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 fiscal year ended March 31, 2008, included in the Company's fiscal year 2008 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; our expectation that the optical memory card license and factory equipment project for Prevent Global will be completed within twelve months of September 30, 2008; our expectations as to production quantities, delivery rates and requested and actual delivery schedule, backlog, revenue, and revenue potential for our products for U.S. or foreign government ID card programs at various future times, including at full implementation; plans to increase card production capacity for anticipated increases in orders including possibly $2 million in capital equipment and leasehold improvements during the next six months; and expecting growth of less than 10% in the specialty card and printer segment and expecting negative gross profit from the drive, system and enabling services market; our ability to obtain photographic film from Kodak; our intent to pursue patent infringers by litigation, arbitration, or negotiation and the outcome of such actions; the need for, expected success of, and potential benefits from our research and development effort; expectations regarding the continuation of various ID card programs and regarding revenues (overall and by segment and by customer), margins, and our profit (including likely losses in the future if full implementation of the Italian program is further delayed); our expectation that R&D expenses will be $500,000 for each of the next two quarters; our plan to expand our Enabling Services business; our plans regarding the growth and associated capital costs of expanding optical card production capacity; estimates that revenues and advance payments will be sufficient to generate cash from operating activities during fiscal 2009 and 2010 and fund our actual capital expenditures despite expected quarterly fluctuations; expectations regarding market growth, product demand, and continuation of current programs; our long-term revenue growth objectives and drive pricing strategy; our projected liquidity in light of the issues surrounding our investments in auction rate securities and our ability to secure more contracts; and our belief as to the credit quality of our auction rate securities and the temporary nature of the decline in the value of these securities and that the line of credit we will receive from UBS AG wil be on favorable terms.

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. Saudi Arabian, government business and potential Angolan and Italian business; risks associated with doing business in and with foreign countries; whether we will be successful in assisting Prevent Global with factory startup and training; whether Prevent Global will obtain the financial resources to make the balance of its required payments to us and to operate the facility; whether the facility will efficiently produce high quality optical memory cards in volume and that meet our standards; lengthy sales cycles and changes in and dependence on government policy-making; reliance on value-added resellers and system integrators to generate sales, perform customer system integration, develop application software, integrate optical card systems with other technologies, test products, and work with governments to implement card programs; 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, the Kingdom of Saudi Arabia and India, or for Department of Homeland Security (DHS) programs in the U.S., or will not be selected for other government programs in the U.S. and abroad; whether we will be successful in developing alternative optical recording media; whether UBS AG will provide us with a credit line until it purchases our auction rate securities, 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 SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities ("SFAS No. 159") and Issue No. 07-3 ("EITF 07-3"), Accounting for Nonrefundable Advance Payments for Goods or Services to Be Used in Future Research and Development Activities 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, 2008 have not changed materially.

RESULTS OF OPERATIONS

Overview

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

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

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

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

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

                                  Three Months Ended          Six Months Ended
                                     September 30,              September 30,
                                   2008          2007         2008         2007
            U.S. operations     $    9,539     $  7,424     $ 16,629     $ 12,340
            German operations        3,928        3,315        7,560        6,254
                                $   13,467     $ 10,739     $ 24,189     $ 18,594

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 generally from a relatively large number of commercial customers in Germany and Europe, Middle East and Africa, that is the EMEA, region.

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

Optical memory cards are a proprietary product of LaserCard Corporation for which we hold 21 U.S. patents. In addition, we have years of know-how in the manufacture and use of cards, encoding devices, read/write drives, systems, enabling services and software. This provides a basis for highly leveraged contribution margins in the optical memory card segment. Therefore, our strategy is to sell all card technologies with a goal to upgrade programs to optical memory when possible.

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

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

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

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

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

Currently our optical memory card segment revenues are mainly derived from the following programs; the U.S. Department of Homeland Security (DHS) Permanent Resident Card (Green Card) program, the Canadian government Permanent Resident Card program, a national ID card for the Kingdom of Saudi Arabia, three state-level vehicle registration card program in India, and the Foreign Resident ID card program in Costa Rica. Also there are emerging programs such as the national citizen ID card program in Italy, two foreign resident ID card programs in Italy, a government agency card program in Italy, and the recently announced national ID card program in Angola.

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

                                        Three Months Ended         Six Months Ended
                                          September 30,             September 30,
                                        2008         2007         2008         2007
  National ID Cards in the Kingdom       22%          30%          20%          23%
  of Saudi Arabia
  U.S. Green Cards                       20%          20%          18%          23%
  Canadian Permanent Resident            9%           10%          5%           7%
  Cards
  Vehicle Registration in India          10%          6%           12%          7%

Since our fiscal year ended March 31, 1998, the U.S. Permanent Resident Card
(the "Green Card") program for the U.S. Department of Homeland Security (DHS)
has been an important part of our revenue base. We recorded card revenues of about $6.4 million in each of the past two fiscal years for this program. In March 2007 we received a five-year follow-on subcontract for this program with an initial one-year term and four one-year extension options of which the first year was exercised. Orders generally are received calling for deliveries over several months or more. Therefore, our backlog varies greatly from quarter to quarter. Our current backlog at September 30, 2008 of $0.8 million partly includes the test quantities of a redesigned card with updated security features. The transition to a redesigned card could cause delays in future orders as DHS reduces its inventory of current cards that were designed in 1997. However, we anticipate that this decrease will be followed by an increase in orders of the newly designed cards to replenish the strategic reserve, although no assurance can be given that this will occur. We anticipate an order for these redesigned cards this fiscal year.

Another U.S. government program, the Border Crossing Card (BCC) accounted for approximately $1 million in revenue during each of the past two fiscal years. We recorded revenue of $0.2 million for this program during the three and six-month periods ended September 30, 2008 and we expect this business to cease as the card is reconfigured in keeping with the requirements of the Western Hemisphere Travel Initiative.

We also supply secure National ID Cards to the Kingdom of Saudi Arabia. We recorded revenue of $3 million and $4.8 million of cards and optical card drives, during the three and six-month periods ended September 30, 2008, respectively. We recorded revenue of $3.2 million and $4.3 million of card and optical card drives, during the three and six-month periods ended September 30, 2007, respectively. There was $2.8 million of backlog for this program at September 30, 2008. We anticipate revenue of $5 million to $10 million annually for this program.

During the three-month period ended June 30, 2008, we recorded revenue of $1.7 million under a contract with the government of Costa Rica for the supply of an ID Management System for the country's Foreign Resident Card program. The ID Management System included a suite of demographic and biometric data collection and card issuance equipment and software solutions to assist the Costa Rican government to manage the issuing of highly secure optical memory-based Foreign Resident ID Cards. The applications include the centralized enrollment of legal foreign residents, automatic fingerprint identification to prevent the issuance of duplicate cards, optical memory encoding and card printing servers, quality assurance and card issuance controlled by our Biometric Verification System. The issuance process also includes biometric identification of workstation operators and strict card auditing processes. The contract terms included a limited supply of Foreign Resident ID Cards, which incorporate a number of security features in addition to our secure optical memory. The card's optical memory will store cardholder information including high resolution color facial image, fingerprint images and templates (for automatic one-to-one identity verification), digitized signature and biographic data. In addition, the optical stripe will also feature our unique Personalized Embedded HologramHD, a personalized optical variable device which, like the digital data, recorded on our optical stripe, cannot be fraudulently altered. There was no revenue recorded for this contract during the three-month period ended September 30, 2008.

The Italian Citizen ID (CIE) Card program has been largely stalled since January 2006 following a change of government and legal disputes around the contractual management of the program. Should the program proceed in line with the government's earlier stated intentions, and the cards be issued over a five-year period, we would anticipate that card orders could ramp toward their full implementation level which could result in annual revenues of $35 million. There was no revenue recorded for this program during the three-month period ended September 30, 2008. We shipped small quantities against orders for special foreign language versions of the Citizen ID Card during the three-month period ended June 30, 2008, and the three and six-month periods ended September 30, 2007. It remains unclear when the prime contractor will issue follow-on orders for this program. We do not expect significant orders this fiscal year.

The issuance system for two Foreign Resident Card programs in Italy is in place and operating and we believe issuing about 5,000 cards per day. Our card backlog for this program at September 30, 2008 was $0.7 million. We believe that follow-on orders will be received during the current fiscal year although it remains unclear when the prime contractor will issue such follow-on orders.

In March 2008, we signed an agreement granting Ritel of Rieti, Italy, the non-exclusive right to manufacture our optical memory read/write drives in Italy and distribute the resulting products worldwide. Ritel, a telecommunications and technology contract manufacturer, has significant know-how and experience in new production processes and new product development which could lead to further innovation and development of lower cost drives. We recorded revenue of $0.5 million during the three-month period ended September 30, 2008 for training and the supply of parts sets to Ritel to manufacture the drives.

In January 2008, the government of Angola announced a contract award to DGM-Sistemas ("DGM"), of Luanda, Angola, for the delivery of a complete ID management system. The contract calls for an initial 8 million optical memory cards for the country's new national citizen ID program to be issued as the infrastructure is built. Up to an additional 12 million cards could be issued later. We teamed with DGM as the exclusive supplier of cards for the project. Other team members include Unisys Corporation (NYSE: UIS) which is responsible for systems integration and our value-added reseller, Identicard S.A. of Portugal, which developed the system architecture. The DGM bid includes $103 million of products and services to be provided by LaserCard including optical memory cards, card personalization systems, printer consumables, installation and training under a five-year subcontract. In July, 2008, we received advance payments in the amount of $5.8 million representing fifty percent (50%) of the value of an order for cards, printers, encoders and consumables. Our backlog at September 30, 2008 for this order includes $8.8 million for optical memory cards, drives, systems, and enabling services, and $2.5 million for hardware and consumables.

The optical memory card license and factory equipment project for Prevent Global/GIG is now expected to be completed within twelve months of September 30, 2008. As a result, we have classified the deferred revenue and advance payments totaling $27.7 million for this project as current liabilities and the equipment held for resale to GIG valued at $6.9 million, as current assets in the condensed consolidated balance sheet. Deferred revenue and advance payments do not represent an obligation on our part to make a future cash payment; instead, we will recognize revenue equal to these current liabilities when the contract is completed. The advance payments received are not refundable. The classification of these large amounts as current assets and liabilities will affect our working capital and current ratio measures until the project is complete and the revenues and costs are recorded in the statement of operations.

We may invest up to $2 million in additional capital equipment and leasehold improvement expenditures for optical memory card and specialty card production capacity and manufacturing enhancement at our facilities through March 31, 2009, as more fully discussed under "Liquidity and Capital Resources."

Revenues

Product Revenues. Our total revenues consisted of sales in our three segments of
(1) optical memory cards, (2) drives, systems and enabling services, and (3) specialty cards and card printers, as well as, at times, other miscellaneous items. Product revenues for the three and six-month periods ended September 30, 2008 were $13.5 million and $24.2 million, respectively. Product revenues for the three and six-month periods ended September 30, 2007 were $10.7 million and $18.6 million, respectively.

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

                                        Three Months Ended               Six Months Ended
                                          September 30,                    September 30,
                                       2008            2007            2008            2007
Optical memory cards               $      8,632     $     6,692     $    14,536     $    11,254
% of total revenues                          64 %            62 %            60 %            61 %

Optical cards drives, systems
and enabling services                       908             732           2,093           1,087
% of total revenues                           7 %             7 %             9 %             6 %

Specialty cards and card
printers                                  3,927           3,315           7,560           6,253
% of total revenues                          29 %            31 %            31 %            34 %
Total revenues                     $     13,467     $    10,739     $    24,189     $    18,594

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

                                        Three Months Ended                Six Months Ended
                                           September 30,                    September 30,
                                       2008             2007            2008            2007
National ID Cards in the Kingdom
of Saudi Arabia                    $      2,673      $     2,680     $     4,455     $     3,545
U.S. Green Cards & Laser Visas            2,855            2,100           4,472           4,830
Vehicle Registration in India             1,281              635           2,791           1,234
Foreign Resident ID Card Program
in Costa Rica                                 -                -             736               -
Canadian Permanent Resident
Cards                                     1,205            1,028           1,205           1,210
Italian ID Card Programs                    522              154             542             183
All other programs                           96               95             335             252
Total optical memory card
revenues                           $      8,632      $     6,692     $    14,536     $    11,254

OMC revenue increased for the three-month period ended September 30, 2008 by 29% as compared with the three-month period ended September 30, 2007 due to the increases in card unit volumes in most programs.

Revenue in the drives, systems and enabling services segment increased $0.2 million for the three-month period ended September 30, 2008 as compared with the three-month period ended September 30, 2007 due to the supply of parts sets to Ritel to manufacture encoders. The $1 million increase in the six-month period ended September 30, 2008 as compared with the same period last year was mainly due to enabling services revenue recorded on a contract for Costa Rica.

Specialty cards and printers revenue was approximately $3.9 million for the three-month period ended September 30, 2008 or an increase of 18% from the $3.3 million for the three-month period ended September 30, 2007, with 8% due to an increase in sales and 11% attributable to increase in foreign currency exchange rates. We anticipate growth in this segment over the remainder of the current fiscal year mainly comprised of card issuing systems in Angola.

License Fees and Other Revenues. There were no license revenues for the three and six-month periods ended September 30, 2008 and 2007. In fiscal year 2004, we entered into license and optical memory card equipment purchase and support agreements, effective April 3, 2004, with Global Investments Group (GIG), based . . .