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 2008 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" Or similar language. Forward-looking statements made in this report include statements regarding our beliefs as to current and potential market segments, customers, and applications for and deployment of our products; the advantages of, potential income from, and duties to be performed under the sale of a second-source card manufacturing license to Prevent Global; our expectation that the optical memory card license and factory equipment project for Prevent Global will be completed within twelve months of December 31, 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 $0.4 million in capital equipment and leasehold improvements during the next three 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 $350,000 in the fourth quarter; 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 ARSs and our ability to secure more contracts; and our belief as to the credit quality of our ARSs and the changes in the fair value of these securities and our belief that the Put Option will not significantly impact our future earnings.

These forward-looking statements are based upon our assumptions about and assessment of the future, which may or may not prove true, and involve a number of risks and uncertainties including, but not limited to, whether there is a market for cards for homeland security in the U.S. and abroad, and if so whether such market will utilize optical memory cards as opposed to other 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 ARSs, and the risks set forth in the section entitled "Risk Factors" 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

The preparation of condensed consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, sales and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates, including those related to bad debts, inventories, intangible assets, income taxes, restructurings, pensions and other post-retirement benefits, stock-based compensation, warranty costs, contingencies and litigation. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

Critical accounting policies are those policies that affect our more significant judgments and estimates used in the preparation of our condensed consolidated financial statements. We believe our critical accounting policies include our policies regarding revenue recognition, allowances for doubtful accounts, inventory valuation, business combinations, value of long-lived assets, including intangibles, employee compensation and benefits, restructuring activities, gains or losses on dispositions and income taxes. For a more detailed discussion of our critical accounting policies, please refer to the 2008 Form 10-K.

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 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 our VAR and SI reseller channel.

Our revenues are derived mainly from advanced technology cards used in government identity programs, such as optical memory, contact, contactless and RFID cards, and from high quality specialty cards for applications such as major event badging and access control. The remainder of our revenues come 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 recorded by our U.S. and German operations (in thousands):

                                  Three Months Ended          Nine Months Ended
                                     December 31,                December 31,
                                   2008          2007         2008          2007
            U.S. operations     $    6,609     $  8,098     $  23,238     $ 20,438
            German operations        4,297        3,061        11,857        9,315
                                $   10,906     $ 11,159     $  35,095     $ 29,753

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 the rest of Europe, the Middle East and Africa, or 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, holograms, 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 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%.

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

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

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

? 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, a Foreign Resident ID Card program in Italy, and the Foreign Resident ID card program in Costa Rica. Also there are emerging programs such as the National Citizen ID Card program in Italy, a government agency card program in Italy, and the recently announced National ID Card program in Angola.

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

                                     Three Months Ended      Nine Months Ended
                                        December 31,            December 31,
                                      2008        2007        2008        2007
        National ID Cards in the      25%         38%         22%         29%
        Kingdom of Saudi Arabia
        U.S. Green Cards              20%          8%         18%         17%
        National ID Card in           17%           -         <10%          -
        Angola
        Vehicle Registration in       <10%        12%         10%         <10%
        India

In January, 2009, we received a purchase order of approximately $8 million for the supply of new advanced U.S. Permanent Resident Cards (the "Green Card"). The order calls for deliveries to commence in March 2009 and be completed by October 2009.

In January, 2009, we received a follow-on purchase order valued at $5.4 million for the National ID card program in the Kingdom of Saudi Arabia. Deliveries are scheduled to begin in the quarter ending March 31, 2009 and are scheduled to be completed in the quarter ending June 30, 2009.

In January 2008, the government of Angola announced a contract award to DGM-Sistemas ("DGM"), of Luanda, Angola, for the delivery of a complete ID management system. The contract calls for an initial 8 million optical memory cards for the country's new national citizen ID program to be issued as the infrastructure is built. Up to an additional 12 million cards could be issued later. We teamed with DGM as the exclusive supplier of cards for the project. Other team members include Unisys Corporation (NYSE: UIS) which is responsible for systems integration and our value-added reseller, Identicard S.A. of Portugal, which developed the system architecture. The DGM bid includes $103 million of products and services to be provided by LaserCard including optical memory cards, card personalization systems, and printer consumables under a five-year subcontract. On October 30, 2008 we announced the receipt of purchase orders totaling $11.6 million for the Angola national citizen ID program. These orders were preceded by advance payments in the amount of $5.8 million received in July 2008, representing fifty percent (50%) of the value of an order for cards, printers, encoders and consumables. We recorded revenue of approximately $2 million for card personalization equipment during the three and nine-month periods ended December 31, 2008. Our backlog at December 31, 2008 for this order includes $8.8 million for optical memory cards and approximately $0.8 million for hardware and consumables.

We may invest up to $0.4 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

Segment 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. Revenues for the three and nine-month periods ended December 31, 2008 were $10.9 million and $35.1 million, respectively. Revenues for the three and nine-month periods ended December 31, 2007 were $11.2 million and $29.8 million, respectively.

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

                                        Three Months Ended               Nine Months Ended
                                           December 31,                     December 31,
                                       2008            2007             2008            2007
Optical memory cards               $      5,984     $     7,924     $     20,520     $    19,178
% of total revenues                          55 %            71 %             58 %            64 %

Optical cards drives, systems
and enabling services                       738             174            2,831           1,261
% of total revenues                           7 %             2 %              8 %             4 %

Specialty cards and card
printers                                  4,297           3,061           11,857           9,314
% of total revenues                          39 %            27 %             34 %            31 %

Elimination of Intersegment
revenue                                    (113 )             -             (113 )             -
% of total revenues                          -1 %           N/A              <1%             N/A

Total revenues                     $     10,906     $    11,159     $     35,095     $    29,753

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

                                        Three Months Ended                Nine Months Ended
                                           December 31,                      December 31,
                                       2008             2007             2008            2007
National ID Cards in the Kingdom
of Saudi Arabia                    $      2,623      $     4,105     $      7,078     $     7,650
U.S. Green Cards                          1,999              855            6,272           5,055
Vehicle Registration in India               611            1,375            3,402           2,609
Foreign Resident ID Cards in
Costa Rica                                  703                -            1,439               -

Optical memory cards revenues decreased for the three-month period ended December 31, 2008 by 24% as compared with the three-month period ended December 31, 2007 due to a 41% decrease in card unit volume. There was a slight increase in average selling price due partially to offset third party commissions on new programs. Optical memory cards revenues increased by 6% for the nine-month period ended December 31, 2008 as compared with the nine-month period ended December 31, 2007 due to an increase in average selling price caused by product mix.

Revenues in the drives, systems and enabling services segment increased $0.6 million for the three-month period ended December 31, 2008 as compared with the three-month period ended December 31, 2007 due to an increase in unit volume. The $1.6 million increase in the nine-month period ended December 31, 2008 as compared with the same period last year was due to increased unit volume and services revenue recorded on a contract for Costa Rica.

Specialty cards and card printers revenues were approximately $4.3 million for the three-month period ended December 31, 2008 or an increase of 40% from the $3.1 million for the three-month period ended December 31, 2007, due to an increase in sales of $1.6 million mainly for the Angola ID Card program partially offset by $0.4 million due to the decrease in the Euro/Dollar exchange rates. Specialty cards and card printers revenues of approximately $11.9 million for the nine-month period ended December 31, 2008 increased 27% from the $9.3 million for the nine-month period ended December 31, 2007, due to an increase in sales of $2 million and $0.5 million attributable to a favorable effect of Euro/Dollar exchange rates. We anticipate further deliveries of card issuing systems for Angola in the amount of $0.8 million over the remainder of the current fiscal year; however, the weakening world economy will probably have a negative effect on some portions of the specialty cards and card printers segment.

Backlog

Some of our customers generally place orders for a period of several months to a year or more, and others place orders for immediate or fast turn delivery. Variations in order placement from a single customer can materially affect backlog. As a result, the relative size of our backlog has not been a reliable indicator of future revenues trends.

Gross Margin

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

                                              Three Months Ended            Nine Months Ended
                                                 December 31,                  December 31,
                                              2008           2007           2008          2007
Optical memory cards                       $    2,781      $   3,268     $    8,581     $   7,091
% of optical memory card revenues                  46 %           41 %           42 %          37 %

Optical cards drives, systems and
enabling services                                (147 )         (218 )          (84 )        (552 )
% of optical card drives, systems and
enabling services revenues                         NM             NM             NM            NM

Specialty cards and card printers                 958            439          3,127         1,800
% of specialty cards and card printers
revenues                                           22 %           14 %           26 %          19 %
Total gross margin                         $    3,592      $   3,489     $   11,624     $   8,339
% of total gross revenues                          33 %           31 %           33 %          28 %

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. Production unit volume greatly affects gross margin due to the absorption of fixed manufacturing costs. Optical memory card gross margin increased by 5 percentage points to 46% for the three-month period ended December 31, 2008 as compared with 41% for the three-month period ended December 31, 2007. The increase was due mainly to an increase in average selling price due partially to offset third party commissions included in the selling price. These commissions are recorded in selling, general and administration expense. Optical memory card gross margin of 42% for the nine-month period ended December 31, 2008 increased by 5 percentage points as compared with the 37% gross margin for the nine-month period ended December 31, 2007 and was mainly due to an increase in average selling price.

Drives, Systems and Enabling Services. We do not anticipate that we will derive significant profits in the near term on drives sales as prices are set near the manufacturing cost in order to promote optical memory card sales. Except for the quarter ended June 30, 2008, drives, systems and enabling services gross margin has been negative over the past three years, inclusive of fixed overhead costs, due to low sales volume and our policy to price drives close to manufacturing cost to promote card sales. This segment also includes enabling services, which also have lower margins than optical memory cards. Although the gross margin improved slightly with increased sales during the three-month period ended December 31, 2008 as compared with the three-month ended December 31, 2007, the increased costs due to the reallocation of resources with the associated overhead expenses in the amount of approximately about $0.2 for the implementation of enabling services capabilities resulted in a lower gross margin. This is expected to continue until and if enabling services revenues increase. During the nine-month period ended December 31, 2008, gross margin has improved by $0.5 million due to increased sales of approximately $1.7 million in enabling services revenue mainly from the Foreign Resident ID Card program in Costa Rica. There was a non-cash charge of approximately $0.1 million for obsolete inventory reserve, a $0.2 write-off of obsolete tooling, and increased overhead of $0.2 million due to the reallocation of resources.

Specialty Cards and Card Printers. The gross margin on specialty cards and card printers was 22% for the three-month period ended December 31, 2008 compared with 14% for the three-month period ended December 31, 2007 due to an increase . . .