UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington D.C. 20549

FORM 10-Q

(Mark One)

ý		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
		For the quarterly period ended September 30, 2005
o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
		For the transition period from to
		Commission File No.: 000-29029

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2006

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File No.: 000-29029

FARGO ELECTRONICS, INC.

(Exact name of registrant as specified in its charter)

Delaware		41-1959505
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)
6533 Flying Cloud Drive Eden Prairie, Minnesota		55344
6533 Flying Cloud Drive Minneapolis, Minnesota		55344
(Address of principal executive offices)		(Zip Code)
Registrant’s telephone number, including area code: (952) 941-9470

~~Indicate~~Registrant’s ~~by check mark whether the registrant (1) has filed all reports~~telephone ~~required~~number, toincluding bearea ~~filed~~code: ~~by Section 13 or 15~~(d952) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No o941-9470

Indicate by check mark whether the registrant is(1) anhas filed ~~accelerated~~all ~~filer (as~~reports ~~defined~~required into ~~Rule 12b-2~~be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ýx No o

AsIndicate ofby ~~November~~check 4,mark ~~2005,~~whether the registrant is a 12large accelerated filer,~~772~~ an accelerated filer,~~762~~ ~~shares~~or a non-accelerated filer. See definition of ~~our~~“accelerated ~~Common~~filer ~~Stock~~and ~~were~~large ~~outstanding~~accelerated filer” in Rule 12b-2 of the Exchange Act.

Large accelerated filer o

Accelerated filer x

Non-accelerated filer o

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

As of August 3, 2006, 13,099,560 shares of our Common Stock were outstanding.

PART 1: FINANCIAL INFORMATION

ITEM 1 FINANCIAL STATEMENTS

FARGO ELECTRONICS, INC. CONDENSED BALANCE SHEETS (In thousands, except per share data) (Unaudited)

CONDENSED BALANCE SHEETS

	June 30, 2006			December 31, 2005
ASSETS

Current assets:
Cash and cash equivalents	$	39,755		$	36,475
Accounts receivable, net	13,491			10,286
Inventories, net	5,509			6,178
Other current assets	631			460
Deferred income taxes	3,423			3,423

Total current assets	62,809			56,822

Equipment and leasehold improvements, net	4,094			3,636

Deferred income taxes	13,188			14,360
Other	15			19

Total assets	$	80,106		$	74,837

LIABILITIES AND STOCKHOLDERS’ EQUITY

Current liabilities:
Accounts payable	$	7,456		$	6,225
Accrued liabilities	3,217			3,666

Total current liabilities	10,673			9,891

Commitments and contingencies	—			—

Stockholders’ equity:
Common stock, $.01 par value; 50,000 shares authorized, 12,808 and 12,784 shares issued and outstanding at June 30, 2006 and December 31, 2005, respectively	128			128
Additional paid-in capital	152,485			152,069
Accumulated deficit	(83,180		)	(87,251		)

Total stockholders’ equity	69,433			64,946

Total liabilities and stockholders’ equity	$	80,106		$	74,837

(In thousands, except per share data)

(Unaudited)

	September 30,			December 31,
ASSETS	2005			2004
Current assets:
Cash and cash equivalents	$	34,231		$	23,435
Accounts receivable, net	11,414			9,702
Inventories, net	6,535			6,219
Prepaid expenses	544			271
Deferred income taxes	3,259			3,259
Total current assets	55,983			42,886
Equipment and leasehold improvements, net	3,238			2,026
Deferred income taxes	14,792			16,966
Other	21			27
Total assets	$	74,034		$	61,905
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable	$	8,479		$	6,018
Accrued liabilities	3,615			2,806
Total current liabilities	12,094			8,824
Commitments and contingencies	—			—
Stockholders' equity:
Common stock, $.01 par value; 50,000 shares authorized, 12,772 and 12,603 shares issued and outstanding at September 30, 2005 and December 31, 2004, respectively	128			126
Additional paid-in capital	151,574			150,303
Accumulated deficit	(89,762		)	(97,348		)
Total stockholders' equity	61,940			53,081
Total liabilities and stockholders' equity	$	74,034		$	61,905

The accompanying notes are an integral part of the unaudited condensed financial statements.

FARGO ELECTRONICS, INC. CONDENSED STATEMENTS OF OPERATIONS (In thousands, except per share data) (Unaudited)

CONDENSED STATEMENTS OF OPERATIONS

	Three Months Ended June 30,				Six Months Ended June 30,
	2006		2005		2006		2005
Net sales	$	22,275	$	18,886	$	42,385	$	37,543

Cost of sales	12,487		10,566		23,698		21,280

Gross profit	9,788		8,320		18,687		16,263

Operating expenses:
Research and development	1,494		1,544		3,074		2,797
Selling, general and administrative	5,621		3,798		10,146		7,468

Total operating expenses	7,115		5,342		13,220		10,265

Operating income	2,673		2,978		5,467		5,998

Other income:
Interest, net	449		188		837		310
Other, net	—		400		—		393
Total other income	449		588		837		703

Income before provision for income taxes	3,122		3,566		6,304		6,701

Provision for income taxes	1,106		1,200		2,233		2,186

Net income	$	2,016	$	2,366	$	4,071	$	4,515

Net income per common share:
Basic earnings per share	$	0.16	$	0.19	$	0.32	$	0.36
Diluted earnings per share	$	0.15	$	0.18	$	0.31	$	0.35

Weighted average common shares outstanding:
Basic	12,804		12,676		12,796		12,646
Diluted	13,170		13,094		13,148		13,051

(In thousands, except per share data)

(Unaudited)

	Three Months Ended September 30,				Nine Months Ended September 30,
	2005		2004		2005		2004
Net sales	$	22,456	$	19,626	$	59,999	$	52,725
Cost of sales	12,719		11,558		33,999		31,324
Gross profit	9,737		8,068		26,000		21,401
Operating expenses
Research and development	1,428		1,337		4,225		3,841
Selling, general and administrative	3,984		3,572		11,452		9,705
Total operating expenses	5,412		4,909		15,677		13,546
Operating income	4,325		3,159		10,323		7,855
Other income
Interest, net	246		52		556		106
Other, net	—		—		393		—
Total other income	246		52		949		106
Income before provision for income taxes	4,571		3,211		11,272		7,961
Provision for income taxes	1,500		906		3,686		2,482
Net income	$	3,071	$	2,305	$	7,586	$	5,479
Net income per common share
Basic earnings per share	$	0.24	$	0.18	$	0.60	$	0.44
Diluted earnings per share	$	0.23	$	0.18	$	0.58	$	0.43
Weighted average common shares outstanding
Basic	12,756		12,519		12,683		12,494
Diluted	13,145		12,780		13,127		12,817

The accompanying notes are an integral part of the unaudited condensed financial statements.

FARGO ELECTRONICS, INC. CONDENSED STATEMENTS OF CASH FLOWS (In thousands) (Unaudited)

CONDENSED STATEMENTS OF CASH FLOWS

	Six Months Ended June 30,
	2006			2005
Cash flows from operating activities:
Net income	$	4,071		$	4,515
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	717			521
Provision for excess and obsolete inventory	145			168
Provision for doubtful accounts	50			—
Loss on disposal of equipment	—			8
Deferred income taxes	1,172			1,452
Stock-based compensation	312			—
Changes in operating assets and liabilities
Accounts receivable	(3,255		)	473
Inventories	524			1,061
Prepaid expenses and other assets	(171		)	(284		)
Accounts payable	877			(816		)
Accrued liabilities	(449		)	(299		)

Net cash provided by operating activities	3,993			6,799

Cash flows from investing activities:
Purchases of equipment and leasehold improvements	(817		)	(1,352		)

Net cash used in investing activities	(817		)	(1,352		)

Cash flows from financing activities:
Proceeds from issuance of common stock	104			976

Net cash provided by financing activities	104			976

Net increase in cash and cash equivalents	3,280			6,423

Cash and cash equivalents, beginning of period	36,475			23,435

Cash and cash equivalents, end of period	$	39,755		$	29,858

Significant noncash activities:
Purchases of equipment included in accounts payable	$	354		$	228

(In thousands)

(Unaudited)

	Nine Months Ended September 30,
	2005			2004
Cash flows from operating activities:
Net income	$	7,586		$	5,479
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	820			781
Provision for excess and obsolete inventory	303			103
Loss on disposal of equipment	8			—
Deferred income taxes	2,174			2,385
Tax benefit recognized for stock options	—			16
Changes in operating assets and liabilities
Accounts receivable	(1,712		)	(3,829		)
Inventories	(619		)	(878		)
Prepaid expenses and other assets	(273		)	(27		)
Accounts payable	2,145			2,785
Accrued liabilities	809			(191		)
Net cash provided by operating activities	11,241			6,624
Cash flows from investing activities:
Purchases of equipment and leasehold improvements	(1,718		)	(681		)
Net cash used in investing activities	(1,718		)	(681		)
Cash flows from financing activities:
Proceeds from issuance of common stock	1,273			464
Net cash provided by financing activities	1,273			464
Net increase in cash and cash equivalents	10,796			6,407
Cash and cash equivalents, beginning of period	23,435			13,445
Cash and cash equivalents, end of period	$	34,231		$	19,852
Significant noncash activities:
Purchases of equipment included in accounts payable	$	316		$	105

The accompanying notes are an integral part of the unaudited condensed financial statements.

FARGO ELECTRONICS, INC. NOTES TO CONDENSED FINANCIAL STATEMENTS (Unaudited)

~~NOTES~~NOTE TO1 ~~CONDENSED~~— ~~FINANCIAL STATEMENTS~~BASIS OF PRESENTATION

~~(Unaudited)~~The interim condensed financial statements presented herein as of June 30, 2006, and for the three and six months ended June 30, 2006 and 2005, are unaudited; however, in our opinion, the interim condensed financial statements include all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of financial position, results of operations and cash flows for the periods presented.

~~NOTE~~The 1results –of ~~BASIS~~operations OFfor ~~PRESENTATION~~the three and six months ended June 30, 2006 and the cash flows for the six months ended June 30, 2006, do not necessarily indicate the results to be expected for the full year. The December 31, 2005, balance sheet data was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America. These unaudited interim condensed financial statements should be read in conjunction with our financial statements and notes thereto contained in our Annual Report on Form 10-K for the year ended December 31, 2005.

~~The~~NOTE ~~interim~~2 ~~condensed financial~~— ~~statements~~STOCK ~~presented~~BASED herein as of September 30, 2005, and for the three and nine months ended September 30, 2005 and 2004, are unaudited; however, in our opinion, the interim condensed financial statements include all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of financial position, results of operations and cash flows for the periods presented.COMPENSATION

~~The~~In ~~results~~May 2003, the Board of Directors and stockholders adopted the Fargo ~~operations~~Electronics, Inc. ~~for~~2003 Stock Incentive Plan (the ~~three~~“2003 Plan”), which authorizes and ~~nine~~reserves ~~months~~a ~~ended~~maximum ~~September~~of 301, ~~2005~~000,000 ~~and~~shares of common stock available for issuance. The 2003 Plan is administered by the ~~cash~~Compensation ~~flows~~Committee of the Board of Directors and provides for the grant of: (a) incentive stock ~~nine~~options; ~~months~~(b) nonqualified ~~ended~~stock ~~September~~options; and (c) 30restricted stock awards to employees, officers, directors and others, subject to certain ~~2005~~limitations, doas ~~not~~defined ~~necessarily~~by ~~indicate~~the 2003 Plan. Stock options issued under the ~~results~~2003 Plan generally have an exercise price equal to bethe ~~expected~~fair ~~for~~market value on the ~~full~~date ~~year. The~~of ~~December 31~~grant, ~~2004~~vest and become exercisable ratably over four years, and expire ~~balance~~no ~~sheet~~later ~~data~~than ~~was~~ten ~~derived~~years from ~~audited~~the ~~financial~~date ~~statements,~~of ~~but~~grant. ~~does~~If ~~not include~~a ~~all~~change ~~disclosures~~in ~~required~~control occurs, as defined by ~~accounting~~the ~~principles~~2003 ~~generally~~Plan, ~~accepted~~the inBoard of Directors, or a committee thereof, at ~~the~~its ~~United~~sole ~~States~~discretion, ofmay ~~America.~~determine ~~These~~that ~~unaudited~~all ~~interim~~stock ~~condensed~~options ~~financial~~that have been outstanding ~~statements~~for ~~should~~at beleast ~~read~~six months will become immediately exercisable in ~~conjunction~~full ~~with~~for ~~our~~the remainder ~~financial~~of ~~statements~~their terms and all restricted stock awards that have been ~~notes~~outstanding ~~thereto~~for ~~contained~~at inleast ~~our~~six ~~Annual~~months ~~Report~~will onbecome ~~Form~~immediately ~~10-K~~100% ~~for~~vested. Unless terminated earlier, the ~~year~~2003 ~~ended December~~Plan 31will terminate on April 30, ~~2004~~2013.

~~NOTE~~In February 1998, 2the –Board ~~STOCK~~of ~~BASED~~Directors and stockholders adopted the Fargo ~~COMPENSATION~~Electronics, Inc. 1998 Stock Option and Grant Plan (the “1998 Plan”) which, as amended, authorized and reserved a maximum number of shares for issuance equal to 15% of the outstanding common stock. The 1998 Plan was terminated, and no new awards were issued thereunder, following approval of the 2003 Plan in May 2003.

~~The~~Effective January 1, 2006, the Company adopted the provisions of Statement ~~measures~~of ~~compensation~~Financial ~~expense~~Accounting ~~for~~Standards ~~its~~(“SFAS”) ~~stock~~No. 123 (revised 2004), “Share-~~based~~Based Payment” (SFAS No. 123R) requiring that compensation ~~plan~~cost ~~using~~relating to share-based payment transactions be recognized in the financial statements. The ~~intrinsic~~Company ~~value~~elected the modified prospective transition method as permitted by SFAS No. ~~Accordingly~~123R. Under this method, compensation cost ~~for~~is ~~stock~~measured ~~options~~at the grant date, ~~granted~~based toon ~~employees~~the calculated fair value of the award, and is ~~measured~~recognized as an expense over the ~~excess,~~requisite ifservice ~~any,~~period of(generally the ~~value~~vesting period of the ~~Company’s~~equity ~~stock~~award). atPrior ~~the~~to ~~date~~January of1, 2006, the ~~grant~~Company ~~over~~accounted ~~the~~for ~~amount~~share-based compensation anto ~~employee~~employees ~~must~~in ~~pay~~accordance with Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to ~~acquire~~Employees” ~~the~~(APB ~~stock~~No. ~~The~~25), ~~Company~~and related ~~provides~~interpretations. ~~disclosure~~The ofCompany followed the ~~effect~~disclosure onrequirements ~~net~~of ~~income~~SFAS asNo. if123, ~~the~~“Accounting ~~fair~~for ~~value~~Stock-~~based~~Based ~~method~~Compensation”, ~~has~~as ~~been~~amended ~~applied~~by inSFAS ~~measuring~~No. ~~compensation~~148, ~~expense~~“Accounting for Stock-Based Compensation-Transition and Disclosure”.

~~Had~~Prior ~~compensation cost~~to ~~for~~ the ~~plan~~adoption ~~been~~of ~~determined~~SFAS ~~based~~No. on123R, the ~~fair~~Company ~~value~~presented all tax benefits of ~~options~~deductions atresulting from the exercise of stock options as ~~date~~operating cash flows in the Statement of ~~grant,~~Cash Flows. SFAS No. 123R requires the cash ~~Company’s~~flows ~~net~~resulting ~~income~~from ~~available~~the totax ~~common~~benefits ~~stockholders~~resulting ~~and~~from tax deductions in ~~basic~~excess ~~and~~of ~~diluted~~the ~~net~~compensation ~~income~~cost ~~per~~recognized ~~share~~for ~~would~~those ~~have~~options ~~been~~(excess ~~reduced~~tax benefits) to be classified as financing cash flows. There were no tax benefits resulting from the ~~following~~exercise of stock options for the three and six months ended ~~pro~~June ~~forma~~30, ~~amounts:~~2006.

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2005			2004			2005			2004
Net income available to common stockholders (in thousands):
As reported	$	3,071		$	2,305		$	7,586		$		5,479
Deduct: Total stock-based employee compensation expense determined under fair value based method, net of related tax effects	(176		)	(154		)	(487		)	(452			)
Pro forma	$	2,895		$	2,151		$	7,099		$		5,027
Basic earnings per common share:
As reported	$	0.24		$	0.18		$	0.60		$		0.44
Pro forma	$	0.23		$	0.17		$	0.56		$		0.40
Diluted earnings per common share:
As reported	$	0.23		$	0.18		$	0.58		$	0.43
Pro forma	$	0.22		$	0.17		$	0.54		$	0.39

~~NOTE~~The 3following –table illustrates the effect on net income and earnings ~~EARNINGS~~per ~~PER~~share ~~SHARE~~if we had applied the fair value recognition provisions of SFAS No. 123 to stock-based employee compensation during the three and six months ended June 30, 2005:

Basic earnings per share is calculated using the weighted average number of shares outstanding during the period. Diluted earnings per share is computed on the basis of the weighted average basic shares outstanding plus the dilutive effect of outstanding stock options using the “treasury stock” method.

	Three Months Ended June 30, 2005			Six Months Ended June 30, 2005
Net income available to common stockholders (in thousands):
As reported	$	2,366		$	4,515
Deduct: Total stock-based employee compensation expense determined under fair value based method, net of related tax effects	(163		)	(311		)
Pro forma	$	2,203		$	4,204

Basic earnings per common share:
As reported	$	0.19		$	0.36
Pro forma	$	0.17		$	0.33
Diluted earnings per common share:
As reported	$	0.18		$	0.35
Pro forma	$	0.17		$	0.32

~~The~~For ~~following table~~purposes ~~sets~~of ~~forth~~this pro-forma disclosure, the ~~computation~~value of ~~basic~~stock-based compensation ~~and~~was ~~diluted~~amortized ~~net~~to ~~income~~expense ~~per~~on ~~share~~a ~~(in~~straight-line basis over the period ~~thousands,~~it ~~except~~is ~~per~~vested ~~share~~or ~~data):~~earned. Forfeitures were estimated based on historical experience.

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2005		2004		2005		2004
BASIC EARNINGS PER SHARE:
Net income available to common stockholders	$	3,071	$	2,305	$	7,586	$	5,479
Weighted average common shares outstanding	12,756		12,519		12,683		12,494
Per share amount	$	0.24	$	0.18	$	0.60	$	0.44
DILUTED EARNINGS PER SHARE:
Net income available to common stockholders	$	3,071	$	2,305	$	7,586	$	5,479
Weighted average common shares outstanding	12,756		12,519		12,683		12,494
Add: Dilutive effect of stock options	389		261		444		323
Weighted average dilutive shares outstanding	13,145		12,780		13,127		12,817
Per share amount	$	0.23	$	0.18	$	0.58	$	0.43

The following table summarizes the stock option transactions for the six months ended June 30, 2006:

There were no options to purchase shares of common stock outstanding with exercise prices greater than the average market price of common shares for the three months and nine months ended September 30, 2005. Options to purchase 309,600 shares of common stock were outstanding but not included in the computation of diluted earnings per share for the three and nine months ended September 30, 2004, because the exercise prices were greater than the average market price of the common shares for the respective periods.

(in thousands, except per share data)	Shares Available for Grant		Options Outstanding		Restricted Stock Outstanding	Weighted Average Exercise Price Per Share of Options
Balances at December 31, 2005	895		654		—	$	8.44
Granted	(13	)	—		13	—
Cancelled	—		—		—	—
Exercised	—		(10	)	—	8.74
Balances at June, 2006	882		644		13	$	8.28

~~NOTE~~On 4May –2, ~~INVENTORIES~~2006, we granted 2,100 shares of restricted stock to each of our six non-employee directors. The shares had a fair market value on the date of grant of $18.43. The restricted stock vests equally over a three-year period with acceleration provisions upon a change in control.

	September 30,			December 31,
	2005			2004
	Unaudited
Raw materials and purchased parts	$	4,032		$	4,597
Finished goods	3,144			2,036
	7,176			6,633
Less: Allowance for excess and obsolete inventories	(641		)	(414		)
Total inventories	$	6,535		$	6,219

The total intrinsic value (which is the amount by which the stock price exceeded the exercise price of the options on the date of exercise) of options exercised during the three and six months ended June 30, 2006 was approximately $42,000 and $97,000, respectively.

~~NOTE~~Information 5related –to ~~WARRANTIES~~stock options outstanding and exercisable at June 30, 2006, is as follows:

~~The~~Options Company’s products are generally covered by a standard one-year warranty. Estimated warranty costs are accrued in the same period in which the related revenue is recognized, based on anticipated parts and labor costs, utilizing historical experience.Outstanding

	Three Months						Nine Months
Range of Exercise Prices	Number Outstanding		Weighted Average Remaining Contractual Life		Weighted Average Exercise Price per Share			Aggregate Intrinsic Value
	Ended September 30,						Ended September 30,
	(in thousands)		(in years)					(in thousands)
	2005			2004			2005			2004
$1.60-$2.40	6		2.3		$	1.60
	(Unaudited)
$2.75-$4.13	112		3.7		2.91
Accrued warranties (in thousands):
$4.81-$7.22	49		2.9		6.33
Beginning of period	$	225		$	450		$	392		$	525
$7.30-$10.95	260		4.0		8.14
Settlements made	(71		)	(91		)	(258		)	(293		)
$11.00-$15.41	217		3.2		12.28
Accruals related to pre-existing warranties (includes changes in estimates)	—			(95		)	(115		)	(95		)
	644		3.6		$	8.43		$	11,206
Accruals for warranties issued	81			91			216			218
End of period	$	235		$	355		$	235		$	355

~~NOTE~~As of June 30, 2006, there was approximately $580,000 of total unrecognized compensation cost (before income taxes) related to non-vested share-based compensation arrangements granted under the 1998 Plan and 2003 Plan. For additional information see Note 6 –Merger ~~RECENTLY~~With ~~ISSUED~~Assa Abloy’s HID Global Corporation in the Notes to ~~ACCOUNTING~~Condensed ~~PRONOUNCEMENTS~~Financial Statements in this Quarterly Report on Form 10-Q.

~~In November 2004,~~Options the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards No. 151, “Inventory Costs, an Amendment of ARB No. 43, Chapter 4” (“SFAS 151”), which is effective for fiscal years beginning after June 15, 2005. SFAS 151 amends the guidance in ARB No. 43 to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs and wasted material (spoilage). Among other provisions, SFAS 151 requires that items such as idle facility expense, excessive spoilage, double freight and rehandling costs be recognized as current-period charges regardless of whether they meet the criterion of “so abnormal” as stated in ARB No. 43. In addition, SFAS 151 requires that allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. We believe the adoption of SFAS 151 will not have any material effect on our financial statements.Exercisable

In December 2004, the FASB issued Statement of Financial Accounting Standards No. 123R, “Share-Based Payment” (“SFAS 123R”), which replaces SFAS 123 and supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees”. SFAS 123R requires that the cost of all share-based payments to employees, including grants of employee stock options, be recognized in the financial statements based on their fair values. That cost will be recognized as an expense over the vesting period of the award. The pro forma disclosures previously permitted under SFAS 123 no longer will be an alternative to financial statement recognition. In addition, we will be required to determine fair value in accordance with SFAS 123R. SFAS 123R is effective for reporting periods beginning January 1, 2006 and requires the application of a transition methodology for stock options that have not vested as of the date of adoption. We are currently evaluating the impact of SFAS 123R on our financial statements.

Range of Exercise Prices	Number Exercisable	Weighted Average Remaining Contractual Life	Weighted Average Exercise Price per Share		Aggregate Intrinsic Value
	(in thousands)	(in years)			(in thousands)
$1.60-$2.40	6		$	1.60
$2.75-$4.13	112		2.91
$4.81-$7.22	49		6.33
$7.30-$10.95	181		8.26
$11.00-$15.41	172		11.66
	520	3.3	$	7.98	$	9,345

~~In December 2004,~~The ~~the~~fair ~~FASB~~value ~~issued~~of ~~FASB~~each ~~Staff~~option ~~Position~~award ~~(FSP)~~is ~~109-1,~~estimated ~~Application~~on the date of ~~FASB~~grant using ~~No. 109,~~the ~~Accounting~~Black-Scholes ~~for~~option-pricing ~~Income~~model. ~~Taxes,~~Expected tovolatility ~~the Tax~~is ~~Deduction~~based on historical ~~Qualified~~data. ~~Production~~The ~~Activities~~expected ~~Provided~~life byrepresents an estimate of the ~~American~~time ~~Jobs~~options ~~Creation~~are ~~Act~~expected ofto ~~2004~~remain outstanding. ~~FSP~~The ~~No. 109~~risk-1free ~~clarifies~~interest ~~Statement~~rate offor ~~Financial~~periods ~~Accounting~~within ~~Standards~~the ~~No. 109’s~~contractual ~~guidance~~life ~~that~~of ~~applies~~the tooption is based on the ~~new~~U.S. ~~tax~~treasury yield ~~deduction~~curve ~~for~~in ~~qualified~~effect ~~domestic~~at ~~production~~the ~~activities.~~time ~~FSP~~of Nogrant. ~~109-1 became~~ ~~effective~~The ~~upon~~following ~~issuance~~table ~~and~~sets weforth ~~believe~~the ~~that~~assumptions used ~~this~~to ~~pronouncement~~determine ~~will~~compensation ~~not have~~cost afor ~~significant~~our ~~impact~~share-based onawards ~~our~~consistent ~~effective~~with the ~~tax~~requirements ~~rate~~of inSFAS ~~2005~~No. 123R:

Assumptions	Three Months Ended June 30, 2006		Six Months Ended June 30, 2006
	(Unaudited)

Volatility	86.35	%	61.90	%
Risk-free interest rates	5.46	%	3.91	%
Expected life	Ten years		Five years
Expected dividends	None		None

The impact on adopting SFAS No. 123R was recorded in our financial statements as follows (in thousands):

	Three Months Ended June 30, 2006			Six Months Ended June 30, 2006
	(Unaudited)
Cost of sales	$	15		$	30
Selling, general and administrative	132			252
Research and development	15			30
Share-based compensation expense before taxes	162			312
Related income tax benefits	(30		)	(55		)
Share-based compensation expense, net of taxes	$	132		$	257

Income tax benefits are recognized based on the estimated fair value of nonqualified stock options. Approximately $80,000 and $160,000, respectively, of the expenses related to incentive stock options for the three and six month periods, for which no income tax benefit can be recognized unless there is a subsequent disqualifying disposition.

NOTE 3 — EARNINGS PER SHARE

The following table sets forth the computation of basic and diluted net income per share (in thousands, except per share data):

	Three Months Ended June 30,				Six Months Ended June 30,
	2006		2005		2006		2005
BASIC EARNINGS PER SHARE:
Net income available to common stockholders	$	2,016	$	2,366	$	4,071	$	4,515
Weighted average common shares outstanding	12,804		12,676		12,796		12,646
Per share amount	$	0.16	$	0.19	$	0.32	$	0.36

DILUTED EARNINGS PER SHARE:
Net income available to common stockholders	$	2,016	$	2,366	$	4,071	$	4,515
Weighted average common shares outstanding	12,804		12,676		12,796		12,646
Add: Dilutive effect of stock options	366		418		352		405

Weighted average dilutive shares outstanding	13,170		13,094		13,148		13,051
Per share amount	$	0.15	$	0.18	$	0.31	$	0.35

There were no options to purchase shares of common stock outstanding with exercise prices greater than the average market price of common shares for the three and six months ended June 30, 2006. There were no options to purchase shares of common stock outstanding with exercise prices greater than the average market price of common shares for the three months ended June 30, 2005. Options to purchase 30,000 shares of common stock were outstanding but not included in the computation of diluted earnings per share for the six months ended June 30, 2005 because the exercise prices were greater than the average market price of the common shares for the period.

NOTE 4 — INVENTORIES (IN THOUSANDS)

	June 30, 2006			December 31, 2005
	(Unaudited)

Raw materials and purchased parts	$	3,602		$	3,988
WIP	87			—
Finished goods	2,520			2,805
	6,209			6,793
Less: Allowance for excess and obsolete inventories	(700		)	(615		)
Total inventories	$	5,509		$	6,178

NOTE 5 — WARRANTIES

The Company’s products are generally covered by either a one-year or two-year standard warranty from the date of sale. Estimated warranty costs are accrued in the same period in which the related revenue is recognized, based on anticipated parts and labor costs, utilizing historical experience.

	Three Months Ended June 30, 2006						Six Months Ended June 30, 2006
	2006			2005			2006			2005
	(Unaudited)
Accrued warranties (in thousands):
Beginning of period	$	260		$	375		$	220		$	392
Settlements made	(59		)	(113		)	(127		)	(187		)
Accruals related to pre-existing warranties (includes changes in estimates)	—			(115		)	—			(115		)
Accruals for warranties issued	69			78			177			135
End of period	$	270		$	225		$	270		$	225

NOTE 6 — MERGER WITH ASSA ABLOY’S HID GLOBAL CORPORATION

On May 22, 2006, the Company’s board of directors voted unanimously to enter into a definitive merger agreement, subject to stockholder approval, to be acquired by a wholly owned subsidiary of of Assa Abloy’s HID Global Corporation in exchange for an all-cash consideration of $25.50 per share. On August 3, 2006, the Company’s stockholders, voting at a special meeting, approved the merger and the transaction closed the same day. As a result of this transaction, the Company became a wholly owned subsidiary of HID Global Corporation and ceased to trade as a public company on Nasdaq as of the close of business on August 3, 2006. Selling, general and administrative expenses for the second quarter of 2006 included approximately $1,000,000 of legal and professional expenses related to this transaction. As a result of the stockholders’ approval, and the completion, of this transaction, all non-vested outstanding stock options and restricted stock at August 3, 2006, became vested, resulting in the acceleration in the third quarter of 2006 of approximately $580,000 of share-based compensation expense.

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

The following discussion and analysis should be read in conjunction with our unaudited interim condensed financial statements and related notes included in this report. Statements made in this report concerning our ~~expectations~~ expectations about future results or events, are “forward-looking statements”. When used in this report, words such as “anticipate,” “believe,” “estimate,” “expect,” and “forecast” as they relate to us or our management are intended to identify such forward-looking statements, but are not the exclusive means of ~~identifying~~ identifying these statements. Such statements are subject to the safe harbor created by the Private Securities Litigation Reform Act of 1995, and are necessarily ~~subject~~ subject to risks and uncertainties. Actual results may differ materially from ~~those~~ those reflected in these forward-looking statements. These statements are based on on current expectations, forecasts and assumptions, and are subject to the ~~risks~~ risks and uncertainties inherent in general industry and market conditions, ~~general~~ general domestic and international economic conditions, and other factors. These ~~risks~~ risks and uncertainties include, but are not limited to: product acceptance and customer demand for our card personalization systems and proprietary supplies; actions taken and alternative products marketed by our competitors; supplier relationships, including reliance on sole and single-source suppliers; manufacturing or design defects that we may discover after shipment; challenges in successfully implementing a new enterprise resource planning computer system; lack of inventories of component parts or finished goods; our focus on the identification card personalization market; continuing technological ~~changes~~ changes in our industry; our dependence on a distribution network and the reaction of this network to changes in distribution programs; domestic and ~~international~~ international regulations and standards; our dependence on international sales and foreign suppliers; material changes in orders placed by large end users; challenges in effectively managing growth; our dependence on technologies we do not own; complex design that could result in manufacturing delays; protecting ~~and~~ and enforcing our intellectual property rights; inadequate protection against infringement claims; the costs of implementing and complying with new regulations enacted in various countries requiring the reduction of hazardous substances in electrical and electronic equipment, including the European Union Waste Electrical and Electronic Equipment Directive and Restriction of Hazardous Substances Directive; and adverse economic and business conditions, including conditions resulting from the terrorist attack on the U.S. on September 11, 2001 and the resulting hostilities and the war with Iraq. For more detail of the risks, uncertainties and other factors that could affect our future operations and results, see our filings with the Securities and Exchange Commission, particularly the Annual Report on Form 10-K for the year ended December 31, ~~2004~~2005.

Overview

We are a ~~global~~leading ~~leader~~developer, inmanufacturer ~~the~~and ~~development~~supplier of ~~secure~~ ~~technologies~~printing ~~for identity card issuance~~ systems~~. We~~ ~~manufacture~~ and ~~supply printing systems~~ ~~and~~ consumable ~~supplies~~materials that personalize plastic identification cards by printing images and text onto the card. Our printing systems are capable of encoding data onto cards that incorporate bar code, magnetic stripe, smart card or proximity card technology. We believe that our engineering expertise and ~~our~~ our ability to offer a broad range of printing systems using multiple printing technologies have led to a reputation for innovation in our industry.

We believe that we are the only manufacturer in our industry to offer three distinct technologies in printing systems - —High Definition Printing (reverse image), traditional Direct-to-Card printing (dye-sublimation) and CardJet ~~printing~~Printing technology (inkjet) - —to personalize plastic identification cards, complete with digital images and text, lamination and electronically encoded information. We believe there are between 30 and 35 companies manufacturing digital card printers. The great majority of these are offering direct-to-card dye-sublimation printers. We believe our ~~high~~High Definition ~~definition~~Printing ~~printing~~ platform currently has two competitors and we are not aware of any other company offering an inkjet solution for printing plastic identification cards.

Concern for personal safety and property protection has led to the need for electronic and visual identification and access control. We believe the demand for our products will increase as governments and corporations worldwide address their security needs. We believe the development and implementation of new technologies that add security features to plastic cards should foster a growing market for our systems.

We market and sell our products exclusively through a distribution channel of system ~~independent~~integrators ~~distributors~~ and ~~resellers~~independent distributors in more than 80 countries worldwide. We estimate that as of December 31, ~~2004~~2005, we have manufactured and sold more than ~~100~~120,000 of our printing systems. End- users of our printing systems create personalized cards for a wide variety of applications including corporate security and access; ~~drivers~~driver’ s licenses, government and military identification; student identification and access; public transportation access; and recreation and gaming.

We sell both printing systems and consumable supplies used in those systems. We produce a diverse array of card printing systems that allow us to meet the needs of end-users, ranging from those who desire a premium system to address10

8We sell both printing systems and consumable materials used in those systems. We produce a diverse array of card printing systems that allow us to meet the needs of end users, ranging from those who desire a premium system to address complex applications to those focused on lower priced systems with fewer features. We also sell consumable materials that are used with our systems, including dye sublimation ribbons, overlaminates, thermal resin ribbons, printheads, inkjet cartridges, inkjet card cartridges and blank cards. Over the past seven years, the proportion of our total revenues provided by consumable materials has increased to 61% of total revenues in 2005 from 49% in 1999. Factors affecting our net sales of card printing systems each year include the mix of systems sold, changes in average selling price and the number of major projects we are successful in winning. As the number of Fargo systems installed and in use continues to grow, it is our belief that the sale of consumable materials for use in these systems will provide us with a significant recurring, and growing, revenue stream.

~~complex applications~~Our tomarkets ~~those~~can ~~focused~~be oncategorized ~~lower~~in three ~~priced~~broad ~~systems~~tiers—entry-level, ~~with~~integration ~~fewer~~and ~~features~~projects. We ~~also~~have ~~sell~~historically been ~~consumable~~successful ~~supplies~~in ~~that~~each ~~are used~~of ~~with~~these ~~our~~markets. ~~systems,~~End ~~including~~users ~~dye~~in ~~sublimation~~the ~~ribbons,~~entry-level ~~overlaminates,~~market ~~thermal~~are ~~resin~~typically ~~ribbons,~~using ~~printheads,~~a ~~inkjet~~simple ~~cartridges,~~photo ~~inkjet~~identification card. ~~cartridges~~Users in this market ~~and~~are ~~blank~~likely ~~cards~~more focused on lower priced systems with fewer features. ~~Over~~ Users in the ~~past~~integration ~~six~~tier typically would add functionality such as access control ~~years,~~or time and attendance recording features. At the ~~proportion~~project oflevel, ~~our~~these customers ~~total~~are ~~revenues~~typically ~~provided~~government byand ~~consumable~~government-related ~~supplies~~projects ~~has~~and ~~increased~~corporate tosecurity ~~60%~~programs ofwith ~~total~~multi-level ~~revenues~~requirements, inwhich ~~2004~~typically ~~from~~will use ~~49%~~a inmuch ~~1999. Factors~~more ~~affecting~~sophisticated ~~our~~and ~~net~~complex ~~sales~~identification of card and are projects ~~printing~~where ~~systems~~the ~~each~~end ~~year~~user ~~include~~is ~~the~~looking ~~mix~~for ofthe ~~systems~~highest ~~sold,~~levels ~~declines~~of infunctionality ~~average~~and ~~selling~~security. ~~price~~Examples of government and ~~the~~government-related ~~number~~projects ofinclude national ~~major~~identification ~~projects~~programs, wemilitary ~~are~~programs ~~successful~~and indriver’s license ~~winning~~programs. As ~~the~~These ~~number~~projects oftypically ~~Fargo~~span ~~systems installed~~multiple years and ininvolve ~~use~~integrating solutions ~~continues~~into tocomplex ~~grow,~~existing itinfrastructures. The printer component of these projects is ~~our~~typically ~~belief~~only ~~that~~a ~~the~~small ~~sale~~piece of the overall project. While the ~~consumable~~company ~~supplies~~actively ~~for~~pursues ~~use~~such inproject business, these ~~systems~~projects ~~will~~are ~~provide~~very competitive usand ~~with~~it ais ~~significant recurring~~very difficult to predict the timing of the bid process, funding and ~~growing,~~implementation ~~revenue~~of ~~stream~~any such projects.

~~Our markets can be categorized in three broad tiers~~We -have ~~entry-level,~~experienced ~~mid-level~~ and ~~high-level. We~~expect ~~have~~to ~~historically~~continue ~~been~~to ~~successful~~experience inquarterly ~~each~~variations ~~of these markets. End users~~ in net ~~the~~sales ~~entry-level~~and ~~market~~gross ~~are typically~~profit ~~using~~as a ~~simple~~result ~~photo~~of ~~identification~~a ~~card. Users~~number inof ~~this~~factors, ~~market~~including, ~~are likely more focused~~among onother ~~lower~~things, ~~priced systems with fewer features. Users in~~ the ~~mid-level~~timing ~~tier typically~~and ~~would~~extent ~~add~~of ~~functionality~~promotional ~~such~~pricing; ~~as access control or time and attendance recording features. At~~ the ~~high-end~~timing of ~~our~~ ~~markets are government and government-related~~ major projects; ~~and~~changes ~~corporate~~in ~~security programs~~average ~~with~~selling ~~multi-level~~prices; ~~requirements,~~the ~~which~~number ~~typically~~and ~~will~~mix ~~use~~of ~~a much more~~products ~~sophisticated~~sold ~~and~~in ~~complex identification card and are projects where~~ the ~~end~~quarter; ~~user is looking for~~ the ~~highest~~availability ~~levels of functionality~~ and ~~security. Examples~~cost of ~~government~~components and ~~government-related~~materials; ~~projects include national identification programs~~costs, ~~military~~benefits ~~programs~~ and ~~driver’s license~~timing ~~programs. These projects typically span multiple years and involve integrating solutions into complex existing infrastructures. The printer component~~ of ~~these~~new ~~projects~~product isintroductions; ~~typically~~customer ~~only~~order ~~a small piece of the overall project. While the company actively pursues such~~size ~~project~~and ~~business,~~shipment ~~these~~timing; ~~projects are very competitive~~ and itseasonal isfactors ~~very~~affecting ~~difficult to predict the~~ timing of ~~the~~purchase ~~bid process, funding and implementation of any such projects~~orders.

WeIn ~~have~~the United ~~experienced~~States, ~~and~~our ~~expect~~distribution toprogram ~~continue~~categorizes toour distribution channel ~~experience,~~into ~~quarterly~~four ~~variations~~program intracks. ~~net~~Fargo Solution Providers provide retail customers with sales, service and ~~gross~~integration ~~profit~~expertise ason aFargo’s ~~result~~full line of Professional aand Persona Series products and systems. Fargo Value Added ~~number~~Distributors ofprovide ~~factors,~~in-depth ~~including,~~integration ~~among~~expertise ~~other~~and ~~things,~~support ~~the~~for ~~timing~~Fargo Solution Providers and ~~extent~~end user customers on Fargo’s full line of products and ~~promotional~~systems. ~~pricing;~~Fargo ~~the~~Distributors ~~timing~~provide product distribution services to Fargo Solution Providers. Fargo Manufacturing Resellers provide a core business strategy of ~~major~~developing ~~projects;~~and manufacturing products where the ~~number~~sale ~~and~~of identification ~~mix~~card printers is a secondary portion of its sales. ~~products~~Internationally, ~~sold~~our distribution program categorizes our distribution into three program tracks. Import Suppliers act as a master distributor in ~~the~~a country. ~~quarter;~~International ~~the~~Dealers ~~availability~~sell to retail customers. International Distributors provide product distribution. We continue to implement our two-product line strategy with restricted distribution on our Professional Series products and ~~cost~~broad distribution of ~~components~~our ~~and materials;~~Persona ~~costs~~Series. From time to time, ~~benefits~~we ~~and~~adjust ~~timing~~selected parts of ~~new~~our ~~product~~distribution ~~introductions;~~system ~~customer~~to address changing ~~order~~requirements. ~~size~~In ~~and~~the ~~shipment~~second ~~timing;~~half ~~and~~of ~~seasonable~~2005, ~~factors~~we ~~affecting~~made ~~timing~~some changes, primarily in the areas of harmonizing discounts world-wide, eliminating some exclusivity options for certain of our distribution and increasing the requirements necessary to purchase ~~orders~~directly from us.

~~In the United States~~During 2005, ~~our~~we ~~distribution~~made ~~program categorizes~~additional ~~our~~investments ~~distribution~~in ~~channel~~the ~~into~~infrastructure ~~four~~of ~~program~~our ~~tracks. Fargo Solution Providers provide retail customers with sales~~business, ~~service and integration~~ ~~expertise~~resulting onin ~~Fargo’s~~an ~~full~~increase ~~line~~in ofoperating ~~Professional and Persona Series products and systems~~expenses. ~~Fargo~~The ~~Value~~purpose ~~Added~~of ~~Distributors provide in-depth integration~~these ~~expertise~~investments ~~and~~is ~~support~~to ~~for~~position ~~Fargo~~ourselves ~~Solution~~better ~~Providers~~to ~~and~~capitalize ~~end~~on ~~user~~anticipated ~~customers on~~market ~~Fargo’s~~opportunities ~~full~~for ~~line~~our of products and ~~systems. Fargo Distributors provide product distribution services~~ to ~~Fargo~~grow ~~Solution~~our ~~Providers. Fargo~~revenue ~~Manufacturing~~in ~~Resellers provide a core business strategy of developing and manufacturing products where~~ the ~~sale~~future. ~~of identification~~It ~~card printers~~ is ~~a secondary portion of its sales. Internationally,~~ our ~~distribution program~~ ~~categorizes~~intention ~~our distribution into three program tracks. Import Suppliers act as a master distributor in a country. International Dealers sell~~ to ~~retail customers. International Distributors provide product distribution. We~~ continue to ~~implement~~make ~~our~~these ~~two-product~~investments. ~~line~~We ~~strategy~~also ~~with~~anticipate ~~restricted~~continued ~~distribution~~legal onexpenses ~~our~~in ~~Professional~~connection ~~Series products~~with ~~and~~patent ~~broad~~litigation ~~distribution~~we ~~of our~~have ~~Persona Series~~initiated. ~~From~~ ~~time to time,~~We webelieve ~~adjust~~these ~~selected~~expenditures ~~parts~~will ofenhance ~~our~~the ~~distribution~~future ~~system~~growth toof ~~address changing requirements. In~~ the ~~second~~company ~~half of~~for ~~2005,~~our weshareholders; ~~are making some changes~~however, ~~primarily in~~ the ~~areas~~anticipated ofgrowth ~~harmonizing discounts~~cannot ~~world-wide,~~be ~~eliminating~~assured ~~some~~and ~~exclusivity options for certain of~~ our ~~distribution~~operating ~~and~~income ~~increasing~~may ~~the~~be ~~requirements~~negatively ~~necessary to purchase directly from us~~affected.

In the second half of 2004, we began making additional investments in the infrastructure of our business, resulting in an increase in operating expenses. The purpose of these investments is to position ourselves better to capitalize on anticipated market opportunities for our products and to grow our revenue in the future. It is our intention to continue to make these investments. We currently expect our future operating expenses to increase at a faster rate than the increases we have experienced in the past. We believe these expenditures will enhance the future growth of the company for our shareholders; however, the anticipated growth cannot be assured and our operating income may be negatively affected.11

9Effective January 1, 2006, we adopted SFAS No. 123R, and elected the modified prospective transition method. This method allows us to apply the new requirements on a prospective basis. These amounts were recorded in our financial statements as follows:

	Three Months Ended June 30, 2006			Six Months Ended June 30, 2006
	(Unaudited)
Cost of sales	$	15		$	30
Selling, general and administrative	132			252
Research and development	15			30
Share-based compensation expense before taxes	162			312
Related income tax benefits	(30		)	(55		)
Share-based compensation expense, net of taxes	$	132		$	257

For additional information on our adoption of SFAS No. 123R see Note 2 Stock Based Compensation in the Notes to Condensed Financial Statements in this Quarterly Report on Form 10-Q.

Merger with Assa Abloy’s HID Global Corporation

On May 22, 2006 our board of directors voted unanimously to enter into a definitive merger agreement, subject to stockholder approval, to be acquired by a wholly owned subsidiary of of Assa Abloy’s HID Global Corporation in exchange for an all-cash consideration of $25.50 per share. On August 3, 2006, our stockholders, voting at a special meeting, approved the merger and the transaction closed the same day. As a result of this transaction, we became a wholly owned subsidiary of HID Global Corporation and ceased to trade as a public company on Nasdaq as of the close of business on August 3, 2006. Selling, general and administrative expenses for the second quarter of 2006 included approximately $1,000,000 of legal and professional expenses related to this transaction. As a result of the stockholders’ approval, and the completion, of this transaction, all non-vested outstanding stock options and restricted stock at August 3, 2006, became vested, resulting in the acceleration in the third quarter of 2006 of approximately $580,000 of share-based compensation expense.

Results of Operations

The following table sets forth, for the periods indicated, certain unaudited selected financial data expressed as a percentage of net sales:

	Three Months Ended				Nine Months Ended
	Three Months Ended June 30,				Six Months Ended June 30,
	September 30,				September 30,
	2006		2005		2006		2005
	2005		2004		2005		2004
Net sales	100.0	%	100.0	%	100.0	%	100.0	%
Cost of sales	56.61		5855.9		5655.79		5956.47
Gross profit	43.49		4144.1		4344.31		4043.63
Operating expenses:
Research and development	6.47		6.8.2		7.03		7.34
Selling, general and administrative	1725.72		1820.21		1923.19		1819.49
Total operating expenses	2431.19		2528.03		2631.12		2527.73
Operating income	1912.30		1615.18		1712.29		1416.90
Other income	1.1		0.2		1.6		0.2
Other income, net	2.0		3.0		2.0		1.8
Income before provision for income taxes	2014.40		1618.38		1814.89		1517.18
Provision for income taxes	64.79		4.6.3		65.23		45.78
Net income	139.71	%	1112.75	%	129.6	%	1012.40	%

Sales to customers by geographic region, for the periods indicated, were as follows (in thousands):

Three Months

Nine Months

Three Months Ended June 30,

Six Months Ended June 30,

Ended September 30,

Geographic Region

2006

2005

2006

2005

Geographic Region

2005

2004

2005

2004

(Unaudited)

Europe

3,~~039~~146

2,~~354~~757

86,~~012~~320

64,~~844~~973

Middle East and Africa

12,~~870~~765

1,~~758~~972

5,~~469~~343

43,~~500~~599

Asia and Australia

12,~~719~~149

2,~~462~~370

64,~~181~~226

54,~~901~~462

North and South America (other than the U.S.)

2,~~611~~497

12,~~919~~151

65,~~557~~168

53,~~857~~946

Total international sales

910,~~239~~557

89,~~493~~250

2621,~~219~~057

2316,~~102~~980

U.S.

1311,~~217~~718

119,~~133~~636

3321,~~780~~328

2920,~~623~~563

Total sales

22,~~456~~275

1918,~~626~~886

5942,~~999~~385

5237,~~725~~543

Comparison of Three Months Ended ~~September~~June 30, ~~2005~~ 2006 and ~~2004~~2005

Net sales. Net sales increased 1417.49% to $22.53 million for the three-month period ended ~~September~~June 30, ~~2005~~2006, from $1918.69 million in the same period of ~~2004~~2005. Sales of printers/encoders increased 2014.5% to $98.08 million from $7.47 million in the ~~third~~second quarter of ~~2004~~2005. The increase in sales of printers/encoders ~~was~~ was due to an increase in unit volume, ~~primarily~~together aswith aan ~~result~~increase ~~of increased project activity, partially offset by a decrease~~ in average selling price~~. The~~ ~~decrease in average selling price was primarily~~ due to changes in unit mix ~~and increased sales of new products~~. ~~introduced~~Sales ~~in the second half~~ of ~~2004. Sales of~~ secure materials increased 1020.73% to $13.5 million from $1211.2 million in the ~~third~~ second quarter of ~~2004~~2005. Sales of secure materials increased due to volume increases and changes in unit mix~~, partially offset by decreased large product revenue and sales of boxed software~~.

1013

International sales increased 814.81% to $910.26 million in the ~~third~~ second quarter of ~~2005~~2006 from $89.5 3 million in the same period of ~~2004~~2005 and accounted for 41 47.14% of net sales for the three months ended ~~September~~June 30, ~~2005~~2006, compared to 4349.30% ~~of net sales~~ in the same period of ~~2004~~2005. International sales increased $01.73 million inover the ~~third~~second quarter of 2005 ~~compared to the same period of 2004,~~ primarily due to ~~growth~~increased ~~of $1.4 million in the Europe and North and South America region (other than the U.S.), offset by decreased~~ sales of ~~$0.7 million~~secure toprinters/encoders ~~the Asia~~ and ~~Australia region.~~ materials ~~We believe the growth~~ in ~~international sales is a result of our new product introductions that meet a broader array of user needs and our increased sales and marketing initiatives. Sales decreased in~~ the ~~Asia~~Middle ~~and~~East ~~Australia~~ region ~~primarily due to timing of sales of secure materials for an on-going project in Australia~~. ~~As a percentage of net sales, international~~Domestic sales ~~decreased~~increased 221.26%~~. This~~ ~~decrease is mainly due~~ to an$11.7 ~~increase~~million in ~~our~~the ~~domestic~~second ~~sales~~quarter ~~which~~of ~~benefited~~2006 from ~~large project sales~~$9. ~~The increase in domestic large~~6 ~~project~~million ~~sales resulted~~ in athe ~~lower~~second ~~proportion~~quarter of ~~international business during~~2005. ~~the~~Domestic ~~third~~sales ~~quarter~~increased ofdue ~~2005~~to ~~compared~~increased tovolumes ~~the~~of ~~same~~secure printers/encoders ~~period~~and ofsecure ~~2004~~materials.

Gross ~~profit.~~ Profit. Gross profit increased 2017.76% to $9.78 million ~~for~~in the ~~three~~second ~~months~~quarter ~~ended~~of ~~September 30,~~2006 ~~2005~~compared ~~from~~to $8.1 3 million in the same period of ~~2004~~2005. Gross profit as a percentage of ~~net~~ sales ~~increased~~ torepresented 43.49% ~~for~~in the ~~three~~second quarter ~~months~~of ~~ended~~2006 ~~September~~compared ~~30,~~to ~~2005, from 41~~44.1% in the ~~same~~second ~~period~~quarter of ~~2004~~2005. The gross profit percentage ~~benefited~~was ~~from~~impacted ~~increased~~by the ~~volume, product~~ mix ~~and~~of ~~cost improvements~~business.

Research and ~~development~~Development. Research and development expenses ~~increased 6.8%~~were to $1.45 million ~~for~~in the ~~three~~second quarter ~~months~~of ~~ended September 30~~2006, ~~2005,~~essentially ~~from~~flat ~~$1.3 million~~with ~~of expenses in~~ the same period of ~~2004~~2005. Research and development expenses aswere ~~a percentage~~ 6.7% of net sales ~~were~~in ~~6.4% for~~ the ~~third~~second quarter of ~~2005,~~2006 compared to 6.8.2% for the same period of ~~2004~~2005. ~~The increase in research and development expenses is mainly due to increased compensation expense due to growth.~~

Selling, General ~~general~~ and ~~administrative~~Administrative Expenses. Selling, general and administrative expenses increased 1148.50% to $45.06 million ~~for~~in the ~~three~~second ~~months~~quarter ~~ended~~of ~~September~~2006 ~~30, 2005,~~ from $3.68 million in the same period of ~~2004~~2005. As a percentage of net sales, selling, general and administrative expenses were 17 25.72% in the ~~third~~second quarter of ~~2005,~~2006 compared to 1820.21% ~~for~~in the same period of 2005. Selling, ~~2004~~general and administrative expenses included $1.0 million of legal and professional expenses incurred during the quarter, related to merger of the company with a wholly owned subsidiary of Assa Abloy’s HID Global Corporation. The ~~increase~~merger was completed in August 2006. The remaining increase in selling, general and administrative expenses is primarily due to ~~additional~~ increased compensation expense from additional headcount, increased advertising and promotion and increased health insurance costs. Selling, general and administrative expenses for the second quarter of 2006 included approximately $~~255~~132,000 ~~due~~of tostock-based compensation ~~growth~~as a result of the adoption of SFAS No. 123R. There was no corresponding amount in the second quarter of 2005.

Operating ~~income~~ Income. Operating income ~~increased~~was ~~36.9% to~~ $42.3 7 million for the second quarter ~~ended~~of ~~September~~2006 ~~30,~~compared ~~2005,~~to ~~from~~ $3.20 million in ~~during~~ the same period of ~~2004~~2005. As a percentage of net sales, operating income was 1912.30% in the ~~third~~second quarter of 2006 ~~2005~~ compared to 16 15.18% in the ~~same~~second ~~period~~quarter of ~~2004~~2005. The decrease in the operating income ~~increase~~percentage ~~resulted~~of ~~mainly~~net ~~from~~sales is due to the ~~increased~~recording ~~gross~~of ~~profit~~$1.0 million in acquisition related expenses in the quarter, ~~partially~~which ~~offset~~had the effect of reducing the operating income percentage of net sales by 4.8%. ~~increased~~Operating ~~operating~~income ~~expenses~~for the second quarter of 2006 was also affected by the recognition of approximately $162,000 of stock-based compensation expense as ~~described~~a result ~~above~~of the adoption of SFAS No. 123R. There was no corresponding amount in the second quarter of 2005.

Other ~~income.~~ Income. Other income for ~~increased~~the tosecond quarter of 2006 was $~~246~~449,000, representing interest income on invested cash. Other income for the second quarter ~~ended~~of ~~September 30,~~ 2005 ~~from~~was $52588,000 ~~during~~made ~~the~~up ~~same~~of ~~period~~$188,000 of ~~2004. The increase was primarily due to increased~~ interest income ~~mainly~~and $400,000 received as a result of a ~~larger~~patent ~~cash~~litigation ~~balance~~settlement.

Income Tax ~~tax expense~~Expense. Income tax expense ~~was $1.5 million~~ for the ~~three months~~second ~~ended~~quarter ~~September~~of ~~30,~~2006 ~~2005,~~was ~~which~~$1.1 ~~results~~million, inrepresenting an effective tax rate of 3235.84%, compared to income tax expense of $01.92 million and an effective tax rate of 2833.27% for the same period of ~~2004~~2005. The ~~change~~ increase in the effective tax rate is because ~~mainly~~the ~~due~~company todid ~~the~~not ~~timing~~record ofany ~~the~~benefit ~~recognition of~~for the research and experimentation credits~~. During~~ in the ~~third~~second quarter of ~~2005,~~2006 as the ~~company recognized approximately $80,000~~federal oflegislation ~~additional~~authorizing ~~tax~~such credits ~~relating~~expired toon aDecember ~~prior year~~31, ~~which were settled during the quarter. During the third quarter of 2004~~2005, ~~the~~and ~~company~~has ~~recognized approximately $200,000 of additional tax credits~~not ~~relating~~yet ~~to a prior year, which were settled in that quarter. Excluding these tax credits, the effective tax rate would have~~ been 34renewed.~~5% for the third quarter of 2005 and 34.4% for the third quarter of 2004.~~

Comparison of ~~Nine~~Six Months Ended June ~~September~~ 30, ~~2005~~ 2006 and ~~2004~~2005

Net ~~sales~~ Sales. Net sales increased 1312.8% to $6042.04 million for the ~~nine~~six-month period ended ~~September~~June 30, ~~2005~~2006, from $5237.75 million in the same period of ~~2004~~2005. Sales of printers/encoders increased 1712.68% to $2316.32 million from $1914.8 3 million in the same period of ~~2004~~2005. The increase in sales of printers/encoders was due to anincreased ~~increase in~~ unit ~~volume,~~volumes ~~partially~~and ~~offset by~~ a ~~decrease in~~ ~~average~~higher ~~selling~~overall ~~price. The decrease in~~ average selling price ~~was primarily~~ due to changes in unit mix. Sales of secure materials increased 1112.59% to $3626.72 million ~~from~~for ~~$32.9 million in~~ the ~~nine~~six-month ~~months~~period ended ~~September~~June 30, ~~2004. Sales~~ of2006, ~~secure~~from ~~materials increased approximately~~ $323.82 million ~~due to unit volume, changes in unit mix~~ ~~and increases~~ in ~~average~~the ~~selling~~same ~~prices~~period ~~as a result~~ of ~~price~~2005. Sales ~~increases effective~~of insecure ~~the~~materials ~~first~~increased ~~quarter~~due ofto ~~2005,~~volume ~~partially~~increases ~~offset~~and bychanges ~~decreased~~in ~~sales~~unit ~~of boxed software~~mix.

International sales increased 13.5% to $26.2 million in the nine months ended September 30, 2005 from $23.1 million in the same period of 2004 and accounted for 43.7% of net sales for the nine months ended September 30, 2005, compared to 43.8% of net sales in the same period of 2004. Growth in all geographic regions contributed to a $3.1 million increase in international sales for the nine months ended September 30, 2005 compared to the same period of 2004. We believe the growth in international sales is a result of our new product introductions that meet a broader array of user needs14

11International sales increased 24% to $21.1 million in the six-month period ended June 30, 2006, from $17.0 million, and represented 49.7% of net sales for the six-month period ended June 30, 2006, compared to 45.2% in the same period of 2005. The growth in international sales of $4.1 million is primarily due to increased sales in the Middle East, Europe and North America (other than the U.S.) and South America regions. We believe the growth in international sales is a result of new product introductions launched in 2005 that meet a broader array of user needs and enhanced sales efforts in these regions. Domestic sales increased 3.7% to $21.3 million in the six-month period ended June 30, 2006, from $20.6 million in the same period of 2005. Domestic sales increased primarily due to additional secure printer/encoder volume.

~~and~~Gross Profit. Gross ~~our~~profit increased 14.9% to $18.7 million for the six-month period ended June 30, 2006, compared to $16.3 million for the same period of 2005. As a percentage of net sales, ~~and~~gross ~~marketing~~profit was ~~initiatives~~44. 1% in the six-month period ended June 30, 2006, compared to 43.3% for the same period of 2005. The gross profit percentage benefited from the improved cost position on our HDP600, DTC400 and C30 printers/encoders relative to the products they replaced and the mix of business.

~~Gross~~Research and ~~profit~~Development. ~~Gross~~Research ~~profit~~and development expenses increased 219.59% to $263.01 million for the six-month ~~nine~~period ~~months~~ ended ~~September~~ June 30, ~~2005~~2006, ~~from~~compared to $212.48 million infor the same period of ~~2004~~2005. ~~Gross~~As ~~profit as~~ a percentage of net ~~sales~~ ~~increased~~sales, research and development expenses amounted to 437.3% for the ~~nine~~six-month period ~~months~~ ended ~~September~~June 30, ~~2005~~2006, ~~from~~compared 40to 7.64% in for the same period of ~~2004~~2005. The ~~gross profit~~increase ~~percentage~~in ~~benefited~~research ~~from increased volume, product mix~~ and ~~cost~~development ~~improvements. Gross~~expenses ~~profit~~is ~~for~~mainly ~~the~~due ~~nine months ended September 30, 2004 benefited from a $360,000 reduction of cost of sales related~~ to ~~the~~increased ~~settlement~~compensation ~~of prior years’ duty drawback claims~~expense.

~~Research~~Selling, general and ~~development~~administrative. ~~Research~~ Selling, general and ~~development~~administrative expenses increased 1035.09% to $410.2 1 million for the ~~nine~~six-month ~~months~~period ended ~~September~~June 30, ~~2005~~2006, ~~from~~compared to $37.85 million offor ~~expenses in~~ the same period ofin ~~2004~~2005. Selling, ~~Research~~general and ~~development~~administrative expenses asincluded a$1.0 ~~percentage~~million of ~~net~~legal ~~sales~~and professional ~~were~~expenses ~~7.0% for~~incurred during the ~~nine~~quarter, ~~months~~related ~~ended~~to ~~September~~merger ~~30,~~of ~~2005,~~the company ~~compared~~with toa ~~7.3%~~wholly ~~for~~owned ~~the~~subsidiary ~~same~~of Assa Abloy’s HID Global ~~period~~Corporation. The ofmerger ~~2004~~was completed in August 2006. The remaining increase in ~~research~~ selling, general and ~~development~~administrative expenses is ~~mainly~~primarily due to increased compensation expense ~~due~~from toadditional headcount, increased advertising and ~~growth~~promotion and increased health insurance costs. Selling, general and administrative expenses for the six-month period ended June 30, 2006, included approximately $252,000 of stock-based compensation as a result of the adoption of SFAS No. 123R. There was no corresponding amount in the first six months of 2005.

~~Selling, general and administrative~~Operating income. ~~Selling, general and administrative expenses~~Operating ~~increased~~income 18decreased 8.09% to $115.5 million for the ~~nine~~first six months ~~ended~~of ~~September~~2006 ~~30, 2005,~~compared ~~from~~to $96.70 million in the same period of ~~2004~~2005. As a percentage of net sales, ~~selling,~~operating ~~general~~income ~~and~~was ~~administrative expenses were 19~~12.19% infor the ~~nine~~first six months ~~ended~~of ~~September~~2006 ~~30, 2005,~~ compared to 1816.40% for the same period of ~~2004~~2005. The decrease in the operating income ~~increase~~percentage of net sales is due to the recording of $1.0 million in ~~selling~~acquisition related expenses in the first six months of 2006, ~~general~~which ~~and~~had ~~administrative~~the ~~expenses~~effect isof reducing ~~primarily~~the operating income percentage of net sales by 2.5%. The remaining decrease is due to increased operating expenses, partially offset by increased ~~advertising~~gross ~~and~~profit ~~promotional~~as ~~expenses~~discussed above. Operating ofincome ~~approximately~~for ~~$190,000,~~the first ~~increased~~six-months ~~professional~~of ~~fees~~2006 was also affected by the recognition of approximately $~~350~~312,000 ~~primarily~~of ~~related~~stock-based tocompensation expense as a result of the adoption of ~~patent~~SFAS ~~litigation~~No. ~~expenses,~~123R. There ~~and~~was ~~additional~~no corresponding ~~compensation~~amount ~~expense~~in ~~due~~the tofirst ~~growth~~six months of 2005.

~~Operating~~ Other income. ~~Operating~~Other income was ~~increased 31.4% to~~ $100.3 8 million for the ~~nine~~first six months ~~ended~~of ~~September~~2006 ~~30,~~compared ~~2005,~~to ~~from~~ $70.97 million ~~during~~for the same period ofin ~~2004~~2005. AsOther aincome ~~percentage~~in of2006 ~~net~~represents ~~sales,~~interest ~~operating~~ income ~~was~~earned ~~17.2%~~on ininvested ~~the~~cash. Other ~~nine~~income ~~months~~in ~~ended~~2005 ~~September~~included 30$0.4 million, ~~2005~~received ~~compared~~as toa ~~14.9%~~result inof ~~the~~a ~~same~~patent ~~period~~litigation settlement, and $0.3 million of interest ~~2004~~income. The increase ~~resulted~~in ~~mainly~~interest income ~~from~~in ~~the increased~~2006 ~~gross~~over ~~profit,~~2005 ~~partially~~is ~~offset~~due byto increased ~~operating~~interest ~~expenses~~rates asand larger balances ~~described~~of ~~above~~invested funds.

~~Other~~Income tax ~~income~~expense. Income ~~Other~~tax ~~income~~expense ~~increased~~was to $~~949,000~~2.2 million for the ~~nine~~six-month ~~months~~period ended ~~September~~ June 30, ~~2005~~2006, which ~~from~~represents ~~$106~~an effective tax rate of 35.4%,~~000~~ ~~during~~compared ~~the~~to ~~same~~income ~~period~~tax expense of ~~2004~~$2. ~~Other~~2 ~~income~~million ~~during~~and an effective tax rate of 32.6% for the ~~nine~~corresponding ~~months~~period in ~~ended~~2005. The increase in the effective ~~September~~tax ~~30,~~rate ~~2005~~is ~~included~~because ~~$400,000~~the ascompany adid ~~result~~not ofrecord aany ~~patent~~benefit ~~litigation~~for the research and ~~settlement~~experimentation ~~received~~credits in the ~~second~~first ~~quarter~~six months of 2006 as the federal legislation authorizing such credits expired on December 31, 2005, and has not yet been renewed. ~~The~~In ~~remaining~~addition, ~~increase~~during the ~~was~~first ~~due~~quarter toof ~~increased interest~~2005, ~~income~~the ~~mainly~~company asrecognized aapproximately ~~result~~$70,000 ofin tax credits related to a ~~larger~~prior ~~cash~~year ~~balance~~tax contingency that was settled during the quarter.

Income tax expense. Income tax expense was $3.7 million for the nine months ended September 30, 2005, which results in an effective tax rate of 32.7%, compared to income tax expense of $2.5 million and an effective tax rate of 31.3% for the same period of 2004. The change in the effective tax rate is mainly due to the timing of the recognition of research and experimentation credits.

Liquidity and Capital Resources

We have historically financed our operations, ~~debt~~ debt service and capital requirements through cash flows generated from operations. Working capital was $4352.9 1 million and $3446.19 million, ~~respectively,~~ at ~~September~~June 30, ~~2005~~2006 and December 31, ~~2004. At~~ ~~September 30,~~ 2005 ~~and throughout 2005 and 2004~~, ~~we had no bank debt outstanding~~respectively.

We believe, based on our current cash levels as well as the operating cash flows expected in ~~2005~~ 2006 and the funds available to us under our $5.0 million revolving credit facility, that we will have sufficient funds to finance our current operations and planned capital expenditures for at least the next 12 months.

We had cash and cash equivalents of $34.2 million at September 30, 2005, an increase of $10.8 million from $23.4 million at December 31, 2004. This increase was primarily due to positive net cash flows provided by our operating activities.15

~~Cash~~We ~~generated from~~had ~~operating activities for the nine-month period ended September 30, 2005 totaled $11.2 million due to net income of $7.6 million, non-~~cash ~~charges of $3.3 million~~ and ~~changes in operating assets and liabilities of approximately $0.3 million. The non-~~cash ~~charges~~equivalents ~~are primarily for deferred income taxes and depreciation and amortization. Cash provided by operating activities increased due an increase in accounts payable~~ of $239.18 million ~~and~~at anJune ~~increase~~30, ~~in accrued liabilities of $0.8 million~~2006, ~~but was negatively impacted by~~ an increase ~~in accounts receivable~~ of $13.73 million ~~and an~~from ~~increase in inventory of~~ $036.65 million~~. The~~ ~~increase~~at inDecember ~~accounts~~31, ~~receivable is mainly due to increased revenue and the timing of sales. The increase in account payable is also due to increased revenue activity in the third quarter of~~ 2005 ~~compared to the fourth quarter of 2004~~. ~~Cash~~ ~~used~~This ~~by investing activities was $1.7 million primarily for the purchase of equipment and leasehold improvements. The~~ increase ~~in cash used by investing~~ ~~activities~~was ~~over 2004 is~~ primarily due to ~~expenditures~~positive ~~related~~net tocash ~~the~~flows ~~purchase of a new enterprise resource planning computer system, which the company is currently in the process of implementing. Cash~~ provided by ~~financing~~our operating activities ~~was $1~~.~~3 million due to proceeds received from the exercise of stock options.~~

12Cash generated from operating activities for the six-month period ended June 30, 2006 totaled $4.0 million due to net income of $4.1 million and non-cash charges of $2.4 million, offset by changes in operating assets and liabilities of approximately $2.5 million. The non-cash charges are primarily for deferred income taxes, depreciation and amortization and stock-based compensation. Cash provided by operating activities was negatively impacted by changes in operating assets and liabilities mainly due to an increase in accounts receivable of $3.3 million and a decrease in accrued liabilities of $0.5 million. The increase in accounts receivable is mainly due to the timing of sales. The decrease in accrued liabilities relates to the payment of incentive compensation for fiscal 2005 and a decrease in income taxes payable. We have an incentive compensation program which covers all associates. In the first quarter of 2006, we paid out approximately $1.1 million for incentive compensation earned for fiscal 2005. Cash used by investing activities was $0.8 million primarily for the purchase of equipment and leasehold improvements. The decrease in cash used by investing activities over 2005 is primarily due to less expenditures related to costs for a new enterprise resource planning computer system, which we implemented in April 2006. Cash provided by financing activities was $0.1 million primarily due to proceeds received from the exercise of stock options.

Cash ~~provided~~generated from by operating activities ~~was $6.6 million~~ for the ~~nine~~six-month period ended ~~September~~ June 30, 2005 totaled ~~2004~~$6.8 million due to net income of $54.5 million, ~~and~~ non-cash charges of $32.3 1 million, ~~partially offset~~and by changes in operating assets and liabilities of approximately ($20.2) million. The non-cash charges are primarily for deferred income taxes and depreciation and amortization. ~~Cash~~ ~~provided~~The bychanges in operating ~~activities~~assets ~~was~~and liabilities ~~negatively~~included ~~impacted~~a bydecrease ~~an increase~~ in ~~accounts~~inventory ~~receivable~~ of $31.81 million ~~and an increase in inventory of $878~~,~~000,~~ ~~but~~equally ~~partially~~ offset by ana ~~increase in~~decrease in accounts payable and accrued liabilities of $21.81 million. ~~The increase~~In inthe ~~accounts~~fourth ~~receivable~~quarter isof ~~mainly~~2004, inventory had increased due to the ~~timing~~introduction ~~and~~of ~~increase~~new ~~of sales~~products. ~~The~~During ~~increase~~the insix ~~inventory~~months isended ~~due~~June 30, 2005, toinventory decreased as the introduction of the new products became a normal course of business and legacy products began to be discontinued. The ~~increase~~ decrease in accounts payable is ~~primarily~~due ~~related~~ to decreased ~~the~~revenue ~~timing~~activity ofin ~~our~~the ~~payments to~~second ~~vendors~~quarter ~~and~~of ~~increased~~2005 ~~purchases~~compared asto athe ~~result~~fourth quarter of ~~increased~~2004 ~~revenue~~and ~~activity in~~ the ~~third~~timing ~~quarter~~ of ~~2004~~purchases. Cash used by investing activities was $~~681,000~~1.4 ~~solely~~million exclusively for ~~purchases~~the purchase of equipment and leasehold improvements. The increase in cash used by investing activities over 2004 is primarily due to expenditures related to the purchase of a new enterprise resource planning computer system, which the company is currently in the process of implementing. Cash provided by financing activities was approximately $~~464,000~~1.0 ~~due~~million due to proceeds received from the exercise of stock options.

Under our revolving credit facility, there was no outstanding balance at ~~September~~June 30, ~~2005~~2006 or at any point during ~~2005~~2006 and ~~2004~~2005. The credit facility expires March 31, ~~2006~~2007. At that time, the credit facility will renew, provided each party executes an amendment documenting such renewal. ~~Borrowings~~ ~~under the revolving credit facility are limited to eligible accounts receivable and inventories, as defined by the agreement.~~ Under the terms of the credit facility, we may borrow at the prime rate of interest or LIBOR plus a margin of 1.5%.

The credit facility requires, among other things, the maintenance of a minimum EBITDA and restricts our ability to pay dividends or incur new operating lease expenditures, as defined in the agreement.

Critical Accounting Policies and Estimates

Management’s discussion and analysis of its financial condition and results of operations are based upon our financial statements, which have been prepared in conformity with accounting principles generally accepted in the United States of America. The preparation of financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the reported amounts of revenues and expenses during the reporting period. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable based upon the information available to us, the results of which form a basis for making judgments about the carrying value of assets and liabilities that are not readily available from other sources. Actual results may differ from these estimates under different assumptions or conditions.

The following critical policies relate to the more significant judgments and estimates used in the preparation of the financial statements:

Revenue Recognition— Revenue is recognized when product has been shipped, risk of loss has passed to the purchaser and we have fulfilled all of our obligations. We provide for promotional discounts, estimated early payment discounts, estimated warranty costs and estimated returns in the period the related revenue is recognized. Certain of our customers have arrangements that include stock balancing return provisions. We provide an allowance for stock balancing based on estimated expected returns. Sales to these customers represented 1418.08%, 1714.30% and 1117.73% of net sales for the years ended December 31, ~~2004~~2005, ~~2003~~2004 and ~~2002~~2003, respectively. Under the terms of the stock balancing agreements, we estimate that the maximum amount of returns is approximately $~~351~~346,000 at ~~September~~June 30, ~~2005~~2006, of which we have recorded an allowance of $~~302~~158,000 for stock balancing estimated returns. This reserve is included in our allowance for doubtful accounts and sales ~~returns.~~

returns.

We make marketing development funds available to our resellers to support demand generation activity by the resellers. We treat payment of these funds as marketing costs up to the fair value of the benefit received where we receive an identifiable benefit and can reasonably estimate the fair value of the benefit received in accordance with the requirements of EITF 01-9, Accounting for Consideration Given by a Vendor to a Customer (Including a Reseller of the Vendor’s Products). Any payments to resellers that do not meet these requirements, including any promotional discounts for the purchase of product, are recorded as reductions to revenue.

Allowance for doubtful accounts and sales returns—We determine the estimate of the allowance for doubtful accounts and sales returns considering a number of factors, including: (1) historical experience, (2) aging of the accounts receivable, (3) analysis of stock balancing agreements and (4) specific information obtained by us on the financial condition and the ~~current~~ current creditworthiness of our customers. If the ~~financing~~financial ~~conditions~~condition of our ~~customers~~ customers were to deteriorate and reduce the ability of our customers to make payments on their accounts, we may be required to increase our allowance by ~~recording~~ recording additional bad debt expense. Likewise, should the financial condition of our customers improve and result in payments or settlements of previously ~~reserved~~ reserved amounts, we may be required to record a reduction in bad debt expense to to reverse the recorded allowance. Our allowance for doubtful accounts and ~~sales~~ sales returns was $~~680~~800,000 at ~~September~~June 30, ~~2005~~2006.

Allowance for excess and obsolete inventories—We value our inventories at the lower of the actual cost to purchase or manufacture, or the current estimated market value. We regularly review our inventory quantities on hand and record a provision for excess and obsolete inventory based primarily on estimated forecasts of product demand and production requirements for the subsequent twelve and twenty -four ~~months~~month periods. We make every effort to ensure the accuracy of our forecasts of ~~future~~ future product demand, however any significant unanticipated changes in demand or or technological developments could have a significant impact on the value of inventories and reported operating results. Our allowance for excess and obsolete inventories at ~~September~~June 30, ~~2005,~~2006 was $~~641~~700,000.

Warranty accrual—Our products are generally covered by either a ~~standard~~ one-year and two-year standard warranty from the date of sale. Estimated warranty costs are accrued in the same period in which the related revenue is recognized, based on anticipated parts and labor costs, utilizing historical experience. Our warranty accrual at June ~~September~~ 30, ~~2005,~~2006 was $~~235~~270,000.

Deferred tax assets—The realization of our deferred tax assets is dependent upon our ability to generate sufficient future taxable income which we believe is more likely than not. ~~We anticipate future taxable income sufficient to realize the recorded deferred tax assets.~~ Historically, we have generated operating income. Future taxable income is based on our forecasts of operating results, and there can be no assurance that such results will be achieved. Our deferred tax assets at ~~September~~June 30, ~~2005 were~~2006 were $1816,~~051~~611,000.

Recently Issued Accounting Standards

~~In November~~ ~~2004~~Effective January 1, 2006, we adopted the provisions of Statement of Financial Accounting Standards ~~Board~~ (“~~FASB~~SFAS”) No. ~~issued~~123 ~~Statement~~(revised of2004), ~~Financial~~“Share-Based ~~Accounting~~Payment” ~~Standards~~(SFAS No. ~~151,~~ 123R) requiring that ~~“Inventory~~compensation ~~Costs,~~cost anrelating ~~Amendment~~to ofshare-based ~~ARB~~payment Notransactions be recognized in the financial statements. ~~43,~~ ~~Chapter~~We 4”elected (“the modified prospective transition method as permitted by SFAS ~~151”)~~No. 123R. Under this method, ~~which~~ compensation cost is ~~effective~~measured at ~~for~~the ~~fiscal~~grant ~~years~~date, ~~beginning~~based ~~after~~on ~~June 15~~the calculated fair value of the award, ~~2005.~~and ~~SFAS~~is ~~151~~recognized ~~amends~~as an expense over the ~~guidance~~requisite inservice ~~ARB~~period No(generally the vesting period of the equity award). 43 Prior to ~~clarify~~January ~~the~~1, ~~accounting~~2006, we accounted for ~~abnormal~~share-based ~~amounts~~compensation ofto ~~idle~~employees ~~facility~~in ~~expense,~~accordance ~~freight~~with Accounting Principles Board Opinion No. 25, ~~handling~~“Accounting ~~costs~~for ~~and~~Stock ~~wasted material~~Issued to Employees” (~~spoilage)~~APB No. ~~Among~~25), and ~~other~~related ~~provisions,~~interpretations. ~~SFAS~~We ~~151~~also ~~requires~~followed ~~that~~the ~~items~~disclosure ~~such~~requirements of asSFAS ~~idle~~No. ~~facility expense~~123, ~~excessive~~“Accounting ~~spoilage~~for Stock-Based Compensation”, ~~double~~as ~~freight~~amended ~~and~~by ~~rehandling~~SFAS No. ~~costs~~148, be“Accounting ~~recognized~~for asStock-Based Compensation-Transition and Disclosure”.

14In July 2006, the FASB issued FASB Interpretation Number 48, Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement 109, or FIN 48. FIN 48 prescribes a comprehensive model for recognizing, measuring, presenting and disclosing in the financial statements tax positions taken or expected to be taken on a tax return, including a decision whether to file or not to file in a particular jurisdiction. FIN 48 is effective for fiscal years beginning after December 15, 2006. If there are changes in net assets as a result of application of FIN 48 these will be accounted for as an adjustment to retained earnings. We are currently assessing the impact of FIN 48 on our condensed balance sheets and condensed statements of operations.

current-period charges regardless of whether they meet the criterion of “so abnormal” as stated in ARB No. 43. In addition, SFAS 151 requires that allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. We believe the adoption of SFAS 151 will not have any material effect on our financial statements.

In December 2004, the FASB issued FSP FAS 109-1, Application of FASB No. 109, Accounting for Income Taxes, to the Tax Deduction on Qualified Production Activities Provided by the American Jobs Creation Act of 2004. FSP FAS No. 109-1 clarifies SFAS No. 109’s guidance that applies to the new tax deduction for qualified domestic production activities. FSP No. 109-1 became effective upon issuance and we believe that this pronouncement will have an insignificant impact on our effective tax rate in 2005.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

Market risk is the risk of loss to future earnings, to fair values or to future cash flows that may result from changes in the price of a financial instrument. The value of a financial instrument may change as a result of changes in interest rates, commodity prices, equity prices and other market changes. Market risk is attributable to all market sensitive financing instruments, including long-term debt.

For additional information on market risk, refer to the “Quantitative and Qualitative Disclosures About Market Risk” section (Item 7A) of our Annual Report on Form 10-K for the year ended December 31, 2004.17

Interest Rate Risk

We are potentially exposed to market risk from interest rate changes in our credit agreement. Under the terms of our credit agreement, we may borrow at the prime rate of interest or LIBOR plus a margin of 1.50%. At June 30, 2006 and throughout 2005, we had no bank debt outstanding.

Foreign Currency Risk

We denominate all foreign sales in U.S. dollars and do not hedge against currency fluctuations. We purchase components and supplies from several Japanese suppliers. To date, currency fluctuations have not had a material effect on our results of operations or financial condition, but could in the future by causing our products to become less affordable or less price competitive than those of foreign manufacturers or by causing the costs of our material supplies to increase. We make all of our purchases in U.S. dollars and we believe that we have reduced the risks of increased purchasing costs that would otherwise occur if the dollar weakens relative to the yen. We have foregone the opportunity, however, to benefit from the full potential cost savings if the dollar strengthens relative to the yen.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures. As of the end of the period covered by this report, the Company conducted an evaluation, under the supervision and with the participation of the principal executive officer and principal financial officer, of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)). Based on this evaluation, the principal executive officer and principal financial officer concluded that the Company’s disclosure controls and procedures were effective.

Changes in Internal Control over Financial Reporting. There was no change in our internal control over financial reporting that occurred during the ~~third~~ second quarter of fiscal ~~2005~~2006 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II: OTHER INFORMATION

ITEM 1 – — LEGAL PROCEEDINGS

Iris Ltd. Litigation

We filed a patent infringement complaint against Iris Ltd., Inc. on February 24, 2004 in Federal District Court in the State of Minnesota and served this complaint on Iris Ltd., Inc. on March 26, 2004. Our complaint alleges infringement of one or more of our patents relating to our printer ribbon product. We are seeking injunctive relief, damages and legal fees. In open court on September 8, 2004, Iris agreed to cease selling its infringing ribbons. In early 2005, Iris announced another ribbon core and ~~has begun~~ began soliciting orders for this ribbon. We ~~amended~~believe this product infringes upon our patents ~~complaint~~and may violate the cessation of sales agreed to ~~include~~in open court. On November 30, 2005, the court granted partial summary judgment for IRIS on ~~second~~claims ~~ribbon~~related ~~offered~~to bythe ~~Iris~~5,755,519 patent based on a technical legal reading of the patent and ~~anticipate~~invalidated some of the claims contained in the patent. The lawsuit is continuing on the claims related to the 6,152,625 patent and other non-~~going~~patent ~~litigation~~related claims, including trademark infringement. We have stated that we anticipate appealing the ruling once the Federal District Court has issued a final determination of all issues in the lawsuit.

Chinese Patent Litigation

On October 27, 2003, we instituted an administrative action in the Shenzhen Intellectual Property Office, which is a branch of the Chinese Intellectual Property Office, claiming that Shenzhen Kanon Industrial Development Company Ltd. is infringing upon one or more of our patents related to our printer ribbon products. We are seeking a permanent injunction, a request for payment of all costs incurred by us in the case, a public apology and compensation for damages resulting from our lost sales. On November 17, 2004, the Shenzhen Municipal Intellectual Property Office issued an opinion that Shenzhen Kanon Industrial Development Company is infringing upon our patents and has ordered Shenzhen Kanon to cease ~~such~~ such infringement. If Shenzhen Kanon does not cease its activities, criminal charges may be filed against Shenzhen Kanon. As late as May 2005, Shenzhen Kanon reiterated its offers to sell products that infringe upon the ribbon patents. We are evaluating our options but anticipate this lawsuit continuing.

activities, criminal charges may be filed against Shenzhen Kanon. As late as May 2005, Shenzhen Kanon reiterated its offers to sell products that infringe upon the ribbon patents. We are evaluating our options but anticipate this lawsuit continuing.

Other Litigation

In addition, we are party to various other litigation matters arising from time to time in the ordinary course of business. We do not believe that any such legal matters exist that would have a material adverse effect on our financial position, results of operations or cash flows.

ITEM 6 - EXHIBITS

Item No.	Description	Method of Filing
31.1	Certification of Gary R. Holland Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934.	Filed electronically herewith.
31.2	Certification of Paul W.B. Stephenson Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934.	Filed electronically herewith.
32.1	Certification of Gary R. Holland Pursuant to 18 U.S.C Section 1350.	Furnished electronically herewith.
32.2	Certification of Paul W.B. Stephenson Pursuant to 18 U.S.C Section 1350.	Furnished electronically herewith.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	FARGO ELECTRONICS, INC.
November 9, 2005	/s/ GARY R. HOLLAND
	Gary R. Holland
	Chairman of the Board of Directors, President and Chief Executive Officer (Principal Executive Officer)
	/s/ PAUL W.B. STEPHENSON
	Paul W.B. Stephenson
	Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer)

Item 1A. RISK FACTORS.

There are no material changes from the risk factors previously disclosed in Item 1A. to Part 1 of our Form 10-K for the year ended December 31, 2005.

ITEM 4 — SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

Our Annual Meeting of Stockholders was held on May 2, 2006. The following individuals were elected at the Annual Meeting to serve as directors of Fargo for terms of three years expiring at our 2009 Annual Meeting of Stockholders or until their successors are elected and qualified. Shares voted in favor of these directors and shares withheld were as follows (there were no broker non-votes):

Name	Shares Voted FOR	Shares Withheld
Edward H. Bersoff	10,993,469	965,075

Gary R. Holland	10,970,012	988,532

Kent O. Lillemoe	11,409,366	549,178

Our other directors, David D. Murphy, Elaine A. Pullen, William H. Gibbs and Edward J. Smith, continued to serve as directors following the meeting. The stockholders also voted to ratify the selection of PricewatererhouseCoopers LLP as our independent registred public accounting firm for 2006 by a vote of 11,913,649 shares in favor, 37,703 shares against and 7,192 shares abstaining.

ITEM 5 — OTHER INFORMATION

On May 22, 2006, Fargo Electronics, Inc. (“Fargo”), Assa Abloy, Inc., an Oregon corporation (“Parent”), HID Global Corporation, a Delaware corporation and a wholly owned subsidiary of Parent (“HID”), and Dakota Acquisition Sub, Inc., a Delaware corporation and a wholly owned subsidiary of HID (“Acquisition Sub”), entered into an Agreement and Plan of Merger (the “Merger Agreement”). The Merger Agreement provides that, upon the terms and subject to the conditions set forth in the Merger Agreement, Acquisition Sub will merge with and into Fargo (the “Merger”), with Fargo continuing as the surviving corporation.

On August 3, 2006, Fargo held a special meeting of its stockholders at which Fargo’s stockholders approved the Merger. On August 3, 2006, pursuant to the Merger Agreement, Acquisition Sub merged with and into Fargo. Fargo is the surviving corporation in the Merger and, as a result, is a wholly-owned subsidiary of HID. Pursuant to the terms of the Merger Agreement, former Fargo stockholders are entitled to receive $25.50 per share in cash for each share of Fargo common stock, par value $0.01 per share, outstanding at the effective time of the Merger and former option holders are entitled to receive $25.50 less the exercise price of each outstanding stock option outstanding at the effective time of the Merger, in each case without interest and less any applicable withholding taxes, as consideration for the Merger.

ITEM 6 - EXHIBITS

Item No.	Description	Method of Filing
2.1	Agreement and Plan of Merger, dated May 22, 2006, among Fargo Electronics, Inc., Assa Abloy, Inc., HID Global Corporation and Dakota Acquisition Sub, Inc.	Incorporated by reference to Exhibit 2.1 to Fargo’s Form 8-K filed on May 23, 2006 (File No. 000-29029).

4.1	Amendment dated as of May 22, 2006 to Rights Agreement dated as of February 9, 2000 between Fargo Electronics, Inc. and Wells Fargo Bank Minnesota, N.A. (formerly Norwest Bank, N.A.)	Incorporated by reference to Exhibit 4.1 to Fargo’s Form 8-K filed on May 23, 2006 (File No. 000-29029).

10.1	2003 Stock Incentive Plan (as amended)	Incorporated by reference to Exhibit 10.1 to Fargo’s Form 8-K filed on May 23, 2006 (File No. 000-29029).

10.2	2001 Employee Stock Purchase Plan (as amended)	Incorporated by reference to Exhibit 10.2 to Fargo’s Form 8-K filed on May 23, 2006 (File No. 000-29029).

10.3	Employment Agreement, dated May 18, 2006, by and between Fargo Electronics, Inc. and Gary R. Holland	Incorporated by reference to Exhibit 10.3 to Fargo’s Form 8-K filed on May 23, 2006 (File No. 000-29029).

10.4	Form of Officers Agreement, dated May 18, 2006, by and between Fargo Electronics, Inc. and certain executive officers	Incorporated by reference to Exhibit 10.4 to Fargo’s Form 8-K filed on May 23, 2006 (File No. 000-29029).

31.1	Certification of Gary H. Holland Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934.	Filed electronically herewith.

31.2	Certification of Paul W.B. Stephenson Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934.	Filed electronically herewith.

32.1	Certification of Gary R. Holland Pursuant to 18 U.S.C Section 1350.	Furnished electronically herewith.

32.2	Certification of Paul W.B. Stephenson Pursuant to 18 U.S.C Section 1350.	Furnished electronically herewith.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	FARGO ELECTRONICS, INC.


August 14, 2006	/s/ GARY R. HOLLAND
	Gary R. Holland
	Director, President and Chief Executive Officer (Principal Executive Officer)


	/s/ PAUL W.B. STEPHENSON
	Paul W.B. Stephenson
	Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer)

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