------------------- -------------------- --------------------- -------------------- --------------------
Optical card drives 693 1,579 (886) 81
-------- -------- --------- -------
- ---------------------------------------- -------------------- --------------------- -------------------- --------------------
Total for segments $ 24,940 $ 13,699 $ 11,241 $ 1,076
======== ======== ========= =======
- ---------------------------------------- -------------------- --------------------- -------------------- --------------------

The following is a reconciliation of segment results to amounts included in
the Company's consolidated financial statements (in thousands):

- ---------------------------------------- -------------------- --------------------- -------------------- --------------------
Total for segments $ 22,351 $ 12,126 $ 10,225 $ 789
- ---------------------------------------- -------------------- --------------------- -------------------- --------------------
Other (a) 2,555 73 2,482 1,660
-------- -------- --------- -------
- ---------------------------------------- -------------------- --------------------- -------------------- --------------------
Total $ 24,906 $ 12,199 $ 12,707 $ 2,449
======== ======== ========= =======
- ---------------------------------------- -------------------- --------------------- -------------------- --------------------

- ---------------------------------------- -------------------------------------------------------------------------------------
Fiscal Year Ended March 31, 2002
- ---------------------------------------- -------------------- --------------------- -------------------- --------------------
Depreciation and
Amortization
Revenue Cost of Sales Gross Profit Expense
------- ------------- ------------ -------

- ---------------------------------------- -------------------- --------------------- -------------------- --------------------
Total for segments $ 19,480 $ 10,635 $ 8,845 $ 859
- ---------------------------------------- -------------------- --------------------- -------------------- --------------------
Other (a) 1,409 17 1,392 697
-------- -------- --------- -------
- ---------------------------------------- -------------------- --------------------- -------------------- --------------------
Total $ 20,889 $ 10,652 $ 10,237 $ 1,556
======== ======== ========= =======
- ---------------------------------------- -------------------- --------------------- -------------------- --------------------

- ---------------------------------------- -------------------------------------------------------------------------------------
Fiscal Year Ended March 31, 2003
- ---------------------------------------- -------------------- --------------------- -------------------- --------------------
Depreciation and
Amortization
Revenue Cost of Sales Gross Profit Expense
------- ------------- ------------ -------

- ---------------------------------------- -------------------- --------------------- -------------------- --------------------
Total for segments $ 24,940 $ 13,699 $ 11,241 $ 1,076
- ---------------------------------------- -------------------- --------------------- -------------------- --------------------
Other (a) 1,391 207 1,184 753
-------- -------- --------- -------
- ---------------------------------------- -------------------- --------------------- -------------------- --------------------
Total $ 26,331 $ 13,906 $ 12,425 $ 1,829
======== ======== ========= =======
- ---------------------------------------- -------------------- --------------------- -------------------- --------------------

(a) Other revenue consists primarily of license revenue. Other cost of sales
and depreciation and amortization expense represents corporate and other
costs not directly associated with segment activities. These revenues,
costs, and expenses are not included in the measure of gross profit (loss)
used by the chief operating decision maker.

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

Fiscal Year
-----------
2001 2002 2003
---- ---- ----
United States................ $ 21,140 $ 18,832 $ 22,205
Canada....................... -- 606 2,764
Europe....................... 1,408 835 426
Asia ........................ 2,299 580 887
Rest of world................ 59 36 49
---------- --------- ----------
$ 24,906 $ 20,889 $ 26,331
========== ========= ==========

MAJOR CUSTOMERS. Two customers each accounted for more than 10% of revenues
during fiscal 2001, and one customer accounted for more than 10% of revenues in
fiscal 2002 and 2003, as follows:

Fiscal Year
-----------
2001 2002 2003
---- ---- ----
Customer A................... 62% 81% 94%
Customer B................... 22% 7% --

The revenues from these two customers was attributable to both the optical
memory cards and the optical card drives segments.

One United States customer comprised 98% of accounts receivable at March
31, 2002 and 99% of accounts receivable at March 31, 2003.

5. RELATED-PARTY TRANSACTIONS

On October 21, 2001, the Company entered into a one-year agreement with
Wexler & Walker Public Policy Associates, a unit of Hill and Knowlton, Inc.,
("Wexler") to be lobbyists on behalf of the Company. The Chairman of Wexler is
Robert S. Walker, a brother of director Walter F. Walker. In October 2002, the
agreement was extended for the period October 1, 2002 through September 2003, or
until terminated upon seven days' notice. The extended agreement provides for a
monthly retainer of $10,000. During the 2003 fiscal year, the Company paid
$96,985 to Wexler. There were no significant amounts due to Wexler as of March
31, 2002 or 2003.

6. COMMON STOCK

STOCK OPTION PLAN. The Company has one stock option plan (the Stock Option
Plan) under which 2,278,602 shares of common stock have been reserved as of
March 31, 2003, consisting of 2,059,798 shares for stock options already granted
and 218,804 shares for stock options not yet granted.

The Company's Stock Option Plan provides that stock options may be granted
to employees, officers, directors, and consultants of the Company and that
option prices may be no less than 100% of the fair market value of the shares at
the date of grant. No options were granted to consultants during fiscal 2001,
2002, or 2003. The Board of Directors specifies the term of options and the
vesting schedule for exercise of options. The option term cannot exceed ten
years (except that incentive stock options granted to a principal shareholder
cannot exceed five years). The following table lists Stock Option Plan activity
from March 31, 2000 through March 31, 2003:

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

Balance March 31, 2000..................... 237,920 1,908,210 $ 10.54
Authorized.............................. 300,000 --
Granted ................................ (364,800) 364,800 $ 15.73
Exercised............................... -- (141,810) $ 9.62
Expired ................................ 103,100 (103,100) $ 11.54
------- ---------
Balance March 31, 2001..................... 276,220 2,028,100 $ 11.49
------- ---------
Authorized.............................. 300,000 --
Granted ................................ (345,500) 345,500 $ 13.82
Exercised............................... -- (416,618) $ 9.52
Expired ................................ 83,251 (83,251) $ 13.86
------- ---------
Balance March 31, 2002..................... 313,971 1,873,731 $ 12.25
------- ---------
Authorized.............................. 275,000 --
Granted ................................ (394,000) 394,000 $ 16.03
Exercised............................... -- (184,100) $ 8.67
Expired ................................ 23,833 (23,833) $ 16.11
------- ---------
Balance March 31, 2003..................... 218,804 2,059,798 $ 13.25
======= =========

The following table summarizes information about stock options outstanding
at March 31, 2003:

OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------------------------------- ----------------------------------
Number Weighted-Average Weighted- Number Weighted-
Range of Outstanding Remaining Average Exercisable Average
Exercise Prices At 3/31/03 Contractual Life Exercise Price At 3/31/03 Exercise Price
--------------- ---------- ---------------- -------------- ---------- --------------

$ 6.97 - $10.75 334,515 5.2 years $ 9.11 258,598 $ 9.43
$10.91 - $12.69 593,308 5.1 years $ 11.76 542,794 $ 11.74
$13.06 - $15.56 730,775 7.7 years $ 14.05 324,775 $ 13.94
$16.47 - $22.75 401,200 8.2 years $ 17.43 124,000 $ 17.02
--------- ---------
Totals 2,059,798 1,250,167
========= =========

EMPLOYEE STOCK PURCHASE PLAN. The Company has an Employee Stock Purchase
Plan (Stock Purchase Plan), under which 84,461 shares are reserved as of March
31, 2003 for future purchases by employees. Under the Stock Purchase Plan,
eligible employees may designate from 2% to 6% of their compensation to be
withheld for the purchase of shares of common stock at 67% of a trailing average
price. The differential between fair market value and the average price of the
shares sold under the Stock Purchase Plan is charged to operations as a
compensation expense and is taxed to the employee as income. Under the Stock
Purchase Plan, employees purchased 12,964 shares for fiscal 2001, 12,942 shares
for fiscal 2002, and 18,405 shares for fiscal 2003. The average purchase price
per share was $9.51 for fiscal 2001, $10.52 for fiscal 2002, and $9.74 for
fiscal 2003. The weighted average market price per share for shares purchased
was $15.05 for fiscal 2001, $17.97 for fiscal 2002, and $14.76 for fiscal 2003.

7. COMMITMENTS AND CONTINGENCIES

The Company occupies its buildings under various operating leases. Rent
expense relating to these buildings was approximately $1,077,000 for fiscal
2001, $1,169,000 for fiscal 2002, and $1,186,000 for fiscal 2003. As of March
31, 2003, future minimum rental payments relating to these leases are (in
thousands):

Fiscal Year
-----------
2004..................... 1,221
2005..................... 911
2006..................... 856
2007..................... 139
Thereafter............... --
-------
$ 3,127

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

8. INCOME TAXES

The provision for income taxes for fiscal 2001, 2002, and 2003 consists of
the following (in thousands):

Fiscal Year
-----------

2001 2002 2003
---- ---- ----
Current provision:
Federal...................... $ 136 $ 49 $ 261
State........................ 220 213 98
Foreign...................... 354 -- --
--------- --------- ---------
710 262 359
--------- --------- ---------
Deferred provision:
Federal...................... (1,807) (3,048) 1,161
--------- --------- ---------

Income tax expense (benefit).... $ (1,097) $ (2,786) $ 1,520
========= ========= =========

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

Fiscal Year
-----------
2001 2002 2003
---- ---- ----
Tax rate reconciliation:
Federal statutory rate................. 34% 34% 34%
State tax, net of federal benefit..... 6% 6% 6%
Change in valuation allowance............. (58%) (159%) --
Alternative minimum taxes................. 2% -- --
------- ------ ------
(16%) (119%) 40%
======= ====== ======

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

2002 2003
---- ----
Net operating loss carryforwards:
Federal................................ $ 10,420 $ 10,311
Tax credits............................... 440 537
Reserves and accruals not
currently deductible for tax purposes.. 2,373 964
Depreciation.............................. 461 574
Capitalized patent costs.................. (175) (153)
Other ................................... 211 107
-------- --------
Total deferred tax asset............... 13,730 12,340
Valuation allowance, equity............... (5,318) (5,254)
-------- --------
Net deferred tax asset.................... $ 8,412 $ 7,086
======== ========

The Company analyzes its deferred tax assets with regard to potential
realization. The Company has established a valuation allowance on a portion of
the deferred tax assets as management could not conclude that it was more likely
than not that those deferred tax assets would be realized. The Company's
determination of the realizability of its deferred tax assets involves
considering all available evidence, both positive and negative, regarding the
likelihood of sufficient future income. The methodology used involves estimates
of future income which assumes ongoing profitability of its core business and
includes the estimated impact of future stock option deductions and the
expiration dates and amounts of net operating loss carryforwards. These
estimates of future income are projected through the life of the related
deferred tax assets using assumptions which management believes to be
reasonable. As of March 31, 2003, the Company would require approximately $17
million of future taxable income to realize the related deferred tax assets
recognized as of March 31, 2003.

There are timing differences between when certain items are included in
book income and when the same items are included on income tax returns.
Therefore, tax payments or credits often occur in different periods than when an
income tax expense or benefit is included in the statements of income.

The Company's federal net operating loss carryforwards as of March 31, 2003
of $30,326,000 will expire at various dates from 2005 through 2023, if not
utilized. The tax effect of this amount is reflected above in the $10,311,000
amount. Of this amount, $5,254,000 will be credited to stockholders' equity to
the extent the Company concludes that it is more likely than not that this
amount will be realized. Tax credits in the amount of $300,000 for alternative
minimum taxes have no expiration. Other tax credits in the amount of $237,000
will expire on various dates from 2013 through 2018 if not utilized.

9. SUBSEQUENT EVENT (Unaudited)

The Company learned on July 10, 2003, that its subsidiary, LaserCard
Systems Corporation, had been named as one of several defendants in a lawsuit
brought by George Rawe. Mr. Rawe alleged in the lawsuit that he was injured in
laser eye surgery performed using a VISX, Incorporated laser that incorporated a
LaserCard as a component. Mr. Rawe is suing the physicians involved for
malpractice and VISX, Incorporated, the Company, and various unnamed defendants
for product liability, alleging their products were defective. The lawsuit was
filed in California Superior Court for San Joaquin County, case number CV020962
and seeks an amount of damages which are not quantified. The Company is just
beginning to evaluate the complaint and the Company's defenses, including the
availability of insurance coverage and any rights or obligations of
indemnification involving VISX, Incorporated.