item 14 exhibits financial statement schedules reports form 8k list documents filed part report 1 consolidated financial statements company filed herewith item 8 follows 2 financial statement schedules none schedules listed applicable required information required set forth therein included consolidated financial statements notes thereto 3 exhibits report filed herewith item 14c incorporated reference documents previously filed securities exchange commission follows exhibits listed applicable registrant b reports form 8k company file reports form 8k quarter ended march 31 1997 c exhibits 324 22 24 27 filed herewith financial statement schedules none signatures pursuant requirements section 13 15d securities exchange act 1934 registrant caused report signed behalf undersigned thereunto duly authorized dated june 25 1997 drexler technology corporation sjerome drexler jerome drexler chairman chief executive officer pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated item 14 exhibits financial statement schedules reports form 8k list documents filed part report 1 consolidated financial statements company filed herewith item 8 follows page number 1 report independent public accountants 30 2 consolidated balance sheets march 31 2001 march 31 2002 32 3 consolidated statements income fiscal years 2000 2001 2002 33 4 consolidated statements stockholders equity fiscal years 2000 2001 2002 34 5 consolidated statements cash flows fiscal years 2000 2001 2002 35 6 notes consolidated financial statements 36 2 financial statement schedules schedule supporting companys consolidated financial statements filed herewith item 14d follows schedule number description page number report independent accountants 54 financial statement schedules ii valuation qualifying accounts 55 schedules listed applicable required information required set forth therein included consolidated financial statements notes thereto 3 exhibits report filed herewith item 14c incorporated reference documents previously filed securities exchange commission follows indicates management contract compensatory plan arrangement b reports form 8k april 12 2002 company filed report form 8k reported item 4 change independent public accountants fiscal year ended march 31 2002 may 15 2002 company filed report form 8k reported item 5 issuance press release containing financial results fourth quarter fiscal year ended march 31 2002 restatement financial results fiscal 1998 fiscal 2001 first nine months fiscal 2002 due changes timing revenue recognition c exhibits 32 23 filed herewith financial statement schedule ii companys consolidated financial statements follows page 55 report independent accountants financial statement schedules board directors drexler technology corporation audit consolidated financial statements drexler technology corporation referred report dated may 13 2002 report consolidated financial statements included annual report form 10k also included audit financial statement schedules fiscal 2002 listed item 14a2 form 10k opinion financial statement schedules present fairly material respects information set forth therein read conjunction related consolidated financial statements pricewaterhousecoopers llp san jose california may 13 2002 schedule ii drexler technology corporation subsidiaries valuation qualifying accounts fiscal years ended march 31 2000 2001 2002 signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized dated june 21 2002 drexler technology corporation jerome drexler jerome drexler chairman chief executive officer know persons presents person whose signature appears constitutes appoints jerome drexler steven g larson acting individually attorneyinfact full power substitution resubstitution name place stead capacities sign amendments report form 10ka file exhibits thereto documents connection therewith securities exchange commission granting unto said attorneysinfact agents full power authority perform every act thing requisite necessary done connection therewith premises fully intents purposes might could person hereby ratifying confirming said attorneysinfact agents substitute substitutes may lawfully cause done virtue hereof pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated index exhibits item 14c exhibit number description 31 amended restated certificate incorporation previously filed exhibit 311 report form 10q period ended september 30 2000 incorporated herein reference 32 amended restated bylaws july 24 2001 filed herewith 101 building lease agreement milla raymond handley 1992 trust marine way previously filed exhibit 1016 report form 10k fiscal year ended march 31 2000 incorporated herein reference 1011 building lease agreement renault handley employees investment co bayshore parkway previously filed exhibit 101 report form 10q period ended september 30 2000 incorporated herein reference 102 optical memory card manufacturing license canon inc previously filed exhibit 4 report form 8k dated january 10 1989 incorporated herein reference 103 optical memory card manufacturing license optical memory card business corporation previously filed exhibit 108 report form 10k fiscal year ended march 31 1991 incorporated herein reference 104 stock option plan previously filed exhibit 101 report form 10q period ended september 30 2000 incorporated herein reference 1041 amendment stock option plan previously filed exhibit 1041 report form 10k filed june 28 2001 incorporated herein reference 105 patent license agreement nippon conlux co ltd previously filed exhibit 106 report form 10k fiscal year ended march 31 1999 incorporated herein reference 106 subcontract information spectrum inc dated june 2 2000 previously filed exhibit 106 report form 10k filed june 28 2001 incorporated herein reference 16 letter change certifying accountant previously filed exhibit 16 report form 8k dated april 8 2002 21 subsidiaries registrant previously filed exhibit 21 report form 10k filed june 28 2001 incorporated herein reference 23 consents independent accountants filed herewith page 59 item 14 principal accountant fees services information required disclosed item pursuant item 9e schedule 14a contained proxy statement caption “independent auditors fees matters” incorporated annual report form 10k reference part iv item 15 item 14 principal accountant fees services information required disclosed item pursuant item 9e schedule 14a contained proxy statement caption “independent auditors fees matters” incorporated annual report form 10k reference part iv item 15 item 14 principal accountant fees services audit nonaudit fees following table shows aggregate fees billed company previous independent accountants kpmg llp kpmg pricewaterhousecoopers llp pwc current independent accountants odenberg ullakko muranishi co llp oum services related fiscal years 2005 2004 audit fees includes fees associated annual audit financial statements internal control financial reporting compliance regulatory requirements sarbanesoxley act 2002 review quarterly reports form 10q annual report form 10k periodic reports form 8k consents issued connection form s8 s3 filings assistance review documents filed sec auditrelated fees auditrelated services principally include employee benefit plan audits due diligence services tax fees includes fees tax compliance tax return preparation assistance general tax planning taxrelated services acquisition international tax consulting fees company billed oum kpmg pwc services audit nonaudit fees approved audit committee companys policy auditor independence permit employment independent auditor material nonaudit related services except following services incidental directly related audit activities tax related activities tax planning behalf company audit committee considered whether provision services audit services compatible maintaining auditors independence preapproval policies procedures companys policy nonaudit services performed companys independent auditor approved advance audit committee companys policy auditor independence requires prior engaging independent auditor nonaudit related activity specifically authorized companys policy auditor independence company management report audit committee nature proposed activity including reasons necessary beneficial company use independent auditor engage activity ii steps taken ensure engagement independent auditor activity among things violate applicable laws regulations united states applicable states rules regulations nasdaq stock market companys securities listed order company engage independent auditor proposed activity company must obtain audit committee approval part iv item 15 item 14 principal accountant fees services information required disclosed item pursuant item 9e schedule 14a contained proxy statement caption “audit committee report outside accountantrelated matters” incorporated annual report form 10k reference part iv item 15 item 14 controls procedures evaluation disclosure controls procedures companys principal executive officer principal financial officer evaluated companys disclosure controls procedures defined exchange act rules 13a14c 15d14c within 90 days prior filing form 10k determined reasonable taking account totality circumstances changes internal controls significant changes companys internal controls factors could significantly affect controls subsequent date evaluation shortly prior release companys earnings statement period covered form 10k part iv item 15 item 14 principal accountant fees services audit nonaudit fees following table shows aggregate fees billed company previous independent accountants pricewaterhousecoopers llp pwc current independent accountants kpmg llp kpmg services related fiscal years 2003 2004 1 includes pwc fees review first quarter fiscal 2004 9700 transition pwc kpmg 82700 s8 s3 registration statements filed fiscal 2004 2 includes 144260 fiscal 2004 ninemonth audit s8 s3 registration statements filed fiscal 2004 3 includes 30267 tax consultation relating fiscal 2004 acquisition challenge card design gmbh cards gmbh audit nonaudit fees approved audit committee companys policy auditor independence permit employment independent auditor material nonaudit related services except following services incidental directly related audit activities tax related activities tax planning behalf company audit committee considered whether provision services audit services compatible maintaining auditors independence preapproval policies procedures companys policy nonaudit services performed companys independent auditor approved advance audit committee companys policy auditor independence requires prior engaging independent auditor nonaudit related activity specifically authorized companys policy auditor independence company management report audit committee nature proposed activity including reasons necessary beneficial company use independent auditor engage activity ii steps taken ensure engagement independent auditor activity among things violate applicable laws regulations united states applicable states rules regulations nasdaq stock market companys securities listed order company engage independent auditor proposed activity company must obtain audit committee approval part iv item 15 item 14 principal accountant fees services audit nonaudit fees following table shows aggregate fees billed company previous independent accountants kpmg llp “kpmg” current independent accountants odenberg ullakko muranishi co llp “oum” services related fiscal years 2006 2005 · audit fees includes fees associated annual audit financial statements internal control financial reporting compliance regulatory requirements sarbanesoxley act 2002 review quarterly reports form 10q annual report form 10k periodic reports form 8k consents issued connection form s8 s3 filings assistance review documents filed sec · auditrelated fees auditrelated services principally include employee benefit plan audits due diligence services · tax fees includes fees tax compliance tax return preparation assistance general tax planning taxrelated services acquisition international tax consulting · fees company billed oum kpmg services audit nonaudit fees approved audit committee company’s policy auditor independence permit employment independent auditor material nonaudit related services except following services incidental directly related audit activities tax related activities tax planning behalf company audit committee considered whether provision services audit services compatible maintaining auditors’ independence preapproval policies procedures company’s policy nonaudit services performed company’s independent auditor approved advance audit committee company’s policy auditor independence requires prior engaging independent auditor nonaudit related activity specifically authorized company’s policy auditor independence company management report audit committee nature proposed activity including reasons necessary beneficial company use independent auditor engage activity ii steps taken ensure engagement independent auditor activity among things violate applicable laws regulations united states applicable states rules regulations nasdaq stock market company’s securities listed order company engage independent auditor proposed activity company must obtain audit committee approval part iv item 15 item 14 exhibits financial statement schedules reports form 8k list documents filed part report 1 consolidated financial statements company filed herewith item 8 follows schedules listed applicable required information required set forth therein included consolidated financial statements notes thereto 3 exhibits report filed herewith item 14c incorporated reference documents previously filed securities exchange commission follows indicates management contract compensatory plan arrangement b reports form 8k company file reports form 8k quarter ended march 31 2001 c exhibits 1041 106 21 23 filed herewith financial statement schedule ii companys consolidated financial statements follows immediately schedule ii drexler technology corporation subsidiaries valuation qualifying accounts fiscal years ended march 31 1999 2000 2001 signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized dated june 28 2001 drexler technology corporation sjerome drexler jerome drexler chairman chief executive officer pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated index exhibits item 14c item 14 principal accountant fees services information required disclosed item pursuant item 9e schedule 14a contained proxy statement caption “independent auditors fees matters” incorporated annual report form 10k reference part iv item 15 item 14 exhibits financial statement schedules reports form 8k list documents filed part report 1 consolidated financial statements company filed herewith item 8 follows 2 financial statement schedules none schedules listed applicable required information required set forth therein included consolidated financial statements notes thereto 3 exhibits report filed herewith item 14c incorporated reference documents previously filed securities exchange commission follows exhibits listed applicable registrant b reports form 8k company file reports form 8k quarter ended march 31 1996 c exhibits 1012 220 240 contained herein financial statement schedules none signatures pursuant requirements section 13 15d securities exchange act 1934 registrant caused report signed behalf undersigned thereunto duly authorized dated june 27 1996 drexler technology corporation sjerome drexler jerome drexler president pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated item 14 exhibits financial statement schedules reports form 8k list documents filed part report 1 consolidated financial statements company filed herewith item 8 follows page number 1 report independent public accountants 26 2 consolidated balance sheets march 31 1999 march 31 2000 27 3 consolidated statements income fiscal years 1998 1999 2000 28 4 consolidated statements stockholders equity fiscal years 1998 1999 2000 29 5 consolidated statements cash flows fiscal years 1998 1999 2000 30 6 notes consolidated financial statements 31 2 financial statement schedules schedule supporting companys consolidated financial statements filed herewith item 14d follows schedule page number description number ii valuation qualifying accounts 47 schedules listed applicable required information required set forth therein included consolidated financial statements notes thereto 3 exhibits report filed herewith item 14c incorporated reference documents previously filed securities exchange commission follows 1 exhibits 31 32 327 articles incorporation bylaws company follows 2 exhibits 101 106 material contracts follows exhibits listed applicable registrant b reports form 8k company file reports form 8k quarter ended march 31 2000 c exhibits 1016 22 24 27 filed herewith financial statement schedules schedule ii companys consolidated financial statements follows immediately schedule ii drexler technology corporation subsidiaries valuation qualifying accounts fiscal years ended march 31 1998 1999 2000 signatures pursuant requirements section 13 15d securities exchange act 1934 registrant caused report signed behalf undersigned thereunto duly authorized dated june 27 2000 drexler technology corporation jerome drexler jerome drexler chairman chief executive officer pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated signature title date jerome drexler chairman board directors june 27 2000 chief executive officer jerome drexler principal executive officer steven g larson vice president finance june 27 2000 treasurer principal financial steven g larson officer principal accounting officer arthur h hausman director june 27 2000 arthur h hausman dan maydan director june 27 2000 dan maydan william e mckenna director june 27 2000 william e mckenna walter f walker director june 27 2000 walter f walker exhibit index exhibit number description 1016 building lease agreement 22 subsidiaries 24 consent independent public accountants 27 financial data schedule item 14 exhibits financial statement schedules reports form 8k list documents filed part report 1 consolidated financial statements company filed herewith item 8 follows 2 financial statement schedules schedule supporting companys consolidated financial statements filed herewith item 14d follows schedules listed applicable required information required set forth therein included consolidated financial statements notes thereto 3 exhibits report filed herewith item 14c incorporated reference documents previously filed securities exchange commission follows exhibits listed applicable registrant b reports form 8k company file reports form 8k quarter ended march 31 1998 c exhibits 325 1025 1066 22 24 27 filed herewith financial statement schedules schedule ii companys consolidated financial statements follows immediately schedule ii drexler technology corporation subsidiaries valuation qualifying accounts fiscal year ended march 31 1998 signatures pursuant requirements section 13 15d securities exchange act 1934 registrant caused report signed behalf undersigned thereunto duly authorized dated june 5 1998 drexler technology corporation jerome drexler jerome drexler chairman chief executive officer pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated exhibit index item 14 exhibits financial statement schedules reports form 8k list documents filed part report 1 consolidated financial statements company filed herewith item 8 follows 2 financial statement schedules schedule supporting companys consolidated financial statements filed herewith item 14d follows schedules listed applicable required information required set forth therein included consolidated financial statements notes thereto 3 exhibits report filed herewith item 14c incorporated reference documents previously filed securities exchange commission follows 1 exhibits 31 32 326 articles incorporation bylaws company follows 2 exhibits 101 106 material contracts follows b reports form 8k company file reports form 8k quarter ended march 31 1999 c exhibits 326 106 22 24 27 filed herewith financial statement schedules schedule ii companys consolidated financial statements follows immediately schedule ii drexler technology corporation subsidiaries valuation qualifying accounts fiscal year ended march 31 1998 1999 signatures pursuant requirements section 13 15d securities exchange act 1934 registrant caused report signed behalf undersigned thereunto duly authorized dated june 25 1999 drexler technology corporation jerome drexler jerome drexler chairman chief executive officer pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated exhibit index item 7 managements discussion analysis financial condition results operations results operationsfiscal 1997 compared fiscal 1996 1995 revenues companys total revenues fiscal 1997 3529000 compared 5295000 fiscal 1996 3166000 fiscal 1995 product sales lasercardr optical memory cards related products valueadded resellers vars licensees enduser customers 3510000 fiscal 1997 versus 5059000 fiscal 1996 2141000 fiscal 1995 difference fiscal 1997 fiscal 1996 due mainly order us department defense dod 537 readerwriter units fiscal 1996 versus 83 units customer fiscal 1997 ongoing dod program total readerwriter sales 390 units fiscal 1997 879 units fiscal 1996 313 units fiscal 1995 optical memory card sales fiscal 1997 1996 1995 456000 420000 150000 cards respectively company received 71 million order february 1997 2 million optical memory cards us immigration naturalization service ins deliveries scheduled begin july 1997 expected average approximately 200000 cards per month thereafter applications companys optical memory card products currently use customers include medical data applications united states several programs italy including secure soccerseason ticket two programs philippinesan admission passretail purchase log dutyfree shopping zone vehicle warranty maintenance records card us governmentrelated programsthe dods cargo manifest card us immigration naturalization services border crossing card green card company sold lasercard products fiscal 1997 approximately 50 customers 9 states 26 foreign countries development commercial markets applications products company utilizes var companies part marketing distribution program lasercard products sales vars include companys optical memory cards companys system software optical card readerwriters made licensee company addon peripherals made companies equipment adding digitized photo fingerprint hand template signature cards vars may add application software personal computers peripherals resell products integrated data systems enduser customers 23 new vars fiscal 1997 compared 17 fiscal 1996 30 fiscal 1995 new vars purchase initial systems including optical cards equipment however assurances new existing var company country successful markets field trials place followon orders company additional quantities cards systems order upgrade var customer base increase probability success company continue efforts recruit new vars eliminate nonproductive ones company provides marketing leads customer technical support system software assist vars software important factor developing commercial markets optical memory cards companys system software consists optical card interface softwaredevice drivers file systems software development tools demonstration software company provide software specific applications instead depends vars integrate optical card products existing software products write new application software specific optical card programs license software vars several vars written optical card software programs applications automobile warranty maintenance records cargo manifesting digital optical key systems admissionsid data logging systems various medicalrelated applications medical image storage health history cards application software development underway vars customers optical memory cards used conjunction card readerwriter equipment connected personal computers accessed manner floppy disk drives readerwriters incorporated lasercard systems sold vars customers company price performance availability readerwriters factors commercialization optical cards company sells readerwriters thousand dollars per unit units generally include companys interface softwaredevice drivers company manufacture card readerwriters instead continues purchase equipment japanese licensee nippon conlux co ltd currently companys sole supplier readerwriters companys inventory level readerwriters fluctuates based timing purchases sales typically approximately 50 75 units company give assurance increased production card readerwriters occur near term highvolume sales correspondingly lower prices result market demand increases sharply short period time initial shortage readerwriters could result also interruption change supply readerwriters could cause delay product shipments possible loss sales would adversely affect operating results licenses sold fiscal 1997 compared one license fiscal 1996 200000 one license 1000000 fiscal 1995 license fee payments received respective fiscal periods fiscal 1996 license agreement included trademark license lasercard distribution license payment fiscal 1995 license agreement lasercard distribution license sold korean var company license fees received company unconditional nonrefundable significant obligations remain unfulfilled company licenses company actively pursuing efforts generate additional license revenues however license sales company sporadic unpredictable timing type license magnitude future license revenues cannot predicted inferred past events royalties royalty revenues 19000 fiscal 1997 36000 fiscal 1996 25000 fiscal 1995 although royalty revenues reached material amounts company anticipate future royalty income longterm continuing basis among two royaltybearing optical memory card manufacturing licenses several royaltybearing equipmentlicense upgrades previously sold company cannot predict whether equipment card sales licensees result material royalties company therefore company relying royalty income expect significant factor near term backlog company received 71 million order february 1997 2 million optical memory cards us immigration naturalization service deliveries scheduled begin july 1997 expected average approximately 200000 cards per month thereafter margins gross margin product sales fiscal 1997 32 compared 28 fiscal 1996 29 fiscal 1995 increase fiscal 1997 compared fiscal 1996 due mainly increase average selling price optical memory cards decrease fiscal 1996 compared 1995 due mainly decrease average selling price optical cards partially offset lower percard cost result greater portion fiscal 1996 optical card sales lowerpriced cards fewer features cards sold previous fiscal year gross margin optical memory card sales fluctuate based upon type volume cards sold card manufacturing commercial orders increases companys optical memory card manufacturing facility used less purposes research engineering therefore manufacturing facility costs depreciation expense building lease payments costs allocated cost card manufacturing less costs charged research engineering fiscal 1997 fiscal 1996 fiscal 1995 company allocated 42 47 17 respectively facility expenses card manufacturing commercial orders marketing samples company reaches production level approximately 15 million cards per year commercial orders cost allocation percentages become relatively fixed essentially card manufacturing facility costs allocated cost product sales facility expenses become fixed cost component product sales decrease percard basis production volumes increase 15 million cards per year income expenses selling general administrative expenses sga fiscal year 1997 sga expenses 2602000 compared 2400000 2023000 respectively fiscal 1996 1995 majority increase fiscal 1997 versus fiscal 1996 attributable increased payroll marketing expenses 377000 increase fiscal 1996 versus fiscal 1995 due mainly 100000 increase payroll expenses 112000 increase marketing expenses including trade shows travel 73000 increase legal expenses sga spending expected continue current levels short term certain financial goals achieved companys plans include increased marketing customer technical support activity research engineering expenses research engineering expenses 938000 fiscal 1997 compared 1092000 fiscal 1996 1860000 fiscal 1995 optical memory card facility used engineering manufacturing therefore facility costs depreciation expense building lease payments costs allocated manufacturing engineering based upon level manufacturing activity depreciation amortization expenses charged research engineering 274000 fiscal 1997 compared 238000 fiscal 1996 603000 fiscal 1995 difference fiscal 1996 1995 due mainly change october 1 1994 estimated useful lives optical card manufacturing equipment company continues undertake ongoing research engineering project activities however reported research engineering expenses expected continue decrease optical card production increases card manufacturing resources allocated card production greater degree present company believes reduction card manufacturing facility expenses allocated research engineering negative effect optical card business since appropriate research engineering projects continuing also possible future projects may require increased spending optical card industry grows income expense income fiscal 1997 64000 compared 272000 fiscal 1996 32000 fiscal 1995 income fiscal 1997 included 22000 gain foreign currency exchange income type fiscal 1996 fiscal 1995 first quarter fiscal 1996 company received 200000 nonrefundable deposit toward license agreement license agreement consummated deposit forfeited licensee income forfeiture deposit recorded income fiscal 1996 income type fiscal 1997 fiscal 1995 interest income fiscal 1997 50000 compared 78000 fiscal 1996 35000 fiscal 1995 changes interest income year due generally changes average invested funds companys interest expense shortterm loans 8000 fiscal 1997 8000 fiscal 1996 7000 fiscal 1995 discontinued operations fiscal 1993 company discontinued emulsion photoplate operation limited market products long anticipated company fiscal 1995 company completed settlement remaining commitments related discontinued emulsion photoplate operation amount lower accruals items therefore discontinued operations income 22000 fiscal 1995 income loss discontinued operations fiscal 1996 fiscal 1997 liquidity march 31 1997 company cash equivalents 2916000 current ratio 15 1 net cash used operating activities 813000 fiscal 1997 compared 940000 fiscal 1996 1729000 fiscal 1995 march 31 1997 company longterm debt company established line credit generally companys customers make advance payments whole part time order placement companys optical memory cards usually made custom specifications specific customer end user application company believes although working capital requirements grow proportion product shipment levels advance payments reduce need working capital financing company may negotiate line credit becomes appropriate although assurance made financing would available needed march 31 1997 company accumulated deficit 27548000 except sporadic sales licenses experienced quarterly losses based current rawmaterial costs expense calculations company estimates break even operations annual sales approximately 16 million 18 million optical memory cards depending margins sales related hardware due large card order ins company expects financial performance improve companys total deferred income tax asset 16114000 march 31 1997 utilized total deferred income tax asset would reduce future tax expense payments included amounts derived federal income tax net operating losses expire various dates 2001 2012 amounts state income tax net operating losses expire various dates 1998 2002 amounts tax credits expire 2000 2004 ability company utilize deferred tax asset contingent upon generating sufficient income within stated time periods view uncertain value asset company recorded full valuation allowance therefore part total deferred tax asset 16114000 added stockholders equity companys balance sheet company planning install 1800000 capital equipment leasehold improvements card production facility fiscal year ending march 31 1998 assets production new products process improvements increase yields result production capacity 6 million cards annually company currently estimates additional 5 million production equipment required reach factory designed capacity 25 million cards per year equipment purchased incrementally commercial orders optical memory cards justify increased production capacity estimated follows 8 million cards annually 12 million 10 million cards annually additional 13 million 25 million cards annually additional 25 million company may make additional capital expenditures cost savings purposes fiscal 1996 company cash receipts net expenses 446000 private placement 115000 shares common stock fiscal 1997 company employees consultants purchased company 314500 shares registered common stock average price 648 per share exercise stock options companys 1991 stock option plan resulted additional cash receipts company 2037000 march 31 1997 company employees consultants held unexercised vested inthemoney options purchase 606767 shares common stock exercise prices ranging 425 906 per share average 662 per share stock options exercised would provide company cash amount 4016000 forwardlooking statements certain statements made relating plans objectives economic performance go beyond historical information may provide indication future results extent forwardlooking statements within meaning section 21e securities exchange act 1934 amended subject factors could cause actual results differ forwardlooking statement factors described risk factors form 10k item 8 item 7 managements discussion analysis financial condition results operations forwardlooking statements used discussion words expects anticipates believes estimates similar expressions intended identify forwardlooking statements including expectations deferred revenue gross profit result restatement financial information discussed statements expected benefits companys direct control readwrite drive assembly design companys research engineering efforts including expected development lower cost drives customeroptimized drive systems drive systems advanced security features need efforts develop readonly drives new readwrite drives software products companys efforts recruit new vars licensees eliminate nonproductive valueadded resellers vars licensees eliminate nonproductive vars adequacy inventory anticipated orders companys us government subcontract expected delivery volumes 2003 2004 fiscal years expectations regarding revenues margins expenses capital resources capital expenditures investments companys deferred tax asset valuation allowance potential reductions federal tax cash payments due current company tax benefits effects readwrite drive prices gross profits readwrite drive sales companys estimates level sales drives would necessary achieve gross profit current prices expectations regarding market readwrite drives readwrite drive prices inventory drives parts statements card delivery volumes current potential customers applications market segments optical memory card products companys plans expectations regarding growth manufacturing capacity expected card yields therefrom expectations regarding market growth product demand including expected emergence opportunities companys products canada china india italy macedonia mexico saudi arabia opportunities expansion current us government id card programs subject risks uncertainties could cause actual results differ materially projected risks uncertainties include limited risks discussed well impact litigation governmental regulatory proceedings arthur andersen llps ability timely consent including restated financial information companys sec filings companys ability initiate grow new programs utilizing companys card products companys reliance vars licensees generate sales perform customer system integration develop application software risks associated business foreign countries potential manufacturing difficulties complications associated increasing manufacturing capacity cards drives uncertainties associated design development manufacture deployment optical card drives systems reliance singlesource limitedsource suppliers certain components raw materials customer concentration reliance continued us government business lengthy sales cycles manufacturing difficulties general economic trends unpredictability customer demand products customer issuance release corresponding orders us governments right withhold order releases reduce quantities released extend delivery dates impact technological advances competitive products ability company customers develop software integrate optical card systems technologies matters discussed section entitled factors may affect future operating results item 1 report forwardlooking statements speak date hereof company expressly disclaims obligation undertaking release publicly updates revisions forwardlooking statements contained herein reflect change companys expectations regard thereto change events conditions circumstances statement critical accounting policies revenue recognition company recognizes revenue following criteria met 1 persuasive evidence arrangement exists 2 delivery occurred services rendered 3 fee fixed determinable 4 collectibility reasonably assured appropriate provision made time estimated warranty costs estimated returns relating product sales companys us government subcontract requires delivery secure governmentfunded vault built company premises deliveries made vault fixed schedule specified prime contractor time cards delivered vault title cards transfers government prime contractor invoiced payment due according normal trade payment terms however revenue recognized cards shipped vault government unless company receives fixed schedule notification plan shipments vault government case revenue would recognized upon latter receipt fixed shipment schedule delivery cards vault accounting income taxes part process preparing consolidated financial statements company required estimate income taxes jurisdictions operates process involves estimating actual current tax exposure together assessing temporary differences resulting differing treatment items deferred revenue tax accounting purposes differences result deferred tax assets liabilities included within consolidated balance sheets company must assess likelihood deferred tax assets recovered future taxable income extent management believes recovery likely company must establish valuation allowance extent valuation allowance established increased period company must include expense within tax provision statements income significant management judgment required determining provision income taxes deferred tax assets liabilities valuation allowance recorded net deferred tax assets company recorded valuation allowance 53 million march 31 2002 due uncertainties related companys ability utilize deferred tax assets primarily consisting certain net operating losses carried forward expire valuation allowance based managements estimates taxable income jurisdiction company operates period deferred tax assets recoverable event actual results differ estimates adjusted future periods company may need establish additional valuation allowance could materially impact companys results operations inventories company values inventory lower actual cost purchase andor manufacture inventory current estimated market value inventory management regularly reviews inventory quantities hand records provision excess obsolete inventory based primarily estimated forecast product demand demonstrated fiscal 2002 demand readwrite drive products fluctuate significantly company unable produce sell readwrite drives volume prices competitive alternate technologies operating results could harmed order obtain favorable pricing purchases readwrite drive parts made quantities exceed historical annual sales rate therefore based upon last years sales quantity company oneyears supply readwrite drive parts hand company purchases readwrite drive parts anticipated readwrite drive demand takes consideration ordertodelivery lead times vendors economic purchase order quantity parts march 31 2002 readwrite drive parts finished goods inventory totaled 34 million compared 22 million march 31 2001 fiscal 2003 company expects purchase additional 500000 readwrite drive parts necessary complete currently planned production drives including approximately 585 drives finished goods inventory approximately 800 readwrite drives current design assembled parts inventory addition approximately 1300 readwrite drives new design could assembled additional purchase discussed company believes market basic upgraded readwrite drives support expand optical card sales based current proposals process readwrite drive inventory hand march 31 2002 including parts received ordered customers anticipated orders materialize company may need writedown value inventory potential excess quantities fiscal 2002 company sold approximately 450 readwrite drives company believes sales approximately 475 readwrite drives per quarter would necessary achieve gross profit readwrite drive sales current selling prices costs company believes readwrite drive inventory march 31 2002 reflected net realizable value addition since lower cost readwrite drive designs may become available company existing parts utilized portion inventory may deemed obsolete would require inventory writedown however anticipated introduction new readwrite drive would timed minimize risk addition company investing research engineering effort develop new readwrite drive products discussed research engineering expenses restatement results fiscal 19982001 first nine months fiscal 2002 connection companys audit fiscal year ended march 31 2002 company newly appointed independent accountants conducted internal review revenue recognition practices followed related government subcontract review fully described companys report form 8k dated may 15 2002 resulted accounting adjustments arising changes timing revenue recognition lasercard optical memory card shipments secure governmentfunded vault built government company premises comply security regulations subcontract past company recognized revenue upon deliveries vault since customer takes title cards assumes risks ownership obligated remit payment cards time rights return except product defects however drexlers newly appointed independent accountants advised company terms conditions companys us government supply subcontract transfer title imminent cash payment pursuant contract payment terms upon delivery cards vault necessary necessarily sufficient recognize revenue upon delivery cards vault secs staff accounting bulletin 101 revenue recognition prior criteria set forth secs accounting auditing enforcement release 108 restated financial statements revenue recognized upon shipment cards vault customer since company provided fixed schedule notification plan shipments vault government company restated previously issued results fiscal years 1998 2001 first nine months fiscal 2002 reflect adjustments timing revenue recognition result restatement revenue fiscal 1998 fiscal 1999 fiscal 2000 declined revenue fiscal 2001 first nine months fiscal 2002 increased results operationsfiscal 2002 compared fiscal 2001 fiscal 2000 revenues 2002 fiscal year ended march 31 2002 companys total revenues 20740000 compared 24906000 fiscal 2001 15443000 fiscal 2000 product revenues sales lasercardr optical memory cards related products totaled 19413000 fiscal 2002 compared 22690000 fiscal 2001 15299000 fiscal 2000 changes product revenues periods due primarily sale optical memory cards two us government card programs described fiscal 2002 company sold lasercard products provided services approximately 32 customers seven states 15 foreign countries companys card deliveries customers totaled 56 million optical memory cards 450 readwrite drives fiscal 2002 compared 59 million optical cards 1280 readwrite drives fiscal 2001 4 million cards 860 readwrite drives fiscal 2000 readwrite drive revenues decreased 26 million fiscal 2002 compared fiscal 2001 increased approximately 13 million fiscal 2001 compared fiscal 2000 1280 readwrite drives sold fiscal 2001 approximately 600 drives delivered mainly us department defense automated manifest system compared approximately 60 readwrite drives fiscal 2002 approximately 270 drives fiscal 2000 orders program historically sporadic remaining decrease readwrite drive deliveries due reduction sales visx incorporated discussed companys principal lasercard market today involves highsecurity counterfeitresistant tamperresistant cards digital governance defined utilization digital information technology nation state region municipality agency institution within market companys largest customer lasercard products united states government representing 78 total revenues fiscal year 2002 compared 62 total revenues fiscal 2001 57 total revenues fiscal 2000 revenues predominantly result two card programsus immigration naturalization service ins permanent resident cards green cards us department state dos border crossing cards laser visas visx incorporated nongovernment customer since 1992 represented 7 companys fiscal 2002 revenues although visxs lasercardequipped surgery systems continued use companys optical memory cards fiscal 2002 visx employ lasercard drives system activation currently produced laser eyesurgery equipment adverse effect companys revenue levels fiscal 2001 2002 optical memory card digital governance programs appear emerging countries include electronic national identification cardsocial services card italy building construction permit cards childrens healthcare cards china state government motorvehicle registration cards india company believes market opportunities optical memory cards also appear include identification cards saudi arabia macedonia document card program mexico resident immigrant cards canada well expansion current us government id card programs addition company continuing efforts develop new optical card readwrite drives readonly drives software products addition using marketing staff company utilizes valueadded reseller var companies card distribution licensees development commercial markets applications lasercard products product sales vars licensees include companys optical memory cards companys system software optical card readwrite drives addon peripherals made companies equipment adding digitized photo fingerprint hand template signature cards varslicensees may add application software personal computers pcs peripherals resell products integrated data systems company continuing efforts recruit new vars card distribution licensees eliminate nonproductive vars company provides customer technical support system software assist vars licensees license fee revenues fiscal 2000 license revenue included 119000 realized sale license italy assemble optical card readerwriters using parts kits supplied company fiscal 2001 license revenue included 712000 italian readwrite drive assembly license 1465000 realized sale digital sound patent license see note 6 consolidated financial statements fiscal 2002 license revenue included 1206000 recognized digital sound patent licenses 119000 realized italian readwrite drive assembly license backlog march 31 2002 backlog lasercard optical memory cards totaled approximately 164 million consisting approximately 111 million firm card orders card supply contracts approximately 53 million cards produced delivered secure governmentfunded vault 111 million amount 85 us government green cards laser visas us government subcontract purchase optical memory cards 53 million amount green cards laser visas produced subcontract march 31 2001 backlog lasercard optical memory cards totaled approximately 12 million consisting approximately 62 million firm card orders card supply contracts approximately 58 million cards produced delivered secure governmentfunded vault announced june 2000 companys us government subcontract authorized maximum 81 million 24 million cards average selling price 323 per card period five years subcontract received company lasercard var us government prime contractor competitively bid government procurement contract subcontract states us government anticipates placing orders units least one million optical memory cards per order subcontract provides initial oneyear contract period four additional oneyear contract options deliveries commenced september 2000 6 million cards delivered vault march 31 2002 subcontract companys us government subcontract requires delivery secure governmentfunded vault built company premises deliveries made vault fixed schedule specified prime contractor time cards delivered vault title cards transfers government prime contractor invoiced payment due according normal trade payment terms however revenue recognized cards shipped vault government unless company receives fixed schedule notification plan shipments vault government case revenue would recognized upon latter receipt fixed shipment schedule delivery cards vault march 31 2002 vault contained 17 million cards sales value 53 million 53 million sales value recorded revenue associated costs recorded cost sales cards shipped unless company receives fixed schedule notification plan shipments vault government case revenue would recognized upon receipt fixed delivery schedule 17 million cards owned us government included inventory companys consolidated balance sheets net revenue value 534 million 248 million cost recorded deferred gross profit amount 286 million consolidated balance sheets gross profit gross margin product sales 46 fiscal 2002 fiscal 2001 43 fiscal 2000 optical memory cards company continues depend gross profit generated optical memory card sales gross profit optical memory card sales 95 million fiscal 2002 99 million fiscal 2001 64 million fiscal 2000 decrease gross profit fiscal 2002 mainly due lower sales volume optical memory card gross profit margins vary based average selling price sales production volume mix card types production efficiency yields changes fixed costs readwrite drives fiscal 2002 gross profit readwrite drive sales decreased 1 million negative gross profit 640000 compared gross profit 430000 fiscal 2001 120000 fiscal 2000 decrease fiscal 2002 due lower selling prices drives lower sales volume level fully absorb fixed manufacturing expenditures fiscal 2002 company reduced selling prices basic readwrite drives 20 typical sales quantities effort increase certain markets optical memory cards reduced gross profit readwrite drive sales fiscal 2002 increased level sales required achieve gross profits readwrite drive sales currently companys priority increase number readwrite drives marketplace rather maximizing perunit gross profit readwrite drives company plans lower readwrite drive prices current model company believes potential markets readwrite drives include us immigration naturalization service us department state us armed forces canada italy several countries company maintains inventory readwrite drive parts finished drives believes adequate meet customer demand however interruption supply readwrite drive parts difficulties encountered readwrite drive assembly could cause delay deliveries drives optical memory cards possible loss sales would adversely affect companys operating results income expenses selling general administrative expenses sga expenses 5165000 fiscal 2002 4134000 fiscal 2001 3996000 fiscal 2000 increase fiscal 2002 compared fiscal 2001 included approximately 575000 increased marketing selling expenditures increase 365000 general administrative expenditures increase 80000 company 401k matching company contribution employee stock purchase plan 138000 increase fiscal 2001 compared fiscal 2000 due increase general corporate compensation expense 238000 68000 expense company 401k matching 97000 increase general expenses including insurance partially offset 59000 decrease bad debt expense 106000 decrease patent amortization expense 100000 expenditure fiscal 2000 thirdparty market study company believes sga expenses fiscal 2003 remain fiscal 2002 levels mainly due increases marketing expenses general increases research engineering expenses company continuing efforts develop new optical memory card readwrite drives readonly drives software products order provide new products stimulate sales growth company anticipates efforts result lower cost drives customeroptimized drive systems drive systems advanced security features expenses 3045000 fiscal 2002 2370000 fiscal 2001 1299000 fiscal 2000 increase spending fiscal 2002 due increase readwrite readonly drive manufacturing engineering product development increase spending fiscal 2001 due readwrite drive manufacturing engineering product development company anticipates expenses continue increase fiscal 2003 primarily due optical memory card readwrite drive development efforts income total income fiscal 2002 consisted 386000 interest income compared 612000 interest income fiscal 2001 total net income 388000 fiscal 2000 difference fiscal 2002 compared fiscal 2001 due interest rate declines difference fiscal 2001 compared fiscal 2000 due greater amount invested funds interest expense fiscal 2002 2001 1000 interest expense fiscal 2000 pretax profit pretax profit fiscal 2002 decreased 44 million compared fiscal 2001 due 16 million reduction product gross profit 17 million increase expenses 09 million decrease license revenue pretax profits fiscal 2001 increased 49 million compared fiscal 2000 due 39 million increase product gross profit 2 million increase license revenue partially offset 12 million increase expenses income taxes company recorded income tax benefit 2786000 fiscal 2002 1097000 fiscal 2001 2919000 fiscal 2000 march 31 2002 company recognized prior tax benefits income statement purposes release remaining valuation allowance would recorded credit equity would impact net income tax benefit fiscal 2002 included credit 2999000 due change federal deferred tax asset net federal alternative minimum taxes partially offset 213000 state tax expense income tax benefit fiscal 2001 included credit 1671000 due change federal deferred tax asset net federal alternative minimum taxes partially offset 220000 state tax expense 354000 foreign income taxes income tax benefit fiscal 2000 included credit 3023000 due change deferred tax asset net federal taxes partially offset 104000 state tax expense company analyzes deferred tax assets regard potential realization company established valuation allowance significant portion deferred tax assets based upon uncertainty realization company considered estimated future taxable income ongoing prudent feasible tax planning strategies assessing amount valuation allowance timing differences certain items included book income items included income tax returns therefore tax payments credits often occur different periods income tax expense benefit included statements income tax purposes company estimates timing differences realized tax return future federal tax cash payments could reduced approximately 12 million liquidity capital resources march 31 2002 company cash equivalents shortterm investments 17076000 current ratio 32 1 longterm debt net cash provided operating activities 4369000 fiscal 2002 7080000 fiscal 2001 2782000 fiscal 2000 major categories comprising cash provided operating activities thousands company believes estimated level revenues next 12 months sufficient generate cash operations next 12 months operating cash flow could negatively impacted significant degree companys largest us government programs delayed canceled extended replaced card orders sources income increases product revenues licenses keep pace increased marketing expenditures company established line credit current plans company may negotiate line credit becomes appropriate although assurance made financing would available favorable terms needed result 5199000 net income recorded fiscal 2002 companys accumulated deficit reduced 8099000 stockholders equity increased 32337000 result net income recorded 3922000 additions equity mainly due stock option exercises net cash used investing activities 6319000 fiscal 2002 2350000 fiscal 2001 8539000 fiscal 2000 amounts include changes maturity liquid investments purchases property equipment 1723000 fiscal 2002 2202000 fiscal 2001 1986000 fiscal 2000 increases patents intangibles 98000 fiscal 2002 164000 fiscal 2001 1150000 fiscal 2000 company considers highly liquid investments consisting primarily commercial paper taxable notes us government bonds original maturities three months less cash equivalents investments original maturities three months one year classified shortterm investments management determines appropriate classification debt equity securities time purchase reevaluates classification investments balance sheet date march 31 2002 company 8883000 classified shortterm investments compared 5387000 march 31 2001 marketable securities classified heldtomaturity cash plus shortterm investments 17076000 march 31 2002 11608000 march 31 2001 optical memory card production company added capital equipment leasehold improvements approximately 13 million fiscal 2002 compared approximately 15 million fiscal 2001 13 million fiscal 2000 depending card type companys card production capacity approximately 7 9 million cards per year expected reach capacity approximately 11 million cards per year may 30 2002 company plans purchase additional production equipment series steps optical memory card orders expand justify production capacity increases rate 25 million cards per year addition investment used expansion company expects make additional capital expenditures cost savings quality improvements purposes company believes next years capital expenditures could minimum 3 million per year card production equipment automatic inspection equipment support growth optical memory card production december 3 2001 company announced raised optical memory card shipment estimates 8 10 million cards fiscal year 2003 began april 1 2002 compared 56 million cards shipped fiscal 2002 connection readwrite drive manufacturing design company added capital equipment leasehold improvements approximately 435000 fiscal 2002 compared 665000 fiscal 2001 650000 fiscal 2000 company expects additional capital investments 400000 800000 made remainder fiscal 2003 net cash provided financing activities 3922000 fiscal 2002 509000 fiscal 2000 compared 1327000 used financing activities fiscal 2001 financing activities consisted proceeds sales common stock companys stockoption stockpurchase plans cash used purchases common stock repurchase program discussed sales common stock plans amounts 4097000 fiscal 2002 1486000 fiscal 2001 509000 fiscal 2000 fiscal 2001 company commenced share repurchase program 200000 shares common stock could purchased company time nasdaq stock market transactions aggregate amount exceeding 3 million fiscal 2002 company used cash 175000 purpose versus 2813000 used fiscal 2001 june 30 2001 company completed program debt financing activities fiscal 2002 2001 2000 item 7a item 7 managements discussion analysis financial condition results operations following discussion analysis financial condition results operations read conjunction audited consolidated financial statements related notes included elsewhere form 10k report year ended march 31 2007 forwardlooking statements discussion risk factors related business operations please refer “forwardlooking statements” section starting page 4 report section entitled “risk factors” starting page 16 report critical accounting policies discussion analysis financial condition results operations based upon consolidated financial statements prepared accordance us generally accepted accounting principles note 2 notes consolidated financial statements describe significant accounting policies methods used preparation consolidated financial statements preparation financial statements requires us make estimates judgments affect reported amounts assets liabilities revenues expenses ongoing basis evaluate estimates including related revenues inventories stockbased compensation warranties income taxes base estimates historical experience various assumptions believed reasonable circumstances results form basis making judgments carrying values assets liabilities readily apparent sources critical accounting policies 1 important portrayal financial condition results operations 2 require management’s difficult subjective complex judgments often requiring estimates matters inherently uncertain critical accounting policies reflect significant judgments assumptions estimates used preparation consolidated financial statements management discussed development selection critical accounting policies estimates audit committee board directors audit committee reviewed disclosures relating report consider accounting policies described critical accounting policies revenue recognition product sales primarily consist optical cards optical card drives specialty cards card printers recognize revenue product sales following criteria met 1 persuasive evidence arrangement exists 2 delivery occurred 3 fee fixed determinable 4 collectibility reasonably assured recognize revenue product sales time shipment shipping terms fob shipping point orders placed pursuant preexisting sales arrangement postshipment obligations warehousing us government subcontract customer acceptance criteria appropriate provision made time shipment estimated warranty costs estimated returns orders permanent resident border crossing cards us government require delivery secure companycontrolled vault shipments made vault us government site bill hold procedure also provides end oneyear contract term renewal option exercised us government take final delivery remaining inventory within six months time cards delivered vault title cards transferred us government risks ownership transferred well prime contractor invoiced payment due within thirty days purchase orders contain return warranty cancellation provisions pursuant provisions sec staff accounting bulletin 104 “revenue recognition” “sab 104” revenue recognized delivery vault fulfilled contractual obligations earnings process complete apply provisions emerging issues task force 0021 revenue arrangements multiple deliverables eitf 0021 revenue arrangements multiple deliverables eitf 0021 provides criteria governing identify whether goods services delivered separately bundled sales arrangement accounted separately deliverables accounted separately meet following criteria delivered items standalone value customer b fair value undelivered items reliably determined c arrangement includes general right return delivery undelivered items probable substantially controlled seller situations deliverables fall within higherlevel literature defined eitf 0021 apply guidance higherlevel literature deliverables meet criteria combined one deliverables apply provisions statement position “sop” 811 accounting performance constructiontype certain productiontype contracts sop 811 applicable contracts revenues time materials contracts recognized services rendered contract labor rates plus material direct costs incurred revenues fixed price contracts recognized percentage completion method based ratio total costs incurred date compared estimated total costs complete contract estimates costs complete include material direct labor overhead allowable general administrative expenses circumstances estimates costs complete project cannot reasonably estimated assured loss incurred percentageofcompletion method based zero profit margin rather completedcontract method used precise estimates made full amount estimated loss charged operations period determined loss realized performance contract fiscal years ended march 31 2007 2006 2005 recognized approximately 12000 77000 127000 respectively revenues based zero profit margin related longterm contract fourth quarter fiscal year 2006 entered subcontract prime contractor middle eastern country provide card personalization workstation integration use country’s personalized national id program includes optical memory cards hardware software contract covering anticipated 11 million worth products services calls multiple deliverables installation certain client acceptance criteria defined agreement applying guidance within eitf 0021 determined deliverables accounted separate units rather bundled arrangement fair value undelivered items cannot readily determined therefore revenue recognition new contract associated contract costs deferred predominant undelivered element card personalization delivered accepted commencing installation acceptance card personalization system determined card personalization system accepted contract revenue would recognized ratably based actual cards personalized accepted began recognizing revenue contract quarter ended march 31 2007 card personalization system accepted period recognized revenue totaling 4 million fiscal year 2007 based upon total number cards accepted march 31 2007 march 31 2007 remained 1 million deferred revenue 09 million deferred contract costs relating contract license revenue may consist upfront license fees royalty payments recognized revenue earned costs license revenue recorded fiscal years 2007 2006 2005 entered license optical memory card equipment purchase support agreements effective april 3 2004 global investments group gig based auckland new zealand optical memory card manufacturing slovenia gig transferred license agreements approval prevent global slovenia prevent march 2007 agreements provide payments us 256 million fully paid march 31 2007 20year license required manufacturing equipment targeted initial manufacturing capacity 10 million optical cards annually installation support fouryear training support package 256 million received 236 million recorded advance payments customer 2 million licensing fee recorded deferred revenue classified long term liabilities consolidated balance sheets march 31 2007 63 million acquired equipment plus direct incremental expenses classified equipment held resale consolidated balance sheets beginning fifth year contract prevent pay 3 million threeyear support package option thirteen additional years support payments 1 million annually addition 416 million discussed prevent pay us royalties 060 per card produced license territories covered license include european union eastern european regions prevent exclusive marketing rights certain territories performance goals maintain rights retain rights utilize 20 new facility capacity backup capacity buffer augment card manufacturing facilities mountain view california possibly german subsidiary granting license prevent establishes potential second source supplier optical memory cards existing prospective customers may request multiple sources cards agreement contains various elements including card manufacturing license sale installation equipment training ongoing support contingent payments support materials royalty payments cards manufactured accordance eitf 0021 “revenue arrangements multiple deliverables” card manufacturing license sale installation equipment training support package accounted one unit accounting since unable determine evidence fair value undelivered items ongoing support able determine evidence fair value predominant undelivered item ongoing annual support manufacturing equipment accordingly revenues arrangement deferred recognized equipment installed accepted exception value ongoing annual support manufacturing equipment recognized quarterly earned beginning equipment accepted training completed date dependent prevent establishing suitable facility slovenia pursuant ftb 901 “accounting separately priced extended warranty product maintenance contracts” support revenue recognized ratably remaining term agreement apply provisions statement position 972 “software revenue recognition” amended statement position 989 “modification sop 972 software revenue recognition respect certain transactions” transactions involving sale software products revenue license software products recognized persuasive evidence arrangement exists software product delivered fee fixed determinable collectibility probable applicable upon acceptance criteria specified upon expiration acceptance period software revenue immaterial fiscal years ended march 2007 2006 2005 respectively product warranty appropriate provision made time shipment estimated warranty costs estimated returns provide limited warranty replacement defective products limited warranty requires us repair replace defective products cost customer within specified time period sale estimate costs may incurred limited warranty records liability amount costs time product revenue recognized factors affect estimate warranty liability include number units sold historical anticipated rates warranty claims assess adequacy recorded warranty liability adjusts amount necessary utilize historical trends information received customers assist determining appropriate estimated warranty accrual levels following table shows warranty liability march 31 thousands significant judgment inherent selection assumptions interpretation historical experience well identification external internal factors affecting estimates reserves product returns believe assumptions used estimate product sales reserves reasonably likely assumptions considering known facts circumstances however product return activity could differ significantly estimates actual product returns significantly different estimates differences would accounted period become known accounting income taxes deferred income tax liability 388000 march 31 2007 568000 march 31 2006 result operations german subsidiary part process preparing consolidated financial statements required estimate income taxes jurisdictions operate process involves estimating actual current tax exposure together assessing temporary differences resulting differing treatment items deferred revenue tax accounting purposes differences result deferred income tax assets liabilities included within consolidated balance sheets must assess likelihood deferred income tax assets recovered future taxable income extent management believes recovery likely must establish valuation allowance fiscal year 2007 valuation allowance decreased 31 million decrease included 63 million decrease related us income tax benefits stock option deductions benefit credited additional paidin capital realized derecognized result adoption fas 123r remaining change valuation allowance relates increases gross deferred income tax assets federal net operating loss carryforwards “nols” march 31 2007 231 million expire various dates 2008 2027 utilized amount 192 million represent nol’s relating windfall stock option deductions benefit credited stockholders’ equity realized federal tax credits amount 540000 alternative minimum taxes expiration federal tax credits amount 284000 expire various dates 2013 2026 utilized california tax credits amount 129000 expiration date methodology determining realizability deferred income tax assets involves estimates future taxable income based upon booked orders estimated impact future stock option deductions expiration dates amounts net operating loss carryforwards difficulty past expect continued difficulty future reliably forecasting foreign business revenue received resulted basing estimates future income purposes booked orders circumstances change may future able estimate future revenue based upon forecast revenues rather using booked orders although cannot say occur concluding full valuation allowance required end fiscal year 2005 2006 continues required end fiscal year 2007 considered positive negative evidence regarding ability generate sufficient future taxable income realize deferred income tax assets positive evidence included 1 level sales business experienced contracts us department homeland security’s permanent resident card border crossing card programs canadian government’s permanent resident card program 2 prospects italy middle eastern country national identification card programs 3 expected future orders negative evidence included 1 reliance limited number customers substantial portion business 2 uncertainty timing anticipated orders customers 3 impact future stock option deductions taxable income 4 experience net operating loss carryforwards expiring unused fiscal year 2004 5 recent financial statement losses 6 prior three years’ cumulative tax net operating losses exclusive payments derived prevent contract weighing positive negative evidence considered “more likely not” criteria pursuant sfas 109 well following risks related business “dependence vars limited number customers” “lengthy sales cycles” “technological change” “competition” described concluded negative evidence outweighed positive evidence result recorded valuation allowance equal full amount deferred income tax asset march 31 2005 march 31 2006 march 31 2007 event actual results differ estimates adjusted future periods may need adjust amount valuation allowance based future determinations whether likely deferred income tax assets realized decrease valuation allowance would recorded income tax benefit reduction income tax expense net operating losses available reduce future taxable income expire various dates fiscal year 2008 fiscal year 2027 extent generate taxable income jurisdictions deferred income tax asset relates net operating losses offset full valuation allowance utilization net operating losses would result reversal related valuation allowance inventories value inventory lower actual cost purchase andor manufacture inventory market value market value based replacement cost estimated realizable value less cost sell regularly review inventory quantities hand records provision excess obsolete inventory based primarily forecasts product demand optical card drives fluctuate significantly order obtain favorable pricing purchases certain readwrite drive parts made quantities exceed booked orders purchase drive parts anticipated demand takes consideration ordertodelivery lead times vendors economic purchase order quantity parts addition keep supply card raw materials deem necessary anticipated demand perform analysis carrying value card readwrite drive inventory quarterly basis respect inventory carrying values follow principles articulated sfas 151 “inventory costs amendment arb 43 chapter 4” “sfas 151” arb 43 chapter 4 “inventory pricing” paragraphs 5 7 10 authoritative guidance eg sab 100 relates determining appropriate cost basis inventory determining whether firm noncancelable purchase commitments accrued loss forecasted demand sufficient utilize committed inventory purchases accounting abnormal amounts idle facility expense freight handling costs wasted material spoilage following sfas 151 allocate fixed production overheads costs conversion based normal capacity production facilities applied sfas 151 inventory costs incurred effective april 1 2006 provisions statement applied prospectively prior adoption sfas 151 full overhead absorption would occur produced full capacity operation resulted recording idle capacity difference actual production full capacity period cost income statement period arose applying sfas 151 analysis shown normal capacity greater actual production therefore amount period cost excess capacity reduced perunit amount overhead applied production inventory increased sfas 151 valuation applied fifo basis resulted increase inventory value totaling 219000 period adoption first quarter fiscal year 2007 establish lower cost market reserves inventory excess obsolescence reserves inventory reserves generally recorded management determines item readily saleable inventory reserves relieved related inventory sold scrapped excess obsolete inventory reserves net change net increase 334000 net relief 145000 net relief 335000 fiscal years ended march 31 2007 2006 2005 respectively net change fiscal year 2007 due largely workinprocess inventory optical memory cards based old design instances recorded charges excess obsolete inventory ensure new cost basis reflected statement operations inventory subsequently sold net relief fiscal years 2006 2005 due disposition reserved inventory optical memory cards readwrite drives part quarterly excessobsolete inventory analysis also determine whether lower cost market adjustments ie selling prices less certain costs sufficient recover inventory carrying values warranted record lower cost market adjustments consolidated statements operations fiscal years ended march 31 2007 2006 fiscal year 2005 recorded lower cost market adjustment readwrite drives amount 205000 inventory reserves based upon lower cost market slow moving obsolete items result believe 10 increase decrease sales would material impact reserves impairment goodwill intangible assets perform annual impairment testing goodwill intangible assets comply sfas 142 march 31 2007 determined estimated future cash flows insufficient justify carrying value goodwill intangible assets based management’s decision suspend optical memory card production germany fourth quarter fiscal year 2007 recorded noncash pretax impairment charge approximately 38 million writeoff goodwill intangible assets acquired upon purchase challenge card design plastikkarten gmbh rastede germany cards gmbh ratingen germany march 31 2004 fiscal years 2006 2005 future cash flows determined sufficient based part planned production portion optical memory cards facility germany intend continue use facility equipment produce specialty cards although plans use facility produce lasercard® optical memory cards germany suspended sharebased compensation described detail note 2 sharebased compensation accompanying notes consolidated financial statements effective april 1 2006 adopted fair value recognition provisions sfas 123r using modifiedprospective transition method fair value recognition provisions sfas 123r sharebased compensation cost estimated grant date based fair value award recognized expense net estimated forfeitures ratably vesting period award calculating sharebased compensation expense requires input highly subjective assumptions including expected term sharebased awards stock price volatility prevesting stock option forfeitures estimated expected life stock options granted fiscal year ended march 31 2007 based upon vesting provision historical exercise cancellation expiration patterns estimate volatility common stock date grant based historical volatility common stock assumptions used calculating fair value stockbased awards represent best estimates involve inherent uncertainties application management judgment result factors change use different assumptions sharebased compensation expense could materially different future addition required estimate expected forfeiture rate recognize expense shares expected vest estimate forfeiture rate based historical experience actual forfeiture rate materially different estimate stockbased compensation expense could significantly different recorded current period result adopting sfas 123r using modified prospective method net income applicable common shareholders fiscal year ended march 31 2007 includes 18 million share based compensation expense including 01 million employee stock purchase plan expense included consolidated statements operations march 31 2007 4 million total unrecognized compensation cost related unvested sharebased compensation arrangements expected recognized remaining vesting period december 31 2010 prior adoption sfas 123r provided pro forma disclosures net income loss fairvaluebased method applied prior year’s consolidated financial statements restated results operations overview headquartered mountain view california manufacture lasercard® optical memory cards card related products including chipready opticalsmart™ cards addition operate wholly owned german subsidiary acquired march 31 2004 challenge card design plastikkarten gmbh “ccd” offices rastede ratingen germany manufactures advancedtechnology cards provide manufacturing capacity certain steps optical memory card production markets cards system solutions thermal card printers completed merger cards gmbh also acquired march 31 2004 challenge card design plastikkarten gmbh january 2006 sell products services partners value added resellers vars card distribution licensees generally knowledge specific markets development markets applications lasercard products sales staff located california new york washington dc area germany whose principal role developing supporting reseller channel revenue consists primarily optical memory cards optical card readwrite drives including systems enabling services specialty cards card printers varslicensees provide countryspecific marketspecific services necessary contract negotiation also may add application software personal computers peripherals resell products integrated solutions continuing efforts recruit new vars eliminate nonproductive vars major near term growth potential lasercard® optical memory cards governmentsponsored identification programs several countries since governmental card programs typically rely policymaking turn subject technical requirements budget approvals political considerations assurance programs implemented expected include optical cards objectives longterm revenue growth include 1 broadening optical memory om product range address lowerend applications characterized higher price sensitivity 2 diversifying om products effectively penetrating industrial commercial markets 3 expanding hardware product offering address new markets add value current offerings 4 increasing om product revenues customized application software enabling services table presents consolidated revenues excluding intercompany transactions recorded us german operations fiscal years ended march 31 thousands revenues recorded us operations generally derived small number government customers located throughout world revenues recorded german operations mainly relatively large number commercial customers including universities germany student identification cards organizers sporting events secure access cards historically largest purchaser lasercard products us government contractor general dynamics information technology gdit previously anteon international corporation gdit government contractor lasercard product sales us department homeland security dhs us department state dos us department defense dod government canada government contracts gdit dhs purchases green cards dos laser visa border crossing cards dod purchases automated manifest system cards canadian government purchases permanent resident cards encompassing programs product sales gdit represented 28 31 total revenues fiscal years 2007 2006 2005 respectively another unaffiliated company laser memory card spa italy accounted 8 31 26 total revenues fiscal years 2007 2006 2005 respectively mainly secure government id card programs italy third company omar k alesayi communications space services co ltd acss accounted 13 revenue fiscal 2007 national id card program middle east major government programs shown percentage total revenues fiscal years ended march 31 regarding italian programs recent purchase order cies pses received august 2005 cie program largely stalled since january 2006 following change government instigation review designed reduce cost improve efficiency program march 2007 believe last major hurdle reactivation cie program removed government decree published establishing fee citizen pay issued card clears way resume cie issuance substantial card inventory implement national id card issuance infrastructure occurs national id card system functions designed cie pse card orders could ramp toward full implementation level could potentially result annual revenues 40 50 million issuance system pse cards place operating government possession substantial card inventory backlog programs march 31 2007 believe fiscal year ending march 31 2008 followon orders programs received significant card revenue realized although remains unclear prime contractor issue followon orders us laser visa border crossing cards bccs green cards us department homeland security dhs important part revenue base programs recorded card revenues 74 million fiscal year 2007 98 million fiscal year 2006 58 million fiscal year 2005 received fiveyear followon us government subcontract march 2007 initial oneyear term four oneyear extension options backlog march 31 2007 programs deliverable september 2007 totaled 48 million expect receive followon purchase orders throughout life subcontract although assurance given subcontract canada’s permanent resident cards recorded revenue 12 million fiscal year 2007 2 million fiscal year 2006 18 million fiscal year 2005 backlog march 31 2007 07 million likely delivered firsthalf fiscal year 2008 delivery rate subject increase decrease customer request depending varying permanent resident approval rates january 2006 entered subcontract providing framework supply secure national id cards middle eastern government supply installation support associated card personalization equipment consumables software followed earlier deliveries cards card encoders previous contracts purchase orders cards issued adult citizens national identity purposes feature latest advancements identity fraud protection provided optical idlock™ combination highlysecure lasercard® optical memory technology embedded hologramhd™ new highdefinition “photographic quality” etched image security feature subcontract covered anticipated 11 million worth product services first time provided enabling services assuming responsibility supplying installing personalization hardware oversight card personalization process quality fully personalized cards including printing cardholder information encoding data embedded hologramhd accordance eitf 0021 revenue contract associated costs deferred card system installed accepted completed quarter ended march 31 2007 accordingly commenced recognizing contract revenue prorated basis cards accepted revenue totaling 4 million recorded fiscal year 2007 although orders slower originally expected subcontract anticipate additional orders delivery fiscal year ending march 31 2008 beginning june quarter effective april 3 2004 sold secondsource cardmanufacturing license including equipment training support global investments group gig based auckland new zealand card manufacturing slovenia began receiving associated cash payments recently approval gig transferred license prevent global slovenia begin recognize revenue arrangement remaining term agreement starting equipment accepted training completed date turn dependent prevent establishing suitable facility slovenia discussed “license fees revenues” third quarter fiscal year 2007 implemented activated new erp system designed provide additional operational financial reporting functionality us operations thorough selection planning testing implementation processes instituted ensure internal controls financial reporting place followed statement position sop 981 “accounting costs computer software developed obtained internal use” eitf issue 9713 accounting costs incurred connection consulting contract internal project combines business process reengineering information technology transformation address accounting internaluse computer software pronouncements provide guidance determining costs accounted internaluse software require certain costs incurred design installation internaluse software capitalized costs incurred preliminary project stage system maintenance costs expensed incurred costs incurred conjunction business process reengineering activities distinguished software development costs expensed incurred capitalized 474000 software costs march 31 2007 related erp initiative charged approximately 211000 inclusive labor selling general administrative expenses fiscal year 2007 lastly plan invest 8 million additional capital equipment leasehold improvement expenditures facilities orders forecasts justify investment expenditures could occur throughout next twelve eighteen months fully discussed “liquidity capital resources” revenues product revenues total revenues consisted sales three segments 1 optical memory cards 2 optical card drives drive accessories maintenance systems enabling services 3 specialty cards card printers well miscellaneous items product revenues 323 million fiscal year 2007 399 million fiscal year 2006 285 million fiscal year 2005 license revenues earned fiscal years 2006 2005 2004 following table presents product revenue segment fiscal years ended march 31 thousands except percentages following table presents optical memory card revenue major program fiscal years ended march 31 thousands optical memory card revenue decreased fiscal year 2007 compared fiscal year 2006 due mainly decrease card unit volume italian cie program increased fiscal year 2006 compared fiscal year 2005 due mainly increase card unit volume italian program well increases programs revenue optical card drive segment including systems enabling services grew 05 million fiscal year 2007 compared fiscal year 2006 due mainly activity national id card program middle eastern government significant change optical card drive revenue fiscal year 2006 compared fiscal year 2005 anticipate derive significant profits future drive sales prices set near manufacturing cost order promote optical memory card sales specialty cards printers revenue 118 million fiscal year 2007 107 million fiscal year 2006 102 million fiscal year 2005 anticipate growth less 10 segment fiscal year 2008 license fees revenues license revenues fiscal year 2007 2006 2005 entered license optical memory card equipment purchase support agreements effective april 3 2004 global investments group gig based auckland new zealand optical memory card manufacturing slovenia gig transferred license agreements approval prevent global slovenia prevent march 2007 agreements provide payments us 256 million fully paid march 31 2007 20year license required manufacturing equipment targeted initial manufacturing capacity 10 million optical cards annually installation support fouryear training support package 256 million received 236 million recorded advance payments customer 2 million licensing fee recorded deferred revenue classified long term liabilities consolidated balance sheets march 31 2007 63 million acquired equipment plus direct incremental expenses classified equipment held resale consolidated balance sheets beginning fifth year contract prevent pay 3 million threeyear support package options thirteen additional years support payments 1 million annually addition 416 million discussed prevent pay us royalties 060 per card produced license territories covered license include european union eastern european regions prevent exclusive marketing rights certain territories performance goals maintain rights retain rights utilize 20 new facility capacity backup capacity buffer augment card manufacturing facilities mountain view california possibly german subsidiary granting license prevent establishes potential second source supplier optical memory cards existing prospective customers may request multiple sources cards agreement contains various elements including card manufacturing license sale installation equipment training ongoing support contingent payments support materials royalty payments cards manufactured accordance eitf 0021 “revenue arrangements multiple deliverables” card manufacturing license sale installation equipment training support package accounted one unit accounting since unable determine evidence fair value undelivered items ongoing support able determine evidence fair value predominant undelivered item ongoing annual support manufacturing equipment accordingly revenues arrangement deferred recognized equipment installed accepted exception value ongoing annual support manufacturing equipment recognized quarterly earned beginning equipment accepted training completed date dependent prevent establishing suitable facility slovenia pursuant ftb 901 “accounting separately priced extended warranty product maintenance contracts” support revenue recognized ratably remaining term agreement backlog march 31 2007 backlog lasercard® optical memory cards totaled 57 million scheduled delivery fiscal year 2008 compared 83 million march 31 2006 09 million march 31 2005 customers generally place orders severalmonth period variations order placement single customer materially affect backlog result relative size backlog reliable indicator future sales revenue trends addition backlog specialty cards printers totaled 06 million euros approximately 08 million compared 08 million euros approximately 1 million march 31 2006 12 million euros approximately 16 million march 31 2005 contract develop conventional nonoptical card production facility totaled 07 million euros approximately 09 million march 31 2007 compared 07 million euros approximately 08 million march 31 2006 08 million euros approximately 1 million march 31 2005 revenue contract conventional nonoptical card production facility contract booked zero profit margin basis therefore total profit contract booked completion probably fiscal year 2008 significant backlog readwrite drives gross margin following table represents gross margin absolute amount percentage revenue segment fiscal years ended march 31 thousands except percentages optical memory cards optical memory card gross margin vary significantly based upon changes average selling price production sales volumes mix card types production efficiency yields changes fixed costs unit volume greatly affects gross margin due absorption fixed manufacturing costs decrease optical memory card gross margin 25 revenue fiscal year 2007 compared 46 revenue fiscal year 2006 mainly due 34 decrease production sales unit volume resultant loss efficiencies economies scale increase optical memory card gross margin 46 revenue fiscal year 2006 compared 26 revenue fiscal year 2005 mainly due 49 increase production unit volume 64 increase sales unit volume minimal increase fixed costs augmented increases production efficiency yields optical card drives readwrite drive gross profits negative past three years inclusive fixed overhead costs due low sales volume policy price drives close manufacturing cost promote card sales segment also includes enabling services also lower margins optical memory cards anticipate readwrite drive negative gross margins continue future unless sales volume sufficient cover fixed costs fiscal year 2005 incurred approximately 03 million costs convert model 780 model q600 drives negative gross profit decreased year similar cost fiscal year 2006 specialty cards card printers gross margin specialty cards card printers 21 fiscal year 25 fiscal years 2006 2005 past three years quarterly gross margins generally low mid 20 range operating expenses following table presents operating expenses fiscal years ended march thousands except percentage selling general administrative expenses sga expenses 16 million fiscal year 2007 compared fiscal year 2006 1 million increase result adoption sfas 123r stock option expensing remaining increase due 04 million consulting services planning increase salaries related additional personnel offset mainly decrease management bonus 07 million fiscal year 2006 sga expenses increased due 07 million management bonus decreased almost every spending category addition 02 million loss exchange rate fluctuations debt incurred fiscal year 2005 repeated fiscal year 2006 2007 believe sga expenses fiscal year 2008 higher fiscal year 2007 levels mainly due expected increases marketing selling expenses well due budgeted bonus fiscal executives employees versus none executives fiscal 2007 research development expenses rd expenses increased 08 million fiscal year 2007 compared fiscal year 2006 continuing efforts develop new optical memory card features structures including various composite card structures allow insertion contactless chips radio frequency rf capability dualinterface contactcontactless optical memory ovd optically variable device products marketdriven requirements also performing optical media development allow new form factors flexibility card layouts integrated security features enhanced optical memory card readwrite drives increased reliability ease use integration new versions readonly drives readers meet various operational requirements office desktop units handheld field units integrated displays biometrics rfid capability along new software products effort provide new products stimulate optical memory card sales growth example recently developed new green card authenticator application based lasercard® reader currently evaluated market allows employers immediate validate potential employees’ green cards hiring process additionally year inhouse evaluation opticalproximity system building access control starting installation first customer location test evaluation site german subsidiary recently completed development new integrated card personalization system shipped several systems customers past year anticipate ongoing research development efforts result enhanced card features capabilities new versions readonly drives advanced security features andor lower manufacturing costs however assurance product development efforts successful features important existing future optical memory card markets decrease rd spending fiscal year 2006 compared fiscal year 2005 primarily due completion major spending first prototype lasercard® portable reader coupled phases new card media development project completion card material projects increases rd expenses anticipated fiscal year 2007 development productionmodel readonly drives optical memory card media development card hardware related programs systems impairment goodwill intangible assets perform annual impairment testing goodwill intangible assets comply sfas 142 “goodwill intangible assets” march 31 2007 determined estimated future cash flows insufficient justify carrying value goodwill intangible assets based management’s decision suspend optical memory card production germany fourth quarter fiscal year 2007 recorded noncash pretax impairment charge approximately 38 million writeoff goodwill intangible assets acquired upon purchase challenge card design plastikkarten gmbh rastede germany cards gmbh ratingen germany march 31 2004 fiscal years 2006 2005 future cash flows determined sufficient based part planned production portion optical memory cards facility germany income net total net income fiscal year 2007 895000 consisting 980000 interest income 45000 miscellaneous income partially offset interest expense 107000 23000 miscellaneous expenses total net income fiscal year 2006 471000 including 583000 interest income partially offset interest expense 80000 32000 miscellaneous expenses net miscellaneous income total net income fiscal year 2005 240000 interest income increase interest income fiscal year 2006 compared fiscal year 2005 primarily due increase investment rates invested funds increase interest income fiscal year 2006 compared fiscal year 2005 primarily due higher income invested funds income taxes recorded income tax benefit 351000 fiscal year 2007 income tax expense 443000 fiscal year 2006 139000 fiscal year 2005 tax benefit fiscal year 2007 due mainly reduction deferred income tax liabilities germany true difference fiscal year 2006 current provision resulted tax return california taxes income tax expense fiscal year 2006 primarily due federal state alternative minimum taxes income tax expense fiscal year 2005 mainly due federal alternative minimum tax payments gigprevent received fiscal years 2007 2006 2005 recorded income federal tax return even though recorded income us generally accepted accounting principles income offset net operating loss carryforwards generated previous years however alternative minimum taxes due tax return income offset net operating loss carryforwards generated previous years liquidity capital resources following table summarizes cash equivalents investments march 31 thousands cash equivalents investments decreased fiscal year 2007 primarily due 31 million purchases property equipment partially offset 1 million proceeds exercise employee stock options cash equivalents investments increased fiscal year 2006 primarily due 5 million generated operating activities proceeds exercise employee stock options amount 43 million partially offset purchase property equipment 23 million following table displays sources uses cash activity fiscal years ended march 31 thousands cash used operations 05 million fiscal year 2007 primarily consists 33 million used due loss net noncash items 46 million received prevent net equipment purchased contract 18 million used changes working capital items cash provided operations 5 million fiscal year 2006 primarily consists 37 million received gig net equipment purchased contract plus 45 million net income plus noncash items additionally advance payments received customers totaled 61 million offset changes working capital items 56 million net cash provided investing activities 06 million fiscal year 2007 consisted primarily 38 million net proceeds maturity investments less capital expenditures approximately 31 million net cash used investing activities 113 million fiscal year 2006 consisted net purchases investments 89 million capital expenditures approximately 23 million net cash provided financing activities fiscal year 2007 1 million consisted net proceeds sale common stock plans net cash provided financing activities fiscal year 2006 44 million consisted net proceeds sale common stock plans believe estimated level revenues customer advance payments next twelve months sufficient generate cash operating activities period however quarterly fluctuations expected operating cash flows could negatively impacted significant degree either largest us government programs delayed reduced canceled extended italian cie card program grow planned internally programs replaced card orders sources income increases product revenues licenses keep pace increased marketing rd capital expenditures established line credit may negotiate line credit although assurance made financing would available favorable terms needed result net loss recorded fiscal year 2007 accumulated deficit increased 264 million 387 million stockholders’ equity decreased 226 million 320 million result net loss partially offset issuance common stock employee stock plans consider highly liquid investments consisting primarily commercial paper discount notes us government bonds original remaining maturities three months less date purchase cash equivalents investments original remaining maturities three months one year date purchase classified shortterm investments original remaining maturities one year date purchase classified longterm determine length investments considering cash requirements yields available type investment considered company determine appropriate classification debt equity securities time purchase reevaluate classification investments balance sheet date march 31 2007 175 million classified shortterm investments longterm investments compared 214 million classified shortterm investments march 31 2006 auction rate securities accounted availableforsale interestbearing securities accounted heldtomaturity made capital equipment leasehold improvement purchases approximately 31 million fiscal year 2007 compared approximately 23 million fiscal year 2006 33 million fiscal year 2005 annual production capacity 10 million rollprocess cards conjunction approximately 9 million sheetprocess cards depending upon optimum mix features plan purchase additional production equipment series steps deem appropriate based part upon orders forecasts plan use cash hand cash generated operations fund capital expenditures approximately 8 million equipment leasehold improvements card production readwrite drive tooling assembly general support items customer orders justify investment expenditures could occur throughout next twelve eighteen months march 31 2004 completed acquisition two related german card companies challenge card design plastikkarten gmbh rastede germany cards gmbh ratingen germany later merged collectively acquired german entity including sales operations united states korea acquired german entity owns plant rastede germany together associated equipment manufactures plastic cards featuring contactless ic chip technology high resolution printing intend continue use facility equipment produce cards although plans use facility produce lasercard® optical memory cards germany suspended fiscal year 2005 commenced share repurchase program 350000 shares common stock could purchased us time nasdaq global market transactions aggregate amount exceeding 3 million second quarter fiscal year 2005 used cash 655000 purpose since terminated program without activity debt financing activities fiscal year 2007 2006 contractual obligations following table provides summary effect liquidity cash flows contractual obligations following years ended march 31 thousands offbalance sheet arrangements offbalance sheet arrangement march 31 2007 2006 reasonably likely current future effect financial condition changes financial condition revenues expenses results operations liquidity capital expenditures capital resources material investors recent accounting pronouncements recent accounting pronouncements disclosed note 2 notes consolidated financial statements item 7a item 7 managements discussion analysis financial condition results operations following management’s discussion analysis contains forwardlooking information read conjunction audited consolidated financial statements notes consolidated financial statements included elsewhere annual report form 10k purpose statements contained report statements historical facts may deemed forwardlooking statements forwardlooking statements discussion risk factors related business operations please refer “forwardlooking statements” section starting page 4 report section entitled “risk factors” starting page 17 report actual results may differ materially plans intentions expectations disclose forwardlooking statements make obligated publicly update forwardlooking statements whether result new information future events otherwise overview headquartered mountain view california manufacture lasercard® optical memory cards card related products including chipready opticalsmart™ cards addition operate wholly owned german subsidiary challenge card design plastikkarten gmbh “ccd” offices rastede ratingen germany manufactures advancedtechnology cards provide manufacturing capacity certain steps optical memory card production markets cards system solutions thermal card printers operate three reportable segments see “segment reporting” note 4 notes consolidated financial statements item 8 “financial statements supplementary data” additional industry segment information ● optical memory cards ● drives systems services formerly called “optical memory card drives” ● specialty cards card printers sell products services partners value added resellers vars system integrators sis generally specific experience development markets applications lasercard products sales staff located california washington dc area germany whose principal role developing supporting reseller channel revenue derived mainly advanced technology cards optical memory contact contactless rfid cards high quality specialty cards applications major event badging access control remainder revenue comes variety activities including sale enabling services consulting custom application development integration id management solution modules data capture card personalization quality assurance card factory design equipment sales knowledge transfer licensing reseller partners generally add value form application software development system integration installation training support services continuing program recruit new vars sis strategically important markets table presents consolidated revenues excluding intercompany transactions recorded us german operations fiscal years ended march 31 thousands revenues recorded us operations generally derived small number government customers located throughout world revenues recorded german operations mainly relatively large number commercial customers europe including universities germany student identification cards organizers sporting events secure access cards major near term growth potential lasercard® optical memory cards governmentsponsored identification programs several countries since governmental card programs typically rely policymaking turn subject technical requirements budget approvals political considerations assurance programs implemented expected include optical cards principal objectives longterm revenue growth ● maintain leverage expand existing optical memory card user community national regional governments worldwide ● increase revenues selling enabling services consulting custom software development integrated secure id solutions include data capture personalization quality assurance modules ● increase market share specialized cards associated id management solutions major event badging access control university student id expand sales products services americas historically largest purchaser lasercard products us government contractor general dynamics information technology gdit previously anteon international corporation gdit government contractor lasercard product sales us department homeland security dhs us department state dos us department defense dod government canada government contracts gdit dhs purchases green cards dos laser visa border crossing cards dod purchases automated manifest system cards canadian government purchases permanent resident cards two customers purchase lasercard products kingdom saudi arabia national id program another unaffiliated company laser memory card spa italy purchases lasercard products mainly secure id card programs italy major customers shown percentage total revenues fiscal years ended march 31 customer 29 28 31 customer b 17 13 customer c 14 2 customer 1 8 31 major government programs shown percentage total revenues fiscal years ended march 31 national citizen id cie card program largely stalled since january 2006 following change government instigation review designed reduce cost improve efficiency program cie foreign resident id card psecse systems function designed cie psecse card orders could ramp toward full implementation level could potentially result annual revenues 40 million received shipped 200000 small order foreign language versions cie card fiscal year 2008 since fiscal year 2005 supplied approximately 154 million worth optical memory cards 450 encoders programs january 4 2008 request proposal rfp issued italys state printer istituto poligrafico e zecca dello stato spa poligrafico inviting interested parties submit qualifications bid anticipated followon rfp 60 million euros approximately 88 million key components installation support services national infrastructure required roll cie card program rfp specifies requirement 9000 enrollment workstations installed supported nationwide regional citybased service centers workstations employed gathering personal information citizens prior issuance cie id cards rfp also specifies installation support services 1300 secure optical memory card encoders provide workstations services key step building infrastructure needed move program full implementation march 2008 signed nonexclusive license agreement ritel manufacture optical memory drives italy distribute resulting drives worldwide ritel telecommunications technology contract manufacturer brings significant knowhow new production processes new product development could lead innovation development lower cost drives expect supply parts sets ritel manufacture encoders delivery first 400 units expected september 2008 issuance system psecse cards italy place operating believe issuing 5000 cards per day backlog cie psecse programs march 31 2008 believe followon orders programs received significant card revenue realized fiscal year 2009 although remains unclear prime contractor issue followon orders us green cards us department homeland security dhs lesser extent laser visa border crossing cards bccs important part revenue base programs recorded card revenues 74 million fiscal year 2008 74 million fiscal year 2007 98 million fiscal year 2006 received fiveyear followon us government subcontract march 2007 covering programs subcontract initial oneyear term four oneyear extension options first year exercised 16 million backlog march 31 2008 dhs asked us support process redesigning green card transition redesigned card could cause delays future orders dhs reduces inventory current cards designed 1997 however anticipate decrease followed increase orders newly designed cards replenish strategic reserve although assurance given anticipate border crossing card bcc design reconfigured include rfid chip specified us department state’s new us passport card keeping requirements western hemisphere travel initiative recently announced another company us passport card contract bid nonoptical rfid card may intention us department state future bcc follow passport card model change occurs could expect bcc business cease recorded 10 million revenue bcc program fiscal year 2008 10 million fiscal year 2007 35 million fiscal year 2006 subcontract canada’s permanent resident cards recorded revenue 28 million fiscal year 2008 12 million fiscal year 2007 2 million fiscal year 2006 backlog march 31 2008 immaterial january 2006 entered subcontract providing framework supply secure national id cards kingdom saudi arabia supply installation support associated card personalization equipment consumables software followed earlier deliveries cards card encoders previous contracts purchase orders cards issued adult citizens national identity purposes feature latest advancements identity fraud protection provided optical idlock™ combination highlysecure lasercard® optical memory technology embedded hologramhd™ new highdefinition “photographic quality” etched image security feature subcontract covered 11 million worth product services first time provided enabling services assuming responsibility supplying installing personalization hardware oversight card personalization process quality fully personalized cards including printing cardholder information encoding data embedded hologramhd accordance emerging issues task force 0021 revenue arrangements multiple deliverables eitf 0021 revenue contract associated costs deferred card system installed accepted fiscal year 2008 recorded revenue 86 million contract purchase orders program addition 40 million recognized fiscal year 2007 backlog program march 31 2008 anticipate revenue 5 million 10 million annually program effective april 3 2004 sold cardmanufacturing license including equipment training support global investments group gig based auckland new zealand card manufacturing slovenia began receiving associated cash payments april 2007 approval gig transferred license prevent global slovenia prevent begin recognize revenue arrangement remaining term agreement starting related equipment accepted training completed date turn dependent prevent establishing suitable facility slovenia discussed “license fees revenues” november 6 2007 subsidiary ccd signed 59 million euros approximately 94 million contract company based kingdom saudi arabia deliver turnkey card manufacturing facility contract includes supply installation stateoftheart plastic card production equipment transfer manufacturing knowhow training production support include constructing preparing building house equipment new factory used produce personalize high quality scratchoff cards loyalty cards sim cards credit cards telecommunication banking sectors rights optical memory card technology manufacturing included arrangement following eitf 0021 accounted sale installation equipment training consulting services support maintenance one unit accounting accordingly revenues arrangement deferred recognized ratably earned remaining term final deliverable maintenance services pursuant ftb 901 accounting separately priced extended warranty product maintenance contracts december 20 2007 signed agreement government costa rica valued approximately 17 million supply id management system country’s foreign resident program terms agreement supply suite demographic biometric data collection card issuance equipment software solutions assist costa rican government manage issuing highly secure optical memory based foreign resident id cards applications include centralized enrollment legal foreign residents automatic fingerprint identification prevent issuance duplicate cards optical memory encoding card printing servers quality assurance card issuance controlled biometric verification system issuance process also include biometric identification workstation operators strict card auditing processes contract terms include limited supply foreign resident id cards incorporate number security features addition secure optical memory card’s optical memory store cardholder information including high resolution color facial image fingerprint images templates automatic onetoone identity verification digitized signature biographic data addition optical stripe also feature unique embedded hologramhd personalized optical variable device like digital data cannot fraudulently altered revenues contract deferred customer’s acceptance equipment software cards anticipated first half fiscal year 2009 january 2008 government angola announced contract award dgmsistemas luanda angola delivery complete id management system contract calls initial 8 million optical memory cards country’s new national citizen id program issued infrastructure built additional 12 million cards could issued later teamed dgm exclusive supplier cards project team members include unisys corporation nyse uis responsible systems integration valueadded reseller identicard sa portugal developed system architecture dgm bid includes 90 million products services provided us including optical memory cards card personalization systems printer consumables installation training key factors emphasized proposal angolan government included security characteristics high data storage capacity optical memory fact optical memory’s digital security never compromised purchase orders expected received identicard sa may invest 7 million additional capital equipment leasehold improvement expenditures optical memory card specialty card production capacity manufacturing enhancement facilities throughout next twelve months fully discussed “liquidity capital resources” results operations revenues product revenues total revenues consisted sales three segments 1 optical memory cards 2 drives systems services 3 specialty cards card printers well miscellaneous items product revenues 370 million fiscal year 2008 323 million fiscal year 2007 399 million fiscal year 2006 license revenues earned fiscal years 2008 2007 2006 following table presents product revenue segment fiscal years ended march 31 thousands except percentages following table presents optical memory card revenue major program fiscal years ended march 31 thousands optical memory card revenue increased fiscal year 2008 compared fiscal year 2007 due increased card unit volume kingdom saudi arabia’s national id program canadian permanent resident card program vehicle registration program india offset decreased card unit volume italian card programs optical memory card revenue decreased fiscal year 2007 compared fiscal year 2006 due mainly decrease card unit volume italian cie program revenue drives systems services segment increased fiscal year 2008 compared fiscal year 2007 02 million fiscal year 2007 compared fiscal year 2006 revenue increased 05 million increases mainly due activity id card program kingdom saudi arabia anticipate derive significant profits future drive sales prices set near manufacturing cost order promote optical memory card sales specialty cards printers revenue 132 million 93 million euros fiscal year 2008 118 million 92 million euros fiscal year 2007 107 million 86 million euros fiscal year 2006 14 million 12 increase revenue fiscal year 2008 compared fiscal year 2007 largely due approximate 11 change foreign exchange rate increases orders major international racing event university projects 11 million 11 increase fiscal year 2007 compared fiscal year 2006 due 11 change foreign exchange rate increases orders major international racing event anticipate growth segment fiscal year 2009 driven newly introduced passport page specialty card products license fees revenues license revenues fiscal year 2008 2007 2006 fiscal year 2004 entered license optical memory card equipment purchase support agreements effective april 3 2004 global investments group gig based auckland new zealand optical memory card manufacturing slovenia gig transferred license agreements approval prevent global družba za upravljanje investicije razvoj dd “prevent” march 2007 agreements provide payments company 267 million current march 31 2008 20year license required manufacturing equipment targeted initial manufacturing capacity 10 million optical cards annually installation support fouryear training support package 267 million received 238 million recorded advance payments customer 29 million licensing fees recorded deferred revenue classified long term liabilities consolidated balance sheets march 31 2008 company 66 million acquired equipment including direct incremental expenses classified equipment held resale consolidated balance sheets company ship equipment prevent upon request installation facility provided fourth quarter fiscal year 2008 prevent sent representatives initiate discussion infrastructure requirements installation equipment facility time company know prevent initiate request beginning april 1 2008 prevent pay 250000 quarterly threeyear support package options thirteen additional years support payments 10 million annually addition aggregate amount 428 million discussed prevent pay royalties 060 per card produced license territories covered license include european union eastern european regions prevent exclusive marketing rights certain territories company retains rights utilize 20 new facility capacity backup capacity buffer augment card manufacturing facilities mountain view california possibly company’s german subsidiary agreement contains various elements including card manufacturing license sale installation equipment training ongoing support contingent payments support materials royalty payments cards manufactured accordance eitf 0021 card manufacturing license sale installation equipment training support package accounted one unit accounting since unable determine evidence fair value undelivered items ongoing support company able determine evidence fair value last predominant item delivered ongoing annual support manufacturing equipment accordingly revenues arrangement deferred recognized equipment installed accepted exception value ongoing annual support manufacturing equipment recognized quarterly earned beginning equipment accepted training completed date dependent prevent establishing suitable facility slovenia pursuant ftb 901 accounting separately priced extended warranty product maintenance contracts support revenue recognized ratably remaining term agreement march 2008 ritel became nonexclusive licensee manufacture optical memory drives italy sell resulting drives worldwide ritel italian telecommunications technology contract manufacturer brings significant knowhow new production processes new product development could lead innovation development lower cost drives expect supply parts sets ritel manufacture encoders delivery first 400 units expected september 2008 backlog march 31 2008 backlog lasercard® optical memory cards totaled 25 million scheduled delivery june 2008 compared 57 million march 31 2007 83 million march 31 2006 customers generally place orders severalmonth period variations order placement single customer materially affect backlog result relative size backlog reliable indicator future sales revenue trends march 31 2008 backlog drives systems services 11 million due largely costa rica contract id management system country’s foreign resident card program significant backlog readwrite drives march 31 2007 backlog march 31 2008 specialty cards printers totaled 11 million euros approximately 18 million compared 06 million euros approximately 08 million march 31 2007 08 million euros approximately 10 million march 31 2006 addition contract deliver turnkey nonoptical card manufacturing facility kingdom saudi arabia valued 59 million euros approximately 93 million contract develop conventional nonoptical card production facility serbia valued 05 million euros approximately 08 million march 31 2008 compared 07 million euros approximately 09 million march 31 2007 07 million euros approximately 08 million march 31 2006 also 27 million prevent contract revenue recorded gross margin following table represents gross margin absolute dollars percentage revenue segment fiscal years ended march 31 thousands except percentages optical memory cards optical memory card gross margin vary significantly based upon changes average selling price production sales volumes mix card types production efficiency yields changes fixed costs unit volume greatly affects gross margin due absorption fixed manufacturing costs increase optical memory card gross margin 35 revenue fiscal year 2008 compared 25 revenue fiscal year 2007 mainly due 12 increase sales volume product mix decrease optical memory card gross margin 25 revenue fiscal year 2007 compared 46 revenue fiscal year 2006 mainly due 34 decrease sales unit volume resultant loss efficiencies economies scale drives systems services drives systems services gross margin negative past three years inclusive fixed overhead costs due low sales volume policy price drives close manufacturing cost promote card sales segment also includes enabling services also lower margins optical memory cards anticipate readwrite drive negative gross margins continue future unless sales volume sufficient cover fixed costs gross margin segment variable depending upon occurrence enabling services revenue specialty cards card printers gross margin specialty cards card printers 20 total revenue fiscal year 2008 21 fiscal year 2007 25 fiscal year 2006 operating expenses following table presents operating expenses fiscal years ended march 31 thousands except percentage selling general administrative expenses sga expenses increased 17 million 12 fiscal 2008 compared fiscal year 2007 approximately 09 million increase due planned retirement agreement retiring ceo described “commitments contingencies” note 7 notes consolidated financial statements item 8 “financial statements supplementary data” 01 million recruitment expenses 04 million increase related sfas 123r stock option expenses miscellaneous expenses sga expenses 16 million fiscal year 2007 compared fiscal year 2006 approximately 10 million increase result adoption sfas 123r stock option expensing remaining increase due 04 million consulting services planning increase salaries related additional personnel partially offset mainly decrease management bonus 07 million believe sga expenses fiscal year 2009 remain consistent fiscal year 2008 levels exception sfas 123r expenses related inducement options recruiting new ceo potential sales commissions contingent bonus payments research development expenses rd expenses decreased 02 million fiscal year 2008 compared fiscal year 2007 mainly due sharebased expenses fiscal year 2007 rd expenses increased 08 million compared fiscal year 2006 due 04 million sfas 123r sharebased expenses 04 million various rd projects continuing effort develop new optical memory card nonoptical card features structures including various composite card structures allow insertion contactless chips radio frequency rf capability dualinterface contactcontactless optical memory ovd optically variable device products marketdriven requirements also performing optical media development allow new form factors flexibility card layouts integrated security features enhanced optical memory card readwrite drives increased reliability ease use integration new versions readonly drives readers meet various operational requirements office desktop units handheld field units integrated displays biometrics rfid capability new software products effort provide new products stimulate optical memory card sales growth also recently completed development new integrated card personalization system shipped several systems customers past year anticipate ongoing research development effort result enhanced card features capabilities new versions readonly drives advanced security features andor lower manufacturing costs however assurance product development effort successful features important existing future optical memory card markets expect rd expenses increase approximately 50 fiscal year 2009 compared fiscal year 2008 due effort described impairment goodwill intangible assets perform annual impairment evaluation goodwill intangible assets comply sfas 142 goodwill intangible assets since march 31 2004 carrying goodwill intangible assets resulting purchase ccd march 31 2004 march 31 2007 determined estimated future cash flows insufficient justify carrying value goodwill intangible assets based management’s decision suspend optical memory card production germany recorded noncash pretax impairment charge approximately 38 million writeoff goodwill indefinite lived intangible assets impairment charge recorded fiscal years 2006 2008 income net following table presents income net fiscal years ended march 31 thousands decrease interest income fiscal 2008 versus fiscal 2007 mainly due lower amount invested funds increase interest income fiscal 2008 versus fiscal 2006 mainly due higher interest rates decrease interest expense fiscal 2008 versus fiscal 2007 due improved management forward contracts increase interest expense fiscal 2007 versus fiscal 2006 mainly due less favorable rates forward contracts expect interest income decrease nearterm due declining interest rates resulting recent actions federal reserve bank lowering federal funds rate issues surrounding auction rate securities income taxes june 2006 financial accounting standards board “fasb” issued interpretation 48 accounting uncertainty income taxesan interpretation fasb statement 109 “fin 48” interpretation clarifies accounting uncertainty income taxes recognized financial statements accordance fasb statement 109 accounting income taxes fin 48 prescribes recognition threshold measurement attribute financial statement recognition measurement tax position taken expected taken tax return interpretation also provides guidance derecognition classification interest penalties accounting interim periods disclosure transition evaluation tax position accordance fin 48 twostep process first step recognition determine whether “morelikelythannot” tax position sustained upon examination including resolution related appeals litigation processes based technical merits position evaluating whether tax position met “morelikelythannot” recognition threshold presume position examined appropriate taxing authority would full knowledge relevant information second step measurement tax position meets “morelikelythannot” recognition threshold measured determine amount benefit recognize financial statements tax position measured largest amount benefit greater 50 percent likely realized upon ultimate settlement fin 48 effective fiscal years beginning december 15 2006 us fiscal year commencing april 1 2007 upon adoption fin 48 april 1 2007 recognized cumulative effect adjustment 62000 decreasing income tax liability unrecognized tax benefits decreasing march 31 2007 accumulated deficit balance march 31 2008 total amount gross unrecognized tax benefits approximately 229000 entire balance represents amount unrecognized tax benefits recognized would affect effective tax rate currently anticipate significant increase decrease unrecognized tax benefits recorded next 12 months recognize interest penalties accrued unrecognized tax benefits component provision income taxes march 31 2008 accrued 34000 payment interest penalties related unrecognized tax benefits reconciliation beginning ending amount unrecognized tax benefit follows although file us federal various state foreign tax returns major tax jurisdictions united states california germany tax years 1993 2008 remain subject examination appropriate governmental agencies mainly united states due tax loss carryovers years recorded income tax benefit 114000 351000 fiscal years 2008 2007 respectively fiscal year 2006 recorded income tax expense 443000 tax benefit fiscal year 2008 due mainly reduction deferred income tax liabilities germany offset adjustment related tax reserve fin 48 payments gigprevent received fiscal years 2008 2007 2006 recorded income federal tax return even though recorded income us generally accepted accounting principles income offset net operating loss carryforwards generated previous years however alternative minimum taxes due tax return income offset net operating loss carryforwards generated previous years full valuation allowance required end fiscal years 2008 2007 2006 considering positive negative evidence regarding ability generate sufficient future taxable income realize deferred income tax assets liquidity capital resources following table summarizes cash equivalents investments march 31 thousands account shortterm marketable securities accordance sfas 115 accounting certain investments debt equity securities “sfas 115” consider highly liquid investments consisting primarily commercial paper discount notes us government bonds auction rate securities original remaining maturities three months less date purchase cash equivalents investments original remaining maturities three months one year date purchase classified shortterm investments original remaining maturities one year date purchase classified longterm determine length investments considering cash requirements yields available type investment considered company determine appropriate classification debt equity securities time purchase reevaluate classification investments balance sheet date march 31 2008 129 million auction rate securities net 06 million unrealized loss accounted availableforsale classified longterm securities due underlying events surrounding failed auctions explained next paragraph held shortterm investments march 31 2008 march 31 2007 held 175 million auction rate securities classified shortterm investments longterm investments auction rate securities structured shortterm interest rate reset dates generally 28 35 days contractual maturities well excess ten years auction rate securities consist investments secured pools student loans guaranteed 95 principal interest federal family education loan program “ffelp aaa rated believe credit quality securities high based guarantees invested auction rate securities secured mortgages collateralized debt obligations end reset period sell continue hold securities par value auction process historically provided liquid market auction rate securities recently however certain auctions failed due sell orders exceeding buy orders continued see deterioration market types securities spread initially primarily subprime mortgage related securities forms securities funds associated failed auctions accessible successful auction occurs buyer found outside auction process underlying securities matured recalled issuer given recent disruptions credit markets fact liquidity types securities remains uncertain march 31 2008 classified auction rate securities longterm asset consolidated balance sheet ability liquidate securities next 12 months uncertain believe declines auction rate securities fair values due lack liquidity temporary ability intent hold investments recovery fair value occurs consider impairment permanent recorded unrealized loss 06 million net tax comprehensive income loss shareholders equity section consolidated balance sheet march 31 2008 valuing investments company primarily uses market data fair values derived brokerage statements supplied company’s brokerage firm fair values auction rate securities failed auctions subject unobservable inputs fair value measurement derived fair values calculated company’s brokerage firm using internally developed valuation methodology based present value cash flow model also used valuation firm help us analyze reasonableness fair values provided brokerage firm evaluate investments periodically possible otherthantemporary impairment reviewing factors length time extent fair value cost basis financial condition issuer ability intent hold investment period time may sufficient anticipated recovery market value record impairment charge extent carrying value available sale securities exceeds estimated fair market value securities decline value determined otherthantemporary believe sufficient available cash execute business plan fiscal 2009 anticipated operations fiscal 2010 expect estimated level revenues customer advance payments next 12 months sufficient generate cash operating activities period although quarterly fluctuations expected expect need liquidity funds invested auction rate securities fiscal 2009 2010 fund operations however operating cash flows could negatively impacted significant degree largest us government program delayed reduced canceled extended angolan national id card program materialize planned internally programs replaced card orders sources income unexpectedly require additional cash resources absence liquidity auction rate investments require us see funds elsewhere may unattractive unavailable agreement government costa rica signed december 20 2007 required us issue completion bond approximately 167000 equivalent 10 contract price purchased certificate deposit representing completion bond classified noncurrent assets consolidated balance sheet march 31 2008 bond shall remain effect one year 12 months final acceptance date delivery last batch shipment tentatively scheduled first quarter fiscal year 2009 march 31 2008 classified restricted cash noncurrent assets established line credit may negotiate line credit although assurance made financing would available favorable terms needed following table displays sources uses cash activity fiscal years ended march 31 thousands cash used operations 03 million fiscal year 2008 consists 18 million used due loss operations net noncash items 05 million used increases operating assets partially offset increases operating liabilities 20 million cash used operations 05 million fiscal year 2007 primarily consists 33 million used due loss operations net noncash items 46 million received prevent net equipment purchased contract 18 million used changes working capital items cash provided operations 50 million fiscal year 2006 primarily consists 37 million received gig net equipment purchased contract plus 45 million net income plus noncash items additionally advance payments received customers totaled 61 million offset changes working capital items 56 million net cash provided investing activities 26 million fiscal year 2008 consisted 40 million net proceeds maturity investments less capital expenditures changes noncurrent assets 14 million net cash provided investing activities 06 million fiscal year 2007 consisted primarily 38 million net proceeds maturity investments less capital expenditures approximately 31 million net cash used investing activities 113 million fiscal year 2006 consisted net purchases investments 89 million capital expenditures approximately 23 million net cash provided financing activities fiscal years 2008 2007 2006 consisted net proceeds sale common stock employee stock plans made capital equipment leasehold improvement purchases approximately 12 million fiscal year 2008 compared approximately 31 million fiscal year 2007 23 million fiscal year 2006 annual production capacity 10 million rollprocess cards conjunction approximately 9 million sheetprocess cards depending upon optimum mix features additional manufacturing equipment currently order delivery september 2008 increase capacity sheetprocess cards 16 million per year plan use cash hand cash generated operations leasing fund capital expenditures approximately 7 million equipment leasehold improvements card production readwrite drive tooling assembly general support items throughout next twelve months portion capital expenditures require debt financing believe obtained reasonable terms addition unexpectedly require additional cash resources absence liquidity auction rate investments could require us seek funds elsewhere may unattractive unavailable fiscal year 2008 entered lease agreement fouryear term acquire equipment recorded capitalized lease amount 113000 80000 euros accordance sfas 13 accounting leases accumulated depreciation march 31 2008 approximately 17000 12000 euros debt financing activities contractual obligations following table provides summary effect liquidity cash flows contractual obligations following years ended march 31 thousands critical accounting policies discussion analysis financial condition results operations based upon consolidated financial statements prepared accordance us generally accepted accounting principles note 2 notes consolidated financial statements describe significant accounting policies methods used preparation consolidated financial statements preparation financial statements requires us make estimates judgments affect reported amounts assets liabilities revenues expenses ongoing basis evaluate estimates including related revenues inventories stockbased compensation warranties income taxes base estimates historical experience various assumptions believed reasonable circumstances results form basis making judgments carrying values assets liabilities readily apparent sources critical accounting policies 1 important portrayal financial condition results operations 2 require management’s difficult subjective complex judgments often requiring estimates matters inherently uncertain critical accounting policies reflect significant judgments assumptions estimates used preparation consolidated financial statements management discussed development selection critical accounting policies estimates audit committee board directors audit committee reviewed disclosures relating report consider accounting policies described critical accounting policies revenue recognition product sales primarily consist sales optical cards drives systems services specialty cards card printers recognize revenue product sales following criteria met 1 persuasive evidence arrangement exists 2 delivery occurred 3 fee fixed determinable 4 collectability reasonably assured recognize revenue product sales time shipment shipping terms fob shipping point orders placed pursuant preexisting sales arrangement postshipment obligations customer acceptance criteria case us government contract warehousing appropriate provision made time shipment estimated warranty costs estimated returns orders permanent resident border crossing cards us government require delivery secure companycontrolled vault shipments later made vault us government site bill hold procedures also provide end oneyear contract term renewal option exercised us government take final delivery remaining inventory within six months time cards delivered vault title cards transferred us government risks ownership transferred well prime contractor invoiced payment due within thirty days purchase orders contain return warranty cancellation provisions pursuant provisions sec staff accounting bulletin 104 revenue recognition “sab 104” revenue recognized delivery vault fulfilled contractual obligations earnings process complete sales include customerspecified acceptance criteria recognize revenue acceptance criteria met presuming revenue criteria met defer revenue services recognize contractual period render services customer accepts apply provisions emerging issues task force issue 0021 revenue arrangements multiple deliverables “eitf 0021” revenue arrangements multiple deliverables eitf 0021 provides criteria governing identify whether goods services delivered separately bundled sales arrangement accounted separately deliverables accounted separately meet following criteria delivered items standalone value customer b fair value undelivered items reliably determined c arrangement includes general right return delivery undelivered items probable substantially controlled seller situations deliverables fall within higherlevel literature defined eitf 0021 apply guidance higherlevel literature deliverables meet criteria combined one deliverables apply provisions statement position 811 accounting performance constructiontype certain productiontype contracts sop 811 applicable contracts revenues time materials contracts recognized services rendered contract labor rates plus material direct costs incurred revenues fixed price contracts recognized percentage completion method based ratio total costs incurred date compared estimated total costs complete contract estimates costs complete include material direct labor overhead allowable general administrative expenses circumstances estimates costs complete project cannot reasonably estimated assured loss incurred percentageofcompletion method based zero profit margin rather completedcontract method used precise estimates made full amount estimated loss charged operations period determined loss realized performance contract fiscal years ended march 31 2008 2007 2006 recognized approximately 249000 12000 77000 respectively revenues based zero profit margin related longterm contract apply provisions statement position 972 software revenue recognition amended statement position 989 modification sop 972 software revenue recognition respect certain transactions involving sale software products revenue license software products recognized persuasive evidence arrangement exists software product delivered fee fixed determinable collectability probable applicable upon acceptance criteria specified upon expiration acceptance period software revenue immaterial fiscal years ended march 2008 2007 2006 respectively product warranty appropriate provision made time shipment estimated warranty costs estimated returns provide limited warranty replacement defective products limited warranty requires us repair replace defective products cost customer within specified time period sale estimate costs may incurred limited warranty records liability amount costs time product revenue recognized factors affect estimate warranty liability include number units sold historical anticipated rates warranty claims assess adequacy recorded warranty liability adjust amount necessary utilize historical trends information received customers assist determining appropriate estimated warranty accrual levels following table shows warranty liability march 31 thousands significant judgment inherent selection assumptions interpretation historical experience well identification external internal factors affecting estimates reserves product returns believe assumptions used estimate product sales reserves reasonably likely assumptions considering known facts circumstances however product return activity could differ significantly estimates actual product returns significantly different estimates differences would accounted period become known accounting income taxes net deferred income tax liability 313000 march 31 2008 388000 march 31 2007 568000 march 31 2006 result operations german subsidiary part process preparing consolidated financial statements required estimate income taxes jurisdictions operate process involves estimating actual current tax exposure together assessing temporary differences resulting differing treatment items deferred revenue tax accounting purposes differences result deferred income tax assets liabilities included within consolidated balance sheets must assess likelihood deferred income tax assets recovered future taxable income extent management believes recovery likely must establish valuation allowance fiscal year 2008 valuation allowance increased 2 million change valuation allowance relates increase net operating loss carryforwards nols 11 million increases gross deferred income tax assets federal net operating loss carryforwards “nols” march 31 2008 262 million expire various dates 2008 2028 utilized amount 193 million represents nol’s relating windfall stock option deductions benefit credited stockholders’ equity realized federal tax credits amount 272000 alternative minimum taxes expiration federal rd tax credits amount 330000 expire various dates 2013 2027 utilized california tax credits related rd alternative minimum tax amount 166000 expiration date methodology determining realizability deferred income tax assets involves estimates future taxable income based upon booked orders estimated impact future stock option deductions expiration dates amounts net operating loss carryforwards difficulty past expect continued difficulty future reliably forecasting revenue resulted basing estimates future income purposes booked orders circumstances change may future able estimate revenue based upon forecast revenues rather using booked orders although cannot say occur concluding full valuation allowance required end fiscal year 2006 2007 continues required end fiscal year 2008 considered positive negative evidence regarding ability generate sufficient future taxable income realize deferred income tax assets positive evidence included 1 level sales business experienced contracts us department homeland security’s permanent resident card border crossing card programs canadian government’s permanent resident card program 2 prospects italy kingdom saudi arabia national identification card programs 3 expected future orders negative evidence included 1 reliance limited number customers substantial portion business 2 uncertainty timing anticipated orders customers 3 impact future stock option deductions taxable income 4 experience net operating loss carryforwards expiring unused fiscal year 2004 5 recent financial statement losses 6 prior three years’ cumulative tax net operating losses exclusive payments derived prevent contract weighing positive negative evidence considered “more likely not” criteria pursuant sfas 109 well following risks related business “dependence small number customers” “lengthy sales cycles” “technological change” “competition” described concluded negative evidence outweighed positive evidence result recorded valuation allowance equal full amount deferred income tax asset march 31 2006 march 31 2007 march 31 2008 event actual results differ estimates adjusted future periods may need adjust amount valuation allowance based future determinations whether likely deferred income tax assets realized decrease valuation allowance would recorded income tax benefit reduction income tax expense net operating losses available reduce future taxable income expire various dates fiscal year 2009 fiscal year 2028 extent generate taxable income jurisdictions deferred income tax asset relates net operating losses offset full valuation allowance utilization net operating losses would result reversal related valuation allowance inventories value inventory lower actual cost purchase andor manufacture inventory market value market value based replacement cost estimated realizable value less cost sell regularly review inventory quantities hand record provision excess obsolete inventory based primarily forecasts product demand optical card drives fluctuate significantly order obtain favorable pricing purchases certain readwrite drive parts made quantities exceed booked orders purchase drive parts anticipated demand takes consideration ordertodelivery lead times vendors economic purchase order quantity parts addition keep supply card raw materials deem necessary anticipated demand use standard costs approximate firstin firstout costing method perform analysis carrying value inventory quarterly basis respect inventory carrying values follow principles articulated sfas 151 inventory costs amendment arb 43 chapter 4 “sfas 151” arb 43 chapter 4 inventory pricing paragraphs 5 7 10 authoritative guidance eg sab 100 relates determining appropriate cost basis inventory determining whether firm noncancelable purchase commitments accrued loss forecasted demand sufficient utilize committed inventory purchases accounting abnormal amounts idle facility expense freight handling costs wasted material spoilage following sfas 151 allocate fixed production overheads costs conversion based normal capacity production facilities applied sfas 151 inventory costs incurred effective april 1 2006 provisions statement applied prospectively prior adoption sfas 151 full overhead absorption would occur produced full capacity operation resulted recording idle capacity difference actual production full capacity period cost income statement period arose applying sfas 151 analysis shown normal capacity greater actual production less full capacity therefore amount period cost excess capacity reduced perunit amount overhead applied production inventory increased sfas 151 valuation applied fifo basis resulted increase inventory value totaling 219000 period adoption first quarter fiscal year 2007 establish aged inventory reserves obsolescence reserves inventory reserves generally recorded management determines item readily saleable inventory reserves relieved related inventory sold scrapped excess obsolete inventory reserves net change net increase 76000 net increase 334000 net decrease 145000 fiscal years ended march 31 2008 2007 2006 respectively net changes fiscal year 2008 2007 largely due inventory optical memory cards based old design net relief fiscal year 2006 due disposition reserved inventory optical memory cards readwrite drives part quarterly excessobsolete inventory analysis also determine whether lower cost market adjustments ie selling prices less certain costs sufficient recover inventory carrying values warranted record lower cost market adjustments consolidated statements operations fiscal years ended march 31 2008 2007 2006 inventory reserves based upon lower cost market slow moving obsolete items result believe 10 increase decrease sales would material impact reserves impairment goodwill intangible assets perform annual impairment testing goodwill intangible assets comply sfas 142 goodwill intangible assets march 31 2007 determined estimated future cash flows insufficient justify carrying value goodwill intangible assets related march 31 2004 acquisition german operations based management’s decision suspend optical memory card production germany recorded noncash pretax impairment charge approximately 38 million writeoff goodwill intangible assets fiscal years 2006 2005 future cash flows determined sufficient based part planned production portion optical memory cards facility germany impairment charge fiscal year 2006 2008 intend continue use facility equipment germany produce specialty cards although plans use facility produce lasercard® optical memory cards germany suspended fiscal year 2007 however plans reinstate production optical memory cards certain steps production germany future sharebased compensation described detail note 2 stockbased compensation accompanying notes consolidated financial statements effective april 1 2006 adopted fair value recognition provisions sfas 123r using modifiedprospective transition method fair value recognition provisions sfas 123r sharebased compensation cost estimated grant date based fair value award recognized expense net estimated forfeitures ratably vesting period award calculating sharebased compensation expense requires input highly subjective assumptions including expected term sharebased awards stock price volatility prevesting stock option forfeitures estimated expected life stock options granted fiscal year ended march 31 2008 based upon vesting provision historical exercise cancellation expiration patterns estimate volatility common stock date grant based historical volatility common stock assumptions used calculating fair value stockbased awards represent best estimates involve inherent uncertainties application management judgment result factors change use different assumptions sharebased compensation expense could materially different future addition required estimate expected forfeiture rate recognize expense shares expected vest estimate forfeiture rate based historical experience actual forfeiture rate materially different estimate stockbased compensation expense could significantly different recorded current period result adopting sfas 123r using modified prospective method net income applicable common shareholders fiscal year ended march 31 2008 includes 2 million sharebased compensation expense stock options 01 million employee stock purchase plan expense included consolidated statements operations fiscal year ended march 31 2007 sharebased compensation expense included 17 million stock options 01 million employee stock purchase plan expensed consolidated statements operations march 31 2008 37 million total unrecognized compensation cost related unvested sharebased compensation arrangements expected recognized remaining vesting period december 31 2012 prior adoption sfas 123r provided pro forma disclosures net income loss fairvaluebased method applied valuation auction rate securities auction rate securities classified availableforsale carried fair value unrealized gain losses recorded component accumulated comprehensive income declines fair value judged otherthantemporary recorded consolidated statement operations incurred auction rate securities classified based assessment liquidity recent balance sheet date securities typically fixed reset dates within one year designed allow investors exit instruments par even though underlying debt instruments may nominal maturity much 40 years however auctions recently began fail result ability exit instruments shortterm guaranteed failed auction generally considered auction sellers buyers auction buyers assessment performed auction rate securities failed auctions instruments classified based ability hold auction rate securities forecasted recovery fair value accordance eitf 0301 fsp fas 1151 1241 meaning otherthantemporary impairment application certain investments evaluate investments periodically possible otherthantemporary impairment reviewing factors current economic market conditions length time extent fair value cost basis financial condition credit rating issuer ability intent hold investment period time may sufficient anticipated recovery market value record impairment charge extent carrying value available sale securities exceeds estimated fair market value securities decline value determined otherthantemporary continue monitor evaluate value investments reporting period possible impairment cause believe otherthantemporary impairment investment holdings valuing investments primarily use market data fair values derived brokerage statements supplied brokerage firm fair value auction rate securities failed auctions subject unobservable inputs fair value measurement derived fair values calculated brokerage firm using internally developed valuation methodology based present value cash flow model also used valuation firm help us analyze reasonableness fair values provided brokerage firm effects recently adopted accounting pronouncement june 2006 financial accounting standards board “fasb” issued interpretation 48 accounting uncertainty income taxesan interpretation fasb statement 109 “fin 48” interpretation clarifies accounting uncertainty income taxes recognized company’s financial statements accordance fasb statement 109 accounting income taxes fin 48 prescribes recognition threshold measurement attribute financial statement recognition measurement tax position taken expected taken tax return interpretation also provides guidance derecognition classification interest penalties accounting interim periods disclosure transition evaluation tax position accordance fin 48 twostep process first step recognition determine whether “morelikelythannot” tax position sustained upon examination including resolution related appeals litigation processes based technical merits position evaluating whether tax position met “morelikelythannot” recognition threshold presume position examined appropriate taxing authority would full knowledge relevant information second step measurement tax position meets “morelikelythannot” recognition threshold measured determine amount benefit recognize financial statements tax position measured largest amount benefit greater 50 percent likely realized upon ultimate settlement fin 48 effective fiscal years beginning december 15 2006 us fiscal year commencing april 1 2007 upon adoption fin 48 april 1 2007 recognized cumulative effect adjustment 62000 decreasing income tax liability unrecognized tax benefits decreasing march 31 2007 accumulated deficit balance march 31 2008 total amount gross unrecognized tax benefits approximately 229000 entire balance represents amount unrecognized tax benefits recognized would affect effective tax rate currently anticipate significant increase decrease unrecognized tax benefits recorded next 12 months recognize interest penalties accrued unrecognized tax benefits component provision income taxes march 31 2008 accrued 34000 payment interest penalties related unrecognized tax benefits reconciliation beginning ending amount unrecognized tax benefit follows although file us federal various state foreign tax returns major tax jurisdictions united states california germany tax years 1993 2008 remain subject examination appropriate governmental agencies mainly united states due tax loss carryovers years recently issued accounting pronouncements june 2007 eitf issue 073 eitf 073 accounting nonrefundable advance payments goods services used future research development activities issued requires companies defer capitalize prepaid nonrefundable research development payments third parties recognize amounts period research development activities performed services provided subject assessment recoverability guidance effective new contracts entered fiscal years beginning december 15 2007 including interim periods within fiscal years earlier application permitted believe application guidance material impact consolidated financial statements september 2006 fasb issued statement 157 fair value measurements “sfas 157” sfas 157 defines fair value establishes framework measuring fair value us generally accepted accounting principles expands disclosures fair value measurements sfas 157 intended applied conjunction accounting pronouncements require permit fair value measurements although sfas 157 require new fair value measurements application may change current practice entities definition fair value contained sfas 157 retains exchange price notion inherent earlier definitions fair value sfas 157 clarifies exchange price orderly transaction market participants sell asset transfer liability principal advantageous market asset liability accordingly definition focuses price would received sell asset paid transfer liability measurement date exit price would paid acquire asset received assume liability measurement date entry price sfas 157 emphasizes fair value marketbased measurement entityspecific measurement therefore sfas 157 prescribes fair value measurement determined based assumptions market participants would use pricing asset liability yet determined impact statement consolidated financial statements february 2007 fasb issued sfas 159 fair value option financial assets financial liabilities “sfas 159” sfas 159 provides entities option report selected financial assets liabilities fair value objective reduce complexity accounting financial instruments volatility earnings caused measuring related assets liabilities differently sfas 159 effective fiscal years beginning november 15 2007 yet determined impact statement consolidated financial statements december 2007 fasb issued sfas 141 revised 2007 business combinations “sfas 141r” sfas 141r establishes principles requirements acquirer recognizes measures financial statements identifiable assets acquired liabilities assumed noncontrolling interest acquiree goodwill acquired sfas 141r also establishes disclosure requirements enable evaluation nature financial effects business combination sfas 141r effective fiscal years beginning december 15 2008 assess potential impact adoption sfas 141r future acquisition occurs december 2007 fasb issued sfas 160 noncontrolling interests consolidated financial statementsan amendment accounting research bulletin 51 “sfas 160” sfas 160 establishes accounting reporting standards ownership interests subsidiaries held parties parent amount consolidated net income attributable parent noncontrolling interest changes parent’s ownership interest valuation retained noncontrolling equity investments subsidiary deconsolidated sfas 160 also establishes disclosure requirements clearly identify distinguish interests parent interests noncontrolling owners sfas 160 effective fiscal years beginning december 15 2008 currently evaluating potential impact adoption sfas 160 consolidated financial statements offbalance sheet arrangements offbalance sheet arrangement march 31 2008 2007 reasonably likely current future effect financial condition changes financial condition revenues expenses results operations liquidity capital expenditures capital resources material investors item 7a item 7 managements discussion analysis results operations financial condition following discussion analysis companys financial condition results operations read conjunction condensed consolidated financial statements related notes included elsewhere form 10k report year ended march 31 2005 forwardlooking statements discussion risk factors related companys business operations please refer forwardlooking statements section starting page 4 report section entitled risk factors may affect future operating results starting page 17 report critical accounting policies discussion analysis financial condition results operations based upon consolidated financial statements prepared accordance accounting principles generally accepted united states america note 2 consolidated financial statements describes significant accounting policies methods used preparation consolidated financial statements preparation financial statements requires us make estimates judgments affect reported amounts assets liabilities revenues expenses ongoing basis evaluate estimates including related revenues inventories income taxes base estimates historical experience various assumptions believed reasonable circumstances results form basis making judgments carrying values assets liabilities readily apparent sources consider accounting policies described critical accounting policies critical accounting policies 1 important portrayal financial condition results operations 2 require managements difficult subjective complex judgments often requiring estimates matters inherently uncertain critical accounting policies reflect significant judgments assumptions estimates used preparation consolidated financial statements management discussed development selection critical accounting policies estimates audit committee board directors audit committee reviewed disclosures relating report revenue recognition product sales primarily consist card sales readwrite drives card printers company recognizes revenue product sales following criteria met 1 persuasive evidence arrangement exists 2 delivery occurred 3 fee fixed determinable 4 collectibility reasonably assured company recognizes revenue product sales time shipment shipping terms fob shipping point orders placed pursuant preexisting sales arrangement postshipment obligations warehousing us government subcontract customer acceptance criteria appropriate provision made time shipment estimated warranty costs estimated returns total amount actual warranty costs returns activity 373000 fiscal 2005 warranty costs return activity immaterial fiscal 2004 2003 companys us government subcontract requires delivery secure vault located company premises shipments made vault shipment schedule provided prime contractor subject revision generally subject cancellation option prime contractor time cards delivered vault title cards transferred government risks ownership transferred well prime contractor invoiced payment due within thirty days contract contain return warranty cancellation provisions pursuant provisions sec staff accounting bulletin 104 sab 104 revenue recognized delivery vault company fulfilled contractual obligations earnings process complete company receive shipment schedule shipment cards vault revenue deferred recognized upon shipment vault addition revenue recognition future deliveries vault would affected us government cancels shipment schedule prime contractor result companys revenues may fluctuate period company continue obtain shipment schedules subcontract shipment schedules cancelled may 2003 emerging issues task force eitf finalized terms eitf issue 0021 revenue arrangements multiple deliverables eitf 0021 provides criteria governing identify whether goods services delivered separately bundled sales arrangement accounted separately deliverables accounted separately meet following criteria delivered items standalone value customer b fair value undelivered items reliably determined c arrangement includes general right return delivery undelivered items probable substantially controlled seller situations deliverables fall within higherlevel literature defined eitf 0021 company applies guidance higherlevel literature deliverables meet criteria combined one deliverables company adopted eitf 0021 new arrangements entered july 1 2003 assesses revenue arrangements criteria set forth eitf 0021 company applies provisions statement position 811 accounting performance constructiontype certain productiontype contracts sop 811 applicable contracts revenues time materials contracts recognized services rendered contract labor rates plus material direct costs incurred revenues fixed price contracts recognized percentage completion method based ratio total costs incurred date compared estimated total costs complete contract estimates costs complete include material direct labor overhead allowable general administrative expenses circumstances estimates costs complete project cannot reasonably estimated assured loss incurred percentageofcompletion method based zero profit margin rather completedcontract method used precise estimates made full amount estimated loss charged operations period determined loss realized performance contract year ended march 31 2005 company recognized approximately 127000 revenues based zero profit margin related longterm contract company revenues generated type contract years ended march 31 2004 2003 company applies provisions statement position sop 972 software revenue recognition amended statement position 989 modification sop 972 software revenue recognition respect certain transactions involving sale software products revenue license companys software products recognized persuasive evidence arrangement exists software product delivered fee fixed determinable collectibility probable applicable upon acceptance criteria specified upon expiration acceptance period software revenue immaterial fiscal 2005 2004 2003 respectively license revenue may consist upfront license fees royalty payments recognized revenue earned secondsource card manufacturing license sold april 2004 global investments group provides royalty payments company card produced 20year term license agreement multielement arrangement described emerging issues task force eitf issue 0021 revenue derived payments recognized time term license revenue recognized remaining term agreement beginning operation factory commences cost license revenue recorded fiscal 2005 2004 2003 accounting income taxes part process preparing consolidated financial statements company required estimate income taxes jurisdictions operates process involves estimating actual current tax exposure together assessing temporary differences resulting differing treatment items deferred revenue tax accounting purposes differences result deferred tax assets liabilities included within consolidated balance sheets company must assess likelihood deferred tax assets recovered future taxable income extent management believes recovery likely company must establish valuation allowance extent valuation allowance established increased period company includes expense within tax provision statements operations significant management judgment required determining provision income taxes particular valuation allowance recorded companys deferred tax assets due companys recent cumulative tax loss history threeyear period ended march 31 2004 income statement loss history previous five quarters difficulty forecasting timing future revenue evidenced deviations achieved revenues expected revenues previous quarters taking account newness certain customer relationships company determined fiscal 2004 necessary increase valuation allowance sfas 109 full amount deferred tax asset result company determined full valuation allowance required net deferred tax asset fiscal 2004 increased existing allowance 24 million 148 million addition company increased valuation allowance net deferred tax asset amount 37 million fiscal 2005 companys methodology determining realizability deferred tax assets involves estimates future taxable income estimated impact future stock option deductions expiration dates amounts net operating loss carryforwards estimates based nearterm projections assumptions management believes reasonable recent prior periods second quarter fiscal 2004 company estimating future taxable income core business assumed ongoing business us government subcontract permanent resident cards green cards laser visa border crossing cards canadian governments permanent resident card program well estimated operating expenses support level business offset estimated impact future stock option deductions starting fiscal 2004 company estimated future taxable income based upon expectations current next three years past core business proven stable company believed past core business expected represent increasingly smaller part business company expects revenues us programs stabilize revenue levels lower expected past company expects new foreign business fluctuated considerably quarter comprise larger portion core business company difficulty past expects continued difficulty future reliably forecasting foreign business revenue received combination anticipated threeyear cumulative tax loss period ended march 31 2004 resulted company basing estimates future income purposes booked orders circumstances change company may future able revert back estimating future revenue based upon forecast revenues rather using booked orders although company cannot say occur concluding valuation allowance required end fiscal 2004 still required end fiscal 2005 company considered positive negative evidence regarding ability generate sufficient future taxable income realize deferred tax assets positive evidence included achieved profitability financial reporting purposes fiscal 1999 fiscal year 2003 positive evidence included 1 level sales business experienced contract canadian governments permanent resident card program 2 prospects italy middle eastern country national identification card programs 3 heightened interest border security initiatives following events september 11 2001 4 expected future orders negative evidence included 1 companys reliance limited number customers substantial portion business 2 uncertainty timing anticipated orders customers 3 impact future stock option deductions taxable income 4 recent experience net operating loss carryforwards expiring unused fiscal 2004 5 financial statement loss fourth quarter fiscal 2003 fiscal 2005 6 three years cumulative tax net operating losses fiscal 2004 weighing positive negative evidence company considered likely criteria pursuant sfas 109 well risk factors related future business described subheadings dependence vars limited number customers lengthy sales cycles technological change competition noted section entitled risk factors may affect future operating results described company concluded negative evidence outweighed positive evidence result increased valuation allowance equal full amount deferred tax asset march 31 2004 march 31 2005 event actual results differ estimates adjusted future periods company may need adjust amount valuation allowance based future determinations whether likely deferred tax assets realized decrease valuation allowance would recorded income tax benefit reduction income tax expense credit stockholders equity companys net operating losses available reduce future taxable income expire various dates fiscal 2007 fiscal 2024 extent company generates taxable income jurisdictions deferred tax asset relates net operating losses offset full valuation allowance utilization net operating losses would result reversal related valuation allowance inventories company values inventory lower actual cost purchase andor manufacture inventory current estimated market value inventory management regularly reviews inventory quantities hand records provision excess obsolete inventory based primarily forecasts product demand readwrite drives fluctuate significantly order obtain favorable pricing purchases certain readwrite drive parts made quantities exceed booked orders company purchases readwrite drive parts anticipated readwrite drive demand takes consideration ordertodelivery lead times vendors economic purchase order quantity parts addition company keeps supply card raw materials deems necessary anticipated demand managements analysis carrying value card readwrite drive inventory performed quarterly basis respect inventory carrying values company follows principles articulated accounting research bulletin 43 chapter 4 inventory pricing paragraphs 5 7 10 authoritative guidance sab 100 relates determining appropriate cost basis inventory determining whether firm noncancelable purchase commitments accrued loss forecasted demand sufficient utilize committed inventory purchases part companys quarterly excessobsolete analysis management also determines whether lower cost market adjustments ie selling prices less certain costs sufficient recover inventory carrying values warranted fiscal 2005 company recorded significant lower cost market adjustments readwrite drives amount 205000 fiscal 2004 2003 company recorded significant lower cost market adjustment instances company recorded charges excess obsolete inventory management ensures new cost basis reflected statement operations inventory subsequently sold companys inventory reserves based upon lower cost market slow moving obsolete items result company believes 10 increase decrease sales would material impact reserves company currently evaluating sfas 151 inventory costs amendment arb 43 chapter 4and expect adoption material impact results operations financial condition results operationsfiscal 2005 compared fiscal 2004 fiscal 2003 overview headquartered mountain view california lasercard corporation formerly known drexler technology corporation october 1 2004 manufactures lasercardr optical memory cards chipready opticalsmarttm cards advancedtechnology cards addition company operates two wholly owned subsidiaries acquired march 31 2004 challenge card design plastikkarten gmbh rastede germany manufactures advancedtechnology cards gmbh ratingen germany markets cards system solutions thermal card printers fiscal 2005 first year results german subsidiaries included consolidated statements operations german operations contributed consolidated companys revenue 10 million net loss 04 million low production volumes italian cie cards partially manufactured germany negative impact results acquisitions provide company optical card manufacturing base serve european middle eastern african asian markets supplementing companys newly expanded manufacturing operations california company reviewing viability merging cards gmbh challenge card design plastikkarten gmbh next twelve months addition using marketing staff california new york germany company utilizes value added reseller var companies card distribution licensees development markets applications lasercard products product sales vars licensees consist primarily companys optical memory cards optical card readwrite drives company also offers sale customized software applications addon peripherals made companies equipment adding digitized photo fingerprint hand template signature cards peripherals generated material revenue company demonstrated various system options varslicensees may add application software personal computers peripherals resell products integrated data systems company continuing efforts recruit new vars eliminate nonproductive vars major near term growth potential lasercard optical memory cards governmentsponsored identification programs several countries since governmental card programs typically rely policymaking turn subject technical requirements budget approvals political considerations assurance programs implemented expected include optical cards objectives longterm revenue growth include 1 broaden optical memory om products range address lower end applications characterized higher price sensitivity 2 diversify om products effectively penetrate industrial commercial markets 3 expand hardware product offering address new markets add value current offering 4 increase om product revenues selling application software integrated solutions personalization kiosk systems lasercard corporation external revenue sourced united states totaled approximately 186 million fiscal 2005 17 million fiscal 2004 263 million fiscal 2003 external revenue sourced germany german subsidiaries totaled approximately 10 million fiscal 2005 first year results german subsidiaries included consolidated statements operations revenues sourced united states generally small number government customers located throughout world revenues sourced germany mainly relatively large number commercial customers largest purchaser lasercard products anteon international corporation anteon valueadded reseller var company anteon government contractor lasercard product sales us department homeland security dhs us department state dos us department defense dod government canada government contracts anteon dhs purchases green cards dos laservisa bccs dod purchases automated manifest system cards canadian government purchases permanent resident cards encompassing programs companys product sales anteon represented 31 72 94 total revenues fiscal 2005 2004 2003 another unaffiliated var laser memory card spa italy accounted 26 22 companys total revenues fiscal 2005 2004 programs italy senegal revenues major government programs shown percentage total revenues fiscal year 2005 2004 2003 united states green cards laser visa bccs 21 44 82 canadian permanent resident cards 6 25 10 italian carta didentita elettronica cie cards 26 22 government italy company received orders cie cards carta didentita elettronica anticipates orders new program pse cards permesso di soggiorno elettronico march 31 2005 company backlog programs company delivered 25 million cards experimental phases 1 2 cie card program italian parliament enacted law moves program full implementation requiring issuance cie cards beginning january 2006 pse card program also included legislation company anticipates orders programs calendar year preparation full implementation according program descriptions released italian government cie card orders could potentially reach 8 10 million cards per year fully implemented companys current fiveyear us government subcontract extended may 2005 green cards laser visa bccs announced june 2000 expire november 26 2005 expected extended replaced new contract subcontract received company anteon lasercard var us government prime contractor competitively bid government procurement contract company believes new contract issued expiration anticipated extension current contract us laser visa border crossing cards bccs us permanent resident cards green cards us department homeland security dhs important part companys revenue base therefore orders delayed beginning fiscal 2004 new artwork cards designed dhs us government decided decrease number cards hold safety stock companys revenues profits suffered programs company recorded card revenues 6 million fiscal 2005 48 million fiscal 2004 212 million fiscal 2003 company believes inventory levels declined level desired government revenue levels increase governments rate card personalization subsequent fiscal year ended march 31 2005 company received orders totaling 73 million comprised 5 million green cards deliveries april 2005 january 2006 23 million bccs deliveries may 2005 october 2005 represents 87 million annualized run rate two programs assuming subsequent orders continuous delivery rate march 31 2005 us governments onsite inventory us government owns maintains vault company premises us government inventories laser visa bccs would last approximately seven months green cards would last approximately eight months us governments trailing twelvemonth cardpersonalization rates company believes us government wants maintain inventory would last approximately 6 months past twelve months us government personalized 10 million cards valued companys selling price two programs 2003 company began shipments subcontract canadas new permanent resident cards cumulative shipments totaled 85 million march 31 2005 backlog time 300000 deliverable july 2005 subsequent yearend company received order amount 18 million calls deliveries thirteenmonth period beginning july 2005 rate approximately 135000 per month secure personal identification card program middle east company sold 120 readwrite drives shipped fiscal 2004 second quarter installation infrastructure required card issuance also shipped less 200000 optical memory cards past two years testing sample purposes new prime contractor selected program moves implementation company currently negotiating new agreement company anticipates successfully concluding company anticipates ship 130000 230000 additional optical memory cards first quarter fiscal 2006 part old agreement part interim order new prime contractor effective april 3 2004 company sold secondsource cardmanufacturing license global investments group based auckland new zealand card manufacturing slovenia agreement provides payments company 14 million 20year license initial fiveyear training support package followed 15 million paid 1 million annually ongoing support additional 15 years additionally company sell approximately 12 million worth required manufacturing equipment installation support tobebuilt facility provide targeted initial manufacturing capacity 10 million optical cards annually company purchased approximately 4 million worth equipment sale gig classified equipment held resale within consolidated balance sheets plans purchase remainder equipment calendar year march 31 2005 company received 15 million payments called agreements consisting partial payment equipment installation support 13 million recorded advance payments customers 2 million license fee recorded deferred revenue classified longterm liabilities within consolidated balance sheets additionally global investments group pay company royalties card produced 20year term license agreement start global investments group facility planned early 2006 revenue recognized remaining term agreement beginning operation factory commences company plans invest approximately 7 million additional capital equipment leasehold improvement expenditures customer orders justify investment expenditures could occur next twelve months fully discussed liquidity capital resources revenues 2005 fiscal year ended march 31 2005 companys total revenues 285 million compared 17 million fiscal 2004 263 million fiscal 2003 product revenues companys total revenues fiscal 2005 consisted sales optical memory cards optical card readwrite drives drive accessories specialty cards printers maintenance miscellaneous items product revenues 285 million fiscal 2005 17 million fiscal 2004 252 million fiscal 2003 fiscal 2005 first year acquired german entities included companys consolidated statements operations german companies revenue 10 million sales external customers fiscal 2005 increase product revenues fiscal 2005 compared fiscal 2004 mainly due revenue acquired german entities 12 million increase optical memory card revenues us governments laser visa bcc green card programs 38 million increase optical memory card revenues carta didentita elettronica cie national id card program italy partially offset 26 million decrease readwrite drive revenue optical memory cards totaled 17 million fiscal 2005 compared 134 million fiscal 2004 242 million fiscal 2003 optical memory card revenues us governments laser visa bcc green card programs 6 million fiscal 2005 48 million fiscal 2004 212 million fiscal 2003 optical memory card revenues italian governments carta didentita elettronica cie national id card program 73 million fiscal 2005 35 million fiscal 2004 immaterial fiscal 2003 fiscal 2005 revenue readwrite drives drive service related accessories totaled 09 million compared 34 million fiscal 2004 07 million fiscal 2003 fiscal 2004 company delivered 1000 optical memory card readwrite drives biometric verification system software us department homeland security program accounts difference fiscal 2004 fiscal 2005 fiscal 2003 readwrite drives comprised 3 total revenues fiscal 2005 20 fiscal 2004 3 fiscal 2003 fiscal 2005 revenue specialty cards printers 10 million first year company operated segment license fees revenues license revenues fiscal 2005 fiscal 2004 fiscal 2003 license revenue included 875000 representing unamortized portion 1 million nonrefundable distribution license fee received 2000 licensee asia committed purchase minimum number optical memory cards program licensees country company recorded fee deferred revenue amortizing revenue proportion actual card purchases licensee december 2002 company determined due licensees failure meet minimum contractual purchase commitment licensees distribution rights become unenforceable licensee would longer acting sole supplier program addition time company decided would longer work licensee terms license agreement since obligations company recognized remaining 875000 revenue quarter ended december 31 2002 fiscal 2003 license revenue also included 235000 relating payment received january 2002 third party considering entering license agreement company originally recorded payment deferred revenue third party subsequently foregone rights agreement due nonperformance accordingly company recognized revenue agreement fourth quarter fiscal 2003 effective april 3 2004 company sold secondsource cardmanufacturing license global investments group based auckland new zealand card manufacturing slovenia discussed overview backlog march 31 2005 backlog lasercard optical memory cards totaled 09 million scheduled delivery fiscal 2006 compared 41 million march 31 2004 19 million march 31 2003 company customers generally place orders severalmonth period variations order placement single customer materially affect backlog may 26 2005 subsequent yearend company received additional orders bringing optical memory card orders scheduled shipment fiscal 2006 approximately 10 million company significant backlog readwrite drives addition backlog challenge card design plastikkarten gmbh cards gmbh march 31 2005 specialty cards printers totaled 12 million euros approximately 16 million contract develop conventional nonoptical card production facility totaled 08 million euros approximately 1 million revenue contract conventional nonoptical card production facility contract booked zero profit margin basis therefore total profit contract booked completion december 2006 11 million included march 31 2004 backlog companys german operations partially completed contract amusement park gate system canceled due insolvency customer affect financial position company since anticipate gross profit loss contract substantially completed prior march 31 2004 acquisition profit accrued prior entity addition cancellation backlog removed 12 million deferred costs inventory 08 million deferred revenue 03 million accounts payable accrued liabilities since contract completed company indemnified potential losses gross margin gross margin product sales 21 fiscal 2005 22 fiscal 2004 45 fiscal 2003 decrease gross margin product sales fiscal 2005 2004 compared fiscal 2003 due primarily lower volume optical memory card sales optical memory cards gross margin optical memory cards 26 fiscal 2005 compared 26 fiscal 2004 50 fiscal 2003 prior fiscal 2004 optical memory card gross margins approximated 50 optical memory card gross profit margins vary significantly based average selling price sales production volume mix card types production efficiency yields changes fixed costs declines fiscal 2005 2004 compared fiscal 2003 primarily due low sales production volume corresponding lower absorption fixed costs 15 million increases overhead costs due introduction cards made sheetlamination process produces premium cards selling prices 20 45 higher typical rolllamination process card readwrite drives fiscal 2005 company negative gross profit readwrite drive sales approximately 12 million compared fiscal 2004 gross profit readwrite drive sales including biometric system software approximately 04 million gross margin 12 compared negative gross profit readwrite drive sales fiscal 2003 approximately 09 million readwrite drives gross profits increased 525000 fiscal 2004 due inclusion biometric system software perdrive basis 1000 drive dhs purchase fiscal 2005 company wrote readwrite drive inventory including costs convert model 780 model q600 amount approximately 03 million fiscal 2003 company wrote readwrite drive inventory totaling approximately 03 million readwrite drive gross profit margins vary significantly based upon sales production volume changes fixed costs inclusion optional features software licenses perdrive basis except large readwrite drive order us government third quarter fiscal 2004 readwrite drive gross profits negative inclusive fixed overhead costs due low sales volume company anticipates quarterly negative gross profits continue future unless sales volume sufficient cover fixed costs also unless per drive system software licenses included future orders company believes margins 10 sales volume sufficient result positive gross profit specialty cards printers gross margin specialty cards printers 25 fiscal 2005 first year company operated segment income expenses selling general administrative expenses sga expenses 119 million fiscal 2005 67 million fiscal 2004 62 million fiscal 2003 52 million increase fiscal 2005 compared fiscal 2004 includes 28 million acquired german companies 1 million additional costs legal accounting auditing cost compliance assessing internal control financial reporting mandated section 404 sarbanesoxley act 2002 04 million increased marketing selling customer service expenditures 02 million exchange rate fluctuations debt subsequently extinguished 03 million occupancy costs 02 million increases investor relations expenditures 03 million miscellaneous expenses 05 million increase fiscal 2004 compared fiscal 2003 primarily due 02 million increase insurance premiums increase 04 million legal accounting fees sga expenses fiscal 2004 higher fiscal 2003 levels mainly due increases accounting legal fees related costs public company acquisition integration two companies germany company believes sga expenses fiscal 2006 higher fiscal 2005 levels mainly due increases marketing selling expenses partially offset approximately 02 million expected decreased expenses associated sarbanes oxley 404 compliance research engineering expenses company continuing efforts develop new optical memory card features structures including various sheetlamination card structures insertion contactless chips radio frequency rf capability optichiptm ovd optically variable device products associated media development enhanced optical memory card readwrite drives readonly drives readers new software products effort provide new products stimulate optical memory card sales growth example company recently developed prototype lasercard handheld reader company anticipates ongoing research engineering efforts result new enhanced card capabilities productionmodel readonly drives advanced security features lower manufacturing costs however assurance product development efforts successful features important companys existing future optical memory card markets total expenses 3 million fiscal 2005 26 million fiscal 2004 28 million fiscal 2003 increase spending fiscal 2005 compared fiscal 2004 mainly due 03 million expenditures acquired german entities decrease spending fiscal 2004 compared fiscal 2003 mainly due completion design new readwrite drive model 01 million reduction related completion previous year amortization design technology transfer costs increases expenses anticipated fiscal 2006 development productionmodel readonly drives optical memory card media development card hardware related programs income expense total net income fiscal 2005 240000 interest income total net income fiscal 2004 176000 consisting 269000 interest income offset 93000 expense recorded marktomarket fair value common stock options warrants issued december 2003 total income 397000 interest income fiscal 2003 decrease interest income fiscal 2005 compared fiscal 2004 primarily due reduction invested funds decrease interest income fiscal 2004 compared fiscal 2003 primarily due decline interest rates income taxes company recorded income tax expense 139000 fiscal 2005 71 million fiscal 2004 fiscal 2003 income tax expense 15 million effective tax rate 40 companys income tax expense fiscal 2005 mainly due alternative minimum taxes us government payments gig received fiscal 2005 recorded income tax return income offset net operating loss carryforwards generated previous years however alternative minimum taxes due income companys income tax expense fiscal 2004 due increasing valuation allowance equal remaining balance companys deferred tax asset fiscal 2004 income tax expense cash item mean company owed income taxes rather longer could demonstrate future would likely able utilize tax benefits previously generated net operating losses methodology determining realizability deferred tax asset critical accounting policy described heading critical accounting policies summary methodology considers positive negative evidence regarding companys ability generate sufficient future taxable income realize deferred tax assets due companys cumulative tax loss history threeyear period ending march 31 2004 income statement loss history five quarters ended march 31 2004 difficulty forecasting timing future revenue could lead positive income financial statements taxable income evidenced deviations achieved revenues expected revenues taking account newness certain customer relationships company determined necessary increase valuation allowance sfas 109 full amount deferred tax asset estimated future revenue taking account booked orders would generate sufficient taxable income realize deferred tax assets company taxable income future unexpired net operating loss income tax carryforward amounts utilized reduce otherwise required income tax payments future tax expense full amount net deferred tax asset currently 185 million future years unless valuation allowance reduced company profitable income tax purposes company utilize available net operating loss carryforwards reduce income tax would otherwise owe meaning federal effective tax rate zero except alternative minimum taxes 2 liquidity capital resources march 31 2005 company cash equivalents shortterm investments 101 million current ratio 32 1 company also 63 million longterm investments original maturities one year two onehalf years cash shortterm investments longterm investments 164 million march 31 2005 209 million march 31 2004 net cash provided operating activities 3 million fiscal 2005 compared cash used operating activities 2 thousand fiscal 2004 64 thousand fiscal 2003 cash increased fiscal 2004 due proceeds equity private placement common stock described cash fluctuate based upon timing advance payments customers relative shipments timing inventory purchases subsequent manufacture sale products company believes estimated level revenues customer advance payments next 12 months sufficient generate cash operating activities period however quarterly fluctuations expected operating cash flow could negatively impacted significant degree either companys largest us government programs delayed reduced canceled extended italian cie card program grow planned internally programs replaced card orders sources income increases product revenues licenses keep pace increased marketing capital expenditures company established line credit current plans company may negotiate line credit becomes appropriate although assurance made financing would available favorable terms needed result 89 million net loss recorded fiscal 2005 companys accumulated deficit increased 271 million stockholders equity decreased 267 million result net loss net cash provided investing activities 25 million fiscal 2005 compared cash used investing activities 105 million fiscal 2004 46 million fiscal 2003 purchases property equipment accounted 33 million fiscal 2005 4 million fiscal 2004 25 million fiscal 2003 purchase two german companies challenge card design plastikkarten gmbh cards gmbh fiscal 2004 accounted 31 million cash used investing activities balance changes mainly due maturities purchases investments company considers highly liquid investments consisting primarily commercial paper discount notes us government bonds original remaining maturities three months less date purchase cash equivalents investments original remaining maturities three months one year date purchase classified shortterm investments original remaining maturities one year date purchase classified longterm company determines length investments considering cash requirements yields available type investment considered company management also determines appropriate classification debt equity securities time purchase reevaluates classification investments balance sheet date march 31 2005 company 124 million classified shortterm longterm investments compared 186 million march 31 2004 auction rate securities accounted availableforsale interestbearing securities accounted heldtomaturity company made capital equipment leasehold improvement purchases approximately 33 million fiscal 2005 compared approximately 4 million fiscal 2004 25 million fiscal 2003 companys current card capacity assuming optimal card type mix estimated approximately 16 million cards per year company plans purchase additional production equipment series steps deemed appropriate company also increasing production capacity cards new structures used programs canada italy middle eastern country addition investment used expansion company expects make additional capital expenditures cost savings quality improvements purposes company plans use cash hand cash generated operations fund capital expenditures approximately 7 million equipment leasehold improvements card production readwrite drive tooling assembly general support items customer orders justify investment march 31 2004 company completed acquisition two related german card companies challenge card design plastikkarten gmbh rastede germany cards gmbh ratingen germany collectively acquired german entities including sales operations united states korea company purchased shares acquired german entities five shareholders purchased assets united states sales operation partnership comprised shareholders acquisition transaction company agreed assume 05 million euros debt pay approximately 48 million euros cash consisting approximately 23 million euros payable closing remaining approximately 25 million euros payable five equal annual installments business certain assets subsequently january 2005 company determined would best interest eliminate debt pay net present value debt selling shareholders acquisition agreement specified purchase price adjusted based upon assets purchased additional liabilities assumed resulted reduction purchase price approximately 04 million euros march 31 2004 present value net total purchase price 55 million purchase price determined negotiation company shareholders taking account matters value tangible assets going concern value business operations acquired german entities four shareholders entered new employment agreements acquired german entities fifth shareholder resident us entered employment agreement registrant addition salaries employment agreements provide commission based upon future results operations acquired german entities could much 38 million euros next four years company used portion available cash fund acquisition shareholders previous material relationship company affiliate subsidiaries although company substantial business acquired german entities recent years one acquired german entities owns plant rastede germany together associated equipment used manufacture plastic cards featuring contactless ic chip technology high resolution printing company intends continue use facility equipment produce cards well enhance facility produce lasercard optical memory cards germany enable company manufacture cards featuring four key id card technologies optical memory contact ic chip contactless rf id magnetic stripe either singly combination along highsecurity features net cash provided financing activities 39 million fiscal 2005 versus 111 million provided financing activities fiscal 2004 18 million fiscal 2003 fiscal 2005 company used cash amount 36 million retire debt attributable acquisition challenge card design gmbh cards gmbh march 31 2004 fiscal 2004 financing activities consisted proceeds equity private placement described proceeds sales common stock companys stockoption stockpurchase plans 03 million fiscal 2005 17 million fiscal 2004 18 million fiscal 2003 company received net proceeds 94 million net fees expenses issuance sale december 2003 791172 shares common stock options purchase 122292 shares common stock warrants purchase 174057 shares common stock aggregate purchase price 101 million private placement purchase price common stock 1276 per share 15 discount fiveday average price december 23 2003 options exercise price 1651 per share ninemonth life warrants exercise price 1726 per share life five years options warrants valued 245000 984000 respectively based blackscholes calculation december 23 2003 pursuant provisions eitf issue 0019 accounting derivative financial instruments indexed potentially settled companys stock eitf 0019 recorded values longterm liabilities balance net proceeds accounted additional paid capital eitf 0019 company markstomarket fair value options warrants end accounting period end fiscal 2004 third quarter resulted options warrants valued 195000 916000 respectively decrease valuation options warrants december 23 2003 quarter end 118000 recorded income accompanying condensed consolidated statement operations resulted decrease companys stock price february 6 2004 company investors entered amendment original agreement resulted reclassification options warrants equity amendment clarified options warrants granted financing may exercised time registration statement covering resale underlying shares effective available instance company would deliver investors shares common stock whose resale currently registered effective date amendment options warrants reclassified equity additional paidincapital result increase value options warrants previous quarter end amendment date due increases companys stock price company recognized expense 211000 included expense condensed consolidated statement operations fourth quarter fiscal 2004 january 23 2004 company filed s3 registration statement securities exchange commission covering resale common stock issued issuable financing securities exchange commission declared registration statement effective april 28 2004 company subject certain indemnity provisions included stock purchase agreement entered part financing associated registration morgan keegan company inc acted companys exclusive placement agent transaction company used approximately 3 million net proceeds private placement connection purchase ccd cm presently intends use balance proceeds 1 purchase capital equipment make leasehold improvements expand companys lasercard optical memory card production capacity 2 additional payments connection purchase ccd cm 3 general corporate purposes fiscal 2005 company commenced share repurchase program 350000 shares common stock could purchased company time nasdaq stock market transactions aggregate amount exceeding 3 million second quarter fiscal 2005 company used cash 655000 purpose since terminated program without activity debt financing activities fiscal 2003 company acquired bank debt amount 14 million fiscal 2004 acquisition challenge card design plastikkarten gmbh cards gmbh germany company extinguished debt fiscal 2005 addition company incurred debt net present value future payments acquisition 22 million transaction march 31 2004 company extinguished debt fiscal 2005 following table provides summary effect liquidity cash flows companys contractual obligations march 31 2005 thousands item 7a item 7 management’s discussion analysis financial condition results operations annual report form 10k including following management’s discussion analysis contains forwardlooking information read conjunction consolidated financial statements notes consolidated financial statements included elsewhere annual report form 10k purpose statements contained report statements historical facts may deemed forwardlooking statements words “believes” “plans” “anticipates” “expects” “will” similar expressions intended identify forwardlooking statements actual results may differ materially plans intentions expectations disclose forwardlooking statements make included important factors heading “risk factors” item 1a among factors believe could cause actual results differ materially forwardlooking statements make obligated publicly update forwardlooking statements whether result new information future events otherwise overview fiscal year 2010 headquartered mountain view california lasercard corporation together subsidiaries leading provider secure id solutions offers associated professional services governments commercial clients around world also manufacture wide range advanced secure identity credentials subsidiary ccd manufactures offers wide range high quality specialty cards plus card personalization id management solutions serving europe middle eastern africa “emea” asian markets cards systems used countries around world united states germany angola italy india costa rica kingdom saudi arabia middle eastern european countries demanding applications including government identification programs citizens foreign residents vehicle registration student campus card driver license applications service provisions facility access majority revenue sales products services partners value added resellers “vars” system integrators “sis” generally specific experience development markets applications lasercard products sales staff located california washington dc area uruguay germany whose principal role developing supporting vars sis reseller channel emphasize selling secure credentials government programs individual identification offer range products including cards contain magnetic stripe contactless chip radio frequency identification “rfid” tags contact ic chip optical security media “osm” holograms biometric identification combination features allows us sell wide range customers around world osm cards proprietary product lasercard hold 18 us patents addition years knowhow manufacture use cards encoding devices readwrite drives systems professional services software provides basis highly leveraged contribution margins osm cards segment therefore strategy sell card technologies goal upgrade programs osm possible sell encoders readwrite drives near direct manufacturing cost enable sales osm cards often results negative gross profits drives systems professional services segment equipment volume allow contribution necessary cover fixed costs sizable professional services revenue even higher volume gross profit margin encoders readwrite drives probably exceed 10 provide professional services strategy promote card sales examples include furnishing equipment training management card issuance system kingdom saudi arabia national id card program complete data collection data base card issuing system costa rica foreign resident id card program following table presents consolidated revenues gross profit fiscal years ended march 31 thousands except percentages revenues full fiscal year 2010 586 million 18 compared fiscal year 2009 driven largely strong optical security media card shipments customer programs angola kingdom saudi arabia india united states also experienced addition new card customers significance specialty cards card printers segment several smaller contracts secured hungary middle east italy programs range secure international professional driver certificates vehicle registration government employee id cards demonstrating ability fulfill diverse set government id requirements beyond largest id programs stronger expected level shipments us green card dhs considering largely onetime positive effect transitioning first generation osmbased green card newly designed multitechnology green card favorably impacted financial results gross margin fiscal year 2010 increased 68 million 40 compared fiscal year 2009 due changes product mix increased sales volume cost containment initiatives relative cost efforts year continued multitier focus following areas benefited full year effect cost reduction activities implemented end fiscal year 2009 maintained focus cost control throughout year improved manufacturing efficiencies enabling greater contributions operating results higher volumes revenues broadened solutions technology offerings embrace multitechnology credential designs expansion optical security media feature set reallocated resources sales marketing functions believe investments together broadening value proposition increased market presence relevance resulted improved relationships clients prospects partners cash equivalents plus investments less shortterm debt ubs totaled 372 million march 31 2010 compared 206 million march 31 2009 cash provided operating activities approximately 167 million fiscal year 2010 capital asset acquisitions totaled 11 million currently expect invest 20 million fiscal year 2011 additional capital equipment leasehold improvement expenditures accounting period purposes presentation label annual accounting period end march 31 quarterly accounting period ends june 30 september 30 december 31 fact operate report based quarterly periods ending friday closest month end fiscal year 2010 ended april 2 2010 comprised 52 weeks fiscal year 2009 ended april 3 2009 comprised 53 weeks fiscal year 2008 ended march 28 2008 comprised 52 weeks consolidated results operations revenues table presents consolidated revenues recorded us german operations fiscal years ended march 31 thousands revenues recorded us operations generally derived small number government customers located throughout world revenues recorded german operations converted euros mainly relatively large number commercial customers emea including universities germany student identification cards organizers sporting events secure access cards equipment consumables national id card program angola historically relatively small number customers accounted significant portion revenue major customers shown percentage total revenues fiscal years ended march 31 acss customer national id card program kingdom saudi arabia quarter ended june 30 2010 subsequently gemalto became customer program major government card programs shown percentage total revenues fiscal years ended march 31 total revenues consisted sales three segments 1 osm cards 2 drives systems professional services 3 specialty cards card printers well times miscellaneous items following table presents consolidated revenues segment fiscal years ended march 31 thousands except percentages following table presents osm card revenues major program fiscal years ended march 31 thousands osm card revenues fiscal year 2010 increased 123 million 40 compared fiscal year 2009 due increased shipments benefited largely onetime positive effect transitioning first generation osmbased us green card newly designed multitechnology green card anticipate future green card program sales average 25 30 million per quarter rollout angola’s national id card program contributed 22 segment’s total revenue expect lower quarterly revenue angola 13 million 26 million coming quarters strong demand fourth quarter fiscal year 2010 osm cards india’s three vehicle registration programs triggered economic recovery local tax incentives estimate revenues programs india average 13 million per quarter next quarters expect ongoing revenues italian government pse foreign resident card program due government decree displaced optical security media security element credential revenues pse card program approximately 39 million 19 million 17 million fiscal years ended march 31 2010 2009 2008 respectively continue closely monitor support position italian cie citizen id card program italian government agency id programs osm card revenues fiscal year 2009 increased 88 million 40 compared fiscal year 2008 due increased shipments revenue drives systems professional services segment fiscal year 2010 decreased 19 million 58 compared fiscal 2009 costa rica card issuing infrastructure installed revenues segment sporadic driven program implementations infrastructure setup enhancements plan periodically deploy operational consultative support optimize performance customer card issuing models may enhance revenue segment revenues drives systems professional services segment fiscal year 2009 increased 17 million 102 compared fiscal year 2008 due implementation lasercarddeveloped endtoend credential issuance system costa rica implementation regionalized model national id card program kingdom saudi arabia specialty cards card printers revenues fiscal year 2010 decreased 17 million 11 compared fiscal year 2009 mainly due equipment consumables delivery complete id management system angola significant fiscal year 2009 fiscal year 2010 secured orders new customers fiscal year 2010 hope turn repeatable orders execute order 22 million card personalization equipment consumables first quarter fiscal year 2011 continue support infrastructure deployment country’s id card program specialty cards card printers revenues fiscal year 2009 increased 26 million 20 compared fiscal year 2008 due subsidiary’s focus accreditation access control applications core customers including major sporting event operator partners serving majority german universities also delivered equipment consumables complete id management system angola weakening world economy probably negative effect portions specialty cards card printers segment backlog customers generally place orders period several months year others place orders immediate fast turn delivery variations order placement single customer materially affect backlog result relative size backlog reliable indicator future revenue trends backlog osm cards march 31 2010 approximately 104 million 30 million specialty cards card printers backlog osm cards march 31 2009 214 million 12 million specialty cards card printers backlog drives systems professional services march 31 2010 09 million significant backlog drives systems professional services march 31 2009 gross profit following table presents gross profit absolute dollar amounts percentage revenue segment fiscal years ended march 31 thousands except percentages osm cards osm card gross margin vary significantly based upon changes average selling price production sales volumes mix card types production efficiency yields changes fixed costs production unit volume combined mix card types greatly affects gross margin due absorption fixed manufacturing costs osm card gross margin fiscal year 2010 50 osm card revenue compared 43 osm card revenue fiscal year 2009 combined favorable impact increase revenue productivity improvements manufacturing cost reduction initiatives attributed increased gross margin depreciation amortization 18 million 17 million fiscal years 2010 2009 respectively noncash charge reserve obsolete inventory 19 million 03 million fiscal years 2010 2009 respectively also recorded 07 million accrued bonus incentive pay fiscal year 2010 compared none fiscal year 2009 osm card gross margin fiscal year 2009 43 osm card revenue compared 35 osm card revenue fiscal year 2008 combined favorable impact increased sales volume several major id card programs productivity improvements manufacturing cost reduction initiatives attributed increased gross margin depreciation amortization 17 million 18 million fiscal years 2009 2008 respectively drives systems professional services except quarter ended june 30 2008 drives systems professional services gross margin negative past three years inclusive fixed overhead costs due low sales volume policy price drives close direct manufacturing cost promote card sales resulting inability cover fixed costs current sales volumes depreciation amortization approximately 01 million 02 million fiscal years 2010 2009 respectively anticipate drives systems professional services negative gross margins continue future unless equipment sales volume sufficient cover fixed costs material amount professional services revenue increased costs associated implementation professional services capabilities 02 million noncash charges approximately 01 million obsolete inventory 02 million writeoff obsolete equipment attributed negative gross margin segment albeit revenue increased 102 fiscal year 2009 compared fiscal year 2008 depreciation amortization approximately 02 million fiscal years 2009 2008 specialty cards card printers gross margin specialty cards card printers 26 revenue fiscal year 2010 compared 27 fiscal year 2009 11 decrease revenue fiscal year 2010 compared fiscal year 2009 secured orders new customers higher margins continued productivity improvements manufacturing cost reduction initiatives may able mitigate fluctuations foreign exchange forward contracts may cause adverse impact foreign operations gross margin specialty cards card printers 27 fiscal year 2009 compared gross margin 20 fiscal year 2008 longterm time material contract serbia concluded quarter ended march 31 2009 contributing approximately 11 overall gross margin segment productivity improvements manufacturing cost reduction initiatives also attributed increase operating expenses following table presents operating expenses fiscal years ended march 31 thousands except percentages selling general administrative expenses “sga” sga expenses fiscal year 2010 increased approximately 09 million 6 compared fiscal year 2009 change largely due 12 million increase performancebased incentives also sales commissions fiscal 2010 17 million 03 million 2009 increases partially offset 06 million decreases including employee stock purchase plan discontinued fiscal year 2009 consulting fees recruitment expenses percentage revenue sga expenses 28 fiscal year 2010 compared 31 fiscal year 2009 sga expenses net commissions expected average 36 million per quarter fiscal 2011 previous year currently expect sales commissions average 09 million quarterly fiscal 2011 depending upon product sales mix sga expenses fiscal year 2009 increased approximately 02 million 1 compared fiscal year 2008 percentage revenue sga expenses 31 fiscal year 2009 compared 41 fiscal year 2008 selling marketing expenses related sales commissions new programs increased 10 million fiscal year 2009 compared fiscal year 2008 increase offset decreases consulting professional services approximately 09 million nonrecurring severance expense related retiring ceo fiscal year 2008 research development expenses “rd” rd expenses fiscal year 2010 decreased 12 million 50 compared fiscal year 2009 percentage revenue rd expenses 2 fiscal year 2010 compared 5 fiscal year 2009 fiscal 2010 various rd projects realigned cost reductions implemented consistent ‘milestone’ based rd strategy continuing effort develop new osm card nonoptical card features structures including various composite card structures allow insertion contactless chips rf capability dualinterface contactcontactless osm ovd products marketdriven requirements also developing enhanced readwrite drives increased reliability ease use integration new software products services effort provide new products stimulate osm card sales growth anticipate ongoing research development efforts result enhanced card features capabilities drives advanced security features andor lower manufacturing costs however assurance product development effort successful features important existing future osm card markets anticipate rd expenditures average 04 million per quarter fiscal year 2011 rd expenses fiscal year 2009 decreased 05 million 18 compared fiscal year 2008 percentage revenue rd expenses 5 fiscal year 2009 compared 8 fiscal year 2008 operating expenses include depreciation amortization approximately 06 million 08 million 06 million fiscal years 2010 2009 2008 respectively income expense net following table presents income expense net fiscal years ended march 31 thousands income expense net interest income fiscal year 2010 decreased 02 million 50 compared fiscal year 2009 due decline interest rates year slight increase interest expense fiscal year 2010 compared fiscal year 2009 largely due interest incurred credit line debt ubs incurred unrealized noncash gain 03 million fiscal year ended march 31 2010 due recording arss investment fair value plus fair value put option based assumptions used ubs’ credit risk fully recovering loss 03 million recorded fiscal year 2009 contract deliver turnkey card manufacturing facility kingdom saudi arabia terminated fiscal year 2010 net gain approximately 05 million recorded income expense mainly due net losses gains foreign exchange fluctuations interest income fiscal year 2009 decreased 05 million 59 compared fiscal year 2008 due decline interest rates fiscal 2009 increase interest expense fiscal year 2009 007 million 96 compared fiscal year 2008 largely due effects premiums forward currency contracts loss fair value arss investments net gain fair value put option resulted approximately 03 million noncash charge fiscal year 2009 provision income taxes recorded income tax expense approximately 13 million fiscal year 2010 compared 86000 fiscal year 2009 pretax book income us operations fiscal year 2010 approximately 59 million compared us pretax book loss 13 million fiscal year 2009 taxable income federal income tax purposes fiscal year ended march 31 2010 approximately 82 million compared 32 million fiscal year ended march 31 2009 portion net operating loss carryover “nol” used offset taxable income however allowed offset 90 taxable income nol subject alternative minimum tax germany operations showed taxable income approximately 14 million fiscal year 2010 compared 04 million fiscal year 2009 recorded income tax expense 184000 fiscal year 2010 germany operations compared income tax benefit 13000 fiscal year 2009 majority german gaap profit offset net operating losses recorded income tax expense approximately 86000 fiscal year 2009 compared income tax benefit 114000 fiscal year 2008 tax benefit fiscal year 2008 due mainly reduction deferred income tax liabilities germany offset adjustment related tax reserve fin 48 payments prevent global received fiscal year ended march 31 2008 recorded income federal tax return even though recorded income us generally accepted accounting principles “gaap” income offset nols generated previous years book pretax loss us operations approximately 13 million compared net loss us operations approximately 65 million fiscal year 2008 taxable income federal income tax purposes fiscal year ended march 31 2009 approximately 32 million compared taxable loss 28 million fiscal year 2008 portion nols used offset taxable income however allowed offset 90 taxable income nol subject alternative minimum tax california also suspended utilization net operating losses tax years 2009 2008 additionally california limited utilization rd credits 50 tax liability without consideration net operating losses germany operations showed taxable income approximately 04 million fiscal year 2009 recorded income tax benefit 13000 fiscal year 2009 german operations majority taxable income offset net operating losses full valuation allowance related us operations required end fiscal years 2010 2009 2008 considering positive negative evidence regarding ability generate sufficient future taxable income realize deferred income tax assets liquidity capital resources following table summarizes cash equivalents investments debt collateralized investments march 31 thousands cash equivalents increased 173 million fiscal year 2010 largely due higher income changes operating assets liabilities fiscal year 2010 ubs redeemed 16 million ars investments par leaving investments 119 million par march 31 2010 compared investments 135 million par march 31 2009 investments recorded fair values classified sortterm investments march 31 2010 longterm investments march 31 2009 consolidated balance sheet following table displays sources uses cash activity fiscal years ended march 31 thousands net cash provided operating activities fiscal year 2010 167 million compared net cash provided operating activities 41 million fiscal year 2009 126 million increase cash provided operating activities fiscal year 2010 compared fiscal 2009 due 69 million increase net income 57 million difference cash provided changes operating assets liabilities net cash provided operating activities 41 million fiscal year 2009 compared net cash used operating activities 03 million fiscal year 2008 41 million cash provided operating activities fiscal year 2009 due 49 million provided net loss adjusted noncash charges depreciation amortization stockbased compensation expense net effect loss due fair value ars investment gain put option miscellaneous items partially offset 09 million cash used changes operating assets liabilities net cash provided investing activities approximately 06 million fiscal year 2010 compared 28 million cash used investing activities fiscal year 2009 contributing mainly change proceeds redemption ars investment ubs amounting 16 million fiscal year 2010 release restricted cash balances 02 million capital expenditures fiscal year 2010 11 million primarily production leasehold improvement compared 25 million capital expenditures fiscal year 2009 may invest 20 million additional capital equipment leasehold improvement march 31 2011 net cash used investing activities 28 million fiscal year 2009 compared 26 million cash provided investing activities fiscal year 2008 capital expenditures fiscal year 2009 25 million mainly due addition new improved production equipment osm card business acquisition patents changes restricted cash balance contributed 03 million net balance net cash used financing activities near zero fiscal year 2010 compared 88 million cash provided financing activities fiscal year 2009 debt borrowing ubs collateralized ars investments march 31 2009 87 million decreased 08 million fiscal year 2010 also contributing change proceeds common stock option exercises 02 million related excess tax benefit fiscal year 2010 08 million partially offset 01 million taxes withheld paid restricted stocks 01 million principal payments capitalized leases related excess tax benefit recorded fiscal year 2009 net cash provided financing activities 88 million fiscal year 2009 compared 07 million cash provided financing activities fiscal year 2008 increase cash financing activities fiscal year 2009 mainly due 87 million drawn ubs credit line 02 million net proceeds sale common stock employee stock plans current borrowing arrangements fiscal year 2009 obtained line credit ubs amount 87 million collateralized ars investments fiscal 2010 debt reduced 08 million shortterm debt fully extinguished ubs portion proceeds sale ars investments ubs june 30 2010 earlier ars called ubs intent credit line provide nocost loan ars sold interest rate charged credit line equal interest rate earned ars investments variable rate advances ubs credit line bear interest variable rate equal lesser libor plus percentage rate 125 275 depending amount advance b applicable weighted average rate interest dividend rate paid us issuer arss case interest rate subject adjustment time reflect changes composition arss calculating weighted average interest rate interest rate paid us respect arss equal period including january 21 2009 applicable coupon rates ii january 22 2009 thereafter applicable taxable slarc maximum auction rate taxable slarss ubs credit line also provides among things ubs may demand full partial payment credit line sole discretion without cause time ubs may time sole discretion terminate cancel credit line provided however ubs required provide us alternative financing substantially similar terms unless demand right exercised result certain specified events customer relationship ubs lasercard terminated cause ubs refer note 2 caption 8 cash equivalents shortterm investments longterm investments consolidated financial statement discussion noncurrent investments believe sufficient available cash execute business plan fiscal year 2011 operating cash flows could negatively impacted significant degree largest government programs delayed reduced canceled extended programs replaced card orders sources income contractual obligations following table provides summary effect liquidity cash flows contractual obligations following years ended march 31 thousands offbalance sheet arrangements offbalance sheet arrangements march 31 2010 march 31 2009 application critical accounting policies estimates discussion analysis financial condition results operations based upon consolidated financial statements prepared accordance us generally accepted accounting principles note 2 notes consolidated financial statements describe significant accounting policies methods used preparation consolidated financial statements preparation financial statements requires us make estimates judgments affect reported amounts assets liabilities revenues expenses ongoing basis evaluate estimates including related revenues inventories stockbased compensation warranties income taxes base estimates historical experience various assumptions believed reasonable circumstances results form basis making judgments carrying values assets liabilities readily apparent sources critical accounting policies 1 important portrayal financial condition results operations 2 require management’s difficult subjective complex judgments often requiring estimates matters inherently uncertain critical accounting policies reflect significant judgments assumptions estimates used preparation consolidated financial statements management discussed development selection critical accounting policies estimates audit committee board directors audit committee reviewed disclosures relating report consider accounting policies described critical accounting policies revenue recognition product sales primarily consist sales osm cards drives systems professional services specialty cards card printers recognize revenue product sales following criteria met 1 persuasive evidence arrangement exists 2 delivery occurred 3 fee fixed determinable 4 collectability reasonably assured recognize revenue product sales time shipment shipping terms fob shipping point orders placed pursuant preexisting sales arrangement postshipment obligations customer acceptance criteria case us government contract warehousing appropriate provision made time shipment estimated warranty costs estimated returns subcontract permanent resident cards us government requires delivery secure lasercardcontrolled vault shipments later made vault us government site subcontract provides us government take final delivery remaining inventory within six months end contract time cards delivered vault title cards transferred us government risks ownership transferred well prime contractor invoiced payment due within thirty days purchase orders contain return warranty cancellation provisions pursuant provisions sec staff accounting bulletin 605 revenue recognition “asc 605” revenue recognized delivery vault fulfilled contractual obligations earnings process complete contracts include customerspecified acceptance criteria recognize revenue acceptance criteria met presuming revenue criteria met defer revenue services recognize contractual period render services customer accepts apply provisions asc 60525 revenue arrangements multiple deliverables revenue arrangements multiple deliverables asc 60525 provides criteria governing identify whether goods services delivered separately bundled sales arrangement accounted separately deliverables accounted separately meet following criteria delivered items standalone value customer b fair value undelivered items reliably determined c arrangement includes general right return delivery undelivered items probable substantially controlled seller situations deliverables fall within higherlevel literature defined asc 60525 apply guidance higherlevel literature deliverables meet criteria combined one deliverables apply provisions asc 60535 accounting performance constructiontype certain productiontype contracts applicable contracts revenues time materials contracts recognized services rendered contract labor rates plus material direct costs incurred revenues fixed price contracts recognized percentage completion method based ratio total costs incurred date compared estimated total costs complete contract estimates costs complete include material direct labor overhead allowable general administrative expenses circumstances estimates costs complete project cannot reasonably estimated assured loss incurred percentageofcompletion method based zero profit margin rather completedcontract method used precise estimates made full amount estimated loss charged operations period determined loss realized performance contract longterm program accounted asc 60535 concluded last quarter fiscal year 2009 revenue approximately 540000 fiscal year 2009 none fiscal year 2010 year ended march 31 2008 recognized revenue approximately 249000 based zero profit margin apply provisions asc 60515 software revenue recognition respect certain transactions involving sale software products revenue license software products recognized persuasive evidence arrangement exists software product delivered fee fixed determinable collectability probable applicable upon acceptance criteria specified upon expiration acceptance period software revenue recorded fiscal year 2010 software revenue immaterial fiscal years ended 2009 2008 respectively product warranty appropriate provision made time shipment estimated warranty costs estimated returns provide limited warranty replacement defective products limited warranty requires us repair replace defective products cost customer within specified time period sale estimate costs may incurred limited warranty record liability amount costs time product revenue recognized factors affect estimate warranty liability include number units sold historical anticipated rates warranty claims assess adequacy recorded warranty liability adjust amount necessary utilize historical trends information received customers assist determining appropriate estimated warranty accrual levels accounting income taxes income taxes accounted accordance asc 740 accounting income taxes requires use asset liability method deferred tax assets liabilities determined based upon differences financial reporting tax bases assets liabilities measured using enacted tax rules laws anticipated effect differences expected reverse net deferred tax assets reduced valuation allowance extent realization related deferred tax asset assured recorded valuation allowance related us operations full amount net deferred tax asset march 31 2010 march 31 2009 significant judgment required determining worldwide provision income taxes recording related tax assets liabilities ordinary course business operational decisions transactions facts circumstances calculations ultimate tax determination certain furthermore tax positions subject challenge german us taxing authorities every quarter review tax positions jurisdiction process evaluating unrecognized tax benefits adjustments made unrecognized tax benefits facts circumstances regarding tax position change could lead adjustments income tax expense effective tax rate fiscal year 2010 recorded provision income tax expense 13 million compared 01 million fiscal year 2009 recorded benefit 01 million fiscal year 2008 inventories value inventory lower actual cost purchase andor manufacture inventory market value market value based replacement cost estimated realizable value less cost sell regularly review inventory quantities hand record provision excess obsolete inventory based primarily forecasts product demand optical card drives fluctuate significantly order obtain favorable pricing purchases certain readwrite drive parts made quantities exceed anticipated annual demand purchase drive parts anticipated demand takes consideration ordertodelivery lead times vendors economic purchase order quantity parts addition keep supply card raw materials deem necessary anticipated demand use standard costs approximate firstin firstout costing method perform analysis carrying value inventory quarterly basis respect inventory carrying values follow principles articulated asc 33010 inventoryoverallinitial measurement relates determining appropriate cost basis inventory determining whether firm noncancelable purchase commitments accrued loss forecasted demand sufficient utilize committed inventory purchases accounting abnormal amounts idle facility expense freight handling costs wasted material spoilage following asc 33010 allocate fixed production overheads costs conversion based normal capacity production facilities applied asc 33010 inventory costs incurred effective april 1 2006 provisions statement applied prospectively management establishes lower cost market reserves excess obsolescence reserves inventory reserves generally recorded management determines item foreseeable revenue forecast inventory reserves relieved related inventory sold scrapped part quarterly excessobsolete inventory analysis also determine whether lower cost market adjustments ie selling prices less certain costs sufficient recover inventory carrying values warranted value longlived assets including intangibles carry variety longlived assets balance sheet including property equipment investments identifiable intangible assets periodically review carrying value assets based part upon current estimated market values projections anticipated future cash flows undertake review facts circumstances suggest cash flows related assets may diminished record impairment charge fiscal year 2010 2009 sharebased compensation described detail note 2 stockbased compensation accompanying notes consolidated financial statements effective april 1 2006 adopted fair value recognition provisions asc 718 using modifiedprospective transition method fair value recognition provisions asc 718 sharebased compensation cost estimated grant date based fair value award recognized expense net estimated forfeitures ratably vesting period award calculating sharebased compensation expense requires input highly subjective assumptions including expected term sharebased awards stock price volatility prevesting stock option forfeitures estimated expected life stock options granted fiscal year ended march 31 2010 based upon vesting provision historical exercise cancellation expiration patterns estimate volatility common stock date grant based historical volatility common stock assumptions used calculating fair value stockbased awards represent best estimates involve inherent uncertainties application management judgment result factors change use different assumptions sharebased compensation expense could materially different future addition required estimate expected forfeiture rate recognize expense shares expected vest estimate forfeiture rate based historical experience actual forfeiture rate materially different estimate stockbased compensation expense could significantly different recorded current period result adopting asc 718 using modified prospective method sharedbased compensation expenses 21 million 24 million 21 million stock options employee stock purchase plan fiscal years 2010 2009 2008 respectively employee stock purchase plan terminated last quarter fiscal year 2009 march 31 2010 27 million total unrecognized compensation cost related unvested sharebased compensation arrangements expected recognized remaining vesting period december 2013 short longterm investments shortterm investments include securities maturities date purchase three months investments remaining maturities less one year investments maturities date purchase greater one year classified longterm investments management determines appropriate classification debt securities time purchase reevaluates classification investments balance sheet date account shortterm marketable securities accordance asc 320 accounting certain investments debt equity securities consider highly liquid investments consisting primarily commercial paper discount notes us government bonds maturities three months less date purchase cash equivalents investments maturities date purchase three months current maturities less one year classified shortterm investments current maturities one year classified longterm investments determine length investments considering cash requirements yields available type investment considered management determines appropriate classification debt equity securities time purchase reevaluates classification investments balance sheet date investments marketable securities designated “trading securities” trading securities bought sold principally purpose selling near term reported financial statements fair value changes fair value period reported component net income classified arss shortterm investments carried fair value plus fair value put option plan exercise “right” sell ars par ubs june 30 2010 ars plus put option march 31 2010 valued 119 million march 31 2009 classified longterm investments combined fair values 132 million investments certificates deposits designated available sale march 31 2010 immaterial none march 31 2009 refer note 2 caption 8 cash equivalents shortterm investments longterm investments consolidated financial statement discussion noncurrent investments recently adopted accounting pronouncements june 2009 financial accounting standards board “fasb” accounting standards codification™ “codification” became single source authoritative gaap codification create new gaap standards incorporated existing accounting reporting standards new topical structure new referencing system identify authoritative accounting standards replacing prior references statement financial accounting standards “sfas” emerging issues task force “eitf” fasb staff position “fsp” etc authoritative standards included codification designated accounting standards codification “asc” topical reference new standards designated accounting standards updates “asu” year assigned sequence number references prior standards updated reflect new referencing system june 2009 fasb concurrently issued amendments asc 860 transfers servicing asc 810 consolidation change way entities account securitizations transfers financial instruments addition increased disclosure amendments eliminate concept qualifying special purpose entities change test consolidation variable interest entities amendments effective lasercard april 1 2010 evaluated amendments believe impact financial condition results operations recently issued accounting pronouncements october 2009 fasb concurrently issued following accounting standards updates asu 200914 software topic 985 certain revenue arrangements include software elements standard removes tangible products scope software revenue recognition guidance also provides guidance determining whether software deliverables arrangement includes tangible product embedded software within scope software revenue guidance asu 200913 revenue recognition topic 605 multipledeliverable revenue arrangements standard modifies revenue recognition guidance arrangements involve delivery multiple elements product software services support customer different times part single revenue generating transaction standard provides principles application guidance determine whether multiple deliverables exist individual deliverables separated allocate revenue arrangement among separate deliverables standard also expands disclosure requirements multiple deliverable revenue arrangements asus applied prospective basis revenue arrangements entered materially modified fiscal years beginning june 15 2010 earlier application permitted alternatively entity elect adopt standards retrospective basis standards must adopted period using transition method expect apply standard prospective basis revenue arrangements entered materially modified beginning april 1 2010 evaluated amendments believe impact financial condition results operations asu 200917 improvements financial reporting enterprises involved variable interest entities topic 810 amendments accounting standards update replace quantitativebased risks rewards calculation determining reporting entity controlling financial interest variable interest entity approach focused identifying reporting entity power direct activities variable interest entity significantly impact entity’s economic performance 1 obligation absorb losses entity 2 right receive benefits entity approach expected primarily qualitative effective identifying reporting entity controlling financial interest variable interest entity amendments update also require additional disclosures reporting entity’s involvement variable interest entities enhance information provided users financial statements evaluated amendments believe impact financial condition results operations january 2010 fasb issued guidance expands interim annual disclosure requirements fair value measurements including information movement assets level 1 2 threetier fair value hierarchy established fair value measurement guidance also requires separate disclosure purchases sales issuance settlements reconciliation fair value measurements using significant unobservable inputs level 3 except detailed disclosure level 3 reconciliation effective fiscal years beginning december 15 2010 disclosures guidance effective fiscal years beginning december 15 2009 evaluated amendments believe impact financial condition results operations item 7a item 7 managements discussion analysis financial condition results operations forwardlooking statements contained report historical facts forwardlooking statements forwardlooking statements report made pursuant safe harbor provisions private securities litigation reform act 1995 historical facts guarantees future performance events rather based current expectations estimates beliefs assumptions goals objectives subject uncertainties difficult predict result companys actual results may differ materially statements made often statements identified use words may intends plans believes anticipates visualizes expects estimates forwardlooking statements made report include statements current potential customers applications orders market segments optical memory card products statements anticipated orders andor shipment quantities schedules companys us government canadian government subcontracts companys expectation awarded contract approximately 1000 readwrite drives us department homeland securitys presolicitation notice expectation demand companys readwrite drives italian national id card cie program companys belief us government intends field optical cardbased biometric verification systems southern us border certain us airports objectives company efforts sell readwrite drives need expected success potential benefits companys research engineering efforts including developing new enhanced card capabilities software products productionmodel readonly drives advanced security features lower manufacturing costs whether introduction new drives increase sales effects readwrite drive prices sales volume gross profits gross margins readwrite drive sales companys estimates level sales drives would necessary achieve gross profit current prices inclusive fixed overhead costs expectations regarding market readwrite drives readwrite drive prices companys belief adequate inventory readwrite drives components companys efforts recruit new valueadded resellers vars licensees adequacy card raw material inventory hand meet future demand companys belief kodak continue supply sufficient photographic film alternate supplier could established needed companys ability expand production capacity anticipated release orders deliveries companys us government subcontract expectations regarding revenues margins capital resources capital expenditures investments companys deferred tax asset related valuation allowance anticipated reductions federal tax cash payments due current company tax benefits statements expected card delivery volumes estimates optical card production capacity expected card yields therefrom companys plans expectations regarding growth associated capital costs capacity estimate revenues sufficient generate cash operations companys expectation retain earnings use reinvestment business expectations regarding market growth product demand foreign business including emerging programs prospective applications china india italy macedonia saudi arabia expectations continued expanded potential us government governmental card programs forwardlooking statements based upon companys assumptions assessment future may prove true involve number risks uncertainties including limited customer concentration reliance continued us government business possibility us government field optical cardbased biometric verification systems southern us border certain us airports lengthy sales cycles changes reliance government policymaking risks associated business foreign countries impact litigation governmental regulatory proceedings ability company customers initiate develop new programs utilizing companys card products companys reliance vars licensees third parties generate sales perform customer system integration develop application software integrate optical card systems technologies risks difficulties associated development manufacture deployment optical cards drives systems potential manufacturing difficulties complications associated increasing manufacturing capacity cards drives outsourcing manufacturing ability produce sell readwrite drives volume reliance singlesource limitedsource suppliers certain components raw materials unpredictability customer demand products customer issuance release corresponding orders government rights withhold order releases reduce quantities released extend shipment dates whether company receives fixed schedule notification plan shipments governmentfunded vault located companys premises enabling company recognize revenues cards delivered vault instead cards later shipped vault us governments rights modify withdraw readerwriter equipment presolicitation notice award resulting contract reduce quantities released extend delivery dates impact technological advances general economic trends competitive products risks set forth section entitled factors may affect future operating results elsewhere report due risks companys future actual results could differ materially discussed forwardlooking statements speak date report except required law company undertakes obligation publicly release updates revisions statements whether result new information future events otherwise critical accounting policies revenue recognition product sales primarily consist card sales readwrite drives company recognizes revenue product sales following criteria met 1 persuasive evidence arrangement exists 2 delivery occurred 3 fee fixed determinable 4 collectibility reasonably assured company recognizes revenue product sales time shipment shipping terms fob shipping point orders placed pursuant preexisting sales arrangement postshipment obligations customer acceptance criteria appropriate provision made time shipment estimated warranty costs estimated returns companys us government subcontract requires delivery secure governmentfunded vault built company premises deliveries made vault fixed schedule specified prime contractor time cards delivered vault title cards transfers government prime contractor invoiced payment due according normal trade payment terms however revenue recognized cards shipped vault government unless company receives fixed schedule notification plan shipments vault government case revenue recognized upon latter receipt fixed shipment schedule delivery cards vault license revenue may consist upfront license fees longterm royalty payments recognized revenue realized cost license revenue unless patent litigation involved material included selling general administrative expenses company applies provisions statement position 972 software revenue recognition amended statement position 989 modification sop 972 software revenue recognition respect certain transactions involving sale software products revenue license companys software products recognized persuasive evidence arrangement exists software product delivered fee fixed determinable collectibility reasonably assured applicable upon acceptance criteria specified upon expiration acceptance period date software sales significant companys business accounting income taxes part process preparing consolidated financial statements company required estimate income taxes jurisdictions operates process involves estimating actual current tax exposure together assessing temporary differences resulting differing treatment items deferred revenue tax accounting purposes differences result deferred tax assets liabilities included within consolidated balance sheets company must assess likelihood deferred tax assets recovered future taxable income extent management believes recovery likely company must establish valuation allowance extent valuation allowance established increased period company must include expense within tax provision statements income significant management judgment required determining provision income taxes deferred tax assets liabilities valuation allowance recorded net deferred tax assets company recorded valuation allowance 53 million march 31 2003 due uncertainties related companys ability utilize deferred tax assets primarily consisting certain net operating losses attributable stock option deductions carried forward expire valuation allowance based managements estimates taxable income jurisdiction company operates period deferred tax assets recoverable companys methodology determining realizability deferred tax assets involves estimates future income assumes ongoing profitability core business includes estimated impact future stock option deductions expiration dates amounts net operating loss carryforwards estimates future income projected life related deferred tax assets using assumptions management believes reasonable march 31 2003 company would require approximately 17 million future taxable income realize related deferred tax assets recognized march 31 2003 event actual results differ estimates adjusted future periods company may need adjust amount valuation allowance based future determinations whether likely deferred tax assets realized increase valuation allowance would require corresponding amount recorded additional income tax expense decrease valuation allowance would recorded credit stockholders equity inventories company values inventory lower actual cost purchase andor manufacture inventory current estimated market value inventory management regularly reviews inventory quantities hand records provision excess obsolete inventory based primarily estimated forecast product demand readwrite drives fluctuate significantly lasercard market growth could limited operating results could harmed company unable produce sell readwrite drives volume order obtain favorable pricing purchases readwrite drive parts made quantities exceed historical annual sales rate drives company purchases readwrite drive parts anticipated readwrite drive demand takes consideration ordertodelivery lead times vendors economic purchase order quantity parts managements analysis carrying value card readwrite drive inventory performed quarterly basis march 31 2003 readwrite drive parts work process finished goods inventory totaled 28 million compared 31 million march 31 2002 fiscal 2003 company sold approximately 175 readwrite drives company believes readwrite drive inventory march 31 2003 reflected net realizable value fiscal 2003 company neared productionready status newer version readwrite drive design change resulted lower cost model enhanced functionality expected fulfill needs number prospective customers newer version however major function offered older drive model therefore obsolete many component parts previous readwrite drive model also used new model however company determined writedown component parts used new model necessary since current plans manufacture additional units old model company recorded 300000 charge fiscal 2003 write parts 680 drives previous model finished goods inventory available purchase primary use encoders personalization systems addition 260 drives new design finished goods inventory first six months fiscal 2004 company expects purchase approximately 250000 readwrite drive parts complete assembly additional 650 drives new design company believes market designs readwrite drives support expand optical card sales based current proposals process readwrite drive inventory hand march 31 2003 including parts received ordered customers example april 22 2003 us department homeland security issued presolicitation notice purchase approximately 1000 optical stripe readwrite drives company also working var italian government regarding national card identification program addition supplying companys optical memory cards program company expects demand readwrite drives necessary encoding initialization needs program company believes demand drives could significant ultimately depend nature scope deployment program anticipated drive orders materialize company may need writedown value inventory potential excess quantities however company concluded march 31 2003 need write value readwrite drive inventory hand reaching conclusion company considered 1 potential market demand 2 company provider readwrite drives function companys cards 3 680 drives previous model provide function offered new model 4 new model provides solution applications requiring encoding initialization function respect inventory carrying values company follows principles articulated accounting research bulletin arb 43 chapter 4 inventory pricing paragraphs 5 7 10 authoritative guidance sab 100 relates determining appropriate cost basis inventory determining whether firm noncancelable purchase commitments accrued loss forecasted demand sufficient utilize committed inventory purchases part companys quarterly excessobsolete analysis management also determines whether lower cost market adjustments ie selling prices less certain costs sufficient recover inventory carrying values warranted date company recorded significant lower cost market adjustments instances company recorded charges excess obsolete inventory management ensures new cost basis reflected statement operations inventory subsequently sold restatement results fiscal 19982001 first nine months fiscal 2002 connection companys audit fiscal year ended march 31 2002 company newly appointed independent accountants conducted internal review revenue recognition practices followed related government subcontract review fully described companys report form 8k dated may 15 2002 resulted accounting adjustments arising changes timing revenue recognition lasercard optical memory card shipments secure governmentfunded vault built government company premises comply security regulations subcontract past company recognized revenue upon deliveries vault since customer takes title cards assumes risks ownership obligated remit payment cards time rights return except product defects however companys newly appointed independent accountants advised company terms conditions companys us government supply subcontract transfer title imminent cash payment pursuant contract payment terms upon delivery cards vault necessary necessarily sufficient recognize revenue upon delivery cards vault secs staff accounting bulletin 101 revenue recognition prior criteria set forth secs accounting auditing enforcement release 108 restated financial statements revenue recognized upon shipment cards vault customer since company provided fixed schedule notification plan shipments vault government company restated previously issued results fiscal years 1998 2001 first nine months fiscal 2002 reflect adjustments timing revenue recognition result restatement revenue fiscal 1998 fiscal 1999 fiscal 2000 declined revenue fiscal 2001 first nine months fiscal 2002 increased results operationsfiscal 2003 compared fiscal 2002 fiscal 2001 overview companys principal lasercard market today involves highsecurity counterfeitresistant tamperresistant cards digital governance regard company provides governments high security lasercard optical memory cards readwrite drives facilitate expedite process governing documenting grant certain rights citizens andor noncitizen permanent residents counterfeit tamperresistant cards consumable products typically replaced rights documented cards expire within market companys largest customer lasercard products united states government representing 82 total revenues fiscal year 2003 compared 78 total revenues fiscal 2002 62 total revenues fiscal 2001 revenues predominantly result two card programsdepartment homeland security previously us immigration naturalization service ins permanent resident cards green cards us department state dos laser visa border crossing cards bccs sales cards readwrite drives canadian permanent resident card program represented 11 total revenues fiscal 2003 3 revenues fiscal 2002 shipments began visx incorporated nongovernment customer since 1992 represented 7 companys fiscal 2002 revenues near zero fiscal 2003 company anticipates orders two programs italythe cie card carta didentica elettronica pse card permesso di soggiorno elettronico company informed italian var italian government plans issue 17 million cie cards 600000 pse cards year december 2003 however company yet received corresponding card orders potential applications optical memory card digital governance programs various countries include identification cards saudi arabia macedonia motor vehicle registration cards india childrens healthcare cards peoples republic china expansion current us government id card programs due increasing need enhanced us border security since governmental card programs typically rely government policymaking turn subject technical requirements budget approvals political considerations assurance programs implemented expected addition using marketing staff company utilizes valueadded reseller var companies card distribution licensees development commercial markets applications lasercard products product sales vars licensees consist primarily companys optical memory cards optical card readwrite drives company also offers sale customized software applications addon peripherals made companies equipment adding digitized photo fingerprint hand template signature cards varslicensees may add application software personal computers pcs peripherals resell products integrated data systems company continuing efforts recruit new vars card distribution licensees eliminate nonproductive vars revenues 2003 fiscal year ended march 31 2003 companys total revenues 26331000 compared 20889000 fiscal 2002 24906000 fiscal 2001 product revenues sales lasercardr optical memory cards related products totaled 25221000 fiscal 2003 compared 19562000 fiscal 2002 22690000 fiscal 2001 changes product revenues periods due primarily sale optical memory cards two us government card programs described fiscal 2003 company sold lasercard products approximately 30 customers six states 10 foreign countries company sold 73 million optical memory cards approximately 175 readwrite drives fiscal 2003 compared 56 million optical cards 450 readwrite drives fiscal 2002 59 million cards 1280 readwrite drives fiscal 2001 readwrite drive revenues decreased 07 million fiscal 2003 compared fiscal 2002 approximately 26 million fiscal 2002 compared fiscal 2001 readwrite drives comprised less 10 total revenues fiscal 2003 fiscal 2002 approximately 15 total revenues fiscal 2001 1280 readwrite drives sold fiscal 2001 approximately 600 drives delivered mainly us department defense automated manifest system compared approximately 60 readwrite drives fiscal 2002 approximately 15 drives fiscal 2003 orders program historically sporadic remaining decrease readwrite drive deliveries due reduction sales visx incorporated var sales cards drives visx negligible fiscal 2003 represented 7 companys fiscal 2002 revenues 22 fiscal 2001 although visxs lasercardequipped surgery systems already installed laser eyesurgery clinics continue use companys optical memory cards visx employ lasercard drives system activation currently produced laser eyesurgery equipment addition sales customers company anticipates delivery approximately 1000 readwrite drives department homeland security fiscal 2004 revenues fiscal 2003 included sales 66 million green cards laser visa bccs company anticipates fiscal 2004 revenues include sales ranging 2 million 3 million cards programs order maintain card revenues fiscal 2003 level fiscal 2004 revenues need include additional orders new existing programs could include italy macedonia saudi arabia united states governments us visit twic programs license fees revenues company entered readwrite drive kits assembly license customer italy generated license revenue 712000 fiscal 2001 119000 fiscal 2002 arrangement structured whereby customer agreed pay us contractually agreed upon fee exchange transfer technical knowledge knowhow training assembly readwritedrives training period extended 16 months period company recognized fee revenue company recorded revenue 1465000 fiscal 2001 1206000 fiscal 2002 realized digital sound patent licenses sold sony corporation dolby laboratories inc revenues net legal costs third party contingency success fees ongoing royalty payments fiscal 2003 license revenue included 875000 representing unamortized portion 1000000 nonrefundable distribution license fee received 2000 licensee asia committed purchase minimum number optical memory cards program licensees country company recorded fee deferred revenue amortizing revenue proportion actual card purchases licensee december 2002 company determined due licensees failure meet minimum contractual purchase commitment licensees distribution rights become unenforceable licensee would longer acting card supplier program addition time company decided would longer work licensee terms license agreement since obligations company recognized remaining 875000 revenue quarter ended december 31 2002 fiscal 2003 license revenue also included 235000 relating payment received january 2002 third party considering entering license agreement company originally recorded payment deferred revenue third party subsequently foregone rights agreement due nonperformance accordingly company recognized revenue arrangement fourth quarter fiscal 2003 backlog march 31 2003 backlog lasercard optical memory cards totaled approximately 19 million firm card orders card supply contracts amount 54 us government green cards laser visas us government subcontract purchase optical memory cards since company fixed delivery schedule card shipments secure us governmentfunded vault company premises company recognized revenues cards located vault therefore cards included backlog march 31 2003 march 31 2002 backlog lasercard optical memory cards totaled approximately 164 million consisting approximately 111 million firm card orders card supply contracts approximately 53 million cards produced delivered located governmentfunded vault 111 million amount 85 us government green cards laser visa bccs companys us government subcontract 53 million amount green cards laser visa bccs produced subcontract fluctuation backlog fiscal 2003 compared fiscal 2002 due receipt fixed delivery schedules fiscal 2003 addition fact government release orders arrive irregular intervals purchase order releases companys fiveyear us government subcontract issued irregular intervals varying card quantities march 31 2002 company six months remaining january 22 2002 release 325 million cards may 8 2003 company announced 18 million order canadian maple leaf permanent resident cards order called deliveries beginning may 2003 gross profit excluding license revenue gross margin product sales 45 fiscal 2003 46 fiscal 2002 46 fiscal 2001 historically optical memory card gross margins approximated 50 optical memory card gross profit margins vary significantly based average selling price sales production volume mix card types production efficiency yields changes fixed costs discussed readwrite drive gross margins currently negative inclusive fixed overhead costs even readwrite drive sales volume achieves profitable levels company believes readwrite drive gross margins remain 10 foreseeable future decrease gross margin product sales fiscal 2003 compared fiscal 2002 fiscal 2001 due largely 1 initial production cards canadian program new manufacturing process initiated company fiscal 2003 2 larger negative gross margin readwrite drive sales discussed optical memory cards company depends gross profit generated optical memory card sales gross profit optical memory card sales 121 million fiscal 2003 95 million fiscal 2002 99 million fiscal 2001 changes gross profit year mainly due changes sales volume readwrite drives fiscal 2003 gross profit readwrite drive sales decreased 250000 negative gross profit 890000 negative gross margin fiscal 2003 includes inventory writeoffs 300000 unabsorbed overhead costs charged cost product sales due manufacturing volume well capacity year fiscal 2002 gross profit readwrite drive sales decreased 1 million negative gross profit 640000 compared gross profit 430000 fiscal 2001 decrease fiscal 2002 due lower selling prices drives lower sales volume level fully absorb fixed manufacturing expenditures prior fiscal 2002 company selling readwrite drives less three thousand dollars per unit quantities six units generally included interface software fiscal 2002 company reduced selling price 20 readwrite drives typical purchase quantities effort develop broader market customer base lasercard optical memory cards reduced gross profit readwrite drive sales fiscal 2002 increased level sales required achieve gross profits readwrite drive sales inclusive fixed overhead costs company believes assembly sales approximately 400 readwrite drives per quarter would necessary achieve gross profit readwrite drive sales current selling prices costs currently effort stimulate optical memory card sales companys priority increase number readwrite drives marketplace rather maximizing perunit gross profit readwrite drives company plans lower readwrite drive prices current model margin new drive model recently introduced company expected similar current drive model company believes potential markets readwrite drives include us department homeland security us department state us armed forces governments canada italy several countries april 22 2003 us department homeland security issued presolicitation notice purchase approximately 1000 optical stripe readwrite drives delivery fivemonth period beginning thirty days contract award company anticipates winning award granted company maintains inventory readwrite drive parts finished drives believes adequate meet customer demand however interruption supply readwrite drive parts difficulties encountered readwrite drive assembly could cause delay deliveries drives optical memory cards possible loss sales would adversely affect companys operating results income expenses selling general administrative expenses sga expenses 6202000 fiscal 2003 5165000 fiscal 2002 4134000 fiscal 2001 increase fiscal 2003 compared fiscal 2002 included approximately 507000 increased marketing selling expenditures increase 273000 general administrative expenditures increase 177000 insurance expenditures increase 132000 legal accounting services increase fiscal 2002 compared fiscal 2001 included approximately 575000 increased marketing selling expenditures increase 365000 general administrative expenditures increase 80000 company 401k matching company contribution employee stock purchase plan company believes sga expenses fiscal 2004 higher fiscal 2003 levels mainly due increases marketing selling expenses increases insurance premiums accounting audit fees general increases research engineering expenses company continuing efforts develop new optical memory card features including insertion contactless chips radio frequency rf capability optical memory card readwrite drives readonly drives readers software products effort provide new products stimulate optical memory card sales growth example company developed prototype lasercard handheld reader company anticipates ongoing research engineering efforts result new enhanced card capabilities productionmodel readonly drives advanced security features lower manufacturing costs however assurance product development efforts successful factors important companys existing future optical memory card markets total expenses 2818000 fiscal 2003 3045000 fiscal 2002 2370000 fiscal 2001 decrease fiscal 2003 compared 2002 mainly due reduction purchased services prototype expenditures increase spending fiscal 2002 due increase readwrite readonly drive manufacturing engineering product development company anticipates expenses increase fiscal 2004 primarily due optical memory card readwrite drive development efforts income total income fiscal 2003 consisted 397000 interest income compared 386000 interest income fiscal 2002 612000 interest income fiscal 2001 difference fiscal 2002 compared fiscal 2001 due interest rate declines pretax profit fiscal 2003 pretax profit increased 14 million compared fiscal 2002 due 22 million increase gross profit partially offset 08 million increase operating expenses pretax profit fiscal 2002 decreased 44 million compared fiscal 2001 due primarily 16 million reduction product gross profit 17 million increase expenses 09 million decrease license revenue income taxes company recorded income tax expense 1520000 fiscal 2003 compared income tax benefits 2786000 fiscal 2002 1097000 fiscal 2001 march 31 2002 company recognized prior tax benefits income statement purposes income tax benefit fiscal 2002 included credit 2999000 due change valuation allowance relating federal deferred tax asset net federal alternative minimum taxes partially offset 213000 state tax expense income tax benefit fiscal 2001 included credit 1671000 due change valuation allowance relating federal deferred tax asset net federal alternative minimum taxes partially offset 220000 state tax expense 354000 foreign income taxes company analyzes deferred tax assets regard potential realization described critical accounting policies accounting income taxes company established valuation allowance significant portion deferred tax assets attributable stock option deductions based upon uncertainty realization release remaining valuation allowance would recorded credit equity would impact net income company considered estimated future taxable income ongoing prudent feasible tax planning strategies assessing amount valuation allowance portion deferred tax asset recognized would reversed determined likely portion would realized companys tax return timing differences certain items included book income items included income tax returns therefore tax payments credits often occur different periods income tax expense benefit included statements income tax purposes company estimates timing differences fully realized tax return future federal tax cash payments could reduced approximately 10 million liquidity capital resources march 31 2003 company cash equivalents shortterm investments 10117000 current ratio 59 1 longterm debt company also 6898000 longterm investments original maturities 1 25 years net cash used operating activities 64000 fiscal 2003 compared net cash provided operating activities 4369000 fiscal 2002 7080000 fiscal 2001 major categories comprising cash provided used operating activities thousands 1163000 increase inventory fiscal 2003 largely due 900000 increase raw materials inventory optical memory card manufacture 460000 increase optical memory card finished goods inventory partially offset 160000 decrease optical memory card workinprocess inventory advance payments customer amount fluctuates amount company backlog advance payments received deferred revenue increases cash received items revenue yet recognized deferred revenue decreases revenue recognized items company believes estimated level revenues next 12 months sufficient generate cash operating activities periods however quarterly fluctuations probable operating cash flow could negatively impacted significant degree either companys largest us government programs delayed canceled extended replaced card orders sources income increases product revenues licenses keep pace increased marketing expenditures company established line credit current plans company may negotiate line credit becomes appropriate although assurance made financing would available favorable terms needed result 2282000 net income recorded fiscal 2003 companys accumulated deficit reduced 5817000 stockholders equity increased 36843000 result net income recorded 2224000 additions equity mainly due stock option exercises net cash used investing activities 4151000 fiscal 2003 6319000 fiscal 2002 2350000 fiscal 2001 amounts include changes maturity liquid investments purchases property equipment 2468000 fiscal 2003 1723000 fiscal 2002 2202000 fiscal 2001 increases patents intangibles 307000 fiscal 2003 98000 fiscal 2002 164000 fiscal 2001 company considers highly liquid investments consisting primarily commercial paper taxable notes us government bonds original remaining maturities three months less date purchase cash equivalents investments original remaining maturities three months one year date purchase classified shortterm company determines length investments considering cash requirements yields available type investment considered company management also determines appropriate classification debt equity securities time purchase reevaluates classification investments balance sheet date march 31 2003 company 11261000 classified shortterm longterm investments compared 9885000 march 31 2002 marketable securities classified heldtomaturity cash plus shortterm longterm investments 17015000 march 31 2003 18078000 march 31 2002 company added capital equipment leasehold improvements approximately 25 million fiscal 2003 compared approximately 17 million fiscal 2002 22 million fiscal 2001 depending card type companys card production capacity currently approximately 13 million cards per year company plans purchase additional production equipment series steps deemed appropriate company addition investment used expansion company expects make additional capital expenditures cost savings quality improvements purposes company plans use cash hand cash generated operations fund capital expenditures 7 million fiscal 2004 equipment leasehold improvements card production readwrite drive tooling assembly general support items majority proposed expenditure slated new card manufacturing equipment net cash provided financing activities 1776000 fiscal 2003 3922000 fiscal 2002 compared 1327000 used financing activities fiscal 2001 financing activities consisted proceeds sales common stock companys stockoption stockpurchase plans cash used purchases common stock repurchase program discussed net cash provided sales common stock plans amounts 1776000 fiscal 2003 4097000 fiscal 2002 1486000 fiscal 2001 fiscal 2001 company commenced share repurchase program 200000 shares common stock could purchased company time nasdaq stock market transactions aggregate amount exceeding 3 million fiscal 2001 first quarter fiscal 2002 company used cash 2813000 175000 purpose since terminated program without activity debt financing activities fiscal 2003 2002 2001 item 7a item 7 managements discussion analysis results operations financial condition following discussion analysis companys financial condition results operations read conjunction condensed consolidated financial statements related notes included elsewhere form 10k report year ended march 31 2004 forwardlooking statements please refer forwardlooking statements section starting page 3 report section entitled factors may affect future operating results starting page 20 report critical accounting policies revenue recognition product sales primarily consist card sales readwrite drives company recognizes revenue product sales following criteria met 1 persuasive evidence arrangement exists 2 delivery occurred 3 fee fixed determinable 4 collectibility reasonably assured company recognizes revenue product sales time shipment shipping terms fob shipping point orders placed pursuant preexisting sales arrangement postshipment obligations customer acceptance criteria appropriate provision made time shipment estimated warranty costs estimated returns date actual warranty costs returns activity material companys us government subcontract requires delivery secure governmentfunded vault located companys premises shipments made vault shipment schedule provided prime contractor subject revision cancellation option prime contractor time cards delivered vault title cards transferred government risks ownership transferred well prime contractor invoiced payment due within thirty days contract contain return warranty cancellation provisions pursuant provisions sec staff accounting bulletin sab 104 revenue recognized delivery vault company fulfilled contractual obligations earnings process complete company receive shipment schedule shipment cards vault revenue recognized upon shipment vault addition revenue recognition future deliveries vault would affected us government cancels shipment schedule result companys revenues may fluctuate period company continue obtain shipment schedules subcontract shipment schedules cancelled license revenue may consist upfront license fees longterm royalty payments recognized revenue earned secondsource card manufacturing license sold april 2004 global investments group provides royalty payments company card produced 20year term license agreement multielement arrangement described emerging issues task force eitf issue 0021 revenue derived upfront payments recognized time term license cost license revenue material included selling general administrative expenses company applies provisions statement position sop 972 software revenue recognition amended sop 989 modification sop 972 software revenue recognition respect certain transactions involving sale software products revenue license companys software products recognized persuasive evidence arrangement exists software product delivered fee fixed determinable collectibility probable applicable upon acceptance criteria specified upon expiration acceptance period accounting income taxes part process preparing consolidated financial statements company required estimate income taxes jurisdictions operates process involves estimating actual current tax exposure together assessing temporary differences resulting differing treatment items deferred revenue tax accounting purposes differences result deferred tax assets liabilities included within consolidated balance sheets company must assess likelihood deferred tax assets recovered future taxable income extent management believes recovery likely company must establish valuation allowance extent valuation allowance established increased period company includes expense within tax provision statements operations significant management judgment required determining provision income taxes particular valuation allowance recorded companys deferred tax assets fiscal 2002 company recorded tax benefit 2786000 included 2999000 reduction valuation allowance deferred tax assets net federal alternative minimum taxes based managements assessment portion deferred tax assets would likely realized due companys recent cumulative tax loss history threeyear period ending march 31 2004 income statement loss history past five quarters difficulty forecasting timing future revenue evidenced deviations achieved revenues expected revenues past quarters taking account newness certain customer relationships company determined necessary increase valuation allowance sfas 109 full amount deferred tax asset result company recorded valuation allowance 148 million march 31 2004 includes charge increase valuation allowance beginning year net deferred tax asset balance 7086000 year ended march 31 2004 due uncertainties related companys ability utilize deferred tax assets addition company recorded valuation allowance net deferred tax asset generated fiscal 2004 amount 2411000 companys methodology determining realizability deferred tax assets involves estimates future taxable income estimated impact future stock option deductions expiration dates amounts net operating loss carryforwards estimates based nearterm projections assumptions management believes reasonable recent prior periods company estimating future taxable income core business assumed ongoing business us government subcontract permanent resident cards laser visa border crossing cards canadian governments permanent resident card program well estimated operating expenses support level business offset estimated impact future stock option deductions company went back estimating future taxable income based upon expectations current next three years past core business proven stable company believed past core business expected represent increasingly smaller part business company expects revenues us programs stabilize revenue levels lower expected past company expects new foreign business fluctuated considerably quarter comprise larger portion core business company difficulty past expects continued difficulty future reliably forecasting foreign business revenue received combination anticipated threeyear cumulative tax loss period ended march 31 2004 resulted company basing estimates future income purposes booked orders circumstances change company may future able revert back estimating future revenue based upon forecast revenues rather using booked orders although company cannot say occur concluding valuation allowance required company considered positive negative evidence regarding ability generate sufficient future taxable income realize deferred tax assets positive evidence included achieved profitability financial reporting purposes fiscal 1999 fiscal year 2003 positive evidence included 1 level sales business experienced contract canadian governments permanent resident card program 2 prospects italy saudi arabia national identification card programs 3 heightened interest border security initiatives following events september 11 2001 4 expected future orders negative evidence included 1 companys reliance limited number customers substantial portion business 2 uncertainty timing anticipated orders customers 3 impact future stock option deductions taxable income 4 recent experience net operating loss carryforwards expiring unused 5 loss fourth quarter fiscal 2003 losses fiscal 2004 6 prospect three years cumulative tax net operating losses weighing positive negative evidence company considered likely criteria pursuant sfas 109 well risk factors related future business described subheadings dependence vars limited number customers lengthy sales cycles technological change competition noted section entitled factors may affect future operating results described company concluded negative evidence outweighed positive evidence result increased valuation allowance equal full amount deferred tax asset march 31 2004 event actual results differ estimates adjusted future periods company may need adjust amount valuation allowance based future determinations whether likely deferred tax assets realized decrease valuation allowance would recorded income tax benefit reduction income tax expense credit stockholders equity companys net operating losses available reduce future taxable income expire various dates fiscal 2005 fiscal 2024 extent company generates taxable income jurisdictions deferred tax asset relates net operating losses offset full valuation allowance utilization net operating losses would result reversal related valuation allowance companys results operations company would need 8226000 income federal income tax return avoid expiration 2797000 deferred tax asset set expire fiscal 2005 inventories company values inventory lower actual cost purchase andor manufacture inventory current estimated market value inventory management regularly reviews inventory quantities hand records provision excess obsolete inventory based primarily forecasts product demand readwrite drives fluctuate significantly order obtain favorable pricing purchases certain readwrite drive parts made quantities exceed historical annual sales rate drives company purchases readwrite drive parts anticipated readwrite drive demand takes consideration ordertodelivery lead times vendors economic purchase order quantity parts managements analysis carrying value card readwrite drive inventory performed quarterly basis respect inventory carrying values company follows principles articulated accounting research bulletin 43 chapter 4 inventory pricing paragraphs 5 7 10 authoritative guidance sab 100 relates determining appropriate cost basis inventory determining whether firm noncancelable purchase commitments accrued loss forecasted demand sufficient utilize committed inventory purchases part companys quarterly excessobsolete analysis management also determines whether lower cost market adjustments ie selling prices less certain costs sufficient recover inventory carrying values warranted fiscal 2004 company recorded significant lower cost market adjustments instances company recorded charges excess obsolete inventory management ensures new cost basis reflected statement operations inventory subsequently sold companys inventory reserves based upon lower cost market slow moving obsolete items result company believes 10 increase decrease sales would material impact reserves results operationsfiscal 2004 compared fiscal 2003 fiscal 2002 overview drexler technology corporation headquartered mountain view california company makes markets highsecurity durable plastic lasercard optical memory cards associated computerized readwrite drives primarily use digital governance programs us foreign governments counterfeit tamperresistant cards consumable products typically replaced cards expire largest purchaser lasercard products anteon international corporation valueadded reseller var company anteon government contractor lasercard product sales us department homeland security dhs us department state dos us department defense dod government canada government contracts anteon dhs purchases us permanent resident cards green cards dos laser visa border crossing cards bccs dod purchases automated manifest system cards canadian government purchases permanent resident cards encompassing programs companys product sales anteon represented 72 total revenues fiscal 2004 ended march 31 2004 94 total revenues fiscal 2003 ended march 31 2003 81 total revenues fiscal 2002 ended march 31 2002 revenues major government programs shown percentage total company revenues fiscal year 2002 2003 2004 united states green cards laser visa bccs 75 82 44 canadian permanent resident cards 3 10 25 italian carta didentita elettronica cie cards 4 22 government italy company received orders cie cards carta didentita elettronica anticipates orders new program pse cards permesso di soggiorno elettronico march 31 2004 company backlog amount 28 million cie cards scheduled delivery may 2004 phase 2 program according program descriptions released italian government cie card orders could potentially reach 8 10 million cards per year phase 3 fully implemented production us laser visa border crossing cards bccs us permanent resident cards green cards us department homeland security dhs delayed beginning fiscal 2004 new artwork cards designed dhs artwork change laser visa bccs completed july 2003 july 14 2003 company announced receipt optical memory card order valued approximately 2 million laser visa bccs new order called card production start immediately completed within four months artwork change green cards resulted order announced company december 19 2003 valued approximately 26 million calling deliveries may 2004 company received followon order either laser visa bccs green cards march 31 2004 onsite inventory owns maintains vault company premises us government inventories laser visa bccs green cards would last approximately 20 12 months respectively us governments current cardpersonalization rates optical memory card revenues fiscal 2004 included approximately 48 million sales us green cards laser visa bccs less approximately 13 million level revenues company previously expected receive programs annual basis optical memory card revenues two programs approximately 212 million fiscal 2003 156 million fiscal 2002 company anticipates fiscal 2005 optical memory card revenues two programs exceed 6 million us government currently personalizing cards 9 million annualized run rate value based upon companys selling price cards anteon company believes annual revenues two programs approximate us government personalization rate time subject fluctuations level inventory deemed appropriate us government company established sheetlamination production facilities make canadian permanent resident cards italian national id cards potential programs process currently labor intensive rolllamination process allows use high security offset printing special features resulting premium card date gross margins canadian sheetprocess cards less 40 company believes time able improve margins cards made sheetlamination process automation yield improvements addition rolllamination card gross margins hampered low sales production volume potential applications lasercard optical memory card digital governance programs include identification cards several countries motor vehicle registration cards india expansion current us government id card programs due perceived increasing need enhanced us border security fiscal 2004 third quarter company received order delivered 1000 optical memory card readwrite drives biometric verification system software department homeland security program 1000 drives software systems deployed dhs us borders enable dhs read encoded data 16 million green cards border crossing cards previously manufactured company issued us government since 1998 potential us government id programs include us visitor immigration status indication technology usvisit program company uncertain whether chosen usvisit subcontractor directly var teaming partner accenture announced prime contractor full implementation program june 1 2004 since governmental card programs typically rely government policymaking turn subject technical requirements budget approvals political considerations assurance usvisit program implemented expected include optical cards solution addition using marketing staff company utilizes var companies card distribution licensees development markets applications lasercard products product sales vars licensees consist primarily companys optical memory cards optical card readwrite drives company also offers sale customized software applications addon peripherals made companies equipment adding digitized photo fingerprint hand template signature cards varslicensees may add application software personal computers peripherals resell products integrated data systems company continuing efforts recruit new vars eliminate nonproductive vars companys current fiveyear us government subcontract green cards laser visa bccs announced june 2000 expire may 25 2005 subcontract received company anteon lasercard var us government prime contractor competitively bid government procurement contract assurance followon contract issued dhs upon expiration current contract especially given advent usvisit program 2002 company awarded subcontract production canadas new permanent resident cards shipments began fiscal 2003 totaled 67 million march 31 2004 including order received april 2004 companys backlog time 24 million called deliveries january 2005 march 2004 company quoted tender issued kingdom saudi arabia three million cards 220 readwrite drives secure personal identification card program products would delivered oneyear period contract issuance company previously sold 120 readwrite drives program shipped fiscal 2004 second quarter installation infrastructure required card issuance also shipped small quantities optical memory cards testing sample purposes firstphase contract allows procurement 300000 cards balance may purchased testing complete secondphase contract expected awarded one prime contractors july 2004 however assurance contract issued company would selected vendor company receive additional orders program contract may ultimately issued saudi arabian government march 31 2004 company successfully concluded acquisition two related german card companies challenge card design plastikkarten gmbh rastede germany cards gmbh ratingen germany including sales operations united states korea acquisitions provide company card manufacturing base serve european middle eastern african asian markets supplementing companys newly expanded manufacturing operations california effective april 3 2004 company sold secondsource cardmanufacturing license global investments group based auckland new zealand card manufacturing slovenia agreement provides payments company 29 million license 20year term license consisting fiveyear training support package followed ongoing support phase additional 15 years additionally company sell approximately 12 million worth required manufacturing equipment installation support new facility provide targeted initial manufacturing capacity 10 million optical cards annually company received initial 5 million payments called agreements consisting partial payment equipment 500000 march 31 2004 45 million subsequent march 31 2004 global investments group pay company royalties card produced 20year term license agreement start global investments group facility planned early 2005 revenue allocated remaining term agreement beginning operation factory commences fully described liquidity capital resources december 2003 company raised approximately 94 million equity private placement net expenses company sold 791172 shares common stock 1276 ninemonth options purchase 122292 shares common stock 1651 fiveyear warrants purchase 174057 shares common stock 1726 kodak companys solesource supplier raw material optical memory card media announced reducing emphasis emulsion based films kodak discontinue manufacturing raw material companys optical memory card media made company would order maximum amount finalrun stock use endeavoring establish alternate supplier raw material although purchase price could increase new supplier company purchased longterm supply raw material make mastering loops believes hand adequate supply media raw material hand order meet anticipated demand company plans invest approximately 11 million additional capital equipment leasehold improvement expenditures fiscal 2005 fully discussed liquidity capital resources regard company entered tenyear leases two buildings mountain view california totaling 69000 square feet average annual lease payments totaling 11 million combined one lease renegotiation lease existing leased building lease signed january 29 2004 additional space rent expense recorded average rent payments term lease payments increase lease term result recorded accrued liability deferred rent time renegotiated lease signed 139000 deferred rent associated original lease amount amortized straightline basis tenyear term new lease company occupied newly leased building april 2004 company move smaller building mid2004 resulted acceleration certain leasehold improvement amortization costs period november 2003 may 2004 recognition approximately 300000 additional leasehold amortization expense period fiscal 2004 amortization expense leasehold improvements 367000 revenues 2004 fiscal year ended march 31 2004 companys total revenues 16963000 compared 26331000 fiscal 2003 20889000 fiscal 2002 product revenues companys product revenues consist sales optical memory cards optical card readwrite drives drive accessories maintenance peripherals miscellaneous items approximately 26 customers four states 16 foreign countries product revenues 16963000 fiscal 2004 25221000 fiscal 2003 19562000 fiscal 2002 changes product revenues periods due primarily sale optical memory cards us governments laser visa bcc green card programs optical memory card revenues programs 48 million fiscal 2004 212 million fiscal 2003 156 million fiscal 2002 company anticipates fiscal 2005 revenues exceed 6 million two programs therefore additional orders new existing programs needed increase revenues prefiscal 2004 levels programs could include india italy saudi arabia senegal costa rica united states revenue optical memory cards totaled 134 million fiscal 2004 compared 242 million fiscal 2003 182 million fiscal 2002 decrease fiscal 2004 mainly due lower unit volume card sales fiscal 2004 revenue readwrite drives drive service related accessories totaled 34 million compared 07 million fiscal 2003 13 million fiscal 2002 increase fiscal 2004 compared fiscal 2003 fiscal 2002 due increase unit sales volume readwrite drives higher selling prices resulting inclusion biometric system software salesvolume increase fiscal 2004 primarily result order delivery 1000 optical memory card readwrite drives biometric verification system software us department homeland security program readwrite drives comprised 20 total revenues fiscal 2004 3 fiscal 2003 6 fiscal 2002 license fees revenues fiscal 2002 company entered readwrite drive kits assembly license customer italy generated license revenue 119000 arrangement structured whereby customer agreed pay contractually agreed upon fee exchange transfer technical knowledge knowhow training assembly readwrite drives training period extended 16 months period company recognized fee revenue also fiscal 2002 company recorded revenue 1206000 realized digital sound patent licenses sold sony corporation dolby laboratories inc revenues net legal costs third party contingency success fees ongoing royalty payments fiscal 2003 license revenue included 875000 representing unamortized portion 1000000 nonrefundable distribution license fee received 2000 licensee asia committed purchase minimum number optical memory cards program licensees country company recorded fee deferred revenue amortizing revenue proportion actual card purchases licensee december 2002 company determined due licensees failure meet minimum contractual purchase commitment licensees distribution rights become unenforceable licensee would longer acting sole card supplier program addition time company decided would longer work licensee terms license agreement since obligations company recognized remaining 875000 revenue quarter ended december 31 2002 fiscal 2003 license revenue also included 235000 relating payment received january 2002 third party considering entering license agreement company originally recorded payment deferred revenue third party subsequently foregone rights agreement due nonperformance accordingly company recognized revenue arrangement fourth quarter fiscal 2003 license revenues 2004 fiscal year ended march 31 2004 however april 16 2004 company announced sale royaltybearing optical memory card manufacturing license global investments group new zealand card manufacturing slovenia license agreement provides payments company 29 million license including fiveyear training support package followed ongoing support phase additional 15 years additionally company agreed sell approximately 12 million worth required manufacturing equipment installation support new facility provide targeted initial manufacturing capacity 10 million optical cards annually options increase capacity 30 million cards per year company date received initial 5 million payments called agreements consisting partial payment equipment 500000 march 31 2004 45 million subsequent march 31 2004 payments recorded deferred revenue recognized revenue term arrangement beginning operation factory commences backlog march 31 2004 backlog lasercard optical memory cards totaled 41 million compared backlog approximately 19 million fiscal 2003 164 million fiscal 2002 order backlog march 31 2004 includes orders following programs green cards us department homeland security italian government national id cards cie cards canadian government permanent resident cards backlog subject fluctuation due customers timing orders company backlog readwrite drives addition backlog challenge card design plastikkarten gmbh cards gmbh products services totaled 21 million euros approximately 26 million march 31 2004 gross margin gross margin product sales 22 fiscal 2004 45 fiscal 2003 46 fiscal 2002 overall gross profit declined 8619000 3806000 fiscal 2004 12425000 fiscal 2003 decreased 6431000 10237000 fiscal 2002 decrease gross margin product sales fiscal 2004 compared fiscal 2003 due primarily lower volume optical memory card sales decrease gross margin product sales fiscal 2003 compared fiscal 2002 due largely 1 initial production cards canadian program new manufacturing process initiated company fiscal 2003 2 larger negative gross margin readwrite drive sales discussed according license effective april 3 2004 global investments group company resell 12 million card manufacturing equipment licensee fiscal 2005 2006 company expects realize little gross margin sale largely passthrough company little cost associated global investments group license revenue therefore gross margin approximate amortized revenue 29 million license fee 41 million revenue associated costs amortized 20year term license optical memory cards prior fiscal 2004 optical memory card gross margins approximated 50 optical memory card gross profit margins vary significantly based average selling price sales production volume mix card types production efficiency yields changes fixed costs gross margin optical memory cards declined 26 fiscal 2004 compared 50 fiscal 2003 52 fiscal 2002 declines fiscal 2004 primarily due low sales production volume corresponding underabsorption fixed costs introduction cards made sheetlamination process currently lower margins cards made rolllamination process changes gross profit fiscal 2003 fiscal 2002 mainly due changes sales volume readwrite drives fiscal 2002 company reduced selling price lasercard readwrite drives 20 typical purchase quantities effort develop broader market customer base lasercard optical memory cards since fiscal 2002 reduced selling price readwrite drives however fiscal 2004 company introduced new drive 25 reduction price typical quantities compared previous model current target applications companys lasercard typically require small number drives relative number cards purchased fiscal 2004 company gross profit readwrite drive sales including biometric system software approximately 410000 gross margin 12 compared negative gross profit readwrite drive sales approximately 890000 fiscal 2003 640000 fiscal 2002 readwrite drive gross profits increased 525000 fiscal 2004 due inclusion biometric system software perdrive basis 1000 drive dhs purchase fiscal 2003 company wrote readwrite drive inventory totaling approximately 300000 readwrite drive gross profit margins vary significantly based upon sales production volume changes fixed costs inclusion optional features software licenses perdrive basis prior receipt comparatively large readwrite drive order us government third quarter fiscal 2004 readwrite drive gross profits negative inclusive fixed overhead costs due low sales volume company anticipates quarterly negative gross profits recur future unless sales volume sufficient cover fixed costs also unless per drive system software licenses included future orders company believes margins 10 sales volume sufficient result positive gross profit income expenses selling general administrative expenses sga expenses 6700000 fiscal 2004 6202000 fiscal 2003 5165000 fiscal 2002 increase fiscal 2004 compared fiscal 2003 primarily due 231000 increase insurance premiums increase 360000 legal accounting fees increase fiscal 2003 compared fiscal 2002 included approximately 507000 increased marketing selling expenditures increase 273000 general administrative expenditures increase 177000 insurance expenditures increase 132000 legal accounting services sga expenses fiscal 2004 higher fiscal 2003 levels mainly due increases accounting legal fees primarily related due diligence acquisition two companies germany increased costs public company believes sga expenses fiscal 2005 higher fiscal 2004 levels mainly due integration acquired companies increases marketing selling expenses cost compliance internal control auditing mandated section 404 sarbanesoxley act research engineering expenses company continuing efforts develop new optical memory card features structures including various sheetlamination card structures insertion contactless chips radio frequency rf capability optichiptm ovd optically variable device products associated media development enhanced optical memory card readwrite drives readonly drives readers new software products effort provide new products stimulate optical memory card sales growth example company recently developed prototype lasercard handheld reader company anticipates ongoing research engineering efforts result new enhanced card capabilities productionmodel readonly drives advanced security features lower manufacturing costs however assurance product development efforts successful features important companys existing future optical memory card markets total expenses 2620000 fiscal 2004 2818000 fiscal 2003 3045000 fiscal 2002 decrease spending fiscal 2004 compared fiscal 2003 mainly due completion design new readwrite drive model 98000 reduction related completion last year amortization design technology transfer costs 227000 decrease fiscal 2003 compared 2002 mainly due reduction purchased services prototype expenditures increases expenses anticipated fiscal 2005 development productionmodel readonly drives optical memory card media development card hardware related programs income expense total net income fiscal 2004 176000 consisting 269000 interest income offset 93000 expense recorded marktomarket fair value common stock options warrants issued december 2003 total income 397000 interest income fiscal 2003 386000 interest income fiscal 2002 decrease interest income fiscal 2004 compared fiscal 2003 primarily due decline interest rates income taxes company recorded income tax expense 7089000 fiscal 2004 fiscal 2003 income tax expense 1520000 effective tax rate 40 fiscal 2002 income tax benefit 2786000 companys income tax expense fiscal 2004 due increasing valuation allowance equal remaining balance companys deferred tax asset income tax expense cash item mean company owes income taxes rather longer demonstrate future likely able utilize tax benefits previously generated net operating losses methodology determining realizability deferred tax asset critical accounting policy described heading critical accounting policies companys sec filings summary methodology considers positive negative evidence regarding companys ability generate sufficient future taxable income realize deferred tax assets due companys recent cumulative tax loss history especially forecast threeyear period ending march 31 2004 income statement loss history five quarters ended march 31 2004 difficulty forecasting timing future revenue could lead positive income financial statements taxable income evidenced deviations achieved revenues expected revenues past quarters taking account newness certain customer relationships company determined necessary increase valuation allowance sfas 109 full amount deferred tax asset estimated future revenue taking account booked orders would generate sufficient taxable income realize deferred tax assets company taxable income future unexpired net operating loss income tax carryforward amounts utilized reduce otherwise required income tax payments future tax expense full amount deferred tax asset currently 148 million march 31 2002 company recognized prior tax benefits income statement purposes income tax benefit fiscal 2002 included credit 2999000 due change valuation allowance relating federal deferred tax asset net federal alternative minimum taxes partially offset 213000 state tax expense subsequent 86 million income tax expense resulted increasing valuation allowance equal deferred tax assets future years unless valuation reduced company profitable income tax purposes company utilize deferred tax asset reduce income tax would otherwise owe meaning effective tax rate zero company 28 million deferred tax assets expire 2005 extent utilized reduce income tax would due company profits income tax return extent global investments group license agreement generates taxable income company overall taxable income position company would able reduce valuation allowance liquidity capital resources march 31 2004 company cash equivalents shortterm investments 12669000 current ratio 21 1 company also 8246000 longterm investments original maturities one year two onehalf years cash shortterm investments longterm investments 20915000 march 31 2004 17015000 march 31 2003 net cash used operating activities 2000 fiscal 2004 compared net cash used operating activities 64000 fiscal 2003 net cash provided operating activities 4369000 fiscal 2002 decrease cash provided operating activities fiscal 2002 fiscal 2003 largely due changes advance payments customers deferred revenue cash increased fiscal 2004 due proceeds equity private placement common stock described cash fluctuate based upon timing advance payments customers relative shipments timing inventory purchases subsequent manufacture sale products company believes estimated level revenues advance payments next 12 months sufficient generate cash operating activities period however quarterly fluctuations expected operating cash flow could negatively impacted significant degree either companys largest us government programs delayed reduced canceled extended italian cie card program grow planned internally programs replaced card orders sources income increases product revenues licenses keep pace increased marketing expenditures company established line credit current plans two acquired german companies existing lines credit banks company may negotiate line credit becomes appropriate although assurance made financing would available favorable terms needed result 12427000 net loss recorded fiscal 2004 companys accumulated deficit increased 18244000 stockholders equity decreased 35686000 result net loss recorded offset 11173000 additions equity due sale stock plans fiscal 2004 proceeds private placement common stock described net cash used investing activities 5144000 fiscal 2004 4151000 fiscal 2003 6319000 fiscal 2002 amounts include 3089000 connection purchase two german companies challenge card design plastikkarten gmbh cards gmbh fiscal 2004 purchases maturities liquid investments purchases property equipment 3996000 fiscal 2004 2468000 fiscal 2003 1723000 fiscal 2002 acquisitions patents intangibles 93000 fiscal 2004 307000 fiscal 2003 98000 fiscal 2002 company considers highly liquid investments consisting primarily commercial paper taxable notes us government bonds original remaining maturities three months less date purchase cash equivalents investments original remaining maturities three months one year date purchase classified shortterm investments original remaining maturities one year date purchase classified longterm company determines length investments considering cash requirements yields available type investment considered company management also determines appropriate classification debt equity securities time purchase reevaluates classification investments balance sheet date march 31 2004 company 9227000 classified shortterm longterm investments compared 11261000 march 31 2003 marketable securities accounted heldtomaturity company made capital equipment leasehold improvement purchases approximately 4 million fiscal 2004 compared 25 million fiscal 2003 approximately 17 million fiscal 2002 companys current card capacity assuming optimal card type mix estimated approximately 16 million cards per year company plans purchase additional production equipment series steps deemed appropriate company also increasing production capacity cards new structures used canadian italian programs addition investment used expansion company expects make additional capital expenditures cost savings quality improvements purposes company plans use cash hand cash generated operations fund capital expenditures approximately 11 million fiscal 2005 equipment leasehold improvements card production readwrite drive tooling assembly general support items march 31 2004 company completed acquisition two related german card companies challenge card design plastikkarten gmbh rastede germany cards gmbh ratingen germany collectively acquired german entities including sales operations united states korea company purchased shares acquired german entities five shareholders purchased assets united states sales operation partnership comprised shareholders acquisition transaction company agreed assume approximately 05 million euros debt pay approximately 475 million euros cash consisting approximately 225 million euros payable closing remaining approximately 25 million euros payable five equal annual installments business certain assets agreement specified purchase price adjusted based upon assets purchased additional liabilities assumed resulted reduction purchase price approximately 04 million euros march 31 2004 present value net total purchase price 55 million purchase price determined negotiation company shareholders taking account matters value tangible assets going concern value business operations acquired german entities four shareholders entered new employment agreements acquired german entities fifth shareholder resident us entered employment agreement registrant addition salaries employment agreements provide commission based upon future results operations acquired german entities could much 375 million euros next five years company used portion available cash fund acquisition shareholders previous material relationship company affiliate subsidiaries although company substantial business acquired german entities recent years one acquired german entities owns plant rastede germany together associated equipment used manufacture plastic cards featuring contactless ic chip technology high resolution printing company intends continue use facility equipment produce cards well enhance facility produce lasercard optical memory cards germany enable ccd manufacture cards featuring four key id card technologies optical memory contact ic chip contactless rf id magnetic stripe either singly combination along highsecurity features net cash provided financing activities 11080000 fiscal 2004 1776000 fiscal 2003 3922000 fiscal 2002 fiscal 2004 financing activities consisted proceeds equity private placement described proceeds sales common stock companys stockoption stockpurchase plans 1691000 fiscal 2004 1776000 fiscal 2003 4097000 fiscal 2002 company received net proceeds 9389000 net fees expenses issuance sale december 2003 791172 shares common stock options purchase 122292 shares common stock warrants purchase 174057 shares common stock aggregate purchase price 10095332 private placement purchase price common stock 1276 per share 15 discount fiveday average price december 23 2003 options exercise price 1651 per share ninemonth life warrants exercise price 1726 per share life five years options warrants valued 245000 984000 respectively based blackscholes calculation december 23 2003 pursuant provisions eitf issue 0019 accounting derivative financial instruments indexed potentially settled companys stock eitf 0019 recorded values longterm liabilities balance net proceeds accounted additional paid capital eitf 0019 company markstomarket fair value options warrants end accounting period end fiscal 2004 third quarter resulted options warrants valued 195000 916000 respectively decrease valuation options warrants december 23 2003 quarter end 118000 recorded income accompanying condensed consolidated statement operations resulted decrease companys stock price february 6 2004 company investors entered amendment original agreement resulted reclassification options warrants equity amendment clarified options warrants granted financing may exercised time registration statement covering resale underlying shares effective available instance company would deliver investors shares common stock whose resale currently registered effective date amendment options warrants reclassified equity additional paidincapital result increase value options warrants closing date amendment date due increases companys stock price company recognized expense 211000 included expense condensed consolidated statement operations fourth quarter fiscal 2004 january 23 2004 company filed s3 registration statement securities exchange commission covering resale common stock issued issuable financing securities exchange commission declared registration statement effective april 28 2004 company subject certain indemnity provisions included stock purchase agreement entered part financing associated registration morgan keegan company inc acted companys exclusive placement agent transaction company used approximately 3 million net proceeds private placement connection purchase ccd cm presently intends use balance proceeds 1 purchase capital equipment make leasehold improvements expand companys lasercard optical memory card production capacity 2 additional payments connection purchase ccd cm 3 general corporate purposes fiscal 2001 company commenced share repurchase program 200000 shares common stock could purchased company time nasdaq stock market transactions aggregate amount exceeding 3 million first quarter fiscal 2002 company used cash 175000 purpose since terminated program without activity debt financing activities fiscal 2004 2003 2002 company acquired bank debt amount 1394000 fiscal 2004 acquisition challenge card design plastikkarten gmbh cards gmbh germany addition net present value future payments acquisition 2150000 transaction following table provides summary effect liquidity cash flows companys contractual obligations march 31 2004 thousands company also entered employment agreements certain shareholders acquired german entities provide commissions based upon results operations acquired entities could much 375 million euros next five years reflected table item 7a item 7 managements discussion analysis financial condition results operations following discussion analysis companys financial condition results operations read conjunction audited consolidated financial statements related notes included elsewhere form 10k report year ended march 31 2006 forwardlooking statements discussion risk factors related company’s business operations please refer “forwardlooking statements” section starting page 4 report section entitled “risk factors” starting page 17 report critical accounting policies discussion analysis financial condition results operations based upon audited consolidated financial statements prepared accordance us generally accepted accounting principles note 2 consolidated financial statements describes significant accounting policies methods used preparation consolidated financial statements preparation financial statements requires us make estimates judgments affect reported amounts assets liabilities revenues expenses ongoing basis evaluate estimates including related revenues inventories stockbased compensation warranties income taxes base estimates historical experience various assumptions believed reasonable circumstances results form basis making judgments carrying values assets liabilities readily apparent sources consider accounting policies described critical accounting policies critical accounting policies 1 important portrayal financial condition results operations 2 require management’s difficult subjective complex judgments often requiring estimates matters inherently uncertain critical accounting policies reflect significant judgments assumptions estimates used preparation consolidated financial statements management discussed development selection critical accounting policies estimates audit committee board directors audit committee reviewed disclosures relating report revenue recognition product sales primarily consist optical cards optical card drives specialty cards card printers company recognizes revenue product sales following criteria met 1 persuasive evidence arrangement exists 2 delivery occurred 3 fee fixed determinable 4 collectibility reasonably assured company recognizes revenue product sales time shipment shipping terms fob shipping point orders placed pursuant preexisting sales arrangement postshipment obligations warehousing us government subcontract customer acceptance criteria appropriate provision made time shipment estimated warranty costs estimated returns provision included accrued liabilities company’s consolidated balance sheet total amount provision charged warranty expense product returns 747000 518000 56000 fiscal years 2006 2005 2004 respectively actual warranty costs returns activity 176000 493000 17000 fiscal years 2006 2005 2004 respectively company’s us government subcontract requires delivery secure vault located company premises shipments made vault shipment schedule provided prime contractor subject revision generally subject cancellation option prime contractor time cards delivered vault title cards transferred government risks ownership transferred well prime contractor invoiced payment due within thirty days contract contain return warranty cancellation provisions pursuant provisions sec staff accounting bulletin 104 sab 104 revenue recognized delivery vault company fulfilled contractual obligations earnings process complete company receive shipment schedule shipment cards vault revenue deferred recognized upon shipment vault addition revenue recognition future deliveries vault would affected us government cancels shipment schedule prime contractor result company’s revenues may fluctuate period company continue obtain shipment schedules subcontract shipment schedules cancelled emerging issues task force 0021 revenue arrangements multiple deliverables eitf 0021 provides criteria governing identify whether goods services delivered separately bundled sales arrangement accounted separately deliverables accounted separately meet following criteria delivered items standalone value customer b fair value undelivered items reliably determined c arrangement includes general right return delivery undelivered items probable substantially controlled seller situations deliverables fall within higherlevel literature defined eitf 0021 company applies guidance higherlevel literature deliverables meet criteria combined one deliverables company adopted eitf 0021 new arrangements entered july 1 2003 assesses revenue arrangements criteria set forth eitf 0021 company applies provisions statement position “sop” 811 accounting performance constructiontype certain productiontype contracts sop 811 applicable contracts revenues time materials contracts recognized services rendered contract labor rates plus material direct costs incurred revenues fixed price contracts recognized percentage completion method based ratio total costs incurred date compared estimated total costs complete contract estimates costs complete include material direct labor overhead allowable general administrative expenses circumstances estimates costs complete project cannot reasonably estimated assured loss incurred percentageofcompletion method based zero profit margin rather completedcontract method used precise estimates made full amount estimated loss charged operations period determined loss realized performance contract fiscal years ended march 31 2006 2005 company recognized approximately 77000 127000 respectively revenues based zero profit margin related longterm contract company revenues generated type contract year ended march 31 2004 beginning fourth quarter fiscal year 2006 company entered contract middle eastern country provide full system integration optical memory cards use country’s personalized national id program includes optical memory cards hardware software contract calls multiple deliverables installation certain client acceptance criteria defined agreement applying guidance within eitf 0021 company determined deliverables accounted separate units rather bundled arrangement fair value undelivered items cannot readily determined therefore revenue recognition new contract associated contract costs deferred predominant undelivered element overview card personalization delivered accepted commencing installation client acceptance card personalization system total contract revenue recognized ratably based actual cards personalized accepted march 31 2006 revenue recognized contract costs incurred contract 1 million recorded deferred contract costs current assets accompanying consolidated balance sheet license revenue may consist upfront license fees royalty payments recognized revenue earned costs license revenue recorded fiscal years 2006 2005 2004 company entered agreement global investments group gig effective april 3 2004 manufacturing optical memory cards accordance eitf 0021 card manufacturing license sale installation equipment training ongoing support accounted one unit accounting since company unable determine evidence fair value undelivered items accordingly revenues arrangement deferred recognized based predominant undelivered item ongoing annual support manufacturing equipment remainder 20year license period pursuant ftb 901 “accounting separately priced extended warranty product maintenance contracts” revenue recognized ratably remaining term agreement beginning equipment accepted training completed date dependent gig providing facility slovenia company also defers direct incremental expenses associated building card manufacturing equipment delivery services revenue deferred company recognize expenses company recognizes related revenue company applies provisions statement position 972 “software revenue recognition” amended statement position 989 “modification sop 972 software revenue recognition respect certain transactions” transactions involving sale software products revenue license company’s software products recognized persuasive evidence arrangement exists software product delivered fee fixed determinable collectibility probable applicable upon acceptance criteria specified upon expiration acceptance period software revenue immaterial fiscal years 2006 2005 2004 respectively accounting income taxes part process preparing consolidated financial statements company required estimate income taxes jurisdictions operates process involves estimating actual current tax exposure together assessing temporary differences resulting differing treatment items deferred revenue tax accounting purposes differences result deferred tax assets liabilities included within consolidated balance sheets company must assess likelihood deferred tax assets recovered future taxable income extent management believes recovery likely company must establish valuation allowance extent valuation allowance established increased period company includes expense within tax provision statements operations significant management judgment required determining provision income taxes particular valuation allowance recorded company’s deferred tax assets company determined fiscal year 2004 due company’s recent cumulative tax loss history previous threeyear period income statement loss history previous five quarters difficulty forecasting timing future revenue evidenced deviations achieved revenues expected revenues previous quarters taking account newness certain customer relationships necessary increase valuation allowance sfas 109 full amount deferred tax asset result company determined full valuation allowance required net deferred tax assets fiscal year 2004 increased existing allowance 24 million 148 million addition company increased valuation allowance deferred tax asset amount 09 million fiscal year 2006 37 million fiscal year 2005 fiscal year 2004 acquisition challenge card design gmbh resulted deferred tax liability 568000 march 31 2006 641000 march 31 2005 companys methodology determining realizability deferred tax assets involves estimates future taxable income estimated impact future stock option deductions expiration dates amounts net operating loss carryforwards estimates based nearterm projections assumptions management believes reasonable recent prior periods second quarter fiscal year 2004 company estimating future taxable income core business assumed ongoing business us government subcontract permanent resident cards green cards laser visa border crossing cards canadian government’s permanent resident card program well estimated operating expenses support level business offset estimated impact future stock option deductions starting third quarter fiscal year 2004 company estimated future taxable income based upon expectations current next three years past core business proven stable company believed past core business expected represent increasingly smaller part business company expected revenues us programs stabilize revenue levels lower expected past company expects new foreign business fluctuated considerably quarter comprise larger portion core business company difficulty past expects continued difficulty future reliably forecasting foreign business revenue received combination anticipated threeyear cumulative tax loss period ended march 31 2004 resulted company basing estimates future income purposes booked orders circumstances change company may future able revert back estimating future revenue based upon forecast revenues rather using booked orders although company cannot say occur concluding valuation allowance required end fiscal year 2004 still required end fiscal year 2006 company considered positive negative evidence regarding ability generate sufficient future taxable income realize deferred tax assets positive evidence included achieved profitability financial reporting purposes fiscal year 1999 fiscal year 2003 positive evidence included 1 level sales business experienced contract canadian government’s permanent resident card program 2 prospects italy middle eastern country national identification card programs 3 heightened interest border security initiatives following events september 11 2001 4 expected future orders negative evidence included 1 company’s reliance limited number customers substantial portion business 2 uncertainty timing anticipated orders customers 3 impact future stock option deductions taxable income 4 recent experience net operating loss carryforwards expiring unused fiscal year 2004 5 financial statement loss fourth quarter fiscal year 2003 first two quarters fiscal year 2006 6 prior three years’ cumulative tax net operating losses weighing positive negative evidence company considered “more likely not” criteria pursuant sfas 109 well following risks “dependence vars limited number customers” “lengthy sales cycles” “technological change” “competition” described company concluded negative evidence outweighed positive evidence result increased valuation allowance equal full amount deferred tax asset march 31 2005 march 31 2006 event actual results differ estimates adjusted future periods company may need adjust amount valuation allowance based future determinations whether likely deferred tax assets realized decrease valuation allowance would recorded income tax benefit reduction income tax expense credit stockholders’ equity company’s net operating losses available reduce future taxable income expire various dates fiscal year 2008 fiscal year 2024 extent company generates taxable income jurisdictions deferred tax asset relates net operating losses offset full valuation allowance utilization net operating losses would result reversal related valuation allowance inventories company values inventory lower actual cost purchase andor manufacture inventory current estimated market value inventory less cost sell management regularly reviews inventory quantities hand records provision excess obsolete inventory based primarily forecasts product demand optical card drives fluctuate significantly order obtain favorable pricing purchases certain readwrite drive parts made quantities exceed booked orders company purchases drive parts anticipated demand takes consideration ordertodelivery lead times vendors economic purchase order quantity parts addition company keeps supply card raw materials deems necessary anticipated demand management’s analysis carrying value card readwrite drive inventory performed quarterly basis respect inventory carrying values company follows principles articulated accounting research bulletin 43 chapter 4 “inventory pricing” paragraphs 5 7 10 authoritative guidance eg sab 100 relates determining appropriate cost basis inventory determining whether firm noncancelable purchase commitments accrued loss forecasted demand sufficient utilize committed inventory purchases part company’s quarterly excessobsolete inventory analysis management also determines whether lower cost market adjustments ie selling prices less certain costs sufficient recover inventory carrying values warranted fiscal year 2006 fiscal year 2005 company record significant lower cost market adjustments readwrite drives fiscal year 2005 amount 205000 included part cost product sales company’s consolidated statements operations fiscal year 2004 company record significant lower cost market adjustment instances company recorded charges excess obsolete inventory management ensures new cost basis reflected statement operations inventory subsequently sold company’s inventory reserves based upon lower cost market slow moving obsolete items result company believes 10 increase decrease sales would material impact reserves company currently evaluating sfas 151 “inventory costs amendment arb 43 chapter 4” expect adoption material impact results operations financial condition value longlived assets including intangibles balance sheet carries variety longlived assets including property equipment identifiable intangible assets goodwill undertake “impairment” review annual basis assets goodwill nonamortizing intangible assets accordance financial accounting standard 142 “fas 142” goodwill intangible assets review based part upon current estimated market values projections anticipated future cash flows accordance financial accounting standard 144 longlived assets periodically review impairment assets impairment loss recognized carrying amount intangible asset recoverable carrying amount exceeds fair value impairment loss recognized adjusted carrying amount intangible asset becomes new accounting basis prohibited reverse previously recognized impairment loss completed annual impairment tests goodwill fiscal year 2006 review longlived assets concluded impairments believe estimates current value reasonable different assumptions regarding items future cash flows volatility inherent markets serve could affect evaluations result impairment charges carrying value assets events circumstances indicate estimates longer reasonable assets tested impairment accordance fas 142 fas 144 stockbased compensation elected continue follow accounting principles board opinion 25 “apb 25” “accounting stock issued employees” account employee stock options alternative fair value method accounting prescribed statement financial accounting standards 123 “sfs 123” “accounting stockbased compensation” requires use option valuation models developed use valuing employee stock options apb 25 compensation expense recognized exercise price employee stock options equals market price underlying stock date grant elected follow sfas 123 apply fair value method stockbased employee compensation would recorded additional 12 million expense year ended march 31 2006 december 2004 financial accounting standards board fasb issued final standard accounting sharebased payments fasb standard 123r revised 2004 sharebased payment fas 123r statement replaces fasb statement 123 accounting stockbased compensation superseded accounting principles board apb opinion 25 accounting stock issued employees statement effective interim annual periods beginning december 15 2005 requires companies measure recognize compensation expense stockbased payments fair value stockbased payments include stock option grants stock plans adoption fas 123r could materially impact results operations warranties estimated reserves product returns warranty estimate reserves utilizing historical information existing products significant judgment inherent selection assumptions interpretation historical experience well identification external internal factors affecting estimates reserves product returns believe assumptions used estimate product sales reserves reasonably likely assumptions considering known facts circumstances however product return activity could differ significantly estimates actual product returns significantly different estimates differences would accounted period become known results operations overview headquartered mountain view california lasercard corporation manufactures lasercard® optical memory cards card related products including chipready opticalsmart™ cards addition company operates wholly owned german subsidiary acquired march 31 2004 challenge card design plastikkarten gmbh “ccd” offices rastede ratingen germany manufactures advancedtechnology cards provides manufacturing capacity certain steps optical memory card production markets cards system solutions thermal card printers company completed merger cards gmbh also acquired march 31 2004 challenge card design plastikkarten gmbh january 2006 addition using marketing staff california new york washington dc area germany company utilizes value added reseller var companies card distribution licensees generally knowledge specific markets development markets applications lasercard products product sales vars licensees consist primarily companys optical memory cards optical card readwrite drives company also offers sale customized software applications addon peripherals made companies equipment adding digitized photo fingerprint signature cards peripherals generated significant revenue company demonstrated various system options varslicensees may add application software personal computers peripherals resell products integrated solutions company continuing efforts recruit new vars eliminate nonproductive vars major near term growth potential lasercard® optical memory cards governmentsponsored identification programs several countries since governmental card programs typically rely policymaking turn subject technical requirements budget approvals political considerations assurance programs implemented expected include optical cards objectives longterm revenue growth include 1 broaden “optical memory” “om” products range address lowerend applications characterized higher price sensitivity 2 diversify om products effectively penetrate industrial commercial markets 3 expand hardware product offering address new markets add value current offerings 4 increase om product revenues selling application software integrated solutions table presents condensed consolidated revenues excluding intercompany transactions recorded us german operations thousands revenues recorded us operations generally small number government customers located throughout world revenues recorded german operations mainly relatively large number commercial customers historically largest purchaser lasercard products us government contractor anteon international corporation anteon valueadded reseller var company anteon us government contractor lasercard product sales us department homeland security dhs us department state dos us department defense dod government canada government contracts anteon dhs purchases green cards dos laser visa bccs dod purchases automated manifest system cards canadian government purchases permanent resident cards encompassing programs company’s product sales anteon represented 31 72 total revenues fiscal year 2006 2005 2004 another unaffiliated var laser memory card spa italy accounted 31 26 22 company’s total revenues fiscal year 2006 2005 2004 mainly secure id card programs italy revenues major government programs shown percentage total revenues government italy company received orders cie cards carta d’identità elettronica pse cards permesso di soggiorno elettronico card issuance infrastructure fully developed national id card system functions designed cie pse card orders could ramp toward full implementation level could potentially result annual revenues 40 million two national id programs fully implemented backlog programs totaled 25 million march 31 2006 deliverable june 2006 company believes card revenue programs amount 20 million 30 million fiscal year ending march 31 2007 although significant incremental shipments beyond backlog expected quarter ending june 30 2006 us laser visa border crossing cards bccs green cards us department homeland security dhs important part company’s revenue base programs company recorded card revenues 98 million fiscal year 2006 58 million fiscal year 2005 48 million fiscal year 2004 company currently delivering orders placed prior expiration us government subcontract november 2005 backlog march 31 2006 programs deliverable august 2006 totaled 37 million company expects receive purchase order new subcontract prior last shipment orders hand although assurance given fiscal year 2006 shipments subcontract canada’s permanent resident cards totaled 2 million backlog march 31 2006 19 million deliverable june 2007 delivery rate subject increase decrease customer request fiscal year 2006 company recorded revenue 17 million national id card program middle eastern country shipments made first six months fiscal year january 2006 company entered separate 11 million contract supply secure national id cards middle eastern government national id card program supply installation support associated card personalization equipment consumables software deliveries expected approximately oneyear period prime contractor elects place series ten purchase orders cards issued adult citizens national identity purposes feature latest advancements identity theft protection provided optical idlock™ combination highlysecure lasercard® optical memory technology embedded hologramhd™ new highdefinition “photographic quality” etched image subcontract first time lasercard corporation assumed responsibility supplying installing personalization hardware oversight card personalization process quality fully personalized cards including printing cardholder information encoding data embedded hologramhd revenue recognized cards issued personalization entire infrastructure called contract installed accepted company anticipates accomplished first six months fiscal year 2007 contract’s first release valued 14 million shipped prior end fiscal year 2006 included backlog revenue recorded revenue recorded release cost items included deferred contract costs company’s consolidated balance sheets effective april 3 2004 company sold secondsource cardmanufacturing license including equipment training support global investments group based auckland new zealand card manufacturing slovenia began receiving cash payments revenue arrangement begin recognized remaining term agreement beginning equipment accepted training completed date dependent gig providing facility slovenia discussed “license fees revenues” company plans invest 9 million additional capital equipment leasehold improvement expenditures facilities forecasts justify investment expenditures could occur throughout next twelve months fully discussed “liquidity capital resources” revenues fiscal year ended march 31 2006 company’s total revenues 399 million compared 285 million fiscal year 2005 17 million fiscal year 2004 product revenues company’s total revenues consisted sales three segments 1 optical memory cards 2 optical card drives drive accessories maintenance 3 specialty cards card printers well miscellaneous items product revenues 399 million fiscal year 2006 285 million fiscal year 2005 17 million fiscal year 2004 license revenues earned fiscal years 2006 2005 2004 following table presents product revenue segment thousands except percentages following table presents optical memory card revenue major program thousands optical memory card revenue increased 62 fiscal year 2006 compared fiscal year 2005 due mainly increases card unit volume us italian programs well increases programs optical memory card revenue increased 30 fiscal year 2005 compared fiscal year 2004 due mainly increase card unit volume italian program well increases programs except decrease volume canadian “maple leaf” permanent resident cards company anticipates annual growth rates averaging 50 segment next several years including 62 growth fiscal year 2006 driven growth current programs augmented addition new programs significant change optical card drive revenue fiscal year 2006 compared fiscal year 2005 25 million decrease fiscal year 2005 compared fiscal year 2004 due unusually large order 1000 drives us department homeland security shipped fiscal year 2004 company anticipate derive significant profits future drive sales prices set near manufacturing cost order promote optical memory card sales specialty cards printers revenue 107 million fiscal year 2006 mostly unchanged 102 million recorded fiscal year 2005 first year company operated segment company anticipates growth less 10 segment fiscal year 2007 license fees revenues license revenues fiscal year 2006 fiscal year 2005 fiscal year 2004 company sold license effective april 3 2004 global investments group gig based auckland new zealand card manufacturing slovenia agreement provides payments company 14 million 20year license fiveyear training support package followed 15 million paid 1 million annually ongoing support additional years additionally company sell approximately 12 million worth required manufacturing equipment installation support new facility built gig provide targeted initial manufacturing capacity 10 million optical cards annually march 31 2006 company acquired 59 million equipment classified equipment held resale consolidated balance sheet company received 205 million payments called agreements consisting partial payment equipment training 65 million 14 million license fee support another approximately 59 million overdue gig recently committing complete payment end june company begun investigate alternative courses action gig fail make payment 205 million company received 185 million recorded advance payments customer 2 million licensing fee recorded deferred revenue classified long term liabilities within consolidated balance sheets addition 41 million discussed gig pay company royalties card produced license territories covered license include european union eastern european regions gig exclusive marketing rights certain territories performance goals maintain rights company assign person site license term assist quality security operational procedures mutual goal facility cards made facility conform company’s standards company also retains rights utilize 20 new facility capacity backup capacity buffer augment card manufacturing facilities mountain view california german subsidiary granting license gig establishes potential second source supplier optical memory cards existing prospective customers may request multiple sources cards agreement contains various elements including card manufacturing license sale installation equipment training ongoing support contingent payments sale materials royalty payments cards manufactured accordance eitf 0021 card manufacturing license sale installation equipment training ongoing support accounted one unit accounting since company unable determine evidence fair value undelivered items accordingly revenues arrangement deferred recognized based predominant undelivered item ongoing annual support manufacturing equipment remainder 20year license period beginning equipment accepted training completed date dependent gig providing facility slovenia pursuant ftb 901 “accounting separately priced extended warranty product maintenance contracts” revenue recognized ratably remaining term agreement company also defers direct incremental expenses associated building card manufacturing equipment delivery services revenue deferred company recognize expenses company recognizes related revenue backlog march 31 2006 backlog lasercard® optical memory cards totaled 83 million scheduled delivery fiscal year 2007 compared 09 million march 31 2005 41 million march 31 2004 addition backlog bundled order optical memory cards readwrite drives card printers software totaled 14 million march 31 2006 company customers generally place orders severalmonth period variations order placement single customer materially affect backlog result relative size company’s backlog reliable indicator future sales revenue trends company significant backlog readwrite drives addition backlog challenge card design plastikkarten gmbh march 31 2006 specialty cards printers totaled 08 million euros approximately 10 million compared 12 million euros approximately 16 million march 31 2005 contract develop conventional nonoptical card production facility totaled 07 million euros approximately 08 million march 31 2006 compared 08 million euros approximately 1 million march 31 2005 circumstances estimates costs complete project cannot reasonably estimated assured loss incurred percentageofcompletion method based zero profit margin rather completedcontract method used precise estimates made therefore revenue contract conventional nonoptical card production facility contract booked zero profit margin basis total profit contract booked completion probably fiscal year 2008 gross margin following table represents gross margin absolute amount percentage segment thousands except percentages optical memory cards optical memory card gross margin vary significantly based upon changes average selling price production sales volumes mix card types production efficiency yields changes fixed costs unit volume affects gross margin due absorption fixed manufacturing costs increase optical memory card gross margin 46 revenue fiscal year 2006 compared 26 revenue fiscal year 2005 mainly due 49 increase production unit volume 64 increase sales unit volume minimal increase fixed costs also augmented increases production efficiency yields 30 sales unit volume increase fiscal year 2005 compared fiscal year 2004 result increase gross margin due largely increase fixed costs increase card manufacturing capacity anticipated orders cards made newly introduced sheetlamination process optical card drives except large readwrite drive order us government third quarter fiscal year 2004 readwrite drive gross profits negative inclusive fixed overhead costs due low sales volume company’s policy price drives close manufacturing cost promote card sales company anticipates readwrite drive negative gross margins continue future unless sales volume sufficient cover fixed costs company believes sales volume increase fiscal year 2007 resulting positive gross margin 10 fiscal year 2005 company incurred approximately 03 million costs convert model 780 model q600 drives negative gross profit decreased year similar cost fiscal year 2006 specialty cards card printers gross margin specialty cards card printers 25 fiscal year 2006 2005 fiscal year 2005 first year company operated segment historically quarterly gross margin ranged 21 31 operating expenses following table presents operating expenses thousands selling general administrative expenses sga expenses essentially flat fiscal year 2006 compared fiscal year 2005 even company’s revenues increased almost 40 fiscal year 2006 sga expenses increased due 07 million management bonus accrual decreased almost every spending category addition 02 million exchange rate fluctuations debt incurred fiscal year 2005 repeated fiscal year 2006 52 million increase fiscal year 2005 compared fiscal year 2004 includes 28 million acquired german companies 1 million additional costs legal accounting auditing cost compliance assessing internal control financial reporting mandated section 404 sarbanesoxley act 2002 04 million increased marketing selling customer service expenditures 02 million exchange rate fluctuations debt subsequently extinguished 03 million occupancy costs 02 million increases investor relations expenditures 03 million miscellaneous expenses company believes sga expenses fiscal year 2007 higher fiscal year 2006 levels mainly due increases marketing selling expenses implementation costs new enterprise resource planning erp system research engineering expenses company continuing efforts develop new optical memory card features structures including various sheetlamination card structures insertion contactless chips radio frequency rf capability optichip™ ovd optically variable device products associated media development enhanced optical memory card readwrite drives readonly drives readers new software products effort provide new products stimulate optical memory card sales growth example company recently developed prototype lasercard® handheld reader evaluated valueadded resellers company anticipates ongoing research engineering efforts result new enhanced card capabilities productionmodel readonly drives advanced security features lower manufacturing costs however assurance product development efforts successful features important company’s existing future optical memory card markets decrease spending fiscal year 2006 compared fiscal year 2005 primarily due completion major spending first prototype lasercard® portable reader coupled phases new card media development project completion card material projects increase spending fiscal year 2005 compared fiscal year 2004 mainly due expenditures acquired german entity increases expenses anticipated fiscal year 2007 development productionmodel readonly drives optical memory card media development card hardware related programs income net total net income fiscal year 2006 471000 including 583000 interest income partially offset interest expense 80000 32000 miscellaneous expenses net miscellaneous income total net income fiscal year 2005 240000 interest income total net income fiscal year 2004 176000 consisting 269000 interest income offset 93000 expense recorded marktomarket fair value common stock options warrants issued december 2003 increase interest income fiscal year 2006 compared fiscal year 2005 primarily due income invested funds decrease interest income fiscal year 2005 compared fiscal year 2004 primarily due reduction invested funds income taxes company recorded income tax expense 443000 fiscal year 2006 139000 fiscal year 2005 71 million fiscal year 2004 company’s income tax expense fiscal year 2006 primarily due federal state alternative minimum taxes company’s income tax expense fiscal year 2005 mainly due federal alternative minimum tax payments gig received fiscal years 2005 recorded income federal tax return even though recorded income us generally accepted accounting principles income offset net operating loss carryforwards generated previous years however alternative minimum taxes due income company’s income tax expense fiscal year 2004 due increasing valuation allowance equal remaining balance company’s deferred tax asset fiscal year 2004 income tax expense cash item mean company owed income taxes rather longer could demonstrate future would likely able utilize tax benefits previously generated net operating losses methodology determining realizability deferred tax asset critical accounting policy described heading critical accounting policies item 7 summary methodology considers positive negative evidence regarding companys ability generate sufficient future taxable income realize deferred tax assets due companys cumulative tax loss history threeyear period ending march 31 2004 income statement loss history five quarters ended march 31 2004 difficulty forecasting timing future revenue could lead positive income financial statements taxable income evidenced deviations achieved revenues expected revenues taking account newness certain customer relationships company determined necessary increase valuation allowance sfas 109 full amount deferred tax asset estimated future revenue taking account booked orders would generate sufficient taxable income realize deferred tax assets company taxable income future unexpired net operating loss income tax carryforward amounts utilized reduce otherwise required income tax payments future tax expense full amount net deferred tax asset currently 195 million future years unless valuation allowance reduced company profitable income tax purposes company utilize available net operating loss carryforwards reduce income tax would otherwise owe meaning federal effective tax rate zero except alternative minimum taxes liquidity capital resources following table summarizes cash equivalents investments march 31 thousands cash equivalents investments increased fiscal year 2006 primarily due 5 million generated operating activities proceeds exercise employee stock options amount 44 million offset purchase property equipment 23 million following table displays sources uses cash activity thousands cash provided operations 5 million fiscal 2006 primarily consists 37 million received gig net equipment purchased contract plus 43 million net income plus noncash charges depreciation excess obsolete inventory warranty reserves stockbased compensation tax benefits related stock options additionally advance payments received customers totaled 61 million offset changes accounts receivable inventories deferred contract costs equipment held resale accounts payable accrued liabilities 56 million net cash used investing activities 113 million fiscal 2006 consisted increase investments 89 million capital expenditures approximately 24 million net cash provided financing activities fiscal 2006 44 million consisted net proceeds sale common stock company’s stock plans company believes estimated level revenues customer advance payments next 12 months sufficient generate cash operating activities period however quarterly fluctuations expected operating cash flows could negatively impacted significant degree either company’s largest us government programs delayed reduced canceled extended italian cie card program grow planned internally programs replaced card orders sources income increases product revenues licenses keep pace increased marketing capital expenditures company established line credit current plans company may negotiate line credit becomes appropriate although assurance made financing would available favorable terms needed result 08 million net income recorded fiscal year 2006 company’s accumulated deficit decreased 271 million 264 million stockholders’ equity increased 320 million 267 million result net income issuance common stock net cash used investing activities 113 million fiscal year 2006 compared cash provided investing activities 25 million fiscal year cash used investing activities 105 million fiscal year 2004 purchases property equipment accounted 23 million fiscal year 2006 33 million fiscal year 2005 4 million fiscal year 2004 purchase two german companies challenge card design plastikkarten gmbh cards gmbh fiscal year 2004 accounted 31 million cash used investing activities balance changes mainly due maturities purchases investments company considers highly liquid investments consisting primarily commercial paper discount notes us government bonds original remaining maturities three months less date purchase cash equivalents investments original remaining maturities three months one year date purchase classified shortterm investments original remaining maturities one year date purchase classified longterm company determines length investments considering cash requirements yields available type investment considered company management also determines appropriate classification debt equity securities time purchase reevaluates classification investments balance sheet date march 31 2006 company 214 million classified shortterm investments longterm investment compared 62 million classified shortterm investments 63 million classified longterm investments march 31 2005 auction rate securities accounted availableforsale interestbearing securities accounted heldtomaturity company made capital equipment leasehold improvement purchases approximately 23 million fiscal year 2006 compared approximately 33 million fiscal year 2005 4 million fiscal year 2004 companys current card capacity assuming optimal card type mix estimated approximately 16 million cards per year company plans purchase additional production equipment series steps deemed appropriate company also increasing production capacity cards new structures used programs canada italy middle eastern country addition investment used expansion company plans make additional capital expenditures expected yield cost savings quality improvements purposes company plans use cash hand cash generated operations fund capital expenditures approximately 9 million equipment leasehold improvements card production readwrite drive tooling assembly general support items customer orders justify investment expenditures could occur throughout next twelve months march 31 2004 company completed acquisition two related german card companies challenge card design plastikkarten gmbh rastede germany cards gmbh ratingen germany collectively acquired german entities including sales operations united states korea company purchased shares acquired german entities five shareholders purchased assets united states sales operation partnership comprised shareholders acquisition transaction company agreed assume 05 million euros debt pay approximately 48 million euros cash consisting approximately 23 million euros payable closing remaining approximately 25 million euros payable five equal annual installments business certain assets subsequently january 2005 company determined would best interest eliminate debt pay net present value debt selling shareholders acquisition agreement specified purchase price adjusted based upon assets purchased additional liabilities assumed resulted reduction purchase price approximately 04 million euros march 31 2004 present value net total purchase price 55 million purchase price determined negotiation company shareholders taking account matters value tangible assets going concern value business operations acquired german entities four shareholders entered new employment agreements acquired german entities fifth shareholder resident us entered employment agreement registrant addition salaries employment agreements provide commission based upon future results operations acquired german entities could much 38 million euros four year period company used portion available cash fund acquisition shareholders previous material relationship company affiliate subsidiaries although company substantial business acquired german entities recent years one acquired german entities owns plant rastede germany together associated equipment manufactures plastic cards featuring contactless ic chip technology high resolution printing company intends continue use facility equipment produce cards well enhance facility produce lasercard® optical memory cards germany enable company manufacture cards featuring four key id card technologies optical memory contact ic chip contactless rfid magnetic stripe either singly combination along highsecurity features net cash provided financing activities 44 million fiscal year 2006 versus 39 million used financing activities fiscal year 2005 111 million provided financing activities fiscal year 2004 proceeds sales common stock company’s stockoption stockpurchase plans 44 million fiscal year 2006 03 million fiscal year 2005 17 million fiscal year 2004 fiscal year 2005 company used cash amount 36 million retire debt attributable acquisition challenge card design gmbh cards gmbh march 31 2004 fiscal year 2004 financing activities consisted proceeds equity private placement described following paragraph company received net proceeds 94 million net fees expenses issuance sale december 2003 791172 shares common stock options purchase 122292 shares common stock warrants purchase 174057 shares common stock aggregate purchase price 101 million private placement purchase price common stock 1276 per share 15 discount fiveday average price december 23 2003 options exercise price 1651 per share ninemonth life warrants exercise price 1726 per share life five years options warrants valued 245000 984000 respectively based blackscholes calculation december 23 2003 pursuant provisions eitf issue 0019“accounting derivative financial instruments indexed potentially settled companys stock” eitf 0019 recorded values longterm liabilities balance net proceeds accounted additional paid capital eitf 0019 company markstomarket fair value options warrants end accounting period end fiscal year 2004 third quarter resulted options warrants valued 195000 916000 respectively decrease valuation options warrants december 23 2003 quarter end 118000 recorded income accompanying condensed consolidated statement operations resulted decrease company’s stock price february 6 2004 company investors entered amendment original agreement resulted reclassification options warrants equity amendment clarified options warrants granted financing may exercised time registration statement covering resale underlying shares effective available instance company would deliver investors shares common stock whose resale currently registered effective date amendment options warrants reclassified equity additional paidincapital result increase value options warrants previous quarter end amendment date due increases company’s stock price company recognized expense 211000 included expense condensed consolidated statement operations fourth quarter fiscal year 2004 january 23 2004 company filed s3 registration statement securities exchange commission covering resale common stock issued issuable financing securities exchange commission declared registration statement effective april 28 2004 company subject certain indemnity provisions included stock purchase agreement entered part financing associated registration morgan keegan company inc acted companys exclusive placement agent transaction company used approximately 3 million net proceeds private placement connection purchase ccd cm fiscal year 2005 company commenced share repurchase program 350000 shares common stock could purchased company time nasdaq stock market transactions aggregate amount exceeding 3 million second quarter fiscal year 2005 company used cash 655000 purpose since terminated program without activity debt financing activities fiscal year 2006 company acquired bank debt amount 14 million fiscal year 2004 acquisition challenge card design plastikkarten gmbh cards gmbh germany company extinguished debt fiscal year 2005 addition company incurred debt net present value future payments acquisition 22 million transaction march 31 2004 company extinguished debt fiscal year 2005 following table provides summary effect liquidity cash flows company’s contractual obligations march 31 2006 thousands offbalance sheet arrangements company offbalance sheet arrangement reasonably likely current future effect financial condition changes financial condition revenues expenses results operations liquidity capital expenditures capital resources material investors item 7a item 7 managements discussion analysis financial condition results operations forwardlooking statements used discussion words expects anticipates believes estimates similar expressions intended identify forwardlooking statements include statements expected benefits companys direct control readwrite manufacturing facility including lower cost drives customeroptimized drive systems drive systems advanced security features adequacy inventory anticipated orders companys us government subcontract expectations regarding revenues margins expenses capital resources capital expenditures companys deferred tax asset valuation allowance effects readwrite drive prices gross profits readwrite sales companys plans expectations regarding growth manufacturing capacity expected card yields therefrom expectations regarding market growth product demand including demand companys cards laser eyesurgery systems expected emergence opportunities companys products italy india china turkey canada saudi arabia subject risks uncertainties could cause actual results differ materially projected risks uncertainties include limited risks discussed well risks relating companys ability develop maintain relationships vars licensees risks associated business foreign countries unpredictability customer demand products manufacturing difficulties complications associated increasing manufacturing capacity reliance single source limited source suppliers components raw materials customer concentration lengthy sales cycles costs uncertainties associated protection intellectual property impact alternative technologies competitive products matters discussed section entitled factors may affect results item 1 report forwardlooking statements speak date hereof company expressly disclaims obligation undertaking release publicly updates revisions forwardlooking statements contained herein reflect change companys expectations regard thereto change events conditions circumstances statement based results operationsfiscal 2001 compared fiscal 2000 fiscal 1999 revenues companys total revenues fiscal 2001 20877000 compared 17092000 fiscal 2000 15850000 fiscal 1999 product revenues sales lasercardr optical memory cards related products totaled 18661000 fiscal 2001 compared 16948000 fiscal 2000 15102000 fiscal 1999 increases product revenues periods due primarily sale optical memory cards two us government card programs described fiscal 2001 company sold lasercard products provided services approximately 40 customers nine states 20 foreign countries companys card shipments customers totaled approximately 46 million optical memory cards fiscal 2001 45 million cards fiscal 2000 4 million cards fiscal 1999 companys principal lasercard market today involves highsecurity counterfeitresistant tamperresistant cards digital governance defined utilization digital information technology nation state region municipality agency institution within market companys largest customer lasercard optical memory cards united states government representing 43 companys fiscal 2001 revenues predominantly result two card programsus immigration naturalization service ins permanent resident cards green cards us department state dos border crossing cards laser visas nongovernment customer visx incorporated representing 26 companys fiscal 2001 revenues indicated new lower cost laser eyesurgery equipment employ lasercard drives system activation although lasercardequipped surgery systems use companys optical memory cards change reduction eye surgeries due current economic conditions adverse effect companys revenue levels optical memory card digital governance programs appear emerging countries include electronic national identification cardsocial services cards italy building construction permit cards china motorvehicle registration cards several states india import permitimport duty collection cards turkey company believes optical memory cards resident immigrants canada identification cards saudi arabia also market opportunities addition using marketing staff company utilizes valueadded reseller var companies licensee companies development commercial markets applications lasercard products product sales vars licensees include companys optical memory cards companys system software optical card readwrite drives addon peripherals made companies equipment adding digitized photo fingerprint hand template signature cards varslicensees may add application software personal computers pcs peripherals resell products integrated data systems order upgrade customer base company continuing efforts recruit new varslicensees eliminate nonproductive vars company provides customer technical support system software assist vars licensees optical cardrelated software important factor developing commercial markets optical memory cards companys system software consists optical card interface softwaredevice drivers file systems software development tools demonstration software application software program date companys software development completed concurrent establishment technological feasibility accordingly software development costs charged research development expense accompanying statements income companys vars andor customers develop application software specific enduser applications several vars written optical card software programs applications automobile warranty maintenance records cargo manifesting digital optical key systems admissionsid data logging systems various medicalrelated applications health history cards company sells application software program lasercard personalization printing encoding personal data optical memory cards used conjunction card readwrite drive produced company connects personal computer readwrite drive integrated pc logical drive driveletter access manner floppy disk drives price performance availability readwrite drives factors commercialization optical cards company selling readwrite drives less three thousand dollars per unit units generally include companys interface softwaredevice drivers subsequent fiscal 2001 year end company reduced selling price readwrite drives 20 typical purchase quantities fiscal 2000 company established capabilities readwrite drive assembly design united states previously company purchased assembled drives licensee japan nippon conlux co ltd conlux sole supplier drives company completed acquisition cash conluxs readwrite drive manufacturing facility manufacturing tooling equipment etc transferred facility mountain view california producing drives locally initially company purchased sets parts conlux assembly united states company qualifying vendors parts purchases readwrite drives creation readwrite drive production capability reduced pretax profits fiscal 2000 1 million result increased cost sales research engineering expenses also related capital investments totaled 1 million compared fiscal 1999 investment parts subassembly inventory drives totaled 2 million fiscal 2000 readwrite drive assembly design companys direct control lower cost drives customeroptimized drive systems drive systems advanced security features expected developed company maintains inventory readwrite drive parts finished drives believes adequate meet customer demand however interruption supply readwrite drive parts difficulties encountered readwrite drive assembly could cause delay shipments drives optical memory cards possible loss sales would adversely affect operating results purchases readwrite drive parts made quantities exceed historical annual sales rate therefore based upon last years sales quantity company oneyears supply readwrite drive parts hand company purchases readwrite drive parts anticipated readwrite drive demand takes consideration ordertodelivery lead times vendors economic purchase order quantity parts march 31 2001 readwrite drive parts finished goods inventory totaled 22 million fiscal 2002 company receive additional 125 million readwrite drive parts order approximately 2000 readwrite drives assembled inventory company believes market readwrite drives however since lower cost readwrite drive designs may become available company parts utilized portion inventory could written company determines market price drives would need reduced readwrite drive design containing parts license revenues license fees 2178000 fiscal 2001 119000 fiscal 2000 700000 fiscal 1999 fiscal 2001 license revenues consisted 713000 earned license allows licensee italy purchase parts kits company assemble readwrite drives parts kits b 1465000 license revenue sale patent license conjunction settlement patent litigation see item 3 legal proceedings fiscal 2000 license revenues consisted revenue earned license allow licensee italy assemble readwrite drives parts kits provided company fiscal 1999 license revenues included 200000 agreement provide technical information 500000 together prioryear payment completed purchase nonexclusive license optical memory card distribution switzerlandbased company optical memory card distribution licenses grant right purchase cards companys favorable pricing revenue license sales past three years derived single upfront payments therefore revenue considered derived nonrecurring transactions license fees received company unconditional nonrefundable company rely license revenue finance operations backlog march 31 2001 backlog lasercard optical memory cards consisting firm card orders releases card supply contracts approximately 62 million amount 77 us government green cards laser visas us government subcontract purchase optical memory cards subcontract announced fiscal 2001 first quarter authorized maximum 81 million 24 million cards period five years subcontract received company lasercard var us government prime contractor competitively bid government procurement contract subcontract company supply 24 million lasercard optical memory cards average selling price 323 per card subcontract states us government anticipates placing orders units least one million optical memory cards per order subcontract provides initial oneyear contract period four additional oneyear contract options shipments commenced september 2000 155 million cards shipped march 31 2001 subcontract margins gross margin product sales 45 fiscal 2001 fiscal 2000 49 fiscal 1999 gross profit readwrite drive sales increased 250000 fiscal 2001 compared fiscal 2000 due higher sales volume may 2001 fiscal year end company reduced selling prices readwrite drives 20 typical sales quantities reduce gross profit readwrite drive sales fiscal 2002 increase quantity sales required achieve gross profits readwrite drive sales currently companys priority distributing readwrite drives marketplace maximizing perunit gross profit readwrite drives company continues depend gross profit generated optical memory card sales gross profit optical memory card sales increased 370000 fiscal 2001 compared fiscal 2000 due mainly improvements card manufacturing resulted higher quality output lower cost fiscal 2000 compared fiscal 1999 readwrite drive gross profit decreased 229000 due following readwrite drive selling prices reduced stimulate sales b readwrite drive costs increased due yendollar exchange rate staffing overhead costs inhouse production readwrite drives gross profit cards increased approximately 540000 fiscal 2000 compared fiscal 1999 due higher card sales volume income expenses selling general administrative expenses sga expenses 4134000 fiscal 2001 3996000 fiscal 2000 3698000 fiscal 1999 138000 increase fiscal 2001 compared fiscal 2000 due increase general corporate compensation expense 238000 68000 expense company 401k matching 97000 increase general expenses including insurance partially offset 59000 decrease bad debt expense 106000 decrease patent amortization expense 100000 expenditure fiscal 2000 thirdparty market study 298000 increase spending fiscal 2000 compared fiscal 1999 consists mostly 170000 marketing customer service 117000 increase patent amortization expense company believes sga expenses fiscal 2002 fiscal 2001 levels mainly due increases marketing expenses general increases research engineering expenses research engineering expenses 2370000 fiscal 2001 compared 1299000 fiscal 2000 456000 fiscal 1999 increase spending fiscal 2001 due readwrite drive manufacturing engineering product development company anticipates expenses continue increase fiscal 2002 primarily due optical card readwrite drive development efforts income expense total net income fiscal 2001 612000 compared 388000 fiscal 2000 268000 fiscal 1999 interest income included 612000 2001 383000 2000 319000 1999 also 1999 loss 44000 miscellaneous items interest expense fiscal 2001 1000 fiscal 2000 7000 fiscal 1999 pretax profits pretax profits fiscal 2001 reduced 750000 compared fiscal 2000 increases readwrite drive research engineering expenses 1 million partially offset 250000 increase readwrite drive gross profit income taxes company recorded 1833000 income tax benefit fiscal 2001 versus 2537000 income tax benefit fiscal 2000 128000 income tax expense fiscal 1999 income tax benefit fiscal 2001 included credit 2407000 due change federal deferred tax asset discussed net federal alternative minimum taxes partially offset 220000 state tax expense 354000 foreign income taxes income tax benefit fiscal 2000 included credit 2618000 due change deferred tax asset partially offset 81000 expense alternative minimum taxes payable company valuation allowance reduces deferred tax asset company believes likely least portion income tax asset realized therefore reduced valuation allowance timing differences certain items included book income items included income tax returns therefore tax payments credits often occur different periods income tax expense benefit included statement operations liquidity capital resources march 31 2001 company cash equivalents shortterm investments 11608000 current ratio 44 1 longterm debt net cash provided operating activities 7080000 fiscal 2001 2782000 fiscal 2000 4292000 fiscal 1999 major categories comprising increases company believes current level revenues sufficient generate cash operations expenses losses would occur companys largest us government programs delayed canceled extended replaced card orders sources income increases product revenues licenses keep pace increased marketing expenditures company established line credit current plans company may negotiate line credit becomes appropriate although assurance made financing would available favorable terms needed result 6487000 profit recorded fiscal 2001 companys accumulated deficit reduced 9789000 stockholders equity increased 26322000 net cash used investing activities 2350000 fiscal 2001 8539000 fiscal 2000 2131000 fiscal 1999 amounts include purchases property equipment discussed 2202000 fiscal 2001 1986000 fiscal 2000 1446000 fiscal 1999 increases patents intangibles 164000 fiscal 2001 1150000 fiscal 2000 685000 fiscal 1999 company considers highly liquid investments consisting primarily commercial paper original maturi ties three months less cash equivalents investments original maturities three months less one year classified shortterm investments fiscal 2000 company began investing shortterm investments consisting primarily commercial paper shortterm investments commercial paper net maturities totaled 5387000 march 31 2001 compared 5403000 march 30 2000 cash plus shortterm investments increased 11608000 march 31 2001 compared 8221000 march 31 2000 optical memory card production company added capital equipment leasehold improvements approximately 15 million fiscal 2001 compared approximately 13 million fiscal 2000 depending card type companys card production capacity approximately 7 9 million cards per year company believes justified business conditions could reach capacity approximately 11 million cards per year december 31 2001 additional investment 2 million company plans purchase additional production equipment series steps optical memory card orders expand justify production capacity increases rate 25 million cards per year addition investment used expansion company expects make additional capital expenditures cost savings quality improvements purposes company believes next years capital expenditures could minimum 15 million per year card production equipment automatic inspection equipment connection readwrite drive manufacturing design company added capital equipment leasehold improvements approximately 665000 fiscal 2001 compared 650000 fiscal 2000 company expects make additional capital investments made fiscal 2002 net cash used financing activities 1327000 fiscal 2001 compared net cash 509000 provided financing activities fiscal 2000 1075000 fiscal 1999 consisting equity items financing activities consisted proceeds sales common stock companys stockoption stockpurchase plans offset purchases common stock repurchase program discussed sales common stock plans amounts 1486000 fiscal 2001 509000 fiscal 2000 1075000 fiscal 1999 debt financing activities fiscal 2001 2000 1999 fiscal 2001 company announced share repurchase program 200000 shares common stock could purchased company time nasdaq stock market transactions aggregate amount exceeding 3 million march 31 2001 company purchased 194850 shares common stock cost 2813000 leaving balance remaining 187000 available future stock purchases program item 7a item 7 management’s discussion analysis financial condition results operations annual report form 10k including following management’s discussion analysis contains forwardlooking information read conjunction consolidated financial statements notes consolidated financial statements included elsewhere annual report form 10k purpose statements contained report statements historical facts may deemed forwardlooking statements words “believes” “plans” “anticipates” “expects” “will” similar expressions intended identify forwardlooking statements actual results may differ materially plans intentions expectations disclose forwardlooking statements make included important factors heading “risk factors” item 1a among factors believe could cause actual results differ materially forwardlooking statements make obligated publicly update forwardlooking statements whether result new information future events otherwise overview headquartered mountain view california lasercard corporation together subsidiaries leading provider secure id solutions governments commercial clients worldwide develop manufacture integrate lasercard® optical memory cards “omcs” encoders peripherals smart specialty cards biometrics modular software cards systems used various applications including citizen identification government service delivery facility access cards systems used countries around world united states germany united kingdom switzerland angola italy india costa rica kingdom saudi arabia demanding applications including government service provision facility access lasercard’s whollyowned german subsidiary ccd offices rastede ratingen germany manufactures offers wide range high quality specialty cards plus card personalization id management solutions ccd cards brands majority revenue sales products services partners value added resellers “vars” system integrators “sis” generally specific experience development markets applications lasercard products sales staff located california washington dc area germany whose principal role developing supporting vars sis reseller channel revenues derived mainly advanced technology cards used government identity programs optical memory contact contactless rfid cards high quality specialty cards applications major event badging access control remainder revenues comes sale enabling services consulting custom application development integration id management solution modules data capture card personalization quality assurance equipment sales knowledge transfer licensing reseller partners generally add value form application software development system integration installation training support services continuing program recruit new vars sis strategically important markets emphasize selling secure credentials government programs individual identification offer range products including cards contain magnetic stripe contactless radio frequency identification “rfid” contact ic chip optical memory holograms biometric identification combination features allows us sell wide range customers around world omcs proprietary product lasercard hold 20 us patents addition years knowhow manufacture use cards encoding devices readwrite drives systems enabling services software provides basis highly leveraged contribution margins omc segment therefore strategy sell card technologies goal upgrade programs optical memory possible sell encoders readwrite drives near direct manufacturing cost enable sales optical memory cards often results negative gross profits drives systems enabling services segment equipment volume allow contribution necessary cover fixed costs sizable enabling services even higher volume gross profit margin encoders readwrite drives probably exceed 10 provide enabling services strategy promote card sales examples include furnishing equipment training management card issuance system kingdom saudi arabia national id card program complete data collection data base card issuing system costa rica foreign resident id card program national id card program angola major near term growth potential lasercard optical memory cards governmentsponsored identification programs several countries since governmental card programs typically rely policymaking turn subject technical requirements budget approvals political considerations assurance programs implemented expected include optical cards products principal strategies longterm revenue growth maintain leverage expand existing optical memory card user community national regional governments worldwide increase revenues offering enabling services consulting custom software development integrated secure id solutions include data capture personalization quality assurance modules increase market share specialized cards associated id management solutions major event badging access control university student id currently optical memory card segment revenues mainly derived following programs us dhs green card programs national id card kingdom saudi arabia three statelevel vehicle registration card programs india foreign resident id card program italy foreign resident id card program costa rica also emerging programs national citizen id card program italy government agency card program italy recently announced national id card program angola may invest 2 million fiscal year 2010 additional capital equipment leasehold improvement expenditures optical memory card specialty card production capacity manufacturing enhancement facilities necessary increased volumes manufacturing efficiency accounting period purposes presentation label annual accounting period end march 31 quarterly accounting period ends june 30 september 30 december 31 fact operate report based quarterly periods ending friday closest month end fiscal year 2009 ended april 3 2009 fiscal year 2008 ended march 28 2008 fiscal year 2007 ended march 30 2007 consolidated results operations revenues table presents consolidated revenues recorded us german operations fiscal years ended march 31 thousands revenues recorded us operations generally derived small number government customers located throughout world revenues recorded german operations mainly relatively large number commercial customers emea including universities germany student identification cards organizers sporting events secure access cards major customers shown percentage total revenues fiscal years ended march 31 major government card programs shown percentage total revenues fiscal years ended march 31 kingdom saudi arabia national id program united states green cards programs less 10 foreign resident id card program costa rica various card programs italy canadian permanent resident cards national id card angola us green card program dhs important part revenue base recorded revenues 58 million fiscal year 2009 approximately 64 million prior two fiscal years dhs gradually reducing inventory current cards designed 1997 transitions infrastructure issue newly designed green cards attributed 9 decrease revenue fiscal year 2009 compared fiscal year 2008 january 2009 received purchase order approximately 8 million supply new advanced us permanent resident cards “green card” deliveries order expected completed fiscal 2010 another us government program bcc accounted approximately 02 million revenue past fiscal year redesigned keeping requirements western hemisphere travel initiative supplied another manufacturer revenues program totaled 1 million prior two fiscal years also supply secure national id cards kingdom saudi arabia recorded revenues 132 million 86 million 44 million program fiscal years 2009 2008 2007 respectively anticipate ongoing revenues range 50 100 million per year backlog march 31 2009 program totaled 09 million supply optical memory cards vehicle registration programs three states india revenues programs totaled 44 million 35 million 18 million fiscal years 2009 2008 2007 respectively expect ongoing orders range 30 million 40 million per year costa rica’s new foreign resident id card introduced june 2008 department immigration dgme selected lasercard’s tamperproof optical memory technology featuring layered security move designed bring costa rica’s dgme closer vision “regional standard” identity credentials facilitate cross border travel strengthened security across multiple countries americas also instrumental introduction new nationwide data capture facilities designed accelerate use new highly secure id card country’s 200000 legal foreign residents recorded revenue 32 million fiscal year 2009 program italy supplier optical card stock secure government identification programs starting citizen id card italian cie cards italian pse cards cse cards italian’s ministry justice id cards cie cards currently issued low volume believe conflicts cards’ validity period continues main hurdle initiation volume issuance march 2009 received order var laser memory card spa approximately 25 million foreign resident id cards special bilingual versions cie cards partially delivered quarter ended march 31 2009 meanwhile italian ministry justice id cards continue personalized issued ministry employees italy’s state printer prime contractor istituto poligrafico e zucca dello stato spa “poligrafico” recorded revenue 29 million 05 million 24 million fiscal years 2009 2008 2007 respectively italian programs backlog march 31 2009 various programs italy totaled 09 million subcontract canada’s permanent resident cards recorded revenue 18 million 28 million 12 million fiscal years 2009 2008 2007 respectively subcontract expired march 31 2009 small final order valued 03 million delivered june 2009 january 2008 government angola announced contract award dgmsistemas “dgm” luanda angola delivery complete id management system contract calls initial 8 million optical memory cards country’s new national citizen id program issued infrastructure built additional 12 million cards could issued later teamed dgm exclusive supplier cards project team members include unisys corporation nyse uis responsible systems integration valueadded reseller identicard sa portugal developed system architecture indefinite deliveryindefinite quantity subcontract includes 103 million products services provided lasercard including optical memory cards card personalization systems printer consumables five years recorded revenue 27 million card personalization equipment consumables fiscal year 2009 backlog march 31 2009 order includes 88 million optical memory cards card deliveries order expected begin second quarter fiscal year 2010 continue throughout fiscal year revenues total revenues consisted sales three segments 1 optical memory cards 2 drives systems enabling services 3 specialty cards card printers well times miscellaneous items total revenues fiscal years 2009 2008 2007 498 million 37 million 323 million respectively following table presents consolidated revenues segment fiscal years ended march 31 thousands except percentages following table presents optical memory card revenues major program fiscal years ended march 31 thousands optical memory card revenues fiscal year 2009 increased 88 million 40 compared fiscal year 2008 due increased volume kingdom saudi arabia’s national id card program italian government’s foreign resident card program costa rican permanent resident card program longer supply cards us government’s bcc program canadian government’s permanent resident card program expect growth fiscal year 2010 due implementation angola’s national id card program redesigned green card us new programs optical memory card revenues fiscal year 2008 increased 32 million 17 compared fiscal year 2007 due increased card sales volume kingdom saudi arabia’s national id card program canadian permanent resident card program vehicle registration program india offset decreased card unit volume italian card programs revenues drives systems enabling services segment fiscal year 2009 increased 17 million 102 compared fiscal year 2008 due implementation credential issuance system costa rica comprehensive endtoend solutions developed implementation regionalized model national id card program kingdom saudi arabia delivery card personalization equipment consumables complete id management system angola revenues drives systems enabling services segment fiscal year 2008 increased 01 million 11 compared fiscal year 2007 due delivery drives systems national id card program kingdom saudi arabia id programs italy specialty cards card printers revenues fiscal year 2009 increased 26 million 20 compared fiscal year 2008 due subsidiary’s focus innovations accreditation access control applications core customers including major sporting event operator partners serving majority german universities also delivered equipment consumables complete id management system angola weakening world economy probably negative effect portions specialty cards card printers segment specialty cards card printers revenues fiscal year 2008 increased 14 million 12 compared fiscal year 2007 attributable favorable effect eurodollar exchange rate approximately 11 increased orders major sporting event operator backlog customers generally place orders period several months year others place orders immediate fast turn delivery variations order placement single customer materially affect backlog result relative size backlog reliable indicator future revenue trends backlog optical memory cards march 31 2009 214 million 12 million specialty cards card printers significant backlog optical card drives systems enabling services march 31 2009 gross margin following table presents gross margin absolute dollar amounts percentage revenue segment fiscal years ended march 31 thousands except percentages omcs omc gross margin vary significantly based upon changes average selling price production sales volumes mix card types production efficiency yields changes fixed costs production unit volume greatly affects gross margin due absorption fixed manufacturing costs omc gross margin fiscal year 2009 43 omc revenue compared 35 omc revenue fiscal year 2008 combined favorable impact increased sales volume several major id card programs productivity improvements manufacturing cost reduction initiatives attributed increased gross margin depreciation amortization 17 million 18 million fiscal years 2009 2008 respectively noncash charge reserve obsolete inventory 03 million 005 million fiscal years 2009 2008 respectively optical memory card gross margin fiscal year 2008 35 omc revenue compared 25 omc revenue fiscal year 2007 increase omc gross margin mainly due 17 increase sales volume several major id card programs product mix depreciation amortization 18 million 17 million fiscal years 2008 2007 respectively drives systems enabling services except quarter ended june 30 2008 drives systems enabling services gross margin negative past three years inclusive fixed overhead costs due low sales volume policy price drives close direct manufacturing cost promote card sales resulting inability cover fixed costs current sales volumes segment also includes enabling services also lower margins optical memory cards increased costs associated implementation enabling services capabilities noncash charges approximately 01 million obsolete inventory 02 million writeoff obsolete equipment attributed negative gross margin segment albeit revenue increased 102 fiscal year 2009 compared fiscal year 2008 depreciation amortization approximately 02 million fiscal years 2009 2008 anticipate drives systems enabling services negative gross margins continue future unless equipment sales volume sufficient cover fixed costs material amount enabling services revenue gross margin decreased approximately 02 million despite improved sales fiscal year 2008 compared fiscal year 2007 due policy price drives close direct manufacturing cost promote card sales depreciation amortization approximately 02 million fiscal years 2008 2007 specialty cards card printers gross margin specialty cards card printers 27 revenue fiscal year 2009 compared 20 fiscal year 2008 longterm time material contract serbia concluded quarter ended march 31 2009 contributing approximately 11 overall gross margin segment productivity improvements manufacturing cost reduction initiatives also attributed increase due current economic conditions anticipate pressure selling prices specialty cards leading lower margins segment unless offset continuation increased revenues higher value printer systems products gross margins segment also harmed future compared fiscal year 2009 conclusion serbia contract may able mitigate fluctuations foreign exchange forward contracts may cause adverse impact foreign operations gross margin specialty cards card printers 20 fiscal year 2008 compared gross margin 21 fiscal year 2007 operating expenses following table presents operating expenses fiscal years ended march 31 thousands except percentages selling general administrative expenses “sga” sga expenses fiscal year 2009 increased approximately 02 million 1 compared fiscal year 2008 percentage revenue sga expenses 31 fiscal year 2009 compared 41 fiscal year 2008 selling marketing expenses related sales commissions new programs increased 1 million fiscal year 2009 compared fiscal year 2008 increase offset decreases consulting professional services approximately 09 million nonrecurring severance expense related retiring ceo fiscal year 2008 depreciation amortization approximately 08 million 06 million fiscal years 2009 2008 respectively anticipate total sga expenses net incentive expenses fiscal year 2010 incurred fiscal year 2009 sga expenses fiscal year 2008 increased 17 million 12 compared fiscal year 2007 percentage revenue sga expenses 41 fiscal year 2008 compared 42 fiscal year 2007 approximately 09 million increase due expenses relating retirement agreement ceo depreciation amortization approximately 06 million 05 million fiscal years 2008 2007 respectively research development expenses “rd” rd expenses fiscal year 2009 decreased 05 million 18 compared fiscal year 2008 percentage revenue rd expenses 5 fiscal year 2009 compared 8 fiscal year 2008 fiscal 2009 various rd projects realigned cost reductions implemented consistent ‘milestone’ based rd strategy continuing effort develop new optical memory card nonoptical card features structures including various composite card structures allow insertion contactless chips rf capability dualinterface contactcontactless optical memory ovd products marketdriven requirements also developing enhanced optical memory card readwrite drives increased reliability ease use integration new software products services effort provide new products stimulate optical memory card sales growth anticipate ongoing research development efforts result enhanced card features capabilities drives advanced security features andor lower manufacturing costs however assurance product development effort successful features important existing future optical memory card markets anticipate rd expenditures 04 million per quarter fiscal year 2010 rd expenses fiscal year 2008 decreased 02 million 7 compared fiscal year 2007 percentage revenue rd expenses 8 fiscal year 2008 compared 10 fiscal year 2007 impairment goodwill intangible assets march 31 2007 upon review annual impairment evaluation goodwill intangible assets determined estimated future cash flows purchase ccd insufficient justify carrying value goodwill based management’s decision suspend significant optical memory card production germany recorded noncash pretax impairment charge approximately 38 million writeoff goodwill indefinitelived intangible assets comply sfas 142 goodwill intangible assets income expense net following table presents income expense net fiscal years ended march 31 thousands income expense net interest income fiscal year 2009 decreased 05 million 59 compared fiscal year 2008 due decline interest rates weightedaverage 218 fiscal 2008 157 fiscal 2009 increase interest expense fiscal year 2009 007 million 96 compared fiscal year 2009 largely due effects premiums forward currency contracts loss fair value ars’ investments net gain fair value put option resulted approximately 03 million noncash charge fiscal year 2009 believe assumptions used ubs’ credit risk remain unchanged june 30 2010 recover loss future periods quarter ended june 30 2010 income expense mainly due losses gains foreign exchange fluctuations interest income fiscal year 2008 decreased 009 million 9 compared fiscal year 2007 due 2 decrease invested funds decline interest rates weightedaverage 529 fiscal 2007 218 fiscal 2008 decrease interest expense fiscal year 2008 compared fiscal year 2007 mainly due improved management forward contracts income expense fiscal year 2009 compared fiscal year 2007 immaterial income taxes june 2006 financial accounting standards board “fasb” issued interpretation 48 accounting uncertainty income taxes interpretation fasb statement 109 “fin 48” effective fiscal years beginning december 15 2006 us fiscal year commencing april 1 2007 fin 48 prescribes recognition threshold measurement attribute financial statement recognition measurement tax position taken expected taken tax return interpretation also provides guidance derecognition classification interest penalties accounting interim periods disclosure transition evaluation tax position accordance fin 48 twostep process first step recognition determine whether “morelikelythannot” tax position sustained upon examination including resolution related appeals litigation processes based technical merits position evaluating whether tax position met “morelikelythannot” recognition threshold presume position examined appropriate taxing authority would full knowledge relevant information second step measurement tax position meets “morelikelythannot” recognition threshold measured determine amount benefit recognize financial statements tax position measured largest amount benefit greater 50 percent likely realized upon ultimate settlement upon adoption fin 48 april 1 2007 recognized cumulative effect adjustment 62000 decreasing income tax liability unrecognized tax benefits decreasing march 31 2007 accumulated deficit balance continually monitor need tax reserves fin 48 fiscal years 2009 2008 identify new reserve requirements march 31 2009 total amount gross unrecognized tax benefits inclusive interest penalties approximately 277000 entire amount recognized would affect effective tax rate currently anticipate significant increase decrease unrecognized tax benefits recorded next 12 months march 31 2008 total amount gross unrecognized tax benefits inclusive interest penalties approximately 263000 entire amount recognized would affect effective tax rate reconciliation beginning ending amount unrecognized tax benefit follows balance march 31 2007 229000 interest penalties 34000 balance march 31 2008 263000 interest penalties 14000 balance march 31 2009 277000 recorded income tax expense approximately 86000 fiscal year 2009 book pretax loss us operations approximately 13 million taxable income federal income tax purposes fiscal year ended march 31 2009 approximately 32 million portion net operating loss carryover “nol” used offset taxable income however allowed offset 90 taxable income nol subject alternative minimum tax california also suspended utilization net operating losses tax years 2009 2008 additionally california limited utilization rd credits 50 tax liability without consideration net operating losses germany operations showed taxable income approximately 04 million recorded income tax benefit 13000 german operations majority german gaap profit offset net operating losses recorded income tax benefit 114000 351000 fiscal years 2008 2007 respectively tax benefit fiscal year 2008 due mainly reduction deferred income tax liabilities germany offset adjustment related tax reserve fin 48 payments prevent global received fiscal year ended march 31 2008 recorded income federal tax return even though recorded income us generally accepted accounting principles income offset net operating loss carryforwards “nols” generated previous years however alternative minimum taxes due tax return income offset nols generated previous years full valuation allowance required end fiscal years 2009 2008 2007 considering positive negative evidence regarding ability generate sufficient future taxable income realize deferred income tax assets liquidity capital resources following table summarizes cash equivalents investments march 31 thousands march 31 2009 held 135 million par value fair value approximately 122 million marketable securities consisting arss classified longterm investments consolidated balance sheet ubs offered accepted “rights” offering whereby ubs offered purchase certain arss placed including hold par face value also included longterm investment put option received rights offering ubs transfer resulted reversal prior unrealized losses net taxes ars accumulated comprehensive income recording otherthan temporary impairment approximately 13 million 135 million par value portion ars portfolio recognition benefit approximately 1 million related put option provided settlement refer note 2 caption 8 cash equivalents shortterm investments longterm investments consolidated financial statement discussion noncurrent investments following table displays sources uses cash activity fiscal years ended march 31 thousands net cash provided operating activities 41 million fiscal year 2009 compared net cash used operating activities 03 million fiscal year 2008 41 million cash provided operating activities fiscal year 2009 due 49 million provided net loss adjusted noncash charges depreciation amortization stockbased compensation expense net effect loss due fair value ars investment gain put option miscellaneous items partially offset 09 million cash used changes operating assets liabilities cash used operating activities 03 million fiscal year 2008 consists 18 million used due net loss net noncash items partially offset 15 million cash provided changes operating assets liabilities cash used operations 05 million fiscal year 2007 primarily consists 33 million used due loss operations net noncash items 46 million received prevent global net equipment purchased contract 18 million used changes operating assets liabilities net cash used investing activities 28 million fiscal year 2009 compared 26 million cash provided investing activities fiscal year 2008 capital expenditures fiscal year 2009 25 million mainly due addition new improved production equipment optical memory card business acquisition patents changes restricted cash balance contributed 03 million net balance may invest 2 million additional capital equipment leasehold improvement expenditures optical memory card specialty card production capacity manufacturing enhancement facilities march 31 2010 net cash provided investing activities 26 million fiscal year 2008 consisted 4 million net proceeds maturity investments less capital expenditures changes noncurrent assets 14 million net cash provided investing activities 06 million fiscal year 2007 consisted primarily 38 million net proceeds maturity investments less capital expenditures approximately 31 million net cash provided financing activities 88 million fiscal year 2009 compared 07 million cash provided financing activities fiscal year 2008 increase cash financing activities fiscal year 2009 mainly due 87 million drawn ubs credit line 02 net proceeds sale common stock employee stock plans net cash provided financing activities fiscal years 2008 2007 consisted net proceeds sale common stock employee stock plans current borrowing arrangements march 31 2009 held 135 million par value fair value approximately 122 million marketable securities consisting arss classified noncurrent assets consolidated balance sheet ubs offered accepted “rights” offering whereby ubs offered purchase certain arss placed including hold par face value part offering obtained line credit amount 87 million collateralized slarss drew full amount march 31 2009 intent credit line provide nocost loan interest rate charged credit line equal interest rate earned arss variable rate advances ubs credit line bear interest variable rate equal lesser libor plus percentage rate 125 275 depending amount advance b applicable weighted average rate interest dividend rate paid us issuer arss case interest rate subject adjustment time reflect changes composition arss calculating weighted average interest rate interest rate paid us respect arss equal period including january 21 2009 applicable coupon rates ii january 22 2009 thereafter applicable taxable slarc maximum auction rate taxable slarss ubs credit line also provides among things ubs may demand full partial payment credit line sole discretion without cause time ubs may time sole discretion terminate cancel credit line provided however ubs required provide us alternative financing substantially similar terms unless demand right exercised result certain specified events customer relationship ubs lasercard terminated cause ubs refer note 2 caption 8 cash equivalents shortterm investments longterm investments consolidated financial statement discussion noncurrent investments believe sufficient available cash execute business plan fiscal year 2010 expect estimated level revenues sufficient generate cash operating activities period expect recover par value arss based “rights” agreement ubs operating cash flows could negatively impacted significant degree largest us government program delayed reduced canceled extended angolan national id card program materialize planned internally programs replaced card orders sources income contractual obligations following table provides summary effect liquidity cash flows contractual obligations following years ended march 31 thousands 1 includes capitalized leases 2 purposes table obligation calculated without interest obligations offbalance sheet arrangements offbalance sheet arrangements march 31 2009 march 31 2008 application critical accounting policies estimates discussion analysis financial condition results operations based upon consolidated financial statements prepared accordance us generally accepted accounting principles note 2 notes consolidated financial statements describe significant accounting policies methods used preparation consolidated financial statements preparation financial statements requires us make estimates judgments affect reported amounts assets liabilities revenues expenses ongoing basis evaluate estimates including related revenues inventories stockbased compensation warranties income taxes base estimates historical experience various assumptions believed reasonable circumstances results form basis making judgments carrying values assets liabilities readily apparent sources critical accounting policies 1 important portrayal financial condition results operations 2 require management’s difficult subjective complex judgments often requiring estimates matters inherently uncertain critical accounting policies reflect significant judgments assumptions estimates used preparation consolidated financial statements management discussed development selection critical accounting policies estimates audit committee board directors audit committee reviewed disclosures relating report consider accounting policies described critical accounting policies revenue recognition product sales primarily consist sales optical cards drives systems services specialty cards card printers recognize revenue product sales following criteria met 1 persuasive evidence arrangement exists 2 delivery occurred 3 fee fixed determinable 4 collectability reasonably assured recognize revenue product sales time shipment shipping terms fob shipping point orders placed pursuant preexisting sales arrangement postshipment obligations customer acceptance criteria case us government contract warehousing appropriate provision made time shipment estimated warranty costs estimated returns orders permanent resident border crossing cards us government require delivery secure companycontrolled vault shipments later made vault us government site bill hold procedures also provide end oneyear contract term renewal option exercised us government take final delivery remaining inventory within six months time cards delivered vault title cards transferred us government risks ownership transferred well prime contractor invoiced payment due within thirty days purchase orders contain return warranty cancellation provisions pursuant provisions sec staff accounting bulletin 104 revenue recognition “sab 104” revenue recognized delivery vault fulfilled contractual obligations earnings process complete sales include customerspecified acceptance criteria recognize revenue acceptance criteria met presuming revenue criteria met defer revenue services recognize contractual period render services customer accepts apply provisions emerging issues task force issue 0021 revenue arrangements multiple deliverables “eitf 0021” revenue arrangements multiple deliverables eitf 0021 provides criteria governing identify whether goods services delivered separately bundled sales arrangement accounted separately deliverables accounted separately meet following criteria delivered items standalone value customer b fair value undelivered items reliably determined c arrangement includes general right return delivery undelivered items probable substantially controlled seller situations deliverables fall within higherlevel literature defined eitf 0021 apply guidance higherlevel literature deliverables meet criteria combined one deliverables apply provisions statement position 811 accounting performance constructiontype certain productiontype contracts “sop 811” applicable contracts revenues time materials contracts recognized services rendered contract labor rates plus material direct costs incurred revenues fixed price contracts recognized percentage completion method based ratio total costs incurred date compared estimated total costs complete contract estimates costs complete include material direct labor overhead allowable general administrative expenses circumstances estimates costs complete project cannot reasonably estimated assured loss incurred percentageofcompletion method based zero profit margin rather completedcontract method used precise estimates made full amount estimated loss charged operations period determined loss realized performance contract longterm program accounted sop 811 concluded last quarter fiscal year 2009 revenue approximately 540000 fiscal year 2009 year ended march 31 2008 2007 recognized revenue approximately 249000 12000 respectively based zero profit margin apply provisions statement position 972 software revenue recognition amended statement position 989 modification sop 972 software revenue recognition respect certain transactions involving sale software products revenue license software products recognized persuasive evidence arrangement exists software product delivered fee fixed determinable collectability probable applicable upon acceptance criteria specified upon expiration acceptance period software revenue immaterial fiscal years ended march 2009 2008 2007 respectively product warranty appropriate provision made time shipment estimated warranty costs estimated returns provide limited warranty replacement defective products limited warranty requires us repair replace defective products cost customer within specified time period sale estimate costs may incurred limited warranty records liability amount costs time product revenue recognized factors affect estimate warranty liability include number units sold historical anticipated rates warranty claims assess adequacy recorded warranty liability adjust amount necessary utilize historical trends information received customers assist determining appropriate estimated warranty accrual levels accounting income taxes significant judgment required determining worldwide provision income taxes recording related tax assets liabilities ordinary course business operational decisions transactions facts circumstances calculations ultimate tax determination certain subject challenge taxing authorities united states california germany tax years 1993 2008 remain subject examination appropriate governmental agencies mainly united states due tax loss carryovers years tax provision contemplates tax rates currently effect determine current deferred tax provisions significant fluctuation rates changes tax laws could cause estimates taxes anticipate either paying recovering future change changes could lead either increase decreases effective tax rate june 2006 fasb issued interpretation 48 accounting uncertainty income taxes interpretation fasb statement 109 “fin 48” effective fiscal years beginning december 15 2006 us fiscal year commencing april 1 2007 fin 48 prescribes recognition threshold measurement attribute financial statement recognition measurement tax position taken expected taken tax return interpretation also provides guidance derecognition classification interest penalties accounting interim periods disclosure transition evaluation tax position accordance fin 48 twostep process first step recognition determine whether “morelikelythannot” tax position sustained upon examination including resolution related appeals litigation processes based technical merits position evaluating whether tax position met “morelikelythannot” recognition threshold presume position examined appropriate taxing authority would full knowledge relevant information second step measurement tax position meets “morelikelythannot” recognition threshold measured determine amount benefit recognize financial statements tax position measured largest amount benefit greater 50 percent likely realized upon ultimate settlement upon adoption fin 48 april 1 2007 recognized cumulative effect adjustment 62000 decreasing income tax liability unrecognized tax benefits decreasing march 31 2007 accumulated deficit balance continually monitor need tax reserves fin 48 fiscal years 2009 2008 identify new reserve requirements additionally accordance sfas 109 accounting income taxes established valuation allowances variety deferred tax assets including nols foreign tax credits income tax credits valuation allowances take consideration ability use deferred tax assets reduce value items amount deemed likely recoverable improvements changes operations domestically internationally could increase ability utilize tax attributes future release valuation allowances periods tax attributes become realizable would reduce effective tax rate evaluate need valuation change thereto quarterly basis inventories value inventory lower actual cost purchase andor manufacture inventory market value market value based replacement cost estimated realizable value less cost sell regularly review inventory quantities hand record provision excess obsolete inventory based primarily forecasts product demand optical card drives fluctuate significantly order obtain favorable pricing purchases certain readwrite drive parts made quantities exceed booked orders purchase drive parts anticipated demand takes consideration ordertodelivery lead times vendors economic purchase order quantity parts addition keep supply card raw materials deem necessary anticipated demand use standard costs approximate firstin firstout costing method perform analysis carrying value inventory quarterly basis respect inventory carrying values follow principles articulated sfas 151 inventory costs amendment arb 43 chapter 4 “sfas 151” arb 43 chapter 4 inventory pricing paragraphs 5 7 10 authoritative guidance eg sab 100 relates determining appropriate cost basis inventory determining whether firm noncancelable purchase commitments accrued loss forecasted demand sufficient utilize committed inventory purchases accounting abnormal amounts idle facility expense freight handling costs wasted material spoilage following sfas 151 allocate fixed production overheads costs conversion based normal capacity production facilities applied sfas 151 inventory costs incurred effective april 1 2006 provisions statement applied prospectively establish aged inventory reserves obsolescence reserves inventory reserves generally recorded management determines item readily saleable inventory reserves relieved related inventory sold scrapped part quarterly excessobsolete inventory analysis also determine whether lower cost market adjustments ie selling prices less certain costs sufficient recover inventory carrying values warranted impairment goodwill intangible assets perform annual impairment testing goodwill intangible assets comply sfas 142 goodwill intangible assets march 31 2007 determined estimated future cash flows insufficient justify carrying value goodwill intangible assets related march 31 2004 acquisition german operations based management’s decision suspend significant optical memory card production germany recorded noncash pretax impairment charge approximately 38 million writeoff goodwill intangible assets fiscal years 2006 2005 future cash flows determined sufficient based part planned production portion optical memory cards facility germany impairment charge fiscal year 2008 2009 intend continue use facility equipment germany produce specialty cards although plans use facility produce lasercard® optical memory cards germany suspended fiscal year 2007 sharebased compensation described detail note 2 stockbased compensation accompanying notes consolidated financial statements effective april 1 2006 adopted fair value recognition provisions sfas 123r using modifiedprospective transition method fair value recognition provisions sfas 123r sharebased compensation cost estimated grant date based fair value award recognized expense net estimated forfeitures ratably vesting period award calculating sharebased compensation expense requires input highly subjective assumptions including expected term sharebased awards stock price volatility prevesting stock option forfeitures estimated expected life stock options granted fiscal year ended march 31 2009 based upon vesting provision historical exercise cancellation expiration patterns estimate volatility common stock date grant based historical volatility common stock assumptions used calculating fair value stockbased awards represent best estimates involve inherent uncertainties application management judgment result factors change use different assumptions sharebased compensation expense could materially different future addition required estimate expected forfeiture rate recognize expense shares expected vest estimate forfeiture rate based historical experience actual forfeiture rate materially different estimate stockbased compensation expense could significantly different recorded current period result adopting sfas 123r using modified prospective method net income applicable common stockholders fiscal year ended march 31 2009 includes 23 million sharebased compensation expense stock options approximately 01 million employee stock purchase plan expense included consolidated statements operations fiscal year ended march 31 2008 sharebased compensation expense included 2 million stock options 01 million employee stock purchase plan expensed consolidated statements operations march 31 2009 43 million total unrecognized compensation cost related unvested sharebased compensation arrangements expected recognized remaining vesting period august 2012 march 31 2008 37 million total unrecognized compensation cost related unvested stock options restricted share awards restricted stock units expected recognized remaining vesting period december 2011 short longterm investments shortterm investments include securities maturities date purchase three months investments remaining maturities less one year investments maturities date purchase greater one year classified longterm investments management determines appropriate classification debt securities time purchase reevaluates classification investments balance sheet date account shortterm marketable securities accordance sfas 115 accounting certain investments debt equity securities “sfas 115” consider highly liquid investments consisting primarily commercial paper discount notes us government bonds arss original remaining maturities three months less date purchase cash equivalents investments original remaining maturities three months one year date purchase classified shortterm investments original remaining maturities one year date purchase classified noncurrent assets determine length investments considering cash requirements yields available type investment considered us determine appropriate classification debt equity securities time purchase reevaluate classification investments balance sheet date classified arss noncurrent assets consolidated balance sheets ability liquidate securities next twelve 12 months uncertain investments designated trading securities trading securities carried fair value unrealized gains losses reported consolidated statement operations “other income expense net” investments marketable securities designated available sale march 31 2009 march 31 2008 ars investments accounted availableforsale classified longterm securities available sale carried fair value unrealized gains losses reported “accumulated comprehensive income” component stockholders’ equity held shortterm investments march 31 2008 refer note 2 caption 8 cash equivalents shortterm investments longterm investments consolidated financial statement discussion noncurrent investments recently adopted accounting pronouncements september 2006 fasb issued sfas 157 “fair value measurements” “sfas 157” clarifies principle fair value based assumptions market participants would use pricing asset liability establishes fair value hierarchy prioritizes information used develop assumptions expands related disclosure requirements standard fair value measurements separately disclosed level within fair value hierarchy sfas 157 applies accounting pronouncements require permit fair value measurements sfas 157 defines fair value based upon exit price model fasb also issued fsp 1572 february 2008 “fsp 1572” fsp 1572 delays effective date application sfas 157 fiscal years beginning november 15 2008 nonfinancial assets nonfinancial liabilities recognized fair value financial statements nonrecurring basis adopted sfas 157 april 1 2008 exception application statement nonrecurring nonfinancial assets nonfinancial liabilities see note 2 caption 9 fair value measurements additional details february 2007 fasb issued sfas 159 fair value option financial assets financial liabilities “sfas 159” sfas 159 provides entities option report selected financial assets liabilities fair value objective reduce complexity accounting financial instruments volatility earnings caused measuring related financial assets liabilities differently unrealized gains losses items fair value option elected would reported earnings adopted sfas 159 april 1 2008 elected measure financial instruments items fair value except company’s longterm investments ars fiscal year ended march 31 2009 see note 2 caption 8 cash equivalents shortterm investments longterm investments additional details material financial assets liabilities carried fair value shortterm debt obligations trade accounts receivable accounts payable still reported carrying values future transacted financial asset liability evaluated fair value election prescribed sfas 159 adoption sfas 159 resulted 03 million net impact consolidated financial position results operations cash flows june 2007 eitf issue 073 accounting nonrefundable advance payments goods services used future research development activities “eitf 073” issued requires companies defer capitalize prepaid nonrefundable research development payments third parties recognize amounts period research development activities performed services provided subject assessment recoverability guidance effective new contracts entered fiscal years beginning december 15 2007 including interim periods within fiscal years adopted eitf 073 prospective basis april 1 2008 adoption impact consolidated financial statements recently issued accounting pronouncements december 2007 fasb issued sfas 141 revised 2007 “business combinations” “sfas 141r” sfas 141r establishes principles requirements acquirer recognizes measures financial statements significant aspects business combination sfas 141r acquisition costs generally expensed incurred noncontrolling interests valued fair value acquisition date inprocess research development recorded fair value indefinitelived intangible asset acquisition date restructuring costs associated business combination generally expensed subsequent acquisition date changes deferred tax asset valuation allowances income tax uncertainties acquisition date generally affect income tax expense sfas 141r amends sfas 109 “accounting income taxes” adjustments made valuation allowances deferred taxes acquired tax contingencies associated acquisitions closed prior effective date sfas 141r would also apply provisions sfas 141r sfas 141r also establishes disclosure requirements enable evaluation nature financial effects business combination early adoption sfas 141r permitted sfas 141r effective prospective basis business combinations acquisition date beginning first annual period subsequent december 15 2008 exception accounting valuation allowances deferred taxes acquired tax contingencies assess potential impact adoption sfas 141r future acquisition occurs december 2007 fasb issued sfas 160 “noncontrolling interests consolidated financial statementsan amendment accounting research bulletin 51” “sfas 160” sfas 160 establishes accounting reporting standards ownership interests subsidiaries held parties parent amount consolidated net income attributable parent noncontrolling interest changes parent’s ownership interest valuation retained noncontrolling equity investments subsidiary deconsolidated sfas 160 also establishes disclosure requirements clearly identify distinguish interests parent interests noncontrolling owners required adopt sfas 160 beginning first annual period subsequent december 15 2008 currently evaluating requirements sfas 160 believe adoption material impact consolidated financial statements march 2008 fasb issued sfas 161 “disclosures derivative instruments hedging activitiesan amendment fasb statement 133” “sfas 161” sfas 161 intended improve transparency financial reporting requiring enhanced disclosures entity’s derivative instruments hedging activities effects entity’s financial position financial performance cash flows sfas 161 applies derivative instruments within scope sfas 133 “accounting derivative instruments hedging activities” well related hedged items bifurcated derivatives nonderivative instruments designated qualify hedging instruments sfas 161 establishes principles requirements entity identifies derivative instruments related hedged items affect financial position financial performance cash flows sfas 161 also establishes disclosure requirements fair values derivative instruments gains losses disclosed tabular format derivative features creditrisk related disclosed provide clarification entity’s liquidity crossreferencing within footnotes required adopt sfas 160 beginning first annual period subsequent december 15 2008 currently evaluating requirements sfas 161 yet determined impact adoption consolidated financial statements april 2008 fasb issued fsp 1423 “determination useful life intangible assets” “fsp 1423” fsp 1423 amends factors considered developing renewal extension assumptions used determine useful life recognized intangible asset sfas 142 “goodwill intangible assets” “sfas 142” objective fsp 1423 improve consistency useful life recognized intangible asset sfas 142 period expected cash flows used measure fair value asset sfas 141r accounting principles fsp 1423 applies intangible assets whether acquired business combination otherwise early adoption prohibited required adopt fsp 1423 first quarter fiscal year 2010 currently evaluating requirements fsp 1423 yet determined impact adoption consolidated financial statements item 7a item 7 managements discussion analysis financial condition results operations results operationsfiscal 1996 compared fiscal 1995 1994 revenues companys total revenues fiscal 1996 5295000 compared 3166000 fiscal 1995 1838000 fiscal 1994 optical memory card products sales optical memory cards related products valueadded reseller vars licensees enduser customers increased 5059000 fiscal 1996 compared 2141000 fiscal 1995 1819000 fiscal 1994 mainly due increases unit shipments commercial applications development commercial market applications products company utilizes var companies part marketing distribution program lasercardr products sales vars include companys optical memory cards companys system software optical card readerwriters made licensee company addon peripherals made companies equipment adding digitized photo fingerprint hand template signature cards vars may add application software personal computers peripherals resell products integrated data systems enduser customers geographic regions fiscal year 1996 company commercially sold approximately 420000 lasercardr optical memory cards 879 readerwriters versus 150000 cards 313 readerwriters fiscal 1995 143000 cards 242 readerwriters fiscal 1994 company sold lasercard products fiscal 1996 approximately 50 customers 8 states 28 foreign countries including products american medical data applications us governmentrelated programs several programs italy including secure soccerseason ticket two programs philippinesan admission passretail purchase log dutyfree shopping zone vehicle warrantymaintenance records card addition sales included products medical card field trialspilot programs united states south korea brazil saudi arabia countries assurances var company country successful markets field trials place followon orders company additional quantities cards systems order upgrade var customer base increase probability success company continue efforts recruit new vars eliminate nonproductive ones company provides marketing leads customer support system software assist vars seventeen newly recruited vars purchased initial systems including optical cards equipment fiscal 1996 software important factor developing commercial markets optical cards companys system software consists optical card interface software device drivers file systems software development tools demonstration software company provide software specific applications instead depends vars integrate optical card products existing software products write new application software specific optical card programs license software vars several vars written optical card software programs applications automobile warrantymaintenance cargo manifesting digital optical key systems admissionsid data logging systems various medicalrelated applications medical image storage health history cards application software development underway vars customers optical memory cards used conjunction card readerwriter equipment connected personal computers accessed manner floppy disk drives readerwriters incorporated lasercard systems sold vars customers company price performance availability readerwriters factors commercialization optical cards company sells readerwriters thousand dollars per unit units generally include companys interface software device drivers company manufacture card readerwriters instead continues purchase equipment japanese licensee nippon conlux co ltd currently companys sole supplier readerwriters companys inventory level readerwriters fluctuates based timing purchases sales company give assurance increased production card readerwriters occur near term highvolume sales correspondingly lower prices result market demand increases sharply short period time initial shortage readerwriters could result also interruption change supply readerwriters could cause delay product shipments possible loss sales would affect operating results adversely licensing company sold one license fiscal 1996 200000 one license 1000000 fiscal 1995 licenses fiscal 1994 payment license fees received respective fiscal periods fiscal 1996 license agreement included trademark license installment payment toward purchase lasercard distribution license fiscal 1995 license agreement lasercard distribution license sold korean var company license fees received company unconditional nonrefundable significant obligations remain unfulfilled company licenses company actively pursuing efforts generate additional license revenues however license sales company sporadic unpredictable timing type license magnitude future license revenues cannot predicted inferred past events royalties royalty revenues 36000 fiscal 1996 25000 fiscal 1995 19000 fiscal 1994 although royalty revenues reached material amounts company anticipate future royalty income longterm continuing basis among two royaltybearing optical memory card manufacturing licenses several royaltybearing equipmentlicense upgrades previously sold company cannot predict whether equipment card sales licensees result material royalties company since optical memory card industry early commercial stage therefore company relying royalty income expect significant factor near term backlog company generally fills orders within 30 120 days receipt purchase order release order therefore date consistent large order backlog companys quarterly sales generally dependent upon new orders placed quarter large order backlog established companys quarterly sales subject material fluctuation margins gross margin product sales fiscal 1996 28 compared 29 fiscal 1995 35 fiscal 1994 respectively decrease fiscal 1996 compared 1995 due mainly decrease average selling price optical memory cards partially offset lower percard cost result greater portion fiscal 1996 card sales lowerpriced cards fewer features cards sold previous fiscal year decrease fiscal 1995 compared fiscal 1994 due mainly increase optical memory card facility costs charged cost product sales decrease markup optical memory card readerwriters gross margins optical memory card sales fluctuate based upon type volume cards sold card manufacturing commercial orders increases companys optical memory card manufacturing facility used less purposes research engineering therefore increasing amount manufacturing facility costs depreciation expense building lease payments costs allocated cost product sales decreasing amount costs charged research engineering allocation effect pretax profits fiscal 1996 1995 1994 respectively company allocated 47 17 11 facility expenses card manufacturing commercial orders marketing samples company reaches production level approximately 15 million cards per year commercial orders cost allocation percentages become relatively fixed essentially card manufacturing facility costs allocated cost product sales facility expenses become fixed cost component product sales decrease percard basis volumes increase income expenses selling general administrative expenses sga fiscal 1996 sga expenses 2400000 compared 2023000 1925000 respectively fiscal 1995 1994 sga spending expected continue current levels short term 377000 increase fiscal 1996 due mainly 100000 increase payroll expenses 112000 increase marketing expenses including trade shows travel 73000 increase legal expenses companys plans include increased marketing customer support activity implemented certain financial goals achieved research engineering expenses research engineering expenses 1092000 fiscal 1996 compared 1860000 fiscal 1995 2202000 fiscal 1994 optical memory card facility used engineering manufacturing therefore facility costs depreciation expense building lease payments costs allocated manufacturing engineering based upon level manufacturing activity depreciation amortization expenses charged research engineering decreased 238000 fiscal 1996 compared 603000 fiscal 1995 947000 fiscal 1994 due mainly change october 1 1994 estimated useful lives optical memory card manufacturing equipment see note 2 notes consolidated financial statements optical card production increases card manufacturing resources allocated card production greater degree present reported research engineering expenses expected decrease company believes reduction card manufacturing facility expenses allocated research engineering negative effect optical card business since research engineering projects continuing also possible future projects may require increased spending optical card industry grows income expense income fiscal 1996 272000 compared 32000 fiscal 1995 733000 fiscal 1994 first quarter fiscal 1996 company received 200000 nonrefundable deposit toward license agreement license agreement consummated deposit forfeited licensee income forfeiture deposit recorded income fiscal 1996 see part item 3 legal proceedings income type fiscal 1995 fiscal 1994 income fiscal 1994 included 713000 net expenses resulting full final settlement claim filed december 1992 company third party possible future business loss income type fiscal 1996 fiscal 1995 interest income fiscal 1996 78000 compared 35000 fiscal 1995 24000 fiscal 1994 increase interest income fiscal 1996 versus fiscal 1995 due increase average invested funds increase fiscal 1995 versus fiscal 1994 due increase average invested funds higher interest rates companys interest expense shortterm loans 8000 fiscal 1996 7000 fiscal 1995 4000 fiscal 1994 discontinued operations fiscal 1993 company discontinued emulsion photoplate operation limited market products long anticipated company fiscal 1995 company completed settlement remaining commitments related discontinued emulsion photoplate operation amount lower accruals items therefore discontinued operations income 22000 fiscal 1995 compared loss 90000 fiscal 1994 income loss type fiscal 1996 liquidity march 31 1996 company cash equivalents 2094000 current ratio 19 1 net cash used operating activities 940000 fiscal year 1996 compared 1729000 fiscal 1995 1200000 fiscal 1994 company longterm debt march 31 1996 company established line credit generally companys customers make advance payments whole part time order placement companys optical memory cards usually made custom specifications specific customer end user application company believes although working capital requirements grow proportion product shipment levels advance payments reduce need working capital financing company may negotiate line credit becomes appropriate current level product sales company generate cash profits operations fund operations company requires either substantial increase order levels optical cards sales additional licenses additional financing based current raw material costs expense calculations company estimates break even operations annual sales approximately 15 million optical memory cards along sales related hardware slow progress customers development implementation lasercardbased programs could extend period company would need additional financing company updated plan increase card production capacity calls addition several years 43 million capital equipment card manufacturing facility additional production employees customer orders sufficient magnitude justify incremental step previously report form 10k year ended march 31 1995 company estimated requirement 3 million capital additions attain 25 million card production level updated plan provides greater variety optical memory card versions based upon presently known customer requirements added 13 million investment highthroughput colorprinting press would expand companys color ink printing capacity would permit color printing 25 million cards per year company estimates could produce updated manufacturing facility 43 million investment capital equipment would implemented incrementally follows increase current production equipment capabilities 3 million 6 million cards annually 500000 producing 10 million cards annually 24 million producing 25 million cards annually 14 million company may make additional capital investments cost savings purposes march 31 1996 company accumulated deficit 25213000 company anticipates size losses decrease due anticipated increases sales optical memory cards related products except possible quarterly fluctuations however increased commercialization delayed company realize increased sales losses continue except event sporadic sales licenses past ranged price approximately 1 million card distribution license 10 million plus royalties card manufacturing license fiscal 1996 company cash receipts net expenses 446000 private placement 115000 shares common stock shares registered securities act 1933 cannot offered sold united states absent registration applicable exemption registration requirements company agreed file s3 registration statement covering certain shares sold company private placements fiscal years 1995 1996 time sec approves registration shareholders may resell shares fiscal 1996 company employees consultants purchased company 355350 shares registered common stock average price 533 per share exercise stock options companys 1991 stock option plan resulted additional cash receipts company 1894000 march 31 1996 company employees consultants held unexercised vested options purchase 860333 shares common stock exercise prices ranging 425 906 per share average 651 per share stock options exercised would provide company cash amount 5603000 company continue product marketing activities licensing efforts consider opportunities additional equity financing order strengthen cash position accelerate marketing sales activities add software manufacturing capabilities rapidly build sales optical memory cards company aware materially adverse trends would limit ability finance operations additional equity financings required however company cannot guarantee equity financing would available needed stock price volatility companys common stock price subject significant volatility due fluctuations revenues earnings capitalization liquidity press coverage financial market interest factors may exacerbated company operates solely optical memory card products industry early stage commercialization forwardlooking statements certain statements made relating plans objectives economic performance go beyond historical information may provide indication future results extent forward looking statements within meaning section 21e securities exchange act 1934 amended subject factors could cause actual results differ forwardlooking statement factors described documents filed company time securities exchange commission including form s3 registration statement 3388588 item 8 item 7 managements discussion analysis financial condition results operations results operationsfiscal 2000 compared fiscal 1999 1998 revenues companys total revenues fiscal 2000 17092000 compared 15850000 fiscal 1999 11081000 fiscal 1998 product revenues sales lasercardr optical memory cards related products totaled 16948000 fiscal 2000 compared 15102000 fiscal 1999 9844000 fiscal 1998 increases product revenues periods due primarily sale optical memory cards government programs described companys card shipments customers totaled approximately 45 million optical memory cards fiscal 2000 4 million cards fiscal 1999 23 million cards fiscal 1998 fiscal 2000 company sold lasercard products provided services approximately 38 customers 6 states 20 foreign countries applications companys lasercard products include electronic commerce payperuse system combined medical data application united states various programs europe asia including medicalrecord card applications building construction permit multifunction card applications us governmentrelated programs including us department defense cargo shipment automated manifest card us immigration naturalization service ins permanent resident card green card us department state dos border crossing card laser visa addition using marketing staff company utilizes valueadded reseller var companies licensees development commercial markets applications lasercard products new licensee company lasercard europe ag established switzerland focus markets germany austria czech republic product sales vars licensees include companys optical memory cards companys system software optical card readwrite drives addon peripherals made companies equipment adding digitized photo fingerprint hand template signature cards varslicensees may add application software personal computers pcs peripherals resell products integrated data systems order upgrade customer base company continuing efforts recruit new varslicensees eliminate nonproductive vars company provides customer technical support system software assist vars licensees software important factor developing commercial markets optical memory cards companys system software consists optical card interface softwaredevice drivers file systems software development tools demonstration software application software program date companys software development completed concurrent establishment technological feasibility accordingly software development costs charged research development expense accompanying statements income companys vars andor customers develop application software specific enduser applications several vars written optical card software programs applications automobile warranty maintenance records cargo manifesting digital optical key systems admissionsid data logging systems various medicalrelated applications health history cards company sells application software program completed fiscal 2000 coordination existing commercial software company personalization printing encoding lasercard optical memory cards used conjunction card readwrite device connects personal computer readwrite drive integrated pc logical drive driveletter access manner floppy disk drives price performance availability readwrite drives factors commercialization optical cards company sells readwrite drives less three thousand dollars per unit units generally include companys interface softwaredevice drivers past fiscal year company established capabilities readwrite drive assembly design united states previously company purchased assembled drives licensee japan nippon conlux co ltd conlux sole supplier company completed acquisition cash conluxs readwrite drive manufacturing facility manufacturing tooling equipment etc transferred facility mountain view california producing drives locally initially company purchased sets parts conlux assembly united states currently company qualifying vendors parts purchased nextgeneration readwrite drive creation readwrite drive production capability reduced pretax profits fiscal year 2000 1 million result increased cost sales research engineering expenses also related capital investments totaled 1 million investment parts subassembly inventory drives totaled 2 million readwrite drive assembly design companys direct control lower cost drives customeroptimized drive systems drive systems advanced security features expected emerge company maintains inventory readwrite drives sets drive parts believes adequate meet customer demand however interruption supply readwrite drive parts difficulties encountered readwrite drive assembly could cause delay shipments drives optical memory cards possible loss sales would adversely affect operating results workstation revenues company recorded revenues 820000 fiscal 1998 delivery six prototype multitechnology card readers multitechnology card workstations existing customer multitechnology card workstations write andor read cards one following technologies optical memory stripe ic chip magnetic stripe ocrb optical character recognition 2dimensional bar code costs development manufacture workstations charged cost sales revenues type fiscal 1999 fiscal 2000 license revenues license fees 119000 fiscal 2000 700000 fiscal 1999 400000 fiscal 1998 fiscal 2000 license revenues consisted revenue earned license allows licensee italy assemble readwrite drives parts kits provided company fiscal 1999 license revenues included 200000 agreement provide technical information 500000 together prioryear payment completed purchase nonexclusive license optical memory card distribution switzerlandbased company optical memory card distribution licenses grant right purchase cards companys favorable pricing fiscal 1998 license revenue included 400000 sale patent license fees received company unconditional nonrefundable company rely license fees finance operations royalty revenues royalty revenues 25000 fiscal 2000 48000 fiscal 1999 17000 fiscal 1998 company cannot predict whether equipment card sales licensees result material royalties company therefore company relying royalty income expect significant factor near term backlog march 31 2000 backlog lasercard optical memory cards approximately 48 million 80 companys march 31 2000 card backlog us government orders april 13 2000 company announced receipt commercial nongovernment order optical memory cards totaling 45 million june 7 2000 company announced awarded u government subcontract authorized maximum 81 million period five years subcontract received company lasercard var us government prime contractor competitively bid government procurement contract subcontract company supply 24 million lasercard optical memory cards average selling price 340 per card subcontract 24 million optical memory cards provides order release company quantities less one million cards per order initial oneyear contract period four additional oneyear contract options first millioncard order subcontract received company following subcontract award thereby raising current total optical card backlog 10 million june 8 2000 deliveries december 2000 10 million backlog released orders estimated average 350000 cards per month margins gross margin product sales fiscal 2000 45 compared 49 fiscal 1999 44 fiscal 1998 gross profit increased 193000 fiscal 2000 compared fiscal 1999 fiscal 2000 readwrite drive gross profit decreased 229000 due following readwrite drive selling prices reduced stimulate sales b readwrite drive costs increased due yendollar exchange rate staffing overhead costs inhouse production readwrite drives companys gross margin sales readwrite drives currently designed negligible march 31 2001 gross profit cards increased approximately 540000 fiscal 2000 compared period last year due higher card sales volume income expenses selling general administrative expenses sga expenses 3996000 fiscal 2000 3698000 fiscal 1999 2978000 fiscal 1998 298000 increase sga spending fiscal 2000 primarily consists 170000 marketing customer service 117000 increase patent amortization expense company believes sga expenses fiscal 2001 increase compared fiscal 2000 due mainly increases marketing patent amortization expenses research engineering expenses research engineering expenses 1299000 fiscal 2000 compared 456000 fiscal 1999 435000 fiscal 1998 approximately 80 increase spending fiscal 2000 due readwrite drive manufacturing engineering product development company anticipates expenses fiscal 2001 increase compared fiscal 2000 due mainly optical card readwrite drive development income expense total net income fiscal 2000 388000 compared 268000 fiscal 1999 154000 fiscal 1998 total net income fiscal 2000 consisted 383000 interest income fiscal 1999 total net income consisted 319000 interest income 44000 loss miscellaneous items net income fiscal 1998 included 148000 interest income 16000 gain miscellaneous items interest expense 1000 fiscal 2000 7000 fiscal 1999 10000 fiscal 1998 income taxes company recorded 2537000 income tax benefit fiscal 2000 versus 128000 income tax expense fiscal 1999 income tax expense 68000 fiscal 1998 income tax benefit fiscal 2000 included credit 2618000 due change deferred tax asset discussed partially offset 81000 expense alternative minimum taxes company valuation allowance reduces deferred tax asset company believes likely least portion income tax asset realized therefore reduced valuation allowance reduction valuation allowance reduces provision income taxes statement operations approximately 7 million valuation allowance available reduce future income tax expense also realized total deferred tax asset remaining march 31 2000 13100000 reduce future income tax payments 7 million amount reduce future reported income tax expense timing differences certain items included book income items included income tax returns therefore tax payments credits often occur different periods income tax expense benefit included statement operations liquidity capital resources march 31 2000 company cash equivalents shortterm investments 8221000 current ratio 48 1 longterm debt net cash provided operating activities 2674000 fiscal 2000 4292000 fiscal 1999 compared 71000 used operating activities fiscal 1998 reduction fiscal 2000 compared fiscal 1999 due mainly cash used readwrite driverelated inventory purchases primarily components parts readwrite drive assembly totaled approximately 17 million fiscal 2000 quarterly fluctuations company anticipate increase investment readwrite driverelated inventory fiscal year 2001 fiscal 1999 change comparison fiscal 1998 due mainly increase card sales fluctuations operating assets liabilities use cash quarters provide cash quarters current level revenues sufficient generate cash operations expenses losses would occur companys largest us government programs delayed canceled extended replaced card orders sources income company established line credit current plans company may negotiate line credit becomes appropriate although assurance made financing would available needed result 5360000 profit recorded fiscal 2000 companys accumulated deficit reduced 16276000 stockholders equity increased 20991000 net cash used investing activities 8539000 fiscal 2000 2131000 fiscal 1999 1805000 fiscal 1998 amounts include purchases property equipment discussed 1986000 fiscal 2000 1446000 fiscal 1999 1723000 fiscal 1998 increases patents intangibles 1150000 fiscal 2000 685000 fiscal 1999 82000 fiscal 1998 fiscal 2000 company began investing shortterm investments consisting primarily commercial paper resulting 5403000 classified shortterm investments march 31 2000 cash plus shortterm investments increased 8221000 march 31 2000 compared 8066000 one year earlier card production company added capital equipment leasehold improvements approximately 1 million fiscal 2000 companys card production capacity reached 7 million cards per year march 31 2000 production stateoftheart optical memory cards capacity expanded fiscal year 2001 company plans purchase additional production equipment series steps optical memory card orders expand justify production capacity increases rate 25 million cards per year addition investment used expansion company make additional capital expenditures cost savings quality improvements purposes company believes next years capital expenditures minimum 15 million per year card production equipment automatic inspection equipment connection readwrite drive manufacturing design company added capital equipment leasehold improvements approximately 650000 fiscal 2000 addition fiscal 2000 company capitalized approximately 360000 costs associated transfer conlux readwrite drive designs additional capital investments made fiscal 2001 net cash provided financing activities 617000 fiscal 2000 1075000 fiscal 1999 3790000 fiscal 1998 financing activities consisted sales common stock plans amounts 617000 fiscal 2000 1075000 fiscal 1999 1910000 fiscal 1998 proceeds private placement common stock amount 1880000 fiscal 1998 forwardlooking statements certain statements made report relating plans objectives economic performance go beyond historical information may provide indication future results extent forwardlooking statements within meaning section 21e securities exchange act 1934 amended subject factors could cause actual results differ forwardlooking statement companys business plan depends upon initiation growth new programs utilizing companys card products subject adverse economic technological developments assurances new existing var licensee company successful markets place followon orders company additional quantities cards systems companys estimate card deliveries primary customers depends upon issuance corresponding order releases customers right withhold releases reduce quantities released extend delivery dates assurance companys readwrite drive assembly design operations result lower cost drives advanced features ability company maintain profitable level optical memory card sales subject risks uncertainties including reliance us government business customer diversification expansion lengthy sales cycles ability economically produce optical card readwrite drives lower cost greater quantity sources supply technological change patent protection competition economic configuration operation companys card manufacturing facility increased output levels factors described item 1 form 10k documents filed company time securities exchange commission item 7a item 7 managements discussion analysis financial condition results operations results operationsfiscal 1998 compared fiscal 1997 1996 revenues companys total revenues fiscal 1998 11081000 compared 3529000 fiscal 1997 5295000 fiscal 1996 product sales lasercardr optical memory cards related products valueadded resellers vars licensees enduser customers 9844000 fiscal 1998 versus 3510000 fiscal 1997 5059000 fiscal 1996 increase sales fiscal 1998 fiscal 1997 resulted primarily united states government orders totalling 4 million optical memory cards approximately 18 million cards delivered fiscal 1998 deliveries us government orders expected continue average 200000 cards per month december 1998 difference fiscal 1997 fiscal 1996 revenues due mainly order us department defense dod 537 readerwriter units fiscal 1996 versus 83 units customer fiscal 1997 ongoing dod program optical memory card sales fiscal 1998 1997 1996 23 million cards 456000 cards 420000 cards respectively applications companys lasercard products include medical data applications united states various programs europe asia several programs philippinesincluding admission passretail purchase log dutyfree shopping zone vehicle warranty maintenance records card us governmentrelated programs including us department defense automated manifest card us immigration naturalization service green card us department state laser visa border crossing card company sold lasercard products fiscal 1998 approximately 38 customers seven states 20 foreign countries company utilizes var companies development commercial markets applications lasercard products product sales vars include companys optical memory cards companys system software optical card readerwriters made licensee company may include addon peripherals made companies equipment adding digitized photo fingerprint hand template signature cards vars may add application software personal computers peripherals resell products integrated data systems enduser customers assurances new existing var company country successful markets field trials place followon orders company additional quantities cards systems order upgrade var customer base increase probability success company continue efforts recruit new vars eliminate nonproductive ones company provides marketing leads customer technical support system software assist vars software important factor developing commercial markets optical memory cards companys system software consists optical card interface softwaredevice drivers file systems software development tools demonstration software company provide software specific applications instead depends vars integrate optical card products existing software products write new application software specific optical card programs license software vars several vars written optical card software programs applications automobile warranty maintenance records cargo manifesting digital optical key systems admissionsid data logging systems various medicalrelated applications medical image storage health history cards application software development underway vars customers optical memory cards used conjunction card readerwriter equipment connected personal computers accessed manner floppy disk drives readerwriters sold vars customers company price performance availability readerwriters factors commercialization optical cards company sells readerwriters thousand dollars per unit units generally include companys interface softwaredevice drivers company manufacture card readerwriters instead continues purchase equipment japanese licensee nippon conlux co ltd currently companys sole supplier readerwriters companys inventory level readerwriters fluctuates zero approximately 300 units based timing purchases sales company give assurance increased production card readerwriters occur near term highvolume sales correspondingly lower prices result market demand increases sharply short period time initial shortage readerwriters could result also interruption change supply readerwriters could cause delay readerwriter optical memory card shipments possible loss sales would adversely affect operating results workstation revenues company recorded fiscal 1998 revenues 820000 delivery six prototype multitechnology card readers multicard workstations existing customer multicard workstations write andor read cards one following technologies optical memory stripe ic chip magnetic stripe ocrb optical character recognition 2dimensional bar code costs development manufacture workstations charged cost sales revenues type fiscal 1997 1996 license revenues license fees 400000 fiscal 1998 200000 fiscal 1996 license fee payments received respective fiscal periods license fee revenues fiscal 1997 fiscal 1996 license agreement included trademark license lasercard distribution license payment fiscal 1998 agreement licensed companys canadian patent covering motion picture digital sound certain rights conversion license rights license fees received company unconditional nonrefundable significant obligations remain unfulfilled company licenses company longer relies license fees finance operations royalty revenues royalty revenues 17000 fiscal 1998 19000 fiscal 1997 36000 fiscal 1996 company cannot predict whether equipment card sales licensees result material royalties company therefore company relying royalty income expect significant factor near term backlog march 31 1998 backlog lasercard optical memory cards approximately 76 million deliveries estimated average 225000 cards per month december 1998 93 backlog us government orders case us government procurement government reserves right change specifications delay deliveries cancel part orders margins combined gross margin product sales workstation contract revenues fiscal 1998 44 compared 32 fiscal 1997 28 fiscal 1996 due largely increase card sales volume increase card manufacturing customer orders companys optical memory card manufacturing facility used less purposes research engineering therefore manufacturing facility costs depreciation expense building lease payments costs allocated cost card manufacturing less costs charged research engineering fiscal 1998 company allocated substantially facility expenses card manufacturing versus approximately 42 47 respectively expenses fiscal years 1997 1996 income expenses selling general administrative expenses sga fiscal year 1998 sga expenses 2978000 compared 2602000 2400000 respectively fiscal 1997 1996 majority increases fiscal 1998 1997 versus prior years attributable increased payroll marketing expenses sga spending expected increase fiscal 1999 due increased marketing customer technical support activities research engineering expenses research engineering expenses excluding customerfunded engineering programs 435000 fiscal 1998 compared 938000 fiscal 1997 1092000 fiscal 1996 expense reduction due primarily accounting facility costs rather actual reduction research engineering optical memory card facility used engineering manufacturing therefore facility costs depreciation expense building lease payments costs allocated manufacturing engineering based upon level activity respective areas substantially expenses allocated card production fiscal 1998 substantial increase card production meet orders fiscal 1997 1996 approximately 42 47 respectively expenses allocated card production company continues undertake ongoing research engineering project activities related optical memory cards future projects require increased spending optical card industry grows income expense income fiscal 1998 154000 compared 64000 fiscal 1997 272000 fiscal 1996 company purchases japanese yen payment readerwriters purchased japanese supplier thus companys normal operations subject gains losses fluctuations yendollar exchange rate net income fiscal 1998 included 16000 gain foreign currency exchange versus 22000 gain fiscal 1997 income type fiscal 1996 first quarter fiscal 1996 company received 200000 nonrefundable deposit toward license agreement license agreement consummated deposit forfeited licensee income forfeiture deposit recorded income fiscal 1996 income type fiscal 1998 fiscal 1997 interest income fiscal 1998 148000 compared 50000 fiscal 1997 78000 fiscal 1996 changes interest income year due generally changes average invested funds companys interest expense shortterm loans 10000 fiscal 1998 8000 fiscal 1997 8000 fiscal 1996 liquidity march 31 1998 company cash equivalents 4830000 current ratio 49 1 longterm debt net cash used operating activities 71000 fiscal 1998 compared 813000 fiscal 1997 940000 fiscal 1996 current level revenues sufficient generate cash operations expenses fluctuations operating assets liabilities use cash quarters provide cash quarters losses could recur us government orders decrease delays customers development opticalcardbased programs corresponding commercialization companys optical cards related products company established line credit current plans company may negotiate line credit becomes appropriate although assurance made financing would available needed result profit recorded fiscal 1998 companys accumulated deficit reduced 25717000 march 31 1998 fiscal 1998 stockholders equity increased 5650000 9709000 due 1831000 profit 1880000 net expenses received company sale 200000 shares common stock privateplacement transactions october 1997 1939000 received company stock issued fiscal 1998 employee stock purchase plan 1991 stock option plan companys total deferred income tax asset 15445000 march 31 1998 utilized total deferred income tax asset would reduce future tax expense payments included amounts derived federal income tax net operating losses expire various dates 2001 2012 amounts state income tax net operating losses expire various dates 1999 2002 amounts tax credits expire 2000 2004 except alternative minimum tax credits expiration ability company utilize deferred tax asset contingent upon generating sufficient income within stated time periods view uncertain value asset company recorded full valuation allowance therefore part total deferred tax asset 15445000 added stockholders equity companys balance sheet company planning install additional 15 million capital equipment leasehold improvements card production facility end september 1998 assets production advanced optical cards new features manufacturingprocess improvements result production capacity 8 million cards annually company believes additional investment 7 million 10 million production equipment automatic inspection equipment may required produce advanced optical cards rate 25 million cards per year currently company intends purchase equipment incrementally commercial orders optical memory cards justify increased production capacity addition investment used expansion company also make additional capital expenditures cost savings quality improvements purposes fiscal 1998 company employees consultants purchased company 283600 shares registered common stock average price 652 per share exercise stock options companys 1991 stock option plan resulted additional cash receipts company 1850000 march 31 1998 company employees consultants held unexercised vested inthemoney options purchase 543200 shares common stock exercise prices ranging 456 1306 per share weighted average 807 per share stock options exercised would provide company cash amount 4381000 new accounting pronouncements june 1997 financial accounting standards board fasb issued statement financial accounting standard sfas 130 reporting comprehensive income establishes standards reporting comprehensive income components revenues expenses gains losses financial statements sfas 130 requires classification comprehensive income financial statement display accumulated balance comprehensive income separately retained earnings additional paidin capital sfas 130 effective fiscal years beginning december 15 1997 company believes pronouncement material effect financial statements june 1997 fasb also issued sfas 131 disclosures segments enterprise related information pronouncement established standards reporting information operating segments annual financial statements requires enterprises report selected information operating segments interim financial reports shareholders sfas 131 also establishes standards related disclosures products services geographic areas major customers sfas 131 effective fiscal years beginning december 15 1997 although earlier application encouraged company yet determine impact adoption new pronouncement forwardlooking statements certain statements made relating plans objectives economic performance go beyond historical information may provide indication future results extent forwardlooking statements within meaning section 21e securities exchange act 1934 amended subject factors could cause actual results differ forwardlooking statement particular ability company maintain profitable level optical memory card sales subject risks uncertainties respect customer diversification customer expansion economic availability readerwriters implementation ongoing commercial applications customers economic configuration operation companys card manufacturing facility increased output levels factors described narrative section form 10k documents filed company time securities exchange commission item 8 item 7 managements discussion analysis financial condition results operations results operationsfiscal 1999 compared fiscal 1998 1997 revenues companys total revenues fiscal 1999 15850000 compared 11081000 fiscal 1998 3529000 fiscal 1997 product revenues sales lasercardr optical memory cards related products totaled 15102000 fiscal 1999 compared 9844000 fiscal 1998 3510000 fiscal 1997 increases product revenues periods due primarily sale bordercrossing cards laser visa cards us department state application permanent resident cards green cards us immigration naturalization service ins companys card shipments customers totaled approximately 4 million optical memory cards fiscal 1999 23 million cards fiscal 1998 456000 cards fiscal 1997 applications companys lasercard products include medical data applications united states various programs europe asia including hospital patientrecord card system vehicle warranty maintenance records card us governmentrelated programs including us department defense automated manifest card ins green card us department state laser visa card fiscal 1999 company sold lasercard products provided services approximately 33 customers six states 17 foreign countries addition using marketing staff company utilizes valueadded reseller var companies licensees development commercial markets applications lasercard products product sales vars licensees include companys optical memory cards companys system software optical card readerwriters made licensee company may include addon peripherals made companies equipment adding digitized photo fingerprint hand template signature cards varslicensees may add application software personal computers pcs peripherals resell products integrated data systems enduser customers assurances new existing var licensee company country successful markets place followon orders company additional quantities cards systems order upgrade customer base increase probability success company continue efforts recruit new varslicensees eliminate nonproductive vars company provides customer technical support system software assist vars licensees software important factor developing commercial markets optical memory cards companys system software consists optical card interface softwaredevice drivers file systems software development tools demonstration software companys vars andor customers develop software specific enduser applications several vars written optical card software programs applications automobile warranty maintenance records cargo manifesting digital optical key systems admissionsid data logging systems various medicalrelated applications medical image storage health history cards company recently finished development complete card issuing application done coordination existing commercial software company offered sale vars greatly reduce need vars develop personalization software optical memory cards used conjunction card readerwriter device connects personal computer pc readerwriter integrated pc logical drive driveletter access manner floppy disk drives readerwriters sold varslicensees customers company price performance availability readerwriters factors commercialization optical cards company sells readerwriters thousand dollars per unit units generally include companys interface softwaredevice drivers prior fiscal 1999 company purchased readerwriters japanese licensee nippon conlux co ltd conlux companys sole supplier readerwriters may 28 1999 arrangements completed conlux company purchase sets parts assemble readerwriters united states rather continuing purchase complete readerwriters assembled japan conlux launching readerwriter manufacturing development operation 5000squarefoot leased facility added staff estimated reduce net income fiscal 2000 1 million 10 cents per share occupancyrelated expenses depreciation amortization salaries fringe benefits certain onetime expenditures estimated 250000 readerwriter assembly training investment readerwriterrelated inventory estimated 2 million capital expenditures readerwriter assembly design budgeted approximately 12 million fiscal 2000 including estimated 300000 capitalized technology transfer costs amortized three years company also obligated pay running patent royalty sales readerwriters company assumed worldwide responsibility repair maintenance conlux readerwriter units 1995 highly skilled technical staff support function company maintains inventory readerwriters believes adequate meet customer demand increases sharply short period time initial shortage readerwriters could result also interruption change supply readerwriter parts could cause delay readerwriter optical memory card shipments possible loss sales would adversely affect operating results workstation revenues company recorded revenues 820000 fiscal 1998 delivery six prototype multitechnology card readers multitechnology card workstations existing customer multitechnology card workstations write andor read cards one following technologies optical memory stripe ic chip magnetic stripe ocrb optical character recognition 2dimensional bar code costs development manufacture workstations charged cost sales revenues type fiscal 1997 fiscal 1999 license revenues license fees 700000 fiscal 1999 400000 fiscal 1998 license fee revenues fiscal 1997 fiscal 1999 license revenues included 200000 agreement provide technical information 500000 together prioryear payment completed purchase nonexclusive license optical memory card distribution optical memory card distribution licenses grant right purchase cards companys favorable pricing fiscal 1998 license revenue included 400000 sale patent license fees received company unconditional nonrefundable significant obligations remain unfulfilled company licenses company rely license fees finance operations royalty revenues royalty revenues 48000 fiscal 1999 17000 fiscal 1998 19000 fiscal 1997 company cannot predict whether equipment card sales licensees result material royalties company therefore company relying royalty income expect significant factor near term backlog march 31 1999 backlog lasercard optical memory cards approximately 44 million 75 million order optical memory cards received company six weeks later us department state laser visa cards ins green cards margins gross margin product sales fiscal 1999 49 compared 44 fiscal 1998 32 fiscal 1997 due largely increase card sales volume gross margin fluctuate changes product mix cards card readerwriter equipment lower gross profit margins cards therefore gross margin percentage next year could decrease greater proportion product sales comes readerwriter equipment present due startup readerwriter assembly activities income expenses selling general administrative expenses sga expenses 3698000 fiscal 1999 2978000 fiscal 1998 2602000 fiscal 1997 increases fiscal 1999 1998 versus prior years due mainly higher expenses payroll marketing customer technical support activities sga expenses grow fiscal 2000 compared fiscal 1999 due increases direct marketing company expenses related startup readerwriter assembly discussed research engineering expenses research engineering expenses 456000 fiscal 1999 compared 435000 fiscal 1998 938000 fiscal 1997 expense reduction 1998 compared 1997 due primarily accounting facility costs rather reduction research engineering activities optical memory card facility used engineering manufacturing therefore facility costs depreciation expense building lease payments costs allocated manufacturing engineering based upon level activity respective areas substantially expenses allocated card production fiscal 1999 1998 substantial increase card production customer orders fiscal 1997 approximately 42 expenses allocated card production company continues undertake ongoing research engineering project activities related optical memory cards associated equipment future projects require increased spending optical card industry grows company anticipates increased research engineering spending fiscal 2000 optical memory card readerwriter development discussed income expense total net income fiscal 1999 268000 compared 154000 fiscal 1998 64000 fiscal 1997 company purchases japanese yen payment readerwriters purchased japanese supplier equipment delivery dates payment dates coincide thus companys normal operations subject gains losses fluctuations yendollar exchange rate net income included loss 37000 foreign currency exchange fiscal 1999 versus 16000 gain fiscal 1998 22000 gain fiscal 1997 interest income 319000 fiscal 1999 148000 fiscal 1998 50000 fiscal 1997 changes interest income year due generally changes average invested funds companys interest expense shortterm loans 7000 fiscal 1999 10000 fiscal 1998 8000 fiscal 1997 liquidity capital resources march 31 1999 company cash equivalents 8066000 current ratio 71 1 longterm debt net cash provided operating activities 4292000 fiscal 1999 compared 71000 used operating activities fiscal 1998 813000 used operating activities fiscal 1997 fiscal 1999 change comparison fiscal 1998 1997 due mainly increase card sales current level revenues sufficient generate cash operations expenses fluctuations operating assets liabilities use cash quarters provide cash quarters losses would recur companys largest us government programs canceled renewed replaced card orders company established line credit current plans company may negotiate line credit becomes appropriate although assurance made financing would available needed result 4127000 profit recorded fiscal 1999 companys accumulated deficit reduced 21629000 march 31 1999 fiscal 1999 stockholders equity increased 14954000 4127000 profit 1118000 received company stock issued fiscal 1999 employee stock purchase plan 1991 stock option plan companys total deferred income tax asset 14380000 march 31 1999 utilized total deferred income tax asset would reduce future tax expense profitandloss statement 14380000 would reduce future tax payments 14268000 included amounts derived federal income tax net operating losses expire various dates 2002 2012 amounts state income tax net operating losses expire 2002 amounts tax credit carryforwards expire various dates 2000 2007 except alternative minimum tax credits expiration ability company utilize deferred tax asset contingent upon generating sufficient income within stated time periods uncertain total deferred tax asset realized company recorded full valuation allowance therefore part total deferred tax asset 14380000 added stockholders equity companys balance sheet production stateoftheart optical memory cards companys card production capacity exceeds 6 million cards per year capacity expanded production capacity exceeding 8 million cards per year sixmonth period expenditure approximately 15 million previously budgeted purpose company plans purchase additional production equipment series steps optical memory card orders expand justify production capacity increases rate 25 million cards per year addition investment used expansion company also make additional capital expenditures cost savings quality improvements purposes company believes next years capital expenditures would minimum 15 million per year card production equipment automatic inspection equipment addition companys plans fiscal 2000 include approximately 12 million equipment capital expenditures readerwriter assembly design discussed fiscal 1999 company employees consultants purchased company 137500 shares registered common stock average price 717 per share exercise stock options companys 1991 stock option plan resulted cash receipts company 986000 optionees permitted exercise company stock options using shares already fiscal 1999 optionees surrendered 5877 previously owned shares purchase 9000 new shares exercise stock options march 31 1999 company employees consultants held unexercised vested inthemoney options purchase 355350 shares common stock exercise prices ranging 456 988 per share weighted average 723 per share stock options exercised cash would provide company cash amount 2570000 forwardlooking statements certain statements made report relating plans objectives economic performance go beyond historical information may provide indication future results extent forwardlooking statements within meaning section 21e securities exchange act 1934 amended subject factors could cause actual results differ forwardlooking statement particular ability company maintain profitable level optical memory card sales subject risks uncertainties respect changes technology customer diversification customer expansion ability economically produce optical card readerwriters implementation ongoing commercial applications customers economic configuration operation companys card manufacturing facility increased output levels factors described narrative section form 10k documents filed company time securities exchange commission item 8 item 7a qualitative quantitative disclosures market risk interest rate risk company invests cash beyond needed daily operations high quality debt securities company seeks primarily preserve value liquidity capital secondarily safely earn income investments accomplish goals company invests debt securities issued us treasury us government agencies corporations b debt instruments meet following criteria commercial paper rated a1p1 debt instruments rated aaa rated major rating services readily sold cash foreign currency exchange rate risk company sells products various international markets sales contracted paid us dollars march 31 2002 company outstanding foreign currency hedge contracts accordingly company material foreign currency exchange risk march 31 2002 fiscal 2002 material changes companys exposure market risk changes interest rates item 8 item 7a quantitative qualitative disclosures market risks interest rate risk invest cash beyond needed daily operations high quality debt securities seek primarily preserve value liquidity capital secondarily safely earn income investments accomplish goals invest debt securities issued us treasury us government agencies state agencies corporations b debt instruments meet following criteria commercial paper rated a1p1 debt instruments rated aaa rated major rating services readily sold cash investments fixed rate floating rate interest earning instruments carry degree interest rate risk fixed rate securities may fair market value adversely impacted rise interest rates floating rate securities may produce less income expected interest rates fall due part factors future investment income may fall short expectations changes interest rates may suffer losses principal forced sell securities seen decline market value changes interest rates material changes fiscal year 2007 exposure market risk changes interest rates following summarizes shortterm investments fair value weighted average yields expected maturity dates fiscal years ended march 31 thousands longterm investments march 31 2007 2006 foreign currency exchange rate risk us operations sell products various international markets fiscal 2007 revenue german subsidiary approximately 118 million denominated foreign currency addition raw material purchases purchased services denominated foreign currency cash provided byused ccd operating activities immaterial use shortterm foreign exchange forward contracts mitigate foreign currency risk associated primarily intercompany receivables payables loans receivable denominated euros german subsidiary foreign exchange forward contracts designated accounting purposes hedging instruments sfas 133 “accounting derivative instruments hedging activities” amended accordingly gains losses resulting changes fair value forward contract reported income net expenses gains losses forward contracts generally offset gains losses associated underlying foreign currency denominated intercompany receivables payables loans receivable march 31 2007 foreign exchange forward contract maturity less 30 days purchase 23 million euros fair value forward contract material march 31 2007 item 8 item 7a quantitative qualitative disclosures market risks interest rate risk invest cash beyond needed daily operations high quality debt securities seek primarily preserve value liquidity capital secondarily safely earn income investments accomplish goals invest debt securities issued us treasury us government agencies state agencies corporations b debt instruments meet following criteria ● commercial paper rated a1p1 debt instruments rated aaa rated major rating services ● readily sold cash investments fixed rate floating rate interest earning instruments carry degree interest rate risk fixed rate securities may fair market value adversely impacted rise interest rates floating rate securities may produce less income expected interest rates fall due part factors future investment income may fall short expectations changes interest rates may suffer losses principal forced sell securities seen decline market value changes interest rates auction rate securities structured shortterm interest rate reset dates generally 28 35 days contractual maturities well excess ten years auction rate securities consist investments secured pools student loans guaranteed 95 principal interest federal family education loan program “ffelp aaa rated believe credit quality securities high based guarantees invested auction rate securities secured mortgages collateralized debt obligations end reset period investors sell continue hold securities par value auction process historically provided liquid market auction rate securities recently however certain auctions failed due sell orders exceeding buy orders continued see deterioration market types securities spread initially primarily subprime mortgage related securities forms securities funds associated failed auctions accessible successful auction occurs buyer found outside auction process underlying securities matured recalled issuer given recent disruptions credit markets fact liquidity types securities remains uncertain march 31 2008 classified auction rate securities longterm asset consolidated balance sheet ability liquidate securities next 12 months uncertain based analysis otherthantemporary impairment factors recorded temporary impairment within accumulated comprehensive loss approximately 06 million march 31 2008 related auction rate securities auction rate securities portfolio march 31 2008 129 million continued experience failed auctions marketable securities reported fair value related unrealized gains losses included accumulated comprehensive income loss component shareholders equity net tax evaluate investments periodically possible otherthantemporary impairment reviewing factors length time extent fair value cost basis financial condition issuer ability intent hold investment period time may sufficient anticipated recovery market value record impairment charge extent carrying value available sale securities exceeds estimated fair market vale securities decline value determined otherthantemporary refer note 2 notes consolidated financial statements item 8 “financial statements supplementary data” discussion investments marketable securities following summarizes investments fair value weighted average yields expected maturity dates fiscal years ended march 31 thousands foreign currency exchange rate risk us operations sell products various international markets fiscal year 2008 revenue german subsidiary approximately 132 million denominated foreign currency addition raw material purchases purchased services denominated foreign currency cash provided byused ccd operating activities immaterial use shortterm foreign exchange forward contracts mitigate foreign currency risk associated primarily intercompany receivables payables loans receivable denominated euros german subsidiary foreign exchange forward contracts designated accounting purposes hedging instruments sfas 133 accounting derivative instruments hedging activities amended accordingly gains losses resulting changes fair value forward contract reported income net expenses gains losses forward contracts generally offset gains losses associated underlying foreign currency denominated intercompany receivables payables loans receivable march 31 2008 foreign exchange forward contract maturity less 30 days purchase 12 million euros fair value forward contract material march 31 2008 item 8 item 7a quantitative qualitative disclosures market risks interest rate risk company invests cash beyond needed daily operations high quality debt securities company seeks primarily preserve value liquidity capital secondarily safely earn income investments accomplish goals company invests debt securities issued us treasury us government agencies state agencies corporations b debt instruments meet following criteria commercial paper rated a1p1 debt instruments rated aaa rated major rating services readily sold cash investments fixed rate floating rate interest earning instruments carry degree interest rate risk fixed rate securities may fair market value adversely impacted rise interest rates floating rate securities may produce less income expected interest rates fall due part factors companys future investment income may fall short expectations changes interest rates may suffer losses principal forced sell securities seen decline market value changes interest rates material changes fourth quarter fiscal 2005 companys exposure market risk changes interest rates following summarizes shortterm longterm investments fair value weighted average yields expected maturity dates march 31 2005 thousands foreign currency exchange rate risk companys us operations sell products various international markets date immaterial amount sales denominated euros addition raw material purchases purchased services denominated euros march 31 2005 outstanding balance debt relating acquisition challenge card design plastikkarten gmbh cards gmbh germany immaterial accordingly exchange rate risk related debt minimal march 31 2005 company entered forward exchange contract hedge potentially minimize foreign currency exchange risk continue evaluate exposure foreign currency exchange rate risk regular basis item 8 item 7a quantitative qualitative disclosures market risks interest rate risk invest cash beyond needed daily operations high quality debt securities investment purposes seek primarily preserve value liquidity capital secondarily safely earn income investments accomplish goals invest debt securities issued us treasury us government agencies state agencies corporations b debt instruments meet following criteria commercial paper rated a1p1 debt instruments rated aaa rated major rating services readily sold cash investments fixed rate floating rate interest earning instruments carry degree interest rate risk fixed rate securities may fair market value adversely impacted rise interest rates floating rate securities may produce less income expected interest rates fall due part factors future investment income may fall short expectations changes interest rates may suffer losses principal forced sell securities seen decline market value changes interest rates subject interest rate risk shortterm borrowings credit line agreement ubs valued 79 million fiscal year ended march 31 2010 secured arss currently hold however credit line provides nocost loan interest rate charged credit line equal interest rate earned ars entered rights settlement whereby ubs offered purchase certain arss placed including hold par face value ubs “right” purchase arss par time july 3 2012 “right” sell arss par ubs beginning june 30 2010 july 3 2012 short longterm borrowings credit line ubs capitalized lease agreements would give rise significant interest rate risk although interest income sensitive changes general level us interest rates particularly since portion investments money market funds expect operating results cash flows affected significant degree effects change market interest rates investments enter investments trading purposes although ars investments designated trading securities march 31 2010 expect recover par value arss based “rights” agreement ubs intend sell ubs june 30 2010 hence classified arss investments current assets including put option march 31 2010 believe sufficient available cash execute business plan fiscal year 2011 expect estimated level revenues sufficient generate cash operating activities period refer note 2 caption 8 cash equivalents shortterm investments longterm investments consolidated financial statement discussion noncurrent investments fair value fluctuation risk march 31 2010 insufficient observable arss market information available determine fair value ars investments put option therefore order validate fair value estimate securities incorporated assumptions credit quality financial standing issuer final stated maturities estimates probability issue called prior final maturity impact due extended periods maximum auction rates liquidity risk premium broker quotes independent valuators using widely accepted financial models management believes reasonable estimates reflecting unique circumstances subject slars method valuing put option forward contracts reasonable march 31 2010 held 119 million par value fair value 111 million marketable securities consisting arss also included current investments put option received rights offering ubs fair value approximately 08 million march 31 2010 ubs “right” purchase arss par time july 3 2012 “right” sell arss par ubs beginning june 30 2010 july 3 2012 hence classified ars investments put options current assets consolidated balance sheet march 31 2010 recognized net loss 03 million related fair values arss put option fiscal year ended march 31 2009 gain like amount fiscal year ended march 31 2010 believe recover full amount arss investment par june 30 2010 intend exercise put option ubs plus minus ten percent change differential ubs’ credit risk compared market interest rates material impact valuation investments following summarizes investments fair value weighted average yields expected maturity dates fiscal years ended march 31 thousands foreign currency exchange rate risk us operations sell products various international markets fiscal year 2010 revenue german subsidiary approximately 140 million net income 13 million denominated foreign currency euro respectively addition raw material purchases purchased services denominated foreign currency use shortterm foreign exchange forward contracts mitigate foreign currency risk associated primarily intercompany receivables payables loans receivable denominated euros german subsidiary foreign exchange forward contracts designated accounting purposes hedging instruments asc815 accounting derivative instruments hedging activities amended accordingly gains losses resulting changes fair value forward contract reported income net expenses gains losses forward contracts generally offset gains losses associated underlying foreign currency denominated intercompany receivables payables loans receivable march 31 2010 foreign exchange forward contract maturity less 30 days purchase 13 million euros fair value forward contract material march 31 2010 plus minus ten percent change differential ubs’ credit risk compared market interest rates material impact valuation investments item 8 item 7a qualitative quantitative disclosures market risks interest rate risk company invests cash beyond needed daily operations high quality debt securities company seeks primarily preserve value liquidity capital secondarily safely earn income investments accomplish goals company invests debt securities issued us treasury us government agencies corporations b debt instruments meet following criteria x commercial paper rated a1p1 debt instruments rated aaa rated major rating services x readily sold cash foreign currency exchange rate risk company sells products various international markets sales denominated us dollars march 31 2003 company outstanding foreign currency hedge contracts accordingly company material foreign currency exchange risk march 31 2003 fiscal 2003 material changes companys exposure market risk changes interest rates item 8 item 7a quantitative qualitative disclosures market risks interest rate risk company invests cash beyond needed daily operations high quality debt securities company seeks primarily preserve value liquidity capital secondarily safely earn income investments accomplish goals company invests debt securities issued us treasury us government agencies corporations b debt instruments meet following criteria commercial paper rated a1p1 debt instruments rated aaa rated major rating services readily sold cash material changes fourth quarter fiscal 2004 companys exposure market risk changes interest rates foreign currency exchange rate risk company sells products various international markets sales denominated us dollars however raw material purchased services denominated euros also march 31 2004 company debt relating acquisition challenge card design plastikkarten gmbh cards gmbh germany amount 29 million euros accordingly company subject exposure exchange rate euros increases relation us dollars march 31 2004 company entered forward exchange contract hedge potentially minimize foreign currency exchange risk item 8 item 7a quantitative qualitative disclosures market risks interest rate risk company invests cash beyond needed daily operations high quality debt securities company seeks primarily preserve value liquidity capital secondarily safely earn income investments accomplish goals company invests debt securities issued us treasury us government agencies state agencies corporations b debt instruments meet following criteria commercial paper rated a1p1 debt instruments rated aaa rated major rating services readily sold cash investments fixed rate floating rate interest earning instruments carry degree interest rate risk fixed rate securities may fair market value adversely impacted rise interest rates floating rate securities may produce less income expected interest rates fall due part factors company’s future investment income may fall short expectations changes interest rates may suffer losses principal forced sell securities seen decline market value changes interest rates material changes fourth quarter fiscal year 2006 companys exposure market risk changes interest rates following summarizes shortterm investments fair value weighted average yields expected maturity dates march 31 2006 thousands longterm investments march 31 2006 foreign currency exchange rate risk company’s us operations sell products various international markets date immaterial amount sales denominated euros addition raw material purchases purchased services denominated euros march 31 2006 outstanding balance debt relating acquisition challenge card design plastikkarten gmbh “ccd” immaterial accordingly exchange rate risk related debt minimal since acquisition cash provided byused ccd’s operating activities immaterial company uses shortterm foreign exchange forward contracts mitigate foreign currency risk associated primarily intercompany payables account loan receivables denominated euros german subsidiaries foreign exchange forward contracts designated accounting purposes hedging instruments sfas 133 “accounting derivative instruments hedging activities” amended accordingly gains losses resulting changes fair value forward contract reported selling general administrative expenses gains losses forward contracts generally offset gains losses associated underlying foreign currency denominated intercompany payable account loan receivables march 31 2006 foreign exchange forward contract maturity less 30 days purchase 19 million euros fair value forward contract material march 31 2006 item 8 item 7a market rate risks interest rate risk company invests cash beyond needed daily operations high quality debt securities company seeks primarily preserve value liquidity capital secondarily safely earn income investments accomplish goals company invests debt securities issued us treasury us government agencies corporations b debt instruments meet following criteria commercial paper rated a1p1 debt instruments rated aaa rated major rating services readily sold cash mature one year date purchase company foreign currency exchange rate risk company sells products various international markets sales contracted paid us dollars march 31 2001 company outstanding foreign currency hedge contracts accordingly company material foreign currency exchange risk march 31 2001 item 8 item 7a quantitative qualitative disclosures market risks interest rate risk invest cash beyond needed daily operations high quality debt securities seek primarily preserve value liquidity capital secondarily safely earn income investments accomplish goals invest debt securities issued us treasury us government agencies state agencies corporations b debt instruments meet following criteria commercial paper rated a1p1 debt instruments rated aaa rated major rating services readily sold cash investments fixed rate floating rate interest earning instruments carry degree interest rate risk fixed rate securities may fair market value adversely impacted rise interest rates floating rate securities may produce less income expected interest rates fall due part factors future investment income may fall short expectations changes interest rates may suffer losses principal forced sell securities seen decline market value changes interest rates subject interest rate risk shortterm borrowings credit line agreement ubs wherein drew aggregate 87 million fiscal year ended march 31 2009 secured arss currently hold however credit line provides nocost loan interest rate charged credit line equal interest rate earned ars entered rights settlement whereby ubs offered purchase certain arss placed including hold par face value ubs “right” purchase arss par time july 3 2012 “right” sell arss par ubs beginning june 30 2010 july 3 2012 short longterm borrowings credit line ubs capitalized lease agreements would give rise significant interest rate risk although interest income sensitive changes general level us interest rates particularly since portion investments money market funds expect operating results cash flows affected significant degree effects change market interest rates investments enter investments speculative purposes although ars investments designated trading securities march 31 2009 expect recover par value arss based “rights” agreement ubs believe sufficient available cash execute business plan fiscal year 2010 expect estimated level revenues sufficient generate cash operating activities period refer note 2 caption 8 cash equivalents shortterm investments longterm investments consolidated financial statement discussion noncurrent investments fair value fluctuation risk march 31 2009 insufficient observable ars market information available determine fair value ars investments put option therefore order validate fair value estimate securities incorporated assumptions credit quality financial standing issuer final stated maturities estimates probability issue called prior final maturity impact due extended periods maximum auction rates liquidity risk premium broker quotes independent valuators using widely accepted financial models management believes reasonable estimates reflecting unique circumstances subject slars method valuing put option forward contracts reasonable loss fair value arss investment net gain fair value put option resulted approximately 03 million noncash charge fiscal year 2009 believe assumptions used ubs’ credit risk remain unchanged june 30 2010 recover loss future periods quarter ended june 30 2010 following summarizes investments fair value weighted average yields expected maturity dates fiscal years ended march 31 thousands 1 unrealized loss income 2 unrealized loss included accumulated comprehensive income 3 unrealized gain income foreign currency exchange rate risk us operations sell products various international markets fiscal year 2009 revenue german subsidiary approximately 158 million net income 04 million denominated foreign currency euro addition raw material purchases purchased services denominated foreign currency use shortterm foreign exchange forward contracts mitigate foreign currency risk associated primarily intercompany receivables payables loans receivable denominated euros german subsidiary foreign exchange forward contracts designated accounting purposes hedging instruments sfas 133 accounting derivative instruments hedging activities amended accordingly gains losses resulting changes fair value forward contract reported income net expenses gains losses forward contracts generally offset gains losses associated underlying foreign currency denominated intercompany receivables payables loans receivable march 31 2009 foreign exchange forward contract maturity less 30 days purchase 13 million euros fair value forward contract material march 31 2009 item 8 item 7a market rate risks applicable item 8 item 8 consolidated financial statements supplementary data report independent public accountants drexler technology corporation audited accompanying consolidated balance sheets drexler technology corporation delaware corporation subsidiaries march 31 1996 1997 related consolidated statements operations stockholders equity cash flows three years period ended march 31 1997 financial statements responsibility companys management responsibility express opinion financial statements based audits conducted audits accordance generally accepted auditing standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion financial statements referred present fairly material respects financial position drexler technology corporation subsidiaries march 31 1996 1997 results operations cash flows three years period ended march 31 1997 conformity generally accepted accounting principles sarthur andersen llp arthur andersen llp san jose california april 21 1997 drexler technology corporation subsidiaries consolidated balance sheets march 31 1996 1997 thousands except share per share amounts accompanying notes integral part financial statements drexler technology corporation subsidiaries consolidated statements operations fiscal years ended march 31 1995 1996 1997 thousands except per share amounts accompanying notes integral part financial statements drexler technology corporation subsidiaries consolidated statements stockholders equity fiscal years ended march 31 1995 1996 1997 thousands except per share amounts accompanying notes integral part financial statements drexler technology corporation subsidiaries consolidated statements cash flows fiscal years ended march 31 1995 1996 1997 thousands accompanying notes integral part financial statements drexler technology corporation subsidiaries notes consolidated financial statements march 31 1997 1 organization operations drexler technology corporation wholly owned subsidiary lasercard systems corporation company develop manufacture market optical data storage products used personal computers information recording storage retrieval companys customers mainly valueadded reseller var companies throughout world develop commercial applications lasercardr products companys target markets include consumer business government applications portable recordable unitary record cards applications include healthcare secure access immigrationid cards vehicle maintenance cards company subject certain risks including competition substitute products larger companies need additional financing profitable operations external financing 2 summary significant accounting policies principles consolidation basis presentation consolidated financial statements include accounts drexler technology corporation wholly owned subsidiaries significant intercompany accounts transactions eliminated consolidation preparation financial statements conformity generally accepted accounting principles requires management make estimates assumptions affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenues expenses reporting period actual results could differ estimates fiscal period purposes presentation company indicated accounting period ending march 31 interim quarterly periods ending corresponding month end company fact operates reports quarterly periods ending friday closest month end fiscal 1995 1996 1997 52week years cash equivalents company considers highly liquid investments consisting primarily commercial paper original maturities three months less cash equivalents inventories stated lower cost market cost determined firstin firstout basis market based lower replacement cost estimated realizable value components inventories march 31 thousands company currently buys optical memory card readerwriters important component systems one supplier interruption change supply readerwriters could cause delay product shipments possible loss sales would adversely affect operating results property equipment components property equipment march 31 thousands depreciation provided estimated useful lives five seven years equipment furniture using doubledeclining balance straightline methods fiscal 1995 company completed review fixed asset lives determined actual lives manufacturing equipment net book value 1320000 generally longer estimated useful lives depreciation purposes therefore company extended estimated useful lives manufacturing equipment five years effective october 1 1994 addition company established salvage value approximately 315000 equipment leasehold improvements amortized shorter life asset life lease using straightline method patent costs incurred connection patents capitalized amortized estimated useful lives patents 9 17 years gross patent expenditures capitalized accumulated amortization march 31 follows thousands software development costs criteria set forth financial accounting standards 86 accounting costs computer software sold leased otherwise marketed capitalization software development costs begins upon establishment technological feasibility product company defines beta version software period time commencing product achieves beta status ending product available general release typically short accordingly amounts could capitalized sfas 86 consideration factors immaterial therefore software development costs capitalized company date advance payments customers company customarily receives advance payments orders placed customers advance payments deferred related orders shipped march 31 1997 approximately 99 total advance payments related contract one customer revenue recognition product sales primarily consist card sales readerwriters company generally recognizes revenue product sales time shipment appropriate provision made time estimated warranty costs license revenues include frontend license fees longterm royalty payments license fees generally recognized revenues license agreement signed longterm royalty payments recognized revenue realized licenses sold fiscal 1997 fiscal 1995 license revenue included 1 million sale optical memory card distribution license fiscal 1996 license revenue included 200000 agreement comprised trademark license installment payment toward possible future license optical memory card distribution optical memory card distribution licenses grant right purchase cards companys favorable pricing cost license revenue material included selling general administrative expenses stockbased compensation effective april 1 1996 company adopted disclosure provisions financial accounting standards 123 accounting stockbased compensation accordance provisions sfas 123 company applies accounting principles board opinion apbo 25 related interpretations accounting stock option plan note 6 consolidated financial statements contains summary pro forma effects reported net income earnings per share fiscal 1996 1997 based fair value options granted grant date prescribed sfas 123 longlived assets march 1995 financial accounting standards board fasb issued sfas 121 accounting impairment longlived assets longlived assets disposed sfas 121 requires longlived assets reviewed impairment necessary impairment loss recorded whenever events changes circumstances indicate carrying amount asset may recoverable sfas 121 effective fiscal year 1997 adoption sfas 121 material effect financial position results operations company fasb 128 disclosure february 1997 fasb issued sfas 128 earnings per share simplifies standards computing earnings per share previously found apbo 15 sfas 128 replaces presentation primary earnings per share presentation basic earnings per share excludes dilution sfas 128 also requires dual presentation basic diluted earnings per share face income statement entities complex capital structures requires reconciliation diluted earnings per share computed similarly fully diluted earnings per share pursuant apb 15 sfas 128 must adopted financial statements issued periods ending december 15 1997 including interim periods earlier application permitted sfas 128 requires restatement priorperiod earnings per share data presented company expect adoption sfas 128 material impact financial statements reclassifications certain reclassifications made prior year presentation conform current year presentation 3 loss per share loss per share computed based upon weighted average number common shares outstanding 4 major customers export sales company operates one industry segmentthe development manufacture sale optical data products used computer data storage five customers accounted 10 revenues one years fiscal 1995 1996 1997 follows na applicable less 10 revenues march 31 1997 two substantial us customers comprised 70 total accounts receivable march 31 1996 two substantial us customers comprised 96 total accounts receivable primarily products sold us government subcontract revenues region follows thousands three foreign countries accounted 10 revenues one years fiscal 1995 1996 1997 follows fiscal 1995 south korea 34 czech republic 14 fiscal 1996 philippine islands 19 fiscal 1997 philippine islands 14 5 discontinued operations fourth quarter fiscal 1993 company closed precision photoglass inc subsidiary manufacturer photoplates semiconductor industry income discontinued operations included consolidated statements operations contained herein fiscal year ended march 31 1995 composed reduction expense reserve 6 common stock option plan company one stock option plan 1991 stock option plan 1991 option plan 1401020 shares common stock reserved march 31 1997 company accounts plan apb opinion 25 accordingly compensation expense recognized consolidated financial statements sfas 123 requires disclosure pro forma net loss per share company adopted fair value method beginning fiscal 1996 fair value method compensation cost measured grant date based value award recognized service period sfas 123 fair value stockbased awards employees calculated use option pricing models require subjective assumptions including future stock price volatility estimated term calculations made using blackscholes optionpricing model following weightedaverage assumptions used grants fiscal 1996 1997 riskfree interest rate 6 expected lives two five years expected volatility 55 fair value option grant estimated date grant calculations resulted weighted average fair values 325 642 respectively options granted fiscal 1996 1997 pro forma net loss 2701000 031 per share fiscal 1996 3397000 038 per share fiscal 1997 sfas 123 method accounting applied options granted prior april 1 1995 resulting pro forma compensation costs may representative costs would expected future years companys 1991 stock option plan provides stock options may granted employees officers consultants company option prices may less 100 fair market value shares date grant options exercisable determined board directors term option cannot exceed ten years except option term cannot exceed five years case incentive stock options granted principal shareholder total option price paid options exercised fiscal 1995 1996 1997 62278 1893609 2036559 respectively following table lists option activity stock option plan occurred since march 31 1994 stock option table following table summarizes information stock options outstanding march 31 1997 employee stock purchase plan company employee stock purchase plan stock purchase plan 65170 shares reserved march 31 1997 stock purchase plan eligible employees may designate 2 6 compensation withheld purchase shares common stock 67 fair market value 33 differential price shares sold stock purchase plan charged operations compensation stock purchase plan employees purchased 4673 shares fiscal 1995 3295 shares fiscal 1996 4242 shares fiscal 1997 average purchase price per share 335 700 749 respectively weighted average fair value per share shares purchased fiscal 1995 1996 1997 500 1045 1117 respectively 7 commitments company occupies facilities various operating leases rent expense relating facilities approximately 363000 fiscal 1995 369000 fiscal 1996 372000 fiscal 1997 march 31 1997 future minimum rental payments relating leases thousands 8 income taxes major components net deferred tax asset march 31 follows thousands company established valuation allowance total deferred tax asset uncertain deferred tax asset realized companys federal net operating losses expire various dates 2001 year 2012 companys state net operating losses expire various dates 1998 year 2002 tax credit carryforwards expire various dates 2000 year 2004 9 income first quarter fiscal 1996 company received 200000 nonrefundable deposit toward license agreement license agreement consummated deposit forfeited licensee income forfeiture deposit recorded income fiscal 1996 quarterly financial information unaudited quarterly results operations company fiscal 1996 fiscal 1997 follows thousands except per share amounts item 9 item 8 consolidated financial statements supplementary data report independent accountants board directors stockholders drexler technology corporation opinion accompanying consolidated balance sheet march 31 2002 related consolidated statements income stockholders equity cash flows present fairly material respects financial position drexler technology corporation subsidiaries march 31 2002 results operations cash flows year ended conformity accounting principles generally accepted united states america financial statements responsibility companys management responsibility express opinion financial statements based audit conducted audit statements accordance auditing standards generally accepted united states america require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements assessing accounting principles used significant estimates made management evaluating overall financial statement presentation believe audit provides reasonable basis opinion pricewaterhousecoopers llp san jose california may 13 2002 report independent public accountants board directors stockholders drexler technology corporation audited accompanying consolidated balance sheet drexler technology corporation delaware corporation subsidiaries march 31 2001 related consolidated statements income stockholders equity cash flows two years period ended march 31 2001 restated consolidated financial statements schedule referred responsibility companys management responsibility express opinion consolidated financial statements schedule based audits conducted audits accordance auditing standards generally accepted united states america standards require plan perform audit obtain reasonable assurance whether consolidated financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures consolidated financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall consolidated financial statement presentation believe audits provide reasonable basis opinion consolidated financial statements referred present fairly material respects financial position drexler technology corporation subsidiaries march 31 2001 results operations cash flows two years period ended march 31 2001 conformity accounting principles generally accepted united states america audits made purpose forming opinion basic financial statements taken whole schedule ii included form 10k presented purposes complying securities exchange commissions rules part basic financial statements schedule subjected auditing procedures applied audits basic financial statements opinion fairly states material respects financial data required set forth therein relation basic financial statements taken whole arthur andersen llp san jose california may 13 2002 drexler technology corporation subsidiaries notes consolidated financial statements 1 organization operations drexler technology corporation wholly owned subsidiary lasercard systems corporation company develop manufacture optical data storage products featuring lasercardr optical memory cards chipready smartopticaltm cards used personal computers information recording storage retrieval products include optical memory cards optical card readwrite drives related data systems peripherals companys customers mainly valueadded reseller var companies licensees united states countries develop commercial applications lasercard products target markets products include government commercial applications portable recordable secure identification cards unitaryrecord cards applications include us immigration green cards laser visa cards border crossing cargo manifests biometric ids access cards walletcard applications company subject certain risks including limited competition substitute products larger companies dependence certain suppliers customers 2 summary significant accounting policies principles consolidation basis presentation consolidated financial statements include accounts drexler technology corporation wholly owned subsidiaries significant intercompany accounts transactions eliminated consolidation preparation financial statements conformity accounting principles generally accepted united states america requires management make estimates assumptions affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenues expenses reporting period actual results could differ estimates fiscal period purposes presentation company indicated accounting period ending march 31 company fact operates reports quarterly periods ending friday closest month end fiscal 2000 ended march 31 2000 fiscal 2001 ended march 30 2001 fiscal 2002 ended march 29 2002 cash equivalents shortterm investments longterm investments company considers highly liquid investments consisting primarily commercial paper taxable notes us government bonds maturities three months less date purchase cash equivalents investments original maturities three months one year classified shortterm investments original maturities greater one year classified longterm investments management determines appropriate classification debt equity securities time purchase reevaluates classification investments balance sheet date shortterm investments held maturity carrying amounts shortterm investments march 31 2001 2002 thousands 2001 2002 commercial paper 5387 corporate bonds 5199 us government agency obligations 1900 certificates deposit 1784 5387 8883 march 31 2002 scheduled maturities heldtomaturity investments thousands one year 8883 one year five years 1002 9885 years ended march 31 2001 2002 maturities purchases thousands 2001 2002 purchases 18938 13964 maturities 18954 9466 16 4498 inventories stated lower cost market cost determined firstin firstout basis market based lower replacement cost estimated realizable value components inventories march 31 thousands 2001 2002 raw materials 2954 3063 workinprocess 552 479 finished goods 1267 1338 systems components held resale 108 93 4881 4973 property equipment components property equipment march 31 thousands 2001 2002 equipment furniture 16823 18425 leasehold improvements 2487 2554 19310 20979 property equipment recorded cost depreciation provided estimated useful lives four seven years equipment furniture using doubledeclining balance straightline methods leasehold improvements amortized shorter life asset life lease using straightline method depreciation expense fiscal 2000 2001 2002 777000 974000 1082000 respectively patent costs legal expenses incurred connection patents capitalized amortized estimated remaining useful lives patents six seventeen years costs incurred connection intangibles amortized using straightline method three years gross patent expenditures capitalized accumulated amortization march 31 follows thousands 2001 2002 gross patent intangible expenditures 3229 3327 accumulated amortization 2351 2715 878 612 company assesses need record impairment losses longlived assets used operations indicators impairment present ongoing basis company reviews value period amortization depreciation longlived assets date company needed record impairment losses longlived assets software development costs accordance statement financial accounting standards sfas 86 accounting costs computer software sold leased otherwise marketed development costs incurred research development new software products expensed incurred technological feasibility form working model established date companys software development completed concurrent establishment technological feasibility accordingly software development costs charged research engineering expenses accompanying statements income advance payments customers company customarily receives advance payments orders placed customers advance payments recorded liability balance sheet related orders shipped revenue recognition product sales primarily consist card sales readwrite drives company recognizes revenue product sales following criteria met 1 persuasive evidence arrangement exists 2 delivery occurred 3 fee fixed determinable 4 collectibility reasonably assured appropriate provision made time estimated warranty costs estimated returns license revenue consists frontend license fees longterm royalty payments recognized revenue realized cost license revenue material included selling general administrative expenses fiscal 2000 license revenue included 119000 realized sale license italy assemble optical card readerwriters using parts kits supplied company fiscal 2001 license revenue included 712000 italian readwrite drive assembly license 1465000 realized sale digital sound patent license see note 6 fiscal 2002 license revenue included 1206000 recognized digital sound patent licenses 119000 realized italian readwrite drive assembly license stockbased compensation effective april 1 1996 company adopted disclosure provisions sfas 123 accounting stockbased compensation accordance provisions sfas 123 company applies accounting principles board opinion apb 25 related interpretations accounting stock option plan note 5 consolidated financial statements contains summary pro forma effects reported net income earnings per share fiscal 2000 2001 2002 based fair value options date grant prescribed sfas 123 comprehensive income loss sfas 130 reporting comprehensive income comprehensive income loss defined changes equity enterprise except resulting stockholders transactions fiscal years ended march 31 2000 2001 2002 comprehensive income equaled net income segment reporting accordance sfas 131 disclosures segments enterprise related information company required disclose information operating segments company operates one industry segmentthe development manufacture sale optical data products used information storage retrieval recent accounting pronouncements june 2001 fasb approved issuance sfas 141 business combinations sfas 142 goodwill intangible assets result sfas 141 business combinations initiated june 30 2001 must accounted using purchase method accounting pooling interests method prohibited except business combinations initiated july 1 2001 sfas 141 impact companys consolidated financial statements fiscal 2002 among provisions sfas 142 requires 1 goodwill resulting acquisitions initiated june 30 2001 amortized 2 goodwill resulting business combinations initiated july 1 2001 continue amortized sfas 142 adopted point remaining goodwill balance longer subject amortization adoption sfas 142 april 1 2002 effect companys financial position results operations october 2001 fasb issued sfas 144 accounting impairment disposal longlived assets sfas 144 supercedes sfas 121 requires one accounting model used longlived assets disposed sale whether previously held used newly acquired broadening presentation discontinued operations include disposal transactions statement effective fiscal years beginning december 5 2001 company yet determined effect sfas 144 financial position results operations cash flows reclassifications certain reclassifications made prior year financial data conform current year presentation 3 net income per share company computes net income per share accordance sfas 128 earnings per share sfas 128 requires companies compute net income per share two different methods basic diluted present per share data periods statement income presented basic net income per share computed dividing net income weighted average number shares common stock outstanding diluted net income per share computed dividing net income weighted average number shares common stock common stock equivalents outstanding common stock equivalents consist stock options using treasury stock method reconciliation numerators denominators basic diluted net income per share computation fiscal years 2000 2001 2002 shown thousands except per share data stock options exercise price greater average market value periods excluded calculation diluted net income per share effect would antidilutive stock options purchase 1196841 321400 280950 shares excluded calculation diluted net income per share years ended march 31 2000 2001 2002 respectively 4 major customers export sales two customers accounted 10 revenues fiscal 2000 2001 one customer accounted 10 revenues fiscal 2002 follows fiscal year 2000 2001 2002 customer 63 62 81 customer b 33 22 7 two united states customers comprised 96 accounts receivable march 31 2001 one united states customer comprised 98 accounts receivable march 31 2002 revenues region follows thousands fiscal year 2000 2001 2002 united states 15037 21140 19292 europe 223 1408 834 asia 128 2299 579 rest world 55 59 35 15443 24906 20740 5 common stock option plan company one stock option plan stock option plan 2187702 shares common stock reserved march 31 2002 consisting 1873731 shares stock options already granted 313971 shares stock options yet granted company accounts plan apb 25 accordingly compensation expense stock option grants stock option plan recognized consolidated financial statements provisions apb 25 sfas 123 requires disclosure pro forma net income per share company adopted fair value method beginning fiscal 1996 fair value method compensation cost measured grant date based value award recognized service period sfas 123 fair value stockbased awards calculated use option pricing models require subjective assumptions including future stock price volatility estimated term calculations made using blackscholes option pricing model assumptions results shown following table fiscal year 2000 2001 2002 riskfree interest rate 6 5 expected volatility 50 weighted average fair values option grants 422 858 754 pro forma net income 3002 6089 2954 per share 30 58 28 calculations assume expected option life two ten years fair value option grant estimated date grant companys stock option plan provides stock options may granted employees officers directors consultants company option prices may less 100 fair market value shares date grant options granted consultants fiscal 2000 2001 2002 board directors specifies term options vesting schedule exercise options option term cannot exceed ten years except incentive stock options granted principal shareholder cannot exceed five years following table lists stock option plan activity march 31 1999 march 31 2002 following table summarizes information stock options outstanding march 31 2002 employee stock purchase plan company employee stock purchase plan stock purchase plan 102866 shares reserved march 31 2002 future purchases employees stock purchase plan eligible employees may designate 2 6 compensation withheld purchase shares common stock 67 trailing average price differential fair market value average price shares sold stock purchase plan charged company operations compensation expense taxed employee income stock purchase plan employees purchased 16857 shares fiscal 2000 12964 shares fiscal 2001 12942 shares fiscal 2002 average purchase price per share 606 fiscal 2000 951 fiscal 2001 1052 fiscal 2002 weighted average fair value per share shares purchased 963 fiscal 2000 1505 fiscal 2001 1797 fiscal 2002 6 commitments contingencies company occupies buildings various operating leases rent expense relating buildings approximately 480000 fiscal 2000 1077000 fiscal 2001 1169000 fiscal 2002 march 31 2002 future minimum rental payments relating leases thousands fiscal year 2003 1164 2004 1218 2005 908 2006 855 2007 139 thereafter 4284 july december 1998 company filed complaints us district court northern district california infringement certain patents owned company covering digital sound encoded motion picture film one complaint named defendants sony corporation provider sdds digital sound system numerous producers distributors exhibitors motion pictures sdds soundtracks complaint named defendants dolby laboratories inc provider dolby digital sound system numerous producers distributors exhibitors motion pictures dolby digital soundtracks defensive counterclaims filed defendants response complaints sony legal action settled parties resulting revenue company dolby legal action resulted settlement letter agreement process implemented definitive agreement prior settlements certain legal costs relating actions capitalized company amortization began fiscal year 1999 net book value capitalized legal costs written proceeds sony settlement payment fiscal year 2001 net settlement amount payable company settlements totaled approximately 2671000 deducting significant amounts related contingency interests recovery amount foreign withholding taxes previously capitalized legal costs approximately 1465000 net settlement amount recorded revenue fiscal 2001 balance 1206000 fiscal 2002 ongoing royalty payments resulting continuation alleged infringing activities defendants normal course business company subject various claims assertions opinion management ultimate disposition claims assertions material adverse impact financial position company 7 income taxes provision income taxes fiscal 2000 2001 2002 consists following thousands fiscal year 2000 2001 2002 current provision federal 37 136 49 state 104 220 213 foreign 354 141 710 262 deferred provision federal 3060 1807 3048 state 3060 1807 3048 income tax benefit 2919 1097 2786 companys effective tax rate differs statutory rate follows fiscal year 2000 2001 2002 tax rate reconciliation federal statutory rate 34 state tax net federal benefit 6 change valuation allowance 198 58 159 alternative minimum taxes 2 156 16 119 major components net deferred tax asset march 31 follows thousands 2001 2002 net operating loss carryforwards federal 10106 10420 tax credits 957 440 reserves accruals currently deductible tax purposes 2175 2373 depreciation 357 461 capitalized patent costs 221 175 38 211 total deferred tax asset 13336 13730 valuation allowance provision 4589 valuation allowance equity 3819 5318 net deferred tax asset 4928 8412 company analyzes deferred tax assets regard potential realization company hasestablished valuation allowance significant portion deferred tax assets based upon uncertainty realization company considered estimated future taxable income ongoing prudent feasible tax planning strategies assessing amount valuation allowance timing differences certain items included book income items included income tax returns therefore tax payments credits often occur different periods income tax expense benefit included statements income companys federal net operating loss carryforwards 30648000 expire various dates 2003 2022 utilized tax effect amount reflected deferred tax asset footnote amount 10640000 amount 5318000 credited equity released march 31 2002 company recognized prior net operating loss benefits impact net income tax credits amount 408000 alternative minimum taxes expiration tax credits amount 32000 expire 2007 utilized item 9 item 8 financial statements supplementary data report independent registered public accounting firm board directors stockholders lasercard corporation audited management’s assessment included management report internal controls financial reporting included item 9a lasercard corporation subsidiaries maintained effective internal control financial reporting march 31 2007 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission coso criteria company’s management responsible maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting responsibility express opinion management’s assessment opinion effectiveness company’s internal control financial reporting based audit conducted audit accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether effective internal control financial reporting maintained material respects audit included obtaining understanding internal control financial reporting evaluating management’s assessment testing evaluating design operating effectiveness internal control performing procedures considered necessary circumstances believe audit provides reasonable basis opinion company’s internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles company’s internal control financial reporting includes policies procedures 1 pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company 2 provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company 3 provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate opinion management’s assessment lasercard corporation subsidiaries maintained effective internal control financial reporting march 31 2007 fairly stated material respects based coso criteria also opinion company maintained material respects effective internal control financial reporting march 31 2007 based coso criteria also audited accordance standards public company accounting oversight board united states consolidated balance sheets lasercard corporation subsidiaries march 31 2007 2006 related consolidated statements operations stockholders’ equity comprehensive income loss cash flows three years period ended march 31 2007 report dated may 18 2007 expressed unqualified opinion thereon odenberg ullakko muranishi co llp san francisco california may 18 report independent registered public accounting firm board directors stockholders lasercard corporation audited accompanying consolidated balance sheets lasercard corporation subsidiaries march 31 2007 2006 related consolidated statements operations stockholders equity comprehensive income loss cash flows three years period ended march 31 2007 financial statements responsibility company’s management responsibility express opinion financial statements based audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audits obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion consolidated financial statements audited us present fairly material respects consolidated financial position lasercard corporation subsidiaries march 31 2007 2006 consolidated results operations cash flows three years period ended march 31 2007 conformity us generally accepted accounting principles discussed note 2 consolidated financial statements company adopted provisions statement financial accounting standard 123r “sharebased payment” statement financial accounting standard 151 “inventory costs amendment arb 43 chapter 4” april 1 2006 also audited accordance standards public company accounting oversight board united states effectiveness lasercard corporation subsidiaries’ internal control financial reporting march 31 2007 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission report dated may 18 2007 expressed unqualified opinion thereon odenberg ullakko muranishi co llp san francisco california may 18 lasercard corporation subsidiaries consolidated balance sheets march 31 2007 2006 thousands except share per share amounts lasercard corporation subsidiaries consolidated statements operations fiscal years ended march 31 2007 2006 2005 thousands except per share amounts lasercard corporation subsidiaries notes consolidated financial statements 1 organization operations lasercard corporation delaware corporation wholly owned subsidiaries lasercard corporation california corporation challenge card design plastikkarten gmbh germany collectively “company” develop manufacture integrate lasercardò optical memory cards optical card drives peripherals specialty cards printers companys customers optical memory card related products mainly valueadded reseller var companies worldwide develop commercial applications lasercard products target markets products include government commercial applications portable recordable secure identification cards unitaryrecord cards current applications include united states permanent resident card “green card” laser visa border crossing cards canadian permanent resident cards italian national id cards biometric ids walletcard applications challenge card design plastikkarten gmbh supplies advancedtechnology cards various applications card printers systems integration gatekeeping ticketing company subject certain risks including limited competition substitute products larger companies dependence certain suppliers customers 2 summary significant accounting policies 1 principles consolidation basis presentation accompanying consolidated financial statements prepared accordance u generally accepted accounting principles consolidated financial statements include accounts lasercard corporation wholly owned subsidiaries significant intercompany accounts transactions eliminated consolidation 2 use estimates preparation consolidated financial statements conformity u generally accepted accounting principles requires management make estimates assumptions affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenues expenses reporting period actual results could differ estimates 3 fiscal period purposes presentation company labels annual accounting period end march 31 quarterly accounting period ends june 30 september 30 december 31 company fact operates reports based quarterly periods ending friday closest month end fiscal year 2007 ended march 30 2007 fiscal year 2006 ended march 31 2006 fiscal year ended april 1 2005 4 foreign currency transactions functional currency companys foreign subsidiaries generally local currency financial statements subsidiaries translated united states dollars using periodend rates exchange assets liabilities average rates exchange year revenues expenses translation gains losses recorded accumulated comprehensive income loss component stockholders equity net gains losses resulting foreign exchange transactions included selling general administrative expenses significant periods presented 5 derivative financial instruments company uses shortterm foreign exchange forward contracts mitigate foreign currency risk associated primarily intercompany receivables payables loans receivable denominated euros german subsidiary foreign exchange forward contracts designated accounting purposes hedging instruments sfas 133 “accounting derivative instruments hedging activities” amended accordingly gains losses resulting changes fair value forward contracts reported income gains losses forward contracts generally offset gains losses associated underlying foreign currency denominated intercompany receivables payables loans receivable march 31 2007 2006 foreign exchange forward contracts maturity less 30 days purchase 23 million euros 19 million euros respectively fair value forward contracts material march 31 2007 2006 lasercard corporation subsidiaries notes consolidated financial statements 6 concentrations risk financial instruments potentially subject company significant concentrations credit risk consist principally cash equivalents shortterm investments longterm investments accounts receivable company places cash equivalents shortterm longterm investments highcredit quality financial institutions company exposed credit risk event default institutions extent amount recorded consolidated balance sheet march 31 2007 company’s shortterm investments consists auction rate securities longterm investments accounts receivable derived revenue earned customers primarily located united states italy germany company performs ongoing credit evaluations customers’ financial condition generally require collateral company maintains reserves potential credit losses historically losses immaterial 7 major customers following customers accounted 10 revenue fiscal years ended march 31 revenue customers attributable optical memory card optical card drive segments customer accounted 10 revenues periods two customers accounted 31 17 respectively accounts receivable march 31 2007 two customers accounted 48 14 respectively accounts receivable march 31 2006 8 cash equivalents shortterm investments longterm investments company considers highly liquid investments consisting primarily commercial paper discount notes us government bonds maturities three months less date purchase cash equivalents cash equivalents march 31 2007 2006 3 million 21 million respectively march 31 2007 2006 company held auction rate securities accounted availableforsale classified shortterm investments fair values auction rate securities based quoted market prices substantially equal carrying costs due frequency reset dates shortterm investments also include investments maturities date purchase three months investments remaining maturities less one year investments maturities date purchase greater one year classified longterm investments management determines appropriate classification debt securities time purchase reevaluates classification investments balance sheet date shortterm investments except auction rate securities recorded fair value longterm investments classified held maturity stated consolidated balance sheets amortized cost investments classified held maturity unrealized gains losses recorded carrying amounts individual held maturity securities reviewed consolidated balance sheet date potential impairment march 31 2007 2006 company determined impairment “other temporary” occurred carrying amounts shortterm investments fiscal years ended march 31 thousands company longterm investment march 31 2007 2006 9 fair value financial instruments carrying amounts company’s financial instruments including cash equivalents shortterm investments accounts receivable accounts payable accrued liabilities approximate fair values due shortterm maturities lasercard corporation subsidiaries notes consolidated financial statements 10 accounts receivable accounts receivable net allowance doubtful accounts product return reserves 144000 142000 march 31 2007 2006 respectively maintain allowances doubtful accounts product return reserves anticipated losses resulting inability customers make required payments inprocess product returns generally compute allowances based specifically identified accounts past due likely collectible interest receivable accrued investments auction rate securities interestbearing securities receivables comprise value added tax refunds miscellaneous items components accounts receivable march 31 thousands 11 inventories stated lower cost market cost determined firstin firstout basis market based replacement cost estimated realizable value less cost sell components inventories march 31 thousands company establishes lower cost market reserves aged inventory reserves obsolescence reserves inventory reserves generally recorded management determines item readily saleable inventory reserves relieved related inventory sold scrapped fiscal years ended march 31 2007 2006 2005 company recorded inventory reserve expense 483000 274000 381000 respectively november 2004 fasb issued sfas 151 “inventory costs amendment arb 43 chapter 4” sfas 151 clarifies costs abnormal amounts idle facility expense freight handling costs wasted material spoilage recognized current period charges addition sfas 151 requires allocation fixed production overhead costs conversion based normal capacity production facilities sfas 151 effective inventory costs incurred fiscal years beginning june 15 2005 company applied sfas 151 inventory costs april 1 2006 provisions statement applied prospectively adoption sfas 151 increased cost inventory 219000 increased net income amount first quarter fiscal year 2007 12 equipment held resale equipment held resale primarily consists parts labor costs incurred build equipment contract global investments group assigned prevent global march 2007 direct incremental costs associated purchase construction items deferred related deferred revenue recognized components equipment held resale march 31 thousands lasercard corporation subsidiaries notes consolidated financial statements 13 property equipment net components property equipment march 31 thousands property equipment recorded cost depreciation provided estimated useful lives four seven years equipment furniture using straightline method twentyfive years building using straightline method leasehold improvements amortized shorter life asset life lease using straightline method depreciation leasehold amortization expense fiscal years 2007 2006 2005 27 million 24 million 25 million respectively maintenance minor repairs replacements expensed incurred disposition retirement property equipment related gains losses charged income expense certain costs incurred connection acquisition software internal use capitalized following statement position sop 981 “accounting costs computer software developed obtained internal use” eitf issue 9713 “accounting costs incurred connection consulting contract internal project combines business process reengineering information technology transformation” capitalized software costs included equipment furniture account amortized four seven years software costs meet capitalization criteria expensed immediately fiscal year 2007 company capitalized 474000 software costs related new enterprise resource planning system charged 211000 inclusive labor selling general administrative expenses 14 goodwill intangible assets goodwill represents excess purchase price fair value identifiable net tangible intangible assets acquired business combination accordance sfas 142 “goodwill intangible assets” company amortize goodwill instead company evaluates goodwill impairment annually fourth quarter whenever events changes circumstances indicate likely impairment loss incurred march 31 2007 company determined estimated future cash flows insufficient justify carrying value goodwill intangible assets based management’s decision suspend optical memory card production germany fourth quarter fiscal year 2007 company recorded noncash impairment charge approximately 38 million connection company’s goodwill intangible assets acquired upon purchase subsidiary challenge card design plastikkarten gmbh rastede germany cards gmbh ratingen germany march 31 2004 fiscal years 2006 2005 future cash flows determined sufficient based planned production optical memory cards germany lasercard corporation subsidiaries notes consolidated financial statements definite life intangible assets capitalized accumulated amortization march 31 thousands weighted average remaining amortization periods fiscal years ended march 31 years legal expenses incurred connection patents capitalized amortized estimated remaining useful lives patents six seven years amortization expense intangible assets fiscal years 2007 2006 2005 143000 139000 172000 respectively estimated amortization expense next five years patents intangible assets definite lives years ended march 31 follows thousands intangible assets indefinite lives march 31 thousands lasercard corporation subsidiaries notes consolidated financial statements 15 assessment impairment tangible intangible longlived assets accordance sfas 144 “accounting impairment disposal longlived assets” company assesses impairment longlived assets whenever events changes circumstances indicate carrying value may recoverable estimated future cash flows expected result use eventual disposition company’s longlived assets subject evaluation include property equipment amortizable intangible assets company’s estimate future undiscounted net cash flows insufficient recover carrying value assets company record impairment loss amount carrying value assets exceeds fair value assets determined recoverable useful lives shorter originally estimated company depreciates amortizes net book value asset newly determined remaining useful lives march 31 2007 fair value longlived assets exceeds book value therefore impairment loss recognized 16 accrued liabilities components accrued liabilities march 31 thousands company estimates warranty costs based historical warranty claim experience applies estimate revenue stream products warranty company’s product warranty claims settled return defective products shipment replacement products warranty returns immaterial fiscal years 2007 2006 2005 warranty reserve reviewed quarterly verify properly reflects remaining obligations based anticipated returns balance obligation period adjustments made actual return claim experience differs estimates 17 software development costs development costs incurred research development new software products expensed incurred technological feasibility form working model established date company’s software development completed concurrent establishment technological feasibility accordingly software development costs charged research development expenses accompanying consolidated statements operations 18 advance payments customers company routinely receives advance payments orders placed customers advance payments recorded liability consolidated balance sheets related orders shipped 19 revenue recognition product sales primarily consist optical card sales optical card readwrite drives sales specialty cards card printers company recognizes revenue product sales following criteria met 1 persuasive evidence arrangement exists 2 delivery occurred 3 fee fixed determinable 4 collectibility reasonably assured company recognizes revenue product sales time shipment shipping terms fob shipping point orders placed pursuant preexisting sales arrangement postshipment obligations warehousing us government subcontract customer acceptance criteria appropriate provision made time shipment estimated warranty costs estimated returns orders permanent resident border crossing cards us government require delivery secure companycontrolled vault shipments made vault us government site bill hold procedures also provide end oneyear contract term renewal option exercised us government take final delivery remaining inventory within six months time cards delivered vault title cards transferred us government risks ownership transferred well prime contractor invoiced payment due within thirty days purchase orders contain return warranty cancellation provisions pursuant provisions sec staff accounting bulletin 104 “revenue recognition” “sab 104” revenue recognized delivery vault company fulfilled contractual obligations earnings process complete lasercard corporation subsidiaries notes consolidated financial statements company applies provisions emerging issues task force issue 0021 revenue arrangements multiple deliverables “eitf 0021” revenue arrangements multiple deliverables eitf 0021 provides criteria governing identify whether goods services delivered separately bundled sales arrangement accounted separately deliverables accounted separately meet following criteria delivered items standalone value customer b fair value undelivered items reliably determined c arrangement includes general right return delivery undelivered items probable substantially controlled seller situations deliverables fall within higherlevel literature defined eitf 0021 company applies guidance higherlevel literature deliverables meet criteria combined one deliverables company applies provisions statement position 811 accounting performance constructiontype certain productiontype contracts “sop 811” applicable contracts revenues time materials contracts recognized services rendered contract labor rates plus material direct costs incurred revenues fixed price contracts recognized percentage completion method based ratio total costs incurred date compared estimated total costs complete contract estimates costs complete include material direct labor overhead allowable general administrative expenses circumstances estimates costs complete project cannot reasonably estimated assured loss incurred percentageofcompletion method based zero profit margin rather completedcontract method used precise estimates made full amount estimated loss charged operations period determined loss realized performance contract fiscal years ended march 31 2007 2006 2005 company recognized approximately 12000 77000 127000 respectively revenues based zero profit margin related longterm contract fourth quarter fiscal year 2006 company entered subcontract covering anticipated 11 million worth product services prime contractor middle eastern country provide card personalization workstation integration use country’s personalized national id program includes optical memory cards hardware software contract calls multiple deliverables installation certain client acceptance criteria defined agreement applying guidance within eitf 0021 company determined deliverables accounted separate units rather bundled arrangement fair value undelivered items cannot readily determined therefore revenue recognition contract associated contract costs deferred predominant undelivered element card personalization delivered accepted commencing installation acceptance card personalization system company determined card personalization system accepted contract revenue would recognized ratably based actual cards personalized accepted company began recognizing revenue contract quarter ended march 31 2007 card personalization system accepted period revenue recognized based upon total number cards accepted time recognized revenue totaling 4 million fiscal year 2007 based upon total number cards accepted march 31 2007 march 31 2007 remained 1 million deferred revenue 09 million deferred contract costs relating contract components deferred contract costs march 31 thousands company applies provisions statement position “sop” 972 “software revenue recognition” amended statement position 989 “modification sop 972 software revenue recognition respect certain transactions” transactions involving sale software products revenue license company’s software products recognized persuasive evidence arrangement exists software product delivered fee fixed determinable collectibility probable applicable upon acceptance criteria specified upon expiration acceptance period software revenue immaterial fiscal years 2007 2006 2005 lasercard corporation subsidiaries notes consolidated financial statements license revenue may consist upfront license fees longterm royalty payments recognized revenue earned license revenues costs recorded fiscal years 2007 2006 2005 company entered license optical memory card equipment purchase support agreements effective april 3 2004 global investments group gig based auckland new zealand optical memory card manufacturing slovenia gig transferred license agreements approval prevent global slovenia prevent march 2007 agreements provide payments company 256 million fully paid march 31 2007 20year license required manufacturing equipment targeted initial manufacturing capacity 10 million optical cards annually installation support fouryear training support package 256 million received 236 million recorded advance payments customer 2 million licensing fee recorded deferred revenue classified long term liabilities consolidated balance sheets march 31 2007 company 63 million acquired equipment plus direct incremental expenses classified equipment held resale consolidated balance sheets beginning fifth year contract prevent pay 3 million threeyear support package options thirteen additional years support payments 1 million annually addition 416 million discussed prevent pay us royalties 060 per card produced license territories covered license include european union eastern european regions prevent exclusive marketing rights certain territories performance goals maintain rights company retains rights utilize 20 new facility capacity backup capacity buffer augment card manufacturing facilities mountain view california possibly company’s german subsidiary granting license prevent establishes potential second source supplier optical memory cards existing prospective customers may request multiple sources cards agreement contains various elements including card manufacturing license sale installation equipment training ongoing support contingent payments support materials royalty payments cards manufactured accordance eitf 0021 “revenue arrangements multiple deliverables” card manufacturing license sale installation equipment training support package accounted one unit accounting since unable determine evidence fair value undelivered items ongoing support company able determine evidence fair value predominant undelivered item ongoing annual support manufacturing equipment accordingly revenues arrangement deferred recognized equipment installed accepted exception value ongoing annual support manufacturing equipment recognized quarterly earned beginning equipment accepted training completed date dependent prevent establishing suitable facility slovenia pursuant ftb 901 “accounting separately priced extended warranty product maintenance contracts” support revenue recognized ratably remaining term agreement 20 research development expenses costs related research design development products charged research development expense incurred research development costs include salaries contractor fees building utility costs depreciation 21 shipping handling costs shipping handling costs recorded cost sales 22 advertising costs advertising costs consist development placement costs company’s advertising campaigns charged expense incurred advertising expense approximately 188000 fiscal year 2007 183000 fiscal year 2006 189000 fiscal year 2005 23 stockbased compensation effective april 1 2006 company adopted statement financial accounting standard “sfas” 123r sharebased payment requires sharebased payment transactions accounted using fair value based method recognition related expense results operations prior adoption sfas 123r permitted sfas 123 accounting stockbased compensation company accounted sharebased payments employees accordance accounting principles board opinion “apb” 25 accounting stock issued employees utilizing intrinsic value method therefore company recognize compensation cost employee director stock options intrinsic value sfas 123r allows companies choose one two transition methods modified prospective transition method modified retrospective transition method lasercard corporation subsidiaries notes consolidated financial statements company adopted sfas 123r using modified prospective method transition requires compensation expense related share based payments recognized beginning adoption date requisite service period generally vesting period awards granted april 1 2006 remaining service period unvested portion awards granted prior april 1 2006 consolidated financial statements prior fiscal years restated reflect impact adopting sfas 123r prior april 1 2006 company accounted stockbased compensation plans using intrinsic value method prescribed accounting principles board opinion 25 “accounting stock issued employees” accordingly compensation cost stock options measured excess quoted market price company’s stock date grant amount employee must pay acquire stock sfas 123 r “accounting stockbased compensation” established accounting disclosure requirements using fairvalue based method accounting stockbased employee compensation plans following table illustrates effect net income loss net income loss per share company applied fair value recognition provisions sfas 123 r fiscal years ended march 31 thousands except per share amounts company computed fair value option grant date grant using blackscholes option valuation model following assumptions fiscal years ended march 31 equity incentive compensation plan “2004 plan” plan provides grant restricted share awards options stock units stock appreciation rights may require satisfaction performance objectives respect shares common stock directors officers employees consultants company subsidiaries exercise price stock options may less 100 fair market value common stock date grant 110 fair market value grant incentive stock option employee owns 10 total combined voting power classes company’s capital stock options granted may exercised 10 years date grant five years date grant incentive stock option employee owns 10 total combined voting power classes company’s capital stock board directors specifies term options prior fiscal year 2006 typically 10 years thereafter typically 7 years vesting schedule exercise options generally 25 one year 625 quarterly next 3 years lasercard corporation subsidiaries notes consolidated financial statements stock options provisions sfas 123r stockbased compensation cost estimated grant date based fair value award compensation cost recognized expense requisite service period award generally vesting period fair value nonvested stock awards determined reference fair market value company’s common stock date grant consistent valuation method company used disclosureonly purposes provisions sfas 123r company uses blackscholes valuation model estimate fair value option awards determining appropriate fair value model related assumptions requires judgment including estimating stock price volatility forfeiture rates expected terms following assumptions utilized estimate fair value company’s stock option awards fiscal year ended march 31 2007 expected stock price volatility 55 risk free interest rates 440 496 expected life options 44 5 years expected annual dividends 0 expected volatility rate based historical volatility company’s common stock expected life represents average time options vest expected outstanding based vesting provisions company’s historical exercise cancellation expiration patterns company estimated forfeitures based historical rates recognizing compensation expense forfeitures estimated based voluntary termination behavior well analysis actual option forfeitures riskfree interest rate based us treasury zerocoupon issues maturity approximating expected life week grant date annual dividend rate assumed cash dividend expected declared paid foreseeable future company updates assumptions least annual basis interim basis significant changes assumptions warranted adoption sfas 123r company recorded stockbased employee compensation expense related stock options approximately 17 million fiscal year ended march 31 2007 net estimated forfeitures company recognized full amount stockbased employee compensation expense equity incentive plans consolidated statements operations fiscal year ended march 31 2007 capitalize costs consolidated balance sheets stockbased compensation expense related stock options recorded company’s consolidated statement operations fiscal year ended march 31 2007 follows thousands cost sales selling general administrative expense 1009 research development expense stockbased compensation expense income tax 1687 less income tax benefit net stockbased compensation expense income tax 1687 recorded income tax benefit stock based compensation expense fiscal year ended march 31 2007 cumulative operating loss carryovers full valuation allowance established fasb staff position fsp 123r3 transition election related accounting tax effects sharebased payment awards requires entity follow either transition guidance additionalpaidincapital pool prescribed sfas 123r alternative transition method described fsp 123r3 entity adopts sfas 123r using modified prospective application may make onetime election adopt transition method described fsp 123r3 may take one year latter initial adoption sfas 123r effective date fsp 123r3 evaluate available transition alternatives make onetime election company currently evaluating available transition alternatives calculating tax effects stockbased compensation sfas 123r lasercard corporation subsidiaries notes consolidated financial statements employee stock purchase plan company employee stock purchase plan espp eligible employees may designate 2 6 compensation withheld purchase shares common stock 67 average price threeday period prior purchase date differential fair market value average price shares sold espp charged operations compensation expense taxed employee income company stock based compensation expense 108000 123000 111000 relating espp included company’s consolidated statements operations fiscal years ended march 31 2007 2006 2005 respectively 24 comprehensive income loss sfas 130 “reporting comprehensive income” comprehensive income loss defined changes equity enterprise except resulting stockholders’ transactions comprehensive income loss fiscal years ended march 31 thousands 25 recent accounting pronouncements june 2006 financial accounting standards board “fasb” issued interpretation 48 “accounting uncertainty income taxesan interpretation fasb statement 109” “fin 48” interpretation clarifies accounting uncertainty income taxes recognized company’s financial statements accordance fasb statement 109 accounting income taxes fin 48 prescribes recognition threshold measurement attribute financial statement recognition measurement tax position taken expected taken tax return interpretation also provides guidance derecognition classification interest penalties accounting interim periods disclosure transition evaluation tax position accordance fin 48 twostep process first step recognition company determines whether “morelikelythannot” tax position sustained upon examination including resolution related appeals litigation processes based technical merits position evaluating whether tax position met “morelikelythannot” recognition threshold company presumes position examined appropriate taxing authority would full knowledge relevant information second step measurement tax position meets “morelikelythannot” recognition threshold measured determine amount benefit recognize financial statements tax position measured largest amount benefit greater 50 percent likely realized upon ultimate settlement fin 48 effective fiscal years beginning december 15 2006 company yet determined effect adoption fin 48 results operations financial position september 2006 fasb issued statement 157 “fair value measurements” “sfas 157” sfas 157 defines fair value establishes framework measuring fair value generally accepted accounting principles expands disclosures fair value measurements sfas 157 intended applied conjunction accounting pronouncements require permit fair value measurements although sfas 157 require new fair value measurements application may change current practice entities definition fair value contained sfas 157 retains exchange price notion inherent earlier definitions fair value sfas 157 clarifies exchange price orderly transaction market participants sell asset transfer liability principal advantageous market asset liability accordingly definition focuses price would received sell asset paid transfer liability measurement date exit price would paid acquire asset received assume liability measurement date entry price sfas 157 emphasizes fair value marketbased measurement entityspecific measurement therefore sfas 157 prescribes fair value measurement determined based assumptions market participants would use pricing asset liability company yet determined impact statement consolidated financial statements lasercard corporation subsidiaries notes consolidated financial statements february 2007 fasb issued sfas 159 “the fair value option financial assets financial liabilities” “sfas 159” sfas 159 provides entities option report selected financial assets liabilities fair value objective reduce complexity accounting financial instruments volatility earnings caused measuring related assets liabilities differently sfas 159 effective fiscal years beginning november 15 2007 company yet determined impact statement consolidated financial statements 26 indemnification company’s major sales agreements provide remedies customers defense settlement payment judgment intellectual property claims related use company’s products company also indemnified various vendors certain potential claims company also entered indemnification agreements directors officers company’s bylaws contain similar indemnification obligations date claims made indemnification provisions result associated estimated fair value liability material 3 net income loss per share basic net income loss per share diluted net loss per share computed dividing net income loss weighted average number shares common stock outstanding fiscal year diluted net income per share computed dividing net income weighted average number shares common stock common stock equivalents outstanding fiscal year common stock equivalents consist stock options warrants using treasury stock method reconciliation denominators basic diluted net income loss per share computation fiscal years ended march 31 thousands except per share data stock options warrants exercise price greater average market value profitable periods excluded calculation diluted net income per share effect would antidilutive therefore stock options purchase 1554000 shares excluded calculation diluted net income per share fiscal year ended march 31 2006 effect common stock equivalents would antidilutive since company incurred loss fiscal years ended march 31 2007 2005 stock options warrants excluded calculation diluted net loss per share fiscal years lasercard corporation subsidiaries notes consolidated financial statements 4 segments segment reporting company operates three reportable segments 1 optical memory cards 2 optical memory card drives including readwrite drives maintenance systems enabling services “optical card drives” 3 specialty cards card printers segments determined based information used chief operating decision maker optical memory cards optical card drives reportable segments strategic business units offer unrelated products services rather reportable segments utilize compatible technology marketed jointly specialty cards printers strategic business unit offering times unrelated products times related products reportable segments accounting policies used derive reportable segment results described summary significant accounting policies resources allocated optical memory card optical card drive segments manner optimizes optical memory card revenues specialty card printers segment manner optimizes consolidated income determined chief operating decision maker segment revenues comprised sales external customers segment gross profit loss includes segment revenues less related cost sales accounts receivable cash deferred income taxes prepaid expenses fixed assets inventory separately reported segment chief operating decision maker therefore amount assets segment meaningful intersegment sales transfers company’s longlived assets attributable united states except 37 million fiscal year 2007 35 million fiscal year 2006 longlived assets attributable operations germany including longlived assets owned us operations located germany companys chief operating decision maker currently companys chief executive officer chief operating decision maker reviews financial information presented consolidated basis accompanied disaggregated information revenues gross profit loss segment lasercard corporation subsidiaries notes consolidated financial statements table presents information optical memory cards optical card drives specialty cards printers fiscal years ended march 31 thousands lasercard corporation subsidiaries notes consolidated financial statements sales geographic region sales geographic region generally determined based upon shipto address invoice company’s knowledge program location revenues geographic region fiscal years ended march 31 follows thousands fiscal years 2007 2006 2005 sales customers outside united states amount 121 million 185 million 109 million respectively denominated us dollars 118 million 104 million 97 million respectively denominated euros 5 relatedparty transactions since october 21 2001 company contracted wexler walker public policy associates unit hill knowlton inc “wexler” lobbyists behalf company chairman wexler robert walker brother walter f walker member company’s board directors contract extended fiscal year 2008 terms conditions monthly retainer 10000 reimbursement related expenses company paid wexler 116000 fiscal year 2007 142082 fiscal year 2006 206000 fiscal year 2005 march 31 2007 10000 due wexler included part current liabilities accompanying consolidated balance sheet 6 common stock 2004 equity incentive compensation plan “2004 plan” october 2004 company’s stockholders approved 2004 equity incentive compensation plan replaced existing 1991 stock option plan provides grant restricted share awards options stock units stock appreciation rights may require satisfaction performance objectives respect shares common stock directors officers employees consultants company subsidiaries 2004 plan administered compensation committee board directors complete discretion select participants establish terms conditions award subject provisions 2004 plan options granted 2004 plan may “incentive stock options” defined section 422 internal revenue code 1986 amended nonqualified options total 2838426 shares common stock reserved issuance 1991 2004 plans march 31 2007 award granted 2004 plan forfeited expires reason shares subject award available additional awards outstanding option issued 1991 plan expires terminates reason without excerised full unpurchased shares option available additional awards 2004 plan 2004 plan exercise price incentive stock options may less 100 fair market value common stock date grant 110 fair market value grant employee owns 10 total combined voting power classes company’s capital stock code currently limits 100000 aggregate value common stock incentive stock options may become exercisable calendar year 2004 plan option plan adopted company nonstatutory stock options may granted plan exercise price less 100 fair market value common stock date grant limitation amount common stock nonstatutory grants may first become exercisable calendar year repricing stock option stock appreciation right permitted without stockholder approval subject limitations contained 2004 plan committee sets terms option grant options exercisable date termination employment immediately terminate time options granted 2004 plan may exercised 10 years date grant five years date grant incentive stock option employee owns 10 total combined voting power classes company’s capital stock board directors specifies term options vesting schedule exercise options granted consultants fiscal years 2007 2006 2005 lasercard corporation subsidiaries notes consolidated financial statements addition march 31 2007 113000 shares stock reserved outside company’s stock option plan issuance upon exercise stock options granted nasdaq rule 4350i1a connection ccdcm acquisition inducement join company six key employees acquired companies granted nonstatutory stock options march 31 2004 term five years purchase 20000 common shares following table lists stock option activity fiscal years ended march 31 thousands except weighted average exercise price weightedaverage grantdate fair value per share options granted fiscal years 2007 2006 2005 769 391 538 respectively weighted average remaining contractual term outstanding options march 31 2007 2006 504 years 534 years respectively 387 years options vested exercisable march 31 2007 aggregate intrinsic value outstanding options vested exercisable approximately 28 million 1 million respectively march 31 2007 aggregate intrinsic value sum amounts closing market price stock march 30 2007 last trading day 1179 per share exceeded exercise price options quoted market price excess exercise price “inthemoneyoptions” aggregate intrinsic value options exercised dates options exercised approximately 08 million 19 million fiscal year ended march 31 2007 2006 respectively march 31 2007 approximately 4 million total unrecognized compensation cost related nonvested sharebased compensation arrangements granted stock plans expected recognized remaining vesting period december 31 2010 adjusted future changes estimated forfeitures lasercard corporation subsidiaries notes consolidated financial statements following table summarizes information stock options outstanding march 31 2007 employee stock purchase plan company employee stock purchase plan stock purchase plan 31099 shares reserved march 31 2007 future purchases employees stock purchase plan eligible employees may designate 2 6 compensation withheld purchase shares common stock 67 trailing average price differential fair market value average price shares sold stock purchase plan charged operations compensation expense taxed employee income stock purchase plan employees purchased 30418 shares fiscal year 2007 25961 shares fiscal year 2006 26730 shares fiscal year 2005 weighted average purchase price per share 761 fiscal year 2007 653 fiscal year 2006 589 fiscal year 2005 weighted average market price per share shares purchased 1144 fiscal year 2007 1126 fiscal year 2006 913 fiscal year 2005 employee benefit plan 401k plan 401k plan provides participating employees opportunity accumulate funds retirement company’s contribution plan exceed lesser 25 maximum employee contribution allowed irs b 25 employee’s contribution c 15 employee’s eligible earnings company contributed 79000 73000 59000 fiscal years 2007 2006 2005 respectively issuance warrants march 31 2007 company warrants outstanding purchase 174057 shares common stock warrants issued connection december 2003 sale common stock private placement warrants exercise price 1726 per share life five years lasercard corporation subsidiaries notes consolidated financial statements 7 commitments contingencies lease company occupies buildings various operating leases rent expense relating buildings approximately 15 million fiscal years 2007 2006 2005 march 31 2007 future minimum rental payments relating leases thousands mutual agreement lessor november 1 2003 lease 27000squarefoot building modified extended october 2013 original lease remaining term may 2006 lease payments totaling 21 million modified lease calls payments totaling 13 million period rent expense recorded average rent payments term lease time renegotiated lease signed 139000 deferred rent associated original lease amount amortized straightline basis tenyear term modified lease purchase commitment company purchases services software manufacturing equipment variety vendors march 31 2007 company noncancelable purchase orders 2 million raw materials delivered 12 months contingencies normal course business company subject various claims opinion management ultimate disposition claims material adverse impact financial position results operation cash flows company 8 income taxes provision income taxes fiscal years ended march 31 thousands lasercard corporation subsidiaries notes consolidated financial statements company’s effective tax rate differs statutory rate fiscal years ended march 31 follows domestic foreign component pretax income loss fiscal years ended march 31 follows thousands major components net deferred income tax assetsliabilities march 31 thousands net deferred income tax liabilities 388000 march 31 2007 568000 march 31 2006 result german subsidiary operations part process preparing consolidated financial statements company required estimate income taxes jurisdictions operates process involves estimating actual current tax exposure together assessing temporary differences resulting differing treatment items deferred revenue tax accounting purposes differences result deferred income tax assets liabilities included within consolidated balance sheets company must assess likelihood deferred income tax assets recovered future taxable income extent management believes recovery likely company must establish valuation allowance lasercard corporation subsidiaries notes consolidated financial statements fiscal year 2007 valuation allowance decreased 31 million decrease included 63 million decrease related us income tax benefits stock option deductions benefit credited additional paidin capital realized derecognized result adoption fas 123r remaining change valuation allowance relates increases company’s gross deferred income tax assets addition company increased valuation allowance amount 09 million fiscal year 2006 37 million fiscal 2005 companys federal net operating loss carryforwards nols march 31 2007 231 million expire various dates fiscal year 2008 fiscal year 2027 utilized amount 192 million represent nol’s relating stock option deductions benefit credited stockholders’ equity realized federal tax credits amount 540000 alternative minimum taxes expiration federal tax credits amount 284000 expire various dates fiscal year 2013 fiscal year 2026 utilized california tax credits amount 129000 expiration date companys methodology determining realizability deferred income tax assets involves estimates future taxable income based upon booked orders estimated impact future stock option deductions expiration dates amounts net operating loss carryforwards company difficulty past expects continued difficulty future reliably forecasting foreign business revenue received resulted company basing estimates future income purposes booked orders circumstances change company may future able estimate future revenue based upon forecast revenues rather using booked orders although company cannot say occur concluding valuation allowance required end fiscal year 2005 2006 still required end fiscal year 2007 company considered positive negative evidence regarding ability generate sufficient future taxable income realize deferred income tax assets positive evidence included 1 level sales business experienced contracts us department homeland security’s permanent resident card border crossing card programs canadian government’s permanent resident card program 2 prospects italy middle eastern country national identification card programs 3 expected future orders negative evidence included 1 company’s reliance limited number customers substantial portion business 2 uncertainty timing anticipated orders customers 3 impact future stock option deductions taxable income 4 experience net operating loss carryforwards expiring unused fiscal year 2004 5 recent financial statement losses 6 prior three years’ cumulative tax net operating losses exclusive payments derived gig contract weighing positive negative evidence company considered “more likely not” criteria pursuant sfas 109 well following risks related company’s business “dependence vars limited number customers” “lengthy sales cycles” “technological change” “competition” described company concluded negative evidence outweighed positive evidence result company recorded valuation allowance equal full amount deferred income tax assets march 31 march 31 2006 march 31 2007 event actual results differ estimates adjusted future periods company may need adjust amount valuation allowance based future determinations whether likely deferred income tax assets realized decrease valuation allowance would recorded income tax benefit reduction income tax expense company’s net operating losses available reduce future taxable income expire various dates fiscal year 2008 fiscal year 2027 extent company generates taxable income jurisdictions deferred income tax asset relates net operating losses offset full valuation allowance utilization net operating losses would result reversal related valuation allowance lasercard corporation subsidiaries selected quarterly financial data unaudited thousands except per share amounts item 9 item 8 financial statements supplementary data report independent registered public accounting firm board directors stockholders lasercard corporation audited lasercard corporation subsidiaries’ internal control financial reporting march 31 2008 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission coso criteria lasercard corporation subsidiaries’ management responsible maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting included management’s report internal control financial reporting included item 9a responsibility express opinion companys internal control financial reporting based audit conducted audit accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether effective internal control financial reporting maintained material respects audit included obtaining understanding internal control financial reporting assessing risk material weakness exists testing evaluating design operating effectiveness internal control based assessed risk performing procedures considered necessary circumstances believe audit provides reasonable basis opinion company’s internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles company’s internal control financial reporting includes policies procedures 1 pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company 2 provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company 3 provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate opinion lasercard corporation subsidiaries maintained material respects effective internal control financial reporting march 31 2008 based coso criteria also audited accordance standards public company accounting oversight board united states consolidated balance sheets lasercard corporation subsidiaries march 31 2008 2007 related consolidated statements operations stockholders’ equity cash flows three years period ended march 31 2008 report dated june 4 2008 expressed unqualified opinion thereon odenberg ullakko muranishi co llp san francisco ca june 4 report independent registered public accounting firm board directors stockholders lasercard corporation audited accompanying consolidated balance sheets lasercard corporation subsidiaries march 31 2008 2007 related consolidated statements operations stockholders’ equity cash flows three years period ended march 31 2008 financial statements responsibility company’s management responsibility express opinion financial statements based audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion consolidated financial statements audited us present fairly material respects consolidated financial position lasercard corporation subsidiaries march 31 2008 2007 consolidated results operations cash flows three years period ended march 31 2008 conformity us generally accepted accounting principles discussed note 2 notes consolidated financial statements april 1 2007 company adopted financial accounting standards board interpretation 48 accounting uncertainty income taxes interpretation fas 109 also discussed note 2 notes consolidated financial statements april 1 2006 company adopted provisions statement financial accounting standards 123 revised sharebased payment also audited accordance standards public company accounting oversight board united states lasercard corporation subsidiaries’ internal control financial reporting march 31 2008 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission report dated june 4 2008 expressed unqualified opinion thereon odenberg ullakko muranishi co llp san francisco ca june 4 lasercard corporation subsidiaries consolidated balance sheets march 31 2008 2007 thousands except share per share amounts lasercard corporation subsidiaries consolidated statements operations fiscal years ended march 31 2008 2007 2006 thousands except per share amounts lasercard corporation subsidiaries notes consolidated financial statements 1 organization operations lasercard corporation delaware corporation wholly owned subsidiaries lasercard corporation california corporation challenge card design plastikkarten gmbh germany ccd collectively “company” develop manufacture integrate lasercard® optical memory cards optical card drives peripherals specialty cards printers companys customers optical memory card related products mainly valueadded reseller var companies worldwide develop commercial applications lasercard products target markets products include government commercial applications portable recordable secure identification cards unitaryrecord cards current applications include united states permanent resident card “green card” canadian permanent resident card italian national id card kingdom saudi arabia’s national id card india’s vehicle registration card three states biometric ids card applications company supplies advancedtechnology cards manufactured ccd various applications card printers systems integration gatekeeping ticketing company recently introduced new secure laser engravable passport data page product features unique hinge system designed maximize durability polycarbonate page incorporated traditional passport book data page include range security features icaocompliant epassport chip passport issuer personalizes data page laser engraving passport holder’s facial image demographics icaocompliant machine readable data onto data page company offering data page without icao standard epassport chip partners several countries process upgrading passports company also business delivering turnkey card manufacturing facilities include supply installation stateoftheart card production equipment transfer manufacturing knowhow training production support company subject certain risks including limited competition substitute products larger companies dependence certain suppliers customers 2 summary significant accounting policies 1 principles consolidation basis presentation accompanying consolidated financial statements prepared accordance u generally accepted accounting principles consolidated financial statements include accounts lasercard corporation wholly owned subsidiaries significant intercompany accounts transactions eliminated consolidation 2 use estimates preparation consolidated financial statements conformity u generally accepted accounting principles requires management make estimates assumptions affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenues expenses reporting period actual results could differ estimates 3 fiscal period purposes presentation company labels annual accounting period end march 31 quarterly accounting period ends june 30 september 30 december 31 company fact operates reports based quarterly periods ending friday closest month end fiscal year 2008 ended march 28 2008 fiscal year 2007 ended march 30 2007 fiscal year 2006 ended march 31 2006 4 foreign currency transactions functional currency companys foreign subsidiaries generally local currency financial statements subsidiaries translated united states dollars using periodend rates exchange assets liabilities average rates exchange year revenues expenses translation gains losses recorded accumulated comprehensive income loss component stockholders equity net gains losses resulting foreign exchange transactions included selling general administrative expenses significant periods presented lasercard corporation subsidiaries notes consolidated financial statements 5 derivative financial instruments company uses shortterm foreign exchange forward contracts mitigate foreign currency risk associated primarily intercompany receivables payables loan receivables denominated euros german subsidiary companys foreign exchange forward contracts designated accounting purposes hedging instruments sfas 133 accounting derivative instruments hedging activities amended accordingly gains losses resulting changes fair value forward contracts reported income gains losses forward contracts generally offset gains losses associated underlying foreign currency denominated intercompany receivables payables loans receivable march 31 2008 2007 company foreign exchange forward contracts maturity less 30 days purchase 12 million euros 23 million euros respectively fair value forward contracts material march 31 2008 2007 6 concentrations risk financial instruments potentially subject company significant concentrations credit risk consist principally cash equivalents shortterm investments longterm investments accounts receivable company places cash equivalents shortterm longterm investments highcredit quality financial institutions company exposed credit risk event default institutions extent amount recorded consolidated balance sheet march 31 2008 company 129 million student loan auction rate securities accounted availableforsale classified longterm securities due underlying events surrounding failed auctions given recent disruptions credit markets fact liquidity types securities remains uncertain company classified auction rate securities longterm assets companys consolidated balance sheet companys ability liquidate securities next 12 months uncertain detailed information risks company faces regard investment auction rate securities found accounts receivable derived revenue earned customers primarily located united states italy germany company performs ongoing credit evaluations customers’ financial condition generally require collateral company maintains reserves potential credit losses historically losses immaterial 7 major customers following customers accounted 10 revenue fiscal years ended march 31 customer 29 28 31 customer b 17 13 customer c 14 2 customer 1 8 31 revenue customers attributable optical memory card optical card drive segments customer accounted 10 revenues periods one customer accounted 37 accounts receivable march 31 2008 two customers accounted 31 17 respectively accounts receivable march 31 2007 8 cash equivalents shortterm investments longterm investments company considers highly liquid investments consisting primarily commercial paper discount notes us government bonds maturities three months less date purchase cash equivalents shortterm investments include securities maturities date purchase three months investments remaining maturities less one year investments maturities date purchase greater one year classified longterm investments management determines appropriate classification debt securities time purchase reevaluates classification investments balance sheet date shortterm longterm investments except investments auction rate securities classified held maturity stated consolidated balance sheets amortized cost investments classified held maturity unrealized gains losses recorded carrying amounts individual held maturity securities reviewed consolidated balance sheet date potential impairment lasercard corporation subsidiaries notes consolidated financial statements companys auction rate securities classified availableforsale carried fair value unrealized gain losses recorded component accumulated comprehensive income declines fair value judged otherthantemporary recorded companys consolidated statement operations incurred auction rate securities classified based assessment liquidity companys recent balance sheet date securities typically fixed reset dates within one year designed allow investors exit instruments par even though underlying debt instruments may nominal maturity much 40 years however auctions recently began fail result companys ability exit instruments shortterm guaranteed failed auction generally considered auction sellers buyers auction buyers assessment performed auction rate securities failed auctions instruments classified based company’s ability hold auction rate securities forecasted recovery fair value accordance eitf 0301 fsp fas 1151 1241 meaning otherthantemporary impairment application certain investments company evaluates investments periodically possible otherthantemporary impairment reviewing factors current economic market conditions length time extent fair value cost basis financial condition credit rating issuer companys ability intent hold investment period time may sufficient anticipated recovery market value company record impairment charge extent carrying value companys available sale securities exceeds estimated fair market value securities decline value determined otherthantemporary company continue monitor evaluate value investments balance sheet date possible impairment cause believe otherthantemporary impairment investment holdings valuing investments company primarily uses market data fair values derived brokerage statements supplied company’s brokerage firm fair value auction rate securities failed auctions subject unobservable inputs fair value measurement derived fair values calculated company’s brokerage firm using internally developed valuation methodology based present value cash flow model company also used valuation firm help management analyze reasonableness fair values provided brokerage firm lasercard corporation subsidiaries notes consolidated financial statements cash equivalents investments consist following thousands shortterm investments fiscal year 2007 represent auction rate securities primarily consisting student loan debt obligations whose underlying assets primarily federal family education loan program “ffelp” guaranteed result recent auction failures fiscal 2008 actual market prices relevant observable inputs readily available determine fair value company’s auction rate securities march 31 2008 company valued auction rate securities using fair value supplied company’s brokerage firm derived brokerage firm’s internal valuation methodology using discounted cash flow model analysis based estimated fair value march 31 2008 company recorded unrealized comprehensive loss 625000 quarter ended march 31 2008 also company reclassified auction rate securities 135 million longterm investments shortterm investments company ability intent hold securities anticipated recovery fair value occurs company expects liquidate auction rate securities without significant loss primarily due government guarantees large portion underlying securities company determined securities temporarily impaired mostly due changes interest rates liquidity factors credit quality company ability intent hold 135 million auction rate securities held march 31 2008 market stability restored respect securities however could take nominal maturity underlying debt instruments realize investments’ recorded value 9 fair value financial instruments carrying amounts company’s financial instruments including cash equivalents shortterm investments accounts receivable accounts payable accrued liabilities approximate fair values due shortterm maturities refer note 2 notes consolidated financial statements regarding cash equivalents shortterm investments longterm investments companys agreement government costa rica signed december 20 2007 required issue completion bond approximately 167000 equivalent 10 contract price company purchased certificate deposit representing completion bond classified noncurrent assets companys consolidated balance sheet march 31 2008 bond shall remain effect one year 12 months final acceptance date delivery last batch shipment tentatively scheduled first quarter fiscal year 2009 march 31 2008 company classified restricted cash noncurrent assets lasercard corporation subsidiaries notes consolidated financial statements 10 accounts receivable accounts receivable net allowance doubtful accounts product return reserves 35000 144000 march 31 2008 2007 respectively company maintains allowances doubtful accounts product return reserves anticipated losses resulting inability customers make required payments inprocess product returns company generally computes allowances based specifically identified accounts past due likely collectible interest receivable represents accruals investments auction rate securities interestbearing securities receivables comprised value added tax refunds miscellaneous items components accounts receivable march 31 thousands 11 inventories stated lower cost market cost determined firstin firstout basis market based replacement cost estimated realizable value less cost sell components inventories march 31 thousands company establishes lower cost market reserves aged inventory reserves obsolescence reserves inventory reserves generally recorded management determines item readily saleable inventory reserves relieved related inventory sold scrapped fiscal years ended march 31 2008 2007 2006 company recorded inventory reserve expense 53000 483000 274000 respectively 12 equipment held resale equipment held resale consists parts labor costs incurred build equipment contract global investments group assigned prevent global march 2007 contract build turnkey nonoptical card manufacturing facility direct incremental costs associated purchase construction items deferred related deferred revenue recognized components equipment held resale march 31 thousands lasercard corporation subsidiaries notes consolidated financial statements 13 property equipment net components property equipment march 31 thousands property equipment recorded cost depreciation provided estimated useful lives four seven years equipment furniture using straightline method twentyfive years building using straightline method leasehold improvements amortized shorter life asset life lease using straightline method depreciation leasehold amortization expense fiscal years 2008 2007 2006 29 million 27 million 24 million respectively maintenance minor repairs replacements expensed incurred disposition retirement property equipment related gains losses charged income expense certain costs incurred connection acquisition software internal use capitalized following statement position sop 981 accounting costs computer software developed obtained internal use eitf issue 9713 accounting costs incurred connection consulting contract internal project combines business process reengineering information technology transformation capitalized software costs included equipment furniture account amortized four seven years software costs meet capitalization criteria expensed immediately fiscal year 2007 company capitalized 474000 software costs related new enterprise resource planning system charged 211000 inclusive labor selling general administrative expenses 14 goodwill intangible assets goodwill represents excess purchase price fair value identifiable net tangible intangible assets acquired business combination accordance sfas 142 goodwill intangible assets company amortize goodwill instead company evaluates goodwill impairment annually fourth quarter whenever events changes circumstances indicate likely impairment loss incurred march 31 2007 company determined estimated future cash flows insufficient justify carrying value goodwill intangible assets based management’s decision suspend optical memory card production germany fourth quarter fiscal year 2007 company recorded noncash impairment charge approximately 38 million representing full impairment company’s goodwill intangible assets indefinite lives acquired upon purchase subsidiary challenge card design plastikkarten gmbh rastede germany cards gmbh ratingen germany march 31 2004 lasercard corporation subsidiaries notes consolidated financial statements definite life intangible assets capitalized accumulated amortization march 31 thousands weighted average remaining amortization periods fiscal years ended march 31 years legal expenses incurred connection patents capitalized amortized estimated remaining useful lives patents seven years amortization expense intangible assets fiscal years 2008 2007 2006 125000 143000 139000 respectively estimated amortization expense next five years patents intangible assets definite lives years ended march 31 thousands 15 assessment impairment tangible intangible longlived assets accordance sfas 144 accounting impairment disposal longlived assets company assesses impairment longlived assets whenever events changes circumstances indicate carrying value may recoverable estimated future cash flows expected result use eventual disposition company’s longlived assets subject evaluation include property equipment amortizable intangible assets company’s estimate future undiscounted net cash flows insufficient recover carrying value assets company record impairment loss amount carrying value assets exceeds fair value assets determined recoverable useful lives shorter originally estimated company depreciates amortizes net book value asset newly determined remaining useful lives march 31 2008 fair value longlived assets exceeds book value therefore impairment loss recognized lasercard corporation subsidiaries notes consolidated financial statements 16 accrued liabilities components accrued liabilities march 31 thousands appropriate provision made time shipment estimated warranty costs company provides limited warranty replacement defective products company’s limited warranty requires repair replace defective products cost customer within specified time period sale company estimates costs may incurred limited warranty record liability amount costs time product revenue recognized factors affect estimate warranty liability include number units sold historical anticipated rates warranty claims company assesses adequacy recorded warranty liability quarterly adjusts amount necessary company utilizes historical trends information received customers assist determining appropriate estimated warranty accrual levels company’s product warranty claims settled return defective products shipment replacement products adequacy warranty reserve reviewed quarterly verify properly reflects remaining obligations based anticipated warranty costs balance obligation period adjustments made actual return claim experience differs estimates warranty returns 02 million related return defective products remaining warranty returns immaterial fiscal years 2007 2006 march 31 2008 company recorded deferred compensation 07 million related planned retirement agreement former chief executive officer president 17 software development costs development costs incurred research development new software products expensed incurred technological feasibility form working model established date company’s software development completed concurrent establishment technological feasibility accordingly software development costs charged research development expenses accompanying consolidated statements operations 18 advance payments customers company routinely receives advance payments orders placed customers advance payments recorded liability consolidated balance sheets related orders shipped services performed revenue would otherwise recognized 19 revenue recognition product sales primarily consist optical card sales drives systems services sales specialty cards card printers company recognizes revenue product sales following criteria met 1 persuasive evidence arrangement exists 2 delivery occurred 3 fee fixed determinable 4 collectability reasonably assured company recognizes revenue product sales time shipment shipping terms fob shipping point orders placed pursuant preexisting sales arrangement postshipment obligations customer acceptance criteria case us government contract warehousing appropriate provision made time shipment estimated warranty costs estimated returns orders permanent resident border crossing cards us government require delivery secure companycontrolled vault shipments later made vault us government site bill hold procedures also provide end oneyear contract term renewal option exercised us government take final delivery remaining inventory within six months time cards delivered vault title cards transferred us government risks ownership transferred well prime contractor invoiced payment due within thirty days purchase orders contain return warranty cancellation provisions pursuant provisions sec staff accounting bulletin 104 revenue recognition “sab 104” revenue recognized delivery vault company fulfilled contractual obligations earnings process complete lasercard corporation subsidiaries notes consolidated financial statements contracts include customerspecified acceptance criteria company recognizes revenue acceptance criteria met presuming revenue criteria met company defers revenue services recognizes contractual period company render services customer accepts company applies provisions emerging issues task force issue 0021 revenue arrangements multiple deliverables “eitf 0021” revenue arrangements multiple deliverables eitf 0021 provides criteria governing identify whether goods services delivered separately bundled sales arrangement accounted separately deliverables accounted separately meet following criteria delivered items standalone value customer b fair value undelivered items reliably determined c arrangement includes general right return delivery undelivered items probable substantially controlled seller situations deliverables fall within higherlevel literature defined eitf 0021 company applies guidance using higherlevel literature deliverables meet criteria combined one deliverables company applies provisions statement position 811 accounting performance constructiontype certain productiontype contracts “sop 811” applicable contracts revenues time materials contracts recognized services rendered contract labor rates plus material direct costs incurred revenues fixed price contracts recognized percentage completion method based ratio total costs incurred date compared estimated total costs complete contract estimates costs complete include material direct labor overhead allowable general administrative expenses circumstances estimates costs complete project cannot reasonably estimated assured loss incurred percentageofcompletion method based zero profit margin rather completedcontract method used precise estimates made full amount estimated loss charged operations period determined loss realized performance contract fiscal years ended march 2008 2007 2006 company recognized approximately 249000 12000 77000 respectively revenues based zero profit margin related longterm contract fourth quarter fiscal year 2006 company entered subcontract covering product services prime contractor kingdom saudi arabia provide card personalization workstation integration use country’s personalized national id card program decentralized card issuance includes optical memory cards hardware software contract called multiple deliverables installation certain client acceptance criteria defined agreement applying guidance within eitf 0021 company determined deliverables accounted separate units rather bundled arrangement fair value undelivered items cannot readily determined therefore revenue recognition contract associated contract costs deferred predominant undelivered element card personalization delivered accepted commencing installation acceptance card personalization system complete company determined card personalization system accepted contract revenue would recognized ratably based actual cards personalized accepted card personalization system accepted quarter ended march 31 2007 company began recognizing revenue contract period cards accepted customer june 23 2007 company prime contractor entered agreement amending terms provision cards supplies according delivery schedule balance fiscal 2008 addition company longer obligations pertaining installation equipment card personalization workstation integration card personalization result amendment company recognizes revenue upon receipt customer’s certificate acceptance cards delivered also amendment associated sales incentives new prices per card established company completed initial orders subcontract march 31 2008 however subcontract allows optional orders customer request fouryear period december 2010 valued another approximately 35 million cards based new agreed upon price per card amendment company recognized revenue totaling 86 million fiscal year 2008 compared 40 million fiscal year 2007 contract purchase orders program lasercard corporation subsidiaries notes consolidated financial statements march 31 2008 remained 06 million deferred revenue 06 million deferred contract costs relating contract 02 million deferred contract costs relating costa rican governments national id system march 31 2007 remained 10 million deferred revenue 09 million deferred contract costs related contract kingdom saudi arabia company applies provisions statement position “sop” 972 software revenue recognition amended statement position 989 modification sop 972 software revenue recognition respect certain transactions involving sale software products revenue license company’s software products recognized persuasive evidence arrangement exists software product delivered fee fixed determinable collectability probable applicable upon acceptance criteria specified upon expiration acceptance period software revenue immaterial fiscal years 2008 2007 2006 license revenue may consist upfront license fees longterm royalty payments recognized revenue earned license revenues costs recorded fiscal years 2008 2007 2006 company entered license optical memory card equipment purchase support agreements effective april 3 2004 global investments group gig based auckland new zealand optical memory card manufacturing slovenia gig transferred license agreements approval prevent global družba za upravljanje investicije razvoj dd “prevent” march 2007 agreements provide payments interest late payments company 267 million fully paid march 31 2008 20year license required manufacturing equipment targeted initial manufacturing capacity 10 million optical cards annually installation support fouryear training support package 267 million received 238 million recorded advance payments customer 29 million licensing fees recorded deferred revenue classified long term liabilities consolidated balance sheets march 31 2008 company held 66 million acquired equipment including direct incremental expenses classified equipment held resale consolidated balance sheets related contract company ship equipment prevent upon request installation facility established prevent time company know prevent initiate request beginning fourth year contract prevent pay 3 million threeyear support package options thirteen additional years support payments 10 million annually addition aggregate amount 428 million discussed prevent pay royalties 060 per card produced license territories covered license include european union eastern european regions prevent exclusive marketing rights certain territories performance goals maintain rights company retains rights utilize 20 new facility capacity backup capacity buffer augment card manufacturing facilities mountain view california possibly company’s german subsidiary granting license prevent establishes potential manufacturing facility supplier optical memory cards existing prospective customers may request multiple sources cards agreement contains various elements including card manufacturing license sale installation equipment training ongoing support contingent payments support materials royalty payments cards manufactured accordance eitf 0021 revenue arrangements multiple deliverables card manufacturing license sale installation equipment training support package accounted one unit accounting since company unable determine evidence fair value undelivered items ongoing support company able determine evidence fair value last predominant item delivered ongoing annual support manufacturing equipment accordingly revenues arrangement deferred recognized equipment installed accepted exception value ongoing annual support manufacturing equipment recognized quarterly earned beginning equipment accepted training completed date dependent prevent establishing suitable facility slovenia pursuant ftb 901 accounting separately priced extended warranty product maintenance contracts support revenue recognized ratably remaining term agreement fourth quarter fiscal year 2008 company started assist prevent global towards transfer manufacturing equipment facility slovenia still much prevent make prevent’s facility fully functional lasercard corporation subsidiaries notes consolidated financial statements 20 research development expenses costs related research design development products charged research development expense incurred research development costs include salaries contractor fees building utility costs depreciation 21 shipping handling costs company reports shipping handling costs sales related cost goods sold extent billed customers instances reflected component cost goods sold 22 advertising costs advertising costs consist development placement costs company’s advertising campaigns charged expense incurred advertising expense approximately 212000 fiscal year 2008 188000 fiscal year 2007 183000 fiscal year 2006 23 stockbased compensation effective april 1 2006 company adopted statement financial accounting standard “sfas” 123r sharebased payment requires sharebased payment transactions accounted using fair value based method recognition related expense results operations prior adoption sfas 123r permitted sfas 123 accounting stockbased compensation company accounted sharebased payments employees accordance accounting principles board opinion “apb” 25 accounting stock issued employees utilizing intrinsic value method therefore company recognize compensation cost employee director stock options intrinsic value sfas 123r allows companies choose one two transition methods modified prospective transition method modified retrospective transition method company adopted sfas 123r using modified prospective method transition requires compensation expense related share based payments recognized beginning adoption date requisite service period generally vesting period awards granted april 1 2006 remaining service period unvested portion awards granted prior april 1 2006 consolidated financial statements prior fiscal years restated reflect impact adopting sfas 123r prior april 1 2006 company accounted stockbased compensation plans using intrinsic value method prescribed accounting principles board opinion 25 accounting stock issued employees accordingly compensation cost stock options measured excess quoted market price company’s stock date grant amount employee must pay acquire stock sfas 123 r established accounting disclosure requirements using fairvalue based method accounting stockbased employee compensation plans lasercard corporation subsidiaries notes consolidated financial statements following table illustrates effect net income loss net income loss per share company applied fair value recognition provisions sfas 123 r fiscal year ended march 31 2006 thousands except per share amounts 2004 equity incentive compensation plan “2004 plan” 2004 plan provides grant restricted share awards options stock units stock appreciation rights may require satisfaction performance objectives respect shares companys common stock directors officers employees consultants company subsidiaries exercise price stock options may less 100 fair market value common stock date grant 110 fair market value grant incentive stock option employee owns 10 total combined voting power classes company’s capital stock options granted may exercised 10 years date grant five years date grant incentive stock option employee owns 10 total combined voting power classes company’s capital stock board directors specifies term options prior fiscal year 2006 typically 10 years thereafter typically 7 years vesting schedule exercise options generally 25 one year 625 quarterly next 3 years stock options provisions sfas 123r stockbased compensation cost estimated grant date based fair value award compensation cost recognized expense requisite service period award generally vesting period fair value nonvested stock awards determined reference fair market value company’s common stock date grant consistent valuation method company used disclosureonly purposes provisions sfas 123 company uses blackscholes valuation model estimate fair value option awards determining appropriate fair value model related assumptions requires judgment including estimating stock price volatility forfeiture rates expected terms following assumptions utilized estimate fair value company’s stock option awards fiscal years ended march 31 expected stock price volatility 55 54 riskfree interest rates 265 493 440 496 381 468 average expected life options 44 5 years 44 5 years 6 years expected annual dividends lasercard corporation subsidiaries notes consolidated financial statements expected volatility rate based historical volatility company’s common stock expected life represents average time options vest expected outstanding based vesting provisions company’s historical exercise cancellation expiration patterns company estimated forfeitures based historical rates recognizing compensation expense forfeitures estimated based voluntary termination behavior well analysis actual option forfeitures riskfree interest rate based us treasury zerocoupon issues maturity approximating expected life week grant date annual dividend rate assumed cash dividend expected declared paid foreseeable future company updates assumptions least annually interim basis significant changes assumptions warranted adoption sfas 123r company recorded stockbased employee compensation expense related stock options restricted shares approximately 2 million fiscal year ended march 31 2008 net estimated forfeitures fiscal year 2007 company recorded stockbased employee compensation expense related stock options restricted shares approximately 17 million company recognized full amount stockbased employee compensation expense equity incentive plans consolidated statements operations fiscal year ended march 31 2008 2007 capitalize costs consolidated balance sheets general overhead pool inventory costs stockbased compensation expense related stock options recorded company’s consolidated statement operations fiscal years ended march 31 thousands restricted shares restricted stock units september 21 2007 restricted shares restricted stock units awarded certain company employees directors provisions 2004 plan shares units subject timebased vesting provisions awarded cost recipients cannot sold assigned transferred pledged restriction period recipients restricted shares right vote shares receive dividends whereas recipients restricted stock units benefits restricted shares awarded officers directors company fair value shares time award expensed straightline basis primarily selling general administrative expenses vesting period officers 25 restricted shares shall vest subject continuous commonlaw employment company first second third fourth anniversaries date grant award expiration directors restricted shares vest full eleventh month date award officers shares vest company affect tax withholding retaining number shares fair market value equal taxes withheld restricted stock units awarded certain employees company fair value time award expensed straightline basis vesting period subject employee’s continuous commonlaw employment company 25 restricted units vest first second third fourth anniversaries date award units vest shares issued settlement net shares retained satisfy withholding obligations march 31 2008 37 million total unrecognized compensation cost related unvested stock options restricted share awards restricted stock units expected recognized remaining vesting period december 31 2012 lasercard corporation subsidiaries notes consolidated financial statements company recorded income tax benefit stock based compensation expense fiscal years ended march 31 2008 2007 company cumulative operating loss carryovers full valuation allowance established fasb staff position fsp 123r3 transition election related accounting tax effects sharebased payment awards requires entity follow either transition guidance additionalpaidincapital apic pool prescribed sfas 123r alternative transition method described fsp 123r3 entity adopts sfas 123r using modified prospective application may make onetime election adopt transition method described fsp 123r3 may take one year latter initial adoption sfas 123r effective date fsp 123r3 evaluate available transition alternatives make onetime election company elected use simplified method provided fsp fas 123r3 calculate apic pool effective april 1 2007 adoption fsp material impact consolidated financial position results operations cash flows employee stock purchase plan company employee stock purchase plan espp eligible employees may designate 2 6 compensation withheld purchase shares common stock 67 average price threeday period prior purchase date differential fair market value average price shares sold espp charged operations compensation expense taxed employee income company stockbased compensation expense 129000 108000 123000 relating espp included company’s consolidated statements operations fiscal years ended march 31 2008 2007 2006 respectively 24 income taxes income taxes accounted accordance fasb statement 109 accounting income taxes requires use asset liability method deferred tax assets liabilities determined based upon differences financial reporting tax bases assets liabilities measured using enacted tax rules laws anticipated effect differences expected reverse net deferred tax assets reduced valuation allowance extent realization related deferred tax asset assured recorded valuation allowance full amount calculated deferred tax asset march 31 2008 2007 see note 8 june 2006 financial accounting standards board “fasb” issued interpretation 48 accounting uncertainty income taxesan interpretation fasb statement 109 “fin 48” fin 48 clarifies accounting uncertainty income taxes recognized company’s financial statements accordance fasb statement 109 accounting income taxes fin 48 prescribes recognition threshold measurement attribute financial statement recognition measurement tax position taken expected taken tax return fin 48 also provides guidance derecognition classification interest penalties accounting interim periods disclosure transition evaluation tax position accordance fin 48 twostep process first step recognition company determines whether “morelikelythannot” tax position sustained upon examination including resolution related appeals litigation processes based technical merits position evaluating whether tax position met “morelikelythannot” recognition threshold company presumes position examined appropriate taxing authority would full knowledge relevant information second step measurement tax position meets “morelikelythannot” recognition threshold measured determine amount benefit recognize financial statements tax position measured largest amount benefit greater 50 percent likely realized upon ultimate settlement fin 48 effective fiscal years beginning december 15 2006 company fiscal year commencing april 1 2007 upon adoption fin 48 april 1 2007 company recognized cumulative effect adjustment 62000 decreasing income tax liability unrecognized tax benefits decreasing march 31 2007 accumulated deficit balance lasercard corporation subsidiaries notes consolidated financial statements 25 comprehensive income loss sfas 130 reporting comprehensive income comprehensive income loss defined changes equity enterprise except resulting stockholders’ transactions comprehensive income loss fiscal years ended march 31 thousands 26 recent accounting pronouncements june 2006 eitf issue 073 accounting nonrefundable advance payments goods services used future research development activities eitf 073 issued requires companies defer capitalize prepaid nonrefundable research development payments third parties recognize amounts period research development activities performed services provided subject assessment recoverability guidance effective new contracts entered fiscal years beginning december 15 2007 including interim periods within fiscal years earlier application permitted company believes application guidance material impact consolidated financial statements september 2006 fasb issued statement 157 fair value measurements “sfas 157” sfas 157 defines fair value establishes framework measuring fair value us generally accepted accounting principles expands disclosures fair value measurements sfas 157 intended applied conjunction accounting pronouncements require permit fair value measurements although sfas 157 require new fair value measurements application may change current practice entities definition fair value contained sfas 157 retains exchange price notion inherent earlier definitions fair value sfas 157 clarifies exchange price orderly transaction market participants sell asset transfer liability principal advantageous market asset liability accordingly definition focuses price would received sell asset paid transfer liability measurement date exit price would paid acquire asset received assume liability measurement date entry price sfas 157 emphasizes fair value marketbased measurement entityspecific measurement therefore sfas 157 prescribes fair value measurement determined based assumptions market participants would use pricing asset liability company yet determined impact statement consolidated financial statements february 2007 fasb issued sfas 159 fair value option financial assets financial liabilities “sfas 159” sfas 159 provides entities option report selected financial assets liabilities fair value objective reduce complexity accounting financial instruments volatility earnings caused measuring related assets liabilities differently sfas 159 effective fiscal years beginning november 15 2007 company yet determined impact statement consolidated financial statements december 2007 fasb issued sfas 141 revised 2007 business combinations “sfas 141r” sfas 141r establishes principles requirements acquirer recognizes measures financial statements identifiable assets acquired liabilities assumed noncontrolling interest acquiree goodwill acquired sfas 141r also establishes disclosure requirements enable evaluation nature financial effects business combination sfas 141r effective fiscal years beginning december 15 2008 company assess potential impact adoption sfas 141r future acquisition occurs lasercard corporation subsidiaries notes consolidated financial statements december 2007 fasb issued sfas 160 noncontrolling interests consolidated financial statementsan amendment accounting research bulletin 51 “sfas 160” sfas 160 establishes accounting reporting standards ownership interests subsidiaries held parties parent amount consolidated net income attributable parent noncontrolling interest changes parent’s ownership interest valuation retained noncontrolling equity investments subsidiary deconsolidated sfas 160 also establishes disclosure requirements clearly identify distinguish interests parent interests noncontrolling owners sfas 160 effective fiscal years beginning december 15 2008 company currently evaluating potential impact adoption sfas 160 consolidated financial statements 27 indemnification company’s major sales agreements provide remedies customers defense settlement payment judgment intellectual property claims related use company’s products company also indemnified various vendors certain potential claims company also entered indemnification agreements directors officers company’s bylaws contain similar indemnification obligations date claims made indemnification provisions result associated estimated fair value liability material 3 net income loss per share basic net income loss per share diluted net loss per share computed dividing net income loss weighted average number shares common stock outstanding fiscal year diluted net income per share computed dividing net income weighted average number shares common stock common stock equivalents outstanding fiscal year common stock equivalents consist stock options warrants using treasury stock method reconciliation denominators basic diluted net income loss per share computation fiscal years ended march 31 thousands except per share data stock options warrants exercise price greater average market value profitable periods excluded calculation diluted net income per share effect would antidilutive therefore stock options purchase 1554000 shares excluded calculation diluted net income per share fiscal year ended march 31 2006 effect common stock equivalents would antidilutive since company incurred loss fiscal years ended march 31 2008 2007 stock options warrants excluded calculation diluted net loss per share fiscal years lasercard corporation subsidiaries notes consolidated financial statements 4 segments segment reporting company operates three reportable segments 1 optical memory cards 2 drives systems services company formerly called “optical memory card drives” segment including readwrite drives maintenance systems enabling services 3 specialty cards card printers segments determined based information used chief operating decision maker optical memory cards drives systems services reportable segments strategic business units offer unrelated products services rather reportable segments utilize compatible technology marketed jointly specialty cards printers strategic business unit offering times unrelated products times related products reportable segments accounting policies used derive reportable segment results described summary significant accounting policies resources allocated optical memory card optical card drive segments manner optimizes optical memory card revenues specialty card printers segment manner optimizes consolidated income determined chief operating decision maker segment revenues comprised sales external customers segment gross profit loss includes segment revenues less related cost sales accounts receivable cash deferred income taxes prepaid expenses fixed assets inventory separately reported segment chief operating decision maker therefore amount assets segment meaningful intersegment sales transfers company’s longlived assets attributable united states except 33 million fiscal year 2008 37 million fiscal year 2007 35 million fiscal year 2006 longlived assets attributable operations germany including longlived assets owned us operations located germany companys chief operating decision maker currently companys interim chief executive officer chief operating decision maker reviews financial information presented consolidated basis accompanied disaggregated information revenues gross profit loss segment lasercard corporation subsidiaries notes consolidated financial statements table presents information optical memory cards systems services specialty cards printers fiscal years ended march 31 thousands lasercard corporation subsidiaries notes consolidated financial statements sales geographic region sales geographic region generally determined based upon shipto address invoice company’s knowledge program location revenues geographic region fiscal years ended march 31 thousands fiscal years 2008 2007 2006 sales customers outside united states amount 156 million 121 million 185 million respectively denominated us dollars 131 million 118 million 104 million respectively denominated euros 5 relatedparty transactions since october 21 2001 company contracted wexler walker public policy associates unit hill knowlton inc “wexler” lobbyists behalf company chairman wexler robert walker brother walter f walker member company’s board directors contract extended fiscal year 2009 terms conditions new monthly retainer 15000 reimbursement related expenses company paid wexler 161000 fiscal year 2008 116000 fiscal year 2007 142082 fiscal year 2006 march 31 2008 50000 due wexler included part current liabilities accompanying consolidated balance sheet 6 common stock 2004 equity incentive compensation plan “2004 plan” october 2004 company’s stockholders approved 2004 equity incentive compensation plan replaced existing 1991 stock option plan 2004 plan provides grant restricted share awards options stock units stock appreciation rights may require satisfaction performance objectives respect shares companys common stock directors officers employees consultants company subsidiaries 2004 plan administered compensation committee board directors complete discretion select participants establish terms conditions award subject provisions 2004 plan options granted 2004 plan may “incentive stock options” defined section 422 internal revenue code 1986 code amended nonqualified options total 2786087 shares common stock reserved issuance 1991 2004 plans march 31 2008 award granted 2004 plan forfeited expires reason shares subject award available additional awards outstanding option issued 1991 plan expires terminates reason without exercised full unpurchased shares subject option available additional awards 2004 plan 2004 plan exercise price incentive stock options may less 100 fair market value common stock date grant 110 fair market value grant employee owns 10 total combined voting power classes company’s capital stock code currently limits 100000 aggregate value common stock incentive stock options may become exercisable calendar year 2004 plan option plan adopted company nonstatutory stock options may granted 2004 plan exercise price less 100 fair market value common stock date grant limitation amount common stock nonstatutory grants may first become exercisable calendar year repricing stock option stock appreciation right permitted without stockholder approval subject limitations contained 2004 plan committee sets terms option grant options exercisable date termination employment immediately terminate time options granted 2004 plan may exercised 10 years date grant five years date grant incentive stock option employee owns 10 total combined voting power classes company’s capital stock board directors specifies term options vesting schedule exercise options granted consultants fiscal years 2008 2007 2006 lasercard corporation subsidiaries notes consolidated financial statements addition march 31 2008 73000 shares common stock reserved outside company’s stock option plan compared 113000 march 31 2007 issuance upon exercise stock options granted nasdaq rule 4350i1a connection ccdcm acquisition inducement join company six key employees acquired companies granted nonstatutory stock options march 31 2004 term five years purchase 20000 common shares expired category fiscal year 2008 following table lists stock option activity fiscal years ended march 31 thousands except weighted average exercise price weightedaverage grantdate fair value per share options granted fiscal years 2008 2007 2006 529 769 391 respectively weighted average remaining contractual term outstanding options march 31 2008 2007 425 years 504 years respectively 345 years options vested exercisable march 31 2008 aggregate intrinsic value outstanding options vested exercisable approximately 08 million 04 million respectively march 31 2008 aggregate intrinsic value sum amounts closing market price companys stock march 31 2008 last trading day 850 per share exceeded exercise price options quoted market price excess exercise price “inthemoneyoptions” aggregate intrinsic value options exercised dates options exercised approximately 01 million 08 million fiscal years ended march 31 2008 2007 respectively lasercard corporation subsidiaries notes consolidated financial statements following table summarizes information stock options outstanding march 31 2008 thousands except weighted average exercise price contractual life company 113000 unvested restricted shares issued certain employees outstanding march 31 2008 granted september 2007 march 31 2008 approximately 37 million total unrecognized compensation cost related nonvested sharebased compensation arrangements granted stock plans expected recognized remaining vesting period december 2012 adjusted future changes estimated forfeitures employee stock purchase plan company employee stock purchase plan stock purchase plan 94185 shares reserved march 31 2008 future purchases employees stock purchase plan eligible employees may designate 2 6 compensation withheld purchase shares common stock 67 trailing average price differential fair market value average price shares sold stock purchase plan charged operations compensation expense taxed employee income stock purchase plan employees purchased 36914 shares fiscal year 2008 30418 shares fiscal year 2007 25961 shares fiscal year 2006 weighted average purchase price per share 709 fiscal year 2008 761 fiscal year 2007 653 fiscal year 2006 weighted average market price per share shares purchased 1037 fiscal year 2008 1144 fiscal year 2007 1126 fiscal year 2006 employee benefit plan 401k plan 401k plan provides participating employees opportunity accumulate funds retirement company’s contribution plan exceed lesser 25 maximum employee contribution allowed irs b 25 employee’s contribution c 15 employee’s eligible earnings company contributed 94000 79000 73000 fiscal years 2008 2007 2006 respectively issuance warrants march 31 2008 company warrants outstanding purchase 174057 shares common stock warrants issued connection december 2003 sale common stock private placement warrants exercise price 1726 per share life five years lasercard corporation subsidiaries notes consolidated financial statements 7 commitments contingencies lease company occupies buildings various operating leases rent expense relating buildings approximately 14 million 15 million 15 million fiscal years 2008 2007 2006 respectively march 31 2008 future minimum rental payments relating leases thousands march 31 2008 approximately 70000 square feet floor space leased company longterm basis card manufacturing readwrite drive production administration sales research development two buildings located mountain view california facilities current total annualized rental approximately 885000 leases expire october 2013 march 2014 one 27000square foot building used optical memory card production one 43000 squarefoot building used optical card production readwrite drive production administration sales research development company leases portion building ratingen germany building rastede germany totaling approximately 15000 square feet optical specialty card manufacturing distribution administration sales total annualized rental 239000 euros leases expire dates february 2009 august 2009 also company owns land building rastede germany used production specialty cards research development purchase commitment company purchases services software manufacturing equipment variety vendors march 31 2008 company noncancelable purchase orders 18 million raw materials delivered 12 months contingencies normal course business company subject various claims opinion management ultimate disposition claims material adverse impact financial position results operation cash flows company employment agreements november 28 2007 company entered planned retirement agreement age discrimination release agreement chief executive officer ceo president anticipation retirement march 31 2008 agreements provide ceo receive two years separation pay per annum rate 350002 consulting retainer 18000 nine months consulting availability services bonus 100000 company continue pay portion health care insurance premium elect cobra coverage 18 months stock options ceased vesting retirement date 18750 options scheduled vest may 24 2008 vest consulting company holds 3125 restricted shares vest september 21 2008 consultant company restricted shares forfeited lasercard allocated costs postretirement payments bonus using discounted cashflow basis remaining months total expected service stock options remeasured using blackscholes method addition company employment agreements two individuals provide severance payments period twelve 12 months following employee’s termination employment company shall continue pay employee monthly basis onetwelfth employee’s per annum base salary determined employee’s last day employment specific provisions also made continued health insurance coverage stock options certain conditions severance payments included details found company’s form 8k filed january 10 2008 lasercard corporation subsidiaries notes consolidated financial statements 8 income taxes provision income taxes benefit fiscal years ended march 31 thousands company’s effective tax rate differs statutory rate fiscal years ended march 31 follows domestic foreign component pretax income loss fiscal years ended march 31 thousands lasercard corporation subsidiaries notes consolidated financial statements major components net deferred income tax assetsliabilities march 31 thousands net deferred income tax liability 313000 march 31 2008 388000 march 31 2007 result operations german subsidiary part process preparing companys consolidated financial statements required estimate income taxes jurisdictions operate process involves estimating actual current tax exposure together assessing temporary differences resulting differing treatment items deferred revenue tax accounting purposes differences result deferred income tax assets liabilities included within consolidated balance sheets company must assess likelihood deferred income tax assets recovered future taxable income extent management believes recovery likely company must establish valuation allowance fiscal year 2008 valuation allowance increased 2 million change valuation allowance relates increase net operating loss carryforwards nols 11 million increases gross deferred income tax assets fiscal year 2007 valuation allowance decreased 31 million decrease included 63 million decrease related us income tax benefits stock option deductions benefit credited additional paidin capital realized derecognized result adoption fas 123r remaining change valuation allowance relates increases company’s gross deferred income tax assets companys federal net operating loss carryforwards “nols” march 31 2008 262 million expire various dates 2009 2028 utilized amount 193 million represent nols relating windfall stock option deductions benefit credited stockholders’ equity realized federal tax credits amount 272000 alternative minimum taxes expiration federal rd tax credits amount 330000 expire various dates 2013 2027 utilized california tax credits related rd alternative minimum taxes amount 166000 expiration date companys methodology determining realizability deferred income tax assets involves estimates future taxable income based upon booked orders estimated impact future stock option deductions expiration dates amounts net operating loss carryforwards company difficulty past expects continued difficulty future reliably forecasting foreign business revenue received resulted basing estimates future income purposes booked orders circumstances change company may future able estimate future revenue based upon forecast revenues rather using booked orders although company cannot say occur lasercard corporation subsidiaries notes consolidated financial statements concluding full valuation allowance required end fiscal year 2006 2007 continues required end fiscal year 2008 company considered positive negative evidence regarding ability generate sufficient future taxable income realize deferred income tax assets positive evidence included 1 level sales business experienced contracts us department homeland security’s permanent resident card border crossing card programs canadian government’s permanent resident card program 2 prospects italy middle eastern country national identification card programs 3 expected future orders negative evidence included 1 reliance limited number customers substantial portion business 2 uncertainty timing anticipated orders companys customers 3 impact future stock option deductions taxable income 4 companys experience net operating loss carryforwards expiring unused fiscal year 2004 5 recent financial statement losses 6 prior three years’ cumulative tax net operating losses exclusive payments derived prevent contract weighing positive negative evidence considered “more likely not” criteria pursuant sfas 109 well following risks related business “dependence vars limited number customers” “lengthy sales cycles” “technological change” “competition” described company concluded negative evidence outweighed positive evidence result recorded valuation allowance equal full amount deferred income tax asset march 31 2006 march 31 2007 march 31 2008 event actual results differ estimates adjusted future periods company may need adjust amount valuation allowance based future determinations whether likely companys deferred income tax assets realized decrease valuation allowance would recorded income tax benefit reduction income tax expense net operating losses available reduce future taxable income expire various dates fiscal year 2009 fiscal year 2028 extent company generates taxable income jurisdictions deferred income tax asset relates net operating losses offset full valuation allowance utilization net operating losses would result reversal related valuation allowance upon adoption fin 48 april 1 2007 company recognized cumulative effect adjustment 62000 decreasing income tax liability unrecognized tax benefits decreasing march 31 2007 accumulated deficit balance march 31 2008 total amount gross unrecognized tax benefits approximately 229000 entire balance represents amount unrecognized tax benefits recognized would affect effective tax rate company currently anticipate significant increase decrease unrecognized tax benefits recorded next 12 months company recognizes interest penalties accrued unrecognized tax benefits component provision income taxes march 31 2008 company accrued 34000 payment interest penalties related unrecognized tax benefits lasercard corporation subsidiaries notes consolidated financial statements reconciliation beginning ending amounts unrecognized tax benefits follows although company files us federal various state foreign tax returns companys major tax jurisdictions united states california germany tax years 1993 2008 remain subject examination appropriate governmental agencies mainly united states due tax loss carryovers years lasercard corporation subsidiaries selected quarterly financial data unaudited thousands except per share amounts item 9 item 8 financial statements supplementary data report independent registered public accounting firm board directors stockholders lasercard corporation audited managements assessment included accompanying management report internal controls financial reporting included item 9a lasercard corporation subsidiaries company maintained effective internal control financial reporting march 31 2005 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission coso criteria companys management responsible maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting responsibility express opinion managements assessment opinion effectiveness companys internal control financial reporting based audit conducted audit accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether effective internal control financial reporting maintained material respects audit included obtaining understanding internal control financial reporting evaluating managements assessment testing evaluating design operating effectiveness internal control performing procedures considered necessary circumstances believe audit provides reasonable basis opinion companys internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles companys internal control financial reporting includes policies procedures 1 pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company 2 provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company 3 provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition companys assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate opinion managements assessment company maintained effective internal control financial reporting march 31 2005 fairly stated material respects based coso criteria also opinion company maintained material respects effective internal control financial reporting march 31 2005 based coso criteria also audited accordance standards public company accounting oversight board united states consolidated balance sheet lasercard corporation subsidiaries march 31 2005 related consolidated statements operations stockholders equity cash flows year ended report dated june 3 2005 expressed unqualified opinion thereon odenberg ullakko muranishi co llp san francisco california june 3 2005 report independent registered public accounting firm board directors stockholders lasercard corporation audited accompanying consolidated balance sheet lasercard corporation subsidiaries march 31 2005 related consolidated statements operations stockholders equity cash flows year ended financial statements responsibility companys management responsibility express opinion financial statements based audit conducted audit accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audit provides reasonable basis opinion consolidated financial statements audited us present fairly material respects financial position lasercard corporation subsidiaries march 31 2005 results operations cash flows year ended conformity accounting principles generally accepted united states america also audited accordance standards public company accounting oversight board united states effectiveness lasercard corporations internal control financial reporting march 31 2005 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission report dated june 3 2005 expressed unqualified opinion thereon odenberg ullakko muranishi co llp san francisco california june 3 2005 report independent registered public accounting firm board directors stockholders lasercard corporation audited accompanying consolidated balance sheet lasercard corporation formerly drexler technology corporation subsidiaries march 31 2004 related consolidated statements operations stockholders equity cash flows year ended consolidated financial statements responsibility companys management responsibility express opinion consolidated financial statements based audit conducted audit accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audit provides reasonable basis opinion consolidated financial statements referred present fairly material respects financial position lasercard corporation subsidiaries march 31 2004 results operations cash flows year ended conformity accounting principles generally accepted united states america kpmg llp mountain view california june 9 2004 report independent registered public accounting firm board directors stockholders lasercard corporation opinion consolidated statements operations stockholders equity cash flows year ended march 31 2003 present fairly material respects results operations cash flows lasercard corporation formerly drexler technology corporation subsidiaries year ended march 31 2003 conformity accounting principles generally accepted united states america financial statements responsibility companys management responsibility express opinion financial statements based audit conducted audit statements accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements assessing accounting principles used significant estimates made management evaluating overall financial statement presentation believe audit provides reasonable basis opinion spricewaterhousecoopers llp san jose california april 28 2003 except note 4 date january 22 2004 lasercard corporation subsidiaries formerly drexler technology corporation notes consolidated financial statements 1 organization operations lasercard corporation delaware corporation wholly owned subsidiaries lasercard corporation california corporation challenge card design plastikkarten gmbh cards gmbh company develop manufacture integrate lasercardr optical memory cards optical card drives peripherals specialty cards printers challenge card design plastikkarten gmbh cards gmbh acquired lasercard corporation march 31 2004 companys customers optical memory card related products mainly valueadded reseller var companies worldwide develop commercial applications lasercard products target markets products include government commercial applications portable recordable secure identification cards unitaryrecord cards current applications include united states permanent resident card green card laser visa border crossing cards us military cargo manifests canadian permanent resident cards italian national id cards biometric ids walletcard applications challenge card design plastikkarten gmbh cards gmbh supply advancedtechnology cards various applications card printers systems integration gatekeeping ticketing company two additional subsidiaries dormant precision photoglass inc microfab systems corporation company subject certain risks including limited competition substitute products larger companies dependence certain suppliers customers 2 summary significant accounting policies principles consolidation basis presentation consolidated financial statements include accounts lasercard corporation wholly owned subsidiaries significant intercompany accounts transactions eliminated consolidation use estimates preparation financial statements conformity accounting principles generally accepted united states america requires management make estimates assumptions affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenues expenses reporting period actual results could differ estimates fiscal period purposes presentation company labels annual accounting period end march 31 quarterly accounting period ends june 30 september 30 december 31 company fact operates reports based quarterly periods ending friday closest month end fiscal 2005 ended april 1 2005 fiscal 2004 ended april 2 2004 fiscal 2003 ended march 28 2003 reclassifications certain prior year amounts reclassified conform current year presentation connection preparation accompanying consolidated financial statements company concluded appropriate classify investments auction rate securities shortterm availableforsale investments previously investments classified cash equivalents accordingly company revised classification exclude cash equivalents 94 million auction rate securities march 31 2004 include amount shortterm availableforsale investments addition company made corresponding revisions accompanying consolidated statements cash flows reflect gross purchases sales securities investing activities result cash used investing activities increased 54 million 2004 498000 2003 revision classification affect previously reported cash flows operations financing activities foreign currency transactions functional currency companys foreign subsidiaries generally local currency financial statements subsidiaries translated united states dollars using periodend rates exchange assets liabilities average rates exchange year revenues expenses translation gains losses recorded accumulated comprehensive income component stockholders equity net gains losses resulting foreign exchange transactions included income net significant periods presented concentrations risk financial instruments potentially subject company significant concentrations credit risk consist principally cash equivalents shortterm investments longterm investments accounts receivable company places cash equivalents shortterm longterm investments highcredit quality financial institutions company exposed credit risk event default institutions extent amount recorded balance sheet march 31 2005 company invested shortterm longterm investments including auction rate securities discount notes us government bonds accounts receivable derived revenue earned customers primarily located united states italy germany company performs ongoing credit evaluations customers financial condition generally require collateral company maintains reserves potential credit losses historically losses immaterial major customers one customer accounted 31 revenues fiscal 2005 72 revenues fiscal 2004 94 revenues fiscal 2003 another customer accounted 26 revenues fiscal 2005 22 revenues fiscal 2004 revenue customers attributable optical memory card optical card drive segments customer accounted 10 revenues periods one united states customer accounted 27 accounts receivable march 31 2005 two customers comprised 53 46 respectively accounts receivable march 31 2004 cash equivalents shortterm investments longterm investments company considers highly liquid investments consisting primarily commercial paper discount notes us government bonds maturities three months less date purchase cash equivalents cash equivalents march 31 2005 march 31 2004 4 million 23 million respectively march 31 2005 2004 company held auction rate securities accounted availableforsale classified short term investments fair values auction rate securities based quoted market prices substantially equal carrying costs due frequency reset dates shortterm investments also include investments maturities date purchase three months one year investments maturities date purchase greater one year classified longterm investments management determines appropriate classification debt securities time purchase reevaluates classification investments balance sheet date shortterm investments except auction rate securities recorded fair value longterm investments classified held maturity stated balance sheet amortized cost investments classified held maturity unrealized gains losses recorded carrying amounts individual held maturity securities reviewed balance sheet date potential impairment march 31 2005 2004 company determined impairment temporary occurred carrying amounts shortterm longterm investments march 31 thousands 2005 2004 shortterm investments one year us government agency obligations 1000 auction rate securities 5150 9400 certificates deposit 981 total shortterm investments 6150 10381 longterm investments one two years us government agency obligations 6300 7300 certificates deposit 946 total longterm investments 6300 8246 total investments 12450 18627 fair value financial instruments carrying amounts companys financial instruments including cash equivalents shortterm investments accounts receivable accounts payable accrued liabilities approximate fair values due short maturities fair value longterm investments 62 million march 31 2005 83 million march 31 2004 inventories stated lower cost market cost determined firstin firstout basis market based lower cost estimated realizable value components inventories march 31 thousands 2005 2004 raw materials 4891 3243 workinprocess 739 1651 finished goods 2279 1905 7909 6799 company establishes lower cost market reserves aged inventory reserves obsolescence reserves inventory reserves generally recorded management determines item readily saleable inventory reserves relieved related inventory sold scrapped company recorded charges write inventory 381000 fiscal 2005 97000 fiscal 2004 425000 fiscal 2003 equipment held resale equipment held resale primarily consists parts labor costs deferred costs incurred build equipment contract global investments group components equipment held resale march 31 thousands 2005 2004 parts 3812 2419 labor cost 212 37 4061 2419 property equipment net components property equipment march 31 thousands 2005 2004 building land 856 811 equipment furniture 23267 21754 construction progress including purchased equipment 1409 2338 leasehold improvements 4505 2706 30037 27609 less accumulated depreciation 17505 16079 total property equipment net 12532 11530 property equipment recorded cost depreciation provided estimated useful lives four seven years equipment furniture using doubledeclining balance straightline methods twentyfive years building using straightline method leasehold improvements amortized shorter life asset life lease using straightline method depreciation leasehold amortization expense fiscal 2005 2004 2003 25 million 19 million 15 million respectively goodwill intangible assets goodwill represents excess purchase price fair value identifiable net tangible intangible assets acquired business combination accordance sfas 142 goodwill intangible assets company amortize goodwill instead company evaluates goodwill impairment annually fourth quarter whenever events changes circumstances indicate likely impairment loss incurred goodwill assigned reporting units operating segments defined current segment reporting structure march 31 2005 company one reporting unit contains goodwill acquisitionrelated intangible assets goodwill include backlog amortized straightline basis estimated useful life six months brand indefinite useful life legal expenses incurred connection patents capitalized amortized estimated remaining useful lives patents six seven years definite life intangible assets capitalized accumulated amortization march 31 follows thousands 2005 2004 patent expenditures 3290 3172 technology transfer expenditures 545 backlog 29 10 total patent intangible expenditures 3845 3756 patent accumulated amortization 2923 2810 technology transfer accumulated amortization 483 455 6 3 accumulated amortization 3412 3268 patents intangibles net 433 488 weighted average remaining amortization periods march 31 follows 2005 2004 backlog 05 years patents 40 years 48 years technology transfer 22 years 32 years total 37 years 42 years amortization expense intangible assets fiscal 2005 2004 2003 172000 201000 352000 respectively amounts relating goodwill intangibles assets longer amortized included amounts estimated amortization expense next five years intangible assets march 31 2005 follows thousands fiscal year 2006 129 2007 112 2008 75 2009 53 2010 36 total 405 intangible assets capitalized would amortized march 31 follows thousands 2005 2004 brand 490 goodwill 3321 total 3811 assessment impairment tangible intangible longlived assets accordance sfas 144 accounting impairment disposal longlived assets company assesses impairment longlived assets whenever events changes circumstances indicate carrying value may recoverable estimated future cash flows expected result use eventual disposition companys longlived assets subject evaluation include property plant equipment amortizable intangible assets companys estimate future undiscounted net cash flows insufficient recover carrying value assets estimated useful life company record impairment loss amount carrying value assets exceeds fair value assets determined recoverable useful lives shorter originally estimated company depreciates amortizes net book value asset newly determined remaining useful lives date company needed record impairment losses longlived assets accrued liabilities components accrued liabilities march 31 thousands 2005 2004 accrued payroll fringe benefits 1062 1107 accrued liabilities 1250 928 total 2312 2035 software development costs development costs incurred research development new software products expensed incurred technological feasibility form working model established date companys software development completed concurrent establishment technological feasibility accordingly software development costs charged research engineering expenses accompanying consolidated statements operations advance payments customers company customarily receives advance payments orders placed customers advance payments recorded liability balance sheet related orders shipped revenue recognition product sales primarily consist optical card sales optical card readwrite drives sales specialty cards card printers company recognizes revenue product sales following criteria met 1 persuasive evidence arrangement exists 2 delivery occurred 3 fee fixed determinable 4 collectibility reasonably assured company recognizes revenue product sales time shipment shipping terms fob shipping point orders placed pursuant preexisting sales arrangement postshipment obligations warehousing us government subcontract customer acceptance criteria appropriate provision made time shipment estimated warranty costs estimated returns total amount actual warranty costs returns activity 373000 fiscal 2005 companys us government subcontract requires delivery secure vault located company premises shipments made vault shipment schedule provided prime contractor subject revision generally subject cancellation option prime contractor time cards delivered vault title cards transferred government risks ownership transferred well prime contractor invoiced payment due within thirty days contract contain return warranty cancellation provisions pursuant provisions sec staff accounting bulletin 104 sab 104 revenue recognized delivery vault company fulfilled contractual obligations earnings process complete company receive shipment schedule shipment cards vault revenue deferred recognized upon shipment vault addition revenue recognition future deliveries vault would affected us government cancels shipment schedule result companys revenues may fluctuate period company continue obtain shipment schedules subcontract shipment schedules cancelled may 2003 emerging issues task force eitf finalized terms eitf issue 0021 revenue arrangements multiple deliverables eitf 0021 provides criteria governing identify whether goods services delivered separately bundled sales arrangement accounted separately deliverables accounted separately meet following criteria delivered items standalone value customer b fair value undelivered items reliably determined c arrangement includes general right return delivery undelivered items probable substantially controlled seller situations deliverables fall within higherlevel literature defined eitf 0021 company applies guidance higherlevel literature deliverables meet criteria combined one deliverables company adopted eitf 0021 new arrangements entered july 1 2003 assesses revenue arrangements multiple deliverables criteria set forth eitf 0021 company applies provisions statement position 811 accounting performance constructiontype certain productiontype contracts sop 811 applicable contracts revenues time materials contracts recognized services rendered contract labor rates plus material direct costs incurred revenues fixed price contracts recognized percentage completion method based ratio total costs incurred date compared estimated total costs complete contract estimates costs complete include material direct labor overhead allowable general administrative expenses circumstances estimates costs complete project cannot reasonably estimated assured loss incurred percentageofcompletion method based zero profit margin rather completedcontract method used precise estimates made full amount estimated loss charged operations period determined loss realized performance contract year ended march 31 2005 company recognized approximately 127000 revenues based zero profit margin related longterm contract company revenues generated type contract years ended march 31 2004 2003 company applies provisions statement position sop 972 software revenue recognition amended statement position 989 modification sop 972 software revenue recognition respect certain transactions involving sale software products revenue license companys software products recognized persuasive evidence arrangement exists software product delivered fee fixed determinable collectibility probable applicable upon acceptance criteria specified upon expiration acceptance period software revenue immaterial fiscal 2005 2004 2003 license revenue may consist upfront license fees longterm royalty payments recognized revenue earned cost license revenue recorded fiscal 2005 2004 2003 license revenue amount 875000 fiscal 2003 represents unamortized portion 1 million nonrefundable distribution license fee received 2000 licensee asia committed purchase minimum number optical memory cards program licensees country company recorded fee deferred revenue amortizing revenue proportion actual card purchases licensee quarter ended december 31 2002 company determined due licensees failure meet minimum contractual purchase commitment licensees distribution rights become unenforceable licensee would longer acting card supplier program fiscal 2003 license revenue also included 235000 relating payment received january 2002 third party considering entering license agreement company originally recorded payment deferred revenue third party subsequently foregone rights agreement due nonperformance accordingly company recognized revenue arrangement fourth quarter fiscal 2003 license revenue fiscal years ended march 31 2005 2004 fiscal 2005 first quarter company sold cardmanufacturing license effective april 3 2004 global investments group gig based auckland new zealand card manufacturing slovenia agreement provides payments company 14 million 20year license fiveyear training support package followed 15 million paid 1 million annually ongoing support additional 15 years additionally company sell approximately 12 million worth required manufacturing equipment installation support new facility built gig provide targeted initial manufacturing capacity 10 million optical cards annually march 31 2005 company 41 million equipment classified equipment held resale balance sheet agreement provides options increase capacity 30 million cards per year company received 15 million payments called agreements consisting partial payment equipment 35 million 115 million license fee support 15 million company received 13 million recorded advance payments customers 2 million licensing fee recorded deferred revenue classified long term liabilities within consolidated balance sheets addition 41 million discussed gig pay company royalties card produced license territories covered license include european union eastern european regions gig exclusive marketing rights certain territories performance goals maintain rights company assign person site license term assist quality security operational procedures mutual goal facility cards made facility conform companys standards gig anticipates start new facility early 2006 company also retains rights utilize 20 new facility capacity backup capacity buffer augment card manufacturing facilities mountain view california granting license gig establishes potential second source supplier optical memory cards existing prospective customers may request multiple sources cards revenue recognized remaining term agreement beginning operation factory commences research engineering expenses costs related research design development products charged research engineering expense incurred shipping handling costs shipping handling recorded cost sales advertising costs advertising costs consist development placement costs companys advertising campaigns charged expense incurred advertising expense approximately 189000 fiscal 2005 advertising costs incurred fiscal 2004 2003 stockbased compensation december 31 2002 financial accounting standards board fasb issued statement financial accounting standards sfas 148 accounting stock based compensation transition disclosure amends sfas 123 sfas 148 requires prominent frequent disclosures effects stockbased compensation company adopted year ended march 31 2003 company accounts stockbased compensation plans using intrinsic value method prescribed accounting principles board opinion 25 accounting stock issued employees compensation cost stock options measured excess quoted market price companys stock date grant amount employee must pay acquire stock sfas 123 accounting stockbased compensation established accounting disclosure requirements using fairvalue based method accounting stockbased employee compensation plans compensation expense plans determined consistent sfas 123 companys net income loss basic diluted net income loss per share would follows dollars thousands except per share amounts company computed fair value option grant date grant using blackscholes option valuation model following assumptions comprehensive income loss sfas 130 reporting comprehensive income comprehensive income loss defined changes equity enterprise except resulting stockholders transactions fiscal years ended march 31 2005 2004 2003 comprehensive income loss follows thousands recent accounting pronouncements october 22 2004 american jobs creation act 2004 act signed law act contains numerous changes us tax law temporary permanent nature including potential tax deduction respect certain qualified domestic manufacturing activities changes carryback carryforward utilization periods foreign tax credits dividend received deduction respect accumulated income earned abroad new law could potentially impact companys effective tax rate future taxable income cash tax planning strategies amongst affects december 2004 fasb issued staff position 1091 fsp 1091 application fasb statement 109 accounting income taxes tax deduction qualified production activities provided american jobs creation act 2004 staff position 1092 fsp 1092 accounting disclosure guidance foreign earnings repatriation provision within american jobs creation act 2004 fsp 1091 clarifies manufacturers tax deduction provided act accounted special deduction accordance sfas 109 tax rate reduction fsp 1092 provides accounting disclosure guidance repatriation certain foreign earnings us taxpayer provided act company currently studying impact onetime favorable foreign dividend provision accordingly company adjusted income tax expense deferred tax liability reflect tax impact repatriation nonus earnings may make december 2004 fasb issued sfas 123r sharebased payment revise sfas 123 accounting stockbased compensation supersede apb opinion 25 accounting stock issued employees related implementation guidance requires companies recognize compensation costs related sharebased payment transactions financial statements costs measured based fair value equity liability instruments issued company apply sfas 123r first quarter fiscal year ending march 31 2007 company yet evaluated impact adoption sfas 123r financial statements december 2004 fasb issued sfas 153 exchanges nonmonetary assets amendment apb opinion 29 eliminates exception nonmonetary exchanges similar productive assets replaces general exception exchanges nonmonetary assets commercial substance nonmonetary exchange commercial substance future cash flows entity expected change significantly result exchange sfas 153 effective nonmonetary asset exchanges occurring fiscal periods beginning june 15 2005 company currently evaluating sfas 153 expect adoption material impact results operations financial condition november 2004 fasb issued sfas 151 inventory costs amendment arb 43 chapter 4 clarifies accounting abnormal amounts idle facility expense freight handling costs wasted material spoilage recognized current period charges addition sfas 151 requires allocation fixed production overheads costs conversion based normal capacity production facilities sfas 151 effective inventory costs incurred fiscal years beginning june 15 2005 company evaluated impact sfas 151 overall result operations financial condition march 2004 financial accounting standards board fasb approved consensus reached emerging issues task force eitf issue 031 meaning otherthantemporary impairment application certain investments eitf 031 objective issue provide guidance identifying impaired investments eitf 031 also provided new disclosure requirements investments deemed temporarily impaired accounting provisions eitf 031 effective reporting periods beginning june 15 2004 disclosure requirements effective annual periods ending june 15 2004 september 2004 fasb deferred requirement record impairment losses caused effect increases riskfree interest rates sector spreads debt securities subject paragraph 16 eitf 031 excluded minor impairments requirement new guidance becomes effective company evaluated impact eitf 031 believe impact significant overall results operations financial condition indemnification companys major sales agreements provide remedies customers defense settlement payment judgment intellectual property claims related use companys products company also indemnified various vendors certain potential claims company also entered indemnification agreements directors officers companys bylaws contain similar indemnification obligations date claims made indemnifications result associated estimated fair value liability material company required indemnify investors companys december 2003 financing third party claim based upon untrue statement alleged untrue statement material fact contained registration statement covering resale shares purchased investors failure company fulfill undertaking included registration statement 3 net income loss per share basic net income loss per share computed dividing net income loss weighted average number shares common stock outstanding diluted net income loss per share computed dividing net income loss weighted average number shares common stock common stock equivalents outstanding common stock equivalents consist stock options warrants using treasury stock method reconciliation denominators basic diluted net income loss per share computation fiscal years ended march 31 2005 2004 2003 shown following table thousands except per share data stock options exercise price greater average market value profitable periods excluded calculation diluted net income per share effect would antidilutive therefore stock options purchase 168000 shares excluded calculation diluted net income per share year ended march 31 2003 effect common stock equivalents would antidilutive since company incurred loss stock options warrants excluded calculation diluted net loss per share fiscal years ended march 31 2004 2005 4 segments segment reporting prior second fiscal quarter 2004 company reported results single reportable segment second fiscal quarter 2004 revenues increased optical card drives result company concluded two reportable segments began reporting results segment information pursuant statement financial accounting standards 131 segment reporting new segment specialty cards printers established acquisition german subsidiaries companys three reportable segments 1 optical memory cards 2 optical memory card drives maintenance related accessories optical card drives 3 specialty cards card printers segments determined based information used chief operating decision maker optical memory cards optical card drives reportable segments strategic business units offer unrelated products services rather reportable segments utilize compatible technology marketed jointly specialty cards printers strategic business unit offering times unrelated products times related products reportable segments accounting policies used derive reportable segment results described summary significant accounting policies resources allocated optical memory card optical card drive segments manner optimizes optical memory card revenues specialty card printers segment manner optimizes consolidated income determined chief operating decision maker segment revenues comprised sales external customers segment gross profit loss includes segment revenues less related cost sales accounts receivable cash deferred income taxes prepaid expenses fixed assets inventory separately reported segment chief operating decision maker therefore amount assets segment meaningful intersegment sales transfers companys longlived assets attributable united states except 34 million fiscal 2005 32 million fiscal 2004 attributable germany companys chief operating decision maker currently companys chief executive officer chief operating decision maker reviews financial information presented consolidated basis accompanied disaggregated information revenues gross profit loss segment table presents information optical memory cards optical card drives specialty cards card printers fiscal years ended march 31 2005 2004 2003 thousands fiscal year ended march 31 2005 optical specialty memory card cards card segment cards drives printers total revenue 17364 933 10235 28532 cost sales 12803 2087 7723 22613 gross profit loss 4561 1154 2512 5919 depreciation amortization expense 1505 159 266 1930 fiscal year ended march 31 2004 optical memory card segment cards drives total revenue 13379 3448 16827 cost sales 9965 3039 13004 gross profit 3414 409 3 823 depreciation amortization expense 1207 179 1386 fiscal year ended march 31 2003 optical memory card segment cards drives total revenue 24247 693 24940 cost sales 12120 1579 13699 gross profit loss 12127 886 11241 depreciation amortization expense 995 81 1076 following reconciliation segment results amounts included companys consolidated financial statements fiscal years ended march 31 2005 2004 2003 thousands fiscal year ended march 31 2005 segment total revenue 28532 12 28544 cost sales 22613 24 22637 gross profit loss 5919 12 5907 depreciation amortization expense 1930 710 2640 fiscal year ended march 31 2004 segment total revenue 16827 136 16963 cost sales 13004 153 13157 gross profit loss 3823 17 3806 depreciation amortization expense 1386 737 2123 fiscal year ended march 31 2003 segment total revenue 24940 1391 26331 cost sales 13699 207 13906 gross profit 11241 1184 12425 depreciation amortization expense 1076 753 1829 revenue consists primarily license revenue cost sales depreciation amortization expense represents corporate costs directly associated segment activities sales geographic region sales geographic region generally determined based upon shipto address invoice revenues geographic region follows thousands fiscal year 2005 2004 2003 united states 7900 8461 22205 italy 7617 3720 334 germany 4820 7 12 europe 4411 49 92 canada 1902 4177 2764 middle east africa 1397 478 33 asia 280 39 887 rest world 217 32 4 28544 16963 26331 fiscal 2005 sales customers outside united states amount 109 million denominated us dollars 97 million denominated euros fiscal 2004 2003 sales customers outside united states denominated us dollars 5 relatedparty transactions since october 21 2001 company contracted wexler walker public policy associates unit hill knowlton inc wexler lobbyists behalf company chairman wexler robert walker brother director walter f walker october 2002 agreement extended period october 1 2002 september 2003 terminated upon seven days notice extended agreement provides monthly retainer 10000 currently purchase order dated november 12 2004 valid april 29 2005 terms conditions previous agreement addition another purchase order dated february 25 2005 total 35000 cover consulting services period january 2005 april 2005 company paid wexler 206000 fiscal 2005 151000 fiscal 2004 83000 fiscal 2003 march 31 2005 35000 due wexler significant amounts due wexler march 31 2004 6 common stock 2004 equity incentive compensation plan 2004 plan october 2004 companys shareholders approved 2004 equity incentive compensation plan succeeded existing stock option plan 2004 plan provides grant restricted share awards options stock units stock appreciation rights may require satisfaction performance objectives respect shares common stock directors officers employees consultants company subsidiaries 2004 plan may administered compensation committee board directors complete discretion select participants establish terms conditions award subject provisions 2004 plan options granted 2004 plan may incentive stock options defined section 422 internal revenue code 1986 amended code nonqualified options total 2423155 shares common stock reserved issuance 2004 plan march 31 2005 award granted 2004 plan forfeited expires reason shares subject award available additional awards outstanding option 1994 plan expires terminates reason without exercised full unpurchased shares subject option available additional awards 2004 plan 2004 plan exercise price incentive stock options may less 100 fair market value common stock date grant 110 fair market value grant employee owns 10 total combined voting power classes companys capital stock code currently limits 100000 aggregate value common stock incentive stock options may become exercisable calendar year 2004 plan option plan adopted company nonstatutory stock options may granted 2004 plan exercise price less 100 fair market value common stock date grant limitation amount common stock nonstatutory grants may first become exercisable calendar year repricing stock option stock appreciation right permitted without shareholder approval subject limitations contained 2004 plan committee sets terms option grant options exercisable date termination employment immediately terminate time options granted 2004 plan may exercised 10 years date grant five years date grant incentive stock option employee owns 10 total combined voting power classes companys capital stock board directors specifies term options vesting schedule exercise options granted consultants fiscal 2005 2004 2003 march 31 2005 475871 shares available future issuance 2004 plan addition march 31 2005 120000 shares stock reserved outside companys stock option plan stock options issued nasdaq rule 4350i1a connection ccdcm acquisition inducement join company six key employees acquired companies granted nonstatutory stock options march 31 2004 term five years purchase 20000 common shares following table lists stock option activity march 31 2002 march 31 2005 options weighted available outstanding average grant options exercise price balance march 31 2002 313971 1873731 1225 authorized 275000 granted 394000 1603 exercised 184100 867 expired 23833 1611 balance march 31 2003 218804 2059798 1325 granted 35000 155000 1443 exercised 145147 1034 expired 40592 1512 balance march 31 2004 224396 2029059 1351 authorized 300000 granted 69000 952 exercised 10300 1068 expired 20475 1547 balance march 31 2005 475871 2067284 1337 following table summarizes information stock options outstanding march 31 2005 employee stock purchase plan company employee stock purchase plan stock purchase plan 87478 shares reserved march 31 2005 future purchases employees stock purchase plan eligible employees may designate 2 6 compensation withheld purchase shares common stock 67 trailing average price differential fair market value average price shares sold stock purchase plan charged operations compensation expense taxed employee income stock purchase plan employees purchased 26730 shares fiscal 2005 20253 shares fiscal 2004 18405 shares fiscal 2003 average purchase price per share 589 fiscal 2005 938 fiscal 2004 974 fiscal 2003 weighted average market price per share shares purchased 913 fiscal 2005 1419 fiscal 2004 1476 fiscal 2003 employee benefit plan 401k plan 401k plan provides participating employees opportunity accumulate funds retirement companys contribution plan exceed lesser 25 maximum employee contribution allowed irs b 25 employees contribution c 15 employees eligible earnings 7 commitments contingencies lease company occupies buildings various operating leases rent expense relating buildings approximately 15 million fiscal 2005 approximately 11 million fiscal 2004 approximately 12 million fiscal 2003 march 31 2005 future minimum rental payments relating leases thousands fiscal year 2006 1150 2007 1072 2008 1021 2009 993 2010 1382 thereafter 5610 total 11228 mutual agreement lessor november 1 2003 lease 27000squarefoot building modified extended october 2013 original lease remaining term may 2006 lease payments totaling 21 million modified lease calls payments totaling 13 million period rent expense recorded average rent payments term lease time renegotiated lease signed 139000 deferred rent associated original lease amount amortized straightline basis tenyear term modified lease purchase commitment company purchases services software manufacturing equipment facilities variety vendors march 31 2005 company noncancelable purchase orders 615000 equipment resale 18 million raw materials delivered 12 months product warranties company estimates warranty costs based historical warranty claim experience applies estimate revenue stream products warranty companys product warranty claims settled returns defective products shipment replacement products warranty returns included allowance sales returns based historical returns allowance sales returns reviewed quarterly verify properly reflects remaining obligations based anticipated returns balance obligation period adjustments made actual return claim experience differs estimates march 31 2005 2004 allowance sales returns 24000 86000 respectively normal course business company subject various claims assertions opinion management ultimate disposition claims assertions material adverse impact financial position company 8 income taxes provision income taxes fiscal 2005 2004 fiscal 2003 consists following thousands companys effective tax rate differs statutory rate follows major components net deferred tax assetliability march 31 follows thousands fiscal 2004 acquisition challenge card design gmbh cards gmbh resulted deferred tax liability 641000 march 31 2005 608000 march 31 2004 company analyzes deferred tax assets regard potential realization company established full valuation allowance deferred tax assets management could conclude likely deferred tax assets would realized beginning third quarter fiscal 2004 throughout fiscal 2005 companys methodology determining realizability deferred tax assets involves estimates future taxable income estimated impact future stock option deductions expiration dates amounts net operating loss carryforwards estimates based nearterm projections assumptions management believes reasonable recent periods prior third quarter fiscal 2004 company estimating future taxable income core business assumed ongoing business us government subcontract united states permanent resident card green card laser visa border crossing cards canadian governments permanent resident card program well estimated operating expenses support level business offset estimated impact future stock option deductions third quarter fiscal 2004 company estimated future taxable income based upon expectations current next three years past core business proven stable company believed past core business expected represent increasingly smaller part business company expects revenues us programs stabilize revenue levels lower expected past expects new foreign business fluctuated considerably quarter comprise larger portion core business company difficulty past expects continued difficulty future reliably forecasting foreign business revenue received combination threeyear cumulative tax loss period ended march 31 2004 resulted company basing estimates future income purposes orders backlog end reporting period circumstances change company may future able estimate future revenue based upon forecast revenues rather using booked orders although company cannot say occur event actual results differ estimates adjusted future periods company may need adjust amount valuation allowance based future determinations whether likely deferred tax assets realized decrease valuation allowance would recorded income tax benefit reduction income tax expense credit stockholders equity companys net operating losses available reduce future taxable income expire various dates fiscal 2007 fiscal 2024 extent company generates taxable income jurisdictions deferred tax asset relates net operating losses offset full valuation allowance utilization net operating losses would result reversal related valuation allowance companys income expense benefit significant management judgment required determining provision income taxes particular valuation allowance recorded companys deferred tax assets due companys recent cumulative tax loss history threeyear period ending march 31 2004 income statement loss history previous five quarters difficulty forecasting timing future revenue evidenced deviations achieved revenues expected revenues previous quarters taking account newness certain customer relationships company determined necessary increase valuation allowance sfas 109 full amount deferred tax asset result company determined full valuation allowance required net deferred tax assets fiscal 2004 increased existing allowance 24 million 148 million addition company increased valuation allowance net deferred tax asset amount 37 million fiscal 2005 companys federal net operating loss carryforwards march 31 2005 272 million expire various dates 2007 2024 utilized tax effect amount reflected federal net operating loss carryforwards totaling 93 million amount 57 million representing tax benefits relating stockbased compensation programs credited stockholders equity extent company concludes likely amount realized federal tax credits amount 476000 alternative minimum taxes expiration federal tax credits amount 207000 expire various dates 2013 2025 utilized california tax credits amount 103000 expiration date 9 issuance stock options warrants december 2003 company issued sold 791172 shares common stock options purchase 122292 shares common stock warrants purchase 174057 shares common stock aggregate purchase price 101 million private placement company received net proceeds 94 million net fees expenses purchase price common stock 1276 per share 15 discount fiveday average price december 23 2003 options exercise price 1651 per share ninemonth life warrants exercise price 1726 per share life five years options warrants valued 245000 984000 respectively based blackscholes calculation december 23 2003 pursuant provisions eitf issue 0019 accounting derivative financial instruments indexed potentially settled companys stock eitf 0019 recorded values shortterm longterm liabilities balance net proceeds accounted additional paidin capital eitf 0019 company markstomarket fair value options warrants end accounting period december 31 2003 resulted options warrants valued 195000 916000 respectively decrease valuation options warrants december 23 2003 december 31 2003 118000 recorded income accompanying consolidated statements operations resulted decrease companys stock price february 6 2004 company investors entered amendment original agreement resulted reclassification options warrants equity amendment clarified options warrants granted financing may exercised time registration statement covering resale underlying shares effective available instance company would deliver investors shares common stock whose resale currently registered effective date amendment option warrant value reclassified equity additional paidin capital result increase value options warrants december 31 2003 amendment date due increases companys stock price company recognized expense 211000 included expense consolidated statements operations fourth quarter fiscal 2004 company subject certain indemnity provisions included stock purchase agreement entered part financing connection registration resale common stock issued issuable financing morgan keegan company inc acted companys placement agent transaction granted warrants purchase 15824 shares common stock option purchase 122292 shares common stock expired september 30 2004 10 stock repurchases august 2 2004 companys board directors approved 350000 share repurchase program pursuant company could make open market privately negotiated repurchase transactions aggregate 3 million fourmonth period beginning august 2 2004 ending december 1 2004 company repurchased 91630 shares common stock open market amounting 655000 average price 715 per share 11 acquisition march 31 2004 company completed acquisition 100 two related german card companies challenge card design plastikkarten gmbh rastede germany cards gmbh ratingen germany collectively acquired german entities including sales operations usa korea company purchased shares acquired german entities five shareholders purchased intangible assets usa sales operation partnership comprised shareholders acquisition transaction company agreed assume approximately 05 million euros debt pay approximately 475 million euros cash consisting approximately 225 million euros payable closing remaining approximately 25 million euros payable shareholders acquired german entities five equal annual installments business certain assets acquisition agreement specified purchase price adjusted based upon assets purchased additional liabilities assumed resulted reduction purchase price approximately 04 million euros march 31 2004 purchase price determined negotiation company shareholders taking account matters value tangible assets going concern value business operations acquired german entities four shareholders entered new employment agreements acquired german entities fifth shareholder resident us entered employment agreement registrant addition salaries employment agreements provide commission based upon results operations acquired german entities could much 375 million euros next four years company used portion available cash fund acquisition shareholders previous material relationship company affiliate subsidiaries although company substantial business acquired german entities recent years one acquired german entities owns plant rastede germany together associated equipment used manufacture plastic cards featuring contactless ic chip technology high resolution printing company intends continue use facility equipment produce cards well enhance facility produce lasercard optical memory cards january 6 2005 22 million 16 million euros made former shareholders currently managing directors acquired german entities settle large part loan related acquisition march 31 2005 outstanding balance 203000 150000 euros maintained company case known contingent claim unknown claims develop actual claims payment approved december 2 2004 companys board directors primary reasons acquisition provide company 1 strong card manufacturing base serve european middle eastern african asian markets 2 additional production capacity 20 million advancedtechnology cards per year 3 expanded product line namely contact ic chip cards contactless rf id cards magnetic stripe cards color thermal printers printing cards 4 future cooperation developing marketing advanced secure optical card solutions goodwill derived purchase price greater value tangible intangible assets acquired less liabilities assumed factors contributed purchase price resulted goodwill 1 assembled workforce particular managing directors acquired companies 2 proximity managing directors target customer base 3 ability managing directors use skills specific knowhow enhance companys product offerings advanced technology card marketplace goodwill resulting purchase price allocation amount 33 million recorded result acquisition none expected deductible income tax purposes intangible asset backlog amount 29000 recorded result acquisition amortized backlog shipped period six months amortizable intangible assets recorded results operations acquired entities acquisition date fiscal 2004 yearend included companys 2004 operating results acquisition occurred end companys fiscal year acquired entities results period material cost acquired entities totaled 53 million comprised 31 million paid upfront plus future payments specified purchase agreement net present value 22 million total purchase price 53 million allocated net assets acquired based estimated fair values follows thousands current assets 4577 property equipment 2094 goodwill intangibles 3840 total assets acquired 10511 current liabilities 4891 longterm debt 369 total liabilities assumed 5260 net assets acquired 5251 cash paid 3101 future payments accrued 2150 total purchase price 5251 pro forma financial information proforma financial information impact acquisition companys consolidated results operations presented acquired german entities foreign entities prepare financial statements accordance united states generally accepted accounting principles us gaap reported revenues excluding sales company fiscal 2002 2003 entities local gaap basis 87 million 86 million respectively local gaap basis management believes materially differ us gaap results operations acquired entities would material companys consolidated results operations 12 debt march 31 consisted following thousands debts denominated euros 29 million euros equals 35 million march 31 2004 related acquisition challenge card design gmbh cards gmbh managing directors cards gmbh personally guaranteed 188000 unsecured promissory notes connection acquisition company agreed take actions eliminate guarantee total amount debt repaid fiscal 2005 debt amount 22 million arising acquisition challenge card design gmbh cards gmbh payable managing directors acquired companies paid fiscal 2005 item 9 item 8 financial statements supplementary data report independent registered public accounting firm board directors stockholders lasercard corporation audited accompanying consolidated balance sheets lasercard corporation subsidiaries collectively “company” march 31 2010 2009 related consolidated statements operations stockholders’ equity cash flows two years period ended march 31 2010 audits also included financial statement schedule lasercard corporation listed item 15a financial statements financial statement schedule responsibility company’s management responsibility express opinion financial statements based audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion consolidated financial statements referred present fairly material respects financial position lasercard corporation subsidiaries march 31 2010 2009 results operations cash flows two years period ended march 31 2010 conformity us generally accepted accounting principles also opinion related financial statement schedule considered relation basic consolidated financial statements taken whole presents fairly material respects information set forth therein also audited accordance standards public company accounting oversight board united states lasercard corporation’s subsidiaries’ internal control financial reporting march 31 2010 based criteria established internal control integrated framework issued committee sponsoring organizations treadway commission report dated june 15 2010 expressed unqualified opinion effectiveness lasercard corporation subsidiaries’ internal control financial reporting ssingerlewak llp san jose california june 15 2010 report independent registered public accounting firm board directors stockholders lasercard corporation audited accompanying consolidated statements operations stockholders’ equity cash flows lasercard corporation subsidiaries year ended march 31 2008 consolidated financial statements responsibility company’s management responsibility express opinion consolidated financial statements based audit conducted audit accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audit provides reasonable basis opinion consolidated financial statements referred present fairly material respects results operations cash flows lasercard corporation subsidiaries year ended march 31 2008 conformity accounting principles generally accepted united states america odenberg ullakko muranishi co llp san francisco california june 4 2008 lasercard corporation subsidiaries consolidated balance sheets march 31 2010 2009 thousands except share per share amounts accompanying notes integral part consolidated financial statements lasercard corporation subsidiaries consolidated statements operations fiscal years ended march 31 2010 2009 2008 thousands except per share amounts lasercard corporation subsidiaries consolidated statements stockholders’ equity comprehensive income loss fiscal years ended march 31 2008 2009 2010 thousands accompanying notes integral part consolidated financial statements lasercard corporation subsidiaries consolidated statements cash flows fiscal years ended march 31 2010 2009 2008 thousands accompanying notes integral part consolidated financial statements lasercard corporation subsidiaries notes consolidated financial statements 1 organization operations lasercard corporation delaware corporation wholly owned subsidiaries lasercard corporation california corporation challenge card design plastikkarten gmbh germany “lasercard” “we” “us” develop manufacture integrate lasercard optical security media “osm” cards optical card drives peripherals specialty cards printers customers osm related products mainly valueadded reseller “var” companies worldwide develop applications lasercard products target markets products include government commercial applications portable recordable secure identification cards unitaryrecord cards current applications include united states green card angola national id card italian national government agency id card programs kingdom saudi arabia’s national id card india’s vehicle registration card three states foreign resident id program costa rica biometric ids card applications supply advancedtechnology cards various applications card printers systems integration access control ticketing may also supply install stateoftheart card production equipment transfer manufacturing knowhow provide training production support card manufacturing subject certain risks including limited competition substitute products larger companies dependence certain suppliers customers 2 summary significant accounting policies 1 principles consolidation basis presentation accompanying consolidated financial statements prepared accordance us gaap consolidated financial statements include accounts significant intercompany accounts transactions eliminated upon consolidation 2 use estimates preparation consolidated financial statements conformity us gaap requires management make estimates assumptions affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenues expenses reporting period actual results could differ estimates 3 fiscal period purposes presentation label annual accounting period end march 31 quarterly accounting period ends june 30 september 30 december 31 fact operate report based quarterly periods ending friday closest month end fiscal year 2010 ended april 2 2010 comprised 52 weeks fiscal year 2009 ended april 3 2009 comprised 53 weeks fiscal year 2008 ended march 28 2008 comprised 52 weeks 4 foreign currency transactions functional currency foreign subsidiary local currency financial statements subsidiary translated us dollars using periodend rates exchange assets liabilities average rates exchange year revenues expenses translation gains losses recorded accumulated comprehensive income loss component stockholders’ equity gains losses resulting foreign exchange transactions netted included income expense significant periods presented 5 derivative financial instruments use shortterm foreign exchange forward contracts mitigate foreign currency risk associated primarily intercompany receivables payables loan receivables denominated euros subsidiary germany foreign exchange forward contracts designated accounting purposes hedging instruments provisions asc 815 accounting derivative instruments hedging activities amended accordingly gains losses resulting changes fair value forward contracts reported income expense net gains losses forward contracts generally offset gains losses associated underlying foreign currency denominated intercompany receivables payables loans receivable march 31 2010 2009 foreign exchange forward contracts maturity less 30 days purchase 13 million euros fair value forward contracts material march 31 2010 2009 lasercard corporation subsidiaries notes consolidated financial statements refer note 2 caption 8 cash equivalents shortterm investments longterm investments consolidated financial statement discussion noncurrent investments 6 concentrations risk financial instruments potentially subject lasercard significant concentrations credit risk consist principally cash equivalents shortterm investments longterm investments accounts receivable place cash equivalents shortterm longterm investments highcredit quality financial institutions exposed credit risk event default institutions extent amount recorded consolidated balance sheets march 31 2010 held 119 million par value marketable securities consisting auction rate securities “arss” classified short term investments consolidated balance sheet due trading securities classification maturity less one year also included shortterm investment put option received “rights” offering ubs financial services “ubs” recognized benefit fair value approximately 08 million ubs “right” purchase arss par time july 3 2012 “right” sell arss par ubs beginning june 30 2010 july 3 2012 intend exercise put option sell arss ubs june 30 2010 loan ubs amount 79 million march 31 2010 credit line collateralized arss march 31 2009 arss investment fair value 122 million classified noncurrent assets consolidated balance sheet put option valued 10 million investments marketable securities designated available sale march 31 2009 immaterial march 31 2010 detailed information reasons behind designation risks face regard investment ars found cash equivalents shortterm investments longterm investments accounts receivable derived revenue earned customers primarily located americas emea perform ongoing credit evaluations customers’ financial condition generally require collateral however may extend credit certain customers without receiving financial information maintain reserves potential credit losses historically losses immaterial 7 major customers following customers accounted 10 revenue fiscal years ended march 31 revenue customers attributable osm cards including multitechnology cards drives systems professional services specialty cards printers segments customer accounted 10 revenue periods two customers accounted 28 17 accounts receivable march 31 2010 three customers accounted 45 18 10 respectively accounts receivable march 31 2009 8 cash equivalents shortterm investments longterm investments account shortterm marketable securities accordance asc 320 accounting certain investments debt equity securities consider highly liquid investments consisting primarily commercial paper discount notes us government bonds arss maturities three months less date purchase cash equivalents investments maturities date purchase three months current maturities less one year classified shortterm investments current maturities one year classified longterm investments determine length investments considering cash requirements yields available type investment considered management determines appropriate classification debt equity securities time purchase reevaluates classification investments balance sheet date investments marketable securities designated “trading securities” trading securities bought sold principally purpose selling near term reported financial statements fair value changes fair value period reported component net income lasercard corporation subsidiaries notes consolidated financial statements arss structured shortterm interest rate reset dates generally 28 35 days contractual maturities cases well excess ten years ninetyfive 810 percent 958 investments student loan auction rate securities “slarss” 95 principal interests guaranteed federal family education loan program “ffelp” aaa rated remaining balance privately financed consists overcollateralized pool graduate student loans believe credit quality securities high based guarantees collateralization february 2008 end reset period could sell continue hold securities par value auction process historically provided liquid market arss since february 2008 however auctions failed due sell orders exceeding buy orders funds associated failed auctions accessible successful auction occurs buyer found outside auction process underlying securities matured recalled issuer ubs purchases described march 31 2010 march 31 2009 insufficient observable arss market information available determine fair value arss therefore order validate fair value estimate securities incorporated assumptions credit quality financial standing issuer final stated maturities estimates probability issue called prior final maturity impact due extended periods maximum auction rates liquidity risk premium broker quotes independent valuators using widely accepted financial models management believes resulting estimates reasonable considering unique circumstances subject slarss method valuing put option forward contracts continue earn interest contractual rate arss march 31 2010 march 31 2009 held 119 million par value 122 million respectively marketable securities consisting arss classified trading securities classified noncurrent assets consolidated balance sheet march 31 2009 current assets balance sheet march 31 2010 intend exercise put option sell arss ubs june 30 2010 ubs issued prospectus dated october 7 2008 “rights” offering whereby ubs offered purchase certain arss placed including hold par face value october 29 2008 “acceptance date” submitted acceptance form participate “rights” offering ubs “right” purchase arss par time july 3 2012 “right” sell arss par ubs beginning june 30 2010 july 3 2012 part offering ubs offered line credit 75 fair value arss calculated ubs purchased ubs line credit certain restrictions described prospectus borrowed total outstanding amount 79 million march 31 2010 decrease 08 million balance march 31 2009 87 million “rights” represent firm agreement accordance asc 815 accounting derivative instruments hedging activities defines firm agreement unrelated party binding parties usually legally enforceable following characteristics agreement specifies significant terms including quantity exchanged fixed price timing transaction b agreement includes disincentive nonperformance sufficiently large make performance probable enforceability “rights” results put option recognized free standing derivative separate arss electing participate rights offering granted ubs right exercisable time prior july 3 2012 purchase cause sale arss “call right” ubs agreed pay us par value arss within one day settlement call right transaction notwithstanding call right permitted sell arss parties besides ubs case put rights attached arss sold would extinguished management elected adopt asc 825 fair value option financial assets financial liabilities december 31 2008 put option elected change treatment ars portfolio availableforsale securities trading securities fiscal year ended march 31 2010 recognized 03 million gain due change fair value arss investment put option reclassified investments noncurrent assets march 31 2009 current assets march 31 2010 reflect management’s intent exercise put option june 30 2010 believe recover value arss par june 30 2010 intend exercise put option ubs fiscal year ended march 31 2009 recorded net loss 03 million resulting fair values arss put option fully recovered loss fiscal year 2010 ubs credit assumptions improved lasercard corporation subsidiaries notes consolidated financial statements cash equivalents investments consist following thousands 9 fair value measurements effective april 1 2008 adopted asc 820 fair value measurements except applies nonfinancial assets nonfinancial liabilities subject fsp 1572 asc 820 clarifies fair value exit price representing amount would received sell asset paid transfer liability orderly transaction market participants fair value marketbased measurement determined based assumptions market participants would use pricing asset liability basis considering assumptions asc 820 establishes threetier value hierarchy prioritizes inputs used valuation methodologies measuring fair value level 1 observable inputs reflect quoted prices unadjusted identical assets liabilities active markets level 2 include inputs directly indirectly observable marketplace level 3 unobservable inputs supported little market activity fair value hierarchy also requires entity maximize use observable inputs minimize use unobservable inputs measuring fair value accordance asc 820 measure cash equivalents marketable securities fair value cash equivalents marketable securities primarily classified within level 1 exception investments arss classified within level 3 cash equivalents marketable securities valued primarily using quoted market prices utilizing market observable inputs investments arss classified within level 3 active markets arss therefore unable obtain independent valuations market sources therefore arss valued using discounted cash flow model inputs cash flow model unobservable market total amount assets measured using level 3 valuation methodologies represented 15 total assets march 31 2010 lasercard corporation subsidiaries notes consolidated financial statements table shows level financial assets accounted fair value march 31 2010 table include assets liabilities measured historical cost basis fair value thousands table summarizes change fair values level 3 item march 31 2010 table include assets liabilities measured historical cost basis fair value thousands lasercard corporation subsidiaries notes consolidated financial statements 10 accounts receivable accounts receivable net allowance doubtful accounts 37000 59000 march 31 2010 2009 respectively maintain allowances doubtful accounts product return reserves anticipated losses resulting inability customers make required payments product returns generally compute allowances based specifically identifying accounts past due likely collectible interest receivable accrued investments arss interestbearing securities receivables comprised value added tax refunds miscellaneous items components accounts receivable march 31 thousands 11 inventories stated lower cost market cost determined firstin firstout basis market based replacement cost estimated realizable value less cost sell components inventories march 31 thousands management establishes lower cost market reserves excess obsolescence reserves inventory reserves generally recorded management determines item foreseeable revenue forecast inventory reserves relieved related inventory sold scrapped fiscal years ended march 31 2010 2009 2008 recorded inventory reserve expense 1858000 352000 53000 respectively mainly due obsolescence 12 equipment held resale equipment held resale consists primarily parts labor costs incurred build equipment contracts recorded 245 million nonrefundable advance payments 33 million deferred revenue march 31 2010 2009 direct incremental costs associated purchase construction items deferred related deferred revenue recognized components equipment held resale march 31 thousands lasercard corporation subsidiaries notes consolidated financial statements 13 property equipment net components property equipment march 31 thousands property equipment recorded cost depreciation provided estimated useful lives four seven years equipment furniture using straightline method twentyfive years building using straightline method leasehold improvements amortized shorter life asset life lease using straightline method depreciation leasehold amortization expense fiscal years 2010 2009 2008 27 million 28 million 29 million respectively maintenance minor repairs replacements expensed incurred disposition retirement property equipment related gains losses charged income expense 14 intangible assets definite life intangible assets capitalized accumulated amortization march 31 thousands weighted average remaining amortization periods fiscal years ended march 31 years legal expenses incurred connection patents capitalized amortized estimated remaining useful lives patents seven years amortization expense intangible assets fiscal years 2010 2009 2008 109000 128000 125000 respectively estimated amortization expense next five years patents intangible assets definite lives years ended march 31 thousands lasercard corporation subsidiaries notes consolidated financial statements 15 assessment impairment tangible intangible longlived assets accordance asc 360 accounting impairment disposal longlived assets assess impairment longlived assets whenever events changes circumstances indicate carrying value may recoverable estimated future cash flows expected result use eventual disposition longlived assets subject evaluation include property equipment amortizable intangible assets estimate future undiscounted net cash flows insufficient recover carrying value assets record impairment loss amount carrying value assets exceeds fair value assets determined recoverable useful lives shorter originally estimated depreciate amortize net book value asset newly determined remaining useful lives march 31 2010 fair value longlived assets exceeds book value disposed obsolete equipment resulted immaterial loss recorded cost goods sold fiscal year 2010 disposed obsolete equipment totaling approximately 15 million recorded loss 03 million parts tooling discontinued device recorded costs goods sold fiscal year 2009 march 31 2010 based estimated future cash flow analysis triggering events significant disposal portion assets adverse change market involving business employing related asset significant decrease benefits realized acquired business management determined fair value longlived assets exceeded book value 16 accrued liabilities components accrued liabilities march 31 thousands approximately 26 million accrued march 31 2010 performancebased incentives sales commissions compared 05 million sales commissions accrued march 31 2009 performancebased incentive accrued march 31 2009 deferred compensation accrual related planned retirement agreement former chief executive officer president zero march 31 2010 340000 march 31 2009 lasercard provides limited warranty replacement defective products appropriate provision made time shipment estimated warranty costs limited warranty specifies repair replace defective products cost customer within specified time period sale estimate costs may incurred limited warranty record liability amount costs time product revenue recognized factors affect estimate warranty liability include number units sold historical anticipated rates warranty claims assess adequacy recorded warranty liability quarterly adjust amount necessary utilize historical trends information received customers assist determining appropriate estimated warranty accrual levels adjustments provision made actual return claim experience differs estimates warranty activities fiscal years ended march 31 thousands lasercard corporation subsidiaries notes consolidated financial statements 17 software development costs development costs incurred research development new software products general distribution expensed incurred technological feasibility form working model established date software development completed concurrent establishment technological feasibility accordingly software development costs meet capitalization criteria charged research development expenses accompanying consolidated statements operations software development costs incurred execution contract obligations capitalized charged cost goods sold time related revenue recorded capitalized software cost march 31 2010 2009 18 advance payments customers deferred revenue routinely receive advance payments orders placed customers advance payments recorded liability consolidated balance sheets related orders shipped services performed revenue would otherwise recognized advance payments approximately 245 million prevent global družba za upravljanje investicije razvoj dd “prevent global” classified noncurrent liability consolidated balance sheet march 31 2010 march 31 2009 certainty project completed within twelve months remaining advance payments orders expected completed within first quarter fiscal year 2011 amounts billed collected customers cannot recognized revenue time billing collection basis met general conditions revenue recognition classified deferred revenue recorded liability consolidated balance sheets deferred revenues represent portion amount billed collected customer expected ultimately recognized revenue deferred revenue 38 million 44 million march 31 2010 2009 respectively largely due 33 million licensing fees related prevent global 19 revenue recognition product sales primarily consist osm card sales drives systems professional services sales specialty cards card printers recognize revenue product sales following criteria met 1 persuasive evidence arrangement exists 2 delivery occurred 3 fee fixed determinable 4 collectibility reasonably assured recognize revenue product sales time shipment shipping terms fob shipping point orders placed pursuant preexisting sales arrangement postshipment obligations customer acceptance criteria case us government contract warehousing appropriate provision made time shipment estimated warranty costs estimated returns subcontract permanent resident cards us government requires delivery secure lasercardcontrolled vault shipments later made vault us government site subcontract provides us government take final delivery remaining inventory within six months end contract time cards delivered vault title cards transferred us government risks ownership transferred well prime contractor invoiced payment due within thirty days purchase orders contain return warranty cancellation provisions pursuant provisions sec staff accounting bulletin 605 revenue recognition “asc 605” revenue recognized delivery vault fulfilled contractual obligations earnings process complete contracts include customerspecified acceptance criteria recognize revenue acceptance criteria met presuming revenue criteria met defer revenue services recognize contractual period render services customer accepts apply provisions asc 60525 revenue arrangements multiple deliverables revenue arrangements multiple deliverables asc 60525 provides criteria governing identify whether goods services delivered separately bundled sales arrangement accounted separately deliverables accounted separately meet following criteria delivered items standalone value customer b fair value undelivered items reliably determined c arrangement includes general right return delivery undelivered items probable substantially controlled seller situations deliverables fall within higherlevel literature defined asc60525 apply guidance higherlevel literature deliverables meet criteria combined one deliverables lasercard corporation subsidiaries notes consolidated financial statements apply provisions asc 60535 accounting performance constructiontype certain productiontype contracts applicable contracts revenues time materials contracts recognized services rendered contract labor rates plus material direct costs incurred revenues fixed price contracts recognized percentage completion method based ratio total costs incurred date compared estimated total costs complete contract estimates costs complete include material direct labor overhead allowable general administrative expenses circumstances estimates costs complete project cannot reasonably estimated assured loss incurred percentageofcompletion method based zero profit margin rather completedcontract method used precise estimates made full amount estimated loss charged operations period determined loss realized performance contract longterm program accounted asc 60535 concluded last quarter fiscal year 2009 revenue approximately 540000 year ended march 31 2008 recognized revenue approximately 249000 based zero profit margin supply cards centralized issuance enhanced osm cards national id card program kingdom saudi arabia recognize revenue upon shipment cards terms subcontract recognized revenue approximately 65 million 09 million subcontract fiscal year 2010 2009 respectively earlier subcontract prime contractor kingdom saudi arabia provided card personalization work station integration use country’s national id card program decentralized card issuance including osm cards hardware software threemonth period ended june 30 2009 informed additional cards would purchased subcontract called multiple deliverables installation certain client acceptance criteria defined agreement applying guidance within asc 60525 determined deliverables accounted separate units rather bundled arrangement since fair value undelivered items could readily determined due contract closeout decentralized card issuance recognized revenue remaining deferred revenue fiscal year 2010 recognized revenue totaling 13 million 122 million 63 million fiscal years 2010 2009 2008 respectively subcontract apply provisions asc 60515 software revenue recognition respect certain transactions involving sale software products revenue license software products recognized persuasive evidence arrangement exists software product delivered fee fixed determinable collectability probable applicable upon acceptance criteria specified upon expiration acceptance period software revenue immaterial fiscal years 2010 2009 2008 entered license optical memory card “omc” equipment purchase support agreements effective april 3 2004 gig based auckland new zealand omc card manufacturing slovenia gig transferred license agreements approval prevent global march 2007 agreements provide payments interest late payments us 29 million 20year license required manufacturing equipment targeted initial manufacturing capacity 10 million omcs annually installation support fouryear training support package 278 million received 245 million recorded advance payments customer 33 million licensing fees recorded deferred revenue classified long term liabilities consolidated balance sheets march 31 2010 held 72 million acquired equipment including direct incremental expenses classified equipment held resale consolidated balance sheets related contract compared 7 million march 31 2009 ship equipment prevent global upon request suitable facility established prevent global inspect facility requested assure necessary services available installation equipment time know prevent global initiate request beginning april 1 2008 agreement provides payments prevent global 30 million threeyear support package options thirteen additional years support payments 1 million annually addition prevent global pay royalties 060 per card produced license nonexclusive territories covered license include european union eastern european regions retain rights utilize 20 new facility capacity backup capacity buffer augment card manufacturing facilities granting license prevent global establishes potential manufacturing facility supplier omcs existing prospective customers may request multiple sources cards accordance asc 60525 revenue arrangements multiple deliverables card manufacturing license sale installation equipment training support package accounted one unit accounting since unable determine evidence fair value undelivered items ongoing support able determine evidence fair value last predominant item delivered ongoing annual support accordingly revenues arrangement deferred recognized equipment installed accepted exception value ongoing annual support manufacturing equipment recognized quarterly earned beginning equipment accepted training completed date dependent prevent global establishing suitable facility slovenia pursuant asc 60520 accounting separately priced extended warranty product maintenance contracts support revenue recognized ratably twelve months fourth quarter calendar year 2008 began training employees prior expected transfer manufacturing equipment tobebuilt facility slovenia since time gig asserted rights contract prevent global reviewing project determine next steps filed claim september 2009 united kingdom requesting court designate rightful counterparty proceed administration contract refer risk factor “we sold card manufacturing license provide certain factory setup training services slovenia global investment group ltd “gig” conjunction prevent global slovenia “prevent global” neither gig prevent global current obligations agreement” details lasercard corporation subsidiaries notes consolidated financial statements 20 research development expenses costs related research design development products charged research development expense incurred research development costs include salaries contractor fees building utility costs depreciation 21 shipping handling costs report shipping handling costs sales related cost goods sold extent billed customers instances reflected component cost goods sold 22 advertising costs advertising costs consist development placement costs advertising campaigns charged expense incurred advertising expense approximately 234000 fiscal year 2010 250000 fiscal year 2009 212000 fiscal year 2008 23 stockbased compensation effective april 1 2006 adopted sharebased payment asc 718 requires sharebased payment transactions accounted using fair value based method recognition related expense results operations prior adoption asc 718 accounted sharebased payments employees accordance accounting principles board opinion “apb” 25 accounting stock issued employees utilizing intrinsic value method therefore recognize compensation cost employee director stock options intrinsic value asc 718 allows companies choose one two transition methods modified prospective transition method modified retrospective transition method adopted asc 718 using modified prospective method transition requires compensation expense related sharebased payments recognized beginning adoption date requisite service period generally vesting period awards granted april 1 2006 remaining service period unvested portion awards granted prior april 1 2006 consolidated financial statements prior fiscal years restated reflect impact adopting asc 718 2004 equity incentive compensation plan amended “2004 plan” awards granted described fully note 6 common stock consolidated financial statement adoption asc 718 recorded stockbased employee compensation expense related stock options restricted stock units restricted shares net estimated forfeitures consolidated statements operations allocated follows capitalize costs consolidated balance sheets general overhead pool inventory costs lasercard corporation subsidiaries notes consolidated financial statements march 31 2010 27 million total unrecognized compensation cost related unvested stock options restricted share awards restricted stock units expected recognized remaining vesting period december 31 2013 march 31 2009 43 million total unrecognized compensation cost related unvested stock options restricted share awards restricted stock units expected recognized remaining vesting period august 2012 recorded income tax benefit stockbased compensation expense fiscal years ended march 31 2010 2009 2008 cumulative operating loss carryforwards full valuation allowance established asc 718 transition election related accounting tax effects sharebased payment awards requires entity follow either transition guidance additionalpaidincapital “apic” pool prescribed asc 718 alternative transition method described fsp 123r3 entity adopts asc 718 using modified prospective application may make onetime election adopt transition method described asc 718 may take one year latter initial adoption asc 718 effective date asc 718 evaluate available transition alternatives make onetime election elected use simplified method provided asc 718 calculate apic pool effective april 1 2007 adoption asc material impact consolidated financial position results operations cash flows 24 income taxes income taxes accounted accordance asc 740 accounting income taxes requires use asset liability method deferred tax assets liabilities determined based upon differences financial reporting tax bases assets liabilities measured using enacted tax rules laws anticipated effect differences expected reverse net deferred tax assets reduced valuation allowance extent realization related deferred tax asset assured recorded valuation allowance full amount calculated deferred tax asset march 31 2010 2009 refer note 8 income taxes consolidated financial statement discussion 25 comprehensive income loss asc 220 reporting comprehensive income comprehensive income loss defined changes equity enterprise except resulting stockholders’ transactions comprehensive income loss fiscal years ended march 31 thousands 26 commitments contingencies litigation october 9 2009 filed claim gig prevent global english high court justice commercial court claim relates series agreements entered 2004 gig turnkey project slovenia enable gig manufacture distribute optical cards “agreements” 2007 gig assigned rights title interest agreements including rights equipment hold prevent global prevent global agreed assume obligations agreements however dispute arisen regarding whether prevent global gig obliged make payments owed us agreements ii title certain equipment agreements iii subject bound arbitration provisions contained agreements therefore seeking declaration english court questions awaiting responses gig prevent global expect court provide ruling august 2010 purchase obligations agreements suppliers parties purchase inventory goods services noncancelable obligations agreements march 31 2010 first quarter fiscal year 2011 approximately 19 million lasercard corporation subsidiaries notes consolidated financial statements leases march 31 2010 lease approximately 70000 square feet floor space longterm basis card manufacturing readwrite drive production administration sales research development two buildings located mountain view california one 27000square foot building used osm card production one 43000 squarefoot building used optical card production readwrite drive production administration sales research development leases expire october 2013 march 2014 include tenyear extension options upon expiration leases believe suitable buildings available leased reasonable basis lease portion building ratingen germany building rastede germany totaling approximately 15000 square feet optical specialty card manufacturing distribution administration sales one leases terminable parties upon sixmonth notice expire march 2012 also land approximately 14000 square foot building rastede germany used production specialty cards research development also lease 900 squarefoot office huntington new york marketing activities lease expire december 2010 believe leased owned facilities satisfactory present operations upon expiration leases believe suitable buildings available leased reasonable basis lease certain equipment capital lease agreements expire various dates 2011 future minimum lease payments capital leases operating leases follows thousands 1 includes capitalized leases 2 purposes table obligation calculated without interest obligations net borrowing ubs refer note 2 caption 8 cash equivalents shortterm longterm investments consolidated financial statement discussion net borrowing ubs 3 net income loss per share basic earnings per share computed dividing net income weightedaverage number common shares outstanding fiscal year ended march 31 2010 diluted earnings per share fiscal year ended march 31 2010 computed dividing net income weightedaverage number common shares outstanding plus dilutive common stock equivalents primarily shares issuable upon exercise stock options using treasury stock method antidilutive securities include outstanding stock options exercise prices excess average fair market value lasercard’s common stock related period antidilutive options excluded calculation diluted net income per share could become dilutive future fiscal year ended march 31 2010 2 million shares basic net loss per share diluted net loss per share computed dividing net loss weighted average number shares common stock outstanding fiscal years ended march 31 2009 2008 lasercard corporation subsidiaries notes consolidated financial statements reconciliation denominators basic diluted net loss per share computation fiscal years ended march 31 thousands except per share data 4 segments segment reporting operate three reportable segments 1 osm cards 2 drives systems professional services including readwrite drives maintenance systems professional services 3 specialty cards card printers segments determined based information used chief operating decision maker osm cards drives systems professional services reportable segments strategic business units offer unrelated products services rather reportable segments utilize compatible technology marketed jointly specialty cards card printers strategic business unit offering times unrelated products times related products reportable segments accounting policies used derive reportable segment results described “summary significant accounting policies” resources allocated osm card drives system professional services segments manner optimizes osm card revenues specialty card printers segment manner optimizes consolidated income determined chief operating decision maker segment revenues comprised sales external customers segment gross profit loss includes segment revenues less related cost sales accounts receivable cash deferred income taxes prepaid expenses fixed assets inventory separately reported segment chief operating decision maker therefore believe amount assets segment meaningful reported intersegment sales 146000 244000 fiscal years ended march 31 2010 2009 respectively intersegment sales transfers fiscal year ended march 31 2008 longlived assets attributable united states except 18 million 22 million 33 million attributable germany fiscal years ended march 31 2010 2009 2008 respectively net decrease 50000 longlived assets march 31 2010 compared march 31 2009 offset 20000 increase caused fluctuation foreign exchange longlived assets attributable operations germany including longlived assets owned us operations located germany chief operating decision maker currently chief executive officer chief operating decision maker reviews financial information presented consolidated basis accompanied disaggregated information revenues gross profit loss segment lasercard corporation subsidiaries notes consolidated financial statements table presents information optical security media cards drives systems professional services specialty cards card printers fiscal years ended march 31 thousands depreciation amortization expenses represent amounts charged selling general administrative expenses research development expenses lasercard corporation subsidiaries notes consolidated financial statements sales geographic region sales geographic region generally determined based upon shipto address invoice knowledge program location revenues geographic region fiscal years ended march 31 thousands fiscal years 2010 2009 2008 sales customers outside united states amount 446 million 340 million 156 million respectively denominated us dollars 140 million 158 million 131 million respectively denominated euros 5 relatedparty transactions since october 21 2001 contracted wexler walker public policy associates unit hill knowlton inc “wexler” lobbyists behalf chairman wexler robert walker brother director walter f walker contract terminated december 1 2008 paid wexler 240000 fiscal year 2009 161000 fiscal year 2008 relatedparty transactions fiscal year 2010 6 common stock 2004 equity incentive compensation plan amended “2004 plan” october 2004 lasercard’s stockholders approved 2004 equity incentive compensation plan replaced 1991 stock option plan 2004 plan provides grant restricted share awards options stock units stock appreciation rights may require satisfaction performance objectives respect shares lasercard’s common stock directors officers employees consultants 2004 plan administered compensation committee board directors complete discretion select participants establish terms conditions award subject provisions 2004 plan options granted 2004 plan may “incentive stock options” defined section 422 internal revenue code 1986 “code” amended nonqualified options total 2315854 shares common stock reserved issuance 1991 2004 plans march 31 2010 award granted 2004 plan forfeited expires reason shares subject award available additional awards outstanding option issued 1991 plan expires terminates reason without exercised full unpurchased shares subject option available additional awards 2004 plan 2004 plan exercise price incentive stock options may less 100 fair market value common stock date grant 110 fair market value grant employee owns 10 total combined voting power classes lasercard’s capital stock code currently limits aggregate value common stock incentive stock options may become exercisable calendar year 100000 nonstatutory stock options may granted 2004 plan exercise price less 100 fair market value common stock date grant repricing stock option stock appreciation right permitted without stockholder approval subject limitations contained 2004 plan compensation committee sets terms option grant options exercisable date termination employment immediately terminate time options granted 2004 plan may exercised 10 years date grant five years date grant incentive stock option employee owns 10 total combined voting power classes lasercard’s capital stock board directors specifies term options vesting schedule exercise options granted consultants fiscal year 2010 lasercard corporation subsidiaries notes consolidated financial statements june 2 2008 chief executive officer “ceo” granted nonstatutory stock option “timebased option” outside 2004 plan purchase 220000 shares common stock exercise price 7115 per share timebased option term 10 years vests 25 june 2 2009 625 following 12 threemonth anniversaries date timebased option fully vested june 2 2012 additionally ceo granted nonstatutory stock option “marketbased option” outside 2004 plan purchase 330000 shares common stock exercise price 7115 per share marketbased option term 10 years vests prior june 2 2013 closing trading price common stock 20 consecutive days greater equal 10 13 16 19 22 per share vesting 60000 shares first two price points achieved 70000 shares last three price points achieved market based options granted lasercard officers similar vesting schedules used latticemodel stated assumptions value stockbased employee compensation expenses march 31 2008 73000 shares common stock reserved outside 2004 plan compared 113000 march 31 2007 issuance upon exercise stock options granted nasdaq rule 4350i1a connection ccdcm acquisition inducement join lasercard six key employees acquired companies granted nonstatutory stock options march 31 2004 term five years purchase 20000 common shares expired category fiscal year 2008 stock options provisions asc 718 stockbased compensation cost estimated grant date based fair value award compensation cost recognized expense requisite service period award generally vesting period fair value nonvested stock awards determined reference fair market value lasercard’s common stock date grant consistent valuation method used disclosureonly purposes provisions asc 718 accounting stockbased compensation used blackscholes valuation model estimate fair value option awards determining appropriate fair value model related assumptions requires judgment including estimating stock price volatility forfeiture rates expected terms market based options granted lasercard officers similar vesting schedules used latticemodel stated assumptions value stockbased employee compensation expenses following assumptions utilized estimate fair value lasercard’s stock option awards fiscal years ended march 31 expected volatility rate based historical volatility lasercard’s common stock expected life represents average time options vest expected outstanding based vesting provisions historical exercise cancellation expiration patterns estimated forfeitures based historical rates recognizing compensation expense forfeitures rates 413 8 estimated fiscal year 2010 based voluntary termination behavior well analysis actual option forfeitures riskfree interest rate based us treasury zerocoupon issues maturity approximating expected life week grant date annual dividend rate assumed cash dividend expected declared paid foreseeable future update assumptions least annually interim basis significant changes assumptions warranted lasercard corporation subsidiaries notes consolidated financial statements following table lists stock option activity fiscal years ended march 31 thousands except weighted average exercise price weighted average grantdate fair value per share options granted fiscal years ended march 31 2010 2009 2008 318 303 529 respectively weighted average remaining contractual term outstanding options fiscal years ended march 31 2010 2009 2008 55 years 63 years 86 years respectively aggregate intrinsic value sum amounts closing market price lasercard’s stock last trading day exceeds exercise price options quoted market price excess exercise price “inthemoneyoptions” closing market price lasercard’s stock march 31 2010 last trading day 661 per share aggregate intrinsic value outstanding options vested exercisable approximately 12 million march 31 2010 aggregate intrinsic value options exercised dates options exercised approximately 005 million fiscal years ended march 31 2010 march 31 2009 quoted market price exercise price “outofthemoneyoptions” outstanding options vested exercisable consequently aggregate intrinsic value outstanding options vested exercisable options exercised closing market price lasercard’s stock march 31 2008 last trading day 850 per share aggregate intrinsic value outstanding options vested exercisable approximately 18 million march 31 2008 aggregate intrinsic value options exercised dates options exercised approximately 01 million fiscal years ended march 31 2008 lasercard corporation subsidiaries notes consolidated financial statements following table summarizes information stock options outstanding march 31 2010 march 31 2009 thousands except weighted average exercise price contractual life restricted shares restricted stock units beginning september 21 2007 restricted shares restricted stock units awarded certain lasercard employees directors provisions 2004 plan shares units subject timebased vesting provisions awarded cost recipients cannot sold assigned transferred pledged restriction period restricted shares units granted employees generally vest 25 first four oneyear anniversaries date award restricted shares granted independent directors generally vest full eleventh month date award fair value restricted shares restricted units time award expensed straightline basis primarily selling general administrative expenses vesting period restricted stock units vest shares issued settlement employees net shares retained satisfy tax withholding obligations recipients restricted shares right vote shares receive dividends whereas recipients restricted stock units benefits june 2 2008 ceo granted 20000 restricted shares “restricted stock” outside 2004 plan compliance nasdaq rule 4350i1a charge ceo registered restricted stock sec form s8 dated february 11 2009 lasercard corporation subsidiaries notes consolidated financial statements 97000 93000 113000 unvested restricted stock units issued 2004 plan outstanding fiscal years ended march 31 2010 2009 2008 respectively 15000 20000 unvested restricted stock issued nasdaq rule 4350i1a fiscal years ended march 31 2010 2009 respectively employee stock purchase plan discontinued employee stock purchase plan “stock purchase plan” effective february 2009 29300 94185 shares reserved march 31 2009 2008 respectively future purchases employees stock purchase plan eligible employees could designate 2 6 compensation withheld purchase shares common stock 67 trailing average price differential fair market value average price shares sold stock purchase plan charged operations compensation expense taxed employee income stock purchase plan employees purchased 64885 shares fiscal year 2009 36914 shares fiscal year 2008 30418 shares fiscal year 2007 weighted average purchase price per share 336 fiscal year 2009 709 fiscal year 2008 761 fiscal year 2007 weighted average market price per share shares purchased 501 fiscal year 2009 1037 fiscal year 2008 1144 fiscal year 2007 employee benefit plan 401k plan 401k plan provides participating employees opportunity accumulate funds retirement march 4 2009 lasercard’s contribution plan exceed lesser 25 maximum employee contribution allowed irs b 25 employee’s contribution c 15 employee’s eligible earnings lasercard contributed approximately 69000 90000 94000 fiscal years 2010 2009 2008 respectively effective march 5 2009 lasercard decided make modest reduction employer discretionary matching contribution 25 first 6 deferred funds 20 issuance warrants march 31 2008 lasercard warrants outstanding purchase 174057 shares lasercard common stock warrants issued connection december 2003 sale common stock private placement warrants exercise price 1726 per share life five years warrants expired december 2008 7 commitments contingencies lease occupy buildings various operating leases rent expense relating buildings approximately 14 million 14 million 15 million fiscal years 2010 2009 2008 respectively entered equipment lease arrangement fiscal year 2009 02 million 01 million fiscal year 2008 expire dates july 2011 september 2011 recorded capitalized lease accordance asc 840 accounting leases new lease arrangements fiscal year 2010 refer note 2 caption 26 commitments contingencies consolidated financial statement discussion operating leases purchase commitment purchase services software manufacturing equipment variety vendors march 31 2010 noncancelable purchase orders 19 million raw materials delivered next two quarters fiscal year 2011 lasercard corporation subsidiaries notes consolidated financial statements future minimum lease payments capital leases operating leases follows thousands 1 includes capitalized leases 2 purposes table obligation calculated without interest obligations contingencies normal course business subject various claims opinion management ultimate disposition claims material adverse impact financial position results operation cash flows employment agreements november 28 2007 lasercard entered planned retirement agreement age discrimination release agreement thenceo retirement march 31 2008 agreements provided thenceo receive two years separation pay per annum rate 350000 consulting retainer 18000 nine months consulting availability services bonus 100000 continued pay portion health care insurance premium cobra coverage 18 months stock options ceased vesting retirement date 18750 options vested may 24 2008 since remained consultant lasercard held 3125 restricted shares vested september 21 2008 restricted shares forfeited lasercard allocated costs postretirement payments bonus using discounted cashflow basis remaining months total expected service stock options remeasured using blackscholes method addition lasercard employment agreements two executives provide severance payments period twelve 12 months following employee’s termination employment lasercard shall continue pay employee monthly basis onetwelfth employee’s per annum base salary determined employee’s last day employment specific provisions also made continued health insurance coverage stock options certain conditions severance payments included details found lasercard’s form 8k filed january 8 2010 8 income taxes domestic foreign component pretax income loss fiscal years ended march 31 thousands lasercard corporation subsidiaries notes consolidated financial statements provision income taxes benefit fiscal years ended march 31 thousands effective tax rate differs statutory rate fiscal years ended march 31 follows lasercard corporation subsidiaries notes consolidated financial statements major components net deferred tax assetsliabilities march 31 thousands net deferred income tax liability 191000 march 31 2010 234000 march 31 2009 attributable operations german subsidiary part process preparing consolidated financial statements required estimate income taxes jurisdictions operate process involves estimating actual current tax exposure together assessing temporary differences resulting differing treatment items deferred revenue tax accounting purposes differences result deferred income tax assets liabilities included within consolidated balance sheets must assess likelihood deferred income tax assets recovered future taxable income extent management believes recovery likely must establish valuation allowance fiscal year 2010 valuation allowance decreased 16 million change valuation allowance related decrease net operating loss carryforwards “nols” 09 million offset increases gross deferred income tax assets fiscal year 2009 valuation allowance decreased 09 million change valuation allowance related decrease net operating loss carryforwards “nols” 15 million offset increases gross deferred income tax assets federal nols march 31 2010 109 million compared 192 million march 31 2009 nols expire various dates 2012 2027 utilized march 31 2010 remaining net operating losses represent nols related windfall stock option deductions benefit credited stockholders’ equity realized federal tax credits amount 472000 alternative minimum taxes expiration federal rd tax credits amount 344000 expire various dates 2021 2029 utilized state nols march 31 2010 march 31 2009 38 million nols expire various dates 2019 2020 utilized amount march 31 2010 333000 represents nols relating windfall stock option deductions benefit credited stockholders’ equity realized california tax credits related rd alternative minimum taxes march 31 2010 amount 61000 expiration date lasercard corporation subsidiaries notes consolidated financial statements methodology determining realizability deferred income tax assets involves estimates future taxable income based upon booked orders estimated impact future stock option deductions expiration dates amounts nols difficulty past expect continued difficulty future reliably forecasting foreign business revenue received resulted basing estimates future income purposes booked orders circumstances change may future able estimate future revenue based upon forecast revenues rather using booked orders although cannot predict occur concluding full valuation allowance required end fiscal year 2010 2009 2008 respectively considered positive negative evidence regarding ability generate sufficient future taxable income realize deferred income tax assets positive evidence included 1 level sales business experienced contracts us green card 2 prospects kingdom saudi arabia national identification card programs 3 orders omcs national id card program angola 4 expected future orders negative evidence included 1 reliance limited number customers substantial portion business 2 uncertainty timing anticipated orders customers 3 impact future stock option deductions taxable income 4 experience net nols expiring unused fiscal year 2007 5 recent financial statement losses 6 prior three years’ cumulative tax net operating losses exclusive payments derived prevent global contract weighing positive negative evidence considered “more likely not” criteria pursuant asc 740 accounting income taxes well following risks related business “dependence vars limited number customers” “lengthy sales cycles” “technological change” “competition” described concluded negative evidence outweighed positive evidence result recorded valuation allowance equal full amount deferred income tax asset march 31 2010 march 31 2009 march 31 2008 event actual results differ estimates adjusted future periods may need adjust amount valuation allowance based future determinations whether likely deferred income tax assets realized decrease valuation allowance would recorded income tax benefit reduction income tax expense net operating losses available reduce future taxable income expire various dates fiscal year 2012 fiscal year 2027 extent generate taxable income jurisdictions deferred income tax asset relates net operating losses offset full valuation allowance utilization net operating losses would result reversal related valuation allowance adopted provisions asc 7401025 april 1 2007 upon adoption fin 48 april 1 2007 recognized cumulative effect adjustment 62000 decreasing income tax liability unrecognized tax benefits decreasing march 31 2007 accumulated deficit balance reconciliation beginning ending amount unrecognized tax benefit follows thousands recognize interest penalties accrued unrecognized tax benefits component provision income taxes accrued 31000 14000 payment interest penalties related unrecognized tax benefits march 31 2010 2009 respectively unrecognized tax benefit recognized would result benefit effective tax rate currently anticipate significant increase decrease unrecognized tax benefits recorded next 12 months lasercard corporation subsidiaries notes consolidated financial statements deferred tax liabilities recognized undistributed earnings foreign subsidiaries management’s intention reinvest undistributed earnings indefinitely foreign subsidiaries undistributed earnings foreign subsidiaries amounted approximately 12 million march 31 2010 distribute earnings form dividends otherwise would subject us income taxes net applicable foreign tax credits withholding taxes payable foreign jurisdiction although file us federal various state foreign tax returns major tax jurisdictions united states california germany tax years 1993 2009 remain subject examination appropriate governmental agencies mainly united states due tax loss carryovers years lasercard corporation subsidiaries selected quarterly financial data unaudited thousands except per share amounts item 9 item 8 consolidated financial statements supplementary data report independent accountants board directors stockholders drexler technology corporation opinion accompanying consolidated balance sheets related consolidated statements income stockholders equity cash flows present fairly material respects financial position drexler technology corporation subsidiaries march 31 2003 march 31 2002 results operations cash flows years ended conformity accounting principles generally accepted united states america financial statements responsibility companys management responsibility express opinion financial statements based audits conducted audits statements accordance auditing standards generally accepted united states america require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements assessing accounting principles used significant estimates made management evaluating overall financial statement presentation believe audits provide reasonable basis opinion financial statements company march 31 2001 year ended audited independent accountants ceased operations independent accountants expressed unqualified opinion financial statements report dated may 13 2002 spricewaterhousecoopers llp san jose california april 28 2003 report conformed copy report previously issued arthur andersen llp reissued firm report independent public accountants board directors stockholders drexler technology corporation audited accompanying consolidated balance sheet drexler technology corporation delaware corporation subsidiaries march 31 2001 related consolidated statements income stockholders equity cash flows two years period ended march 31 2001 restated consolidated financial statements schedule referred responsibility companys management responsibility express opinion consolidated financial statements schedule based audits conducted audits accordance auditing standards generally accepted united states america standards require plan perform audit obtain reasonable assurance whether consolidated financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures consolidated financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall consolidated financial statement presentation believe audits provide reasonable basis opinion consolidated financial statements referred present fairly material respects financial position drexler technology corporation subsidiaries march 31 2001 results operations cash flows two years period ended march 31 2001 conformity accounting principles generally accepted united states america audits made purpose forming opinion basic financial statements taken whole schedule ii included form 10k presented purposes complying securities exchange commissions rules part basic financial statements schedule subjected auditing procedures applied audits basic financial statements opinion fairly states material respects financial data required set forth therein relation basic financial statements taken whole sarthur andersen llp san jose california may 13 2002 drexler technology corporation subsidiaries notes consolidated financial statements 1 organization operations drexler technology corporation wholly owned subsidiary lasercard systems corporation company develop manufacture optical data storage products featuring lasercardr optical memory cards chipready smartopticaltm cards used personal computers information recording storage retrieval optical data storage products include optical memory cards optical card readwrite drives related systems peripherals companys customers mainly valueadded reseller var companies licensees united states countries develop commercial applications lasercard products target markets products include government commercial applications portable recordable secure identification cards unitaryrecord cards applications include us immigration green cards laser visa border crossing cards us military cargo manifests canadian permanent resident cards biometric ids access cards walletcard applications company subject certain risks including limited competition substitute products larger companies dependence certain suppliers customers 2 summary significant accounting policies principles consolidation basis presentation consolidated financial statements include accounts drexler technology corporation wholly owned subsidiaries significant intercompany accounts transactions eliminated consolidation use estimates preparation financial statements conformity accounting principles generally accepted united states america requires management make estimates assumptions affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenues expenses reporting period actual results could differ estimates fiscal period purposes presentation company labels annual accounting period end march 31 company fact operates reports based quarterly periods ending friday closest month end fiscal 2001 ended march 30 2001 fiscal 2002 ended march 29 2002 fiscal 2003 ended march 28 2003 cash equivalents shortterm investments longterm investments company considers highly liquid investments consisting primarily commercial paper taxable notes us government bonds maturities three months less date purchase cash equivalents investments original remaining maturities date purchase three months one year classified shortterm investments original maturities greater one year classified longterm investments management determines appropriate classification debt equity securities time purchase reevaluates classification investments balance sheet date shortterm investments classified held maturity carrying amounts shortterm investments march 31 2002 2003 thousands 2002 2003 corporate bonds 5199 us government agency obligations 1900 401 certificates deposit 1784 3962 8883 4363 march 31 2003 scheduled maturities heldtomaturity investments thousands one year 4363 one year five years 6898 11261 fair value financial instruments carrying amounts companys financial instruments including cash equivalents accounts receivable accounts payable accrued liabilities approximate fair values due short maturities inventories stated lower cost market cost determined firstin firstout basis market based lower replacement cost estimated realizable value components inventories march 31 thousands 2002 2003 raw materials 3063 3209 workinprocess 479 220 finished goods 1338 2257 systems components held resale 93 25 4973 5711 fiscal 2003 company recorded 425000 charge write excess inventory property equipment net components property equipment march 31 thousands 2002 2003 equipment furniture 18425 20523 leasehold improvements 2554 2681 20979 23204 property equipment recorded cost depreciation provided estimated useful lives four seven years equipment furniture using doubledeclining balance straightline methods leasehold improvements amortized shorter life asset life lease using straightline method depreciation leasehold amortization expense fiscal 2001 2002 2003 974000 1082000 1477000 respectively patent costs legal expenses incurred connection patents capitalized amortized estimated remaining useful lives patents six seventeen years costs incurred connection intangibles amortized using straightline method three five years gross patent expenditures capitalized accumulated amortization march 31 follows thousands 2002 2003 gross patent intangible expenditures 3327 3634 accumulated amortization 2715 3067 612 567 assessment impairment longlived assets company periodically evaluates whether events circumstances occurred indicate carrying value longlived assets may recoverable company determines asset impaired impairment charge recorded based excess carrying value fair value impaired asset reduction value charged expense date company needed record impairment losses longlived assets accrued liabilities components accrued liabilities march 31 thousands 2002 2003 accrued payroll fringe benefits 525 605 accrued liabilities 592 829 1117 1434 software development costs development costs incurred research development new software products expensed incurred technological feasibility form working model established date companys software development completed concurrent establishment technological feasibility accordingly software development costs charged research engineering expenses accompanying statements income advance payments customers company customarily receives advance payments orders placed customers advance payments recorded liability balance sheet related orders shipped revenue recognition product sales primarily consist card sales readwrite drives company recognizes revenue product sales following criteria met 1 persuasive evidence arrangement exists 2 delivery occurred 3 fee fixed determinable 4 collectibility reasonably assured company recognizes revenue product sales time shipment shipping terms fob shipping point orders placed pursuant preexisting sales arrangement postshipment obligations customer acceptance criteria appropriate provision made time shipment estimated warranty costs estimated returns product sales primarily consist card sales readwrite drives companys us government subcontract requires delivery secure governmentfunded vault built company premises deliveries made vault fixed schedule specified prime contractor time cards delivered vault title cards transfers government prime contractor invoiced payment due according normal trade payment terms however revenue recognized cards shipped vault government unless company receives fixed schedule notification plan shipments vault government case revenue recognized upon latter receipt fixed shipment schedule delivery cards vault company applies provisions statement position 972 software revenue recognition amended statement position 989 modification sop 972 software revenue recognition respect certain transactions involving sale software products revenue license companys software products recognized persuasive evidence arrangement exists software product delivered fee fixed determinable collectibility reasonably assured applicable upon acceptance criteria specified upon expiration acceptance period software sales significant companys business periods presented license revenue may consist upfront license fees longterm royalty payments recognized revenue realized cost license revenue unless patent litigation involved material included selling general administrative expenses company entered readwrite drive kits assembly license customer italy generated license revenue 712000 fiscal 2001 119000 fiscal 2002 arrangement structured whereby customer agreed pay us contractually agreed upon fee exchange transfer technical knowledge knowhow training assembly readwritedrives training period extended 16 months period company recognized fee revenue company recorded revenue 1465000 fiscal 2001 1206000 fiscal 2002 relating digital sound patent licenses sold sony corporation dolby laboratories inc revenues net legal costs third party contingency success fees ongoing royalty payments research engineering expenses costs related research design development products charged research development expense incurred stockbased compensation december 31 2002 financial accounting standards board fasb issued statement financial accounting standards sfas 148 accounting stock based compensation transition disclosure amends sfas 123 sfas 148 requires prominent frequent disclosures effects stockbased compensation company adopted year ended december 31 2003 company accounts stockbased compensation plans using intrinsic value method prescribed accounting principles board opinion 25 accounting stock issued employees compensation cost stock options measured excess quoted market price companys stock date grant amount employee must pay acquire stock sfas 123 accounting stockbased compensation established accounting disclosure requirements using fairvalue based method accounting stockbased employee compensation plans compensation expense plans determined consistent sfas 123 company net income basic diluted net income per share would decreased following pro forma amounts dollars thousands except per share amounts comprehensive income loss sfas 130 reporting comprehensive income comprehensive income loss defined changes equity enterprise except resulting stockholders transactions fiscal years ended march 31 2000 2001 2002 comprehensive income equaled net income segment reporting accordance sfas 131 disclosures segments enterprise related information company required disclose information operating segments company operates one segmentthe development manufacture sale optical data products used information storage retrieval recent accounting pronouncements april 2002 fasb issued sfas 145 rescission fasb statement 4 44 64 amendment fasb statement 13 technical corrections eliminates inconsistencies required accounting saleleaseback transactions required accounting certain lease modifications economic effects similar saleleaseback transactions sfas 145 also amends existing authoritative pronouncements make various technical corrections clarify meanings describe applicability changed conditions provisions sfas 145 effective fiscal years beginning may 15 2002 transactions occurring may 15 2002 company expect adoption sfas 145 material impact financial statements june 2002 fasb issued sfas 146 accounting exit disposal activities addresses recognition measurement reporting costs associated exit disposal activities including restructuring activities currently accounted pursuant guidance emerging issues task force eitf set forth eitf issue 943 liability recognition certain employee termination benefits costs exit activity including certain costs incurred restructuring sfas 146 effective exit disposal activities initiated december 31 2002 company expect adoption sfas 146 material impact financial statements november 2002 fasb issued fasb interpretation 45 fin 45 guarantors accounting disclosure requirements guarantees including indirect guarantees indebtedness others fin 45 requires liability recorded guarantors balance sheet upon issuance guarantee addition fin 45 requires disclosures guarantees entity issued including reconciliation changes entitys product warranty liabilities initial recognition initial measurement provisions fin 45 applicable prospective basis guarantees issued modified december 31 2002 irrespective guarantors fiscal yearend disclosure requirements fin 45 effective financial statements interim annual periods ending december 15 2002 adoption standard material impact companys financial statements although company complied disclosure requirements standard november 2002 emerging issues task force eitf reached consensus issue 0021 revenue arrangements multiple deliverables eitf issue 0021 provides guidance account arrangements involve delivery performance multiple products services andor rights use assets provisions eitf issue 0021 apply revenue arrangements entered fiscal periods beginning june 15 2003 company believes adoption standard material impact consolidated financial statements january 2003 fasb issued financial interpretation 46 consolidation variable interest entities fin 46 fin 46 addresses consolidation business enterprises variable interest entities interpretation certain entities known variable interest entities vies must consolidated primary beneficiary entity primary beneficiary generally defined majority risks rewards arising vie vies significant majority variable interest held certain disclosures required applies immediately variable interest entities created january 31 2003 applies first year interim period beginning june 15 2003 variable interest entities enterprise holds variable interest acquired february 1 2003 company believe adoption interpretation material effect consolidated financial position results operations cash flows may 2003 fasb issued sfas 149 amendment statement 133 derivative instruments hedging activities sfas 149 amends clarifies accounting derivative instruments including certain derivative instruments embedded contracts hedging activities sfas 133 sfas 149 effective contracts entered modified june 30 2003 hedging relationships designated june 30 2003 company currently analyzing provisions sfas 149 determine impact adoption believe material impact consolidated financial statements may 2003 fasb issued sfas 150 accounting certain financial instruments characteristics liabilities equity sfas 150 establishes standards companies classify measures certain financial instruments characteristics liabilities equity requires companies classify financial instrument within scope liability asset circumstances sfas 150 effective beginning second quarter fiscal 2004 company currently analyzing provisions sfas 150 determine impact believe material impact consolidated financial statements reclassifications certain reclassifications made prior year financial data conform current year presentation indemnification companys major sales agreements provide remedies customers defense settlement payment judgment intellectual property claims related use products company also entered indemnification agreements directors officers companys bylaws contain similar indemnification obligations claims made indemnifications rare associated estimated fair value liability material 3 net income per share basic net income per share computed dividing net income weighted average number shares common stock outstanding diluted net income per share computed dividing net income weighted average number shares common stock common stock equivalents outstanding common stock equivalents consist stock options using treasury stock method reconciliation numerators denominators basic diluted net income per share computation fiscal years 2001 2002 2003 shown thousands except per share data stock options exercise price greater average market value periods excluded calculation diluted net income per share effect would antidilutive stock options purchase 321400 280950 168000 shares excluded calculation diluted net income per share years ended march 31 2001 2002 2003 respectively 4 major customers export sales two customers accounted 10 revenues fiscal 2001 2002 one customer accounted 10 revenues fiscal 2003 follows fiscal year 2001 2002 2003 customer 62 81 94 customer b 22 7 one united states customer comprised 98 accounts receivable march 31 2002 99 accounts receivable march 31 2003 sales geographic region generally determined based upon ship address invoice revenues geographic region follows thousands fiscal year 2001 2002 2003 united states 21140 18832 22205 north america 10 622 2780 europe 1408 835 426 asia 2299 580 887 rest world 49 20 33 24906 20889 26331 5 relatedparty transactions october 21 2001 company entered oneyear agreement wexler walker public policy associates unit hill knowlton inc wexler lobbyists behalf company chairman wexler robert walker brother director walter f walker october 2002 agreement extended period october 1 2002 september 2003 terminated upon seven days notice extended agreement provides monthly retainer 10000 2003 fiscal year company paid 96985 wexler significant amounts due wexler march 31 2002 2003 6 common stock option plan company one stock option plan stock option plan 2278602 shares common stock reserved march 31 2003 consisting 2059798 shares stock options already granted 218804 shares stock options yet granted companys stock option plan provides stock options may granted employees officers directors consultants company option prices may less 100 fair market value shares date grant options granted consultants fiscal 2001 2002 2003 board directors specifies term options vesting schedule exercise options option term cannot exceed ten years except incentive stock options granted principal shareholder cannot exceed five years following table lists stock option plan activity march 31 2000 march 31 2003 following table summarizes information stock options outstanding march 31 2003 employee stock purchase plan company employee stock purchase plan stock purchase plan 84461 shares reserved march 31 2003 future purchases employees stock purchase plan eligible employees may designate 2 6 compensation withheld purchase shares common stock 67 trailing average price differential fair market value average price shares sold stock purchase plan charged operations compensation expense taxed employee income stock purchase plan employees purchased 12964 shares fiscal 2001 12942 shares fiscal 2002 18405 shares fiscal 2003 average purchase price per share 951 fiscal 2001 1052 fiscal 2002 974 fiscal 2003 weighted average market price per share shares purchased 1505 fiscal 2001 1797 fiscal 2002 1476 fiscal 2003 7 commitments contingencies company occupies buildings various operating leases rent expense relating buildings approximately 1077000 fiscal 2001 1169000 fiscal 2002 1186000 fiscal 2003 march 31 2003 future minimum rental payments relating leases thousands fiscal year 2004 1221 2005 911 2006 856 2007 139 thereafter 3127 normal course business company subject various claims assertions opinion management ultimate disposition claims assertions material adverse impact financial position company 8 income taxes provision income taxes fiscal 2001 2002 2003 consists following thousands fiscal year 2001 2002 2003 current provision federal 136 49 1184 state 220 213 336 foreign 354 710 262 1520 deferred provision federal 1807 3048 income tax expense benefit 1097 2786 1520 companys effective tax rate differs statutory rate follows fiscal year 2001 2002 2003 tax rate reconciliation federal statutory rate 34 state tax net federal benefit 6 change valuation allowance 58 159 alternative minimum taxes 2 16 119 40 major components net deferred tax asset march 31 follows thousands 2002 2003 net operating loss carryforwards federal 10420 10311 tax credits 440 537 reserves accruals currently deductible tax purposes 2373 964 depreciation 461 574 capitalized patent costs 175 153 211 107 total deferred tax asset 13730 12340 valuation allowance equity 5318 5254 net deferred tax asset 8412 7086 company analyzes deferred tax assets regard potential realization company established valuation allowance portion deferred tax assets management could conclude likely deferred tax assets would realized companys determination realizability deferred tax assets involves considering available evidence positive negative regarding likelihood sufficient future income methodology used involves estimates future income assumes ongoing profitability core business includes estimated impact future stock option deductions expiration dates amounts nol carryforwards estimates future income projected life related deferred tax assets using assumptions management believes reasonable march 31 2003 company would require approximately 17 million future taxable income realize related deferred tax assets recognized march 31 2003 timing differences certain items included book income items included income tax returns therefore tax payments credits often occur different periods income tax expense benefit included statements income companys federal net operating loss carryforwards march 31 2003 30326000 expire various dates 2005 2023 utilized tax effect amount reflected 10311000 amount 5254000 credited stockholders equity extent company concludes likely amount realized tax credits amount 300000 alternative minimum taxes expiration tax credits amount 237000 expire various dates 2013 2018 utilized item 9 item 8 financial statements supplementary data report independent registered public accounting firm board directors stockholders drexler technology corporation audited accompanying consolidated balance sheet drexler technology corporation subsidiaries march 31 2004 related consolidated statements operations stockholders equity cash flows year ended consolidated financial statements responsibility companys management responsibility express opinion consolidated financial statements based audit conducted audit accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audit provides reasonable basis opinion consolidated financial statements referred present fairly material respects financial position drexler technology corporation subsidiaries march 31 2004 results operations cash flows year ended conformity accounting principles generally accepted united states america kpmg llp mountain view california june 9 2004 report independent registered public accounting firm board directors stockholders drexler technology corporation opinion accompanying consolidated balance sheet related consolidated statements operations stockholders equity cash flows present fairly material respects financial position drexler technology corporation subsidiaries march 31 2003 results operations cash flows two years period ended march 31 2003 conformity accounting principles generally accepted united states america financial statements responsibility companys management responsibility express opinion financial statements based audits conducted audits statements accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements assessing accounting principles used significant estimates made management evaluating overall financial statement presentation believe audits provide reasonable basis opinion pricewaterhousecoopers llp san jose california april 28 2003 except note 4 date january 22 2004 drexler technology corporation subsidiaries notes consolidated financial statements 1 organization operations drexler technology corporation wholly owned subsidiaries lasercard systems corporation challenge card design plastikkarten gmbh cards gmbh company develop manufacture integrate lasercardr optical memory cards advancedtechnology cards optical card drives card systems peripherals challenge card design plastikkarten gmbh cards gmbh acquired drexler technology march 31 2004 fiscal 2004 companys customers mainly valueadded reseller var companies licensees united states countries develop commercial applications lasercard products target markets products include government commercial applications portable recordable secure identification cards unitaryrecord cards applications include us immigration green cards laser visa border crossing cards us military cargo manifests canadian permanent resident cards italian national id cards biometric ids walletcard applications challenge card design plastikkarten gmbh cards gmbh supply advancedtechnology cards various applications card printers systems integration gatekeeping ticketing company two additional subsidiaries dormant precision photoglass inc microfab systems corporation company subject certain risks including limited competition substitute products larger companies dependence certain suppliers customers companys us government subcontract expires may 25 2005 2 summary significant accounting policies principles consolidation basis presentation consolidated financial statements include accounts drexler technology corporation wholly owned subsidiaries significant intercompany accounts transactions eliminated consolidation use estimates preparation financial statements conformity accounting principles generally accepted united states america requires management make estimates assumptions affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenues expenses reporting period actual results could differ estimates fiscal period purposes presentation company labels annual accounting period end march 31 quarterly accounting period ends june 30 september 30 december 31 company fact operates reports based quarterly periods ending friday closest month end fiscal 2002 ended march 29 2002 fiscal 2003 ended march 28 2003 fiscal 2004 ended april 2 2004 cash equivalents shortterm investments longterm investments company considers highly liquid investments consisting primarily commercial paper taxable notes us government bonds maturities three months less date purchase cash equivalents cash equivalents march 31 2003 march 31 2004 4396000 9400000 respectively investments original remaining maturities date purchase three months one year classified shortterm investments original remaining maturities date purchase greater one year classified longterm investments management determines appropriate classification debt equity securities time purchase reevaluates classification investments balance sheet date shortterm longterm investments classified held maturity stated balance sheet amortized cost investments classified held maturity unrealized gains losses recorded carrying amounts individual held maturity securities reviewed balance sheet date potential impairment march 31 2003 march 31 2004 company determined impairment temporary occurred carrying amounts shortterm longterm investments march 31 thousands 2003 2004 shortterm investments us government agency obligations 401 certificates deposit 3962 981 total shortterm investments 4363 981 longterm investments us government agency obligations 6500 7300 certificates deposit 398 946 total longterm investments 6898 8246 total investments 11261 9227 scheduled maturities heldtomaturity investments march 31 thousands one year 981 one year five years 8246 9227 fair value financial instruments carrying amounts companys financial instruments including cash equivalents shortterm investments accounts receivable accounts payable accrued liabilities approximate fair values due short maturities fair value longterm investments 6910000 march 31 2003 8269000 march 31 2004 inventories stated lower cost market cost determined firstin firstout basis market based lower cost estimated realizable value components inventories march 31 thousands 2003 2004 raw materials 3234 3243 workinprocess 220 1651 finished goods 2257 1905 5711 6799 company recorded charges write excess obsolete inventory 276000 fiscal 2002 425000 fiscal 2003 97000 fiscal 2004 property equipment net components property equipment march 31 thousands 2003 2004 building land 811 equipment furniture 19200 21754 construction progress including purchased equipment 1323 2338 leasehold improvements 2681 2706 23204 27609 property equipment recorded cost depreciation provided estimated useful lives four seven years equipment furniture using doubledeclining balance straightline methods leasehold improvements amortized shorter life asset life lease using straightline method depreciation leasehold amortization expense fiscal 2002 2003 2004 1192000 1477000 1922000 respectively goodwill intangible assets goodwill represents excess purchase price fair value identifiable net tangible intangible assets acquired business combination accordance sfas 142 goodwill intangible assets company amortize goodwill instead company evaluates goodwill impairment annually fourth quarter whenever events changes circumstances indicate likely impairment loss incurred goodwill assigned reporting units operating segments defined current segment reporting structure march 31 2004 company one reporting unit contains goodwill acquisitionrelated intangible assets goodwill include backlog amortized straightline basis estimated useful life six months brand indefinite useful life legal expenses incurred connection patents capitalized amortized estimated remaining useful lives patents six seventeen years definite life intangible assets capitalized accumulated amortization march 31 follows thousands 2003 2004 patent expenditures 3089 3172 technology transfer expenditures 545 backlog 29 10 total patent intangible expenditures 3634 3756 patent accumulated amortization 2638 2810 technology transfer accumulated amortization 429 455 3 accumulated amortization 3067 3268 patents intangibles net 567 488 weighted average remaining amortization periods march 31 follows 2003 2004 backlog 05 years patents 44 years 48 years technology transfer 27 years 32 years total 38 years 42 years amortization expense intangible assets fiscal 2002 2003 2004 364000 352000 201000 respectively amounts relating goodwill intangibles assets longer amortized included amounts estimated amortization expense next five years follows thousands fiscal year 2005 147 2006 112 2007 97 2008 62 2009 41 total 459 intangible assets capitalized would amortized march 31 follows thousands 2003 2004 brand 490 goodwill 3321 total 3811 assessment impairment tangible intangible longlived assets accordance sfas 144 accounting impairment disposal longlived assets company assesses impairment longlived assets whenever events changes circumstances indicate carrying value may recoverable estimated future cash flows expected result use eventual disposition companys longlived assets subject evaluation include property plant equipment amortizable intangible assets companys estimate future undiscounted net cash flows insufficient recover carrying value assets estimated useful life company record impairment loss amount carrying value assets exceeds fair value assets determined recoverable useful lives shorter originally estimated company depreciates amortizes net book value asset newly determined remaining useful lives date company needed record impairment losses longlived assets accrued liabilities components accrued liabilities march 31 thousands 2003 2004 accrued payroll fringe benefits 605 1107 accrued liabilities 829 928 total 1434 2035 software development costs development costs incurred research development new software products expensed incurred technological feasibility form working model established date companys software development completed concurrent establishment technological feasibility accordingly software development costs charged research engineering expenses accompanying consolidated statements operations advance payments customers company customarily receives advance payments orders placed customers advance payments recorded liability balance sheet related orders shipped revenue recognition product sales primarily consist card sales readwrite drives company recognizes revenue product sales following criteria met 1 persuasive evidence arrangement exists 2 delivery occurred 3 fee fixed determinable 4 collectibility reasonably assured company recognizes revenue product sales time shipment shipping terms fob shipping point orders placed pursuant preexisting sales arrangement postshipment obligations customer acceptance criteria appropriate provision made time shipment estimated warranty costs estimated returns product sales primarily consist card sales readwrite drives companys us government subcontract requires delivery secure governmentfunded vault located company premises shipments made vault shipment schedule provided prime contractor subject revision cancellation option prime contractor time cards delivered vault title cards transferred government risks ownership transferred well prime contractor invoiced payment due within thirty days contract contain return warranty cancellation provisions pursuant provisions staff accounting bulletin 104 sab 104 revenue recognized delivery vault company fulfilled contractual obligations earnings process complete company receive shipment schedule revenue deferred recognized upon shipment vault company applies provisions statement position sop 972 software revenue recognition amended statement position 989 modification sop 972 software revenue recognition respect certain transactions involving sale software products revenue license companys software products recognized persuasive evidence arrangement exists software product delivered fee fixed determinable collectibility reasonably assured applicable upon acceptance criteria specified upon expiration acceptance period license revenue may consist upfront license fees longterm royalty payments recognized revenue earned cost license revenue material included selling general administrative expenses company entered readwrite drive kits assembly license customer italy generated license revenue 119000 fiscal 2002 arrangement structured whereby customer agreed pay company contractually agreed upon fee exchange transfer technical knowledge knowhow training assembly readwritedrives training period extended 16 months period company recognized fee revenue company recorded revenue 1206000 fiscal 2002 relating digital sound patent licenses sold sony corporation dolby laboratories inc revenues net legal costs third party contingency success fees ongoing royalty payments continuing obligations license revenue amount 875000 fiscal 2003 represents unamortized portion 1000000 nonrefundable distribution license fee received 2000 licensee asia committed purchase minimum number optical memory cards program licensees country company recorded fee deferred revenue amortizing revenue proportion actual card purchases licensee quarter ended december 31 2002 company determined due licensees failure meet minimum contractual purchase commitment licensees distribution rights become unenforceable licensee would longer acting card supplier program fiscal 2003 license revenue also included 235000 relating payment received january 2002 third party considering entering license agreement company originally recorded payment deferred revenue third party subsequently foregone rights agreement due nonperformance accordingly company recognized revenue arrangement fourth quarter fiscal 2003 license revenue fiscal year ended march 31 2004 effective april 3 2004 subsequent year end company sold cardmanufacturing license global investments group based auckland new zealand card manufacturing slovenia agreement provides payments company 29 million license 20year term license including fiveyear training support package followed ongoing support phase additional 15 years additionally company sell approximately 12 million worth required manufacturing equipment installation support new facility provide targeted initial manufacturing capacity 10 million optical cards annually march 31 2004 company 2419000 equipment classified equipment held resale balance sheet options increase capacity 30 million cards per year provided company received initial 5 million payments called agreements consisting partial payment equipment 500000 march 31 2004 45 million subsequent march 31 2004 addition 41 million discussed global investments group pay company royalties card produced license territories covered license include european union eastern european regions global investments group exclusive marketing rights certain territories performance goals maintain rights company assign personnel site license term assist quality security operational procedures mutual goal facility cards made conform companys standards start global investments group facility planned early 2005 revenue license allocated remaining term agreement beginning operation factory commences company also retains rights utilize 20 new facility capacity backup capacity buffer augment card manufacturing facilities mountain view california granting license gig establishes second source supplier optical memory cards existing prospective customers may request multiple sources cards company expect record material license revenues agreement prior fiscal 2006 research engineering expenses costs related research design development products charged research engineering expense incurred stockbased compensation december 31 2002 financial accounting standards board fasb issued statement financial accounting standards sfas 148 accounting stock based compensation transition disclosure amends sfas 123 sfas 148 requires prominent frequent disclosures effects stockbased compensation company adopted year ended march 31 2003 company accounts stockbased compensation plans using intrinsic value method prescribed accounting principles board opinion 25 accounting stock issued employees compensation cost stock options measured excess quoted market price companys stock date grant amount employee must pay acquire stock sfas 123 accounting stockbased compensation established accounting disclosure requirements using fairvalue based method accounting stockbased employee compensation plans compensation expense plans determined consistent sfas 123 companys net income loss basic diluted net income loss per share would decreased following pro forma amounts dollars thousands except per share amounts company computed fair value option grant date grant using blackscholes option valuation model following assumptions comprehensive income loss sfas 130 reporting comprehensive income comprehensive income loss defined changes equity enterprise except resulting stockholders transactions fiscal years ended march 31 2002 2003 2004 comprehensive income loss equaled net income loss recent accounting pronouncements november 2002 emerging issues task force eitf reached consensus issue 0021 revenue arrangements multiple deliverables eitf 0021 eitf 0021 provides guidance account arrangements involve delivery performance multiple products services andor rights use assets provisions eitf 0021 apply revenue arrangements entered fiscal periods beginning june 15 2003 adoption standard material impact companys financial position results operations january 2003 fasb issued financial interpretation 46 consolidation variable interest entities fin 46 fin 46 addresses consolidation business enterprises variable interest entities interpretation certain entities known variable interest entities vies must consolidated primary beneficiary entity primary beneficiary generally defined majority risks rewards arising vie vies significant majority variable interest held certain disclosures required december 2003 fasb revised fin 46 delaying effective dates certain entities created february 1 2003 making amendments clarify application guidance potential variable interest entities special purpose entities spes revised fin 46 fin 46r required applied later end first fiscal year interim reporting period ending march 15 2004 original guidance fin 46 still applicable however end first interim annual reporting period ending december 15 2003 spes created prior february 1 2003 fin 46r may applied prospectively cumulative effect adjustment date first applied restating previously issued financial statements cumulativeeffect adjustment beginning first year restated fin 46r also requires certain disclosures entitys relationship variable interest entities company adopt fin 46r nonspe entities quarter ended june 30 2005 adoption standard impact companys financial position results operations may 2003 fasb issued sfas 149 amendment statement 133 derivative instruments hedging activities sfas 149 amends clarifies accounting derivative instruments including certain derivative instruments embedded contracts hedging activities sfas 133 sfas 149 effective contracts entered modified june 30 2003 hedging relationships designated june 30 2003 adoption sfas 149 impact companys financial position results operations may 2003 fasb issued sfas 150 accounting certain financial instruments characteristics liabilities equity sfas 150 establishes standards companies classify measure certain financial instruments characteristics liabilities equity requires companies classify financial instrument within scope liability asset circumstances sfas 150 effective beginning third quarter fiscal 2004 adoption sfas 150 impact companys financial position results operations july 2003 eitf reached consensus issue 035 applicability aicpa statement position 972 sop 972 nonsoftware deliverables eitf 035 consensus reached sop 972 applicable nonsoftware deliverables included arrangement contains software essential nonsoftware deliverables functionality consensus applied companys financial year beginning october 1 2003 company yet evaluated impact eitf 035 financial position results operations november 2003 eitf reached consensus eitf issue 031 meaning otherthantemporary impairment application certain investments eitf 031 eitf 031 requires disclosures concerning unrealized losses related investments debt marketable equity securities accounted sfas 115 disclosures include length time investments loss position discussion pertaining nature impairment adoption eitf issue 031 impact companys financial position results operations december 2003 sec issued sab 104 supercedes sab 101 revenue recognition financial statements primary purpose sab 104 rescind accounting guidance contained sab 101 related multiple element revenue arrangements superceded result issuance eitf 0021 adoption sab 104 impact companys financial position results operations reclassifications certain reclassifications made prior year financial data conform current year presentation indemnification companys major sales agreements provide remedies customers defense settlement payment judgment intellectual property claims related use companys products company also entered indemnification agreements directors officers companys bylaws contain similar indemnification obligations date claims made indemnifications result associated estimated fair value liability material company required indemnify investors companys december 2003 financing third party claim based upon untrue statement alleged untrue statement material fact contained registration statement covering resale shares purchased investors failure company fulfill undertaking included registration statement 3 net income loss per share basic net income loss per share computed dividing net income loss weighted average number shares common stock outstanding diluted net income loss per share computed dividing net income loss weighted average number shares common stock common stock equivalents outstanding common stock equivalents consist stock options warrants using treasury stock method reconciliation denominators basic diluted net income loss per share computation fiscal years ended march 31 2002 2003 2004 shown following table thousands except per share data stock options exercise price greater average market value profitable periods excluded calculation diluted net income per share effect would antidilutive therefore stock options purchase 280950 168000 shares excluded calculation diluted net income per share years ended march 31 2002 2003 respectively effect common stock equivalents would antidilutive since company incurred loss stock options warrants excluded calculation diluted net loss per share fiscal year ended march 31 2004 4 segments segment reporting prior second fiscal quarter 2004 company reported results single reportable segment second fiscal quarter 2004 revenues increased optical card drives result company concluded two reportable segments began reporting results segment information pursuant statement financial accounting standards 131 segment reporting segment financial data years ended march 31 2002 2003 restated reflect segments companys two reportable segments 1 optical memory cards 2 optical memory card drives maintenance related accessories optical card drives segments determined based information used chief operating decision maker segments reported strategic business units offer unrelated products services rather reportable segments utilize compatible technology marketed jointly accounting policies used derive reportable segment results described summary significant accounting policies resources allocated segments manner optimizes optical memory card revenues determined chief operating decision maker segment revenues comprised sales external customers segment gross profit loss includes segment revenues less related cost sales fixed assets inventory separately reported segment chief operating decision maker accounts receivable cash deferred income taxes prepaid expenses certain fixed assets separately identifiable segments therefore amount assets segment meaningful intersegment sales transfers companys longlived assets attributable united states except 3195000 attributable germany companys chief operating decision maker currently companys cochief executive officers prior companys chairman chief executive officer considered chief operating decision maker chief operating decision maker reviews financial information presented consolidated basis accompanied disaggregated information revenues gross profit loss segment table presents information optical memory cards optical card drives fiscal years ended march 31 2002 2003 2004 thousands fiscal year ended march 31 2002 optical memory card segment cards drives total revenue 18201 1279 19480 cost sales 8717 1918 10635 gross profit loss 9484 639 8845 depreciation amortization expense 798 61 859 fiscal year ended march 31 2003 optical memory card segment cards drives total revenue 24247 693 24940 cost sales 12120 1579 13699 gross profit loss 12127 886 11241 depreciation amortization expense 995 81 1076 fiscal year ended march 31 2004 optical memory card segment cards drives total revenue 13379 3448 16827 cost sales 9965 3039 13004 gross profit 3414 409 3823 depreciation amortization expense 1207 179 1386 following reconciliation segment results amounts included companys consolidated financial statements fiscal years ended march 31 2002 2003 2004 thousands fiscal year ended march 31 2002 segment total revenue 19480 1409 20889 cost sales 10635 17 10652 gross profit 8845 1392 10237 depreciation amortization expense 859 697 1556 fiscal year ended march 31 2003 segment total revenue 24940 1391 26331 cost sales 13699 207 13906 gross profit 11241 1184 12425 depreciation amortization expense 1076 753 1829 fiscal year ended march 31 2004 segment total revenue 16827 136 16963 cost sales 13004 153 13157 gross profit loss 3823 17 3806 depreciation amortization expense 1386 737 2123 revenue consists primarily license revenue cost sales depreciation amortization expense represents corporate costs directly associated segment activities sales geographic region sales geographic region generally determined based upon shipto address invoice revenues geographic region follows thousands fiscal year 2002 2003 2004 united states 18832 22205 8461 canada 606 2764 4177 italy 729 334 3720 middle east africa 12 33 478 asia 580 887 39 rest world 130 108 88 20889 26331 16963 sales customers outside united states denominated us dollars major customers one customer accounted 81 revenues fiscal 2002 94 revenues fiscal 2003 72 revenues fiscal 2004 another customer accounted 22 revenues fiscal 2004 revenue customers attributable optical memory card optical card drive segments customer accounted 10 revenues periods one united states customer comprised 99 accounts receivable march 31 2003 two customers comprised 53 46 respectively accounts receivable march 31 2004 5 relatedparty transactions october 21 2001 company entered oneyear agreement wexler walker public policy associates unit hill knowlton inc wexler lobbyists behalf company chairman wexler robert walker brother director walter f walker october 2002 agreement extended period october 1 2002 september 2003 terminated upon seven days notice extended agreement provided monthly retainer 10000 currently purchase order dated december 11 2003 valid september 30 2004 terms conditions previous agreement company paid 24245 wexler fiscal 2002 82985 fiscal 2003 151147 fiscal 2004 significant amounts due wexler march 31 2003 2004 6 common stock option plan company one stock option plan stock option plan 2133455 shares common stock reserved march 31 2004 consisting 1909059 shares stock options already granted 224396 shares stock options yet granted addition march 31 2004 120000 shares stock reserved outside companys stock option plan stock options issued nasdaq rule 4350i1a connection ccdcm acquisition inducement join company six key employees acquired companies granted nonstatutory stock options term five years purchase 20000 common shares companys stock option plan provides stock options may granted employees officers directors consultants company option prices may less 100 fair market value shares date grant options granted consultants fiscal 2002 2003 2004 board directors specifies term options vesting schedule exercise options option term cannot exceed ten years except incentive stock options granted principal shareholder cannot exceed five years following table lists stock option plan activity march 31 2001 march 31 2004 options weighted available outstanding average grant options exercise price balance march 31 2001 276220 2028100 1149 authorized 300000 granted 345500 1382 exercised 416618 952 expired 83251 1386 balance march 31 2002 313971 1873731 1225 authorized 275000 granted 394000 1603 exercised 184100 867 expired 23833 1611 balance march 31 2003 218804 2059798 1325 granted 35000 155000 1443 exercised 145147 1034 expired 40592 1512 balance march 31 2004 224396 2029059 1351 following table summarizes information stock options outstanding march 31 2004 employee stock purchase plan company employee stock purchase plan stock purchase plan 64208 shares reserved march 31 2004 future purchases employees stock purchase plan eligible employees may designate 2 6 compensation withheld purchase shares common stock 67 trailing average price differential fair market value average price shares sold stock purchase plan charged operations compensation expense taxed employee income stock purchase plan employees purchased 12942 shares fiscal 2002 18405 shares fiscal 2003 20253 shares fiscal 2004 average purchase price per share 1052 fiscal 2002 974 fiscal 2003 938 fiscal 2004 weighted average market price per share shares purchased 1797 fiscal 2002 1476 fiscal 2003 1419 fiscal 2004 7 commitments contingencies company occupies buildings various operating leases rent expense relating buildings approximately 1169000 fiscal 2002 1186000 fiscal 2003 approximately 1102000 fiscal 2004 march 31 2004 future minimum rental payments relating leases thousands fiscal year 2005 1374 2006 1218 2007 1138 2008 1086 2009 1048 thereafter 6800 total 12664 mutual agreement lessor november 1 2003 lease 27000squarefoot building modified extended october 2013 original lease remaining term may 2006 lease payments totaling 2083000 modified lease calls payments totaling 1293000 period rent expense recorded average rent payments term lease time renegotiated lease signed 139000 deferred rent associated original lease amount amortized straightline basis tenyear term modified lease normal course business company subject various claims assertions opinion management ultimate disposition claims assertions material adverse impact financial position company 8 income taxes provision benefit income taxes fiscal 2002 2003 fiscal 2004 consists following thousands fiscal year 2002 2003 2004 current federal 49 261 state 213 98 3 262 359 3 deferred federal 3048 1161 6552 state 534 3048 1161 7086 income tax expense benefit 2786 1520 7089 companys effective tax rate differs statutory rate follows fiscal year 2002 2003 2004 tax reconciliation federal statutory rate 34 state tax net federal benefit 6 0 change valuation allowance 159 166 119 40 132 major components net deferred tax assetliability march 31 follows thousands fiscal year 2003 2004 deferred tax asset net operating loss carryforwards federal 10311 12252 foreign 32 tax credits 537 662 reserves accruals currently deductible tax purposes 964 1032 depreciation 574 787 107 141 total deferred tax asset 12493 14906 valuation allowance 5254 14751 net deferred tax asset 7239 155 deferred tax liability german operations 640 capitalized patent costs 153 123 total deferred tax liability 153 763 net deferred tax assetliability 7086 608 fiscal 2004 acquisition challenge card design gmbh cards gmbh resulted deferred tax liability 608000 company analyzes deferred tax assets regard potential realization company established full valuation allowance deferred tax assets management could conclude likely deferred tax assets would realized companys methodology determining realizability deferred tax assets involves estimates future taxable income estimated impact future stock option deductions expiration dates amounts net operating loss carryforwards estimates based nearterm projections assumptions management believes reasonable recent prior periods company estimating future taxable income core business assumed ongoing business us government subcontract permanent resident cards laser visa border crossing cards canadian governments permanent resident card program well estimated operating expenses support level business offset estimated impact future stock option deductions company subsequently went back estimating future taxable income based upon expectations current next three years past core business proven stable company believed past core business expected represent increasingly smaller part business company expects revenues us programs stabilize revenue levels lower expected past expects new foreign business fluctuated considerably quarter comprise larger portion core business company difficulty past expects continued difficulty future reliably forecasting foreign business revenue received combination threeyear cumulative tax loss period ended march 31 2004 resulted company basing estimates future income purposes orders backlog end reporting period circumstances change company may future able estimate future revenue based upon forecast revenues rather using booked orders although company cannot say occur event actual results differ estimates adjusted future periods company may need adjust amount valuation allowance based future determinations whether likely deferred tax assets realized decrease valuation allowance would recorded income tax benefit reduction income tax expense credit stockholders equity companys net operating losses available reduce future taxable income expire various dates fiscal 2005 fiscal 2024 extent company generates taxable income jurisdictions deferred tax asset relates net operating losses offset full valuation allowance utilization net operating losses would result reversal related valuation allowance companys results operations company would need 8226000 income federal income tax return avoid expiration 2797000 deferred tax asset set expire fiscal 2005 significant management judgment required determining provision income taxes particular valuation allowance recorded companys deferred tax assets fiscal 2002 company recorded tax benefit 2786000 included 2999000 reduction valuation allowance deferred tax assets net federal alternative minimum taxes based managements assessment portion deferred tax assets would likely realized due companys recent cumulative tax loss history threeyear period ending march 31 2004 income statement loss history past five quarters difficulty forecasting timing future revenue evidenced deviations achieved revenues expected revenues past quarters taking account newness certain customer relationships company determined necessary increase valuation allowance sfas 109 full amount deferred tax asset result company recorded valuation allowance 148 million march 31 2004 includes charge increase valuation allowance beginning year net deferred tax asset balance 7086000 year ended march 31 2004 due uncertainties related companys ability utilize deferred tax assets addition company recorded valuation allowance net deferred tax asset generated fiscal 2004 amount 2411000 companys federal net operating loss carryforwards march 31 2004 36040000 expire various dates 2005 2024 utilized tax effect amount reflected federal net operating loss carryforwards totaling 12252000 amount 5811000 representing tax benefits relating stockbased compensation programs credited stockholders equity extent company concludes likely amount realized tax credits amount 312000 alternative minimum taxes expiration tax credits amount 350000 expire various dates 2013 2022 utilized 9 issuance stock options warrants december 2003 company issued sold 791172 shares common stock options purchase 122292 shares common stock warrants purchase 174057 shares common stock aggregate purchase price 10095332 private placement company received net proceeds 9389000 net fees expenses purchase price common stock 1276 per share 15 discount fiveday average price december 23 2003 options exercise price 1651 per share ninemonth life warrants exercise price 1726 per share life five years options warrants valued 245000 984000 respectively based blackscholes calculation december 23 2003 pursuant provisions eitf issue 0019 accounting derivative financial instruments indexed potentially settled companys stock eitf 0019 recorded values shortterm longterm liabilities balance net proceeds accounted additional paidin capital eitf 0019 company markstomarket fair value options warrants end accounting period march 31 2004 resulted options warrants valued 195000 916000 respectively decrease valuation options warrants december 23 2003 march 31 2004 118000 recorded income accompanying consolidated statements operations resulted decrease companys stock price february 6 2004 company investors entered amendment original agreement resulted reclassification options warrants equity amendment clarified options warrants granted financing may exercised time registration statement covering resale underlying share effective available instance company would deliver investors shares common stock whose resale currently registered effective date amendment option warrant value reclassified equity additional paidin capital result increase value options warrants closing date amendment date due increases companys stock price company recognized expense 211000 included expense consolidated statements operations fourth quarter fiscal 2004 company subject certain indemnity provisions included stock purchase agreement entered part financing connection registration resale common stock issued issuable financing morgan keegan company inc acted companys placement agent transaction granted warrants purchase 15824 shares common stock 10 acquisition march 31 2004 company completed acquisition 100 two related german card companies challenge card design plastikkarten gmbh rastede germany cards gmbh ratingen germany collectively acquired german entities including sales operations usa korea company purchased shares acquired german entities five shareholders purchased intangible assets usa sales operation partnership comprised shareholders acquisition transaction company agreed assume approximately 05 million euros debt pay approximately 475 million euros cash consisting approximately 225 million euros payable closing remaining approximately 25 million euros payable five equal annual installments business certain assets agreement specified purchase price adjusted based upon assets purchased additional liabilities assumed resulted reduction purchase price approximately 04 million euros march 31 2004 purchase price determined negotiation company shareholders taking account matters value tangible assets going concern value business operations acquired german entities four shareholders entered new employment agreements acquired german entities fifth shareholder resident us entered employment agreement registrant addition salaries employment agreements provide commission based upon results operations acquired german entities could much 375 million euros next five years company used portion available cash fund acquisition shareholders previous material relationship company affiliate subsidiaries although company substantial business acquired german entities recent years one acquired german entities owns plant rastede germany together associated equipment used manufacture plastic cards featuring contactless ic chip technology high resolution printing company intends continue use facility equipment produce cards well enhance facility produce lasercard optical memory cards primary reasons acquisition provide company 1 strong card manufacturing base serve european middle eastern african asian markets 2 additional production capacity 20 million advancedtechnology cards per year 3 expanded product line namely contact ic chip cards contactless rf id cards magnetic stripe cards color thermal printers printing cards 4 future cooperation developing marketing advanced secure optical card solutions goodwill derived purchase price greater value tangible intangible assets acquired less liabilities assumed factors contributed purchase price resulted goodwill 1 assembled workforce particular managing directors acquired companies 2 proximity managing directors target customer base 3 ability managing directors use skills specific knowhow enhance companys product offerings advanced technology card marketplace goodwill resulting purchase price allocation amount 3321000 recorded result acquisition none expected deductible income tax purposes intangible asset backlog amount 29000 recorded result acquisition amortized backlog shipped period estimated six months amortizable intangible assets recorded results operations acquired entities acquisition date year end included companys 2004 operating results acquisition occurred end companys fiscal year acquired entities results period material cost acquired entities totaled 5251000 comprised 3101000 paid upfront plus future payments specified purchase agreement net present value 2150000 total purchase price 5251000 allocated net assets acquired based estimated fair values follows thousands current assets 4577 property equipment 2094 goodwill intangibles 3840 total assets acquired 10511 current liabilities 4891 longterm debt 369 total liabilities assumed 5260 net assets acquired 5251 cash paid 3101 future payments accrued 2150 total purchase price 5251 proforma financial information impact acquisition companys consolidated results operations presented acquired german entities foreign entities prepare financial statements accordance united states generally accepted accounting principles us gaap reported revenues excluding sales company fiscal 2002 2003 entities local gaap basis 8654000 8580000 respectively similar local gaap basis management believes materially differ us gaap results operations acquired entities would material companys consolidated results operations 11 debt march 31 consisted following thousands unsecured promissory notes 75 10 726 notes secured equipment 404 74 668 notes secured acquired companies 6 discount rate 2150 total debt 3544 less current portion longterm debt bank borrowings 1166 longterm debt 2378 debt denominated euros 2883000 euros equals 3544000 march 31 2004 related acquisition challenge card design gmbh cards gmbh managing directors cards gmbh personally guaranteed 188000 unsecured promissory notes connection acquisition company agreed take actions eliminate guarantee anticipates liquidate unsecured promissory notes secured equipment fiscal 2005 interest promissory notes variable based margin bundesbank discount rate notes secured equipment collateralized underlying equipment terms agreements principal interest due monthly original maturity periods range five twelve years notes due dates ranging december 2004 january 2007 contain certain covenant default provisions require company provide financial statements annual basis march 31 2004 company compliance covenants agreements debt amount 2150000 arising acquisition challenge card design gmbh cards gmbh payable managing directors acquired companies payable annually twelvemonth anniversaries purchase agreement subject certain deductions relate purchased assets assumed liabilities outstanding debt obligations mature future fiscal years follows thousands fiscal year total debt 2005 1166 2006 792 2007 640 2008 487 2009 459 total 3544 credit lines banks associated acquired german companies totaled 910000 euros 1119000 march 31 2004 portion notes personally guaranteed managing directors cards gmbh company agreed take actions remove guarantee fiscal 2005 1 second quarter fiscal 2003 first time company received fixed schedule shipments secure governmentfunded vault built company premises revenue 217 million cards located vault recognized upon receipt fixed shipment schedule company received fixed schedule revenues fiscal 2003 second quarter would based shipment cards vault past would reduced revenue approximately 69 million three months ended september 30 2002 item 9 item 8 financial statements supplementary data report independent registered public accounting firm board directors stockholders lasercard corporation audited management’s assessment included accompanying management report internal controls financial reporting included item 9a lasercard corporation subsidiaries maintained effective internal control financial reporting march 31 2006 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission coso criteria company’s management responsible maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting responsibility express opinion management’s assessment opinion effectiveness company’s internal control financial reporting based audit conducted audit accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether effective internal control financial reporting maintained material respects audit included obtaining understanding internal control financial reporting evaluating management’s assessment testing evaluating design operating effectiveness internal control performing procedures considered necessary circumstances believe audit provides reasonable basis opinion company’s internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles company’s internal control financial reporting includes policies procedures 1 pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company 2 provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company 3 provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate opinion management’s assessment company maintained effective internal control financial reporting march 31 2006 fairly stated material respects based coso criteria also opinion company maintained material respects effective internal control financial reporting march 31 2006 based coso criteria also audited accordance standards public company accounting oversight board united states consolidated balance sheets lasercard corporation subsidiaries march 31 2006 2005 related consolidated statements operations stockholders’ equity comprehensive income loss cash flows years ended report dated may 15 2006 expressed unqualified opinion thereon odenberg ullakko muranishi co llp san francisco california may 15 report independent registered public accounting firm board directors stockholders lasercard corporation audited accompanying consolidated balance sheets lasercard corporation subsidiaries march 31 2006 2005 related consolidated statements operations stockholders equity comprehensive income loss cash flows years ended financial statements responsibility companys management responsibility express opinion financial statements based audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audits obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion consolidated financial statements audited us present fairly material respects consolidated financial position lasercard corporation subsidiaries march 31 2006 2005 consolidated results operations cash flows years ended conformity us generally accepted accounting principles also audited accordance standards public company accounting oversight board united states effectiveness lasercard corporation subsidiaries internal control financial reporting march 31 2006 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission report dated may 15 2006 expressed unqualified opinion thereon odenberg ullakko muranishi co llp san francisco california may 15 report independent registered public accounting firm board directors stockholders lasercard corporation audited accompanying consolidated statements operations stockholders’ equity comprehensive income loss cash flows lasercard corporation formerly drexler technology corporation subsidiaries year ended march 31 2004 consolidated financial statements responsibility companys management responsibility express opinion consolidated financial statements based audit conducted audit accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audit provides reasonable basis opinion consolidated financial statements referred present fairly material respects results operations cash flows lasercard corporation subsidiaries year ended march 31 2004 conformity accounting principles generally accepted united states america kpmg llp mountain view california june 9 2004 except note 28 june 14 2006 lasercard corporation subsidiaries consolidated balance sheets march 31 2006 2005 thousands except share per share amounts accompanying notes integral part consolidated financial statements lasercard corporation subsidiaries consolidated statements operations fiscal years ended march 31 2006 2005 2004 thousands except per share amounts accompanying notes integral part consolidated financial statements lasercard corporation subsidiaries notes consolidated financial statements 1 organization operations lasercard corporation delaware corporation wholly owned subsidiaries lasercard corporation california corporation challenge card design plastikkarten gmbh collectively “company” develop manufacture integrate lasercardò optical memory cards optical card drives peripherals specialty cards printers challenge card design plastikkarten gmbh cards gmbh acquired lasercard corporation march 31 2004 cards gmbh merged challenge card design plastikkarten gmbh “ccd” fiscal year 2006 companys customers optical memory card related products mainly valueadded reseller var companies worldwide develop commercial applications lasercard products target markets products include government commercial applications portable recordable secure identification cards unitaryrecord cards current applications include united states permanent resident card “green card” laser visa border crossing cards us military cargo manifests canadian permanent resident cards italian national id cards biometric ids walletcard applications challenge card design plastikkarten gmbh supplies advancedtechnology cards various applications card printers systems integration gatekeeping ticketing company subject certain risks including limited competition substitute products larger companies dependence certain suppliers customers 2 summary significant accounting policies 1 principles consolidation basis presentation accompanying consolidated financial statements prepared accrual basis accounting accordance u generally accepted accounting principles consolidated financial statements include accounts lasercard corporation wholly owned subsidiaries significant intercompany accounts transactions eliminated consolidation 2 use estimates preparation consolidated financial statements conformity u generally accepted accounting principles requires management make estimates assumptions affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenues expenses reporting period actual results could differ estimates 3 fiscal period purposes presentation company labels annual accounting period end march 31 quarterly accounting period ends june 30 september 30 december 31 company fact operates reports based quarterly periods ending friday closest month end fiscal year 2006 ended march 31 2006 fiscal year 2005 ended april 1 2005 fiscal year 2004 ended april 2 2004 4 foreign currency transactions functional currency companys foreign subsidiaries generally local currency financial statements subsidiaries translated united states dollars using periodend rates exchange assets liabilities average rates exchange year revenues expenses translation gains losses recorded accumulated comprehensive income component stockholders equity net gains losses resulting foreign exchange transactions included selling general administrative expenses significant periods presented 5 derivative financial instruments company uses shortterm foreign exchange forward contracts mitigate foreign currency risk associated primarily intercompany payables account loan receivables denominated euros german subsidiaries foreign exchange forward contracts designated accounting purposes hedging instruments sfas 133 “accounting derivative instruments hedging activities” amended accordingly gains losses resulting changes fair value forward contract reported selling general administrative expenses gains losses forward contracts generally offset gains losses associated underlying foreign currency denominated intercompany payable account loan receivables march 31 2006 foreign exchange forward contract maturity less 30 days purchase 19 million euros fair value forward contract material march 31 2006 6 concentrations risk financial instruments potentially subject company significant concentrations credit risk consist principally cash equivalents shortterm investments longterm investments accounts receivable company places cash equivalents shortterm longterm investments highcredit quality financial institutions company exposed credit risk event default institutions extent amount recorded consolidated balance sheet march 31 2006 company invested shortterm longterm investments including auction rate securities discount notes us government bonds accounts receivable derived revenue earned customers primarily located united states italy germany company performs ongoing credit evaluations customers’ financial condition generally require collateral company maintains reserves potential credit losses historically losses immaterial 7 major customersone customer accounted 31 revenues fiscal year 2006 31 revenues fiscal year 2005 72 revenues fiscal year 2004 another customer accounted 31 revenues fiscal year 2006 26 revenues fiscal year 2005 22 revenues fiscal year 2004 revenue customers attributable optical memory card optical card drive segments customer accounted 10 revenues periods two customers accounted 48 14 respectively accounts receivable march 31 2006 one customer accounted 27 accounts receivable march 31 2005 8 cash equivalents shortterm investments longterm investments company considers highly liquid investments consisting primarily commercial paper discount notes us government bonds maturities three months less date purchase cash equivalents cash equivalents march 31 2006 march 31 2005 21 million 4 million respectively march 31 2006 2005 company held auction rate securities accounted availableforsale classified shortterm investments fair values auction rate securities based quoted market prices substantially equal carrying costs due frequency reset dates shortterm investments also include investments maturities date purchase three months investments remaining maturities less one year investments maturities date purchase greater one year classified longterm investments management determines appropriate classification debt securities time purchase reevaluates classification investments balance sheet date shortterm investments except auction rate securities recorded fair value longterm investments classified held maturity stated consolidated balance sheet amortized cost investments classified held maturity unrealized gains losses recorded carrying amounts individual held maturity securities reviewed consolidated balance sheet date potential impairment march 31 2006 2005 company determined impairment “other temporary” occurred carrying amounts shortterm longterm investments march 31 thousands company revised amounts previously reported purchases investments proceeds sale investments cash flows investing activities accompanying march 31 2004 consolidated statement cash flows include activity related auction rate securities transactions previously company presented auction rate note securities transaction activity cash flows investing activities net basis 9 fair value financial instruments carrying amounts company’s financial instruments including cash equivalents shortterm investments accounts receivable accounts payable accrued liabilities approximate fair values due short maturities company longterm investments march 31 2006 10 accounts receivable accounts receivable net reserves doubtful accounts product return reserves 142000 56000 march 31 2006 march 31 2005 respectively maintain allowances doubtful accounts product return reserves anticipated losses resulting inability customers make required payments inprocess product returns generally compute allowances based specifically identifying accounts past due likely collectible interest receivable accrued investments auction rate securities interestbearing securities receivables comprise value added tax refunds miscellaneous items components accounts receivable march 31 thousands 11 inventories stated lower cost market cost determined firstin firstout basis market based lower cost estimated realizable value less cost sell components inventories march 31 thousands company establishes lower cost market reserves aged inventory reserves obsolescence reserves inventory reserves generally recorded management determines item readily saleable inventory reserves relieved related inventory sold scrapped company recorded charges write inventory 194000 fiscal year 2006 381000 fiscal year 2005 97000 fiscal year 2004 12 equipment held resaleequipment held resale primarily consists parts labor costs incurred build equipment contract global investments group direct incremental costs associated purchase construction items deferred revenue recorded components equipment held resale march 31 thousands 13 property equipment net components property equipment march 31 thousands property equipment including tooling recorded cost depreciation provided estimated useful lives four seven years equipment furniture using straightline method twentyfive years building using straightline method leasehold improvements amortized shorter life asset life lease using straightline method depreciation leasehold amortization expense fiscal years 2006 2005 2004 24 million 25 million 19 million respectively maintenance minor repairs replacements expensed incurred disposition retirement property equipment related gains losses charged incomeexpenses 14 goodwill patents intangible assetsgoodwill represents excess purchase price fair value identifiable net tangible intangible assets acquired business combination accordance sfas 142 “goodwill patents intangible assets” company amortize goodwill instead company evaluates goodwill impairment annually fourth quarter whenever events changes circumstances indicate likely impairment loss incurred goodwill assigned reporting units operating segments defined current segment reporting structure march 31 2006 company one reporting unit contains goodwill acquisitionrelated intangible assets goodwill include backlog amortized straightline basis estimated useful life six months brand indefinite useful life legal expenses incurred connection patents capitalized amortized estimated remaining useful lives patents six seven years definite life intangible assets capitalized accumulated amortization march 31 follows thousands weighted average remaining amortization periods march 31 follows patents 33 years 40 years technology transfer 13 years 22 years total 30 years 37 years amortization expense intangible assets fiscal years 2006 2005 2004 139000 172000 201000 respectively estimated amortization expense next five years patents intangible assets definite lives march 31 2006 follows thousands intangible assets indefinite lives march 31 follows thousands 15 assessment impairment tangible intangible longlived assets accordance sfas 144 “accounting impairment disposal longlived assets” company assesses impairment longlived assets whenever events changes circumstances indicate carrying value may recoverable estimated future cash flows expected result use eventual disposition company’s longlived assets subject evaluation include property equipment amortizable intangible assets company’s estimate future undiscounted net cash flows insufficient recover carrying value assets company record impairment loss amount carrying value assets exceeds fair value assets determined recoverable useful lives shorter originally estimated company depreciates amortizes net book value asset newly determined remaining useful lives march 31 2006 fair value longlived assets exceeds book value therefore impairment loss recognized 16 accrued liabilities components accrued liabilities march 31 thousands 17 software development costs development costs incurred research development new software products expensed incurred technological feasibility form working model established date company’s software development completed concurrent establishment technological feasibility accordingly software development costs charged research engineering expenses accompanying consolidated statements operations 18 preproduction design development costscosts incurred preproduction phase contracts expensed incurred included cost goods sold 19 advance payments customers company routinely receives advance payments orders placed customers advance payments recorded liability consolidated balance sheet related orders shipped 20 revenue recognition product sales primarily consist optical card sales optical card readwrite drives sales specialty cards card printers company recognizes revenue product sales following criteria met 1 persuasive evidence arrangement exists 2 delivery occurred 3 fee fixed determinable 4 collectibility reasonably assured company recognizes revenue product sales time shipment shipping terms fob shipping point orders placed pursuant preexisting sales arrangement postshipment obligations warehousing us government subcontract customer acceptance criteria appropriate provision made time shipment estimated warranty costs estimated returns total amount provision charged warranty expense product returns 747000 518000 56000 fiscal years 2006 2005 2004 respectively actual warranty costs returns activity 176000 493000 17000 fiscal years 2006 2005 2004 respectively company’s us government subcontract requires delivery secure vault located company premises shipments made vault shipment schedule provided prime contractor subject revision generally subject cancellation option prime contractor time cards delivered vault title cards transferred government risks ownership transferred well prime contractor invoiced payment due within thirty days contract contain return warranty cancellation provisions pursuant provisions sec staff accounting bulletin 104 “sab 104” revenue recognized delivery vault company fulfilled contractual obligations earnings process complete company receive shipment schedule shipment cards vault revenue deferred recognized upon shipment vault addition revenue recognition future deliveries vault would affected us government cancels shipment schedule result company’s revenues may fluctuate period company continue obtain shipment schedules subcontract shipment schedules cancelled company applies provisions emerging issues task force issue 0021 revenue arrangements multiple deliverables “eitf 0021” revenue arrangements multiple deliverables eitf 0021 provides criteria governing identify whether goods services delivered separately bundled sales arrangement accounted separately deliverables accounted separately meet following criteria delivered items standalone value customer b fair value undelivered items reliably determined c arrangement includes general right return delivery undelivered items probable substantially controlled seller situations deliverables fall within higherlevel literature defined eitf 0021 company applies guidance higherlevel literature deliverables meet criteria combined one deliverables company applies provisions statement position 811 accounting performance constructiontype certain productiontype contracts “sop 811” applicable contracts revenues time materials contracts recognized services rendered contract labor rates plus material direct costs incurred revenues fixed price contracts recognized percentage completion method based ratio total costs incurred date compared estimated total costs complete contract estimates costs complete include material direct labor overhead allowable general administrative expenses circumstances estimates costs complete project cannot reasonably estimated assured loss incurred percentageofcompletion method based zero profit margin rather completedcontract method used precise estimates made full amount estimated loss charged operations period determined loss realized performance contract company recognized approximately 77000 127000 revenues fiscal year ended march 31 2006 march 31 2005 respectively based zero profit margin related longterm contract company revenues generated type contract year ended march 31 2004 beginning fourth quarter fiscal year 2006 company entered contract middle eastern country provide full system integration optical memory cards use country’s personalized national id program includes optical memory cards hardware software contract calls multiple deliverables installation certain client acceptance criteria defined agreement applying guidance within eitf 0021 company determined deliverables accounted separate units rather bundled arrangement fair value undelivered items cannot readily determined therefore revenue recognition new contract associated contract costs deferred predominant undelivered element overview card personalization delivered accepted commencing installation client acceptance card personalization system total contract revenue recognized ratably based actual cards personalized accepted march 31 2006 revenue recognized contract costs incurred contract 1 million recorded deferred contract costs current assets accompanying consolidated balance sheet components deferred contract costs consist following thousands company applies provisions statement position “sop” 972 “software revenue recognition” amended statement position 989 “modification sop 972 software revenue recognition respect certain transactions” transactions involving sale software products revenue license company’s software products recognized persuasive evidence arrangement exists software product delivered fee fixed determinable collectibility probable applicable upon acceptance criteria specified upon expiration acceptance period software revenue immaterial fiscal years 2006 2005 2004 license revenue may consist upfront license fees longterm royalty payments recognized revenue earned license costs revenues recorded fiscal years 2006 2005 2004 company entered agreement global investments group gig effective april 3 2004 manufacturing optical memory cards accordance eitf 0021 card manufacturing license sale installation equipment training ongoing support accounted one unit accounting since company unable determine evidence fair value undelivered items accordingly revenues arrangement deferred recognized based predominant undelivered item ongoing annual support manufacturing equipment remainder 20year license period pursuant ftb 901 “accounting separately priced extended warranty product maintenance contracts” revenue recognized ratably remaining term agreement beginning equipment accepted training completed date dependent gig providing facility slovenia company also defers direct incremental expenses associated building card manufacturing equipment delivery services revenue deferred company recognize expenses company recognizes related revenue company sold license effective april 3 2004 global investments group gig based auckland new zealand card manufacturing slovenia agreement provides payments company 14 million 20year license fiveyear training support package followed 15 million paid 1 million annually ongoing support additional 15 years additionally company sell approximately 12 million worth required manufacturing equipment installation support new facility built gig provide targeted initial manufacturing capacity million optical cards annually march 31 2006 company acquired 59 million equipment classified equipment held resale consolidated balance sheet company received 205 million payments called agreements consisting partial payment equipment training 65 million 14 million license fee support another approximately 59 million overdue gig recently committing complete payment end june company begun investigate alternative courses action gig fail make payment 205 million company received 185 million recorded advance payments customer 2 million licensing fee recorded deferred revenue classified longterm liabilities within consolidated balance sheets addition 41 million discussed gig pay company royalties card produced license territories covered license include european union eastern european regions gig exclusive marketing rights certain territories performance goals maintain rights company assign person site license term assist quality security operational procedures mutual goal facility cards made facility conform company’s standards company also retains rights utilize 20 new facility capacity backup capacity buffer augment card manufacturing facilities mountain view california german subsidiary granting license gig establishes potential second source supplier optical memory cards existing prospective customers may request multiple sources cards agreement contains various elements including card manufacturing license sale installation equipment training ongoing support contingent payments sale materials royalty payments cards manufactured accordance eitf 0021 card manufacturing license sale installation equipment training ongoing support accounted one unit accounting since company unable determine evidence fair value undelivered items accordingly revenues arrangement deferred recognized based predominant undelivered item ongoing annual support manufacturing equipment remainder 20year license period beginning equipment accepted training completed date dependent gig providing facility slovenia pursuant ftb 901 “accounting separately priced extended warranty product maintenance contracts” revenue recognized ratably remaining term agreement company also defers direct incremental expenses associated building card manufacturing equipment delivery services revenue deferred company recognize expenses company recognizes related revenue 21 research engineering expenses costs related research design development products charged research engineering expense incurred research engineering costs include salaries contractor fees building utility costs depreciation 22 shipping handling costs shipping handling costs recorded cost product sales 23 advertising costs advertising costs consist development placement costs company’s advertising campaigns charged expense incurred advertising expense approximately 183000 fiscal year 2006 189000 fiscal year 2005 advertising costs incurred fiscal year 2004 24 stockbased compensation company accounts stockbased compensation plans using intrinsic value method prescribed accounting principles board opinion 25 “accounting stock issued employees” compensation cost stock options measured excess quoted market price company’s stock date grant amount employee must pay acquire stock sfas 123 “accounting stockbased compensation” established accounting disclosure requirements using fairvalue based method accounting stockbased employee compensation plans following table illustrates effect net income loss income loss per share company applied fair value recognition provisions sfas 123 thousands except per share amounts company computed fair value option grant date grant using blackscholes option valuation model following assumptions 25 comprehensive income loss sfas 130 “reporting comprehensive income” comprehensive income loss defined changes equity enterprise except resulting stockholders’ transactions fiscal years ended march 31 2006 2005 2004 comprehensive income loss follows thousands 26 recent accounting pronouncements june 1 2005 financial accounting standards board fasb issued statement 154 “accounting changes error corrections” fas 154 replacement apb 20 “accounting changes fasb statement 3 reporting accounting changes interim financial statements” fas 154 applies voluntary changes accounting principles changes requirements accounting reporting change accounting principle statement establishes unless impracticable retrospective application required method reporting change accounting principle absence explicit transition requirements specific newly adopted accounting principle also requires reporting error correction involves adjustments previously issued financial statements similar generally applicable reporting accounting change retrospectively fas 154 effective accounting changes corrections errors made fiscal years beginning december 15 2005 company expect adoption fas 154 material impact results operations financial condition march 2005 financial accounting standards board “fasb” issued interpretation 47 “accounting conditional asset retirement obligations” interpretation 47 clarifies entity must record liability “conditional” asset retirement obligation fair value obligation reasonably estimated interpretation 47 also clarifies entity would sufficient information reasonably estimate fair value asset retirement obligation interpretation 47 effective later end fiscal year ending december 15 2005 company’s adoption fourth quarter fiscal year 2006 material impact results operations financial condition october 22 2004 american jobs creation act 2004 “act” signed law act contains numerous changes us tax law temporary permanent nature including potential tax deduction respect certain qualified domestic manufacturing activities changes carryback carryforward utilization periods foreign tax credits dividend received deduction respect accumulated income earned abroad new law could potentially impact company’s effective tax rate future taxable income cash tax planning strategies amongst affects december 2004 fasb issued staff position 1091 “fsp 1091” “application fasb statement 109 accounting income taxes tax deduction qualified production activities provided american jobs creation act 2004” staff position 1092 “fsp 1092” “accounting disclosure guidance foreign earnings repatriation provision within american jobs creation act 2004” fsp 1091 clarifies manufacturer’s tax deduction provided act accounted special deduction accordance sfas tax rate reduction fsp 1092 provides accounting disclosure guidance repatriation certain foreign earnings us taxpayer provided act currently material foreign earnings consider accordingly company adjusted income tax expense deferred tax liability reflect tax impact repatriation nonus earnings may make december 2004 fasb issued sfas 123r “sharebased payment” revise sfas 123 “accounting stockbased compensation” supersede apb opinion 25 “accounting stock issued employees” related implementation guidance requires companies recognize compensation costs related sharebased payment transactions financial statements costs measured based fair value equity liability instruments issued company apply sfas 123r first quarter fiscal year ending march 31 2007 based options outstanding march 31 2006 company expects adoption sfas 123r result pretax expense approximately 2 million fiscal year 2007 amount vary depending number option shares granted price stock time option grant variables used blackscholes model december 2004 fasb issued sfas 153 “exchanges nonmonetary assets amendment apb opinion 29” eliminates exception nonmonetary exchanges similar productive assets replaces general exception exchanges nonmonetary assets commercial substance nonmonetary exchange commercial substance future cash flows entity expected change significantly result exchange sfas 153 effective nonmonetary asset exchanges occurring fiscal periods beginning june 15 2005 company currently evaluating sfas 153 expect adoption material impact results operations financial condition november 2004 fasb issued sfas 151 “inventory costs amendment arb 43 chapter 4” clarifies accounting abnormal amounts idle facility expense freight handling costs wasted material spoilage recognized current period charges addition sfas 151 requires allocation fixed production overheads costs conversion based normal capacity production facilities sfas 151 effective inventory costs incurred fiscal years beginning june 15 2005 company continues evaluate impact sfas 151 overall result operations financial condition management expects material impact new pronouncement results operations financial condition 27 indemnification company’s major sales agreements provide remedies customers defense settlement payment judgment intellectual property claims related use company’s products company also indemnified various vendors certain potential claims company also entered indemnification agreements directors officers company’s bylaws contain similar indemnification obligations date claims made indemnifications result associated estimated fair value liability material company required indemnify investors companys december 2003 financing third party claim based upon untrue statement alleged untrue statement material fact contained registration statement covering resale shares purchased investors failure company fulfill undertaking included registration statement 3 net income loss per share basic net income loss per share computed dividing net income loss weighted average number shares common stock outstanding diluted net income loss per share computed dividing net income loss weighted average number shares common stock common stock equivalents outstanding common stock equivalents consist stock options warrants using treasury stock method reconciliation denominators basic diluted net income loss per share computation fiscal years ended march 31 2006 2005 2004 shown following table thousands except per share data stock options exercise price greater average market value profitable periods excluded calculation diluted net income per share effect would antidilutive therefore stock options purchase 1554000 shares excluded calculation diluted net income per share fiscal year ended march 31 2006 effect common stock equivalents would antidilutive since company incurred loss fiscal years ended march 31 2005 2004 stock options warrants excluded calculation diluted net loss per share fiscal years 4 segments segment reporting company operates three reportable segments 1 optical memory cards 2 optical memory card drives including readwrite drives maintenance related accessories “optical card drives” 3 specialty cards card printers segments determined based information used chief operating decision maker optical memory cards optical card drives reportable segments strategic business units offer unrelated products services rather reportable segments utilize compatible technology marketed jointly specialty cards printers acquired march 31 2004 strategic business unit offering times unrelated products times related products reportable segments accounting policies used derive reportable segment results described summary significant accounting policies resources allocated optical memory card optical card drive segments manner optimizes optical memory card revenues specialty card printers segment manner optimizes consolidated income determined chief operating decision maker segment revenues comprised sales external customers segment gross profit loss includes segment revenues less related cost sales accounts receivable cash deferred income taxes prepaid expenses fixed assets inventory separately reported segment chief operating decision maker therefore amount assets segment meaningful intersegment sales transfers company’s longlived assets attributable united states except 55 million fiscal year 2006 56 million fiscal year 2005 attributable operations germany companys chief operating decision maker currently companys chief executive officer chief operating decision maker reviews financial information presented consolidated basis accompanied disaggregated information revenues gross profit loss segment table presents information optical memory cards optical card drives specialty cards card printers fiscal years ended march 31 2006 2005 2004 thousands following reconciliation segment results amounts included company’s consolidated financial statements fiscal years ended march 31 2006 2005 2004 thousands depreciation amortization expense represents amounts charged selling general administrative research engineering sales geographic region sales geographic region generally determined based upon shipto address invoice revenues geographic region follows thousands fiscal years 2006 2005 sales customers outside united states amount 185 million 109 million respectively denominated us dollars 104 million 97 million respectively denominated euros fiscal year 2004 sales customers outside united states denominated us dollars 5 relatedparty transactions since october 21 2001 company contracted wexler walker public policy associates unit hill knowlton inc “wexler” lobbyists behalf company chairman wexler robert walker brother walter f walker member company’s board directors october 2002 agreement extended period october 1 2002 september terminated upon seven days’ notice extended agreement provides monthly retainer 10000 purchase order dated november 12 2004 valid april 29 2005 terms conditions previous agreement addition another purchase order dated february 25 total 35000 cover consulting services period january 2005 april 2005 purchase order extended may 2005 july 2006 aggregate amount 125000 company paid wexler 142082 fiscal year 2006 206000 fiscal year 2005 151000 fiscal year 2004 march 31 2006 10012 due wexler included part current liabilities accompanying consolidated balance sheets 6 common stock equity incentive compensation plan “2004 plan” october 2004 company’s shareholders approved 2004 equity incentive compensation plan replaced existing 1994 stock option plan provides grant restricted share awards options stock units stock appreciation rights may require satisfaction performance objectives respect shares common stock directors officers employees consultants company subsidiaries 2004 plan administered compensation committee board directors complete discretion select participants establish terms conditions award subject provisions 2004 plan options granted 2004 plan may “incentive stock options” defined section 422 internal revenue code 1986 amended code nonqualified options total 2365432 shares common stock reserved issuance 2004 plan march 31 2006 award granted 2004 plan forfeited expires reason shares subject award available additional awards outstanding option 1994 plan expires terminates reason without exercised full unpurchased shares subject option available additional awards 2004 plan 2004 plan exercise price incentive stock options may less 100 fair market value common stock date grant 110 fair market value grant employee owns 10 total combined voting power classes company’s capital stock code currently limits 100000 aggregate value common stock incentive stock options may become exercisable calendar year 2004 plan option plan adopted company nonstatutory stock options may granted 2004 plan exercise price less 100 fair market value common stock date grant limitation amount common stock nonstatutory grants may first become exercisable calendar year repricing stock option stock appreciation right permitted without shareholder approval subject limitations contained 2004 plan committee sets terms option grant options exercisable date termination employment immediately terminate time options granted 2004 plan may exercised 10 years date grant five years date grant incentive stock option employee owns 10 total combined voting power classes company’s capital stock board directors specifies term options vesting schedule exercise options granted consultants fiscal years 2006 2005 2004 march 31 2006 421759 shares available future issuance 2004 plan addition march 31 2006 120000 shares stock reserved outside company’s stock option plan stock options issued nasdaq rule 4350i1a connection ccdcm acquisition inducement join company six key employees acquired companies granted nonstatutory stock options march 31 2004 term five years purchase 20000 common shares following table lists stock option activity march 31 2003 march 31 2006 following table summarizes information stock options outstanding march 31 2006 employee stock purchase plan company employee stock purchase plan stock purchase plan 61517 shares reserved march 31 2006 future purchases employees stock purchase plan eligible employees may designate 2 6 compensation withheld purchase shares common stock 67 trailing average price differential fair market value average price shares sold stock purchase plan charged operations compensation expense taxed employee income stock purchase plan employees purchased 25961 shares fiscal year 2006 26730 shares fiscal year 2005 20253 shares fiscal year 2004 weighted average purchase price per share 653 fiscal year 2006 589 fiscal year 2005 938 fiscal year 2004 weighted average market price per share shares purchased 1126 fiscal year 2006 913 fiscal year 2005 1419 fiscal year 2004 employee benefit plan 401k plan 401k plan provides participating employees opportunity accumulate funds retirement company’s contribution plan exceed lesser 25 maximum employee contribution allowed irs b 25 employee’s contribution c 15 employee’s eligible earnings company contributed 73000 59000 28000 fiscal years 2006 2005 2004 respectively 7 commitments contingencies lease company occupies buildings various operating leases rent expense relating buildings approximately 15 million fiscal year 2006 approximately 15 million fiscal year 2005 approximately 11 million fiscal year 2004 march 31 2006 future minimum rental payments relating leases thousands mutual agreement lessor november 1 2003 lease 27000squarefoot building modified extended october 2013 original lease remaining term may 2006 lease payments totaling 21 million modified lease calls payments totaling 13 million period rent expense recorded average rent payments term lease time renegotiated lease signed 139000 deferred rent associated original lease amount amortized straightline basis tenyear term modified lease purchase commitment company purchases services software manufacturing equipment facilities variety vendors march 31 2006 company noncancelable purchase orders 17 million raw materials delivered 12 months product warranties company estimates warranty costs based historical warranty claim experience applies estimate revenue stream products warranty company’s product warranty claims settled returns defective products shipment replacement products warranty returns included allowance sales returns based historical returns prior fiscal year 2006 warranty returns immaterial fiscal years 2005 2004 current fiscal year company reclassified warranty returns part accrued liabilities warranty reserve reviewed quarterly verify properly reflects remaining obligations based anticipated returns balance obligation period adjustments made actual return claim experience differs estimates march 31 2006 2005 warranty reserves 648000 132000 respectively included part accrued liabilities consolidated balance sheets normal course business company subject various claims assertions opinion management ultimate disposition claims assertions material adverse impact financial position company 8 income taxes provision income taxes fiscal year 2006 2005 2004 consists following thousands company’s effective tax rate differs statutory rate follows major components net deferred tax assetliability march 31 follows thousands fiscal year 2004 acquisition challenge card design gmbh resulted deferred tax liability 568000 march 31 2006 641000 march 31 2005 part process preparing consolidated financial statements company required estimate income taxes jurisdictions operates process involves estimating actual current tax exposure together assessing temporary differences resulting differing treatment items deferred revenue tax accounting purposes differences result deferred tax assets liabilities included within consolidated balance sheets company must assess likelihood deferred tax assets recovered future taxable income extent management believes recovery likely company must establish valuation allowance extent valuation allowance established increased period company includes expense within tax provision statements operations significant management judgment required determining provision income taxes particular valuation allowance recorded company’s deferred tax assets company determined fiscal year 2004 due company’s recent cumulative tax loss history previous threeyear period income statement loss history previous five quarters difficulty forecasting timing future revenue evidenced deviations achieved revenues expected revenues previous quarters taking account newness certain customer relationships necessary increase valuation allowance sfas 109 full amount deferred tax asset result company determined full valuation allowance required net deferred tax assets fiscal year 2004 increased existing allowance 24 million 148 million addition company increased valuation allowance deferred tax asset amount 09 million fiscal year 2006 37 million fiscal year 2005 companys federal net operating loss carryforwards march 31 2006 221 million expire various dates 2008 2024 utilized tax effect amount reflected federal net operating loss carryforwards totaling 75 million amount 63 million representing tax benefits relating stockbased compensation programs credited stockholders’ equity extent company concludes likely amount realized federal tax credits amount 539000 alternative minimum taxes expiration federal tax credits amount 238000 expire various dates 2013 2025 utilized california tax credits amount 26000 expiration date companys methodology determining realizability deferred tax assets involves estimates future taxable income estimated impact future stock option deductions expiration dates amounts net operating loss carryforwards estimates based nearterm projections assumptions management believes reasonable recent prior periods second quarter fiscal year 2004 company estimating future taxable income core business assumed ongoing business us government subcontract permanent resident cards green cards laser visa border crossing cards canadian government’s permanent resident card program well estimated operating expenses support level business offset estimated impact future stock option deductions starting third quarter fiscal year 2004 company estimated future taxable income based upon expectations current next three years past core business proven stable company believed past core business expected represent increasingly smaller part business company expected revenues us programs stabilize revenue levels lower expected past company expects new foreign business fluctuated considerably quarter comprise larger portion core business company difficulty past expects continued difficulty future reliably forecasting foreign business revenue received combination anticipated threeyear cumulative tax loss period ended march 31 2004 resulted company basing estimates future income purposes booked orders circumstances change company may future able revert back estimating future revenue based upon forecast revenues rather using booked orders although company cannot say occur concluding valuation allowance required end fiscal year 2004 still required end fiscal year 2006 company considered positive negative evidence regarding ability generate sufficient future taxable income realize deferred tax assets positive evidence included achieved profitability financial reporting purposes fiscal year 1999 fiscal year 2003 positive evidence included 1 level sales business experienced contract canadian government’s permanent resident card program 2 prospects italy middle eastern country national identification card programs 3 heightened interest border security initiatives following events september 11 2001 4 expected future orders negative evidence included 1 company’s reliance limited number customers substantial portion business 2 uncertainty timing anticipated orders customers 3 impact future stock option deductions taxable income 4 recent experience net operating loss carryforwards expiring unused fiscal year 2004 5 financial statement loss fourth quarter fiscal year 2003 first two quarters fiscal year 2006 6 prior three years’ cumulative tax net operating losses weighing positive negative evidence company considered “more likely not” criteria pursuant sfas 109 well following risks “dependence vars limited number customers” “lengthy sales cycles” “technological change” “competition” described company concluded negative evidence outweighed positive evidence result increased valuation allowance equal full amount deferred tax asset march 31 2005 march 31 2006 event actual results differ estimates adjusted future periods company may need adjust amount valuation allowance based future determinations whether likely deferred tax assets realized decrease valuation allowance would recorded income tax benefit reduction income tax expense credit stockholders’ equity company’s net operating losses available reduce future taxable income expire various dates fiscal year 2008 fiscal year 2024 extent company generates taxable income jurisdictions deferred tax asset relates net operating losses offset full valuation allowance utilization net operating losses would result reversal related valuation allowance 9 issuance stock options warrants december 2003 company issued sold 791172 shares common stock options purchase 122292 shares common stock warrants purchase 174057 shares common stock aggregate purchase price 101 million private placement company received net proceeds 94 million net fees expenses purchase price common stock 1276 per share 15 discount fiveday average price december 23 2003 options exercise price 1651 per share ninemonth life warrants exercise price 1726 per share life five years options warrants valued 245000 984000 respectively based blackscholes calculation december 23 2003 pursuant provisions eitf issue 0019“accounting derivative financial instruments indexed potentially settled companys stock” eitf 0019 recorded values shortterm longterm liabilities balance net proceeds accounted additional paidin capital eitf 0019 company markstomarket fair value options warrants end accounting period december 31 2003 resulted options warrants valued 195000 916000 respectively decrease valuation options warrants december 23 2003 december 31 2003 118000 recorded income accompanying consolidated statements operations resulted decrease company’s stock price february 6 2004 company investors entered amendment original agreement resulted reclassification options warrants equity amendment clarified options warrants granted financing may exercised time registration statement covering resale underlying shares effective available instance company would deliver investors shares common stock whose resale currently registered effective date amendment option warrant value reclassified equity additional paidin capital result increase value options warrants december 31 2003 amendment date due increases company’s stock price company recognized expense 211000 included expense consolidated statements operations fourth quarter fiscal year 2004 company subject certain indemnity provisions included stock purchase agreement entered part financing connection registration resale common stock issued issuable financing morgan keegan company inc acted companys placement agent transaction granted warrants purchase 15824 shares common stock option purchase 122292 shares common stock expired september 30 2004 10 stock repurchases august 2 2004 company’s board directors approved 350000 share repurchase program pursuant company could make open market privately negotiated repurchase transactions aggregate 3 million fourmonth period beginning august 2 2004 ending december 1 2004 fiscal year 2005 company repurchased 91630 shares common stock open market amounting 655000 average price 715 per share 11 acquisition march 31 2004 company completed acquisition 100 two related german card companies challenge card design plastikkarten gmbh rastede germany cards gmbh ratingen germany collectively acquired german entities including sales operations usa korea company purchased shares acquired german entities five shareholders purchased intangible assets usa sales operation partnership comprised shareholders acquisition transaction company agreed assume approximately 05 million euros debt pay approximately 475 million euros cash consisting approximately 225 million euros payable closing remaining approximately 25 million euros payable shareholders acquired german entities five equal annual installments business certain assets acquisition agreement specified purchase price adjusted based upon assets purchased additional liabilities assumed resulted reduction purchase price approximately 04 million euros march 31 2004 purchase price determined negotiation company shareholders taking account matters value tangible assets going concern value business operations acquired german entities four shareholders entered new employment agreements acquired german entities fifth shareholder resident us entered employment agreement registrant addition salaries employment agreements provide commission based upon results operations acquired german entities could much 375 million euros next four years company used portion available cash fund acquisition shareholders previous material relationship company affiliate subsidiaries although company substantial business acquired german entities recent years one acquired german entities owns plant rastede germany together associated equipment used manufacture plastic cards featuring contactless ic chip technology high resolution printing company intends continue use facility equipment produce cards well enhance facility produce lasercard® optical memory cards january 6 2005 22 million 16 million euros payment made former shareholders currently managing directors acquired german entities settle large part loan related acquisition march 31 2005 outstanding balance 203000 150000 euros maintained company case known contingent claim unknown claims develop actual claims payment approved december 2 2004 company’s board directors primary reasons acquisition provide company 1 strong card manufacturing base serve european middle eastern african asian markets 2 additional production capacity 20 million advancedtechnology cards per year 3 expanded product line namely contact ic chip cards contactless rfid cards magnetic stripe cards color thermal printers printing cards 4 future cooperation developing marketing advanced secure optical card solutions goodwill derived purchase price greater value tangible intangible assets acquired less liabilities assumed factors contributed purchase price resulted goodwill 1 assembled workforce particular managing directors acquired companies 2 proximity managing directors target customer base 3 ability managing directors use skills specific knowhow enhance companys product offerings advanced technology card marketplace goodwill resulting purchase price allocation amount 33 million recorded result acquisition goodwill expected deductible income tax purposes intangible asset backlog amount 29000 recorded result acquisition amortized backlog shipped period six months amortizable intangible assets recorded results operations acquired entities acquisition date fiscal year 2004 yearend included companys 2004 operating results acquisition occurred end companys fiscal year acquired entities results period material cost acquired entities totaled 53 million comprised 31 million paid upfront plus future payments specified purchase agreement net present value 22 million total purchase price 53 million allocated net assets acquired based estimated fair values follows thousands current assets 4577 property equipment 2094 goodwill intangibles 3840 total assets acquired 10511 current liabilities 4891 longterm debt 369 total liabilities assumed 5260 net assets acquired 5251 cash paid 3101 future payments accrued 2150 total purchase price 5251 proforma financial information proforma financial information impact acquisition company’s consolidated results operations presented acquired german entities foreign entities prepare financial statements accordance united states generally accepted accounting principles us gaap reported revenues excluding sales company fiscal year 2004 entities local gaap basis 104 million unaudited local gaap basis management believes materially differ us gaap results operations acquired entities would material company’s consolidated results operations lasercard corporation subsidiaries selected quarterly financial data unaudited thousands except per share amounts item 9 item 8 consolidated financial statements supplementary data report independent public accountants board directors stockholders drexler technology corporation audited accompanying consolidated balance sheets drexler technology corporation delaware corporation subsidiaries march 31 2000 2001 related consolidated statements income stockholders equity cash flows three years period ended march 31 2001 consolidated financial statements schedule referred responsibility companys management responsibility express opinion consolidated financial statements schedule based audits conducted audits accordance auditing standards generally accepted united states standards require plan perform audit obtain reasonable assurance whether consolidated financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures consolidated financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall consolidated financial statement presentation believe audits provide reasonable basis opinion consolidated financial statements referred present fairly material respects financial position drexler technology corporation subsidiaries march 31 2000 2001 results operations cash flows three years period ended march 31 2001 conformity accounting principles generally accepted united states audits made purpose forming opinion basic financial statements taken whole schedule ii included form 10k responsibility companys management presented purposes complying securities exchange commissions rules presented purposes additional analysis required part basic financial statements information subjected auditing procedures applied audits basic financial statements opinion fairly stated material respects relation basic financial statements taken whole sarthur andersen llp arthur andersen llp san jose california april 25 2001 drexler technology corporation subsidiaries consolidated balance sheets march 31 2000 2001 thousands except share per share amounts accompanying notes integral part consolidated financial statements drexler technology corporation subsidiaries consolidated statements income fiscal years ended march 31 1999 2000 2001 thousands accompanying notes integral part consolidated financial statements drexler technology corporation subsidiaries consolidated statements stockholders equity fiscal years ended march 31 1999 2000 2001 thousands except per share amounts accompanying notes integral part consolidated financial statements drexler technology corporation subsidiaries consolidated statements cash flows fiscal years ended march 31 1999 2000 2001 thousands accompanying notes integral part consolidated financial statements drexler technology corporation subsidiaries notes consolidated financial statements march 31 2001 1 organization operations drexler technology corporation wholly owned subsidiary lasercard systems corporation company develop manufacture market optical data storage products used personal computers information recording storage retrieval companys customers mainly valueadded reseller var companies united states countries develop commercial applications lasercardr products target markets products include consumer business government applications portable recordable secure unitary record cards applications include us immigration green cards bordercrossing laser visa cards cargo manifests access cards healthcare record cards identification cards company subject certain risks including limited competition substitute products larger companies dependence certain suppliers customers 2 summary significant accounting policies principles consolidation basis presentation consolidated financial statements include accounts drexler technology corporation wholly owned subsidiaries significant intercompany accounts transac tions eliminated consolidation preparation financial statements conformity accounting principles generally accepted united states requires management make estimates assumptions affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenues expenses reporting period actual results could differ estimates fiscal period purposes presentation company indicated accounting period ending march 31 interim quarterly periods ending corresponding month end company fact operates reports quarterly periods ending friday closest month end cash equivalents shortterm investments company considers highly liquid investments consisting primarily commercial paper original maturities three months less cash equivalents investments original maturities three months less one year classified shortterm investments company invests shortterm investments consist primarily commercial paper management determines appropriate classification debt equity securities time purchase reevaluates classification investments balance sheet date march 31 2001 company 5387000 classified shortterm investments marketable securities classified heldtomaturity consisted commercial paper notes receivable march 2000 company held promissory note amount 150000 securing obligation due company one party note accrued interest 5 per annum payment received note matured fiscal 2001 inventories stated lower cost market cost determined firstin firstout basis market based lower replacement cost estimated realizable value components inventories march 31 thousands 2000 2001 raw materials 2851 2954 workinprocess 658 552 finished goods 745 1267 systems components held resale 165 108 4419 4881 property equipment components property equipment march 31 thousands 2000 2001 equipment furniture 15024 16823 leasehold improvements 2098 2487 17122 19310 depreciation provided estimated useful lives four seven years equipment furniture using doubledeclining balance straightline methods leasehold improvements amortized shorter life asset life lease using straightline method patent costs legal expenses incurred connection patents capitalized amortized estimated remaining useful lives patents six seventeen years costs incurred connection intangibles amortized using straightline method three years gross patent expenditures capitalized accumulated amortization march 31 follows thousands 2000 2001 gross patent intangible expenditures 4302 3229 accumulated amortization 2178 2351 2124 878 company assesses need record impairment losses longlived assets used operations indicators impairment present ongoing basis company reviews value period amortization depreciation longlived assets date company needed record impairment losses longlived assets software development costs accordance statement financial accounting standards sfas 86 accounting costs computer software sold leased otherwise marketed development costs incurred research development new software products expensed incurred technological feasibility form working model established date companys software development completed concurrent establishment technological feasibility accordingly software development costs charged research development expense accompanying statements income advance payments customers company customarily receives advance payments orders placed customers advance payments recorded liability balance sheet related orders shipped revenue recognition product sales primarily consist card sales readwrite drives company gen erally recognizes revenue product sales time shipment appropriate provision made time estimated warranty costs estimated returns december 1999 securities exchange commission issued staff accounting bulletin sab 101 revenue recognition financial statements sab 101 provides guidance applying generally accepted accounting principles revenue recognition issues financial statements company adopted sab 101 required fourth quarter fiscal 2001 material impact companys financial statements result license revenue consists frontend license fees longterm royalty payments recognized revenue realized cost license revenue material included selling general administrative expenses fiscal 1999 license revenue included 200000 agreement provide technical information 500000 party complete purchase nonexclusive license optical memory card distribution grants right purchase cards favorable pricing fiscal 2000 license revenue included 119000 realized sale license assemble optical card readerwriters using parts kits supplied company fiscal 2001 license revenue included 712000 realized sale license assemble optical card readwrite drives 1465000 realized sale patent license see note 6 stockbased compensation effective april 1 1996 company adopted disclosure provisions sfas 123 accounting stockbased compensation accordance provisions sfas 123 company applies accounting principles board opinion apb 25 related interpretations accounting stock option plan note 5 consolidated financial statements contains summary pro forma effects reported net income earnings per share fiscal 1999 2000 2001 based fair value options date grant prescribed sfas 123 comprehensive income loss sfas 130 reporting comprehensive income comprehensive income loss defined changes equity enterprise except resulting stockholders transactions company adopted sfas 130 quarter ended june 30 1998 fiscal years ended march 31 1999 2000 2001 comprehensive income equaled net income segment reporting accordance sfas 131 disclosures segments enterprise related information company required disclose information operating segments company adopted sfas 131 fiscal year ended march 31 1999 company operates one industry segmentthe development manufacture sale optical data products used information storage retrieval recent accounting pronouncements june 1998 financial accounting standards board fasb issued sfas 133 accounting derivative instruments hedging activities establishes accounting reporting standards derivative instruments hedging activities sfas 133 recently amended effective fiscal years beginning june 15 2000 company currently hold derivative instruments engage hedging activities therefore adoption sfas 133 expected impact companys consolidated financial position results operations march 2000 fasb issued financial standards board interpretation fin 44 accounting certain transactions involving stock compensationan interpretation apb opinion 25 effective july 1 2000 fin 44 addresses application apb 25 clarify among issues definition employee purposes applying apb 25 b criteria determining whether plan qualifies noncompensatory plan c accounting consequence various modifications terms previously fixed stock option award accounting exchange stock compensation awards business combination company adopted fin 44 quarter ended september 30 2000 adoption material impact consolidated financial position results operations reclassifications certain reclassifications made prior year financial data conform current year presentation 3 earnings per share company computes earnings per share accordance sfas 128 earnings per share sfas 128 requires companies compute net income per share two different methods basic diluted present per share data periods statement income presented basic earnings per share computed dividing net income weighted average number shares common stock outstanding diluted earnings per share computed dividing net income weighted average number shares common stock common stock equivalents outstanding common stock equivalents consist stock options using treasury stock method reconciliation numerators denominators basic diluted earnings per share computation fiscal years 1999 2000 2001 shown thousands except per share data years ended march 31 1999 2000 2001 stock options purchase 561373 1196841 321400 shares respectively excluded dilutive effect stock options antidilutive 4 major customers export sales two customers accounted 10 revenues fiscal 1999 2000 2001 follows fiscal year 1999 2000 2001 customer 72 66 55 customer b 21 30 26 three customers comprised 96 accounts receivable march 31 1999 two united states customers comprised 98 accounts receivable march 31 2000 96 accounts receivable march 31 2001 revenues region follows thousands fiscal year 1999 2000 2001 united states 14825 16686 17111 europe 803 223 1408 asia 168 128 2299 rest world 54 55 59 15850 17092 20877 5 common stock option plan company one stock option plan stock option plan 2304320 shares common stock reserved march 31 2001 consisting 2028100 shares stock options already granted 276220 shares stock options yet granted company accounts plan apb 25 accordingly compensation expense stock option grants stock option plan recognized consolidated financial statements provisions apb 25 sfas 123 requires disclosure pro forma net income per share company adopted fair value method beginning fiscal 1996 fair value method compensation cost measured grant date based value award recognized service period sfas 123 fair value stockbased awards calculated use option pricing models require subjective assumptions including future stock price volatility estimated term calculations made using blackscholes option pricing model assumptions results shown following table fiscal year 1999 2000 2001 riskfree interest rate 5 6 5 expected volatility 35 50 weighted average fair values option grants 404 422 858 pro forma net income 2382 3575 4664 per share 24 36 45 calculations assume expected option life two ten years fair value option grant estimated date grant companys stock option plan provides stock options may granted employees officers consultants company option prices may less 100 fair market value shares date grant board directors specifies term options vesting schedule exercise options option term cannot exceed ten years except incentive stock options granted principal shareholder cannot exceed five years following table lists stock option plan activity march 31 1998 march 31 2001 following table summarizes information stock options outstanding march 31 2001 employee stock purchase plan company employee stock purchase plan stock purchase plan 115808 shares reserved march 31 2001 future purchases employees stock purchase plan eligible employees may designate 2 6 compensation withheld purchase shares common stock 67 trailing average price differential fair market value average price shares sold stock purchase plan charged company operations compensation expense taxed employee income stock purchase plan employees purchased 12810 shares fiscal 1999 16857 fiscal 2000 12964 fiscal 2001 average purchase price per share 684 fiscal 1999 606 fiscal 2000 951 fiscal 2001 weighted average fair value per share shares purchased 1021 fiscal 1999 963 fiscal 2000 1505 fiscal 2001 6 commitments contingencies company occupies buildings various operating leases rent expense relating buildings approximately 373000 fiscal 1999 480000 fiscal 2000 1077000 fiscal 2001 march 31 2001 future minimum rental payments relating leases thousands fiscal year 2002 1110 2003 1121 2004 1149 2005 834 2006 830 thereafter 139 5183 july december 1998 company filed complaints us district court northern district california infringement certain patents owned company covering digital sound encoded motion picture film one complaint named defendants sony corporation provider sdds digital sound system numerous producers distributors exhibitors motion pictures sdds soundtracks complaint named defendants dolby laboratories inc provider dolby digital sound system numerous producers distributors exhibitors motion pictures dolby digital soundtracks defensive counterclaims filed defendants response complaints sony legal action settled parties resulting revenue company dolby legal action resulted settlement letter agreement process implemented definitive agreement prior settlements certain legal costs relating actions capitalized company amortization began fiscal year 1999 net book value capitalized legal costs written proceeds sony settlement payment fiscal year 2001 net settlement amount payable company settlements totals approximately 2 million deducting significant amounts related contingency interests recovery amount foreign withholding taxes previously capitalized legal costs twothirds net settlement amount recorded revenue fiscal 2001 company expects record balance fiscal 2002 ongoing royalty payments resulting continuation alleged infringing activities defendants normal course business company subject various claims assertions may arise opinion management ultimate disposition claims assertions material adverse impact financial position company 7 income taxes provision income taxes fiscal 1999 2000 2001 consists following thousands fiscal year 1999 2000 2001 current provision federal 94 56 93 state 34 104 220 128 160 313 deferred provision federal 2697 2146 state 2697 2146 provision income taxes 12 2537 1833 companys effective tax rate differs statutory rate follows fiscal year 1999 2000 2001 tax rate reconciliation federal statutory rate 34 state tax net federal benefit 6 utilization net operating loss carryforwards 40 132 81 alternative minimum taxes 3 2 3 90 39 major components net deferred tax asset march 31 follows thousands 1999 2000 2001 net operating loss carryforwards federal 12845 11900 10106 state 73 tax credits 1350 1147 957 reserves accruals currently deductible tax purposes 479 565 913 depreciation 172 235 357 capitalized patent costs 521 714 221 18 33 38 total deferred tax asset 14380 13100 12074 valuation allowance provision 11039 7011 2973 valuation allowance equity 3341 3446 3819 net deferred tax asset 2643 5282 company established valuation allowance uncertain portion deferred tax asset fully realized companys federal net operating losses expire various dates 2003 2012 tax credit carry forwards expire various dates 2002 2004 except 413 tax credits alternative minimum taxes expiration company anticipates since net operating loss carryforwards utilized prior utilization tax credits tax credits utilized fiscal 2002 approximately 366 tax credits expire written valuation reserve fiscal 2002 item 9 item 8 financial statements supplementary data report independent registered public accounting firm financial statement schedule board directors stockholders lasercard corporation audited accompanying consolidated balance sheets lasercard corporation subsidiaries collectively “company” march 31 2009 related consolidated statements operations stockholders’ equity cash flows year ended march 31 2009 audit also included financial statement schedule lasercard corporation listed item 15a financial statements financial statement schedule responsibility company’s management responsibility express opinion financial statements based audit conducted audit accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audit provides reasonable basis opinion consolidated financial statements referred present fairly material respects financial position lasercard corporation subsidiaries march 31 2009 results operations cash flows year ended march 31 2009 conformity us generally accepted accounting principles also opinion related financial statement schedule considered relation basic consolidated financial statements taken whole presents fairly material respects information set forth therein discussed note 2 consolidated financial statements company adopted provisions statement financial standards 157 “fair value measurements” statement financial standards 159 “the fair value option financial assets liabilities including amendment fasb statement 115” april 1 2008 also audited accordance standards public company accounting oversight board united states lasercard corporation’s subsidiaries’ internal control financial reporting march 31 2009 based criteria established internal control integrated framework issued committee sponsoring organizations treadway commission report dated june 15 2009 expressed unqualified opinion effectiveness lasercard corporation subsidiaries’ internal control financial reporting ssingerlewak llp san jose california june 15 report independent registered public accounting firm board directors stockholders lasercard corporation audited accompanying consolidated balance sheet lasercard corporation subsidiaries march 31 2008 related consolidated statements operations stockholders’ equity cash flows two years period ended march 31 2008 consolidated financial statements responsibility company’s management responsibility express opinion consolidated financial statements based audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion consolidated financial statements referred present fairly material respects financial position lasercard corporation subsidiaries march 31 2008 results operations cash flows two years period ended march 31 2008 conformity accounting principles generally accepted united states america discussed note 2 notes consolidated financial statements april 1 2007 company adopted financial accounting standards board interpretation 48 accounting uncertainty income taxes interpretation fas 109 also discussed note 2 notes consolidated financial statements april 1 2006 company adopted provisions statement financial accounting standards 123 revised sharebased payment odenberg ullakko muranishi co llp san francisco california june 4 lasercard corporation subsidiaries consolidated balance sheets march 31 2009 2008 thousands except share per share amounts accompanying notes integral part consolidated financial statements lasercard corporation subsidiaries consolidated statements operations fiscal years ended march 31 2009 2008 2007 thousands except per share amounts accompanying notes integral part consolidated financial statements lasercard corporation subsidiaries consolidated statements stockholders’ equity comprehensive loss fiscal years ended march 31 2007 2008 2009 thousands accompanying notes integral part consolidated financial statements lasercard corporation subsidiaries consolidated statements cash flows fiscal years ended march 31 2009 2008 2007 thousands accompanying notes integral part consolidated financial statements lasercard corporation subsidiaries notes consolidated financial statements 1 organization operations lasercard corporation delaware corporation wholly owned subsidiaries lasercard corporation california corporation challenge card design plastikkarten gmbh germany “ccd” collectively “company” develop manufacture integrate lasercard optical memory cards “omcs” optical card drives peripherals specialty cards printers company’s customers omc related products mainly valueadded reseller var companies worldwide develop applications lasercard products target markets products include government commercial applications portable recordable secure identification cards unitaryrecord cards current applications include united states green card italian national government id card programs kingdom saudi arabia’s national id card india’s vehicle registration card three states foreign resident id program costa rica biometric ids card applications company supplies advancedtechnology cards manufactured ccd various applications card printers systems integration gatekeeping ticketing company recently introduced new secure laser engravable passport data page product features unique hinge system designed maximize durability polycarbonate page incorporated traditional passport book data page include range security features icaocompliant epassport chip passport issuer personalizes data page laser engraving passport holder’s facial image demographics icaocompliant machine readable data onto data page company offering data page without icao standard epassport chip partners several countries process upgrading passports company also business delivering turnkey card manufacturing facilities include supply installation stateoftheart card production equipment transfer manufacturing knowhow training production support company subject certain risks including limited competition substitute products larger companies dependence certain suppliers customers 2 summary significant accounting policies 1 principles consolidation basis presentation accompanying consolidated financial statements prepared accordance us generally accepted accounting principles consolidated financial statements include accounts lasercard corporation wholly owned subsidiaries significant intercompany accounts transactions eliminated consolidation 2 use estimates preparation consolidated financial statements conformity us generally accepted accounting principles requires management make estimates assumptions affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenues expenses reporting period actual results could differ estimates 3 fiscal period purposes presentation company labels annual accounting period end march 31 quarterly accounting period ends june 30 september 30 december 31 company fact operates reports based quarterly periods ending friday closest month end fiscal year 2009 ended april 3 2009 fiscal year 2008 ended march 28 2008 fiscal year 2007 ended march 30 2007 4 foreign currency transactions functional currency company’s foreign subsidiary generally local currency financial statements subsidiaries translated united states dollars using periodend rates exchange assets liabilities average rates exchange year revenues expenses translation gains losses recorded accumulated comprehensive income loss component stockholders’ equity net gains losses resulting foreign exchange transactions included selling general administrative expenses significant periods presented lasercard corporation subsidiaries notes consolidated financial statements 5 derivative financial instruments company uses shortterm foreign exchange forward contracts mitigate foreign currency risk associated primarily intercompany receivables payables loan receivables denominated euros german subsidiary company’s foreign exchange forward contracts designated accounting purposes hedging instruments sfas 133 accounting derivative instruments hedging activities amended accordingly gains losses resulting changes fair value forward contracts reported income expense net gains losses forward contracts generally offset gains losses associated underlying foreign currency denominated intercompany receivables payables loans receivable march 31 2009 2008 company foreign exchange forward contracts maturity less 30 days purchase 13 million euros 12 million euros respectively fair value forward contracts material march 31 2009 2008 refer note 2 caption 8 cash equivalents shortterm investments longterm investments consolidated financial statement discussion noncurrent investments 6 concentrations risk financial instruments potentially subject company significant concentrations credit risk consist principally cash equivalents shortterm investments longterm investments accounts receivable company places cash equivalents shortterm longterm investments highcredit quality financial institutions company exposed credit risk event default institutions extent amount recorded consolidated balance sheets march 31 2009 company held 135 million par value fair value approximately 122 million marketable securities consisting auction rate securities “arss” structured shortterm interest rate reset dates generally 28 35 days contractual maturities cases well excess ten years ninetysix 310 percent 963 company’s investments represent slarss 95 principal interest guaranteed ffelp aaa rated remaining balance privately financed consists overcollateralized pool graduate student loans company believes credit quality securities high based guarantees collateralization end reset period company sell continue hold securities par value auction process historically provided liquid market arss february 2008 however auctions failed due sell orders exceeding buy orders funds associated failed auctions accessible successful auction occurs buyer found outside auction process underlying securities matured recalled issuer given disruptions credit markets fact liquidity types securities remains uncertain march 31 2009 company classified arss noncurrent assets consolidated balance sheets ability liquidate securities next twelve 12 months uncertain investments designated trading securities company investments marketable securities designated available sale march 31 2009 detailed information reasons behind designation risks company faces regard investment ars found cash equivalents shortterm investments longterm investments march 31 2008 company 129 million arss net 06 million unrealized loss “accumulated comprehensive income” stockholders’ equity accounted availableforsale classified longterm securities due underlying events surrounding failed auctions company held shortterm investments march 31 2008 company continues earn interest maximum contractual rate ars accounts receivable derived revenue earned customers primarily located united states italy kingdom saudi arabia germany company performs ongoing credit evaluations customers’ financial condition generally require collateral company maintains reserves potential credit losses historically losses immaterial 7 major customers following customers accounted 10 revenue fiscal years ended march 31 revenue customers attributable omc optical card drive systems enabling services segments customer accounted 10 revenue periods lasercard corporation subsidiaries notes consolidated financial statements three customers accounted 45 18 10 respectively accounts receivable march 31 2009 one customer accounted 37 accounts receivable march 31 2008 8 cash equivalents shortterm investments longterm investments company considers highly liquid investments consisting primarily commercial paper discount notes us government bonds maturities three months less date purchase cash equivalents shortterm investments include securities maturities date purchase three months investments remaining maturities less one year investments maturities date purchase greater one year classified longterm investments management determines appropriate classification debt securities time purchase reevaluates classification investments balance sheet date company accounts shortterm marketable securities accordance sfas 115 accounting certain investments debt equity securities “sfas 115” company considers highly liquid investments consisting primarily commercial paper discount notes us government bonds arss original remaining maturities three months less date purchase cash equivalents investments original remaining maturities three months one year date purchase classified shortterm investments original remaining maturities one year date purchase classified noncurrent assets company determines length investments considering cash requirements yields available type investment considered company determines appropriate classification debt equity securities time purchase reevaluates classification investments balance sheet date company owns investments marketable securities designated “available sale” “trading securities” securities available sale carried fair value unrealized gains losses reported “accumulated comprehensive income” component stockholders’ equity trading securities carried fair value unrealized gains losses reported company’s consolidated statement operations “other income expense net” march 31 2009 company held 135 million par value fair value approximately 122 million marketable securities consisting arss structured shortterm interest rate reset dates generally 28 35 days contractual maturities cases well excess ten years ninetysix 310 percent 963 company’s investments represent slarss 95 principal interest guaranteed ffelp aaa rated remaining balance privately financed consists overcollateralized pool graduate student loans company believes credit quality securities high based guarantees collateralization end reset period company sell continue hold securities par value auction process historically provided liquid market arss february 2008 however auctions failed due sell orders exceeding buy orders funds associated failed auctions accessible successful auction occurs buyer found outside auction process underlying securities matured recalled issuer given disruptions credit markets fact liquidity types securities remains uncertain march 31 2009 company classified arss noncurrent assets consolidated balance sheets ability liquidate securities next twelve 12 months uncertain investments designated trading securities march 31 2008 company 129 million arss net 06 million unrealized loss “accumulated comprehensive income” stockholders’ equity accounted availableforsale classified longterm securities company held shortterm investments march 31 2008 company continues earn interest maximum contractual rate ars ubs ag issued prospectus dated october 7 2008 “rights” offering whereby ubs offered purchase certain arss placed including company holds par face value october 29 2008 “acceptance date” company submitted acceptance form participate “rights” offering ubs “right” purchase arss par time july 3 2012 company “right” sell arss par ubs beginning june 30 2010 july 3 2012 part offering ubs offered line credit 75 fair value arss calculated ubs purchased ubs line credit certain restrictions described prospectus december 2008 company obtained line credit ubs amount 87 million collateralized slars company drew entire amount credit line lasercard corporation subsidiaries notes consolidated financial statements rights represent firm agreement accordance sfas 133 accounting derivative instruments hedging activities “sfas 133” defines firm agreement unrelated party binding parties usually legally enforceable following characteristics agreement specifies significant terms including quantity exchanged fixed price timing transaction b agreement includes disincentive nonperformance sufficiently large make performance probable enforceability rights results put option recognized free standing derivative separate ars electing participate rights offering company granted ubs right exercisable time prior july 3 2012 purchase cause sale arss “call right” ubs agreed pay us par value ars within one day settlement call right transaction notwithstanding call right company permitted sell arss parties ubs case put rights attached arss sold would extinguished company elected adopt sfas 159 fair value option financial assets financial liabilities “sfas 159” december 31 2008 put option elected treat ars portfolio availableforsale trading securities transfer resulted reversal prior unrealized losses net taxes arss accumulated comprehensive income otherthan temporary impairment approximately 13 million 135 million par value portion company’s ars portfolio recognition benefit approximately 1 million related put option provided settlement transfer trading securities reflects management’s intent exercise put option period june 30 2010 july 3 2012 march 31 2009 insufficient observable ars market information available determine fair value put option therefore order validate fair value estimate securities company incorporated assumptions credit quality financial standing issuer final stated maturities estimates probability issue called prior final maturity impact due extended periods maximum auction rates liquidity risk premium broker quotes independent valuators using widely accepted financial models management believes reasonable estimates reflecting unique circumstances subject slars method valuing put option forward contracts reasonable longterm investments fiscal year 2008 represent ars primarily consisting student loan debt obligations whose underlying assets primarily federal family education loan program “ffelp” guaranteed result recent auction failures fiscal 2008 actual market prices relevant observable inputs readily available determine fair value company’s ars march 31 2008 company valued ars using fair value supplied company’s brokerage firm derived brokerage firm’s internal valuation methodology using discounted cash flow model analysis based estimated fair value march 31 2008 company recorded unrealized comprehensive loss 625000 quarter ended march 31 2008 also company reclassified ars 135 million longterm investments shortterm investments company ability intent hold securities anticipated recovery fair value occurs lasercard corporation subsidiaries notes consolidated financial statements cash equivalents investments consist following thousands 9 fair value measurements effective april 1 2008 company adopted sfas 157 fair value measurements “sfas 157” except applies nonfinancial assets nonfinancial liabilities subject fsp 1572 sfas 157 clarifies fair value exit price representing amount would received sell asset paid transfer liability orderly transaction market participants fair value marketbased measurement determined based assumptions market participants would use pricing asset liability basis considering assumptions sfas 157 establishes threetier value hierarchy prioritizes inputs used valuation methodologies measuring fair value level 1 observable inputs reflect quoted prices unadjusted identical assets liabilities active markets level 2 include inputs directly indirectly observable marketplace level 3 unobservable inputs supported little market activity fair value hierarchy also requires entity maximize use observable inputs minimize use unobservable inputs measuring fair value accordance sfas 157 company measures cash equivalents marketable securities fair value company’s cash equivalents marketable securities primarily classified within level 1 exception investments arss classified within level 3 cash equivalents marketable securities valued primarily using quoted market prices utilizing market observable inputs company’s investments arss classified within level 3 active markets arss therefore company unable obtain independent valuations market sources therefore arss valued using discounted cash flow model inputs cash flow model unobservable market total amount assets measured using level 3 valuation methodologies represented 20 total assets march 31 2009 lasercard corporation subsidiaries notes consolidated financial statements table shows level company’s financial assets accounted fair value march 31 2009 table include assets liabilities measured historical cost basis fair value thousands table shows level company’s financial assets accounted fair value march 31 2009 table include assets liabilities measured historical cost basis fair value thousands lasercard corporation subsidiaries notes consolidated financial statements 10 accounts receivable accounts receivable net allowance doubtful accounts 59000 35000 march 31 2009 2008 respectively company maintains allowances doubtful accounts product return reserves anticipated losses resulting inability customers make required payments inprocess product returns company generally computes allowances based specifically identified accounts past due likely collectible interest receivable represents accruals investments arss interestbearing securities receivables comprised value added tax refunds miscellaneous items components accounts receivable march 31 thousands 11 inventories stated lower cost market cost determined firstin firstout basis market based replacement cost estimated realizable value less cost sell components inventories march 31 thousands company establishes lower cost market reserves aged inventory reserves obsolescence reserves inventory reserves generally recorded management determines item readily saleable inventory reserves relieved related inventory sold scrapped fiscal years ended march 31 2009 2008 2007 company recorded inventory reserve expense 352000 53000 483000 respectively 12 equipment held resale equipment held resale consists primarily parts labor costs incurred build equipment contracts company received 295 million nonrefundable advance payments direct incremental costs associated purchase construction items deferred related deferred revenue recognized components equipment held resale march 31 thousands lasercard corporation subsidiaries notes consolidated financial statements 13 property equipment net components property equipment march 31 thousands property equipment recorded cost depreciation provided estimated useful lives four seven years equipment furniture using straightline method twentyfive years building using straightline method leasehold improvements amortized shorter life asset life lease using straightline method depreciation leasehold amortization expense fiscal years 2009 2008 2007 28 million 29 million 27 million respectively maintenance minor repairs replacements expensed incurred disposition retirement property equipment related gains losses charged income expense 14 goodwill intangible assets goodwill represents excess purchase price fair value identifiable net tangible intangible assets acquired business combination accordance sfas 142 goodwill intangible assets company amortize goodwill instead company evaluates goodwill impairment annually fourth quarter whenever events changes circumstances indicate likely impairment loss incurred goodwill remaining consolidated balance sheets march 31 2009 2008 definite life intangible assets capitalized accumulated amortization march 31 thousands weighted average remaining amortization periods fiscal years ended march 31 years lasercard corporation subsidiaries notes consolidated financial statements legal expenses incurred connection patents capitalized amortized estimated remaining useful lives patents seven years amortization expense intangible assets fiscal years 2009 2008 2007 128000 125000 143000 respectively estimated amortization expense next five years patents intangible assets definite lives years ended march 31 thousands 15 assessment impairment tangible intangible longlived assets accordance sfas 144 accounting impairment disposal longlived assets company assesses impairment longlived assets whenever events changes circumstances indicate carrying value may recoverable estimated future cash flows expected result use eventual disposition company’s longlived assets subject evaluation include property equipment amortizable intangible assets company’s estimate future undiscounted net cash flows insufficient recover carrying value assets company record impairment loss amount carrying value assets exceeds fair value assets determined recoverable useful lives shorter originally estimated company depreciates amortizes net book value asset newly determined remaining useful lives march 31 2009 fair value longlived assets exceeds book value therefore impairment loss recognized company disposed obsolete equipment totaling approximately 15 million recorded loss 03 million parts tooling discontinued device recorded costs goods sold fiscal year 2009 march 31 2008 based company’s estimated future cash flow analysis triggering events significant disposal portion assets adverse change market involving business employing related asset significant decrease benefits realized acquired business management determined fair value longlived assets exceeded book value 16 accrued liabilities components accrued liabilities march 31 thousands appropriate provision made time shipment estimated warranty costs company provides limited warranty replacement defective products company’s limited warranty requires repair replace defective products cost customer within specified time period sale company estimates costs may incurred limited warranty record liability amount costs time product revenue recognized factors affect estimate warranty liability include number units sold historical anticipated rates warranty claims company assesses adequacy recorded warranty liability quarterly adjusts amount necessary company utilizes historical trends information received customers assist determining appropriate estimated warranty accrual levels company’s product warranty claims settled return defective products shipment replacement products adequacy warranty reserve reviewed quarterly verify properly reflects remaining obligations based anticipated warranty costs balance obligation period adjustments made actual return claim experience differs estimates company recorded deferred compensation 07 million related planned retirement agreement former chief executive officer president march 31 2008 balance approximately 03 million remained march 31 2009 lasercard corporation subsidiaries notes consolidated financial statements warranty activities fiscal years ended march 31 thousands 17 software development costs development costs incurred research development new software products general distribution expensed incurred technological feasibility form working model established date company’s software development completed concurrent establishment technological feasibility accordingly software development costs meet capitalization criteria charged research development expenses accompanying condensed consolidated statements operations software development costs incurred execution contract obligations capitalized charged cost goods sold time related revenue recorded 18 advance payments customers company routinely receives advance payments orders placed customers advance payments recorded liability consolidated balance sheets related orders shipped services performed revenue would otherwise recognized advance payments approximately 245 million prevent global advance payments approximately 17 million contract deliver turnkey nonoptical card manufacturing facility kingdom saudi arabia classified noncurrent liabilities condensed consolidated balance sheet march 31 2009 projects longer expected completed within twelve months 19 revenue recognition product sales primarily consist optical card sales drives systems enabling services sales specialty cards card printers company recognizes revenue product sales following criteria met 1 persuasive evidence arrangement exists 2 delivery occurred 3 fee fixed determinable 4 collectibility reasonably assured company recognizes revenue product sales time shipment shipping terms fob shipping point orders placed pursuant preexisting sales arrangement postshipment obligations customer acceptance criteria case us government contract warehousing appropriate provision made time shipment estimated warranty costs estimated returns orders permanent resident border crossing cards us government require delivery secure companycontrolled vault shipments later made vault us government site bill hold procedures also provide end oneyear contract term renewal option exercised us government take final delivery remaining inventory within six months time cards delivered vault title cards transferred us government risks ownership transferred well prime contractor invoiced payment due within thirty days purchase orders contain return warranty cancellation provisions pursuant provisions sec staff accounting bulletin 104 revenue recognition “sab 104” revenue recognized delivery vault company fulfilled contractual obligations earnings process complete contracts include customerspecified acceptance criteria company recognizes revenue acceptance criteria met presuming revenue criteria met company defers revenue services recognizes contractual period company renders services customer accepts company applies provisions emerging issues task force issue 0021 revenue arrangements multiple deliverables “eitf 0021” revenue arrangements multiple deliverables eitf 0021 provides criteria governing identify whether goods services delivered separately bundled sales arrangement accounted separately deliverables accounted separately meet following criteria delivered items standalone value customer b fair value undelivered items reliably determined c arrangement includes general right return delivery undelivered items probable substantially controlled seller situations deliverables fall within higherlevel literature defined eitf 0021 company applies guidance higherlevel literature deliverables meet criteria combined one deliverables lasercard corporation subsidiaries notes consolidated financial statements company applies provisions statement position 811 accounting performance constructiontype certain productiontype contracts “sop 811” applicable contracts revenues time materials contracts recognized services rendered contract labor rates plus material direct costs incurred revenues fixed price contracts recognized percentage completion method based ratio total costs incurred date compared estimated total costs complete contract estimates costs complete include material direct labor overhead allowable general administrative expenses circumstances estimates costs complete project cannot reasonably estimated assured loss incurred percentageofcompletion method based zero profit margin rather completedcontract method used precise estimates made full amount estimated loss charged operations period determined loss realized performance contract longterm program accounted sop 811 concluded last quarter fiscal year 2009 revenue approximately 540000 fiscal year 2009 year ended march 31 2008 2007 company recognized revenue approximately 249000 12000 respectively based zero profit margin fourth quarter fiscal year 2006 company entered subcontract covering product services prime contractor kingdom saudi arabia provide card personalization workstation integration use country’s personalized national id card program decentralized card issuance includes omcs hardware software contract called multiple deliverables installation certain client acceptance criteria defined agreement applying guidance within eitf 0021 company determined deliverables accounted separate units rather bundled arrangement fair value undelivered items cannot readily determined therefore revenue recognition contract associated contract costs deferred predominant undelivered element card personalization delivered accepted commencing installation acceptance card personalization system complete company determined card personalization system accepted contract revenue would recognized ratably based actual cards personalized acceptance card personalization system accepted quarter ended march 31 2007 company began recognizing revenue contract period cards accepted customer date june 23 2007 company prime contractor entered agreement amending terms provision cards supplies according delivery schedule balance fiscal year 2008 addition company longer obligations pertaining installation equipment card personalization workstation integration card personalization company began recognizing revenue upon receipt customer’s certificate acceptance cards delivered company recognizes revenue upon transfer title acceptance criteria perfunctory company recognized revenue totaling 122 million 63 million 43 million fiscal years 2009 2008 2007 respectively contract march 31 2009 remained 05 million deferred revenue 04 million deferred contact costs associated contract march 31 2008 remained 06 million deferred revenue amount deferred contract costs relating contract company applies provisions statement position “sop” 972 software revenue recognition amended statement position 989 modification sop 972 software revenue recognition respect certain transactions involving sale software products revenue license company’s software products recognized persuasive evidence arrangement exists software product delivered fee fixed determinable collectability probable applicable upon acceptance criteria specified upon expiration acceptance period software revenue immaterial fiscal years 2009 2008 2007 lasercard corporation subsidiaries notes consolidated financial statements license revenue may consist upfront license fees longterm royalty payments recognized revenue earned license revenue fiscal year 2009 immaterial license revenue cost recorded fiscal years 2008 2007 company entered license omc equipment purchase support agreements effective april 3 2004 global investments group “gig” based auckland new zealand omc manufacturing slovenia gig transferred license agreements approval prevent global družba za upravljanje investicije razvoj dd “prevent global” march 2007 agreements provide payments interest late payments company 285 million 20year license required manufacturing equipment targeted initial manufacturing capacity 10 million optical cards annually installation support fouryear training support package 278 million company received 245 million recorded advance payments customer 33 million licensing fees recorded deferred revenue classified long term liabilities consolidated balance sheets march 31 2009 company held 7 million acquired equipment including direct incremental expenses classified equipment held resale consolidated balance sheets related contract compared 66 million march 31 2008 company ship equipment prevent global upon request suitable facility established prevent global company inspect facility requested assure necessary services available installation equipment time company know prevent global initiate request beginning april 1 2008 agreement provide payments prevent global 3 million threeyear support package options thirteen additional years support payments 1 million annually addition prevent global pay royalties 060 per card produced license nonexclusive territories covered license include european union eastern european regions company retains rights utilize 20 new facility capacity backup capacity buffer augment card manufacturing facilities mountain view california possibly company’s german subsidiary granting license prevent global establishes potential manufacturing facility supplier omcs existing prospective customers may request multiple sources cards agreement contains various elements including card manufacturing license sale installation equipment training ongoing support contingent payments support materials royalty payments cards manufactured accordance eitf 0021 revenue arrangements multiple deliverables card manufacturing license sale installation equipment training support package accounted one unit accounting since company unable determine evidence fair value undelivered items ongoing support company able determine evidence fair value last predominant item delivered ongoing annual support accordingly revenues arrangement deferred recognized equipment installed accepted exception value ongoing annual support manufacturing equipment recognized quarterly earned beginning equipment accepted training completed date dependent prevent global establishing suitable facility slovenia pursuant ftb 901 accounting separately priced extended warranty product maintenance contracts support revenue recognized ratably remaining term agreement fourth quarter calendar year 2008 company began training employees prior expected transfer manufacturing equipment tobebuilt facility slovenia since time prevent global reviewing project determine next steps refer risk factor “we sold card manufacturing license provide certain factory setup training services prevent global slovenia prevent global successful could compete us business” details 20 research development expenses costs related research design development products charged research development expense incurred research development costs include salaries contractor fees building utility costs depreciation 21 shipping handling costs company reports shipping handling costs sales related cost goods sold extent billed customers instances reflected component cost goods sold 22 advertising costs advertising costs consist development placement costs company’s advertising campaigns charged expense incurred advertising expense approximately 250000 fiscal year 2009 212000 fiscal year 2008 188000 fiscal year 2007 lasercard corporation subsidiaries notes consolidated financial statements 23 stockbased compensation effective april 1 2006 company adopted statement financial accounting standard “sfas” 123r sharebased payment requires sharebased payment transactions accounted using fair value based method recognition related expense results operations prior adoption sfas 123r permitted sfas 123 accounting stockbased compensation company accounted sharebased payments employees accordance accounting principles board opinion “apb” 25 accounting stock issued employees utilizing intrinsic value method therefore company recognize compensation cost employee director stock options intrinsic value sfas 123r allows companies choose one two transition methods modified prospective transition method modified retrospective transition method company adopted sfas 123r using modified prospective method transition requires compensation expense related share based payments recognized beginning adoption date requisite service period generally vesting period awards granted april 1 2006 remaining service period unvested portion awards granted prior april 1 2006 consolidated financial statements prior fiscal years restated reflect impact adopting sfas 123r 2004 equity incentive compensation plan amended “2004 plan” 2004 plan provides grant restricted share awards options stock units stock appreciation rights may require satisfaction performance objectives respect shares company’s common stock directors officers employees consultants company subsidiaries exercise price stock options may less 100 fair market value common stock date grant 110 fair market value grant incentive stock option employee owns 10 total combined voting power classes company’s capital stock options granted may exercised ten years date grant five years date grant incentive stock option employee owns 10 total combined voting power classes company’s capital stock board directors specifies term options prior fiscal year 2006 typically ten years thereafter typically seven years vesting schedule options market price options described become exercisable generally 25 one year 625 quarterly next three years stock options provisions sfas 123r stockbased compensation cost estimated grant date based fair value award compensation cost recognized expense requisite service period award generally vesting period fair value nonvested stock awards determined reference fair market value company’s common stock date grant consistent valuation method company used disclosureonly purposes provisions sfas 123 accounting stockbased compensation company uses blackscholes valuation model estimate fair value option awards determining appropriate fair value model related assumptions requires judgment including estimating stock price volatility forfeiture rates expected terms fiscal year 2009 company granted new chief executive officer staff nonstatutory stock options “marketbased option” purchase total 715000 shares common stock exercise price 712 484 per share respectively market price date grant marketbased options term ten years vest prior five years grant date closing trading price common stock twenty consecutive days greater equal 10 13 16 19 22 per share different vesting points market based options granted company officers similar vesting schedules company used latticemodel stated assumptions value stockbased employee compensation expenses lasercard corporation subsidiaries notes consolidated financial statements following assumptions utilized estimate fair value company’s stock option awards fiscal years ended march 31 expected volatility rate based historical volatility company’s common stock expected life represents average time options vest expected outstanding based vesting provisions company’s historical exercise cancellation expiration patterns company estimated forfeitures based historical rates recognizing compensation expense forfeitures estimated based voluntary termination behavior well analysis actual option forfeitures riskfree interest rate based us treasury zerocoupon issues maturity approximating expected life week grant date annual dividend rate assumed cash dividend expected declared paid foreseeable future company updates assumptions least annually interim basis significant changes assumptions warranted adoption sfas 123r company recorded stockbased employee compensation expense related stock options restricted shares approximately 23 million fiscal year 2009 2 million fiscal year 2008 17 million fiscal year 2007 net estimated forfeitures company recognized full amount stockbased employee compensation expense equity incentive plans consolidated statements operations fiscal year ended march 31 2008 2007 stockbased compensation expense related stock options recorded company’s consolidated statement operations fiscal years ended march 31 thousands company capitalize costs condensed consolidated balance sheets general overhead pool inventory costs restricted shares restricted stock units beginning september 21 2007 restricted shares restricted stock units awarded certain company employees directors provisions 2004 plan shares units subject timebased vesting provisions awarded cost recipients cannot sold assigned transferred pledged restriction period recipients restricted shares right vote shares receive dividends whereas recipients restricted stock units benefits june 2 2008 company’s ceo granted 20000 restricted shares “restricted stock” outside 2004 plan charge ceo restricted stock vests four years vesting 25 first four oneyear anniversaries june 2 2008 company committed register restricted stock sec form s8 since issued outside 2004 plan compliance nasdaq rule 4350i1a september 19 2008 restricted shares awarded directors company directors restricted shares vest full eleventh month date award fair value restricted shares including restricted stock time award expensed straightline basis primarily selling general administrative expenses vesting period lasercard corporation subsidiaries notes consolidated financial statements restricted stock units awarded certain employees company september 22 2008 fair value time award expensed straightline basis vesting period subject employee’s continuous commonlaw employment company 25 restricted units vest first second third fourth anniversaries date award earlier upon change control units vest shares issued settlement net shares retained satisfy withholding obligations march 31 2009 43 million total unrecognized compensation cost related unvested stock options restricted share awards restricted stock units expected recognized remaining vesting period august 2012 march 31 2008 37 million total unrecognized compensation cost related unvested stock options restricted share awards restricted stock units expected recognized remaining vesting period december 2011 company record income tax benefit stock based compensation expense fiscal years ended march 31 2009 2008 company cumulative operating loss carryovers full valuation allowance established fsp 123r3 transition election related accounting tax effects sharebased payment awards requires entity follow either transition guidance additionalpaidincapital “apic” pool prescribed sfas 123r alternative transition method described fsp 123r3 entity adopts sfas 123r using modified prospective application may make onetime election adopt transition method described fsp 123r3 may take one year latter initial adoption sfas 123r effective date fsp 123r3 evaluate available transition alternatives make onetime election company elected use simplified method provided fsp fas 123r3 calculate apic pool effective april 1 2007 adoption fsp material impact consolidated financial position results operations cash flows employee stock purchase plan company employee stock purchase plan “espp” eligible employees may designate 2 6 compensation withheld purchase shares common stock 67 average price threeday period prior purchase date differential fair market value average price shares sold espp charged operations compensation expense taxed employee income company stockbased compensation expense 84000 129000 108000 relating espp included company’s consolidated statements operations fiscal years ended march 31 2009 2008 2007 respectively effective february 2009 company decided discontinue espp 24 income taxes income taxes accounted accordance financial accounting standards board “fasb” statement 109 accounting income taxes requires use asset liability method deferred tax assets liabilities determined based upon differences financial reporting tax bases assets liabilities measured using enacted tax rules laws anticipated effect differences expected reverse net deferred tax assets reduced valuation allowance extent realization related deferred tax asset assured recorded valuation allowance full amount calculated deferred tax asset march 31 2009 2008 see note 8 lasercard corporation subsidiaries notes consolidated financial statements june 2006 fasb issued interpretation 48 accounting uncertainty income taxesan interpretation fasb statement 109 “fin 48” fin 48 clarifies accounting uncertainty income taxes recognized company’s financial statements accordance fasb statement 109 accounting income taxes fin 48 prescribes recognition threshold measurement attribute financial statement recognition measurement tax position taken expected taken tax return fin 48 also provides guidance derecognition classification interest penalties accounting interim periods disclosure transition evaluation tax position accordance fin 48 twostep process first step recognition company determines whether “morelikelythannot” tax position sustained upon examination including resolution related appeals litigation processes based technical merits position evaluating whether tax position met “morelikelythannot” recognition threshold company presumes position examined appropriate taxing authority would full knowledge relevant information second step measurement tax position meets “morelikelythannot” recognition threshold measured determine amount benefit recognize financial statements tax position measured largest amount benefit greater 50 percent likely realized upon ultimate settlement fin 48 effective fiscal years beginning december 15 2006 company fiscal year commencing april 1 2007 upon adoption fin 48 april 1 2007 company recognized cumulative effect adjustment 62000 decreasing income tax liability unrecognized tax benefits decreasing march 31 2007 accumulated deficit balance continually monitor need tax reserves fin 48 fiscal years 2009 2008 identified new reserve requirements 25 comprehensive income loss sfas 130 reporting comprehensive income comprehensive income loss defined changes equity enterprise except resulting stockholders’ transactions comprehensive income loss fiscal years ended march 31 thousands 26 recent accounting pronouncements december 2007 fasb issued sfas 141 revised 2007 “business combinations” “sfas 141r” sfas 141r establishes principles requirements acquirer recognizes measures financial statements significant aspects business combination sfas 141r acquisition costs generally expensed incurred noncontrolling interests valued fair value acquisition date inprocess research development recorded fair value indefinitelived intangible asset acquisition date restructuring costs associated business combination generally expensed subsequent acquisition date changes deferred tax asset valuation allowances income tax uncertainties acquisition date generally affect income tax expense sfas 141r amends sfas 109 “accounting income taxes” adjustments made valuation allowances deferred taxes acquired tax contingencies associated acquisitions closed prior effective date sfas 141r would also apply provisions sfas 141r sfas 141r also establishes disclosure requirements enable evaluation nature financial effects business combination early adoption sfas 141r permitted sfas 141r effective prospective basis business combinations acquisition date beginning first annual period subsequent december 15 2008 exception accounting valuation allowances deferred taxes acquired tax contingencies company assess potential impact adoption sfas 141r future acquisition occurs december 2007 fasb issued sfas 160 “noncontrolling interests consolidated financial statementsan amendment accounting research bulletin 51” “sfas 160” sfas 160 establishes accounting reporting standards ownership interests subsidiaries held parties parent amount consolidated net income attributable parent noncontrolling interest changes parent’s ownership interest valuation retained noncontrolling equity investments subsidiary deconsolidated sfas 160 also establishes disclosure requirements clearly identify distinguish interests parent interests noncontrolling owners company required adopt sfas 160 beginning first annual period subsequent december 15 2008 company currently evaluating requirements sfas 160 believe adoption material impact consolidated financial statements lasercard corporation subsidiaries notes consolidated financial statements march 2008 fasb issued sfas 161 “disclosures derivative instruments hedging activitiesan amendment fasb statement 133” “sfas 161” sfas 161 intended improve transparency financial reporting requiring enhanced disclosures entity’s derivative instruments hedging activities effects entity’s financial position financial performance cash flows sfas 161 applies derivative instruments within scope sfas 133 “accounting derivative instruments hedging activities” well related hedged items bifurcated derivatives nonderivative instruments designated qualify hedging instruments sfas 161 establishes principles requirements entity identifies derivative instruments related hedged items affect financial position financial performance cash flows sfas 161 also establishes disclosure requirements fair values derivative instruments gains losses disclosed tabular format derivative features creditrisk related disclosed provide clarification entity’s liquidity crossreferencing within footnotes company required adopt sfas 160 beginning first annual period subsequent december 15 2008 company currently evaluating requirements sfas 161 yet determined impact adoption consolidated financial statements april 2008 fasb issued fsp 1423 “determination useful life intangible assets” “fsp 1423” fsp 1423 amends factors considered developing renewal extension assumptions used determine useful life recognized intangible asset sfas 142 “goodwill intangible assets” “sfas 142” objective fsp 1423 improve consistency useful life recognized intangible asset sfas 142 period expected cash flows used measure fair value asset sfas 141r accounting principles fsp 1423 applies intangible assets whether acquired business combination otherwise early adoption prohibited company required adopt fsp 1423 first quarter fiscal year 2010 company currently evaluating requirements fsp 1423 yet determined impact adoption consolidated financial statements 27 indemnification company’s major sales agreements provide remedies customers defense settlement payment judgment intellectual property claims related use company’s products company also indemnified various vendors certain potential claims company also entered indemnification agreements directors officers company’s bylaws contain similar indemnification obligations date claims made indemnification provisions result associated estimated fair value liability material 3 net loss per share basic net loss per share diluted net loss per share computed dividing net loss weighted average number shares common stock outstanding fiscal year reconciliation denominators basic diluted net loss per share computation fiscal years ended march 31 thousands except per share data lasercard corporation subsidiaries notes consolidated financial statements 4 segments segment reporting company operates three reportable segments 1 omcs 2 drives systems enabling services company formerly called “optical memory card drives” segment including readwrite drives maintenance systems enabling services 3 specialty cards card printers segments determined based information used chief operating decision maker omcs drives systems enabling services reportable segments strategic business units offer unrelated products services rather reportable segments utilize compatible technology marketed jointly specialty cards printers strategic business unit offering times unrelated products times related products reportable segments accounting policies used derive reportable segment results described “summary significant accounting policies” resources allocated omc optical card drive segments manner optimizes omc revenues specialty card printers segment manner optimizes consolidated income determined chief operating decision maker segment revenues comprised sales external customers segment gross profit loss includes segment revenues less related cost sales accounts receivable cash deferred income taxes prepaid expenses fixed assets inventory separately reported segment chief operating decision maker therefore amount assets segment meaningful company reported intersegment sales 244000 fiscal year 2009 intersegment sales transfers fiscal years 2008 2007 company’s longlived assets attributable united states except 22 million fiscal year 2009 33 million fiscal year 2008 fluctuation foreign exchange caused 323000 decrease longlived assets march 31 2009 compared march 31 2008 longlived assets attributable operations germany including longlived assets owned us operations located germany company’s chief operating decision maker currently company’s chief executive officer chief operating decision maker reviews financial information presented consolidated basis accompanied disaggregated information revenues gross profit loss segment lasercard corporation subsidiaries notes consolidated financial statements table presents information optical memory cards systems services specialty cards printers fiscal years ended march 31 thousands represents expense recorded selling general administrative research development lasercard corporation subsidiaries notes consolidated financial statements sales geographic region sales geographic region generally determined based upon shipto address invoice company’s knowledge program location revenues geographic region fiscal years ended march 31 thousands fiscal years 2009 2008 2007 sales customers outside united states amount 34 million 156 million 121 million respectively denominated us dollars 158 million 131 million 118 million respectively denominated euros 5 relatedparty transactions since october 21 2001 contracted wexler walker public policy associates unit hill knowlton inc “wexler” lobbyists behalf us chairman wexler robert walker brother walter f walker member board directors contract terminated december 1 2008 company paid wexler 240000 fiscal year 2009 161000 fiscal year 2008 116000 fiscal year 2007 6 common stock equity incentive compensation plan amended “2004 plan” october 2004 company’s stockholders approved 2004 equity incentive compensation plan replaced existing 1991 stock option plan 2004 plan provides grant restricted share awards options stock units stock appreciation rights may require satisfaction performance objectives respect shares company’s common stock directors officers employees consultants company subsidiaries 2004 plan administered compensation committee board directors complete discretion select participants establish terms conditions award subject provisions 2004 plan options granted 2004 plan may “incentive stock options” defined section 422 internal revenue code 1986 “the code” amended nonqualified options total 2592668 shares common stock reserved issuance 1991 2004 plans march 31 2009 award granted 2004 plan forfeited expires reason shares subject award available additional awards outstanding option issued 1991 plan expires terminates reason without exercised full unpurchased shares subject option available additional awards 2004 plan 2004 plan exercise price incentive stock options may less 100 fair market value common stock date grant 110 fair market value grant employee owns 10 total combined voting power classes company’s capital stock code currently limits 100000 aggregate value common stock incentive stock options may become exercisable calendar year 2004 plan option plan adopted company nonstatutory stock options may granted 2004 plan exercise price less 100 fair market value common stock date grant limitation amount common stock nonstatutory grants may first become exercisable calendar year repricing stock option stock appreciation right permitted without stockholder approval subject limitations contained 2004 plan committee sets terms option grant options exercisable date termination employment immediately terminate time options granted 2004 plan may exercised 10 years date grant five years date grant incentive stock option employee owns 10 total combined voting power classes company’s capital stock board directors specifies term options vesting schedule exercise options granted consultants fiscal years 2009 2008 2007 lasercard corporation subsidiaries notes consolidated financial statements june 2 2008 company granted new chief executive officer “ceo” nonstatutory stock option “timebased option” outside 2004 plan purchase 220000 shares common stock exercise price 7115 per share timebased option term ten 10 years vests 25 june 2 2009 625 following twelve 12 threemonth anniversaries date timebased option fully vested june 2 2012 additionally ceo granted nonstatutory stock option “marketbased option” outside 2004 plan purchase 330000 shares common stock exercise price 7115 per share marketbased option term ten 10 years vests prior june 2 2013 closing trading price common stock twenty 20 consecutive days greater equal 10 13 16 19 22 per share vesting 60000 shares first two price points achieved 70000 shares last three price points achieved company registered 593726 shares company’s common stock february 2009 par value 001 per share underlying timebased marketbased options sec form s8 market based options granted company officers similar vesting schedules company used latticemodel stated assumptions value stockbased employee compensation expenses march 31 2008 73000 shares common stock reserved outside company’s stock option plan compared 113000 march 31 2007 issuance upon exercise stock options granted nasdaq rule 4350i1a connection ccdcm acquisition inducement join company six key employees acquired companies granted nonstatutory stock options march 31 2004 term five years purchase 20000 common shares expired category fiscal year 2008 following table lists stock option activity fiscal years ended march 31 thousands except weighted average exercise price weightedaverage grantdate fair value per share options granted fiscal years 2009 2008 2007 303 529 769 respectively weighted average remaining contractual term outstanding options march 31 2009 2008 63 years 86 years respectively 41 years 35 years options vested exercisable march 31 2009 2008 respectively aggregate intrinsic value sum amounts closing market price company’s stock april 3 2009 last trading day 258 per share exceeded exercise price options quoted market price excess exercise price “inthemoneyoptions” march 31 2009 quoted market price exercise price “outofthemoneyoptions” outstanding options vested exercisable consequently aggregate intrinsic value outstanding options vested exercisable options exercised lasercard corporation subsidiaries notes consolidated financial statements closing market price company’s stock march 31 2008 last trading day 850 per share aggregate intrinsic value outstanding options vested exercisable approximately 18 million march 31 2008 aggregate intrinsic value options exercised dates options exercised approximately 01 million fiscal years ended march 31 2008 following table summarizes information stock options outstanding fiscal year ended march 31 thousands except weighted average exercise price contractual life company 93000 unvested restricted stock units issued certain employees outstanding march 31 2009 granted september 2008 company 113000 unvested restricted shares issued certain employees outstanding march 31 2008 granted september 2007 march 31 2009 approximately 43 million total unrecognized compensation cost related nonvested sharebased compensation arrangements granted stock plans expected recognized remaining vesting period august 2012 adjusted future changes estimated forfeitures lasercard corporation subsidiaries notes consolidated financial statements march 31 2008 approximately 37 million total unrecognized compensation cost related nonvested sharebased compensation arrangements granted stock plans expected recognized remaining vesting period december 2011 adjusted future changes estimated forfeitures employee stock purchase plan company employee stock purchase plan “stock purchase plan” 29300 94185 shares reserved march 31 2009 2008 respectively future purchases employees stock purchase plan eligible employees may designate 2 6 compensation withheld purchase shares common stock 67 trailing average price differential fair market value average price shares sold stock purchase plan charged operations compensation expense taxed employee income stock purchase plan employees purchased 64885 shares fiscal year 2009 36914 shares fiscal year 2008 30418 shares fiscal year 2007 weighted average purchase price per share 336 fiscal year 2009 709 fiscal year 2008 761 fiscal year 2007 weighted average market price per share shares purchased 501 fiscal year 2009 1037 fiscal year 2008 1144 fiscal year 2007 effective february 2009 company decided discontinue espp employee benefit plan 401k plan 401k plan provides participating employees opportunity accumulate funds retirement company’s contribution plan exceed lesser 25 maximum employee contribution allowed irs b 25 employee’s contribution c 15 employee’s eligible earnings company contributed approximately 90000 94000 79000 fiscal years 2009 2008 2007 respectively effective march 5 2009 company decided make modest reduction employer discretionary matching contribution 25 first 6 deferred funds 20 issuance warrants march 31 2008 company warrants outstanding purchase 174057 shares common stock warrants issued connection december 2003 sale common stock private placement warrants exercise price 1726 per share life five years warrants expired december 2008 7 commitments contingencies lease company occupies buildings various operating leases rent expense relating buildings approximately 14 million 14 million 15 million fiscal years 2009 2008 2007 respectively march 31 2009 approximately 70000 square feet floor space leased company longterm basis card manufacturing readwrite drive production administration sales research development two buildings located mountain view california one 27000square foot building used omc production one 43000 squarefoot building used optical card production readwrite drive production administration sales research development upon expiration leases company believes suitable buildings available leased reasonable basis leases expire october 2013 march 2014 company leases portion building ratingen germany building rastede germany totaling approximately 15000 square feet optical specialty card manufacturing distribution administration sales one expire within sixmonth notice march 2012 also company owns land approximately 14000 square foot building rastede germany used production specialty cards research development company also leases small office huntington new york marketing activities company believes leased owned facilities satisfactory present operations lasercard corporation subsidiaries notes consolidated financial statements march 31 2009 future minimum rental payments relating leases thousands company entered lease arrangement fiscal year 2009 02 million 01 million fiscal year 2008 expire dates july 2011 september 2011 recorded capitalized lease accordance sfas 13 accounting leases purchase commitment company purchases services software manufacturing equipment variety vendors march 31 2009 company noncancelable purchase orders 24 million raw materials delivered 12 months contingencies normal course business company subject various claims opinion management ultimate disposition claims material adverse impact financial position results operation cash flows company employment agreements november 28 2007 company entered planned retirement agreement age discrimination release agreement chief executive officer “ceo” president retirement march 31 2008 agreements provided ceo receive two years separation pay per annum rate 350000 consulting retainer 18000 nine months consulting availability services bonus 100000 company continued pay portion health care insurance premium cobra coverage 18 months stock options ceased vesting retirement date 18750 options vested may 24 2008 since remained consultant company held 3125 restricted shares vested september 21 2008 restricted shares forfeited lasercard allocated costs postretirement payments bonus using discounted cashflow basis remaining months total expected service stock options remeasured using blackscholes method addition company employment agreements two individuals provide severance payments period twelve 12 months following employee’s termination employment company shall continue pay employee monthly basis onetwelfth employee’s per annum base salary determined employee’s last day employment specific provisions also made continued health insurance coverage stock options certain conditions severance payments included details found company’s form 8k filed january 10 2008 form 10q filed august 5 2008 8 income taxes provision income taxes benefit fiscal years ended march 31 thousands lasercard corporation subsidiaries notes consolidated financial statements company’s effective tax rate differs statutory rate fiscal years ended march 31 follows domestic foreign component pretax income loss fiscal years ended march 31 thousands major components net deferred income tax assetsliabilities march 31 thousands lasercard corporation subsidiaries notes consolidated financial statements net deferred income tax liability 234000 march 31 2009 313000 march 31 2008 result operations german subsidiary part process preparing company’s consolidated financial statements company required estimate income taxes jurisdictions company operates process involves estimating actual current tax exposure together assessing temporary differences resulting differing treatment items deferred revenue tax accounting purposes differences result deferred income tax assets liabilities included within consolidated balance sheets company must assess likelihood deferred income tax assets recovered future taxable income extent management believes recovery likely company must establish valuation allowance fiscal year 2009 valuation allowance decreased 09 million change valuation allowance related decrease net operating loss carryforwards “nols” 15 million offset increases gross deferred income tax assets fiscal year 2008 valuation allowance increased 2 million change valuation allowance related increase nols 11 million increases gross deferred income tax assets company’s federal nols march 31 2009 192 million compared 262 million march 31 2008 nols expire various dates 2009 2027 utilized amount march 31 2009 167 million represent nols relating windfall stock option deductions compared 193 million march 31 2008 benefit credited stockholders’ equity realized federal tax credits amount 336000 alternative minimum taxes expiration federal rd tax credits amount 344000 expire various dates 2013 2027 utilized company’s state nols march 31 2009 38 million compared 43 million march 31 2008 nols expire various dates 2019 2020 utilized amount march 31 2009 333000 represents nols relating windfall stock option deductions compared 333000 march 31 2008 benefit credited stockholders’ equity realized california tax credits related rd alternative minimum taxes march 31 2009 amount 214000 expiration date however california suspended utilization nols tax years 2009 2008 also california limited utilization rd credits 50 tax liability without consideration nols march 31 2008 federal tax credits 272000 alternative minimum taxes federal rd tax credits 330000 california tax credits related rd alternative minimum taxes 166000 company’s methodology determining realizability deferred income tax assets involves estimates future taxable income based upon booked orders estimated impact future stock option deductions expiration dates amounts nols company difficulty past expects continued difficulty future reliably forecasting foreign business revenue received resulted company’s basing estimates future income purposes booked orders circumstances change company may future able estimate future revenue based upon forecast revenues rather using booked orders although company cannot predict occur concluding full valuation allowance required end fiscal year 2009 2008 2007 respectively company considered positive negative evidence regarding ability generate sufficient future taxable income realize deferred income tax assets positive evidence included 1 level sales business experienced contracts us green card 2 prospects italy kingdom saudi arabia national identification card programs 3 orders omcs national id card program angola 4 expected future orders negative evidence included 1 reliance limited number customers substantial portion business 2 uncertainty timing anticipated orders company’s customers 3 impact future stock option deductions taxable income 4 company’s experience net nols expiring unused fiscal year 2027 5 recent financial statement losses 6 prior three years’ cumulative tax net operating losses exclusive payments derived prevent global contract weighing positive negative evidence considered “more likely not” criteria pursuant sfas 109 well following risks related business “dependence vars limited number customers” “lengthy sales cycles” “technological change” “competition” described company concluded negative evidence outweighed positive evidence result recorded valuation allowance equal full amount deferred income tax asset march 31 2009 march 31 2008 march 31 2007 lasercard corporation subsidiaries notes consolidated financial statements event actual results differ estimates adjusted future periods company may need adjust amount valuation allowance based future determinations whether likely company’s deferred income tax assets realized decrease valuation allowance would recorded income tax benefit reduction income tax expense net operating losses available reduce future taxable income expire various dates fiscal year 2010 fiscal year 2027 extent company generates taxable income jurisdictions deferred income tax asset relates net operating losses offset full valuation allowance utilization net operating losses would result reversal related valuation allowance upon adoption fin 48 april 1 2007 company recognized cumulative effect adjustment 62000 decreasing income tax liability unrecognized tax benefits decreasing march 31 2007 accumulated deficit balance continually monitor need tax reserves fin 48 fiscal years 2009 2008 identify new reserve requirements march 31 2009 total amount gross unrecognized tax benefits inclusive interest penalties approximately 277000 entire amount recognized would affect effective tax rate currently anticipate significant increase decrease unrecognized tax benefits recorded next 12 months march 31 2008 total amount gross unrecognized tax benefits inclusive interest penalties approximately 263000 reconciliation beginning ending amount unrecognized tax benefit follows balance march 31 2007 229000 interest penalties 34000 balance march 31 2008 263000 interest penalties 14000 balance march 31 2009 277000 company recognizes interest penalties accrued unrecognized tax benefits component provision income taxes march 31 2009 company accrued 14000 payment interest penalties related unrecognized tax benefits march 31 2008 company accrued 34000 payment interest penalties related unrecognized tax benefits although company files us federal various state foreign tax returns company’s major tax jurisdictions united states california germany tax years 1993 2008 remain subject examination appropriate governmental agencies mainly united states due tax loss carryovers years lasercard corporation subsidiaries selected quarterly financial data unaudited thousands except per share amounts item 9 item 8 consolidated financial statements supplementary data report independent public accountants drexler technology corporation audited accompanying consolidated balance sheets drexler technology corporation delaware corporation subsidiaries march 31 1995 1996 related consolidated statements operations stockholders equity cash flows three years period ended march 31 1996 consolidated financial statements responsibility companys management responsibility express opinion consolidated financial statements based audits conducted audits accordance generally accepted auditing standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion financial statements referred present fairly material respects financial position drexler technology corporation subsidiaries march 31 1995 1996 results operations cash flows three years period ended march 31 1996 conformity generally accepted accounting principles sarthur andersen llp arthur andersen llp san jose california april 26 1996 drexler technology corporation subsidiaries consolidated balance sheets march 31 1995 1996 thousands except share per share amounts assets accompanying notes integral part consolidated balance sheets drexler technology corporation subsidiaries consolidated statements operations fiscal years ended march 31 1994 1995 1996 thousands except per share amounts accompanying notes integral part consolidated financial statements drexler technology corporation subsidiaries consolidated statements stockholders equity fiscal years ended march 31 1994 1995 1996 thousands except per share amounts accompanying notes integral part consolidated financial statements drexler technology corporation subsidiaries consolidated statements cash flows fiscal years ended march 31 1994 1995 1996 thousands accompanying notes integral part consolidated financial statements drexler technology corporation subsidiaries notes consolidated financial statements march 31 1996 1 organization operations drexler technology corporation wholly owned subsidiary lasercard systems corporation company develop manufacture market optical data storage products used personal computers information recording storage retrieval companys customers mainly valueadded reseller var companies throughout world develop commercial applications lasercardr products companys target markets include consumer business government applications portable recordable unitary record cards applications include healthcare secure accessid automobile maintenance cards company subject certain risks including competition substitute products larger companies need additional financing profitable operations external financing 2 summary significant accounting policies principles consolidation basis presentation consolidated financial statements include accounts drexler technology corporation wholly owned subsidiaries significant intercompany accounts transactions eliminated consolidation preparation financial statements conformity generally accepted accounting principles requires management make estimates assumptions affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenues expenses reporting period actual results could differ estimates fiscal period purposes presentation company indicated accounting period ending march 31 interim quarterly periods ending corresponding month end company fact operates reports quarterly periods ending friday closest month end fiscal 1994 1995 1996 52week years cash equivalents company considers highly liquid investments consisting primarily commercial paper original maturities three months less cash equivalents inventories stated lower cost market cost determined firstin firstout basis market based lower replacement cost estimated realizable value components inventories march 31 thousands company currently buys readerwriters important component systems one supplier interruption change supply readerwriters could cause delay product shipments possible loss sales would affect operating results adversely property equipment components property equipment march 31 thousands depreciation provided estimated useful lives five seven years equipment furniture using doubledeclining balance straightline methods fiscal 1995 company completed review fixed asset lives determined actual lives manufacturing equipment net book value 1320000 generally longer estimated useful lives depreciation purposes therefore company extended estimated useful lives manufacturing equipment five years effective october 1 1994 addition company established salvage value approximately 315000 equipment year ended march 31 1995 change estimated lives reduced depreciation expense approximately 375000 decreased net loss approximately 375000 005 per share year ended march 31 1996 change reduced depreciation expense approximately 658000 decreased net loss approximately 658000 008 per share leasehold improvements amortized shorter life asset life lease using straightline method patent costs incurred connection patents capitalized amortized estimated useful lives patents 9 17 years gross patent expenditures capitalized accumulated amortization march 31 follows thousands software development costs criteria set forth sfas 86 accounting costs computer software sold leased otherwise marketed capitalization software development costs begins upon establishment technological feasibility product company defines beta version software period time commencing product achieves beta status ending product available general release typically short accordingly amounts could capitalized sfas 86 consideration factors immaterial therefore software development costs capitalized company date revenue recognition product sales primarily consist card sales readerwriters company generally recognizes revenue product sales time shipment appropriate provision made time estimated warranty costs license revenues include frontend license fees longterm royalty payments license fees generally recognized revenues license agreement signed longterm royalty payments recognized revenue realized licenses sold fiscal 1994 fiscal 1995 license revenue included 1 million sale optical memory card distribution license fiscal 1996 license revenue included 200000 agreement comprised trademark license installment payment toward possible future license optical memory card distribution optical memory card distribution licenses grant right purchase cards companys favorable pricing cost license revenue material included selling general administrative expenses reclassifications certain reclassifications made prior year presentation conform current year presentation new accounting standards october 1995 financial accounting standards board issued sfas 123 accounting stockbased compensation effective companys 1997 fiscal year sfas 123 allows companies stockbased compensation arrangements employees adopt new fairvalue basis accounting stock options equity instruments continue apply existing accounting rules accounting principles board apb opinion 25 accounting stock issued employees additional financial statement disclosure company plans continue account stockbased compensation arrangements apb opinion 25 therefore anticipate sfas 123 material impact financial position results operations cash flows march 1995 financial accounting standards board issued sfas 121 accounting impairment longlived assets longlived assets disposed sfas 121 requires longlived assets reviewed impairment necessary impairment loss recorded whenever events changes circumstances indicate carrying amount asset may recoverable sfas 121 effective fiscal year 1997 management believe adoption sfas 121 material effect financial position results operations company 3 loss per share loss per share computed based upon weighted average number common shares outstanding 4 major customers export sales company operates one industry segmentthe development manufacture sale optical data products used computer data storage five customers accounted 10 revenues one years fiscal 1994 1995 1996 follows na applicable less 10 revenues march 31 1996 two substantial us customers comprised 96 total accounts receivable primarily products sold us government subcontract revenues region follows thousands three foreign countries accounted 10 revenues one years fiscal 1994 1995 1996 follows fiscal 1994 czech republic 18 fiscal 1995 south korea 34 czech republic 14 fiscal 1996 philippine islands 19 5 discontinued operations fourth quarter fiscal 1993 company closed precision photoglass inc subsidiary manufacturer photoplates semiconductor industry components income loss discontinued operations included consolidated statements operations contained herein fiscal years ended march 31 thousands liabilities related discontinued operations march 31 1995 consisted accounts payable 6 common stock march 31 1996 company reserved 1465520 shares 69412 shares common stock option stock purchase plans respectively companys 1991 stock option plan provides stock options may granted employees officers consultants company option prices may less 100 fair market value shares date grant options exercisable determined board directors term option cannot exceed ten years except option term cannot exceed five years case incentive stock options granted principal shareholder following option activity plan occurred since march 31 1993 march 31 1996 total 860333 option shares fully vested exercisable plan total option price paid options exercised fiscal 1994 1995 1996 1386348 62278 1893609 respectively companys employee stock purchase plan eligible employees may designate 2 6 compensation withheld purchase shares common stock 67 fair market value 33 differential price shares sold plan charged operations compensation plan employees purchased 2762 shares fiscal 1994 4673 shares fiscal 1995 3295 shares fiscal 1996 average purchase price per share 400 335 700 respectively 7 commitments company occupies facilities various operating leases rent expense relating facilities approximately 380000 fiscal 1994 363000 fiscal 1995 369000 fiscal 1996 march 31 1996 future minimum rental payments relating leases thousands 8 income taxes major components net deferred tax asset march 31 follows thousands company established valuation allowance total deferred tax asset uncertain deferred tax asset realized companys federal net operating losses expire various dates 2001 year 2011 companys state net operating losses expire various dates 1997 year 2001 tax credit carryforwards expire various dates 2000 year 2004 9 income december 1992 company filed claim third party possible future business loss june 1993 company third party reached agreement whereby third party agreed pay company 744000 full final settlement claim income settlement recorded fiscal 1994 income net expenses 31000 income type fiscal 1995 1996 first quarter fiscal 1996 company received 200000 nonrefundable deposit toward license agreement license agreement consummated deposit forfeited licensee income forfeiture deposit recorded income fiscal 1996 quarterly financial information unaudited quarterly results operations company fiscal 1995 fiscal 1996 follows thousands except per share amounts item 9 item 8 consolidated financial statements supplementary data report independent public accountants drexler technology corporation audited accompanying consolidated balance sheets drexler technology corporation delaware corporation subsidiaries march 31 1999 2000 related consolidated statements income stockholders equity cash flows three years period ended march 31 2000 financial statements responsibility companys management responsibility express opinion financial statements based audits conducted audits accordance auditing standards generally accepted united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion financial statements referred present fairly material respects financial position drexler technology corporation subsidiaries march 31 1999 2000 results operations cash flows three years period ended march 31 2000 conformity accounting principles generally accepted united states audits made purpose forming opinion basic financial statements taken whole schedule ii included form 10k responsibility companys management presented purposes complying securities exchange commissions rules part basic financial statements schedule subjected auditing procedures applied audits basic financial statements opinion fairly states material respects financial data required set forth therein relation basic financial statements taken whole arthur andersen llp san jose california april 27 2000 drexler technology corporation subsidiaries consolidated balance sheets march 31 1999 2000 thousands except share per share amounts accompanying notes integral part financial statements drexler technology corporation subsidiaries consolidated statements income fiscal years ended march 31 1998 1999 2000 thousands except per share amounts accompanying notes integral part financial statements drexler technology corporation subsidiaries consolidated statements stockholders equity fiscal years ended march 31 1998 1999 2000 thousands except per share amounts accompanying notes integral part financial statements drexler technology corporation subsidiaries consolidated statements cash flows fiscal years ended march 31 1998 1999 2000 thousands accompanying notes integral part financial statements drexler technology corporation subsidiaries notes consolidated financial statements march 31 2000 1 organization operations drexler technology corporation wholly owned subsidiary lasercard systems corporation company develop manufacture market optical data storage products used personal computers information recording storage retrieval companys customers mainly valueadded reseller var companies united states countries develop commercial applications lasercardr products target markets products include consumer business government applications portable recordable unitary record cards applications include us immigration green cards bordercrossing laser visa cards cargo manifests access cards healthcare record cards identification cards company subject certain risks including limited competition substitute products larger companies dependence certain suppliers customers 2 summary significant accounting policies principles consolidation basis presentation consolidated financial statements include accounts drexler technology corporation wholly owned subsidiaries significant intercompany accounts transactions eliminated consolidation preparation financial statements conformity accounting principles generally accepted united states requires management make estimates assumptions affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenues expenses reporting period actual results could differ estimates fiscal period purposes presentation company indicated accounting period ending march 31 interim quarterly periods ending corresponding month end company fact operates reports quarterly periods ending friday closest month end fiscal 1998 53week year fiscal 1999 2000 52week years notes receivable march 1999 company entered two equal promissory notes totaling 300000 securing obligation due company one party notes bear interest 5 per annum one note matured march 31 2000 full payment received note matures march 31 2001 march 31 2000 fair value note receivable approximated carrying value cash equivalents shortterm investments company considers highly liquid investments consisting primarily commercial paper original maturities three months less cash equivalents investments original maturities three months less one year classified shortterm investments fiscal 2000 second quarter ended september 30 1999 company began investing shortterm investments consisting primarily commercial paper resulting 5403000 classified shortterm investments march 31 2000 management determines appropriate classification debt equity securities time purchase reevaluates designation balance sheet date march 31 2000 marketable securities classified heldtomaturity consisted commercial paper inventories stated lower cost market cost determined firstin firstout basis market based lower replacement cost estimated realizable value components inventories march 31 thousands 1999 2000 raw materials 976 2851 workinprocess 310 658 finished goods 182 745 systems components held resale 441 165 1909 4419 property equipment components property equipment march 31 thousands 1999 2000 equipment furniture 14030 15024 leasehold improvements 2519 2098 16549 17122 depreciation provided estimated useful lives four seven years equipment furniture using doubledeclining balance straightline methods leasehold improvements amortized shorter life asset life lease using straightline method patent costs legal expenses incurred connection patents capitalized amortized estimated remaining useful lives patents six seventeen years costs incurred connection intangibles amortized using straightline method three years gross patent expenditures capitalized accumulated amortization march 31 follows thousands 1999 2000 gross patent intangible expenditures 3152 4302 accumulated amortization 1844 2178 1308 2124 company assesses need record impairment losses longlived assets used operations indicators impairment present ongoing basis company reviews value period amortization depreciation longlived assets date company needed record impairment losses longlived assets software development costs accordance statement financial accounting standards sfas 86 accounting costs computer software sold leased otherwise marketed development costs incurred research development new software products expensed incurred technological feasibility form working model established date companys software development completed concurrent establishment technological feasibility accordingly software development costs charged research development expense accompanying statements income advance payments customers company customarily receives advance payments orders placed customers advance payments recorded liability balance sheet related orders shipped revenue recognition product sales primarily consist card sales readwrite drives company generally recognizes revenue product sales time shipment appropriate provision made time estimated warranty costs due significant increases volume fiscal 1998 company established productreturn reserve estimated returns fiscal 1998 company recorded 820000 revenues delivery six prototype multitechnology card readers existing customer costs development manufacture workstations charged cost sales revenues type fiscal 1999 fiscal 2000 license revenue consists frontend license fees longterm royalty payments recognized revenue realized cost license revenue material included selling general administrative expenses fiscal 1998 license revenue included 400000 sale patent license fiscal 1999 license revenue included 200000 agreement provide technical information 500000 party complete purchase nonexclusive license optical memory card distribution grants right purchase cards companys favorable pricing fiscal 2000 license revenue included 119000 realized sale license assemble optical card readerwriters using parts kits supplied company stockbased compensation effective april 1 1996 company adopted disclosure provisions sfas 123 accounting stockbased compensation accordance provisions sfas 123 company applies accounting principles board opinion apb 25 related interpretations accounting stock option plan note 5 consolidated financial statements contains summary pro forma effects reported net income earnings per share fiscal 1998 1999 2000 based fair value options date grant prescribed sfas 123 recent accounting pronouncements june 1997 financial accounting standards board fasb issued sfas 130 reporting comprehensive income establishes standards reporting comprehensive income components revenues expenses gains losses financial statements sfas 130 requires classification comprehensive income financial statement display accumulated balance comprehensive income separately retained earnings additional paidin capital sfas 130 effective fiscal years beginning december 15 1997 company adopted sfas 130 quarter ended june 30 1998 fiscal years ended march 31 1999 2000 comprehensive income equaled net income june 1997 fasb also issued sfas 131 disclosures segments enterprise related information pronouncement establishes standards reporting information operating segments annual financial statements requires enterprises report selected information operating segments interim financial reports shareholders sfas 131 also establishes standards related disclosures products services geographic areas major customers company adopted sfas 131 fiscal year ended march 31 1999 company operates one industry segmentthe development manufacture sale optical data products used digital data storage result adoption sfas 131 impact companys disclosures june 1998 fasb issued sfas 133 accounting derivative instruments hedging activities establishes accounting reporting standards derivative instruments hedging activities applies quarter beginning january 1 2001 company currently hold derivative instruments engage hedging activities therefore adoption sfas 133 expected impact companys consolidated financial position results operations december 1999 securities exchange commission issued staff accounting bulletin sab 101 revenue recognition sab 101 provides guidance applying generally accepted accounting principles revenue recognition issues financial statements company believes current revenue recognition policies comply sab 101 march 2000 fasb issued financial standards board interpretation fin 44 accounting certain transactions involving stock compensationan interpretation apb opinion 25 fin 44 addresses application apb 25 clarify among issues definition employee purposes applying apb 25 b criteria determining whether plan qualifies noncompensatory plan c accounting consequence various modifications terms previously fixed stock option award accounting exchange stock compensation awards business combination fin 44 effective july 1 2000 certain conclusions cover specific events occur either december 15 1998 january 12 2000 extent fin 44 covers events occurring period december 15 1998 january 12 2000 effective date july 1 2000 effects applying interpretation recognized prospective basis july 1 2000 company currently evaluating fin 44 expect material effect financial position results operations reclassifications certain reclassifications made prior year presentation conform current year presentation 3 earnings per share company computes earnings per share accordance sfas 128 earnings per share sfas 128 requires companies compute net income per share two different methods basic diluted present per share data periods statement income presented basic earnings per share computed dividing net income weighted average number shares common stock outstanding diluted earnings per share computed dividing net income weighted average number shares common stock common stock equivalents outstanding common stock equivalents consist stock options using treasury stock method reconciliation numerators denominators basic diluted earnings per share computation fiscal years 1998 1999 2000 shown thousands except per share data exercise price greater average market value periods stock options representing 407950 shares excluded calculation fiscal 1998 diluted earnings per share stock options representing 561373 shares excluded calculation fiscal 1999 diluted earnings per share stock options representing 1196841 shares excluded calculation fiscal 2000 earnings per share 4 major customers export sales two customers accounted 10 revenues fiscal 1998 1999 2000 follows fiscal year 1998 1999 2000 customer 74 72 66 customer b 15 21 30 two substantial united states customers comprised 99 accounts receivable march 31 1998 98 accounts receivable march 31 2000 three customers comprised 96 accounts receivable march 31 1999 revenues region follows thousands fiscal year 1998 1999 2000 united states 9980 14825 16686 europe 558 803 223 asia 462 168 128 rest world 81 54 55 11081 15850 17092 5 common stock option plan company one stock option plan 1991 stock option plan 1991 option plan 2146130 shares common stock reserved march 31 2000 company accounts plan apb 25 accordingly compensation expense stock option grants 1991 stock option plan recognized consolidated financial statements provisions apb 25 sfas 123 requires disclosure pro forma net income per share company adopted fair value method beginning fiscal 1996 fair value method compensation cost measured grant date based value award recognized service period sfas 123 fair value stockbased awards calculated use option pricing models require subjective assumptions including future stock price volatility estimated term calculations made using blackscholes option pricing model results shown following table fiscal year 1998 1999 2000 riskfree interest rate 6 5 6 expected volatility 40 35 50 weighted average fair values option grants 433 404 422 pro forma net income 598 2382 3575 per share 06 24 36 calculations assume expected option life two ten years interest rate volatility weightedaverage assumptions shown table fair value option grant estimated date grant sfas 123 method accounting applied options granted prior april 1 1995 resulting pro forma compensation costs may representative costs future years companys 1991 option plan provides stock options may granted employees officers consultants company option prices may less 100 fair market value shares date grant board directors specifies term options vesting schedule exercise options option term cannot exceed ten years except incentive stock options granted principal shareholder cannot exceed five years following table lists 1991 option plan activity march 31 1997 march 31 2000 following table summarizes information stock options outstanding march 31 2000 employee stock purchase plan company employee stock purchase plan stock purchase plan 28772 shares reserved march 31 2000 future purchases employees stock purchase plan eligible employees may designate 2 6 compensation withheld purchase shares common stock 67 trailing average price differential fair market value average price shares sold stock purchase plan charged company operations compensation expense taxed employee income stock purchase plan employees purchased 6731 shares fiscal 1998 12810 shares fiscal 1999 16857 fiscal 2000 average purchase price per share 878 fiscal 1998 684 fiscal 1999 606 fiscal 2000 weighted average fair value per share shares purchased 1311 fiscal 1998 1021 fiscal 1999 963 fiscal 2000 6 commitments contingencies company occupies buildings various operating leases rent expense relating buildings approximately 373000 fiscal 1998 373000 fiscal 1999 480000 fiscal 2000 march 31 2000 future minimum rental payments relating leases thousands fiscal year 2001 974 2002 1089 2003 1099 2004 1126 2005 811 thereafter 941 6040 july december 1998 company filed complaints us district court northern district california infringement certain patents owned company covering digital sound encoded motion picture film certain defensive counterclaims filed defendants response complaints certain costs relating actions capitalized amortized remaining lives patents see note 2 company believe resolution actions including counterclaims material adverse effect financial condition company subject various claims assertions arise normal course business opinion management ultimate disposition claims assertions material adverse impact financial position company 7 income taxes provision income taxes fiscal 1998 fiscal 1999 fiscal 2000 consists following thousands fiscal year 1998 1999 2000 current provision federal 51 94 56 state 17 34 104 68 128 160 deferred provision federal 2697 state 2697 provision income taxes 68 128 2537 companys effective tax rate differs statutory rate follows fiscal year 1998 1999 2000 tax rate reconciliation federal statutory rate 34 state tax net federal benefit 6 utilization net operating loss carryforwards 40 132 alternative minimum taxes 4 3 2 4 3 90 major components net deferred tax asset march 31 follows thousands 1998 1999 2000 net operating loss carryforwards federal 14014 12845 11900 state 342 73 tax credits 1126 1350 1147 reserves accruals currently deductible tax purposes 361 479 565 depreciation 91 172 235 capitalized patent costs 300 521 714 7 18 33 total deferred tax asset 15445 14380 13100 valuation allowance provision 12430 11039 7011 valuation allowance equity 3015 3341 3446 net deferred tax asset 2643 company established valuation allowance uncertain portion deferred tax asset fully realized companys federal net operating losses expire various dates 2002 2012 tax credit carryforwards expire various dates 2001 2008 except 304 tax credits alternative minimum taxes expiration quarterly financial information unaudited quarterly results operations company fiscal 1999 fiscal 2000 follows thousands except per share amounts 1st quarter 2nd quarter 3rd quarter 4th quarter fiscal 1999 revenues 3846 3661 4056 4287 net income 975 993 1003 1156 income per share basic 10 12 diluted 10 12 fiscal 2000 revenues 3741 4252 4321 4778 net income 845 1387 1378 1750 income per share basic 09 14 18 diluted 09 14 17 item 9 item 8 consolidated financial statements supplementary data report independent public accountants drexler technology corporation audited accompanying consolidated balance sheets drexler technology corporation delaware corporation subsidiaries march 31 1997 1998 related consolidated statements operations stockholders equity cash flows three years period ended march 31 1998 financial statements responsibility companys management responsibility express opinion financial statements based audits conducted audits accordance generally accepted auditing standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion financial statements referred present fairly material respects financial position drexler technology corporation subsidiaries march 31 1997 1998 results operations cash flows three years period ended march 31 1998 conformity generally accepted accounting principles audit made purpose forming opinion basic financial statements taken whole schedule ii included form 10k responsibility companys management presented purposes complying securities exchange commissions rules part basic financial statements schedule subjected auditing procedures applied audit basic financial statements opinion fairly states material respects financial data required set forth therein relation basic financial statements taken whole sarthur andersen llp arthur andersen llp san jose california may 4 1998 drexler technology corporation subsidiaries consolidated balance sheets march 31 1997 1998 thousands except share per share amounts accompanying notes integral part financial statements drexler technology corporation subsidiaries consolidated statements operations fiscal years ended march 31 1996 1997 1998 thousands except per share amounts accompanying notes integral part financial statements drexler technology corporation subsidiaries consolidated statements stockholders equity fiscal years ended march 31 1996 1997 1998 thousands except per share amounts accompanying notes integral part financial statements drexler technology corporation subsidiaries consolidated statements cash flows fiscal years ended march 31 1996 1997 1998 thousands accompanying notes integral part financial statements drexler technology corporation subsidiaries notes consolidated financial statements march 31 1998 1 organization operations drexler technology corporation wholly owned subsidiary lasercard systems corporation company develop manufacture market optical data storage products used personal computers information recording storage retrieval companys customers mainly valueadded reseller var companies throughout world develop commercial applications lasercardr products companys target markets include consumer business government applications portable recordable unitary record cards applications include healthcare secure access immigrationid cards vehicle maintenance cards company subject certain risks including limited competition substitute products larger companies 2 summary significant accounting policies principles consolidation basis presentation consolidated financial statements include accounts drexler technology corporation wholly owned subsidiaries significant intercompany accounts transactions eliminated consolidation preparation financial statements conformity generally accepted accounting principles requires management make estimates assumptions affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenues expenses reporting period actual results could differ estimates fiscal period purposes presentation company indicated accounting period ending march 31 interim quarterly periods ending corresponding month end company fact operates reports quarterly periods ending friday closest month end fiscal 1996 1997 52week years fiscal 1998 53week year cash equivalents company considers highly liquid investments consisting primarily commercial paper original maturities three months less cash equivalents inventories stated lower cost market cost determined firstin firstout basis market based lower replacement cost estimated realizable value components inventories march 31 thousands company currently buys optical memory card readerwriters important component systems one supplier interruption change supply readerwriters could cause delay product shipments possible loss sales would adversely affect operating results property equipment components property equipment march 31 thousands depreciation provided estimated useful lives five seven years equipment furniture using doubledeclining balance straightline methods leasehold improvements amortized shorter life asset life lease using straightline method patent costs incurred connection patents capitalized amortized estimated useful lives patents 9 17 years gross patent expenditures capitalized accumulated amortization march 31 follows thousands software development costs criteria set forth statement financial accounting standard sfas 86 accounting costs computer software sold leased otherwise marketed capitalization software development costs begins upon establishment technological feasibility product company defines beta version software period time commencing product achieves beta status ending product available general release typically short accordingly amounts could capitalized sfas 86 consideration factors immaterial therefore software development costs capitalized company date advance payments customers company customarily receives advance payments orders placed customers advance payments deferred related orders shipped march 31 1998 approximately 93 total advance payments related contract one customer revenue recognition product sales primarily consist card sales readerwriters company generally recognizes revenue product sales time shipment appropriate provision made time estimated warranty costs due significant increases volume fiscal 1998 company recorded productreturn reserve estimated returns fiscal 1998 company recorded 820000 revenues delivery six prototype multitechnology card readers existing customer costs development manufacture workstations charged cost sales license revenues include frontend license fees longterm royalty payments license fees generally recognized revenues license agreement signed longterm royalty payments recognized revenue realized fiscal 1996 license revenue included 200000 agreement comprised trademark license installment payment toward possible future license optical memory card distribution optical memory card distribution licenses grant right purchase cards companys favorable pricing licenses sold fiscal 1997 fiscal 1998 license revenue included 400000 sale patent license cost license revenue material included selling general administrative expenses stockbased compensation effective april 1 1996 company adopted disclosure provisions sfas 123 accounting stockbased compensation accordance provisions sfas 123 company applies accounting principles board opinion apbo 25 related interpretations accounting stock option plan note 5 consolidated financial statements contains summary pro forma effects reported net income earnings per share fiscal 1996 1997 1998 based fair value options granted grant date prescribed sfas 123 new accounting pronouncements june 1997 financial accounting standards board fasb issued sfas 130 reporting comprehensive income establishes standards reporting comprehensive income components revenues expenses gains losses financial statements sfas 130 requires classification comprehensive income financial statement display accumulated balance comprehensive income separately retained earnings additional paidin capital sfas 130 effective fiscal years beginning december 15 1997 company believes pronouncement material effect financial statements june 1997 fasb also issued sfas 131 disclosures segments enterprise related information pronouncement established standards reporting information operating segments annual financial statements requires enterprises report selected information operating segments interim financial reports shareholders sfas 131 also establishes standards related disclosures products services geographic areas major customers sfas 131 effective fiscal years beginning december 15 1997 although earlier application encouraged company yet determine impact adoption new pronouncement reclassifications certain reclassifications made prior year presentation conform current year presentation 3 net income loss per share february 1997 fasb issued sfas 128 earnings per share simplifies standards computing earnings per share previously found apbo 15 sfas 128 replaces presentation primary earnings per share presentation basic earnings per share excludes dilution sfas 128 also requires dual presentation basic diluted earnings per share face income statement entitles complex capital structures requires reconciliation sfas 128 must adopted financial statements issued periods ending december 15 1997 including interim periods sfas 128 requires restatement priorperiod earnings per share data presented company adopted sfas 128 earnings per share quarter ended december 31 1997 sfas 128 requires computation basic diluted earnings per share adoption sfas 128 material impact companys financial statements basic earnings loss per share computed using weighted average number common shares outstanding diluted earnings per share fiscal year ended march 31 1998 computed using weighted average number shares common stock outstanding dilutive common stock equivalents using treasury stock method diluted loss per share fiscal years ended march 31 1996 1997 equals basic loss per share common stock equivalents antidilutive fiscal 1996 1997 amounts restated accordance provisions sfas 128 company adopted sfas 128 fiscal year ended march 31 1998 reconciliation numerators denominators basic diluted earnings per share computation follows stock options representing 407950 shares excluded calculation fiscal 1998 diluted earnings per share exercise price greater average market value period 4 major customers export sales company operates one industry segmentthe development manufacture sale optical data products used computer data storage three customers accounted 10 revenues one years fiscal 1996 1997 1998 follows na applicable less 10 revenues two substantial us customers comprised 96 accounts receivable march 31 1996 70 accounts receivable march 31 1997 99 accounts receivable march 31 1998 primarily products sold one us government subcontract 1996 1997 two us government subcontracts 1998 revenues region follows thousands one foreign country accounted 10 revenues fiscal 1996 1997 follows philippine islands 19 fiscal 1996 14 fiscal 1997 foreign country accounted 10 revenues fiscal 1998 5 common stock option plan company one stock option plan 1991 stock option plan 1991 option plan 1567420 shares common stock reserved march 31 1998 company accounts plan apbo 25 accordingly compensation expense recognized consolidated financial statements sfas 123 requires disclosure pro forma net loss per share company adopted fair value method beginning fiscal 1996 fair value method compensation cost measured grant date based value award recognized service period sfas 123 fair value stockbased awards employees calculated use option pricing models require subjective assumptions including future stock price volatility estimated term calculations made using blackscholes optionpricing model following weightedaverage assumptions used grants fiscal 1996 1997 1998 riskfree interest rate 6 expected lives two five years expected volatility 55 fiscal 1996 55 fiscal 1997 40 fiscal 1998 fair value option grant estimated date grant calculations resulted weighted average fair values 325 642 433 respectively options granted fiscal 1996 1997 1998 pro forma net loss 2701000 031 per share fiscal 1996 3397000 038 per share fiscal 1997 pro forma net income 598000 06 per share fiscal 1998 sfas 123 method accounting applied options granted prior april 1 1995 resulting pro forma compensation costs may representative costs would expected future years companys 1991 option plan provides stock options may granted employees officers consultants company option prices may less 100 fair market value shares date grant options exercisable determined board directors term option cannot exceed ten years except option term cannot exceed five years case incentive stock options granted principal shareholder total option price paid options exercised fiscal 1996 1997 1998 1893609 2036559 1850229 respectively following table lists option activity 1991 option plan occurred since march 31 1995 following table summarizes information stock options outstanding march 31 1998 employee stock purchase plan company employee stock purchase plan stock purchase plan 58439 shares reserved march 31 1998 stock purchase plan eligible employees may designate 2 6 compensation withheld purchase shares common stock 67 fair market value 33 differential price shares sold stock purchase plan charged operations compensation stock purchase plan employees purchased 3295 shares fiscal 1996 4242 shares fiscal 1997 6731 shares fiscal 1998 average purchase price per share 700 749 878 respectively weighted average fair value per share shares purchased fiscal 1996 1997 1998 1045 1117 1311 respectively 6 commitments company occupies facilities various operating leases rent expense relating facilities approximately 369000 fiscal 1996 372000 fiscal 1997 373000 fiscal 1998 march 31 1998 future minimum rental payments relating leases thousands 7 income taxes provision taxes fiscal 1997 1996 due net operating losses provision income taxes fiscal 1998 consists following thousands companys effective tax rate differs statutory rate follows major components net deferred tax asset march 31 follows thousands company established valuation allowance total deferred tax asset uncertain deferred tax asset realized change valuation allowance fiscal 1997 1998 includes current year timing differences deferred provision expiration certain state carryforward balances companys federal net operating losses expire various dates 2001 year 2012 companys state net operating losses expire various dates 1999 year 2002 tax credit carryforwards expire various dates 2000 year 2004 8 income first quarter fiscal 1996 company received 200000 nonrefundable deposit toward license agreement license agreement consummated deposit forfeited licensee income forfeiture deposit recorded income fiscal 1996 quarterly financial information unaudited quarterly results operations company fiscal 1997 fiscal 1998 follows thousands except per share amounts item 9 item 8 consolidated financial statements supplementary data report independent public accountants drexler technology corporation audited accompanying consolidated balance sheets drexler technology corporation delaware corporation subsidiaries march 31 1998 1999 related consolidated statements operations stockholders equity cash flows three years period ended march 31 1999 financial statements responsibility companys management responsibility express opinion financial statements based audits conducted audits accordance generally accepted auditing standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion financial statements referred present fairly material respects financial position drexler technology corporation subsidiaries march 31 1998 1999 results operations cash flows three years period ended march 31 1999 conformity generally accepted accounting principles audits made purpose forming opinion basic financial statements taken whole schedule ii included form 10k responsibility companys management presented purposes complying securities exchange commissions rules part basic financial statements schedule subjected auditing procedures applied audits basic financial statements opinion fairly states material respects financial data required set forth therein relation basic financial statements taken whole arthur andersen llp arthur andersen llp san jose california april 30 1999 drexler technology corporation subsidiaries consolidated balance sheets march 31 1998 1999 thousands except share per share amounts accompanying notes integral part financial statements drexler technology corporation subsidiaries consolidated statements operations fiscal years ended march 31 1997 1998 1999 thousands except per share amounts accompanying notes integral part financial statements drexler technology corporation subsidiaries consolidated statements stockholders equity fiscal years ended march 31 1997 1998 1999 thousands except per share amounts accompanying notes integral part financial statements drexler technology corporation subsidiaries consolidated statements cash flows fiscal years ended march 31 1997 1998 1999 thousands accompanying notes integral part financial statements drexler technology corporation subsidiaries notes consolidated financial statements march 31 1999 1 organization operations drexler technology corporation wholly owned subsidiary lasercard systems corporation company develop manufacture market optical data storage products used personal computers information recording storage retrieval companys customers mainly valueadded reseller var companies united states countries develop commercial applications lasercardr products target markets products include consumer business government applications portable recordable unitary record cards applications include immigration cards cargo manifests access cards healthcare record cards identification cards automotive record cards company subject certain risks including limited competition substitute products larger companies dependence certain suppliers customers 2 summary significant accounting policies principles consolidation basis presentation consolidated financial statements include accounts drexler technology corporation wholly owned subsidiaries significant intercompany accounts transactions eliminated consolidation preparation financial statements conformity generally accepted accounting principles requires management make estimates assumptions affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenues expenses reporting period actual results could differ estimates fiscal period purposes presentation company indicated accounting period ending march 31 interim quarterly periods ending corresponding month end company fact operates reports quarterly periods ending friday closest month end fiscal 1998 53week year fiscal 1997 1999 52week years notes receivable march 1999 company entered two equal promissory notes totaling 300000 securing obligation due company notes bear interest 5 per annum one note matures march 31 2000 note matures march 31 2001 march 31 1999 fair value notes receivable approximated carrying value cash equivalents company considers highly liquid investments consisting primarily commercial paper original maturities three months less cash equivalents inventories stated lower cost market cost determined firstin firstout basis market based lower replacement cost estimated realizable value components inventories march 31 thousands property equipment components property equipment march 31 thousands depreciation provided estimated useful lives five seven years equipment furniture using doubledeclining balance straightline methods leasehold improvements amortized shorter life asset life lease using straightline method patent costs incurred connection patents capitalized amortized estimated useful lives patents 9 17 years gross patent expenditures capitalized accumulated amortization march 31 follows thousands software development costs criteria set forth statement financial accounting standards sfas 86 accounting costs computer software sold leased otherwise marketed capitalization software development costs begins upon establishment technological feasibility product company defines beta version software period time achievement beta status availability product general release typically short accordingly amounts could capitalized sfas 86 consideration factors immaterial therefore software development costs capitalized company date advance payments customers company customarily receives advance payments orders placed customers advance payments deferred related orders shipped revenue recognition product sales primarily consist card sales readerwriters company generally recognizes revenue product sales time shipment appropriate provision made time estimated warranty costs due significant increases volume fiscal 1998 company established productreturn reserve estimated returns fiscal 1998 company recorded 820000 revenues delivery six prototype multitechnology card readers existing customer costs development manufacture workstations charged cost sales revenues type fiscal 1997 fiscal 1999 license revenues include frontend license fees longterm royalty payments license fees generally recognized revenues license agreement signed longterm royalty payments recognized revenue realized licenses sold fiscal 1997 fiscal 1998 license revenue included 400000 sale patent license fiscal 1999 license revenue included 200000 agreement provide technical information 500000 complete purchase nonexclusive license optical memory card distribution optical memory card distribution licenses grant right purchase cards companys favorable pricing cost license revenue material included selling general administrative expenses stockbased compensation effective april 1 1996 company adopted disclosure provisions sfas 123 accounting stockbased compensation accordance provisions sfas 123 company applies accounting principles board opinion apb 25 related interpretations accounting stock option plan note 5 consolidated financial statements contains summary pro forma effects reported net income earnings per share fiscal 1997 1998 1999 based fair value options date grant prescribed sfas 123 new accounting pronouncements june 1997 financial accounting standards board fasb issued sfas 130 reporting comprehensive income establishes standards reporting comprehensive income components revenues expenses gains losses financial statements sfas 130 requires classification comprehensive income financial statement display accumulated balance comprehensive income separately retained earnings additional paidin capital sfas 130 effective fiscal years beginning december 15 1997 company adopted sfas 130 quarter ended june 30 1998 fiscal year ended march 31 1999 comprehensive income equalled net income june 1997 fasb also issued sfas 131 disclosures segments enterprise related information pronouncement establishes standards reporting information operating segments annual financial statements requires enterprises report selected information operating segments interim financial reports shareholders sfas 131 also establishes standards related disclosures products services geographic areas major customers company adopted sfas 131 fiscal year ended march 31 1999 company operates one industry segmentthe development manufacture sale optical data products used computer data storage result adoption sfas 131 impact companys disclosures june 1998 fasb issued sfas 133 accounting derivative instruments hedging activities establishes accounting reporting standards derivative instruments hedging activities pronouncement effective fiscal years beginning june 15 1999 statement must applied derivative instruments issued acquired substantively modified december 31 1997 adoption sfas 133 expected impact companys consolidated financial position results operations reclassifications certain reclassifications made prior year presentation conform current year presentation 3 net income loss per share february 1997 fasb issued sfas 128 earnings per share simplifies standards computing earnings per share previously found apb 15 sfas 128 replaces presentation primary earnings per share presentation basic earnings per share excludes dilution sfas 128 also requires dual presentation basic diluted earnings per share face income statement entities complex capital structures requires reconciliation sfas 128 must adopted financial statements issued periods ending december 15 1997 including interim periods sfas 128 requires restatement priorperiod earnings per share data presented company adopted sfas 128 fiscal year ended march 31 1998 adoption sfas 128 material impact companys financial statements basic earnings loss per share computed using weighted average number common shares outstanding diluted earnings per share fiscal years ended march 31 1998 1999 computed using weighted average number shares common stock outstanding dilutive common stock equivalents using treasury stock method diluted loss per share fiscal year ended march 31 1997 equals basic loss per share common stock equivalents antidilutive fiscal 1997 amounts restated accordance provisions sfas 128 reconciliation numerators denominators basic diluted earnings per share computation shown follows exercise price greater average market value periods stock options representing 407950 shares excluded calculation fiscal 1998 diluted earnings per share stock options representing 561373 shares excluded calculation fiscal 1999 diluted earnings per share 4 major customers export sales three customers accounted 10 revenues one years fiscal 1997 1998 1999 follows na applicable less 10 revenues two substantial us customers comprised 70 accounts receivable march 31 1997 99 accounts receivable march 31 1998 three customers comprised 96 accounts receivable march 31 1999 revenues region follows thousands one foreign country philippine islands accounted 14 revenues fiscal 1997 foreign country accounted 10 revenues fiscal 1998 fiscal 1999 5 common stock option plan company one stock option plan 1991 stock option plan 1991 option plan 1900920 shares common stock reserved march 31 1999 company accounts plan apb 25 accordingly compensation expense stock option grants 1991 stock option plan recognized consolidated financial statements provisions apb 25 sfas 123 requires disclosure pro forma net loss per share company adopted fair value method beginning fiscal 1996 fair value method compensation cost measured grant date based value award recognized service period sfas 123 fair value stockbased awards calculated use option pricing models require subjective assumptions including future stock price volatility estimated term calculations made using blackscholes optionpricing model results shown following table calculations assume expected option life two five years interest rate volatility weightedaverage assumptions shown table fair value option grant estimated date grant sfas 123 method accounting applied options granted prior april 1 1995 resulting pro forma compensation costs may representative costs would expected future years companys 1991 option plan provides stock options may granted employees officers consultants company option prices may less 100 fair market value shares date grant board directors specifies term options vesting schedule exercise options option term cannot exceed ten years except incentive stock options granted principal shareholder cannot exceed five years option prices paid company options exercised totaled approximately 2036000 fiscal 1997 1850000 fiscal 1998 986000 fiscal 1999 following table lists 1991 option plan activity march 31 1996 march 31 1999 following table summarizes information stock options outstanding march 31 1999 employee stock purchase plan company employee stock purchase plan stock purchase plan march 31 1999 45629 shares reserved future purchases employees stock purchase plan eligible employees may designate 2 6 compensation withheld purchase shares common stock 67 fair market value 33 differential price shares sold stock purchase plan charged company operations compensation expense taxed employee income stock purchase plan employees purchased 4242 shares fiscal 1997 6731 shares fiscal 1998 12810 shares fiscal 1999 average purchase price per share 749 fiscal 1997 878 fiscal 1998 684 fiscal 1999 weighted average fair value per share shares purchased 1117 fiscal 1997 1311 fiscal 1998 1021 fiscal 1999 6 commitments contingencies company occupies facilities various operating leases rent expense relating facilities approximately 372000 fiscal 1997 373000 fiscal 1998 373000 fiscal 1999 march 31 1999 future minimum rental payments relating leases thousands july december 1998 company filed complaints us district court northern district california infringement certain patents owned company covering digital sound encoded motion picture film certain defensive counterclaims filed defendants response complaints certain costs relating actions capitalized amortized remaining lives patents see note 2 company believe resolution actions including counterclaims material adverse effect financial condition company 7 income taxes provision taxes fiscal 1997 due net operating losses provision income taxes fiscal 1998 fiscal 1999 consists following thousands companys effective tax rate differs statutory rate follows major components net deferred tax asset march 31 follows thousands company established valuation allowance total deferred tax asset uncertain deferred tax asset realized companys federal net operating losses expire various dates 2002 year 2012 companys state net operating losses expire 2002 tax credit carryforwards expire various dates 2000 year 2007 quarterly financial information unaudited quarterly results operations company fiscal 1998 fiscal 1999 follows thousands except per share amounts item 9 item 15 exhibits financial statement schedules list documents filed part report 1 consolidated financial statements filed herewith item 8 follows description page number 1 reports independent registered public accounting firm 2 consolidated balance sheets march 31 2007 march 31 2006 3 consolidated statements operations fiscal years 2007 2006 4 consolidated statements stockholders equity comprehensive income loss fiscal years 2007 2006 2005 5 consolidated statements cash flows fiscal years 2007 2006 6 notes consolidated financial statements 2 financial statement schedules schedule supporting consolidated financial statements filed herewith item 14d follows exhibit filed herewith incorporated number description herein reference 31 amended restated certificate incorporation exhibit 31 report form 10k fiscal year ended march 31 32 amended restated bylaws exhibit 32 report form 10k fiscal year ended march 31 101 building lease agreement renault handley employees investment co 26442648 bayshore pkwy mountain view ca exhibit 101 report form 10q period ended december 31 102 building lease agreement shoreline park llc 1395 charleston road mountain view ca mailing address 1875 north shoreline boulevard mountain view ca exhibit 102 report form 10k fiscal year ended march 31 2004 103 amended restated stock option plan exhibit 1041 report form 10q period ended september 30 107 stock warrant purchase agreement amended exhibit 992 report form 10q period ended december 31 2003 108 optical card manufacturing license agreement global investments group exhibit 108 report form 10k fiscal year ended march 31 2004 109 equity incentive compensation plan amended appendix schedule 14a proxy statement 2005annual stockholders meeting 1010 june 29 2006 amendment license equipment agreement global investments group exhibit 1010 report form 10q period ended june 30 2006 1011 october 27 2006 modified third amendment license equipment agreement global investments group prevent lok exhibit 1011 report form 8k dated october 30 2006 163 letter change certifying accountants exhibit 161 report form 8k dated december 14 2004 subsidiaries registrant filed herewith page 82 231 consent odenberg ullakko muranishi co llp independent registered public accounting firm filed herewith page 83 power attorney filed herewith page 79 311 rule 13a14a15d14a certification richard haddock principal executive officer filed herewith page 84 312 rule 13a14a15d14a certification steven g larson principal financial officer filed herewith page 85 321 section 1350 certification richard haddock chief executive officers filed herewith page 86 322 section 1350 certification steven g larson chief financial officer filed herewith page 87 indicates management contract compensatory plan arrangement portions omitted pursuant request confidential treatment b exhibits 21 231 24 311 312 321 322 filed herewith c financial statement schedule ii consolidated financial statements page 78 report independent registered public accounting firm financial statement schedule board directors stockholders lasercard corporation audit referred report dated may 18 2007 included related financial statement schedule fiscal years ended march 31 2007 2006 2005 included annual report form 10k financial statement schedule responsibility management responsibility express opinion financial statement schedule based audits opinion financial statement schedule considered relation consolidated financial statements taken whole presents fairly material respects information set forth therein sodenberg ullakko muranishi co llp san francisco california may 18 schedule ii signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized dated june 12 2007 lasercard corporation richard haddock richard haddock chief executive officer know persons presents person whose signature appears constitutes appoints richard haddock steven g larson acting individually attorneyinfact full power substitution resubstitution name place stead capacities sign amendments report form 10k file exhibits thereto documents connection therewith securities exchange commission granting unto said attorneysinfact agents full power authority perform every act thing requisite necessary done connection therewith premises fully intents purposes might could person hereby ratifying confirming said attorneysinfact agents substitute substitutes may lawfully cause done virtue hereof pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated signature title date srichard haddock president chief executive officer june 12 2007 richard haddock principal executive officer director ssteven g larson vice president finance treasurer june 12 2007 steven g larson principal financial officer principal accounting officer sbernard c bailey director june 12 2007 bernard c bailey sarthur h hausman director june 12 2007 arthur h hausman sdonald e mattson director june 12 2007 donald e mattson director dan maydan salbert j moyer director june 12 2007 albert j moyer swalter f walker director june 12 2007 walter f walker index exhibits item 14c exhibit number description 31 amended restated certificate incorporation exhibit 31 report form 10k fiscal year ended march 31 2005 32 amended restated bylaws exhibit 32 report form 10k fiscal year ended march 31 2005 101 building lease agreement renault handley employees investment co 26442648 bayshore parkway mountain view ca previously filed exhibit 101 report form 10q period ending december 31 2003 incorporated herein reference 102 building lease agreement shoreline park llc 1395 charleston road mountain view ca mailing address 1875 north shoreline boulevard mountain view ca filed exhibit 102 report form 10k fiscal year ended march 31 2004 incorporated herein reference 103 amended restated stock option plan previously filed exhibit 1041 report form 10q period ended september 30 2002 incorporated herein reference 107 stock warrant purchase agreement amended previously filed exhibit 992 report form 10q period ended december 31 2003 108 optical card manufacturing license agreement global investments group filed exhibit 108 report form 10k fiscal year ended march 31 2004 incorporated herein reference 109 equity incentive compensation plan amended previously filed appendix schedule 14a proxy statement 2005 annual stockholders meeting filed sec september 6 2005 incorporated herein reference 1010 june 29 2006 amendment license equipment agreement global investments group prevent lok previously filed exhibit 1010 report form 10q period ending june 30 2006 incorporated herein reference 1011 october 27 2006 modified third amendment license equipment agreements global investments group prevent lok previously filed exhibit 1011 form 8k dated october 30 2006 filed sec november 1 2006 incorporated herein reference 163 letter change certifying accountant previously filed exhibit 161 current report form 8k dated december 14 2004 subsidiaries registrant filed herewith page 82 231 consent odenberg ullakko muranishi co llp independent registered public accounting firm filed herewith page 83 power attorney filed herewith page 79 311 rule 13a14a15d14a certification richard haddock principal executive officer filed herewith page 312 rule 13a14a15d14a certification steven g larson principal financial officer filed herewith page 85 321 section 1350 certification richard haddock chief executive officer president filed herewith page 86 322 section 1350 certification steven g larson chief financial officer filed herewith page 87 indicates management contract compensatory plan arrangement portions omitted pursuant request confidential treatment item 15 exhibits financial statement schedules list documents filed part report 1 consolidated financial statements filed herewith item 8 follows description page number 1 reports independent registered public accounting firm 2 consolidated balance sheets march 31 2008 march 31 2007 3 consolidated statements operations fiscal years 2008 2007 4 consolidated statements stockholders equity comprehensive income loss fiscal years 2008 2007 2006 5 consolidated statements cash flows fiscal years 2008 2007 6 notes consolidated financial statements 2 financial statement schedules schedule supporting consolidated financial statements filed herewith item 14d follows schedule number description page number report independent registered public accounting firm financial statement schedule ii valuation qualifying accounts schedules listed applicable required information required set forth therein included consolidated financial statements notes thereto 3 exhibits report filed herewith item 15b incorporated reference documents previously filed securities exchange commission follows exhibit number description filed herewith incorporated herein reference 3i amended restated certificate incorporation exhibit 31 report form 10k fiscal year ended march 31 3ii amended restated bylaws add new section 465 vice chairman exhibit 3ii report form 10q period ended december 31 101 building lease agreement renault handley employees investment co 26442648 bayshore pkwy mountain view ca exhibit 101 report form 10q period ended december 31 102 building lease agreement shoreline park llc 1395 charleston road mountain view ca mailing address 1875 north shoreline boulevard mountain view ca exhibit 102 report form 10k fiscal year ended march 31 103 amended restated stock option plan exhibit 1041 report form 10q period ended september 30 107 stock warrant purchase agreement amended exhibit 992 report form 10q period ended december 31 108 optical card manufacturing license agreement global investments group exhibit 108 report form 10k fiscal year ended march 31 2004 109 equity incentive compensation plan amended appendix schedule 14a proxy statement 2005annual stockholders meeting 1010 june 29 2006 amendment license equipment agreement global investments group exhibit 1010 report form 10q period ended june 30 2006 1011 october 27 2006 modified third amendment license equipment agreement global investments group prevent lok exhibit 1011 report form 8k dated october 30 2006 1012 employee stock purchase plan amended appendix schedule 14a proxy statement 2007 annual stockholders meeting 1013 planned retirement agreement age discrimination release agreement richard haddock exhibit 1013 report form 10q period ended december 31 2007 1014 executive employment agreements christopher j dyball steven g larson exhibit 1014 report form 10q period ended december 31 2007 163 letter change certifying accountants exhibit 161 report form 8k dated december 14 2004 subsidiaries registrant filed herewith page 93 231 consent odenberg ullakko muranishi co llp independent registered public accounting firm filed herewith page 94 power attorney filed herewith page 90 311 rule 13a14a15d14a certification bernard c bailey principal executive officer filed herewith page 95 312 rule 13a14a15d14a certification steven g larson principal financial officer filed herewith page 96 321 section 1350 certification bernard c bailey principal executive officer filed herewith page 97 322 section 1350 certification steven g larson principal financial officer filed herewith page 98 indicates management contract compensatory plan arrangement portions omitted pursuant request confidential treatment b exhibits 21 231 24 311 312 321 322 filed herewith c financial statement schedule ii consolidated financial statements page 89 report independent registered public accounting firm financial statement schedule board directors stockholders lasercard corporation audit referred report dated june 4 2008 included related financial statement schedule fiscal years ended march 31 2008 2007 2006 included annual report form 10k financial statement schedule responsibility management responsibility express opinion financial statement schedule based audits opinion financial statement schedule considered relation consolidated financial statements taken whole presents fairly material respects information set forth therein sodenberg ullakko muranishi co llp san francisco california june 4 schedule ii signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized dated june 6 2008 lasercard corporation sbernard c bailey bernard c bailey interim chief executive officer know persons presents person whose signature appears constitutes appoints bernard c bailey steven g larson acting individually attorneyinfact full power substitution resubstitution name place stead capacities sign amendments report form 10k file exhibits thereto documents connection therewith securities exchange commission granting unto said attorneysinfact agents full power authority perform every act thing requisite necessary done connection therewith premises fully intents purposes might could person hereby ratifying confirming said attorneysinfact agents substitute substitutes may lawfully cause done virtue hereof pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated index exhibits item 14c exhibit number description 3i amended restated certificate incorporation exhibit 31 report form 10k fiscal year ended march 31 2005 3ii amended restated bylaws exhibit 3ii report form 10q period ended december 31 2007 101 building lease agreement renault handley employees investment co 26442648 bayshore parkway mountain view ca previously filed exhibit 101 report form 10q period ending december 31 2003 incorporated herein reference 102 building lease agreement shoreline park llc 1395 charleston road mountain view ca mailing address 1875 north shoreline boulevard mountain view ca filed exhibit 102 report form 10k fiscal year ended march 31 2004 incorporated herein reference 103 amended restated stock option plan previously filed exhibit 1041 report form 10q period ended september 30 2002 incorporated herein reference 107 stock warrant purchase agreement amended previously filed exhibit 992 report form 10q period ended december 31 108 optical card manufacturing license agreement global investments group filed exhibit 108 report form 10k fiscal year ended march 31 2004 incorporated herein reference 109 equity incentive compensation plan amended previously filed appendix schedule 14a proxy statement 2005 annual stockholders meeting filed sec september 6 2005 incorporated herein reference 1010 june 29 2006 amendment license equipment agreement global investments group prevent lok previously filed exhibit 1010 report form 10q period ending june 30 2006 incorporated herein reference 1011 october 27 2006 modified third amendment license equipment agreements global investments group prevent lok previously filed exhibit 1011 form 8k dated october 30 2006 filed sec november 1 2006 incorporated herein reference 1012 employee stock purchase plan amended previously filed appendix amended schedule 14a proxy statement 2007 annual stockholders meeting filed sec august 3 2007 incorporated herein reference 1013 november 28 2007 planned retirement agreement age discrimination release agreement richard haddock incorporated herein reference 1014 january 4 2008 executive employment agreements steven g larson richard haddock incorporated herein reference 163 letter change certifying accountant previously filed exhibit 161 current report form 8k dated december 14 2004 subsidiaries registrant filed herewith page 231 consent odenberg ullakko muranishi co llp independent registered public accounting firm filed herewith page 94 power attorney filed herewith page 90 311 rule 13a14a15d14a certification bernard c bailey principal executive officer filed herewith page 312 rule 13a14a15d14a certification steven g larson principal financial officer filed herewith page 96 321 section 1350 certification bernard c bailey principal executive officer president filed herewith page 97 322 section 1350 certification steven g larson principal financial officer filed herewith page 98 indicates management contract compensatory plan arrangement portions omitted pursuant request confidential treatment item 15 exhibits financial statement schedules list documents filed part report 1 consolidated financial statements company filed herewith item 8 follows 2 financial statement schedules schedule supporting companys consolidated financial statements filed herewith item 14d follows schedules listed applicable required information required set forth therein included consolidated financial statements notes thereto 3 exhibits report filed herewith item 14c incorporated reference documents previously filed securities exchange commission follows indicates management contract compensatory plan arrangement b exhibits 31 32 21 231 232 233 24 311 312 321 322 filed herewith c financial statement schedule ii companys consolidated financial statements page 84 report independent registered public accounting firm financial statement schedule board directors stockholders lasercard corporation audit referred report dated june 3 2005 included related financial statement schedule march 31 2005 year ended included annual report form 10k financial statement schedule responsibility companys management responsibility express opinion financial statement schedule based audit opinion financial statement schedule considered relation consolidated financial statements taken whole presents fairly material respects information set forth therein sodenberg ullakko muranishi co llp san francisco california june 3 2005 report independent registered public accounting firm financial statement schedule board directors stockholders lasercard corporation audit referred report dated june 9 2004 included related financial statement schedule march 31 2004 year ended included annual report form 10k financial statement schedule responsibility companys management responsibility express opinion financial statement schedule based audit opinion financial statement schedule considered relation consolidated financial statements taken whole presents fairly material respects information set forth therein kpmg llp mountain view california june 9 2004 report independent registered public accounting firm financial statement schedule board directors stockholders lasercard corporation audit consolidated financial statements lasercard corporation formerly drexler technology corporation referred report dated april 28 2003 except note 4 date january 22 2004 report consolidated financial statements included annual report form 10k also included audit financial statement schedule fiscal 2003 listed item 15a2 form 10k opinion financial statement schedule presents fairly material respects information set forth therein read conjunction related consolidated financial statements spricewaterhousecoopers llp san jose california april 28 2003 1 represents amount bad debt reserve recorded accounts receivable acquired entities date acquisition 2 amount relates stock option deductions credited additional paidin capital realized signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized dated june 14 2005 lasercard corporation richard haddock richard haddock chief executive officer know persons presents person whose signature appears constitutes appoints richard haddock steven g larson acting individually attorneyinfact full power substitution resubstitution name place stead capacities sign amendments report form 10k file exhibits thereto documents connection therewith securities exchange commission granting unto said attorneysinfact agents full power authority perform every act thing requisite necessary done connection therewith premises fully intents purposes might could person hereby ratifying confirming said attorneysinfact agents substitute substitutes may lawfully cause done virtue hereof pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated index exhibits item 14c exhibit number description 31 amended restated certificate incorporation filed herewith page 88 32 amended restated bylaws filed herewith page 92 101 building lease agreement renault handley employees investment co 26442648 bayshore parkway mountain view ca previously filed exhibit 101 report form 10q period ending december 31 2003 incorporated herein reference 102 building lease agreement shoreline park llc 1395 charleston road mountain view ca mailing address 1875 north shoreline boulevard mountain view ca filed exhibit 102 report form 10k fiscal year ended march 31 2004 incorporated herein reference 103 amended restated stock option plan previously filed exhibit 1041 report form 10q period ended september 30 2002 incorporated herein reference 104 patent license agreement nippon conlux co ltd previously filed exhibit 106 report form 10k fiscal year ended march 31 1999 incorporated herein reference 105 us government subcontract information spectrum inc anteon international dated june 2 2000 previously filed exhibit 106 report form 10k fiscal year ended march 31 2001 incorporated herein reference 106 engagement letter morgan keegan co inc amended previously filed exhibit 991 report form 10q period ended december 31 2003 107 stock warrant purchase agreement amended previously filed exhibit 992 report form 10q period ended december 31 2003 108 optical card manufacturing license agreement global investments group portions omitted pursuant request confidential treatment filed exhibit 108 report form 10k fiscal year ended march 31 2004 incorporated herein reference 161 letter change certifying accountant previously filed exhibit 16 current report form 8k dated april 8 2002 162 letter change certifying accountant previously filed exhibit 161 current report form 8k dated august 29 2003 163 letter change certifying accountant previously filed exhibit 161 current report form 8k dated december 14 2004 21 subsidiaries registrant filed herewith page 106 231 consent independent registered public accounting firm oum filed herewith page 107 232 consent independent registered public accounting firm kpmg filed herewith page 108 233 consent independent registered public accounting firm pricewaterhousecoopers filed herewith page 109 24 power attorney filed herewith page 85 311 rule 13a14a certification richard haddock principal executive officer filed herewith 110 312 rule 13a14a certification steven g larson principal financial officer filed herewith page 111 321 section 1350 certification richard haddock chief executive officer filed herewith page 112 322 section 1350 certification steven g larson chief financial officer filed herewith page 113 item 15 exhibits financial statement schedules list documents filed part report 1 consolidated financial statements filed herewith item 8 follows 2 financial statement schedules schedule supporting consolidated financial statements filed herewith item 14d follows schedule number description page number ii report independent registered public accounting firm report odenberg ullakko muranishi co llp independent registered public accounting firm financial statement schedule fiscal 2008 valuation qualifying accounts schedules listed applicable required information required set forth therein included consolidated financial statements notes thereto 3 exhibits report filed herewith item 15b incorporated reference documents previously filed sec follows 101 building lease agreement renault handley employees investment co 26442648 bayshore pkwy mountain view ca previously filed exhibit 101 quarterly report form 10q period ended december 31 2003 incorporated herein reference 102 building lease agreement shoreline park llc 1395 charleston road mountain view ca mailing address 1875 north shoreline boulevard mountain view ca previously filed exhibit 102 annual report form 10k fiscal year ended march 31 2004 incorporated herein reference 103 amended restated stock option plan previously filed exhibit 1041 quarterly report form 10q period ended september 30 2002 incorporated herein reference 104 optical card manufacturing license agreement global investments group previously filed exhibit 108 annual report form 10k fiscal year ended march 31 2004 incorporated herein reference 105 2004 equity incentive compensation plan amended previously filed appendix schedule 14a proxy statement 2005annual stockholders meeting september 6 2005 incorporated herein reference 106 june 29 2006 amendment license equipment agreement global investments group previously filed exhibit 1010 quarterly report form 10q period ended june 30 2006 incorporated herein reference 107 october 27 2006 modified third amendment license equipment agreement global investments group prevent lok previously filed exhibit 1011 current report form 8k dated november 1 2006 incorporated herein reference 108 employee stock purchase plan amended previously filed appendix schedule 14a proxy statement 2007 annual stockholders meeting august 3 2007 incorporated herein reference 109 planned retirement agreement age discrimination release agreement richard haddock previously filed exhibit 1013 quarterly report form 10q period ended december 31 2007 incorporated herein reference 1010 executive employment agreements christopher j dyball steven g larson previously filed exhibit 101 exhibit 102 current report form 8k january 8 2010 incorporated herein reference 1011 ubs ag credit line agreement approval dated december 5 2008 previously filed exhibit 101 quarterly report form 10q period ended december 31 2008 incorporated herein reference 1012 june 2 2008 executive employment agreement robert devincenzi previously filed exhibit 101 quarterly report form 10q period ended june 30 2008 incorporated herein reference 1013 june 2 2008 restricted stock award robert devincenzi previously filed exhibit 102 quarterly report form 10q period ended june 30 2008 incorporated herein reference 1014 june 2 2008 nonstatutory stock option agreements robert devincenzi previously filed exhibit 103 quarterly report form 10q period ended june 30 2008 incorporated herein reference 1015 2004 equity incentive compensation plan amended previously filed exhibit 1018 current report form 8k september 22 2008 incorporated herein reference 1016 lasercard executive bonus plan previously filed exhibit 101 current report form 8k july 29 2009 incorporated herein reference subsidiaries registrant filed herewith 231 consent singerlewak llp independent registered public accounting firm filed herewith 232 consent odenberg ullakko muranishi co llp independent registered public accounting firm filed herewith power attorney filed herewith 311 chief executive officer certification pursuant section 302 sarbanesoxley act 2002 filed herewith 312 chief financial officer certification pursuant section 302 sarbanesoxley act 2002 filed herewith 321 chief executive officer certification pursuant 18 usc section 1350 adopted pursuant section 906 sarbanesoxley act 2002 filed herewith 322 chief executive officer certification pursuant 18 usc section 1350 adopted pursuant section 906 sarbanesoxley act 2002 filed herewith indicates management contract compensatory plan arrangement portions omitted pursuant request confidential treatment b financial statement schedule ii consolidated financial statements report independent registered public accounting firms relating financial statement schedule report independent registered public accounting firm board directors stockholders lasercard corporation audited lasercard corporation subsidiaries’ internal control financial reporting march 31 2010 based criteria established internal control integrated framework issued committee sponsoring organizations treadway commission lasercard corporation subsidiaries’ management responsible maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting included management’s report internal control financial reporting item 9a responsibility express opinion company’s internal control financial reporting based audit conducted audit accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether effective internal control financial reporting maintained material respects audit included obtaining understanding internal control financial reporting assessing risk material weakness exists testing evaluating design operating effectiveness internal control based assessed risk audit also included performing procedures considered necessary circumstances believe audit provides reasonable basis opinion company’s internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles company’s internal control financial reporting includes policies procedures pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company b provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company c provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate opinion lasercard corporation subsidiaries maintained material respects effective internal control financial reporting march 31 2010 based criteria established internal control integrated framework issued committee sponsoring organizations treadway commission also audited accordance standards public company accounting oversight board united states consolidated balance sheets lasercard corporation subsidiaries march 31 2010 2009 related consolidated statements operations stockholders’ equity cash flows two years period ended march 31 2010 report dated june 15 2010 expressed unqualified opinion ssingerlewak llp san jose california june 15 2010 report odenberg ullakko muranishi co llp independent registered public accounting firm financial statement schedule fiscal 2008 board directors stockholders lasercard corporation audit referred report dated june 4 2008 included related financial statement schedule year ended march 31 2008 included annual report form 10k financial statement schedule responsibility company’s management responsibility express opinion financial statement schedule based audit opinion financial statement schedule considered relation consolidated financial statements taken whole presents fairly material respects information set forth therein sodenberg ullakko muranishi co llp san francisco california june 4 2008 schedule ii lasercard corporation subsidiaries valuation qualifying accounts fiscal years ended march 31 2008 2009 2010 thousands notes 1 due foreign exchange rate translation 2 fifo adjustment standard change previously reserved obsolete inventory granulation obsolete inventory signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized dated june 15 2010 lasercard corporation srobert devincenzi robert devincenzi chief executive officer know persons presents person whose signature appears constitutes appoints robert devincenzi steven g larson acting individually attorneyinfact full power substitution resubstitution name place stead capacities sign amendments annual report form 10k file exhibits thereto documents connection therewith securities exchange commission granting unto said attorneysinfact agents full power authority perform every act thing requisite necessary done connection therewith premises fully intents purposes might could person hereby ratifying confirming said attorneysinfact agents substitute substitutes may lawfully cause done virtue hereof pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated walter f walker index exhibits item 14c indicates management contract compensatory plan arrangement portions omitted pursuant request confidential treatment item 15 exhibits financial statement schedules reports form 8k list documents filed part report 1 consolidated financial statements company filed herewith item 8 follows indicates management contract compensatory plan arrangement b reports form 8k none c exhibits exhibit 23 filed herewith page 64 financial statement schedule ii companys consolidated financial statements follows page 59 report independent accountants financial statement schedule board directors stockholders drexler technology corporation audit consolidated financial statements drexler technology corporation referred report dated april 28 2003 report consolidated financial statements included annual report form 10k also included audit financial statement schedule fiscal 2003 fiscal 2002 listed item 15a2 form 10k opinion financial statement schedule presents fairly material respects information set forth therein read conjunction related consolidated financial statements spricewaterhousecoopers llp san jose ca april 28 2003 signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized dated july 11 2003 r e x l e r e c h n l g c r p r n jerome drexler jerome drexler chairman chief executive officer know persons presents person whose signature appears constitutes appoints jerome drexler steven g larson acting individually attorneyinfact full power substitution resubstitution name place stead capacities sign amendments report form 10k file exhibits thereto documents connection therewith securities exchange commission granting unto said attorneysinfact agents full power authority perform every act thing requisite necessary done connection therewith premises fully intents purposes might could person hereby ratifying confirming said attorneysinfact agents substitute substitutes may lawfully cause done virtue hereof pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated certification statements registrants chief executive officer chief financial officer relating annual report form 10k required section 906 sarbanesoxley act 2002 18 usc section 1350 submitted securities exchange commission additional correspondence accompanying report certifications jerome drexler certify 1 reviewed annual report form 10k drexler technology corporation delaware corporation 2 based knowledge annual report contain untrue statement material fact omit state material fact necessary make statements made light circumstances statements made misleading respect period covered annual report 3 based knowledge financial statements financial information included annual report fairly present material respects financial condition results operations cash flows registrant periods presented annual report 4 registrants certifying officer responsible establishing maintaining disclosure controls procedures defined exchange act rules 13a14 15d14 registrant designed disclosure controls procedures ensure material information relating registrant including consolidated subsidiaries made known us others within entities particularly period annual report prepared b evaluated effectiveness registrants disclosure controls procedures date within 90 days prior filing date annual report evaluation date c presented annual report conclusions effectiveness disclosure controls procedures based evaluation date 5 registrants certifying officer disclosed based recent evaluation registrants auditors audit committee registrants board directors persons performing equivalent function significant deficiencies design operation internal controls could adversely affect registrants ability record process summarize report financial data identified registrants auditors material weaknesses internal controls b fraud whether material involves management employees significant role registrants internal controls 6 registrants certifying officer indicated annual report whether significant changes internal controls factors could significantly affect internal controls subsequent date recent evaluation including corrective actions regard significant deficiencies material weaknesses date july 11 2003 jerome drexler jerome drexler chairman board principal executive officer certifications steven g larson certify 1 reviewed annual report form 10k drexler technology corporation delaware corporation 2 based knowledge annual report contain untrue statement material fact omit state material fact necessary make statements made light circumstances statements made misleading respect period covered annual report 3 based knowledge financial statements financial information included annual report fairly present material respects financial condition results operations cash flows registrant periods presented annual report 4 registrants certifying officer responsible establishing maintaining disclosure controls procedures defined exchange act rules 13a14 15d14 registrant designed disclosure controls procedures ensure material information relating registrant including consolidated subsidiaries made known us others within entities particularly period annual report prepared b evaluated effectiveness registrants disclosure controls procedures date within 90 days prior filing date annual report evaluation date c presented annual report conclusions effectiveness disclosure controls procedures based evaluation date 5 registrants certifying officer disclosed based recent evaluation registrants auditors audit committee registrants board directors persons performing equivalent function significant deficiencies design operation internal controls could adversely affect registrants ability record process summarize report financial data identified registrants auditors material weaknesses internal controls b fraud whether material involves management employees significant role registrants internal controls 6 registrants certifying officer indicated annual report whether significant changes internal controls factors could significantly affect internal controls subsequent date recent evaluation including corrective actions regard significant deficiencies material weaknesses date july 11 2003 steven g larson steven g larson vice president finance treasurer principal financial officer exhibit index exhibits item 14c exhibit number description 31 amended restated certificate incorporation previously filed exhibit 311 report form 10q period ended september 30 2000 incorporated herein reference 32 amended restated bylaws july 24 2001 previously filed exhibit 32 report form 10k filed june 21 2002 incorporated herein reference 101 building lease agreement milla raymond handley 1992 trust marine way previously filed exhibit 1016 report form 10k fiscal year ended march 31 2000 incorporated herein reference 1011 building lease agreement renault handley employees investment co bayshore parkway previously filed exhibit 101 report form 10q period ended september 30 2000 incorporated herein reference 102 optical memory card manufacturing license canon inc previously filed exhibit 4 report form 8k dated january 10 1989 incorporated herein reference 103 optical memory card manufacturing license optical memory card business corporation previously filed exhibit 108 report form 10k fiscal year ended march 31 1991 incorporated herein reference 104 stock option plan previously filed exhibit 101 report form 10q period ended september 30 2000 incorporated herein reference 1041 amendment stock option plan previously filed exhibit 1041 report form 10k filed june 28 2001 incorporated herein reference 105 patent license agreement nippon conlux co ltd previously filed exhibit 106 report form 10k fiscal year ended march 31 1999 incorporated herein reference 106 subcontract information spectrum inc dated june 2 2000 insdos previously filed exhibit 106 report form 10k filed june 28 2001 incorporated herein reference 16 letter change certifying accountant previously filed exhibit 16 report form 8k dated april 8 2002 21 subsidiaries registrant previously filed exhibit 21 report form 10k filed june 28 2001 incorporated herein reference 23 consent independent accountants filed herewith page 64 item 15 exhibits financial statement schedules reports form 8k list documents filed part report 1 consolidated financial statements company filed herewith item 8 follows page description number 1 reports independent registered public accounting firms 42 2 consolidated balance sheets march 31 2003 march 31 2004 44 3 consolidated statements operations fiscal years 2002 2003 2004 45 4 consolidated statements stockholders equity fiscal years 2002 2003 2004 46 5 consolidated statements cash flows fiscal years 2002 2003 2004 47 6 notes consolidated financial statements 48 2 financial statement schedules schedule supporting companys consolidated financial statements filed herewith item 14d follows schedule page number description number report independent registered public accounting firms financial statement schedule 78 ii valuation qualifying accounts 80 schedules listed applicable required information required set forth therein included consolidated financial statements notes thereto 3 exhibits report filed herewith item 14c incorporated reference documents previously filed securities exchange commission follows filed herewith exhibit incorporated herein number description reference 31 amended restated certificate exhibit 311 incorporation report form 10q period ended september 30 2000 32 amended restated bylaws exhibit 32 report form 10k fiscal year ended march 31 filed herewith exhibit incorporated herein number description reference 101 building lease agreement exhibit 101 renault handley employees report form 10q investment co 26442648 period ended bayshore pkwy mountain view ca december 31 2003 102 building lease agreement filed herewith shoreline park llc 1395 page 82 charleston road mountain view ca mailing address 1875 north shoreline boulevard mountain view ca 103 amended restated stock option exhibit 1041 plan report form 10q period ended september 30 2002 104 patent license agreement exhibit 106 nippon conlux co ltd report form 10k fiscal year ended march 31 105 us government subcontract exhibit 106 information spectrum inc report form 10k anteon international dated fiscal year june 2 2000 ended march 31 106 engagement letter morgan exhibit 991 keegan co inc amended report form 10q period ended december 31 2003 107 stock warrant purchase exhibit 992 agreement amended report form 10q period ended december 31 2003 108 optical card manufacturing filed herewith license agreement global page 83 investments group portions omitted pursuant request confidential treatment 161 letter change certifying exhibit 16 accountants report form 8k dated april 8 2002 162 letter change certifying exhibit 161 accountants report form 8k dated august 29 21 subsidiaries registrant filed herewith page 84 231 consent independent registered filed herewith public accounting firm kpmg page 85 232 consent independent registered filed herewith public accounting firm page 86 pricewaterhousecoopers 24 power attorney filed herewith page 81 311 rule 13a14a certification filed herewith christopher j dyball page 87 coprincipal executive officer 312 rule 13a14a certification filed herewith richard haddock coprincipal page 88 executive officer filed herewith exhibit incorporated herein number description reference 313 rule 13a14a certification filed herewith steven g larson principal page 89 financial officer 321 section 1350 certification filed herewith christopher j dyball richard page 90 haddock cochief executive officers 322 section 1350 certification filed herewith steven g larson chief financial page 91 officer indicates management contract compensatory plan arrangement b reports form 8k january 23 2004 company filed report form 8k dated january 23 2004 presented item 5 financial statements independent accountants reports reflect change contained companys form 10ka fiscal year ended march 31 2003 include segment reporting disclosure note 4 financial statements february 11 2004 company filed report form 8k dated february 5 2004 reported item 12 issuance press release containing financial results fiscal 2004 third quarter ended december 31 2003 march 17 2004 company filed report form 8k dated march 16 2004 presented item 5 audited consolidated financial statements ninemonth period ended december 31 2003 march 31 2003 two years ended could incorporated companys thenpending form s3 registration statement c exhibits 102 108 21 231 232 24 311 312 313 321 322 filed herewith financial statement schedule ii companys consolidated financial statements page 80 report independent registered public accounting firm financial statement schedule board directors stockholders drexler technology corporation audit referred report dated june 9 2004 included related financial statement schedule march 31 2004 year ended included annual report form 10k financial statement schedule responsibility companys management responsibility express opinion financial statement schedule based audit opinion financial statement schedule considered relation consolidated financial statements taken whole presents fairly material respects information set forth therein kpmg llp mountain view california june 9 2004 report independent registered public accounting firm financial statement schedule board directors drexler technology corporation audit consolidated financial statements drexler technology corporation referred report dated april 28 2003 except note 4 date january 22 2004 report consolidated financial statements included annual report form 10k also included audit financial statement schedule fiscal 2003 fiscal 2002 listed item 15a2 form 10k opinion financial statement schedule presents fairly material respects information set forth therein read conjunction related consolidated financial statements pricewaterhousecoopers llp san jose california april 28 2003 1 represents amount bad debt reserve recorded accounts receivable acquired entities date acquisition 2 amount relates stock option deductions credited additional paidin capital realized signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized dated june 15 2004 drexler technology corporation christopher j dyball richard haddock christopher j dyball richard haddock cochief executive officer cochief executive officer know persons presents person whose signature appears constitutes appoints christopher j dyball richard haddock steven g larson acting individually attorneyinfact full power substitution resubstitution name place stead capacities sign amendments report form 10k file exhibits thereto documents connection therewith securities exchange commission granting unto said attorneysinfact agents full power authority perform every act thing requisite necessary done connection therewith premises fully intents purposes might could person hereby ratifying confirming said attorneysinfact agents substitute substitutes may lawfully cause done virtue hereof pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated index exhibits item 14c exhibit number description 31 amended restated certificate incorporation previously filed exhibit 311 report form 10q period ended september 30 2000 incorporated herein reference 32 amended restated bylaws previously filed exhibit 32 report form 10k fiscal year ended march 31 2002 incorporated herein reference 101 building lease agreement renault handley employees investment co 26442648 bayshore parkway mountain view ca previously filed exhibit 101 report form 10q period ending december 31 2003 incorporated herein reference 102 building lease agreement shoreline park llc 1395 charleston road mountain view ca mailing address 1875 north shoreline boulevard mountain view ca filed herewith page 82 103 amended restated stock option plan previously filed exhibit 1041 report form 10q period ended september 30 2002 incorporated herein reference 104 patent license agreement nippon conlux co ltd previously filed exhibit 106 report form 10k fiscal year ended march 31 1999 incorporated herein reference 105 us government subcontract information spectrum inc anteon international dated june 2 2000 previously filed exhibit 106 report form 10k fiscal year ended march 31 2001 incorporated herein reference 106 engagement letter morgan keegan co inc amended previously filed exhibit 991 report form 10q period ended december 31 2003 107 stock warrant purchase agreement amended previously filed exhibit 992 report form 10q period ended december 31 2003 108 optical card manufacturing license agreement global investments group portions omitted pursuant request confidential treatment filed herewith page 83 161 letter change certifying accountant previously filed exhibit 16 report form 8k dated april 8 2002 162 letter change certifying accountant previously filed exhibit 161 report form 8k dated august 29 2003 21 subsidiaries registrant filed herewith page 84 231 consent independent registered public accounting firm kpmg filed herewith page 85 232 consent independent registered public accounting firm pricewaterhousecoopers filed herewith page 86 24 power attorney filed herewith page 81 311 rule 13a14a certification christopher j dyball coprincipal executive officer filed herewith page 87 312 rule 13a14a certification richard haddock coprincipal executive officer filed herewith page 88 313 rule 13a14a certification steven g larson principal financial officer filed herewith page 89 321 section 1350 certification christopher j dyball richard haddock cochief executive officers filed herewith page 90 322 section 1350 certification steven g larson chief financial officer filed herewith page 91 item 15 exhibits financial statement schedules list documents filed part report 1 consolidated financial statements company filed herewith item 8 follows description page number 1 reports independent registered public accounting firms 2 consolidated balance sheets march 31 2006 march 31 2005 3 consolidated statements operations fiscal years 2006 2005 4 consolidated statements stockholders equity comprehensive income loss fiscal years 2006 2005 2004 5 consolidated statements cash flows fiscal years 2006 2005 6 notes consolidated financial statements 2 financial statement schedules schedule supporting companys consolidated financial statements filed herewith item 14d follows schedule number description page number report independent registered public accounting firms financial statement schedule ii valuation qualifying accounts schedules listed applicable required information required set forth therein included consolidated financial statements notes thereto 3 exhibits report filed herewith item 14c incorporated reference documents previously filed securities exchange commission follows exhibit number description filed herewith incorporated herein reference 31 amended restated certificate incorporation exhibit 31 report form 10k fiscal year ended march 31 32 amended restated bylaws exhibit 32 report form 10k fiscal year ended march 31 101 building lease agreement renault handley employees investment co 26442648 bayshore pkwy mountain view ca exhibit 101 report form 10q period ended december 31 102 building lease agreement shoreline park llc 1395 charleston road mountain view ca mailing address 1875 north shoreline boulevard mountain view ca exhibit 102 report form 10k fiscal year ended march 31 103 amended restated stock option plan exhibit 1041 report form 10q period ended september 30 107 stock warrant purchase agreement amended exhibit 992 report form 10q period ended december 31 108 optical card manufacturing license agreement global investments group portions omitted pursuant request confidential treatment exhibit 108 report form 10k fiscal year ended march 31 161 letter change certifying accountants exhibit 16 report form 8k dated april 8 2002 162 letter change certifying accountants exhibit 161 report form 8k dated august 29 2003 163 letter change certifying accountants exhibit 161 report form 8k dated december 14 2004 subsidiaries registrant filed herewith page 92 231 consent independent registered public accounting firm oum filed herewith page 93 232 consent independent registered public accounting firm kpmg filed herewith page 94 power attorney filed herewith page 90 311 rule 13a14a15d14a certification richard haddock principal executive officer filed herewith page 95 312 rule 13a14a15d14a certification steven g larson principal financial officer filed herewith page 96 321 section 1350 certification richard haddock chief executive officers filed herewith page 97 322 section 1350 certification steven g larson chief financial officer filed herewith page 98 indicates management contract compensatory plan arrangement b exhibits 21 231 232 24 311 312 321 322 filed herewith c financial statement schedule ii companys consolidated financial statements page 89 report independent registered public accounting firm financial statement schedule board directors stockholders lasercard corporation audit referred report dated may 15 2006 included related financial statement schedule march 31 2006 2005 included annual report form 10k financial statement schedule responsibility company’s management responsibility express opinion financial statement schedule based audits opinion financial statement schedule considered relation consolidated financial statements taken whole presents fairly material respects information set forth therein sodenberg ullakko muranishi co llp san francisco california may 15 report independent registered public accounting firm financial statement schedule board directors stockholders lasercard corporation audit referred report dated june 9 2004 except note 28 june 14 2006 included related financial statement schedule march 31 2004 included annual report form 10k financial statement schedule responsibility companys management responsibility express opinion financial statement schedule based audit opinion financial statement schedule considered relation consolidated financial statements taken whole presents fairly material respects information set forth therein kpmg llp mountain view california june 14 schedule ii signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized dated june 13 2006 lasercard corporation srichard haddock richard haddock chief executive officer know persons presents person whose signature appears constitutes appoints richard haddock steven g larson acting individually attorneyinfact full power substitution resubstitution name place stead capacities sign amendments report form 10k file exhibits thereto documents connection therewith securities exchange commission granting unto said attorneysinfact agents full power authority perform every act thing requisite necessary done connection therewith premises fully intents purposes might could person hereby ratifying confirming said attorneysinfact agents substitute substitutes may lawfully cause done virtue hereof pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated signature title date richard haddock president chief executive officer june 13 2006 richard haddock principal executive officer director steven g larson vice president finance treasurer june 13 2006 steven g larson principal financial officer principal accounting officer christopher j dyball chief operating officer june 13 2006 christopher j dyball director arthur h hausman director june 13 2006 arthur h hausman donald e mattson director june 13 2006 donald e mattson dan maydan director june 13 2006 dan maydan albert j moyer director june 13 2006 albert j moyer walter f walker director june 13 2006 walter f walker index exhibits item 14c exhibit number description 31 amended restated certificate incorporation exhibit 31 report form 10k fiscal year ended march 31 2005 32 amended restated bylaws exhibit 32 report form 10k fiscal year ended march 31 2005 101 building lease agreement renault handley employees investment co 26442648 bayshore parkway mountain view ca previously filed exhibit 101 report form 10q period ending december 31 2003 incorporated herein reference 102 building lease agreement shoreline park llc 1395 charleston road mountain view ca mailing address 1875 north shoreline boulevard mountain view ca filed exhibit 102 report form 10k fiscal year ended march 31 2004 incorporated herein reference 103 amended restated stock option plan previously filed exhibit 1041 report form 10q period ended september 30 2002 incorporated herein reference 107 stock warrant purchase agreement amended previously filed exhibit 992 report form 10q period ended december 31 108 optical card manufacturing license agreement global investments group portions omitted pursuant request confidential treatment filed exhibit 108 report form 10k fiscal year ended march 31 2004 incorporated herein reference 161 letter change certifying accountant previously filed exhibit 16 current report form 8k dated april 8 2002 162 letter change certifying accountant previously filed exhibit 161 current report form 8k dated august 29 2003 163 letter change certifying accountant previously filed exhibit 161 current report form 8k dated december 14 2004 subsidiaries registrant filed herewith page 92 231 consent independent registered public accounting firm oum filed herewith 232 consent independent registered public accounting firm kpmg filed herewith power attorney filed herewith page 90 311 rule 13a14a15d14a certification richard haddock principal executive officer filed herewith page 95 312 rule 13a14a15d14a certification steven g larson principal financial officer filed herewith page 96 321 section 1350 certification richard haddock chief executive officer president filed herewith page 97 322 section 1350 certification steven g larson chief financial officer filed herewith page 98 item 15 exhibits financial statement schedules list documents filed part report 1 consolidated financial statements filed herewith item 8 follows 2 financial statement schedules schedule supporting consolidated financial statements filed herewith item 14d follows schedules listed applicable required information required set forth therein included consolidated financial statements notes thereto 3 exhibits report filed herewith item 15b incorporated reference documents previously filed sec follows 232 consent odenberg ullakko muranishi co llp independent registered public accounting firm filed herewith power attorney filed herewith 311 rule 13a14a15d14a certification robert devincenzi principal executive officer filed herewith 312 rule 13a14a15d14a certification steven g larson principal financial officer filed herewith 321 section 1350 certification robert devincenzi principal executive officer filed herewith 322 section 1350 certification steven g larson principal financial officer filed herewith indicates management contract compensatory plan arrangement portions omitted pursuant request confidential treatment b financial statement schedule ii consolidated financial statements report independent registered public accounting firms relating financial statement schedule report independent registered public accounting firm board directors stockholders lasercard corporation audited lasercard corporation subsidiaries’ internal control financial reporting march 31 2009 based criteria established internal control integrated framework issued committee sponsoring organizations treadway commission lasercard corporation subsidiaries’ management responsible maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting included management’s report internal control financial reporting item 9a responsibility express opinion company’s internal control financial reporting based audit conducted audit accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether effective internal control financial reporting maintained material respects audit included obtaining understanding internal control financial reporting assessing risk material weakness exists testing evaluating design operating effectiveness internal control based assessed risk audit also included performing procedures considered necessary circumstances believe audit provides reasonable basis opinion company’s internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles company’s internal control financial reporting includes policies procedures pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company b provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company c provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate opinion lasercard corporation subsidiaries maintained material respects effective internal control financial reporting march 31 2009 based criteria established internal control integrated framework issued committee sponsoring organizations treadway commission also audited accordance standards public company accounting oversight board united states consolidated financial statements financial statement schedule lasercard corporation subsidiaries report dated june 15 2009 expressed unqualified opinion ssingerlewak llp san jose california june 15 report odenberg ullakko muranishi co llp independent registered public accounting firm financial statement schedule fiscal 2008 2007 board directors stockholders lasercard corporation audits referred report dated june 4 2008 included related financial statement schedule two years period ended march 31 2008 included annual report form 10k financial statement schedule responsibility company’s management responsibility express opinion financial statement schedule based audits opinion financial statement schedule considered relation consolidated financial statements taken whole presents fairly material respects information set forth therein sodenberg ullakko muranishi co llp san francisco california june 4 schedule ii lasercard corporation subsidiaries valuation qualifying accounts fiscal years ended march 31 2007 2008 2009 thousands notes 1 due foreign exchange rate translation 2 fifo adjustment standard change previously reserved obsolete inventory signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized dated june 15 2009 lasercard corporation know persons presents person whose signature appears constitutes appoints robert devincenzi steven g larson acting individually attorneyinfact full power substitution resubstitution name place stead capacities sign amendments annual report form 10k file exhibits thereto documents connection therewith securities exchange commission granting unto said attorneysinfact agents full power authority perform every act thing requisite necessary done connection therewith premises fully intents purposes might could person hereby ratifying confirming said attorneysinfact agents substitute substitutes may lawfully cause done virtue hereof pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated index exhibits item 14c 1015 equity incentive compensation plan amended previously filed exhibit 1018 form 8k dated september 19 2008 161 letter change certifying accountant previously filed exhibit 161 current report form 8k dated june 9 2008 amended june 23 subsidiaries registrant filed herewith 231 consent singerlewak llp independent registered public accounting firm filed herewith 232 consent odenberg ullakko muranishi co llp independent registered public accounting firm filed herewith power attorney filed herewith 311 rule 13a14a15d14a certification robert devincenzi principal executive officer filed herewith 312 rule 13a14a15d14a certification steven g larson principal financial officer filed herewith 321 section 1350 certification robert devincenzi principal executive officer president filed herewith 322 section 1350 certification steven g larson principal financial officer filed herewith indicates management contract compensatory plan arrangement portions omitted pursuant request confidential treatment