Edgar Filing: PUBLICARD INC

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-K
-----------------

(Mark One)

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
OF 1934

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2003 OR

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934

FOR THE TRANSITION PERIOD FROM ____ TO ____.

COMMISSION FILE NUMBER 0-29794

PUBLICARD, INC.
(Exact Name of Registrant as Specified in Its Charter)

PENNSYLVANIA 23-0991870
(State or Other Jurisdiction (I.R.S. Employer Identification No.)
of Incorporation or Organization)

620 FIFTH AVENUE, 7TH FLOOR, NEW YORK, NY 10020
(Address of Principal Executive Offices) (Zip Code)

Registrant's telephone number, including area code: (212) 651-3102

Securities registered pursuant to Section 12(b) of the Act:

Title of Each Class Name of Each Exchange on Which Registered
------------------- -----------------------------------------
NONE NONE

Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK ($.10 PAR VALUE)
(Title of Class)
RIGHTS TO PURCHASE CLASS A PREFERRED STOCK, FIRST SERIES
(Title of Class)

Indicate by check mark whether the registrant: (1) has filed all reports
required to 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 X No
--- ---

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. X
---

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes No X
--- ---

As of June 30, 2003, the aggregate market value of the voting Common Stock held
by non-affiliates of the registrant was approximately $1,580,000.

Number of shares of Common Stock outstanding as of March 24, 2004: 24,690,902

DOCUMENTS INCORPORATED BY REFERENCE
None

PART I

This Form 10-K contains forward-looking statements, including (without
limitation) statements concerning possible or assumed future results of
operations of PubliCARD, Inc. and subsidiaries, ("PubliCARD" or the "Company")
preceded by, followed by or that include the words "believes," "expects,"
"anticipates," "estimates," "intends," "plans" or similar expressions. For those
statements, we claim the protection of the safe harbor for forward-looking
statements contained in the U.S. Private Securities Litigation Reform Act of
1995. Forward-looking statements are not guarantees of future performance. They
involve risks, uncertainties and assumptions. You should understand that such
statements made under "Factors That May Affect Future Results" and elsewhere in
this document could affect our future results and could cause those results to
differ materially from those expressed in such forward-looking statements.

ITEM 1. BUSINESS

PubliCARD was originally incorporated in 1913 in the Commonwealth of
Pennsylvania. Through its Infineer Ltd. subsidiary, PubliCARD is a smart card
technology company, which designs and develops smart card software and hardware
solutions for campus environments. This market includes institutions such as
corporate campuses, secondary schools and universities. The Company's ChipNet
solution focuses on delivering a multi-functional platform to control access to
and payment for a wide variety of applications using a single smart card. The
solution has been designed to accommodate integration with a range of third
party technologies. The Company believes that the educational, government and
corporate sectors all continue to move toward the more functional and broader
applications that a smart card solution can provide over traditional methods.
The Company sells its transaction solutions to value-added resellers and
distributors, and directly to end-users.

At present, PubliCARD's sole operating activities are conducted through
its Infineer Ltd. subsidiary. The Company's future plans revolve around a
potential acquisition strategy that would focus on businesses in areas outside
the high technology sector while continuing to support the expansion of the
Infineer business. However, the Company will not be able to implement such plans
unless it is successful in obtaining funding, as to which no assurance can be
given.

The consolidated financial statements included in this Form 10-K
contemplate the realization of assets and the satisfaction of liabilities in the
normal course of business. The Company has incurred operating losses, a
substantial decline in working capital and negative cash flow from operations
for a number of years. The Company has also experienced a substantial reduction
in its cash and short term investments, which declined from $17.0 million at
December 31, 2000, to $3.6 million at December 31, 2003. The Company also had a
working capital deficiency of $1.0 million and an accumulated deficit of $113.6
million at December 31, 2003.

If the distress termination of the Company's defined benefit pension plan
for which the Company has applied is completed (see Note 5 to the Notes to
Consolidated Financial Statements), the Company's 2003 and 2004 funding
requirements to the plan could be eliminated, in which case management believes
that existing cash and short term investments may be sufficient to meet the
Company's operating and capital requirements at the currently anticipated levels
through December 31, 2004. However, additional capital will be necessary in
order to operate beyond December 2004 and to fund the current business plan and
other obligations. While the Company is actively considering various funding
alternatives, the Company has not secured or entered into any arrangements to
obtain additional funds. There can be no assurance that the Company will
eliminate the 2003 or 2004 funding requirements for the defined benefit pension
plan or be able to obtain additional funding on acceptable terms or at all. If
the Company cannot raise additional capital to continue its present level of
operations it may not be able to meet its obligations, take advantage of future
acquisition opportunities or further develop or enhance its product offering,
any of which could have a material adverse effect on its business and results of
operations and could lead the Company to seek bankruptcy protection. These
conditions raise substantial doubt about the Company's ability to continue as a
going concern. The consolidated financial statements do not include any
adjustments that might result from the Company's failure to obtain funding or
inability to continue as a going concern.

INDUSTRY

Security and privacy are primary concerns of the ever-growing information
economy. The expected level of growth in secure business-to-business and
consumer-to-business transactions will only occur if consumers, businesses,
governments and other organizations are confident that their network and
Internet exchanges and transactions are secure from unauthorized intrusion,
usage, sabotage and theft. To effectively address the growing need for greater
enterprise and on-line security, individuals and organizations are turning to
smart card technology. Through its central processing and memory capabilities,
smart card technology enables cryptographic communications, authentication and
other applications that permit secure data access, information exchange and
electronic transactions within network and Internet environments.

A smart card is similar in appearance to a traditional credit card, but
unlike a traditional credit card, stores information on an integrated circuit
chip embedded within the card, rather than on a magnetic stripe on the surface.
While a typical magnetic stripe card can store information such as a user's
name, account and personal identification number, a smart card can has the
capacity to store detailed account information, health care records, merchant
coupons, still or video images and cash. Additionally, the integrated circuit
within a smart card serves as a central processing unit which, combined with its
memory capacity, facilitates the use of encryption applications, which secure
data and value exchanges within networks and the Internet. Smart cards also
permit bi-directional authentication in which the smart card can authenticate
the validity of the intended party or device prior to exchanging information or
value.

The rollout of smart card technology started in the telecommunication
sector, specifically to facilitate the use of public payphones (replacing coins)
and mobile phones (Subscriber Identification Modules). The deployment of smart
card technology in this sector demonstrates the security and adaptability of the
technology and evidences the uniqueness of smart cards as a medium for storing,
transporting and processing personal information, access keys and other
information.

Smart card technology is now being widely deployed in other market
sectors, including the security and transaction management sectors. In the
security sector, smart card technology is being used to authenticate and secure
access to physical premises, PCs, networks, virtual private networks, and the
Internet, and through cryptography, facilitate secure email, electronic document
and information exchanges, e-commerce transactions/payments and other Internet
and broadband applications. In the transaction management sector, smart card
technology is being used within a variety of closed system environments. For
example, smart card technology is being used in the banking sector to secure
payment transactions in physical and virtual worlds and in the transportation
sector to replace "tickets," thereby speeding up the ticketing process and
making it more efficient. Other closed environments such as corporate or
educational campuses are using smart card technology to resolve a mix of both
security and transaction needs including purchase and payment transactions,
identification, authentication and access.

Demand for smart card solutions is being further driven by governments and
financial institutions. The U.S. Department of Defense began deployment of smart
cards to armed force personnel under the Common Access Card personal identity
program in 2000. The European Commission ("EC") is also supporting the adoption
of smart card technology in their continuing efforts to create a more efficient
and competitive economy within the European community. Through the eEurope
program, the EC is sponsoring programs to standardize smart card infrastructure
devices and harmonize system platforms. Finally, smart card technology is
rapidly becoming a key facilitator of financial transactions. The financial and
banking community in Asia and Europe is using smart card technology to support
credit, debit and e-purse cards (cards that store cash values),
multi-application services and services dealing with coupons and/or tickets.
Several large U.S. financial institutions, including American Express,
MasterCard and Visa International, have introduced smart cards as part of their
financial card systems.

The use of smart card technology is especially well suited for managing
transactions in closed environment solutions that restrict access and manage
payments. In closed environments, smart cards are used to control access to
physical premises, process payments and provide portable network security. The
Company believes that the educational, government and corporate sectors all
continue to provide growth opportunities as these institutions move toward the
more functional and broader applications that a smart card solution can provide
over other traditional methods. Smart card solutions offer a greater level of
flexibility and permit development of customer specific applications that cannot
be offered by traditional methods of providing closed environment security and
transaction management such as the magnetic stripe.

With the increased use and acceptance of smart cards and related
technologies worldwide, there are numerous applications to use smart card
technology in a variety of infrastructure platforms. PubliCARD has developed a
client-server based software solution for closed campus proprietary card users,
which is focused on delivering multi-functionality around a single card
supporting a wide range of third party technologies.

STRATEGY

HISTORY OF THE COMPANY'S SMART CARD INITIATIVE

PubliCARD established its presence within the smart card industry through
a series of acquisitions:

o In February 1998, PubliCARD acquired, through a joint venture arrangement
in Greenwald Intellicard, Inc. ("Greenwald Intellicard"), the assets and
intellectual property of Intellicard Systems, Ltd. Greenwald Intellicard
provided smart cards, smart card readers, value transfer stations, card
management software and machine interface boards for the commercial
laundry appliance industry. PubliCARD initially owned 50% of Greenwald
Intellicard, and acquired the remaining 50% in February 1999 and February
2000.

o In November 1998, PubliCARD acquired Tritheim Technologies, Inc.
("Tritheim"), which developed conditional access and security products for
the software industry, computers and the electronic information and the
digital video broadcast industry. In May 2000, the Company changed the
name of its Tritheim subsidiary to Infineer, Inc. as part of a re-branding
effort.

o In February 1999, PubliCARD acquired Amazing! Smart Card Technologies,
Inc. ("Amazing"), a developer of consumer smart card solutions and a
manufacturer of customized smart cards.

o In February 1999, PubliCARD acquired Greystone Peripherals, Inc.
("Greystone"), a developer of hard disk duplicators.

o In November 1999, PubliCARD acquired Absec Limited ("Absec"), a designer
of closed environment solutions, including small value electronic cash
systems and database management solutions. In May of 2000, the Company
changed the name of its Absec subsidiary to Infineer Ltd. ("Infineer") as
part of a re-branding effort.

While PubliCARD developed a number of successful smart card products and
solutions, its operations were fragmented throughout a variety of markets.
PubliCARD's Board of Directors, together with its management team, determined to
integrate its operations and focus on a single market in which:

o high growth potential existed;
o PubliCARD had established relationships;
o PubliCARD had already deployed products and gained credibility; and
o PubliCARD possessed core technologies and competencies.

PubliCARD believed that it could leverage its existing smart card
technology for deployment in the rapidly growing enterprise and on-line security
and transaction management market sectors, which PubliCARD had already
penetrated and which it believed exhibited each of the characteristics
identified above. To effect this new business strategy, in March 2000, the
Company's Board of Directors adopted a plan to dispose of the operations of the
Company's Greenwald Industries Inc. ("Greenwald"), Greenwald Intellicard,
Greystone and Amazing subsidiaries. These subsidiaries designed, manufactured
and distributed mechanical and smart card laundry solutions, hard disk
duplicators and smart cards.

On June 29, 2000, the Company completed the sale of substantially all of
the assets of Greenwald and Greenwald Intellicard to The Eastern Company
("Eastern") for $22.5 million in cash, less $1.75 million held in escrow to
secure the payment of certain indemnification obligations. As part of the
transaction, Eastern assumed certain liabilities of Greenwald and Greenwald
Intellicard, including certain contractual liabilities, accounts payable and
accrued liabilities. The Company completed the wind-down of the operations of
Amazing and Greystone including the sale of certain assets and the licensing of
certain intellectual property during 2000 and 2001.

In December 2000, the Company acquired a 3.5% ownership interest in TecSec
Incorporated ("TecSec") for $5.1 million. TecSec, a Virginia company, develops
and markets encryption products and solutions, which are designed to enable the
next generation information security for the enterprise, multi-enterprise
e-business and other markets.

In July 2001, after evaluating the timing of potential future revenues,
PubliCARD's Board decided to shift the Company's strategic focus. While the
Board remained confident in the long-term prospects of the smart card business,
the timing of public sector and corporate initiatives in wide-scale, broadband
environments utilizing the Company's smart card reader and chip products had
become more uncertain. Given the lengthened time horizon, the Board did not
believe it would be prudent to continue to invest the Company's current
resources in the ongoing development and marketing of these technologies.
Accordingly, the Board determined that shareholders' interests would be best
served by pursuing strategic alliances with one or more companies that have the
resources to capitalize more fully on the Company's smart card reader and
chip-related technologies. In connection with this shift in the Company's
strategic focus, workforce reductions and other measures were implemented to
achieve cost savings.

In September 2001, the Company formed a new minority-owned affiliate, Mako
Technologies LLC ("Mako") to market its smart card reader and chip technologies.
The move was consistent with the Company's decision to explore strategic
transactions that would enable the Company to reduce or eliminate its ongoing
cash funding requirements for its smart card reader and chip business while
retaining an interest in the upside potential for these technologies. The
Company contributed certain inventories and equipment valued at $238,000, in
exchange for a 31% fully diluted ownership interest in Mako. The Company also
granted a license of its reader and chip technology to Mako in exchange for
royalties based on sales over the next two years. After reducing headcount and
reassessing business potential, a decision was made in April 2002 to liquidate
Mako and terminate the license agreement. The Company subsequently licensed the
technology to a third party and does not expect to receive significant
royalties.

CURRENT STRATEGY

At present, PubliCARD's sole operating activities are conducted through its
Infineer subsidiary, which designs smart card solutions for educational and
corporate sites. The Company's future plans revolve around a potential
acquisition strategy focused on businesses in areas outside the high technology
sector while continuing to support the expansion of the Infineer business.
However, the Company will not be able to implement such plans unless it is
successful in obtaining funding, as to which no assurance can be given. Key
elements of our strategy include the following:

o GENERATE CAPITAL. If the distress termination of the Company's defined
benefit pension plan for which the Company has applied is completed (see
Note 5 to the Notes to Consolidated Financial Statements), the Company's
2003 and 2004 funding requirements to the plan could be eliminated, in
which case management believes that existing cash and short term
investments may be sufficient to meet the Company's operating and capital
requirements at the currently anticipated levels through December 31,
2004. However, additional capital will be necessary to fund the current
business plan and other obligations and to operate beyond December 2004.
While the Company is actively considering various funding alternatives,
the Company has not secured or entered into any arrangements to obtain
additional funds. There can be no assurance that the Company will
eliminate the 2003 or 2004 funding requirements for the defined benefit
pension plan or be able to obtain additional funding on acceptable terms
or at all.

o GROW PUBLICARD BUSINESS THROUGH ACQUISITIONS. An important element of the
Company's strategic plan involves the acquisition of businesses in areas
outside the technology sectors in which the Company has recently been
engaged, so as to diversify its asset base. The Company made a series of
successful acquisitions in the 1980's and early 1990's and will endeavor
to replicate this success by seeking out businesses meeting a targeted
profile. Implementation of this plan will require the Company to obtain
funding. However, there can be no assurance that the Company will be able
to obtain funding on acceptable terms or at all.

o EXPAND INFINEER MARKET REACH. Management believes that Infineer can expand
the market reach of its smart card solutions by forming strategic
marketing and distribution relationships with a number of key industry
players both in the United Kingdom and elsewhere. Infineer has a strong
market position in the United Kingdom educational sector, and to a lesser
extent in the corporate market, and intends on leveraging this market
position to select markets outside of the United Kingdom.

o EXPAND INFINEER PRODUCT OFFERING. Management believes that Infineer can
expand its total product offering, technologies and market position by
partnering with companies engaged in complementary businesses or by
acquiring or licensing complementary technologies and products. Infineer
intends to form relationships, which will provide a "complete" solution to
the educational and corporate campus market places.

PUBLICARD PRODUCTS AND SOLUTIONS

PubliCARD designs and develops smart card software and hardware solutions
for campus environments. The Company's solutions facilitate card-based payment
for a wide variety of services typically found on both corporate and education
sites. Infineer's card-based solutions are currently installed in over 350
sites, primarily in educational and corporate sites in the United Kingdom. The
Company's products and solutions include the following:

o CHIPNET. The Company provides transaction solutions using a single smart
card that facilitate smart card based payments for a wide variety of
services typically found on both corporate and educational sites.
Implementing a cashless system has many benefits including improved cash
flow, enhanced service levels and superior management information.
Uniquely adapted to the campus environment and users, ChipNet enables
identification, payment at cafeterias, vending machines, photocopiers and
printers, and network access to PCs. ChipNet also integrates with third
party library management, campus wide access control and time and
attendance tracking. The ChipNet solution comprises application software,
hardware and smart cards.

On ChipNet sites, card holders load money onto an Infineer
multi-application smart card. The card can then be used to pay for
cafeteria and vending machine purchases, as well as for copier and
networked printer usage. Each time a transaction takes place, all details
are recorded, such as the date and time, user and item purchased. These are
then processed by a robust back office software package, utilizing a
powerful tracking tool that delivers accurate management information on
sales and card activity. As the ChipNet solution is based around an open
database platform, integration with third party cards, applications and
electronic purses can be facilitated quickly and easily.

o CHIPNET QUICKSTART. ChipNet QuickStart is a user-friendly smart card
payment system aimed at libraries and Internet cafes, which will simplify
administration and payment for PC log-on, networked printing and
photocopying. ChipNet QuickStart has been developed to fill a gap in the
market for an entry-level smart card solution providing an
administration-free payment system. Although ChipNet QuickStart offers the
capacity to run without being networked, it also contains a built-in
upgrade path to ChipNet.

o SMARTPRINT CENTRAL. The SmartPrint CENTRAL solution combines a print
release software package and a card reader to provide a dedicated print
release station. The user logs on at any networked PC and, having created
or edited their document, sends it across the network to the printer. In
order to have the print job printed, the user must physically go to the
print release PC, which would typically be located beside the printer,
select their print job from the print queue and insert a card for payment.
When payment has taken place, the job is printed. SmartPrint CENTRAL is
available for the standard card technologies provided by Infineer, namely
smart card, revaluable magnetic card and disposable magnetic card.

o EASYCARD. The EasyCard product line delivers a complete and cost effective
solution to the problem of vending prints, copies and faxes. Operating
with either low cost disposable magnetic cards or rechargeable cards in
two formats, slim and ISO standard, EasyCard is a simple to use solution,
ideal for schools, colleges, universities, libraries and copy shops. Users
carry cards, featuring either a monetary or copy value, and the
appropriate amount is deducted each time a service is used. Both analogue
and digital copiers can now contribute valuable revenue to institutions by
charging for their use. For those customers not paying in advance for
services, account cards can be used, recording the use of a range of
services against an individual or department. A full range of support
products offer card acceptance at vending machines, cafeterias,
self-service card centers and encoding stations. EasyCard delivers a range
of solutions from "sell and forget" disposable magnetic card operated
formats to combination solutions accepting disposable, rechargeable and
account cards with full card personalization for access control and time
and attendance tracking.

SALES AND MARKETING

PubliCARD sells and distributes its products through a range of
distribution channels, including value-added resellers, value-added distributors
and other distributors. PubliCARD also sells and distributes its products
directly to end-users in the United Kingdom through its direct sales force.
PubliCARD has approximately 20 employees directly engaged in the sale,
distribution and support of its products in the United Kingdom and is
represented by 15 independent distributors and resellers.

In support of its sales strategies, PubliCARD also makes use of direct
mail campaigns to its customers, advertising in targeted trade media and at
trade shows and conferences. PubliCARD intends to continue seeking to form
strategic relationships with key industry players to provide it with access to
leading edge technology, marketing and sales leverage, and access to key
customers and accounts.

RESEARCH AND DEVELOPMENT

Research and development is a key element to PubliCARD's future success
and competitive position. PubliCARD develops an annual technology development
plan as an integral part of its business planning process. This plan identifies
new areas requiring development in support of identified business opportunities,
as well as a program of maintenance and enhancement for PubliCARD's existing
solutions.

PubliCARD's product development is organized to quickly bring products
from concept to product introduction. PubliCARD's future success will depend
upon its ability to enhance existing products and to develop and to introduce
new products on a timely basis that keep pace with technological developments
and emerging industry standards and address the increasingly sophisticated needs
of its customers. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Factors That May Affect Future Results --
Our future success depends on our ability to keep pace with technological
changes and introduce new products in a timely manner."

COMPETITION

Competition in the markets in which PubliCARD operates is intense and is
characterized by rapidly changing technologies, evolving industry standards,
frequent new product introductions and rapid changes in customer requirements.
To maintain and improve its competitive position, PubliCARD must continue to
develop and introduce, on a timely and cost-effective basis, new products and
product features that keep pace with technological developments and emerging
industry standards and address the increasingly sophisticated needs of its
customers. The principal competitive factors affecting the market for
PubliCARD's technology products are the product's technical characteristics and
price, customer service and competitor reputation, as well as competitor
reputation positioning and resources. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations - Factors That May Affect
Future Results -- The highly competitive markets in which we operate could have
a material adverse effect on our business and operating results." PubliCARD will
be required to continue to respond promptly and effectively to the challenges of
technological changes and its competitors' innovations.

The market for smart card technology solutions is new, intensely
competitive and rapidly evolving. PubliCARD expects competition to continue to
increase both from existing competitors and new market entrants. PubliCARD's
primary competition currently comes from or is anticipated to come from
companies offering campus environment solutions, including small value
electronic cash systems and database management solutions, such as G2 Integrated
Solutions (Girovend), MARS, Cunninghams, Uniware, Diebold, and Schlumberger.

Many of PubliCARD's current and potential competitors have longer
operating histories and significantly greater financial, technical, sales,
customer support, marketing and other resources, as well as greater name
recognition and a larger installed base of their products and technologies than
PubliCARD. Many of these companies have broader customer relationships that
could be leveraged, including relationships with many of PubliCARD's customers.
These companies also have more established customer support and professional
services organizations than PubliCARD does. In addition, a number of companies
with significantly greater resources than PubliCARD could attempt to increase
their presence in the marketplace by acquiring or forming strategic alliances
with competitors of PubliCARD, resulting in increased competition.

INTELLECTUAL PROPERTY

PubliCARD's success depends significantly upon its proprietary technology.
PubliCARD relies on a combination of patent, copyright and trademark laws, trade
secrets, confidentiality agreements and contractual provisions to protect its
proprietary rights. PubliCARD seeks to protect its software, documentation and
other written materials under trade secret and copyright laws, which afford only
limited protection. PubliCARD generally enters into confidentiality and
non-disclosure agreements with its employees and with key vendors and suppliers.
Despite PubliCARD's efforts to protect its proprietary rights, unauthorized
parties may attempt to copy aspects of PubliCARD's products or to obtain and use
information that PubliCARD regards as proprietary. Moreover, effective copyright
and trade secret protection may be unavailable or limited in certain foreign
countries, making the possibility of misappropriation of PubliCARD's proprietary
technology more likely. The steps taken by PubliCARD to protect its proprietary
technology might not prevent misappropriation of such technology, and such
protections may not preclude competitors from developing products with
functionality or features similar to PubliCARD's products.

PubliCARD currently has various trademarks and trademark applications
registered and pending in the United States. PubliCARD will continue to evaluate
the registration of additional trademarks as it deems appropriate. While
PubliCARD currently has a number of patents issued and various patent
applications pending, it doesn't believe that these patents are of benefit to
current operations. There can be no assurance that any new patents will be
issued, that PubliCARD will develop proprietary products or technologies that
are patentable, that any issued patent will provide PubliCARD with any
competitive advantages or will not be challenged by third parties or that the
patents of others will not have a material adverse effect on PubliCARD's
business and operating results.

In the event that PubliCARD's technology or products are determined to
infringe upon the rights of others, PubliCARD could be required to cease using
such technology and stop selling such products, if PubliCARD is unable to obtain
licenses to utilize such technology. There can be no assurance that PubliCARD
would be able to obtain such licenses in a timely manner on acceptable terms and
conditions, and the failure to do so could have a material adverse effect on
PubliCARD's financial condition and results of operations. If PubliCARD is
unable to obtain such licenses, it could encounter significant delays in product
market introductions while it attempted to design around the infringed-upon
patents or rights, or could find the development, manufacture or sale of
products requiring such license to be foreclosed. In addition, patent disputes
are common in the smart card and computer industries and there can be no
assurance that PubliCARD will have the financial resources to enforce or defend
a patent infringement or proprietary rights action.

PubliCARD expects that software product developers will be increasingly
subject to infringement claims as the number of products and competitors in the
smart card market grows. Any such claims, with or without merit, could be
time-consuming, result in costly litigation and diversion of technical and
management personnel, cause product shipment delays or require PubliCARD to
develop non-infringing technology or enter into royalty or licensing agreements.
Such royalty or licensing agreements, if required, may not be available on terms
acceptable to PubliCARD or at all. In the event of a successful claim of product
infringement against PubliCARD and failure or inability of PubliCARD to develop
non-infringing technology or license the infringed or similar technology,
PubliCARD's business, financial condition and results of operations could be
materially adversely affected. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Factors That May Affect Future
Results -- Our proprietary technology is difficult to protect and may infringe
on the intellectual proprietary rights of third parties."

EMPLOYEES

As of March 24, 2004, PubliCARD had approximately 47 employees, of which
20 are involved in sales, marketing and support, 9 in product development, 9 in
manufacturing and 9 in administration. The Company considers its employee
relations to be good.

SEGMENT INFORMATION

The Company's sole operating activities involve the deployment of smart
card solutions for educational and corporate sites. As such, the Company reports
as a single segment. Revenues by geographical areas for the years ended December
31, 2003, 2002 and 2001 are as follows (in thousands):

2003 2002 2001
-------- -------- --------
United States $ 869 $ 1,029 $ 1,727
Europe 3,467 3,445 3,671
Rest of world 445 131 254
-------- -------- --------
$ 4,781 $ 4,605 $5,652
======== ======== ========

The Company has operations in the United States and United Kingdom.
Identifiable tangible assets by country as of December 31, 2003, 2002 and 2001
are as follows (in thousands):

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

United States $ 4,542 $ 4,842 $ 12,037
United Kingdom 2,035 2,235 2,557
-------- -------- --------
$ 6,577 $ 7,077 $ 14,594
======== ======== ========

See also the Company's Financial Statements beginning on page F-1.

ITEM 1A. EXECUTIVE OFFICERS OF THE REGISTRANT

The following table sets forth information about the executive officers of
the Company as of March 24, 2004. The business address of each executive officer
is the address of the Company, 620 Fifth Avenue, New York, New York 10020.

Name Age Office and Position
---- --- -------------------

Harry I. Freund 64 Director, Chairman of the Board
and Chairman

Jay S. Goldsmith 60 Director, Vice Chairman of the
Board and Vice Chairman

Antonio L. DeLise 42 Director, President, Chief Executive Officer,
Chief Financial Officer and Secretary

There is no family relationship between any of the executive officers of
the Company. Each officer is elected to serve for a term ending with the next
annual meeting of shareholders.

Mr. Freund has been a Director of the Company since April 12, 1985,
Chairman of the Board of Directors since December 1985 and Chairman since
October 1998. Since 1975, Mr. Freund has been Chairman of Balfour Investors Inc.
("Balfour"), a merchant banking firm that had previously been engaged in a
general brokerage business.

Mr. Goldsmith has been a Director of the Company since April 12, 1985,
Vice Chairman of the Board of Directors since December 1985 and Vice Chairman
since October 1998. Since 1975, Mr. Goldsmith has been President of Balfour.

Mr. DeLise joined the Company in April 1995 as Vice President, Chief
Financial Officer and Secretary. He was appointed to the Board of Directors in
July 2001 and was elected to the additional posts of President in February 2002
and Chief Executive Officer in August 2002.

ITEM 2. PROPERTIES

The Company leases the following facilities, which are believed to be
adequate for its present needs.

YEAR OF LEASE SQUARE
PREMISES PURPOSE EXPIRATION FOOTAGE
-------- ------- ------------- -------

New York, NY Executive offices for PubliCARD 2004 5,600
New York, NY Executive offices for PubliCARD 2007 3,600
Bangor, Northern Office and manufacturing 2008 12,000
Ireland

The Company leases office space in New York City under a lease expiring on
May 1, 2004. In February 2004, the Company entered a new lease for office space
in New York City with a term commencing on May 1, 2004 and expiring on April 30,
2007.

Balfour occupies a portion of the office space leased by the Company in
New York City. The Chairman and Vice Chairman of the Company's Board of
Directors are the only shareholders of Balfour. Balfour pays to the Company 50%
of the rent and occupancy costs paid by the Company under its lease, including
base rent, electricity, water, real estate tax escalations and operation and
maintenance escalations. The base rent payable by Balfour is approximately
$11,000 per month.

ITEM 3. LEGAL PROCEEDINGS

On May 28, 2002, a lawsuit was filed against the Company in the Superior
Court of the State of California, in the County of Los Angeles by Leonard M.
Ross and affiliated entities alleging, among other things, misrepresentation and
securities fraud. The lawsuit names the Company and four of its current and
former executive officers and directors as the defendants. The plaintiffs seek
monetary and punitive damages for alleged actions made by the defendants in
order to induce the plaintiffs to purchase, hold or refrain from selling
PubliCARD common stock. The plaintiffs allege that the defendants made a series
of material misrepresentations, misleading statements, omissions and
concealments, specifically and directly to the plaintiffs concerning the nature,
existence and status of contracts with certain purchasers, the nature and
existence of investments in the Company by third parties, the nature and
existence of business relationships and investments by the Company. The Company
believes it has meritorious defenses to the allegations and intends to defend
vigorously.

In November 2002, the Company and the individual defendants served with
the action filed a demurrer seeking the dismissal of six of the plaintiffs' nine
purported causes of action. In January 2003, the court ruled in favor of the
demurrer and dismissed the entire complaint. The plaintiffs were granted the
right to replead and subsequently filed an amended complaint in February 2003.
The Company and individual defendants filed a second demurrer in March 2003. In
June 2003, the court ruled in favor of the demurrer and dismissed, without leave
to amend, six of the eleven purported causes of action in the amended complaint.
The lawsuit is in the early stages. Preliminary discovery has just commenced and
no trial date has been set. Consequently, at this time it is not reasonably
possible to estimate the damages, or range of damages, if any, that the Company
might incur in connection with this action. However, if the outcome of this
lawsuit is unfavorable to the Company, it could have a material adverse effect
on the Company's operations, cash flow and financial position.

The Company incurred approximately $200,000 in defense costs in 2002. No
additional costs have been incurred in 2003. Notice of the commencement of this
action has been given to the Company's directors and officers liability
insurance carriers. The Company's directors and officers liability insurance
carriers are funding the additional costs of defending this action, subject to
the carriers' reservation of rights.

Various other legal proceedings are pending against the Company. The
Company considers all such other proceedings to be ordinary litigation incident
to the character of its business. Certain claims are covered by liability
insurance. The Company believes that the resolution of these claims to the
extent not covered by insurance will not, individually or in the aggregate, have
a material adverse effect on the consolidated financial position or consolidated
results of operations of the Company.

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

On December 8, 2003, an annual meeting of shareholders of the Company was
held at which directors were elected to serve until their successors shall have
been elected and shall have qualified. The appointment of Deloitte & Touche LLP
as the Company's outside auditors for the year ending December 31, 2003 was also
ratified. The voting results were as follows:

Election of directors For Against Abstain
--------------------- --- ------- -------
Harry I. Freund 20,764,787 - 979,861
Jay S. Goldsmith 20,763,887 - 980,761
Clifford B. Cohn 20,772,437 - 972,211
L.G. Schafran 21,382,612 - 362,036
Emil Vogel 21,381,712 - 362,936
Antonio L. DeLise 21,374,162 - 370,486

Ratification of auditors 21,653,833 71,369 19,446

PART II

ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES

(a) PubliCARD's common stock was listed on the Nasdaq National Market from
December 22, 1998 to May 1, 2002. Effective May 2, 2002, the listing of
PubliCARD common stock was transferred to the Nasdaq SmallCap Market. On
March 19, 2003, the Company received a Nasdaq Staff Determination letter
indicating that the Company failed to comply with the minimum bid price
requirement for continued listing on the Nasdaq SmallCap Market and that
the Company's common stock was therefore subject to delisting. The board
of directors of the Company decided not to appeal the delisting
determination. Effective March 28, 2003, the Company's common stock began
trading on the OTC Bulletin Board. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Factors That
May Affect Future Results - Our stock was delisted from the Nasdaq
System." The following table sets forth the high and low closing sale
prices of PubliCARD's common stock for the calendar periods indicated (in
dollars):

2003 2002
---- ----
HIGH LOW HIGH LOW
First Quarter .16 .06 .27 .09
Second Quarter .09 .042 .52 .11
Third Quarter .09 .045 .26 .10
Fourth Quarter .12 .04 .31 .08

(b) There were approximately 2,300 registered holders of record of common
stock of the Company as of March 24, 2004.

(c) The Company did not pay dividends on its common stock during the prior
five fiscal years and does not anticipate paying dividends in the
foreseeable future.

ITEM 6. SELECTED FINANCIAL DATA

The selected financial data of the Company presented below for the five
year period ended December 31, 2003 have been derived from the consolidated
financial statements of the Company. The information set forth below should be
read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the Company's Consolidated Financial
Statements and the Notes thereto included elsewhere in this Form 10-K.

YEAR ENDED DECEMBER 31
---------------------------------------------------------
2003 2002 2001 2000 1999
--------- --------- --------- --------- ---------
(in thousands, except per share amounts)
STATEMENT OF OPERATIONS DATA:

Revenues $ 4,781 $ 4,605 $ 5,652 $ 5,543 $ 1,930
Cost of sales 2,316 2,455 2,875 2,913 978
Inventory adjustment - - 1,661 - -
--------- --------- --------- --------- ---------
Gross margin 2,465 2,150 1,116 2,630 952
--------- --------- --------- --------- ---------
Operating expenses:
General and administrative 2,708 3,235 4,625 6,664 5,713
Sales and marketing 1,844 1,877 3,413 7,562 2,862
Product development 584 605 2,442 4,364 1,318
Stock compensation expense - - 86 1,116 2,759
Amortization of goodwill and intangibles 40 576 1,824 2,638 1,749
Impairment of goodwill and intangibles - 1,365 - - -
Repositioning and other special charges - - 5,656 - 1,895
--------- --------- --------- --------- ---------
5,176 7,658 18,046 22,344 16,296
--------- --------- --------- --------- ---------
Loss from operations (2,711) (5,508) (16,930) (19,714) (15,344)
--------- --------- --------- --------- ---------
Other income (expenses):
Interest income 15 71 476 936 561
Interest expense (12) (39) (65) (100) (158)
Cost of retirement benefits - non-operating (903) (795) (788) (812) (1,028)
Write-down of minority investment (3,000) (2,068) - - -
Gain on insurance recoveries 4,590 - - - -
Other income (expense) 428 80 136 15 (751)
--------- --------- --------- --------- ---------
1,118 (2,751) (241) 39 (1,376)
--------- --------- --------- --------- ---------
Loss from continuing operations (1,593) (8,259) (17,171) (19,675) (16,720)
--------- --------- --------- --------- ---------

Discontinued operations:
Income (loss) from discontinued operations - - - - (13,999)
Gain (loss) on disposition of discontinued
operations - 1,066 2,350 4,275 (5,000)
--------- --------- --------- --------- ---------
Net loss $ (1,593) $ (7,193) $ (14,821) $ (15,400) $ (35,719)
========= ========= ========= ========= =========

Basic and diluted earnings (loss) per common share:
Continuing operations $ (.07) $ (.34) $ (.71) $ (.84) $ (.88)
Discontinued operations - .04 .10 .18 (1.00)
--------- --------- --------- --------- ---------
$ (.07) $ (.30) $ (.61) $ (.66) $ (1.88)
========= ========= ========= ========= =========

AS OF DECEMBER 31
--------------------------------------------------------
2003 2002 2001 2000 1999
-------- -------- -------- -------- --------
(in thousands)
BALANCE SHEET DATA:

Working capital (deficiency) $ (987) $ (548) $ 2,631 $ 13,168 $ 23,889
Total assets 7,399 7,939 17,397 37,179 45,488
Other non-current liabilities 3,552 4,990 5,328 6,010 6,674
Shareholders' equity (deficit) (2,928) (1,002) 7,484 23,578 30,399

No dividends on common shares have been declared or paid during the last five
years.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS

OVERVIEW

PubliCARD was incorporated in the Commonwealth of Pennsylvania in 1913.
PubliCARD entered the smart card industry in early 1998, and began to develop
solutions for the conditional access, security, payment system and data storage
needs of industries utilizing smart card technology. In 1998 and 1999, the
Company made a series of acquisitions to enhance its position in the smart card
industry. In March 2000, PubliCARD's Board of Directors (the "Board"), together
with its management team, determined to integrate its operations and focus on
deploying smart card solutions, which facilitate secure access and transactions.
To effect this new business strategy, in March 2000, the Board adopted a plan of
disposition pursuant to which the Company divested its non-core operations. See
Note 9 to the Consolidated Financial Statements for a discussion on the
disposition plan.

In July 2001, after evaluating the timing of potential future revenues,
PubliCARD's Board decided to shift the Company's strategic focus. While the
Board remained confident in the long-term prospects of the smart card business,
the timing of public sector and corporate initiatives in wide-scale, broadband
environments utilizing the Company's smart card reader and chip products had
become more uncertain. Given the lengthened time horizon, the Board did not
believe it would be prudent to continue to invest the Company's current
resources in the ongoing development and marketing of these technologies.
Accordingly, the Board determined that shareholders' interests will be best
served by pursuing strategic alliances with one or more companies that have the
resources to capitalize more fully on the Company's smart card reader and
chip-related technologies. In connection with this shift in the Company's
strategic focus, workforce reductions and other measures were implemented to
achieve cost savings. See Note 10 to the Consolidated Financial Statements for a
discussion on the repositioning charge associated with this action.

At present, PubliCARD's sole operating activities are conducted through
its Infineer Ltd. ("Infineer") subsidiary, which designs smart card platform
solutions for educational and corporate sites. The Company's future plans
revolve around a potential acquisition strategy that would focus on businesses
in areas outside the high technology sector while continuing to support the
expansion of the Infineer business. However, the Company will not be able to
implement such plans unless it is successful in obtaining additional funding, as
to which no assurance can be given.

PubliCARD's financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
Consolidated Financial Statements, the Company has incurred operating losses,
has a working capital deficiency and requires additional capital to meet its
obligations and accomplish the Company's business plan, which raises substantial
doubt about its ability to continue as a going concern. The financial statements
do not include any adjustments that might result from the Company's failure to
obtain funding or inability to continue as a going concern.

RESULTS OF OPERATIONS

YEAR ENDED DECEMBER 31, 2003 COMPARED TO YEAR ENDED DECEMBER 31, 2002

REVENUES. Revenues are generated from product sales, technology and
software license fees, installation and maintenance contracts. Consolidated
revenues increased to $4.8 million in 2003 compared to $4.6 million for 2002
driven by a 6% increase from foreign currency changes. Excluding the impact of
foreign currency changes, sales in 2003 decreased by 2%.

GROSS MARGIN. Cost of sales consists primarily of material, personnel
costs and overhead. Gross margin as a percentage of sales increased to 52% in
2003 from 47% in 2002. The gross margin improvement resulted from higher margins
generated from certain custom development projects and increased service revenue
in the United Kingdom.

SALES AND MARKETING EXPENSES. Sales and marketing expenses consist
primarily of personnel and travel costs, public relations, trade shows and
marketing materials. Sales and marketing expenses were $1.8 million in 2003
compared to $1.9 million in 2002.

PRODUCT DEVELOPMENT EXPENSES. Product development expenses consist
primarily of personnel and travel costs, independent consultants and contract
engineering services. Product development expenses include expenses associated
with the development of new products and enhancements to existing products.
Product development expenses amounted to $584,000 in 2003 compared to $605,000
in 2002.

GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
consist primarily of personnel and related costs for general corporate
functions, including finance and accounting, human resources, risk management
and legal. General and administrative expenses for the year ended December 31,
2003 decreased to $2.7 million from $3.2 million for 2002. The decrease in
expense is mainly due to a $400,000 decline in salary costs due to a headcount
reduction of three employees.

AMORTIZATION OF INTANGIBLES. In accordance with Financial Accounting
Standards Board ("FASB") Statement of Financial Accounting Standards ("SFAS")
No. 142, "Goodwill and Other Intangible Assets" ("SFAS No. 142"), no
amortization expense for goodwill will be recorded in current and future
periods. Goodwill and other intangibles will be subject to an annual review for
impairment or earlier if circumstances or events indicate that impairment has
occurred. This may result in future write-downs or the write-off of such assets.
Amortization expense in 2003 and 2002 relates to the continuing amortization of
definite lived intangibles. Amortization expense decreased from $576,000 in 2002
to $40,000 in 2003 as a result of an impairment charge recorded in 2002, which
significantly reduced the carrying value of intangibles.

OTHER INCOME AND EXPENSE. Interest income decreased to $15,000 from
$71,000 in the prior year principally due to lower interest rates and investment
balances. Cost of retirement benefits, which represents amounts related to
discontinued product lines and related plant closings in prior years,
principally relates to pension expense associated with the Company's frozen
defined benefit pension plan.

During 2003, the Company entered into three binding settlements with
various historical insurers that resolved certain claims (including certain
future claims) under policies of insurance issued to the Company by those
insurers. As a result of the settlements, after allowance for associated
expenses, offsetting adjustments and amounts held in escrow, the Company
received net proceeds of approximately $4.1 million in 2003. Pursuant to one of
the settlements, an additional net amount of approximately $470,000 will be held
in escrow for up to three years. The Company recognized a gain from these
settlements of approximately $4.6 million in 2003.

In 2003 and 2002, other expense includes charges for an impairment of the
Company's minority investment in TecSec of $3.0 million and $2.1 million,
respectively. In addition, for 2002, other expense includes a $200,000 charge in
connection with the defense of a shareholder lawsuit.

YEAR ENDED DECEMBER 31, 2002 COMPARED TO YEAR ENDED DECEMBER 31, 2001

REVENUES. Consolidated revenues decreased to $4.6 million in 2002 compared
to $5.7 million for 2001. The 2001 figure included $1.0 million of revenues
associated with the smart card reader and chip business, which the Company
exited in July 2001. Sales related to smart card solutions for educational and
corporate sites were comparable between years.

GROSS MARGIN. Cost of sales in 2001 included an adjustment of $1.7 million
for the write-off of inventories associated with the July 2001 repositioning
action. Excluding the inventory adjustment, gross margin as a percentage of
sales decreased to 47% in 2002 from 49% in 2001.

SALES AND MARKETING EXPENSES. Sales and marketing expenses were $1.9
million in 2002 compared to $3.4 million in 2001. The decrease in expense is
attributed to the July 2001 repositioning action.

PRODUCT DEVELOPMENT EXPENSES. Product development expenses amounted to
$605,000 in 2002 compared to $2.4 million in 2001. The decrease in expense is
attributed to the July 2001 repositioning action.

GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
for the year ended December 31, 2002 decreased to $3.2 million from $4.6 million
for 2001. The decrease in expense is mainly due to an aggregate reduction in
corporate expenses of approximately $1.6 million associated with various cost
containment initiatives. The initiatives resulted in a decline in salaries and
benefits of $1.0 million, professional fees of $176,000 and employee business
expense of $162,000.

STOCK COMPENSATION EXPENSE. Stock-based compensation recorded in 2001
principally relates to the issuance of stock awards and a below market stock
option grant to an executive hired in late 1999.

AMORTIZATION OF GOODWILL AND INTANGIBLES. Amortization expense in 2002 of
$576,000 related to the continuing amortization of definite lived intangibles.
Amortization expense in 2001 of $1.8 million included goodwill amortization of
$1.1 million. Pursuant to SFAS No. 142, amortization of goodwill ceased after
2001.

IMPAIRMENT OF GOODWILL AND INTANGIBLES. The Company performed an initial
review for impairment of goodwill as of January 1, 2002 and determined that no
impairment existed at that date. The Company determined the fair value of its
sole reporting unit primarily using two approaches: a market approach technique
and a discounted cash flow valuation technique. The market approach relied
primarily on the implied fair value using a multiple of revenues for several
entities with comparable operations and economic characteristics. Significant
assumptions used in the discounted cash valuation included estimates of future
cash flows, future short-term and long-term growth rates and estimated cost of
capital for purposes of arriving at a discount factor.

In the fourth quarter of 2002, the Company determined that its intangible
assets had been impaired and recorded an impairment loss of $1.0 million. The
Company attributes the impairment loss to the significant 2002 operating loss
for the reporting unit and lower forecasted revenue growth due to a continued
overall decline in technology spending and a shortage of capital available to
invest in the reporting unit.

OTHER INCOME AND EXPENSE. Interest income decreased to $71,000 from
$476,000 in the prior year principally due to lower investment balances. Cost of
retirement benefits relates to pension expense associated with the Company's
frozen defined benefit pension plan. In addition, in 2002 other expenses
included a $2.1 million charge for an impairment of the Company's minority
investment in TecSec and a $200,000 charge in connection with the defense of a
shareholder lawsuit.

LIQUIDITY

The Company has financed its operations over the last several years
primarily through funds received from the sale of of a non-core businesses in
2000 and insurance recoveries in 2003. During the year ended December 31, 2003,
cash, including short-term investments, increased by $2.3 million to $3.6
million as of December 31, 2003.

Operating activities utilized cash of $2.2 million in 2003 and principally
consisted of the net loss of $1.6 million plus a gain on insurance recoveries of
$4.6 million offset by depreciation and amortization of $193,000, a decrease in
net assets and liabilities of $1.1 million and a $3.0 million minority
investment impairment charge. The decrease in net assets and liabilities is
largely attributable to the non-payment of the 2003 minimum required
contributions to the Company's frozen defined benefit pension plan of
approximately $1.4 million.

Investing activities provided cash of $4.5 million in 2003 and consisted
principally of $4.1 million of proceeds received from insurance recoveries.

The Company has experienced negative cash flow from operating activities in
the past and expects to experience negative cash flow in 2004 and beyond. In
addition to funding operating and capital requirements and corporate overhead,
future uses of cash include the following:

o The Company sponsors a defined benefit pension plan, which was frozen in
1993. As of December 31, 2003, the actuarial present value of accrued
liabilities exceeded the plan assets by approximately $6.9 million
(determined on an ongoing basis). If the plan is continued, the required
contribution to the plan is approximately $3.9 million in 2004. Absent
some action by the Company, the annual contribution requirements beyond
2004 would continue to be significant. In view of its financial condition,
in January 2003, the Company filed a notice with the Pension Benefit
Guaranty Corporation ("PBGC") seeking a "distress termination" of the
Plan. If the PBGC determines that the Company meets one of the tests for
such a termination, the Plan will terminate and the PBGC will become
responsible for meeting future retirement obligations to participants
(within certain limitations). The Company would be liable to the PBGC for
the amount of the unfunded guaranteed benefit obligation. The Company
believes that on a termination basis, the Plan's liabilities could exceed
the value of its assets by in excess of $7.0 million. In addition, the
Company did not make the required contributions that were due to the Plan
in 2003 which aggregate approximately $1.4 million. The Company has
initiated discussions with the PBGC concerning the termination of the Plan
and its repayment obligation to the PBGC if the Plan is terminated
(including the timing of its repayment obligation). It is not possible to
predict the outcome of such discussions.

o The Company and certain current and former officers are defendants in a
lawsuit alleging, among other things, misrepresentation and securities
fraud. The Company believes that it has meritorious defenses to the
allegations and intends to defend itself vigorously. The cost of defending
against this action could be significant, and if the Company is not
successful in defending itself, the Company may be required to pay the
plaintiff's damages, which could have a material adverse effect on the
Company's business and operations.

o The Company leases certain office space, vehicles and office equipment
under operating leases that expire over the next five years. Minimum
future payments for operating leases having initial or remaining
non-cancelable terms in excess of one year aggregates $1.2 million.

The Company will need to raise additional capital that may not be
available to it. If the distress termination of the Company's defined benefit
pension plan for which the Company has applied is completed (see Note 5 to the
Notes to Consolidated Financial Statements), the Company's 2003 and 2004 funding
requirements to the plan could be eliminated, in which case management believes
that existing cash and short-term investments may be sufficient to meet the
Company's operating and capital requirements at the currently anticipated levels
through December 31, 2004. However, additional capital will be necessary in
order to operate beyond December 2004 and to fund the current business plan and
other obligations. While the Company is actively considering various funding
alternatives, it has not secured or entered into any arrangements to obtain
additional capital. There can be no assurance that the Company will be able to
eliminate the 2003 or 2004 funding requirements for the defined benefit pension
plan or be able to obtain additional funding on acceptable terms or at all. If
the Company cannot raise additional capital to continue its present level of
operations, it may not be able to meet its obligations, take advantage of future
acquisition opportunities or further develop or enhance its product offering,
any of which could have a material adverse effect on its business and results of
operations.

The Company currently has no capacity for commercial debt financing.
Should such capacity become available it may be adversely affected in the future
by factors such as higher interest rates, inability to borrow without
collateral, and continued operating losses. Borrowings may also involve
covenants limiting or restricting its operations or future opportunities.

As a result of a failure to meet certain continuing listing requirements
of the Nasdaq National Market ("National Market"), the Company transferred the
listing of its common stock to the Nasdaq SmallCap Market ("SmallCap Market")
effective May 2, 2002. On March 19, 2003, the Company received a Nasdaq Staff
Determination letter indicating that the Company failed to comply with the
minimum bid price requirement for continued listing on the SmallCap Market and
that the Company's common stock was therefore subject to delisting. The Board of
the Company decided not to appeal the delisting determination. Effective March
28, 2003, the Company's common stock no longer traded on the Nasdaq SmallCap
Market. On March 28, 2003 the Company's common stock began trading on the OTC
Bulletin Board. As a result of the delisting, the liquidity of the common stock
may be adversely affected. This could impair the Company's ability to raise
capital in the future. If additional capital is raised through the issuance of
equity securities, the Company's stockholders' percentage ownership of the
common stock will be reduced and stockholders may experience dilution in net
book value per share, or the new equity securities may have rights, preferences
or privileges senior to those of its common stockholders.

If the Company's liquidity does not improve, it may be unable to continue
as a going concern and could seek bankruptcy protection. Such an event may
result in the Company's common and preferred stock being negatively affected or
becoming worthless. The auditors' report on the Company's Consolidated Financial
Statements for the year ended December 31, 2003 contains an emphasis paragraph
concerning substantial doubt about the Company's ability to continue as a going
concern.

CONTRACTUAL OBLIGATIONS

The following is a summary of the Company's commitments as of December 31,
2003 (in thousands):

PAYMENTS DUE BY PERIOD
----------------------
LESS THAN 1 1 TO 3 3 TO 5 MORE THAN 5
TOTAL YEAR YEARS YEARS YEARS
------- ------- ------- ------- -------

Operating lease obligations $ 1,164 $ 356 $ 631 $ 177 $ -
Other long-term liabilities:
Pension liability and other retiree benefits 7,122 3,896 3,136 60 30
Other long-term obligations 296 - 296 - -
------- ------- ------- ------- -------
Total $ 8,582 $ 4,252 $ 4,063 $ 237 $ 30
======= ======= ======= ======= =======

CRITICAL ACCOUNTING POLICIES

The Company's significant accounting policies are more fully described in
the Notes to the Company's Consolidated Financial Statements. Certain accounting
policies require the application of significant judgment by management in
selecting the appropriate assumptions for calculating financial estimates. By
their nature, these judgments are subject to an inherent degree of uncertainty.
The Company considers certain accounting policies related to revenue
recognition, estimates of reserves for receivables and inventories, valuation of
investments and goodwill and intangibles and pension accounting to be critical
policies due to the estimation processes involved.

REVENUE RECOGNITION AND ACCOUNTS RECEIVABLE. Revenue from product sales
and technology and software license fees is recorded upon shipment if a signed
contract exists, the fee is fixed and determinable, the collection of the
resulting receivable is probable and the Company has no obligation to install
the product or solution. If the Company is responsible for installation, revenue
from product sales and license fees is deferred and recognized upon client
acceptance or "go live" date. Maintenance and support fees are deferred and
recognized as revenue ratably over the contract period. Provisions are recorded
for estimated warranty repairs and returns at the time the products are shipped.
In the event changes in conditions cause management to determine that revenue
recognition criteria are not met for certain future transactions, revenue
recognized for any reporting period could be adversely affected.

The Company performs ongoing credit evaluations of its customers and
adjusts credit limits based upon payment history and the customer's credit
worthiness. The Company continually monitors collections and payments from its
customers and maintains a provision for estimated credit losses based upon
historical experience and any specific customer collection issues that it has
identified. While such credit losses have historically been within management's
expectations and the provisions established, there is no assurance that the
Company will continue to experience the same credit loss rates as in the past.

INVENTORIES. Inventories are stated at lower of cost (first-in, first-out
method) or market. The Company periodically evaluates the need to record
adjustments for impairment of inventory. Inventory in excess of the Company's
estimated usage requirements is written down to its estimated net realizable
value. Inherent in the estimates of net realizable value are management's
estimates related to the Company's production schedules, customer demand,
possible alternative uses and the ultimate realization of potentially excess
inventory. During 2001, the decision to exit the smart card reader and chip
business resulted in a significant inventory realizability adjustment. While
management deems this adjustment to be non-recurring, a decrease in future
demand for current products could result in an increase in the amount of excess
inventories on hand.

VALUATION OF INVESTMENTS. The Company periodically assesses the carrying
value of its minority-owned investments for impairment. This assessment is based
upon a review of operations and indications of continued viability, such as
subsequent rounds of financing. As discussed in Note 2 to the Consolidated
Financial Statements, during 2003 and 2002 the Company made a determination that
its minority-owned investments in TecSec and Mako were impaired and both
investments have been written-off. Future recoveries, if any, will be recorded
as income upon receipt.

IMPAIRMENT OF GOODWILL AND INTANGIBLES. Effective January 1, 2002, the
Company adopted SFAS No. 142. In accordance with the guidelines of this
statement, goodwill and indefinite lived intangible assets are no longer
amortized but will be assessed for impairment on at least an annual basis. SFAS
No. 142 also requires that intangible assets with estimable useful lives be
amortized over their respective estimated useful lives and reviewed for
impairment. The Company performed an initial review for impairment of goodwill
as of January 1, 2002 and determined that no impairment existed at that date.
The Company determined the fair value of its sole reporting unit primarily using
two approaches: a market approach technique and a discounted cash flow valuation
technique. The market approach relied primarily on the implied fair value using
a multiple of revenues for several entities with comparable operations and
economic characteristics. Significant assumptions used in the discounted cash
valuation included estimates of future cash flows, future short-term and
long-term growth rates and estimated cost of capital for purposes of arriving at
a discount factor.

Long-lived assets and certain identifiable intangible assets to be held
and used are reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of such assets may not be recoverable.
Determination of recoverability is based on an estimate of undiscounted future
cash flows resulting from the use of the asset and its eventual disposition.
Measurement of any impairment loss for long-lived assets and certain
identifiable intangible assets that management expects to hold and use is based
on the net realizable of the asset.

PENSION OBLIGATIONS. The determination of obligations and expense for
pension benefits is dependent on the selection of certain assumptions used by
actuaries in calculating such amounts. These assumptions include, among others,
the discount rate and the expected rate of return on plan assets. Actual results
that differ from assumptions are accumulated and amortized over future periods
and therefore, generally affect the recognized expense and recorded obligation
in such future periods. While management believes that the assumptions are
appropriate, differences in actual experience or significant changes in
assumptions may materially affect the pension obligation and future expense.

RECENT ACCOUNTING PRONOUNCEMENTS

In November 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others". The interpretation addresses the
disclosures to be made by a guarantor in its financial statements about its
obligations under guarantee. In addition, it also clarifies the requirements
related to the recognition of a liability by a guarantor at the inception of a
guarantee for the obligations the guarantor has undertaken in issuing that
guarantee. The initial recognition and measurement provisions of this
interpretation are applicable on a prospective basis to guarantees issued or
modified after December 31, 2002. The disclosure provisions became effective
December 15, 2002. The adoption of the recognition and measurement provisions
did not have a material impact on the Company's Consolidated Financial
Statements.

In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation-Transition and Disclosure". SFAS No. 148 amends SFAS
No. 123, "Accounting for Stock-Based Compensation", to provide alternative
methods of transition for a voluntary change to the fair value based method of
accounting for stock-based employee compensation. In addition, SFAS No. 148
amends the disclosure requirements of SFAS No. 123 to require prominent
disclosures in both annual and interim financial statements about the method of
accounting for stock based employee compensation and the effect of the method
used on reported results. The provisions of SFAS No. 148 are effective for
financial statements for fiscal years and interim periods ending after December
15, 2002. The disclosure provisions of SFAS No. 148 have been adopted by the
Company. SFAS No. 148 did not require the Company to change to the fair value
based method of accounting for stock-based compensation.

In January 2003, the FASB issued FASB Interpretation ("FIN") No. 46,
"Consolidation of Variable Interest Entities". In December 2003, the FASB issued
FIN No. 46 (Revised) ("FIN 46-R") to address certain FIN 46 implementation
issues. This interpretation clarifies the application of Accounting Research
Bulletin ("ARB") No. 51, "Consolidated Financial Statements" for companies that
have interests in entities that are Variable Interest Entities (VIE) as defined
under FIN 46. According to this interpretation, if a company has an interest in
a VIE and is at risk for a majority of the VIE's expected losses or receives a
majority of the VIE's expected gains it shall consolidate the VIE. FIN 46-R also
requires additional disclosures by primary beneficiaries and other significant
variable interest holders. For entities acquired or created before February 1,
2003, this interpretation is effective no later than the end of the first
interim or reporting period ending after March 15, 2004, except for those VIE's
that are considered to be special purpose entities, for which the effective date
is no later than the end of the first interim or annual reporting period ending
after December 15, 2003. For all entities that were acquired subsequent to
January 31, 2003, this interpretation is effective as of the first interim or
annual period ending after December 31, 2003. The adoption of the provisions of
this interpretation did not have a material effect on the Company's Consolidated
Financial Statements.

In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133
on Derivative Instruments and Hedging Activities" ("SFAS No. 149"). SFAS No. 149
clarifies under what circumstances a contract with an initial net investment
meets the characteristic of a derivative as discussed in SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities". In addition, it
clarifies when a derivative contains a financing component that warrants special
reporting in the statement of cash flows. SFAS No. 149 amends certain other
existing pronouncements. SFAS No. 149 is effective on a prospective basis for
contracts entered into or modified after June 30, 2003, and for hedging
relationships designated after June 30, 2003. The adoption of this statement did
not have a material impact on the Company's Consolidated Financial Statements.

In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity"
("SFAS No. 150"). SFAS No. 150 establishes standards for how an issuer
classifies and measures certain financial instruments with characteristics of
both liabilities and equity. It requires that an issuer classify a financial
instrument that is within its scope as a liability (or an asset in some
circumstances). Many of those instruments were previously classified as equity.
This statement will become effective for financial instruments entered into or
modified after May 31, 2003, and otherwise shall be effective at the beginning
of the first interim period beginning after June 15, 2003. The adoption of this
statement did not have a material impact on the Company's Consolidated Financial
Statements.

In December 2003, the FASB issued SFAS No. 132 (revised 2003), "Employers'
Disclosures about Pensions and Other Postretirement Benefits" ("SFAS No. 132
revised") that improves financial statement disclosures for defined benefit
plans. The change replaces existing SFAS No. 132 disclosure requirements for
pensions and other postretirement benefits and revises employers' disclosures
about pension plans and other postretirement benefit plans. It does not change
the measurement of recognition of those plans required by SFAS No. 87,
"Employers' Accounting for Pensions" or SFAS No. 88, "Employers' Accounting for
Settlements and Curtailments of Defined Benefit Pension Plans and for
Termination Benefits." SFAS No. 132 revised retains the disclosure requirements
contained in the original SFAS No. 132, but requires additional disclosures
about the plan assets, obligations, cash flows, and net periodic benefit cost of
defined benefit pension plans and other defined benefit postretirement plans.
SFAS No. 132 revised is effective for annual and interim periods with fiscal
years ending after December 15, 2003. The Company adopted the revised disclosure
provisions.

In December 2003, the Securities and Exchange Commission issued Staff
Accounting Bulletin ("SAB") No. 104, Revenue Recognition, which supersedes SAB
No. 101, Revenue Recognition in Financial Statements. SAB No. 104 rescinds
accounting guidance in SAB No. 101 related to multiple-element arrangements as
this guidance has been superseded as a result of the issuance of EITF 00-21,
"Accounting for Revenue Arrangements with Multiple Deliverables." The adoption
of SAB No. 104 did not have a material impact on the Company's Consolidated
Financial Statements.

FACTORS THAT MAY AFFECT FUTURE RESULTS

WE HAVE A HISTORY OF OPERATING LOSSES AND NEGATIVE CASH FLOW, WE HAVE
ONGOING FUNDING OBLIGATIONS AND WE NEED TO RAISE ADDITIONAL CAPITAL THAT MAY NOT
BE AVAILABLE TO US, ALL OF WHICH COULD LEAD US TO SEEK BANKRUPTCY PROTECTION. We
have incurred losses and experienced negative cash flow from operating
activities in the past, and we expect to incur losses and experience negative
cash flow from operating activities in the foreseeable future. We incurred
losses from continuing operations in 2001, 2002 and 2003 of approximately $17.2
million, $8.3 million and $1.6 million, respectively. In addition, we
experienced negative cash flow from operating activities of $12.7 million, $5.1
million and $2.2 million in 2001, 2002 and 2003, respectively, and have a
working capital deficiency of $1.0 million as of December 31, 2003.

We sponsor a defined benefit pension plan (the "Plan") which was frozen in
1993. As of December 31, 2003, the present value of the accrued liabilities of
our plan exceeded its assets by approximately $6.9 million. (determined on an
ongoing basis). If the Plan is continued, the required contribution to the Plan
is approximately $3.9 million for 2004 and we will be obligated to make
continued contributions in future years which, absent some action by us, we
expect that the annual contribution requirements beyond 2004 will continue to be
significant. Future contribution levels depend in large measure on the mortality
rate of plan participants, the discount rate required, and the expected return
on the plan assets. In April 2002, we failed to make the required quarterly
contribution to the Plan due April 15, 2002, in the amount of $253,000. We made
this contribution on June 11, 2002 and quarterly contributions of $253,000 were
made on a timely basis in July 2002 and October 2002. In view of our financial
condition, in January 2003, we filed a notice with the PBGC seeking a "distress
termination" of the Plan and did not make the contributions due to the Plan
during 2003 which aggregate approximately $1.4 million. If the PBGC determines
that we meet one of the tests for such termination, the Plan will terminate and
the PBGC will become responsible for meeting future retirement obligations to
participants (within certain limitations). We would be liable to the PBGC for
the amount of the unfunded benefit obligation. We believe that, on a termination
basis, the Plan's liabilities could exceed the value of its assets by in excess
of $7.0 million. We have initiated discussions with the PBGC concerning the
termination of the Plan and our repayment obligation to the PBGC if the Plan is
terminated (including the timing of our repayment obligation). It is not
possible to predict the outcome of such discussions.

We and certain current and former officers are defendants in a lawsuit
alleging, among other things, misrepresentation and securities fraud. We believe
that we have meritorious defenses to the allegations and intend to defend
ourselves vigorously. The cost of defending against this action could be
significant, and if the Company is not successful in defending itself, the
Company may be required to pay the plaintiff's damages, which could have a
material adverse effect on the Company's business and operations. See "We are
unable to predict the extent to which the resolution of lawsuits pending against
us could adversely affect our business". In addition, we have future
non-cancelable operating lease obligations for office space, vehicles and office
equipment aggregating $1.2 million.

We will need to raise additional capital that may not be available to us.
If the distress termination of the Plan for which we have applied is completed,
our 2003 and 2004 funding requirements discussed above could be eliminated, in
which case, we believe that existing cash and short term investments may be
sufficient to meet our operating and capital requirements at the currently
anticipated level through December 31, 2004. However, additional capital will be
necessary in order to operate beyond December 2004 and to fund the current
business plan and other obligations. While we are actively considering various
funding alternatives, no arrangement to obtain additional funding has been
secured or entered into. There can be no assurance that we will eliminate the
past due and 2004 funding requirements for the Plan or be able to obtain
additional funding, on acceptable terms or at all. If we cannot raise additional
capital to continue at our present level of operations we may not be able to
meet our obligations, take advantage of future acquisition opportunities or
further develop or enhance our product offering, any of which could have a
material adverse effect on our business and results of operations and could lead
us to seek bankruptcy protection. The auditors' reports on the Company's
Consolidated Financial Statements for the years ended December 31, 2001, 2002
and 2003 contained an emphasis paragraph concerning substantial doubt about the
Company's ability to continue as a going concern.

We currently have no capacity for commercial debt financing. Should such
capacity become available to us, we may be adversely affected in the future by
factors such as higher interest rates, inability to borrow without collateral,
and continued operating losses. Borrowings may also involve covenants limiting
or restricting our operations or future opportunities.

OUR STOCK WAS DELISTED FROM THE NASDAQ SYSTEM. On February 14, 2002, we
received a notice from The Nasdaq Stock Market ("Nasdaq") that our common stock
had failed to maintain a minimum closing bid price of $1.00 over the last 30
consecutive trading days as required by the Nasdaq National Market rules. We
received a second notice on February 27, 2002, that our common stock also failed
to maintain a market value of public float of $5 million.

In accordance with the Nasdaq rules, we were required to regain compliance
with the National Market minimum bid price requirement and with the market value
of public float requirement by May 2002. Since our common stock continued to
trade significantly below $1.00, in April 2002, we filed an application to
transfer the listing of our common stock to the SmallCap Market. The application
was approved and our common stock listing was transferred to the SmallCap Market
effective May 2, 2002. The SmallCap Market also has a minimum bid price
requirement of $1.00. We qualified for an extended grace period to comply with
the SmallCap Market's $1.00 minimum bid price requirement, which extended the
delisting determination by Nasdaq until February 10, 2003.

On March 19, 2003, we received a Nasdaq Staff Determination letter
indicating that we failed to comply with the minimum bid price requirement for
continued listing on the SmallCap Market and that our common stock was therefore
subject to delisting. Our board of directors decided not to appeal the delisting
determination. Effective March 28, 2003, our common stock no longer traded on
the SmallCap Market. On March 28, 2003, our common stock began trading on the
OTC Bulletin Board.

As a result of the delisting, the liquidity of our common stock may be
materially adversely affected. This could impair our ability to raise capital in
the future. There can be no assurance that we will be able to obtain additional
funding, on acceptable terms or at all. If we cannot raise additional capital to
continue at our present level of operations we may not be able to meet our
obligations, take advantage of future acquisition opportunities or further
develop or enhance our product offering, any of which could have a material
adverse effect on our business and results of operations and could lead us to
seek bankruptcy protection.

WE ARE UNABLE TO PREDICT THE EXTENT TO WHICH THE RESOLUTION OF LAWSUITS
PENDING AGAINST US COULD ADVERSELY AFFECT OUR BUSINESS. On May 28, 2002, a
lawsuit was filed against us in the Superior Court of the State of California,

in the County of Los Angeles by Leonard M. Ross and affiliated entities
alleging, among other things misrepresentation and securities fraud. The lawsuit
names four of our current and former executive officers and directors and us as
the defendants. The plaintiffs seek monetary and punitive damages for alleged
actions made by the defendants in order to induce the plaintiff to purchase,
hold or refrain from selling our common stock. The plaintiffs allege that the
defendants made a series of material misrepresentations, misleading statements,
omissions and concealments, specifically and directly to the plaintiffs
concerning the nature, existence and status of contracts with certain
purchasers, the nature and existence of investments in us by third parties, the
nature and existence of business relationships and investments by us. We believe
we have meritorious defenses to the allegations and intend to defend vigorously.

In November 2002, we and the individual defendants served with the action
filed a demurrer seeking the dismissal of six of the plaintiffs' nine purported
causes of action. In January 2003, the court ruled in favor of the demurrer and
dismissed the entire complaint. The plaintiffs were granted the right to replead
and subsequently filed an amended complaint in February 2003. We and the
individual defendants filed a second demurrer in March 2003. In June 2003, the
court ruled in favor of the demurrer and dismissed, without leave to amend, six
of the eleven purported causes of action in the amended complaint. The lawsuit
is in the early stages. Preliminary discovery has just commenced and no trial
date has been set. Consequently, at this time it is not reasonably possible to
estimate the damages, or range of damages, if any, that we might incur in
connection with this action. However, if the outcome of this lawsuit is
unfavorable to us, it could have a material adverse effect on our operations,
cash flow and financial position.

We incurred approximately $200,000 in defense costs in 2002. No additional
costs have been incurred in 2003. Notice of the commencement of this action has
been given to our directors and officers liability insurance carriers. Our
directors and officers liability insurance carriers are funding the additional
costs of defending this action, subject to the carriers' reservation of rights.

WE FACE RISKS ASSOCIATED WITH ACQUISITIONS. An important element of our
strategic plan involves the acquisition of businesses in areas outside the
technology sectors in which we have recently been engaged, so as to diversify
our asset base. However, we will only be able to engage in future acquisitions
if we are successful in obtaining additional funding, as to which no assurance
can be given. Acquisitions would require us to invest financial resources and
may have a dilutive effect on our earnings or book value per share of common
stock. We cannot assure you that we will consummate any acquisitions in the
future, that any financing required for such acquisitions will be available on
acceptable terms or at all, or that any past or future acquisitions will not
materially adversely affect our results of operations and financial condition.

Our acquisition strategy generally presents a number of significant risks
and uncertainties, including the risks that:

o we will not be able to retain the employees or business relationships of
the acquired company;
o we will fail to realize any synergies or other cost reduction objectives
expected from the acquisition;
o we will not be able to integrate the operations, products, personnel and
facilities of acquired companies;
o management's attention will be diverted to pursuing acquisition
opportunities and integrating acquired products, technologies or companies
and will be distracted from performing its regular responsibilities;
o we will incur or assume liabilities, including liabilities that are
unknown or not fully known to us at the time of the acquisition; and
o we will enter markets in which we have no direct prior experience.

We cannot assure you that any of the foregoing will not materialize, which
could have an adverse effect on our results of operations and financial
condition.

THE MARKET'S ACCEPTANCE OF OUR PRODUCTS IS UNCERTAIN. Demand for, and
market acceptance of, our software solutions and products are subject to a high
level of uncertainty due to rapidly changing technology, new product
introductions and changes in customer requirements and preferences. The success
of our products or any future products depends upon our ability to enhance our
existing products and to develop and introduce new products and technologies to
meet customer requirements. We face the risk that our current and future
products will not achieve market acceptance.

Our future revenues and earnings depend in large part on the success of
these products, and if the benefits are not perceived sufficient or if
alternative technologies are more widely accepted, the demand for our solutions
may not grow and our business and operating results would be materially and
adversely affected.

WE DEPEND ON A RELATIVELY SMALL NUMBER OF CUSTOMERS FOR A MAJORITY OF OUR
REVENUES. We rely on a limited number of customers in our business. We expect to
continue to depend upon a relatively small number of customers for a majority of
the revenues in our business. For the year ended December 31, 2003, no one
customer accounted for more than 10% of our revenues. Amounts due from a one
customer represented approximately 11% of the accounts receivable balance as of
December 31, 2003.

We generally do not enter into long-term supply commitments with our
customers. Instead, we bid on a project basis. Significant reductions in sales
to any of our largest customers would have a material adverse effect on our
business. In addition, we generate significant accounts receivable and inventory
balances in connection with providing products to our customers. A customer's
inability to pay for our products could have a material adverse effect on our
results of operations.

OUR FUTURE SUCCESS DEPENDS ON OUR ABILITY TO KEEP PACE WITH TECHNOLOGICAL
CHANGES AND INTRODUCE NEW PRODUCTS IN A TIMELY MANNER. The rate of technological
change currently affecting the smart card market is particularly rapid compared
to other industries. Our ability to anticipate these trends and adapt to new
technologies is critical to our success. Because new product development
commitments must be made well in advance of actual sales, new product decisions
must anticipate future demand as well as the speed and direction of
technological change. Our ability to remain competitive will depend upon our
ability to develop in a timely and cost effective manner new and enhanced
products at competitive prices. New product introductions or enhancements by our
competitors could cause a decline in sales or loss of market acceptance of our
existing products and lower profit margins.

Our success in developing, introducing and selling new and enhanced
products depends upon a variety of factors, including:

o product selections;
o timely and efficient completion of product design and development;
o timely and efficient implementation of manufacturing processes;
o effective sales, service and marketing;
o price; and
o product performance in the field.

Our ability to develop new products also depends upon the success of our
research and development efforts. We may need to devote additional resources to
our research and development efforts in the future. We cannot assure you that
funds will be available for these expenditures or that these funds will lead to
the development of viable products.

THE HIGHLY COMPETITIVE MARKETS IN WHICH WE OPERATE COULD HAVE A MATERIAL
ADVERSE EFFECT ON OUR BUSINESS AND OPERATING RESULTS. The markets in which we
operate are intensely competitive and characterized by rapidly changing
technology. We compete against numerous companies, many of which have greater
resources than we do, and we believe that competition is likely to intensify.

We believe that the principal competitive factors affecting us are:

o the extent to which products support industry standards and are
capable of being operated or integrated with other products;
o technical features and level of security;
o strength of distribution channels;
o price;
o product reputation, reliability, quality, performance and customer
support;
o product features such as adaptability, functionality and ease of
use; and
o competitor reputation, positioning and resources.

We cannot assure you that competitive pressures will not have a material
adverse effect on our business and operating results. Many of our current and
potential competitors have longer operating histories and significantly greater
financial, technical, sales, customer support, marketing and other resources, as
well as greater name recognition and a larger installed base of their products
and technologies than our company. Additionally, there can be no assurance that
new competitors will not enter our markets. Increased competition would likely
result in price reductions, reduced margins and loss of market share, any of
which could have a material adverse effect on our business and operating
results.

Our primary competition currently comes from companies offering closed
environment solutions, including small value electronic cash systems and
database management solutions, such as G2 Integrated Solutions (Girovend), MARS,
Cunninghams, Uniware, Diebold and Schlumberger.

Many of our current and potential competitors have broader customer
relationships that could be leveraged, including relationships with many of our
customers. These companies also have more established customer support and
professional services organizations than we do. In addition, a number of
companies with significantly greater resources than we have could attempt to
increase their presence by acquiring or forming strategic alliances with our
competitors, resulting in increased competition.

OUR LONG PRODUCT SALES CYCLES SUBJECT US TO RISK. Our products fall into
two categories; those that are standardized and ready to install and use and
those that require significant development efforts to implement within the
purchasers' own systems. Those products requiring significant development
efforts tend to be newly developed technologies and software applications that
can represent major investments for customers. We are subject to potential
customers' internal review processes and systems requirements. The
implementation of some of our products involves deliveries of small quantities
for pilot programs and significant testing by the customers before firm orders
are received, or lengthy beta testing of software solutions. For these more
complex products, the sales process may take one year or longer, during which
time we may expend significant financial, technical and management resources,
without any certainty of a sale.

WE MAY BE LIMITED IN OUR USE OF OUR FEDERAL NET OPERATING LOSS
CARRYFORWARDS. As of December 31, 2003, we had federal net operating loss
carryforwards, subject to review by the Internal Revenue Service, totaling
approximately $66.8 million for federal income tax purposes. The federal net
operating loss carryforwards begin to expire in 2005. We do not expect to earn
any significant taxable income in the next several years, and may not do so
until much later, if ever. A federal net operating loss can generally be carried
back two, three or five years and then forward fifteen or twenty years
(depending on the year in which the loss was incurred), and used to offset
taxable income earned by a company (and thus reduce its income tax liability).

Section 382 of the Internal Revenue Code provides that when a company
undergoes an "ownership change," that company's use of its net operating losses
is limited in each subsequent year. An "ownership change" occurs when, as of any
testing date, the sum of the increases in ownership of each shareholder that
owns five percent or more of the value of a company's stock as compared to that
shareholder's lowest percentage ownership during the preceding three-year period
exceeds fifty percentage points. For purposes of this rule, certain shareholders
who own less than five percent of a company's stock are aggregated and treated
as a single five-percent shareholder. We may issue a substantial number of
shares of our stock in connection with public and private offerings,
acquisitions and other transactions in the future, although no assurance can be
given that any such offering, acquisition or other transaction will be effected.
In addition, the exercise of outstanding options to purchase shares of our
common stock may require us to issue additional shares of our common stock. The
issuance of a significant number of shares of stock could result in an
"ownership change." If we were to experience such an "ownership change," we
estimate that virtually all of our available federal net operating loss
carryforwards would be effectively unavailable to reduce our taxable income.

The extent of the actual future use of our federal net operating loss
carryforwards is subject to inherent uncertainty because it depends on the
amount of otherwise taxable income we may earn. We cannot give any assurance
that we will have sufficient taxable income in future years to use any of our
federal net operating loss carryforwards before they would otherwise expire.

OUR PROPRIETARY TECHNOLOGY IS DIFFICULT TO PROTECT AND MAY INFRINGE ON THE
INTELLECTUAL PROPERTY RIGHTS OF THIRD PARTIES. Our success depends significantly
upon our proprietary technology. We rely on a combination of patent, copyright
and trademark laws, trade secrets, confidentiality agreements and contractual
provisions to protect our proprietary rights. We seek to protect our software,
documentation and other written materials under trade secret and copyright laws,
which afford only limited protection. We cannot assure you that any of our
applications will be approved, that any new patents will be issued, that we will
develop proprietary products or technologies that are patentable, that any
issued patent will provide us with any competitive advantages or will not be
challenged by third parties. Furthermore, we cannot assure you that the patents
of others will not have a material adverse effect on our business and operating
results.

If our technology or products is determined to infringe upon the rights of
others, and we were unable to obtain licenses to use the technology, we could be
required to cease using the technology and stop selling the products. We may not
be able to obtain a license in a timely manner on acceptable terms or at all.
Any of these events would have a material adverse effect on our financial
condition and results of operations.

Patent disputes are common in technology related industries. We cannot
assure you that we will have the financial resources to enforce or defend a
patent infringement or proprietary rights action. As the number of products and
competitors in the smart card market grows, the likelihood of infringement
claims also increases. Any claim or litigation may be time consuming and costly,
cause product shipment delays or require us to redesign our products or enter
into royalty or licensing agreements. Any of these events would have a material
adverse effect on our business and operating results. Despite our efforts to
protect our proprietary rights, unauthorized parties may attempt to copy aspects
of our products or to use our proprietary information and software. In addition,
the laws of some foreign countries do not protect proprietary and intellectual
property rights as effectively as do the laws of the United States. Our means of
protecting our proprietary and intellectual property rights may not be adequate.
There is a risk that our competitors will independently develop similar
technology, duplicate our products or design around patents or other
intellectual property rights.

We believe that establishing, maintaining and enhancing the Infineer brand
name is essential to our business. We filed an application for a United States
trademark registration and an application for service mark registration of our
name and logo. We are aware of third parties that use marks or names that
contain similar sounding words or variations of the "infi" prefix. In July 2002,
we received a claim from a third party challenging the use of the Infineer name.
We have reached an agreement in principle with this third party, subject to
negotiation of definitive documentation, and believe this particular challenge
should be resolved. As a result of this claim and other challenges which may
occur in the future, we may incur significant expenses, pay substantial damages
and be prevented from using the Infineer name. Use of a similar name by third
parties may also cause confusion to our clients and confusion in the market,
which could decrease the value of our brand and harm our reputation. We cannot
assure you that our business would not be adversely affected if we are required
to change our name or if confusion in the market did occur.

THE NATURE OF OUR PRODUCTS SUBJECTS US TO PRODUCT LIABILITY RISKS. Our
customers may rely on certain of our current products and products in
development to prevent unauthorized access to digital content for financial
transactions, computer networks, and real property. A malfunction of or design
defect in certain of our products could result in tort or warranty claims.
Although we attempt to reduce the risk of exposure from such claims through
warranty disclaimers and liability limitation clauses in our sales agreements
and by maintaining product liability insurance, we cannot assure you that these
measures will be effective in limiting our liability for any damages. Any
liability for damages resulting from security breaches could be substantial and
could have a material adverse effect on our business and operating results. In
addition, a well-publicized actual or perceived security breach involving our
conditional access or security products could adversely affect the market's
perception of our products in general, regardless of whether any breach is
attributable to our products. This could result in a decline in demand for our
products, which could have a material adverse effect on our business and
operating results.

WE MAY HAVE DIFFICULTY RETAINING OR RECRUITING PROFESSIONALS FOR OUR
BUSINESS. Our future success and performance is dependent on the continued
services and performance of our senior management and other key personnel. If we
fail to meet our operating and financial objectives this may make it more
difficult to retain and reward our senior management and key personnel. The loss
of the services of any of our executive officers or other key employees could
materially adversely affect our business.

Our business requires experienced software and hardware engineers, and our
success depends on identifying, hiring, training and retaining such experienced,
knowledgeable professionals. If a significant number of our current employees or
any of our senior technical personnel resign, or for other reasons are no longer
employed by us, we may be unable to complete or retain existing projects or bid
for new projects of similar scope and revenues. In addition, former employees
may compete with us in the future.

Even if we retain our current employees, our management must continually
recruit talented professionals in order for our business to grow. Furthermore,
there is significant competition for employees with the skills required to
perform the services we offer. We cannot assure you that we will be able to
attract a sufficient number of qualified employees in the future to sustain and
grow our business, or that we will be successful in motivating and retaining the
employees we are able to attract. If we cannot attract, motivate and retain
qualified professionals, our business, financial condition and results of
operations will suffer.

OUR INTERNATIONAL OPERATIONS SUBJECT US TO RISK ASSOCIATED WITH OPERATING
IN FOREIGN MARKETS, INCLUDING FLUCTUATIONS IN CURRENCY EXCHANGE RATES, WHICH
COULD ADVERSELY AFFECT OUR OPERATIONS AND FINANCIAL CONDITION. Sales outside the
U.S. represented approximately 82% of total sales for the year ended December
31, 2003. Because we derive a substantial portion of our business outside the
United States, we are subject to certain risks associated with operating in
foreign markets including the following:

o tariffs and other trade barriers;
o difficulties in staffing and managing foreign operations;
o currency exchange risks;
o export controls related to encryption technology;
o unexpected changes in regulatory requirements;
o changes in economic and political conditions;
o potentially adverse tax consequences; and
o burdens of complying with a variety of foreign laws.

Any of the foregoing could adversely impact the success of our operations.
We cannot assure you that such factors will not have a material adverse effect
on our future sales and, consequently, on our business, operating results and
financial condition. In addition, fluctuations in exchange rates could have a
material adverse effect on our business, operating results and financial
condition. To date, we have not engaged in currency hedging.

CHANGES WE MAY NEED OR BE REQUIRED TO MAKE IN OUR INSURANCE COVERAGE MAY
EXPOSE US TO INCREASED LIABILITIES AND MAY INTERFERE WITH OUR ABILITY TO RETAIN
OR ATTRACT QUALIFIED OFFICERS AND DIRECTORS. We renew or replace various
insurance policies on an annual basis, including those that cover directors and
officers liability. Given the current climate of rapidly increasing insurance
premiums and erosions of coverage, we may need or be required to reduce our
coverage and increase our deductibles in order to afford the premiums. To the
extent we reduce our coverage and increase our deductibles, our exposure and the
exposure of our directors and officers for liabilities that either become
excluded from coverage or underinsured will increase. As a result, we may lose
or may experience difficulty in attracting qualified directors and officers.

WE ARE SUBJECT TO GOVERNMENT REGULATION. Federal, state and local
regulations impose various environmental controls on the discharge of chemicals
and gases, which have been used in our past assembly processes and may be used
in future processes. Moreover, changes in such environmental rules and
regulations may require us to invest in capital equipment and implement
compliance programs in the future. Any failure by us to comply with
environmental rules and regulations, including the discharge of hazardous
substances, could subject us to liabilities and could materially adversely
affect our operations.

OUR ARTICLES OF INCORPORATION AND BY-LAWS, CERTAIN CHANGE OF CONTROL
AGREEMENTS, OUR RIGHTS PLAN AND PROVISIONS OF PENNSYLVANIA LAW COULD DETER
TAKEOVER ATTEMPTS.

Blank check preferred stock. Our board of directors has the authority to
issue preferred stock and to fix the rights, preferences, privileges and
restrictions, including voting rights, of these shares without any further vote
or action by the holders of our common stock. The rights of the holders of any
preferred stock that may be issued in the future may adversely affect the rights
of the holders of our common stock. The issuance of preferred stock could make
it more difficult for a third party to acquire a majority of our outstanding
voting stock, thereby delaying, deferring or preventing a change of control.
Such preferred stock may have other rights, including economic rights, senior to
our common stock, and as a result, the issuance of the preferred stock could
limit the price that investors might be willing to pay in the future for shares
of our common stock and could have a material adverse effect on the market value
of our common stock.

Rights plan. Our rights plan entitles the registered holders of rights to
purchase shares of our class A preferred stock upon the occurrence of certain
events, and may have the effect of delaying, deferring or preventing a change of
control.

Change of control agreements. We are a party to change of control
agreements, which provide for payments to certain of our directors and executive
officers under certain circumstances following a change of control. Since the
change of control agreements require large cash payments to be made by any
person effecting a change of control, these agreements may discourage takeover
attempts.

The change of control agreements provide that, if the services of any
person party to a change of control agreement are terminated within three years
following a change of control, that individual will be entitled to receive, in a
lump sum within 10 days of the termination date, a payment equal to 2.99 times
that individual's average annual compensation for the shorter of the five years
preceding the change of control and the period the individual received
compensation from us for personal services. Assuming a change of control were to
occur at the present time, payments would be made of approximately $738,000 to
each of Mr. Harry I. Freund and Mr. Jay S. Goldsmith. If any such payment,
either alone or together with others made in connection with the individual's
termination, is considered to be an excess parachute payment under the Internal
Revenue Code, the individual will be entitled to receive an additional payment
in an amount which, when added to the initial payment, would result in a net
benefit to the individual, after giving effect to excise taxes imposed by
Section 4999 of the Internal Revenue Code and income taxes on such additional
payment, equal to the initial payment before such additional payment and we
would not be able to deduct these initial or additional payments for income tax
purposes.

Pennsylvania law. We are a Pennsylvania corporation. Anti-takeover
provisions of Pennsylvania law could make it difficult for a third party to
acquire control of us, even if such change of control would be beneficial to our
shareholders.

OUR STOCK PRICE IS EXTREMELY VOLATILE. The stock market has recently
experienced significant price and volume fluctuations unrelated to the operating
performance of particular companies. The market price of our common stock has
been highly volatile and is likely to continue to be volatile. The future
trading price for our common stock will depend on a number of factors,
including:

o delisting of our common stock from the Nasdaq SmallCap Market
effective March 28, 2003 (see "Our stock has been delisted from the
Nasdaq System" above);
o the volume of activity for our common stock is minimal and therefore
a large number of shares placed for sale or purchase could increase
its volatility;
o our ability to effectively manage our business, including our
ability to raise capital;
o variations in our annual or quarterly financial results or those of
our competitors;
o general economic conditions, in particular, the technology service
sector;
o expected or announced relationships with other companies;
o announcements of technological advances innovations or new products
by us or our competitors;
o patents or other proprietary rights or patent litigation; and
o product liability or warranty litigation.

We cannot be certain that the market price of our common stock will not
experience significant fluctuations in the future, including fluctuations that
are adverse and unrelated to our performance.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Foreign currency exchange rate risk
We conduct operations in the United Kingdom and sell products in several
different countries. Therefore, our operating results may be impacted by the
fluctuating exchange rates of foreign currencies, especially the British pound,
in relation to the U.S. dollar. We do not currently engage in hedging activities
with respect to our foreign currency exposure. We continually monitor our
exposure to currency fluctuations and may use financial hedging techniques when
appropriate to minimize the effect of these fluctuations. Even so, exchange rate
fluctuations may still have a material adverse effect on our business and
operating results.

Market Risk
We are exposed to market risk primarily through short-term investments and
an overdraft facility. Our investment policy calls for investment in short-term,
low risk instruments. As of December 31, 2003, short-term investments
(principally U.S. Treasury bills) were $3.5 million and borrowing under the
overdraft facility amounted to $271,000. Due to the nature of these investments
and the amount of the overdraft facility, any change in rates would not have a
material impact on our financial condition or results of operations.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The Company's consolidated financial statements, the report of independent
public accountants thereon and related schedules appear beginning on page F-2.
See Index to Consolidated Financial Statements on page F-1.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

None.

ITEM 9A. CONTROLS AND PROCEDURES

With the participation of management, the Company's chief executive
officer and chief financial officer has evaluated the effectiveness of the
Company's disclosure controls and procedures as of the end of the period covered
by this report. Based upon this evaluation, the chief executive officer and
chief financial officer has concluded that, as of the end of such period, the
Company's disclosure controls and procedures are effective.

There has not been any change in the Company's internal controls over
financial reporting during the fiscal year to which this report relates that has
materially affected, or is reasonably likely to materially affect, the Company's
internal controls over financial reporting.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The Company currently has six directors, all of whom were elected at the
Annual Meeting of Shareholders held on December 8, 2003. All directors serve
until the next election of directors or until their successors have been elected
and have qualified. There is no family relationship between any of the directors
and executive officers of the Company.

Set forth below as to each director of the Company is information
regarding age (as of March 24, 2004), position with the Company, principal
occupation, business experience, period of service as a director of the Company
and directorships currently held.

HARRY I. FREUND: Age 64; Director of PubliCARD since April 12, 1985,
Chairman of the Board of Directors since December 1985 and Chairman of PubliCARD
since October 1998. Mr. Freund has been Chairman of Balfour Investors Inc., a
merchant-banking firm that had previously been engaged in a general brokerage
business ("Balfour"), since 1975. Mr. Freund is also Vice Chairman of Glasstech,
Inc.

JAY S. GOLDSMITH: Age 60; Director of PubliCARD since April 12, 1985, Vice
Chairman of the Board of Directors since December 1985 and Vice Chairman of
PubliCARD since October 1998. Mr. Goldsmith has been President of Balfour since
1975. Mr. Goldsmith is also Chairman of Glasstech, Inc.

ANTONIO L. DELISE: Age 42; Director of PubliCARD since July 9, 2001. Mr.
DeLise joined the Company in April 1995 as Vice President, Chief Financial
Officer and Secretary. He was appointed to the Board of Directors in July 2001
and was elected to the additional posts of President in February 2002 and Chief
Executive Officer in August 2002. Prior to joining the Company, Mr. DeLise was
employed as a senior manager with the firm of Arthur Andersen LLP from July 1983
through March 1995.

CLIFFORD B. COHN: Age 52; Director of PubliCARD since July 31, 1980, and
was Vice President of Government Affairs of PubliCARD from April 1, 1982 to
November 20, 1984. Mr. Cohn is the principal of Cohn & Associates, a law firm in
Philadelphia, Pennsylvania. Mr. Cohn was an attorney for Grayson & Goldin P.C.,
a law firm in Philadelphia, Pennsylvania, during 2002.

L. G. SCHAFRAN: Age 65; Director of PubliCARD since December 3, 1986. Mr.
Schafran is the Managing General Partner of L.G. Schafran & Associates, an
investment and development firm established in 1984. Mr. Schafran is a Director
of Tarragon Realty Investors, Inc., Chairman of the Board and Co-Chief Executive
Officer of Delta-Omega Technologies, Inc., Co-Liquidating Trustee of the Banyan
Strategic Realty Trust and Director of Worldspace, Inc.

EMIL VOGEL: Age 60; Director of PubliCARD since October 5, 2001. Mr. Vogel
has been the Senior Partner and founder of Tarnow Associates ("Tarnow") since
1982. Prior to founding Tarnow, Mr. Vogel spent nine years with an executive
search firm in the New York City metropolitan area conducting senior level
search assignments. Mr. Vogel is also a director of Q.E.P. Co., Inc.

The information with respect to the executive officers of the Company
required by this item is set forth in Item 1A of this Form 10-K.

AUDIT COMMITTEE

The present members of the Audit Committee are Mr. Schafran (Chairman), Mr. Cohn
and Mr. Vogel. The Company's Board of Directors has adopted a written charter
for the Audit Committee, which can be found on the Corporate Governance section
of the Company's website at www.publicard.com. The Board of Directors of the
Company has determined that Mr. Schafran qualifies as an "audit committee
expert" as defined by the Securities and Exchange Commission.

CODE OF ETHICS

The Company has adopted a Code of Ethics that applies to the chief
executive officer and senior financial officers. The Code of Ethics can be found
on the Corporate Governance section of the Company's website at
www.publicard.com. Changes to and waivers granted with respect to the Code of
Ethics that are required to be disclosed pursuant to the applicable rules and
regulations of the Securities and Exchange Commission will be posted to the
Company's website.

SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), requires the Company's directors and officers and persons who
own more than 10 percent of a registered class of the Company's equity
securities, to file reports of ownership and changes in ownership with the
Securities and Exchange Commission (the "SEC"). Officers, directors and greater
than 10% shareholders are required by SEC regulations to furnish the Company
with copies of all Section 16(a) forms they file. To the Company's knowledge,
based solely upon the Company's review of the copies of such forms received by
it during the fiscal year ended December 31, 2003 and representations that no
other reports were required, the Company believes that each person who, at any
time during such fiscal year, was a director, officer or, to the Company's
knowledge, beneficial owner of more than 10% of the Company's common stock
complied with all Section 16(a) filing requirements during such fiscal year.

ITEM 11. EXECUTIVE COMPENSATION

The following tables set forth information concerning the cash
compensation, stock options and retirement benefits provided to the Company's
executive officers. The notes to these tables provide more specific information
concerning compensation.

SUMMARY COMPENSATION TABLE

LONG-TERM
NAME AND PRINCIPAL POSITION YEAR ANNUAL COMPENSATION COMPENSATION
--------------------------- ---- ------------------- SECURITIES UNDERLYING ALL OTHER
SALARY ($) BONUS ($) (1) OPTIONS/ SARS (#) (2) COMPENSATION ($)
---------- ------------- ---------------------- ----------------

Antonio L. DeLise (3)............ 2003 275,000 84,832 - 8,706(5)
President, Chief Executive
Officer, Chief Financial Officer
and Secretary
2002 262,500 40,000 - 8,380(5)
2001 250,000 50,750 270,000(6) 7,159(5)

Harry I. Freund................... 2003 150,000 - - -
Chairman of the Board of
Directors and Chairman
2002 170,833 - - -
2001 275,000 - 800,000(6) 15,000(4)

Jay S. Goldsmith.................. 2003 150,000 - - -
Vice Chairman of the Board of
Directors and Vice Chairman
2002 170,833 - - -
2001 275,000 - 800,000(6) 22,966(4)

(1) Reflects bonus earned during the fiscal year. In some instances, all or a
portion of the bonus was paid during the following fiscal year.
(2) Options to acquire shares of Common Stock.
(3) Mr. DeLise has served as Chief Financial Officer since April 1995 and was
appointed to the additional posts of President in February 2002 and Chief
Executive Officer in August 2002.
(4) Represents life insurance premiums paid on behalf of Mr. Freund and Mr.
Goldsmith.
(5) Consists of $5,250, $5,500 and $6,000 in contributions to PubliCARD's
401(k) plan for 2001, 2002 and 2003, respectively, and $1,909, $2,880 and
$2,706 for term life and disability insurance payments paid on behalf of
Mr. DeLise for 2001, 2002 and 2003, respectively.
(6) Includes stock options granted pursuant to a 2001 stock option
cancellation and re-pricing program (See "Stock Option Agreements") in the
amount of 500,000 to Mr. Freund, 500,000 to Mr. Goldsmith, and 95,000 to
Mr. DeLise.

OPTION GRANTS IN LAST FISCAL YEAR

During the fiscal year ended December 31, 2003, there were no options
granted to the named executive officers.

AGGREGATE STOCK OPTION EXERCISES IN FISCAL YEAR 2003 AND FISCAL YEAR-END OPTION
VALUES

The following table sets forth certain information as of December 31, 2003
concerning exercisable and unexercisable stock options held by the following
persons:

NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT FISCAL IN-THE-MONEY OPTIONS AT
SHARES YEAR END FISCAL YEAR END (1)
ACQUIRED ON VALUE ----------------------------- ----------------------------
NAME EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- -------- -------- ----------- ------------- ----------- -------------

Antonio L. DeLise - - 239,167 43,333 - -

Harry I. Freund - - 416,667 83,333 - -

Jay S. Goldsmith - - 416,667 83,333 - -

(1) These values are based on the December 31, 2003 closing price for
PubliCARD's common stock on the Over-the-counter Bulletin Board of $.055 per
share.

STOCK OPTION PLANS

Under the 1993 Long-Term Incentive Plan and the 1993 Non-employee Director
Stock Option Plan adopted by shareholders of the Company in 1994 and the 1999
Long-Term Incentive Plan and 1999 Stock Option Plan for Non-employee Directors
adopted by shareholders of the Company in 1999, the Company may grant stock
options, restricted stock options, stock appreciation rights, performance awards
and other stock-based awards equivalent to up to 7,300,000 shares of common
stock. As of December 31, 2003, a total of 2,018,025 shares of Common Stock in
the aggregate were available for grant under the stock option plans.

The plans are administered by the Board of Directors and/or the
Compensation Committee of the Board of Directors of the Company. Subject to the
express provisions of the plans, the Compensation Committee or the Board of
Directors, as applicable, has full and final authority to determine the terms of
all awards granted under the plans including (a) the purchase price of the
shares covered by each award, (b) whether any payment will be required upon
grant of the award, (c) the individuals to whom, and the time at which, awards
shall be granted, (d) the number of shares to be subject to each award, (e) when
an award can be exercised and whether in whole or in installments, (f) whether
the exercisability of the awards is subject to risk of forfeiture or other
condition and (g) whether the stock issued upon exercise of an award is subject
to repurchase by the Company, and the terms of such repurchase.

STOCK OPTION AGREEMENTS

In February 2001, the Company concluded a stock option re-pricing program
whereby a total of approximately 3.3 million stock options were cancelled.
Pursuant to the program, employees and directors voluntarily elected to cancel
stock options held with an exercise price that exceeded $4.81 per share. In
return, the Company granted a total of approximately 3.1 million replacement
stock options on August 20, 2001. The replacement stock options, which were
granted under the Company's stock option plans, generally contain the same terms
and conditions of the cancelled stock options and have an exercise price of $.39
per share, the closing price of the Company's Common Stock on August 20, 2001.

In January 1996, PubliCARD issued options to Messrs. Cohn and Schafran to
buy a total of 200,000 shares of PubliCARD's Common Stock at an exercise price
of $2.50 per share for five years. In 2000, a total of 40,000 of such options
were exercised. The expiration date on the remaining options was subsequently
extended by five years to January 2006.

EMPLOYMENT AND CHANGE IN CONTROL AGREEMENTS

In August 1987, the Company entered into change of control agreements with
each of Messrs. Freund and Goldsmith, which provide for payments to them under
certain circumstances following a change of control of the Company. These
agreements were not adopted in response to any specific acquisition of shares of
PubliCARD or any other event threatening to bring about a change of control of
the Company. For purposes of the agreements, a change of control is defined as
any of the following: (a) the Company ceasing to be a publicly owned corporation
having at least 2,000 shareholders, (b) any person or group acquiring in excess
of 30% of the voting power of the Company's securities, (c) Messrs. Freund,
Goldsmith, Cohn, DeLise, Schafran and Vogel and any other director designated as
a "Continuing Director" prior to his election as a director by a majority of the
foregoing persons (the "Continuing Directors") ceasing for any reason to
constitute at least a majority of the board of directors, (d) the Company
merging or consolidating with any entity, unless approved by a majority of the
Continuing Directors or (e) the sale or transfer of a substantial portion of
PubliCARD's assets to another entity, unless approved by a majority of the
Continuing Directors.

In the event one of the above-named individuals (a) is terminated as an
employee of the Company for any reason other than conviction of a felony or any
act of fraud or embezzlement, (b) is disabled for six consecutive months or
dies, (c) is not elected and maintained in the office which he now occupies, (d)
is not included by the board of directors in the slate of directors recommended
to shareholders, (e) receives a reduction in his salary or fringe benefits, (f)
experiences a change in his place of employment or is required to travel
excessively or (g) experiences other substantial, material and adverse changes
in conditions under which the individual's services are to be rendered, within
three years following a change of control, the individual will be entitled to
receive in a lump sum within 10 days of the date of discontinuance, a payment
equal to 2.99 times the individual's average annual compensation for the shorter
of (a) the five years preceding the change of control, or (b) the period the
individual received compensation from PubliCARD for personal services. Assuming
a change of control of the Company and the discontinuance of an individual's
services were to occur at the present time, payments in the amounts, assuming
there are no "excess parachute payments" as defined in the Internal Revenue Code
of 1986 (the "Code"), would be made pursuant to the change of control agreements
of approximately $738,000 to each of Mr. Freund and Mr. Goldsmith. In the event
any such payment, either alone or together with others made in connection with
the individual's discontinuance, is considered to be an excess parachute
payment, the individual is entitled to receive an additional payment in an
amount which, when added to the initial payment, results in a net benefit to the
individual, after giving effect to excise taxes imposed by Section 4999 of the
Code and income taxes on such additional payment, equal to the initial payment
before such additional payment. Since the change of control agreements would
require large cash payments to be made by any person or group effecting a change
of control of PubliCARD, absent the assent of a majority of the Continuing
Directors, these agreements may discourage hostile takeover attempts of
PubliCARD.

The change of control agreements would have expired on December 1, 2003 but have
been and will continue to be automatically extended for a period of one year on
each December 1, unless terminated by either party prior to any December 1. In
the event a change of control occurs while the change of control agreements are
in effect, the term of such agreements will automatically be extended to three
years from the date of the change of control and the foregoing renewal option
will become inapplicable.

INFORMATION CONCERNING THE BOARD OF DIRECTORS

Through September 30, 2000, directors who were not officers of the Company
were paid $2,500 per month for services as directors and, in addition, $750 per
day for each meeting of the board or of shareholders that they attend without
regard to the number of meetings attended each day. Effective October 1, 2000,
the monthly retainer and per diem fees were suspended. Pursuant to the 1999
Stock Option Plan for Non-employee Directors adopted by shareholders of the
Company in 1999, non-employee directors receive 30,000 options to purchase
common stock of the Company in August of each year.

Messrs. Freund and Goldsmith are each party to an agreement with the
Company providing for payments to them under certain circumstances following a
change in control of the Company. See "Employment and Change in Control
Agreements."

Directors of the Company are elected at each annual meeting of
shareholders to hold office until the next annual meeting of shareholders and
until their respective successors are duly elected and qualified. Executive
officers are elected to hold office until the first meeting of directors
following the next annual meeting of shareholders or until their successors are
sooner elected by the Board and qualified.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

The Compensation Committee of the Board of Directors, which consists
entirely of outside directors, reviews the compensation of key employees of the
Company. The present members of the Compensation Committee are Clifford B. Cohn
(Chairman) and L.G. Schafran. See Item 13-"Certain Relationships and Related
Transactions".

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following information is furnished as of March 24, 2004 with respect
to each class of equity securities of the Company beneficially owned by each
person who owns of record or is known by the Company to own beneficially more
than 5% of the common stock of the Company and by all directors, nominees and
officers and by all directors, nominees and officers as a group. All information
with respect to beneficial ownership has been furnished to the Company by the
respective shareholders of the Company and the directors, nominees and officers.

BENEFICIAL OWNERSHIP OF SHARES
OF COMMON STOCK AS OF PERCENT OF
NAME POSITION MARCH 24, 2004 (1) CLASS (1)
---- -------- ------------------ ----------

Taube Hodson Stonex N/A 2,735,500(2) 11.1%
Partners Limited
27 St. James Place
London SW1A INR
United Kingdom

Harry I. Freund Director, Chairman of the 969,401(3) 3.9%
Board and Chairman

Jay S. Goldsmith Director, Vice Chairman of 1,180,997(4) 4.7%
the Board and Vice Chairman

Antonio L. DeLise Director, President, Chief 280,611(5) 1.1%
Executive Officer, Chief
Financial Officer and
Secretary

Clifford B. Cohn Director 210,314(6) Less than 1%

L.G. Schafran Director 364,050(7) 1.5%

Emil Vogel Director 138,800(8) Less than 1%

All directors, nominees and 3,131,173(9) 11.9%
officers as a group (6 persons)

(1) Calculated in accordance with Rule 13d-3 adopted by the SEC under the
Exchange Act.
(2) Based on statements on Schedule 13G filed with the SEC on October 11, 1999
and on Form 4 Amendment No. 2 filed with the SEC on January 15, 2004.
Taube Hodson Stonex Partners Limited is a discretionary investment advisor
to J. Rothschild Assurance Life Fund, St. James Place International Unit
Trust, J. Rothschild Assurance Pension Fund, J. Rothschild International
Assurance Managed Fund, J. Rothschild International Assurance US$ Managed
Fund, TDG Funds Limited, GAM Worldwide Fund and The Partners Fund. Taube
Hodson Stonex Partners Limited has power to vote and direct the vote and
power to dispose and direct the disposition of shares held by such funds.
(3) Includes 444,444 shares of Common Stock which may be acquired by Mr.
Freund within 60 days. Also includes 5,454 shares of Common Stock held by
Mr. Freund's spouse over which Mr. Freund has shared voting and investment
power but as to which he disclaims any beneficial interest. Also includes
13,000 shares that may be deemed to be owned beneficially by Mr. Freund
which are held by the Balfour Defined Benefit Pension Plan (the "Plan"),
for which Mr. Freund is a Trustee and Plan Administrator and in which he
participates. Mr. Freund disclaims ownership of 5,850 shares of such
13,000 shares.

(4) Includes 444,444 shares of Common Stock which may be acquired by Mr.
Goldsmith within 60 days. Also includes 13,000 shares that may be deemed
to be owned beneficially by Mr. Goldsmith which are held by the Plan, of
which Mr. Goldsmith is a Trustee and Plan Administrator and in which he
participates. Mr. Goldsmith disclaims ownership of 7,280 shares of Common
Stock held by the Plan.

(5) Includes 253,611 shares which may be acquired by Mr. DeLise within 60 days
through the exercise of stock options.

(6) Includes 210,000 shares which may be acquired by Mr. Cohn within 60 days
through the exercise of stock options.

(7) Includes 250,000 shares which may be acquired by Mr. Schafran within 60
days through the exercise of stock options. Also includes 114,050 shares
of Common Stock held by Mr. Schafran's spouse as to which Mr. Schafran
disclaims any beneficial interest.

(8) Includes 80,000 shares which may be acquired by Mr. Vogel within 60 days
through the exercise of stock options.

(9) Includes 1,682,499 shares of Common Stock which may be acquired by such
persons within 60 days.

The following table sets forth certain equity compensation plan
information for the Company as of December 31, 2003.

NUMBER OF SECURITIES REMAINING
NUMBER OF SECURITIES TO WEIGHTED-AVERAGE AVAILABLE FOR FUTURE ISSUANCE
BE ISSUED UPON EXERCISE EXERCISE PRICE OF UNDER EQUITY COMPENSATION PLANS
OF OUTSTANDING OPTIONS, OUTSTANDING OPTIONS, (EXCLUDING SECURITIES REFLECTED IN
WARRANTS AND RIGHTS WARRANTS AND RIGHTS COLUMN (A))
PLAN CATEGORY (A) (B) (C)
------------- ------------------- ------------------- -------------------

Equity compensation plans
approved by security
holders 2,292,975 $.79 2,018,025

Equity compensation plans
not approved by security
holders 352,000 $6.45 -
--------- ---------

Total 2,644,975 $1.54 2,018,025
========= =========

See Item 11-"Executive Compensation" for a description of the Company's
equity compensation plans.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

See "Employment and Change in Control Agreements" and "Information
Concerning the Board of Directors" in Item 11 and the notes to the table under
Security Ownership of Certain Beneficial Owners in Item 12 for information with
respect to information required by this Item.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

The following table summarizes the aggregate fees billed to the Company by
Deloitte & Touche LLP, the Company's independent auditor:

2003 2002
-------- -------

Audit fees $179,758 $164,761
Audit-related fees 11,038 16,480
Tax fees - -
All other fees - -

Audit-related fees consist of retirement plan audit fees. The Audit
Committee requires that all services performed by Deloitte & Touche LLP are
pre-approved prior to the services being performed. All services were
pre-approved by the Audit Committee in 2003 and 2002. The Audit Committee has
considered whether the provision of non-audit services by the Company's
principal auditor are compatible with maintaining auditor independence. Deloitte
& Touche LLP did not perform any non-audit services for the Company during 2003
and 2002.

PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(a) Financial Statements, Financial Statement Schedules and Exhibits.

1) Financial Statements - See accompanying Index to Consolidated
Financial Statements, Page F-1.

2) Financial Statement Schedules - See accompanying Index to
Consolidated Financial Statements, Page F-1.

3) Exhibits:

3.1 Amended and Restated Articles of Incorporation, amended and restated
through November 2, 1998, of PubliCARD. Incorporated by reference to
PubliCARD's Quarterly Report on Form 10-Q for the quarterly period
ended September 30, 1998, dated November 9, 1998.

3.2 By-laws of PubliCARD. Incorporated by reference to PubliCARD's
Annual Report on Form 10-K for the fiscal year ended December 31,
1990, dated March 28, 1991.

4.1 Certificate of Designation, Preferences and Rights of Class A
Preferred Stock, First Series. Incorporated by reference from
PubliCARD's Registration Statement on Form 8-A, dated September 26,
1988.

4.2 Amended and Restated Rights Agreement, dated as of August 7, 1998,
between PubliCARD and Continental Stock Transfer & Trust Company, as
Rights Agent. Incorporated by reference from PubliCARD's Current
Report on Form 8-K, filed on September 17, 1998.

4.3 Certificate of Designation, Preferences and Rights of Class A
Preferred Stock, Second Series as filed with the Department of State
of the Commonwealth of Pennsylvania on November 29, 2000.
Incorporated by reference from PubliCARD's Current Report on Form
8-K filed on December 18, 2000.

4.4 Rights Plan, adopted November 1, 2000. Incorporated by reference
from PubliCARD's Current Report on Form 8-K filed on December 18,
2000.

10.1 Agreements, dated as of August 1987, between PubliCARD and each of
Harry I. Freund and Jay S. Goldsmith concerning a change of control
of PubliCARD. Incorporated by reference from PubliCARD's Form 8
Amendment to PubliCARD's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1987, filed on December 18, 1987.

10.2 PubliCARD's 1993 Long Term Incentive Plan. Incorporated by reference
from PubliCARD's Annual Report on Form 10-K for the year ended
December 31, 1993, dated March 29, 1994.

10.3 PubliCARD's Non-employee Director Stock Option Plan. Incorporated by
reference from PubliCARD's Annual Report on Form 10-K for the year
ended December 31, 1993, dated March 29, 1994.

10.4 PubliCARD's 1999 Stock Option Plan for Non-Employee Directors.
Incorporated by reference from PubliCARD's Annual Report on Form
10-K for the year ended December 31, 1999, dated March 30, 2000.

10.5 PubliCARD's 1999 Long-Term Incentive Plan. Incorporated by reference
from PubliCARD's Annual Report on Form 10-K for the year ended
December 31, 1999, dated March 30, 2000.

21.1 Subsidiaries of PubliCARD. Filed herewith.

23.1 Consent letter from Independent Auditors. Filed herewith.

31.1 Rule 13a-14(a)/15d-14(a) certification. Filed herewith.

32.1 Section 1350 certification. Filed herewith.

(b) Reports on Form 8-K

Form 8-K dated November 10, 2003, reporting the Registrant's results of
operations for the third quarter of 2003.

SIGNATURES

Pursuant to the requirements of Section 13 or 15 (d) 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.

PUBLICARD, INC.
----------------
(Registrant)

Date March 29, 2004 By: /s/ ANTONIO L. DELISE
------------------ ----------------------
Antonio L. DeLise, President,
Chief Executive Officer, Chief
Financial Officer and Director

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.

Date March 29, 2004 By: /s/ ANTONIO L. DELISE
------------------ ----------------------
Antonio L. DeLise, President,
Chief Executive Officer, Chief
Financial Officer and Director

Date March 29, 2004 By: /s/ CLIFFORD B. COHN
------------------ ----------------------
Clifford B. Cohn, Director

Date March 29, 2004 By: /s/ HARRY I. FREUND
------------------ ----------------------
Harry I. Freund, Chairman and
Director

Date March 29, 2004 By: /s/ JAY S. GOLDSMITH
------------------ ----------------------
Jay S. Goldsmith, Vice Chairman
and Director

Date March 29, 2004 By: /s/ L. G. SCHAFRAN
------------------ ----------------------
L. G. Schafran, Director

Date March 29, 2004 By: /s/ EMIL VOGEL
------------------ ----------------------
Emil Vogel, Director

PUBLICARD, INC.
AND SUBSIDIARY COMPANIES

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE

Financial Statements
--------------------

Independent auditors' report--Deloitte & Touche LLP F-2

Report of independent public accountants--Arthur Andersen LLP F-3

Consolidated balance sheets as of December 31, 2003 and 2002 F-4

Consolidated statements of operations for the years ended December 31, 2003,
2002 and 2001 F-5

Consolidated statements of shareholders' equity (deficit) for the years ended
December 31, 2003, 2002 and 2001 F-6

Consolidated statements of cash flows for the years ended
December 31, 2003, 2002 and 2001 F-7

Notes to consolidated financial statements F-8 through F-26

Schedule
--------

Independent auditors' report on schedule--Deloitte & Touche LLP F-27

Report of independent public accountants on schedule--Arthur Andersen LLP F-28

Schedule II - Valuation and qualifying accounts F-29

All other schedules required by Regulation S-X have been omitted because
they are not applicable or because the required information is included in the
financial statements or notes thereto.

F-1

PUBLICARD, INC.
AND SUBSIDIARY COMPANIES

INDEPENDENT AUDITORS' REPORT

To the Board of Directors and Shareholders of
PubliCARD, Inc.
New York, New York

We have audited the accompanying consolidated balance sheets of PubliCARD, Inc.
and subsidiary companies (the "Company") as of December 31, 2003 and 2002, and
the related consolidated statements of operations, shareholders' equity
(deficit), and cash flows for the years then ended. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits. The
financial statements of the Company as of December 31, 2001 and for the year
then ended, before the inclusion of the transitional disclosures relating to
Goodwill and Intangible Assets, as described in Note 1 of the notes to the
consolidated financial statements, were audited by other auditors who have
ceased operations. Those auditors expressed an unqualified opinion on those
financial statements in their report dated March 20, 2002.

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

In our opinion, the 2003 and 2002 consolidated financial statements present
fairly, in all material respects, the financial position of PubliCARD, Inc. and
subsidiary companies as of December 31, 2003 and 2002, and the results of its
operations and its cash flows for the years then ended in conformity with
accounting principles generally accepted in the United States of America.

As discussed above, the consolidated financial statements of PubliCARD, Inc. and
subsidiary companies as of December 31, 2001, and for the year then ended, were
audited by other auditors who have ceased operations. As described in Note 1,
these consolidated financial statements have been revised to include the
transitional disclosures required by SFAS 142, which was adopted by the Company
as of January 1, 2002. Our audit procedures with respect to the disclosures in
Note 1 with respect to 2001 included (1) comparing the previously reported net
loss to the previously issued financial statements and the adjustments to
reported net loss representing amortization expense recognized in those periods
related to goodwill, to the Company's underlying analysis obtained from
management, and (2) testing the mathematical accuracy of the reconciliation of
adjusted net loss to reported net loss and the related loss-per-share amounts.
In our opinion, the disclosures for 2001 in Note 1 are appropriate. However, we
were not engaged to audit, review, or apply any procedures to the 2001
consolidated financial statements of the Company other than with respect to such
disclosures and, accordingly, we do not express an opinion or any other form of
assurance on the 2001 consolidated financial statements taken as a whole.

The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 1 to the
consolidated financial statements, the Company has experienced recurring losses
from operations, a substantial decline in working capital and negative cash
flows from operations, and requires additional capital to meet its obligations,
which raises substantial doubt about its ability to continue as a going concern.
Management's plans concerning these matters are also described in Note 1. The
consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.

/s/ DELOITTE & TOUCHE LLP

New York, New York
March 22, 2004

F-2

PUBLICARD, INC.
AND SUBSIDIARY COMPANIES

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

PubliCARD, Inc. dismissed Arthur Andersen LLP on June 5, 2002, and subsequently
engaged Deloitte & Touche LLP as its independent auditors. The predecessor
auditors' report appearing below is a copy of Arthur Andersen LLP's previously
issued opinion dated March 20, 2002. Since PubliCARD, Inc. is unable to obtain a
manually signed audit report, a copy of Arthur Andersen LLP's most recently
signed and dated report has been included below to satisfy filing requirements,
as permitted under Rule 2-02(e) of Regulation S-X.

To the Shareholders of PubliCARD, Inc.:

We have audited the accompanying consolidated balance sheets of PubliCARD, Inc.
(a Pennsylvania corporation) and subsidiary companies as of December 31, 2001
and 2000, and the related consolidated statements of income (loss),
shareholders' equity and cash flows for each of the three years in the period
ended December 31, 2001. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.

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

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of PubliCARD, Inc. and subsidiary
companies as of December 31, 2001 and 2000, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 2001, in conformity with accounting principles generally accepted in the
United States.

The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has incurred operating losses and requires
additional capital to meet its obligations and accomplish the Company's business
plan, which raises substantial doubt about its ability to continue as a going
concern. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.

/s/ Arthur Andersen LLP

Stamford, Connecticut
March 20, 2002

F-3

PUBLICARD, INC.
AND SUBSIDIARY COMPANIES

CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2003 AND 2002

ASSETS 2003 2002
-------- --------
(in thousands, except share data)
Current assets:

Cash, including short-term investments of $3,501 and
$1,138 in 2003 and 2002, respectively $ 3,580 $ 1,290
Trade receivables, less allowance for doubtful
accounts of $115 and $103 in 2003 and 2002, respectively 1,133 853
Inventories 635 885
Prepaid insurance and other 440 375
-------- --------

Total current assets 5,788 3,403

Equipment and leasehold improvements, net 191 379
Goodwill and intangibles 822 862
Other assets 598 3,295
-------- --------
$ 7,399 $ 7,939
======== ========

LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)

Current liabilities:
Trade accounts payable and overdraft $ 1,569 $ 1,269
Accrued liabilities 5,206 2,682
-------- --------
Total current liabilities 6,775 3,951

Other non-current liabilities 3,552 4,990
-------- --------

Total liabilities 10,327 8,941
-------- --------
Commitments and contingencies (Note 7)

Shareholders' equity (deficit):
Class A Preferred Stock, Second Series, no par value:
1,000 shares authorized; 565 and 765 issued and
outstanding as of December 31, 2003 and 2002, respectively 2,825 3,825

Common shares, $0.10 par value: 40,000,000 shares authorized;
24,690,902 and 24,190,902 shares issued and outstanding as
of December 31, 2003 and 2002, respectively 2,469 2,419
Additional paid-in capital 108,119 107,169
Accumulated deficit (113,617) (112,024)
Other comprehensive loss (2,724) (2,391)
-------- --------
Total shareholders' equity (deficit) (2,928) (1,002)
-------- --------
$ 7,399 $ 7,939
======== ========

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

F-4

PUBLICARD, INC.
AND SUBSIDIARY COMPANIES

CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001

2003 2002 2001
----------- ----------- -----------
(in thousands, except share data)

Revenues $ 4,781 $ 4,605 $ 5,652
----------- ----------- -----------

Cost of sales 2,316 2,455 2,875
Inventory adjustment - - 1,661
----------- ----------- -----------
Gross margin 2,465 2,150 1,116
----------- ----------- -----------

Operating expenses:
General and administrative 2,708 3,235 4,625
Sales and marketing 1,844 1,877 3,413
Product development 584 605 2,442
Stock compensation expense - - 86
Amortization of goodwill and intangibles 40 576 1,824
Impairment of goodwill and intangibles - 1,365 -
Repositioning charge - - 5,656
----------- ----------- -----------
5,176 7,658 18,046
----------- ----------- -----------
Loss from operations (2,711) (5,508) (16,930)
----------- ----------- -----------

Other income (expenses):
Interest income 15 71 476
Interest expense (12) (39) (65)
Cost of retirement benefits - non-operating (903) (795) (788)
Write-down of minority investment (3,000) (2,068) -
Gain on insurance recoveries 4,590 - -
Other income 428 80 136
----------- ----------- -----------
1,118 (2,751) (241)
----------- ----------- -----------
Loss from continuing operations (1,593) (8,259) (17,171)
Income from discontinued operations - 1,066 2,350
----------- ----------- -----------
Net loss $ (1,593) $ (7,193) $ (14,821)
=========== =========== ===========

Basic and diluted earnings (loss) per common share:
Continuing operations $ (.07) $ (.34) $ (.71)
Discontinued operations - .04 .10
----------- ----------- -----------
$ (.07) $ (.30) $ (.61)
=========== =========== ===========

Weighted average common shares outstanding 24,469,748 24,179,364 24,188,325
=========== =========== ===========

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

F-5

PUBLICARD, INC.
AND SUBSIDIARY COMPANIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001

Class A
Preferred Stock Common Shares
--------------- ------------- Additional
Shares Shares Paid-in Accumulated
Issued Amount Issued Amount Capital Deficit
------ ------ ------ ------ ------- -------
(in thousands, except share data)

Balance - January 1, 2001 790 $3,950 24,237,402 $2,424 $ 107,300 $ (90,010)
---------- ---------- ---------- --------- ---------- ----------

Conversion of preferred stock (10) (50) 25,000 2 48 -
-
Private placement costs - - - - (43) -
Repurchase of common shares - - (109,000) (11) (207) -
Amortization of unearned compensation - - - - - -

Comprehensive loss:
Net loss - - - - - (14,821)
Foreign currency
translation adjustment - - - - - -
Minimum pension liability - - - - - -
---------- ---------- ---------- --------- ---------- ----------
Total comprehensive loss

Balance - December 31, 2001 780 3,900 24,153,402 2,415 107,098 (104,831)
---------- ---------- ---------- --------- ---------- ----------

Conversion of preferred stock (15) (75) 37,500 4 71 -

Comprehensive loss:
Net loss - - - - - (7,193)
Foreign currency
translation adjustment - - - - - -
Minimum pension liability - - - - - -
---------- ---------- ---------- --------- ---------- ----------
Total comprehensive loss

Balance - December 31, 2002 765 3,825 24,190,902 2,419 107,169 (112,024)
---------- ---------- ---------- --------- ---------- ----------

Conversion of preferred stock (200) (1,000) 500,000 50 950 -

Comprehensive loss:
Net loss - - - - - (1,593)
Foreign currency translation adjustment - - - - - -
Minimum pension liability - - - - - -
---------- ---------- ---------- --------- ---------- ----------

Total comprehensive loss

Balance - December 31, 2003 565 $2,825 24,690,902 $ 2,469 $ 108,119 $ (113,617)
========== ========== ========== ========= ========== ==========

Share-
Other Unearned holders'
Comprehensive Compensa- Equity
Loss tion (Deficit)
---- ---- ---------

Balance - January 1, 2001 $ - $ (86) $ 23,578

Conversion of preferred stock - - -

Private placement costs - - (43)
Repurchase of common shares - - (218)
Amortization of unearned compensation - 86 86

Comprehensive loss:
Net loss - - (14,821)
Foreign currency
translation adjustment (197) - (197)
Minimum pension liability (901) - (901)
---------- ---------- ----------
Total comprehensive loss (15,919)
----------

Balance - December 31, 2001 (1,098) - 7,484
---------- ---------- ----------

Conversion of preferred stock - - -

Comprehensive loss:
Net loss - - (7,193)
Foreign currency
translation adjustment 112 - 112
Minimum pension liability (1,405) - (1,405)
---------- ---------- ----------
Total comprehensive loss (8,486)
----------

Balance - December 31, 2002 (2,391) - (1,002)
---------- ---------- ----------

Conversion of preferred stock - - -

Comprehensive loss:
Net loss - - (1,593)
Foreign currency translation adjustment 10 - 10
Minimum pension liability (343) - (343)
---------- ---------- ----------

Total comprehensive loss (1,926)
----------

Balance - December 31, 2003 $ (2,724) $ - $ (2,928)
========== ========== ==========

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

F-6

PUBLICARD, INC.
AND SUBSIDIARY COMPANIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
2003 2002 2001
---- ---- ----
(in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:

Net loss $(1,593) $(7,193) $(14,821)
Adjustments to reconcile net loss to net cash
used in operating activities:
Gain from discontinued operations - (1,066) (2,350)
Insurance recoveries (4,590) - -
Write-down of minority investment 3,000 2,068 -
Amortization of goodwill and intangibles 40 576 1,824
Impairment of goodwill and intangibles - 1,365 -
Stock compensation expense - - 86
Depreciation and amortization 153 205 308
Gain on disposal of property and fixed assets (286) - -
Repositioning charge and inventory adjustment - - 7,317
Changes in assets and liabilities:
Trade receivables (239) 686 122
Inventories 281 (248) (830)
Prepaid insurance and other current assets 37 404 (450)
Other assets 293 533 340
Trade accounts payable 258 (27) 15
Accrued liabilities 2,455 (135) (2,227)
Other non-current liabilities (1,999) (2,253) (2,004)
-------- -------- --------
Net cash used in operating activities (2,190) (5,085) (12,670)
-------- -------- --------

CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (11) (28) (83)
Proceeds from insurance recoveries, net of funds held in escrow 4,118 - -
Proceeds from discontinued operations and sale of
property and fixed assets 371 1,865 223
Other (3) 47 6
-------- -------- --------
Net cash provided by investing activities 4,475 1,884 146
-------- -------- --------

CASH FLOWS FROM FINANCING ACTIVITIES:
Private placement of Class A Preferred Stock expenses - - (43)
-------- -------- --------
Net cash used in financing activities - - (43)
-------- -------- --------

Effect of exchange rate changes on cash and cash equivalents 5 12 (3)
-------- -------- --------

Net increase (decrease) in cash 2,290 (3,189) (12,570)
Cash - beginning of period 1,290 4,479 17,049
-------- -------- --------

Cash - end of period $ 3,580 $ 1,290 $ 4,479
======== ======== ========

Cash paid for interest $ 12 $ 81 $ 79
======== ======== ========

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

F-7

PUBLICARD, INC.
AND SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

DESCRIPTION OF THE BUSINESS
PubliCARD, Inc. ("PubliCARD" or the "Company") was incorporated in the
Commonwealth of Pennsylvania in 1913. PubliCARD entered the smart card industry
in early 1998, and began to develop solutions for the conditional access,
security, payment system and data storage needs of industries utilizing smart
card technology. In 1998 and 1999, the Company made a series of acquisitions to
enhance its position in the smart card industry. In March 2000, PubliCARD's
Board of Directors (the "Board"), together with its management team, determined
to integrate its operations and focus on deploying smart card solutions, which
facilitate secure access and transactions. To effect this new business strategy,
in March 2000, the Board adopted a plan of disposition pursuant to which the
Company divested its non-core operations. See Note 9 for a discussion on the
disposition plan.

At present, PubliCARD's sole operating activities are conducted through
its Infineer Ltd. subsidiary ("Infineer"), which designs smart card solutions
for educational and corporate sites. The Company's future plans revolve around a
potential acquisition strategy that would focus on businesses in areas outside
the high technology sector while continuing to support the expansion of the
Infineer business. However, the Company will not be able to implement such plans
unless it is successful in obtaining funding, as to which no assurance can be
given.

LIQUIDITY AND GOING CONCERN CONSIDERATIONS
These consolidated financial statements contemplate the realization of
assets and the satisfaction of liabilities in the normal course of business. The
Company has incurred operating losses, a substantial decline in working capital
and negative cash flow from operations for a number of years. The Company has
also experienced a substantial reduction in its cash and short term investments,
which declined from $17.0 million at December 31, 2000 to $3.6 million at
December 31, 2003. The Company also had a working capital deficiency of $1.0
million and an accumulated deficit of $113.6 million at December 31, 2003.

If the distress termination of the Company's defined benefit pension plan
for which the Company has applied is completed (see Note 5), the Company's 2003
and 2004 funding requirements to the plan could be eliminated, in which case
management believes that existing cash and short term investments may be
sufficient to meet the Company's operating and capital requirements at the
currently anticipated levels through December 31, 2004. However, additional
capital will be necessary in order to operate beyond December 2004 and to fund
the current business plan and other obligations. While the Company is actively
considering various funding alternatives, the Company has not secured or entered
into any arrangements to obtain additional funds. There can be no assurance that
the Company will eliminate the 2003 or 2004 funding requirements for the defined
benefit pension plan or be able to obtain additional funding on acceptable terms
or at all. If the Company cannot raise additional capital to continue its
present level of operations it may not be able to meet its obligations, take
advantage of future acquisition opportunities or further develop or enhance its
product offering, any of which could have a material adverse effect on its
business and results of operations and could lead the Company to seek bankruptcy
protection. These conditions raise substantial doubt about the Company's ability
to continue as a going concern. The consolidated financial statements do not
include any adjustments that might result from the outcome of this uncertainty.

F-8

PUBLICARD, INC.
AND SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of PubliCARD
and its wholly-owned subsidiaries. All intercompany transactions are eliminated
in consolidation.

SHORT-TERM INVESTMENTS
Short-term investments consist of certain liquid instruments with original
maturities of three months or less including U.S. Treasury obligations and money
market funds.

INVENTORIES
Inventories are stated at lower of cost (first-in, first-out method) or
market. The Company periodically evaluates the need to record adjustments for
impairment of inventory. Inventory in excess of the Company's estimated usage
requirements is written down to its estimated net realizable value. Inherent in
the estimates of net realizable value are management's estimates related to the
Company's production schedules, customer demand, possible alternative uses and
the ultimate realization of potentially excess inventory. Inventories at
December 31, 2003 and 2002 consisted of the following (in thousands):

2003 2002
----- -----

Raw materials and supplies $ 444 $ 154
Work-in-process 42 21
Finished goods 149 710
----- -----
$ 635 $ 885
===== =====

DEPRECIATION AND AMORTIZATION
Equipment and leasehold improvements are stated at cost. Improvements and
replacements are capitalized, while expenditures for maintenance and repairs are
charged to expense as incurred. Depreciation for equipment is computed using the
straight-line method over estimated useful lives of three to five years.
Amortization for leasehold improvements is computed using the lesser of the
estimated useful life or the life of the lease. Equipment and leasehold
improvements at December 31, 2003 and 2002 consisted of the following (in
thousands):

2003 2002
---- ----

Equipment, furniture and fixtures $ 1,093 $ 899
Leasehold improvements 224 224
Accumulated depreciation
and amortization (1,126) (744)
------- -------
$ 191 $ 379
======= =======

Depreciation and amortization expense was $153,000, $205,000 and $308,000
in 2003, 2002 and 2001, respectively.

GOODWILL AND INTANGIBLES
Goodwill is the excess of the purchase price and related costs over the
value assigned to the net tangible and intangible assets relating to the
November 1999 acquisition of Infineer. Through December 31, 2001, goodwill had
been amortized over a five year life. Effective January 1, 2002, the Company
adopted Financial Accounting Standards Board ("FASB") Statement of Financial
Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets"
("SFAS No. 142"). In accordance with the guidelines of this statement, goodwill
and indefinite lived intangible assets are no longer amortized but will be
assessed for impairment on at least an annual basis. SFAS No. 142 also requires
that intangible assets with estimable useful lives be amortized over their
respective estimated useful lives and reviewed for impairment. The historical
results of periods prior to 2002 in the Company's Consolidated Statements of
Operations do not reflect the effect of SFAS No. 142 and, accordingly, the 2001
results included goodwill amortization expense of $1.1 million. Excluding
goodwill amortization, the pro forma net loss for 2001 was $13.7 million or $.57
per share.

F-9

PUBLICARD, INC.
AND SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The Company performed an initial review for impairment of goodwill as of
January 1, 2002 and determined that no impairment existed at that date. The
Company determined the fair value of its sole reporting unit primarily using two
approaches: a market approach technique and a discounted cash flow valuation
technique. The market approach relied primarily on the implied fair value using
a multiple of revenues for several entities with comparable operations and
economic characteristics. Significant assumptions used in the discounted cash
valuation included estimates of future cash flows, future short-term and
long-term growth rates and estimated cost of capital for purposes of arriving at
a discount factor.

In performing its annual goodwill impairment test at the end of the fourth
quarter of 2002, the Company determined that goodwill had been impaired. Based
on comparing the values derived from the two techniques described above to the
carrying value of the reporting unit, the Company recorded a goodwill impairment
loss of $364,000 in the fourth quarter of 2002. The Company attributed the
impairment loss to the value of a comparable entity that was sold in a
transaction in late 2002, the significant 2002 operating loss for the reporting
unit and lower forecasted revenue growth due to a continued overall decline in
technology spending and a shortage of capital available to invest in the
reporting unit. The Company performed its annual goodwill impairment test at the
end of the fourth quarter of 2003 and determined that goodwill had not been
impaired. On an ongoing basis, the Company expects to perform its annual
impairment test at the end of the fourth quarter absent any interim impairment
indicators.

The changes in the carrying value of goodwill for the year ended December
31, 2003 and 2002 was as follows (in thousands):
2003 2002
---- ----

Balance, beginning of year $ 782 $1,146
Impairment loss - (364)
------ ------
Balance, end of year $ 782 $ 782
====== ======

Amortization of goodwill for 2001 was $1.1 million. In 2001, the Company
wrote-off $3.3 million of goodwill associated with the July 2001 repositioning
action. See Note 10.

Intangible assets consist of completed technology identified as of the
Infineer acquisition date and are amortized over a five year life. Long-lived
assets and certain identifiable intangible assets to be held and used are
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of such assets may not be recoverable. Determination of
recoverability is based on an estimate of undiscounted future cash flows
resulting from the use of the asset and its eventual disposition. Measurement of
any impairment loss for long-lived assets and certain identifiable intangible
assets that management expects to hold and use is based on the net realizable of
the asset. In the fourth quarter of 2002, the Company determined that its
intangible assets had been impaired and recorded an impairment loss of $1.0
million. The Company attributes the impairment loss to the significant 2002
operating loss for the reporting unit and lower forecasted revenue growth due to
a continued overall decline in technology spending and a shortage of capital
available to invest in the reporting unit. In 2001, the Company wrote-off
$822,000 of intangibles associated with the July 2001 repositioning action. See
Note 10.

F-10

PUBLICARD, INC.
AND SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The gross carrying amount and accumulated amortization of intangible assets
at December 31, 2003 and 2002 consisted of the following (in thousands):

2003 2002
---- ----

Gross carrying amount $ 1,881 $ 1,881
Accumulated amortization (1,841) (1,801)
------- -------
$ 40 $ 80
======= =======

Amortization of intangibles for 2003, 2002 and 2001 was $40,000, $576,000
and $746,000 respectively. The estimated annual amortization expense for
intangibles is $40,000 for 2004.

VALUATION OF INVESTMENTS
The Company periodically assesses the carrying value of its minority-owned
investments for impairment. This assessment is based upon a review of operations
and indications of continued viability, such as subsequent rounds of financing.

REVENUE RECOGNITION AND ACCOUNTS RECEIVABLE
Revenue from product sales and technology and software license fees is
recorded upon shipment if a signed contract exists, the fee is fixed and
determinable, the collection of the resulting receivable is probable and the
Company has no obligation to install the product or solution. If the Company is
responsible for installation, revenue from product sales and license fees is
deferred and recognized upon client acceptance or "go live" date. Maintenance
and support fees are deferred and recognized as revenue ratably over the
contract period. Provisions are recorded for estimated warranty repairs and
returns at the time the products are shipped. Should changes in conditions cause
management to determine that revenue recognition criteria are not met for
certain future transactions, revenue recognized for any reporting period could
be adversely affected.

STOCK-BASED COMPENSATION
SFAS No. 123, "Accounting for Stock-Based Compensation" ("SFAS No. 123"),
requires that an entity account for employee stock-based compensation under a
fair value based method. However, SFAS No. 123 also allows an entity to continue
to measure compensation cost using the intrinsic value method of accounting
prescribed by Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees ("APB No. 25"). The Company continues to account for
employee stock-based compensation using the intrinsic value based method and is
required to make pro forma disclosures of net income (loss) and related per
share amounts as if the fair value based method of accounting under SFAS No. 123
had been applied. Restricted stock or stock awards are recorded as compensation
expense over the vesting period, if any, based on the market value on the date
of grant.

In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation-Transition and Disclosure". SFAS No. 148 amends SFAS No. 123,
"Accounting for Stock-Based Compensation", to provide alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock-based employee compensation. In addition, SFAS No. 148 amends the
disclosure requirements of SFAS No. 123 to require prominent disclosures in both
annual and interim financial statements about the method of accounting for stock
based employee compensation and the effect of the method used on reported
results. The provisions of SFAS No. 148 are effective for financial statements
for fiscal years and interim periods ending after December 15, 2002.

F-11

PUBLICARD, INC.
AND SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The disclosure provisions of SFAS No. 148 have been adopted by the Company (see
below). SFAS No. 148 did not require the Company to change to the fair value
based method of accounting for stock-based compensation.

At December 31, 2003, the Company had four fixed stock-based compensation
plans, which are described more fully in Note 6. The exercise price of each
option granted pursuant to these plans is equal to the market price of the
Company's common stock on the date of grant. Accordingly, pursuant to APB
Opinion No. 25, no compensation cost has been recognized for such grants. Had
compensation cost been determined based on the fair value at the grant dates for
such awards consistent with the method prescribed by SFAS No. 123, the Company's
net loss and loss per share would have been as follows (in thousands, except per
share data):

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

Net loss, as reported $ (1,593) $ (7,193) $ (14,821)
Deduct stock-based compensation expense
determined under fair value based method (490) (172) (1,301)
-------- -------- ---------
Pro forma net loss $ (2,083) $ (7,365) $ (16,122)
======== ======== =========

Basic and diluted loss per share:
As reported $ (.07) $ (.30) $ (.61)
======== ======== ========
Pro forma $ (.09) $ (.30) $ (.67)
======== ======== ========

For purposes of the pro forma disclosure, the fair value of each option
grant is estimated on the date of grant using the Black-Scholes option pricing
model. The weighted average assumptions used to estimate the value of the
options included in the pro forma amounts and the weighted average estimated
fair value of an option granted are as follows:

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

Expected option term (years) 5.0 5.0 7.85
Expected volatility 93.0% 75.0% 85.0%
Risk-free interest rate 3.4% 3.5% 6.2%
Weighted average fair value per option $.05 $.16 $.31

USE OF ESTIMATES
The preparation of these financial statements required the use of certain
estimates by management in determining the Company's assets, liabilities,
revenues and expenses. Certain of our accounting policies require the
application of significant judgment by management in selecting the appropriate
assumptions for calculating financial estimates. By their nature, these
judgments are subject to an inherent degree of uncertainty. The Company
considers certain accounting policies related to revenue recognition, estimates
of reserves for receivables and inventories, valuation of investments, goodwill
and intangibles and pension accounting to be critical policies due to the
estimation processes involved. While all available information has been
considered, actual amounts could differ from those reported.

EARNINGS (LOSS) PER COMMON SHARE
Basic net income (loss) per common share is based on net income divided by
the weighted average number of common shares outstanding during each year.
Diluted net income (loss) per common share assumes issuance of the net
incremental shares from stock options, warrants and convertible preferred stock
at the later of the beginning of the year or date of issuance. Diluted net
income (loss) per share was the same as basic net income (loss) per share in
2003, 2002 and 2001 since the effect of stock options, warrants and convertible
preferred stock were anti-dilutive.

F-12

PUBLICARD, INC.
AND SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOREIGN CURRENCY TRANSLATION
The local currency of the Company's foreign (United Kingdom) subsidiary is
its functional currency. Assets and liabilities of the Company's foreign
subsidiary are translated into U.S. dollars at the current exchange rate.
Statement of operations accounts are translated at the average rate of exchange
prevailing during the year. Translation adjustments arising from the use of
differing exchange rates from period to period are a component of accumulated
comprehensive loss included in stockholders' equity.

CONCENTRATION OF CREDIT RISK
The carrying amount of financial instruments including cash and short-term
investments, accounts receivable and accounts payable approximated fair value as
of December 31, 2003, because of the relatively short maturity of these
instruments. The Company maintains all of its cash and short-term investments
with high-credit quality financial institutions. For the year ended December 31,
2003, no one customer accounted for more than 10% of revenues. Amounts due from
a second customer represented approximately 11% of the accounts receivable
balance as of December 31, 2003.

RESEARCH AND DEVELOPMENT AND SOFTWARE DEVELOPMENT COSTS
Research and development costs are expensed as incurred. In accordance
with SFAS No. 86, "Accounting for the Costs of Computer Software to be Sold,
Leased or Otherwise Marketed", the Company capitalizes eligible computer
software costs upon achievement of technological feasibility subject to net
realizable value considerations. Through December 31, 2003, such costs eligible
for capitalization were insignificant. Accordingly, all such costs have been
charged to product development expenses.

INCOME TAXES
The Company follows SFAS No. 109, "Accounting for Income Taxes" ("SFAS No.
109"). Under the asset and liability method of SFAS No. 109, deferred tax assets
and liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases. Since the Company has no recent
history of profits, management cannot assess the likelihood that the future
benefit of these losses will be recognized. Thus, a full valuation allowance has
been recorded.

RECENT ACCOUNTING PRONOUNCEMENTS
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others". The interpretation addresses the
disclosures to be made by a guarantor in its financial statements about its
obligations under guarantee. In addition, it also clarifies the requirements
related to the recognition of a liability by a guarantor at the inception of a
guarantee for the obligations the guarantor has undertaken in issuing that
guarantee. The initial recognition and measurement provisions of this
interpretation are applicable on a prospective basis to guarantees issued or
modified after December 31, 2002. The disclosure provisions became effective
December 15, 2002. The adoption of the recognition and measurement provisions
did not have a material impact on the Company's Consolidated Financial
Statements.

F-13

PUBLICARD, INC.
AND SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 2 - INVESTMENTS

In December 2000, the Company acquired an ownership interest in TecSec,
Incorporated, a Virginia corporation ("TecSec"), for $5.1 million. TecSec
develops and markets encryption products and solutions, which are designed to
enable the next generation information security for the enterprise,
multi-enterprise e-business and other markets. The TecSec investment, amounting
to a 5% ownership interest on a fully diluted basis, has been accounted for at
cost. The Company has certain anti-dilutive rights whereby its ownership
interest may be increased following contributions of additional third-party
capital. In the third quarter of 2002, the Company determined that the
investment in TecSec had been impaired and recorded a charge of $2.1 million.
The Company attributed the impairment to a general decline in valuations of
technology entities, the difficulties in raising capital and TecSec's recurring
operating losses. In the fourth quarter of 2003, the Company determined that the
investment had been further impaired and recorded a charge of $3.0 million. The
Company attributed this further impairment to the delay in anticipated
government sector awards involving information security technology and TecSec's
ongoing operating losses and liquidity issues. The impairment charges are
included in "Other expense (income)". TecSec is currently evaluating alternative
sources of financing to meet ongoing capital and operating needs including
possible technology license and equity investment transactions, although there
is no assurance that it will be able to obtain financing or continue in
operations. Future recoveries, if any, from the Company's ownership interest in
TecSec will be recorded as income upon receipt.

F-14

PUBLICARD, INC.
AND SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

In conjunction with the decision to exit the smart card reader and chip
business, in September 2001, the Company formed a new minority-owned affiliate,
Mako Technologies LLC ("Mako"), to market its smart card reader and chip
technologies. The Company contributed certain inventories and equipment valued
at $238,000, in exchange for a 31% fully diluted ownership interest in Mako. The
Company also granted a license of its reader and chip technology to Mako in
exchange for royalties based on sales over the next two years. After reducing
headcount and reassessing business potential, a decision was made in April 2002
to liquidate Mako and terminate the license agreement. Pending the final
wind-down of this venture, the Company wrote-off the entire investment in Mako
in 2002. During 2002, the Company also realized proceeds of $224,000 from the
sale of smart card reader and chip inventory, which had been previously
written-off. The Mako write-off and inventory proceeds are reflected in "Other
(expense) income".

NOTE 3 - SHAREHOLDERS' EQUITY

On December 6, 2000, the Company completed the private placement of
525,000 shares of common stock and 790 shares of Class A Preferred Stock, Second
Series ("Class A Preferred Stock"), a newly designated series of convertible
preferred stock, resulting in aggregate proceeds of $5.0 million to PubliCARD.
The securities were sold to institutional investors and other accredited
investors in the U.S. and Europe. Each share of Class A Preferred Stock is
convertible into 2,500 shares of common stock. Therefore, the shares of common
stock issued plus the shares of common stock issuable upon conversion of the
Class A Preferred Stock aggregate 2.5 million common shares. The proceeds from
the private placement were used to acquire the ownership interest in TecSec. In
2001, 2002 and 2003, 10 shares, 15 shares and 200 shares of Class A Preferred
Stock were converted into 25,000 shares, 37,500 shares and 500,000 shares,
respectively, of PubliCARD's common stock.

In connection with the December 2000 private placement, the Company issued
100 rights equally to the participants in the private placement. These rights
entitle the participating holders of common stock and Class A Preferred stock to
receive an aggregate of ten percent of any increase in value of the TecSec
investment realized by the Company. The Company performed an internal valuation
of the participation rights and concluded their value on the issuance date to be
de minimus.

In June 2001, the Company repurchased 109,000 shares of common stock
pursuant to an incentive award agreement related to the disposition of certain
assets.

On August 9, 1988, the Company declared a dividend of one right ("Right")
for each outstanding share of its common stock. Each Right entitles the holder
to purchase one one-hundredth of a share of a new series of Class A Preferred
Stock, First Series, at an exercise price of $7.50, subject to adjustment to
prevent dilution. The Rights become exercisable 10 days after a person or group
acquires 20% or more of the Company's common stock or announces a tender or
exchange offer for 30% or more of the Company's common stock. If, after the
Rights become exercisable, the Company is party to a merger or similar business
combination transaction, each Right not held by a party to such transaction may
be used to purchase common stock having a market value of two times the exercise
price. The Rights, which have no voting power, may be redeemed by the Company at
$.01 per Right. In July 1998, the Company's Board of Directors approved the
extension of the rights plan to August 8, 2008.

F-15

PUBLICARD, INC.
AND SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 4 - INCOME TAXES

The loss from continuing operations before income taxes consisted of the
following (in thousands):

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

United States $ (508) $(4,686) $(14,477)
Foreign (1,085) (3,573) (2,694)
------- ------- --------
$(1,593) $(8,259) $(17,171)
======= ======= ========

A reconciliation of taxes computed at the U.S. Federal statutory tax rate
to income tax expense for continuing operations follows (in thousands):

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

Federal taxes, at statutory rate $ (558) $(2,890) $ (6,010)
Effect of domestic and foreign losses
with no tax benefit 543 2,204 4,235
Amortization of goodwill and
intangibles and other
non-deductible expenses 15 686 1,775
------- ------- --------
Income tax expense $ - $ - $ -
======= ======= ========

The components of net deferred taxes are as follows (in thousands):

2003 2002
---- ----

Net operating loss carryforward $24,583 $23,495
Pension expense 1,417 1,155
TecSec investment - 724
Other, net (26) 161
------- -------
25,974 25,535
Less valuation allowance (25,974) (25,535)
------- -------
Net deferred taxes $ - $ -
======= =======

As of December 31, 2003, approximately $66.8 million of U.S. tax loss
carryforwards (subject to review by the Internal Revenue Service), expiring from
2005 through 2023, were available to offset future taxable income. The
carryforwards expire as follows (in thousands):

YEAR ENDING
DECEMBER 31, AMOUNT

2005 $ 6,700
2006 2,400
2007 4,300
2008 5,000
2009 2,300
2010 - 2023 46,100
--------
$ 66,800
========

F-16

PUBLICARD, INC.
AND SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Due to the "change of ownership" provisions of the Internal Revenue Code
of 1986, the availability of net operating loss carryforwards to offset federal
taxable income in future periods could be subject to an annual limitation if a
change in ownership for income tax purposes occurs. If such change in ownership
were to occur, management estimates that virtually all of the available net
operating loss carryforwards would be unavailable to reduce its income tax
liability. Furthermore, the extent of the actual future use of the net operating
loss carryforwards is subject to inherent uncertainty, because it depends on the
amount of otherwise taxable income the Company may earn. No assurance can be
given that the Company will have sufficient taxable income in future years, if
any, to use the net operating losses before they would otherwise expire.

At December 31, 2003, the Company's foreign subsidiary had a net operating
loss carryforward for income tax purposes of approximately $4.0 million. The
operating loss carryforward has no expiration period. For financial reporting
purposes, a valuation allowance of $1.2 million has been recognized to offset
the deferred tax asset relating to this carryforward.

NOTE 5 - EMPLOYEE BENEFITS

The Company maintains a 401(k) plan for its U.S. employees. The assets of
the Company's 401(k) plan are held by an outside fund manager and are invested
in accordance with the instructions of the individual plan participants. The
Company's matching contributions totaled $9,000, $14,000 and $68,000 in 2003,
2002 and 2001, respectively.

The Company sponsors a defined benefit pension plan (the "Plan").
Participants ceased accruing benefits under the Plan effective December 31,
1993. Information regarding the Plan, measured as of December 31, 2003 and 2002,
is as follows (in thousands):

2003 2002
---- ----
Change in benefit obligation:
Benefit obligation at beginning of year $ 9,354 $ 9,063
Interest cost 531 611
Benefit payments (916) (953)
Actuarial (gain) or loss 778 633
---------- ----------
Benefit obligation at end of year 9,747 9,354
---------- ----------

Change in plan assets:
Fair value of plan assets at beginning of year 3,210 3,601
Actual return on plan assets 542 (502)
Employer contributions - 1,064
Benefit payments and plan expenses (947) (953)
---------- ----------
Fair value of plan assets at end of year 2,805 3,210
---------- ----------

Funded status (6,942) (6,144)
Unrecognized transition obligation - 293
Unrecognized prior service cost 2 2
Unrecognized net loss 2,649 2,306
---------- ----------
$ (4,291) $ (3,543)
========== ==========

Amounts recognized in statement of financial position consist of:

Accrued benefit liability $ (6,942) $ (6,144)
Intangible asset 2 295
Accumulated comprehensive loss 2,649 2,306
---------- ----------
Net amount recognized $ (4,291) $ (3,543)
========== ==========

F-17

PUBLICARD, INC.
AND SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Cost of retirement benefits - non-operating of $903,000, $795,000 and
$788,000 in 2003, 2002 and 2001, respectively, includes the net periodic pension
cost and other Plan related expenses. The components of the net periodic pension
cost were as follows (in thousands):

2003 2002 2001
--------- --------- ---------
Interest cost $ 531 $ 611 $ 648
Expected return on plan assets (162) (268) (317)
Amortization of transition obligation 293 293 293
Amortization of net (gain) loss 86 - -
--------- --------- ---------
Net periodic pension cost $ 748 $ 636 $ 624
========= ========= =========

The increase in the minimum liability included in other comprehensive
income was as follows (in thousands):

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

Other comprehensive income $ 343 $ 1,405 $ 901

The assumptions used to determine the net periodic pension cost for the
years ending December 31, 2003, 2002 and 2001 and the benefit obligation as of
December 31, 2003 and 2002 were are follows:

NET PERIODIC PENSION COST BENEFIT OBLIGATION
--------------------------- ------------------
2003 2002 2001 2003 2002
---- ---- ---- ---- ----

Discount rate 6.0% 7.25% 7.5% 5.0% 6.0%
Long-term rate of return 6.0% 8.0% 8.0% N/A N/A

As discussed below, Company filed a notice with the Pension Benefit
Guaranty Corporation ("PBGC") seeking a "distress termination" of the Plan. The
discount rate and long-term rate of return assumptions were decreased in 2003 to
reflect the Plan's short time horizon due to the pending termination request.

The Plan's asset allocation at December 31, 2003 and 2002, by asset
category was as follows:

2003 2002
---- ----

Equity securities 64% 60%
Government bonds 23% 23%
Corporate bonds 4% 7%
Money market and accrued income 9% 10%
---- ----
100% 100%
==== ====

The investment objectives of the Plan is to diversify assets in order to
reduce the risk of wide swings in market value from year-to-year, to provide
asset growth at a rate in excess of the rate of inflation and to achieve a
positive rate of return over the long term that significantly contributes to
meeting the Plan's obligations. The target asset mix guidelines are as follows:

ASSET CLASS MINIMUM TARGET MAXIMUM
----------- ------- ------ -------
Equity securities 40% 60% 80%
Investment grade debt securities 30% 40% 50%
Cash and cash equivalents 0% 0% 10%

F-18

PUBLICARD, INC.
AND SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Equity securities include PubliCARD common stock in the amount of
approximately $9,000 and $26,000 at December 31, 2003 and 2002, respectively
(less than 1% of total plan assets).

Prior to 2003, the Company's funding policy had been to contribute amounts
sufficient to meet the minimum funding requirements as set forth in employee
benefit and tax laws. Contributions to the Plan were $1.1 million in each year
for 2002 and 2001.

In January 2003, the Company filed a notice with the PBGC seeking a
"distress termination" of the Plan. If the PBGC determines that the Company
meets one of the tests for such a termination, the Plan will terminate and the
PBGC will become responsible for meeting future retirement obligations of
participants (within certain limitations). The Company would be liable to the
PBGC for the amount of the unfunded guaranteed benefit obligation. The Company
believes that on a termination basis, the Plan's liabilities could exceed the
value of its assets by in excess of $7.0 million. In addition, the Company did
not make the required quarterly contributions during 2003 which aggregate to
approximately $1.4 million. The Company has initiated discussions with the PBGC
concerning the termination of the Plan and its obligation to the PBGC if the
Plan is terminated (including the timing of its repayment obligation). If the
Plan is not terminated, the Company would be obligated to make minimum
contributions of approximately $3.9 million in 2004, which includes the 2003
funding deficiency. It is not possible to predict the outcome of such
discussions.

NOTE 6 - STOCK OPTIONS AND WARRANTS

The Company has issued stock options pursuant to four fixed stock-based
compensation plans, made special stock option awards to certain directors,
consultants and employees and also issued common stock purchase warrants in
connection with certain subordinated notes. A summary of shares purchasable upon
the exercise of stock options and common stock purchase warrants as of December
31, 2003, 2002 and 2001 are as follows:

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

Fixed stock-based compensation plans 2,292,975 2,939,175 4,608,450
Special stock options 352,000 363,960 535,011
Common stock purchase warrants - - 1,523,573
--------- --------- ---------
2,644,975 3,303,135 6,667,034
========= ========= ==========

In February 2001, the Company concluded a stock option re-pricing program
whereby a total of approximately 3.3 million stock options were cancelled.
Pursuant to the program, employees and directors voluntarily elected to cancel
stock options held with an exercise price that exceeded $4.81 per share. In
return, the Company granted a total of approximately 3.1 million replacement
stock options on August 20, 2001. The replacement stock options, which were
granted under the Company's fixed stock-based compensation plans, generally
contain the same terms and conditions of the cancelled stock options and have an
exercise price of $.39 per share, the closing price of the Company's common
stock on August 20, 2001.

FIXED STOCK-BASED COMPENSATION PLANS
The Company has four stock-based compensation plans that provide for the
granting of incentive and non-qualified stock options, restricted stock, stock
appreciation rights, performance awards and other stock-based awards to
employees, non-employee directors and consultants. Under these plans adopted by
shareholders of the Company, the Company may grant up to 7,300,000 shares of
common stock. The plans are administered by either the Board of Directors of the
Company or the Compensation Committee of the Board of Directors. The exercise
price of each option granted was equal to the market price of the Company's
common stock on the date of grant. Stock options granted to non-employee
directors expire five years from the date of grant and vest immediately. Stock
options granted to employees generally expire five or ten years from the date of
grant. Prior to 1999, stock options granted to employees vested immediately.
Grants subsequent to 1998 generally vest over three or four years. As of
December 31, 2003, there were 2,018,025 shares available for grant under the
fixed stock-based compensation plans.

F-19

PUBLICARD, INC.
AND SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

A summary of the stock options issued pursuant to the fixed stock-based
compensation plans as of December 31, 2003, 2002 and 2001 and changes during the
years then ended is presented below:

2003 2002 2001
-------------------- ---------------------- ----------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
------ -------- ------ -------- ------ --------

Balance at January 1 2,939,175 $1.01 4,608,450 $1.07 3,543,750 $4.63
Granted 90,000 .07 90,000 .25 4,171,400 .69
Exercised - - - - - -
Canceled (736,200) 1.58 (1,759,275) 1.13 (3,106,700) 4.63
--------- --------- ---------
Balance at December 31 2,292,975 .79 2,939,175 1.01 4,608,450 1.07
========= ========= =========

A summary of the Company's stock options outstanding and exercisable
issued pursuant to the fixed stock-based compensation plans as of December 31,
2003, is as follows:

OUTSTANDING EXERCISABLE
----------------------------------------- -----------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
RANGE OF CONTRACTUAL EXERCISE EXERCISE
EXERCISE PRICE SHARES LIFE PRICE SHARES PRICE
-------------- ---------- ----------- ----------- ---------- --------

$.07 90,000 4.6 $.07 90,000 $.07
$.25 to $.40 1,970,600 5.4 .38 1,735,500 .38
$2.06 to $4.00 142,375 1.6 2.99 129,344 3.06
$6.875 90,000 .6 6.88 90,000 6.88
---------- ----------
$.07 to $6.875 (all options) 2,292,975 4.9 .79 2,044,844 .82
========== ==========

SPECIAL STOCK OPTIONS AND STOCK AWARDS
The Company has issued special stock options outside of the fixed stock
option plans. As of December 31, 2003, there are a total of 352,000 special
stock options outstanding. All of such options are currently exercisable. No
special stock options were granted or exercised in 2003, 2002 or 2001.

In connection with the Company's business acquisitions in 1998 and 1999,
the Company granted options to purchase shares of common stock to certain
employees and owners of the acquired businesses. As of December 31, 2003, a
total of 192,000 options granted outside of the fixed stock option plans
remained outstanding with an exercise price of $9.75 per share. These options
expire in February 2004.

In January 1996, the Company issued options to two members of the
Company's Board of Directors to purchase 200,000 shares of the Company's common
stock at a price of $2.50 per share for five years. In 2000, a total of 40,000
options were exercised. The expiration date of the remaining 160,000 options was
subsequently extended by five years to January 2006.

COMMON STOCK PURCHASE WARRANTS
In December 1986, the Company issued $30 million of 13% Subordinated Notes
together with detachable warrants and underwriter's warrants to purchase a total
of 4,800,000 shares of the Company's common stock for five years, which period
was subsequently extended by five years. In 1997, the shareholders of the
Company approved an additional five-year extension and certain modifications to
the warrants. On July 2, 2002, the remaining warrants, entitling the warrant
holders to purchase 1,523,573 shares of common stock, expired.

F-20

PUBLICARD, INC.
AND SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 7 - COMMITMENTS AND CONTINGENCIES

LEASES
The Company leases certain office space, vehicles and office equipment
under operating leases that expire over the next five years. Certain of these
operating leases provide the Company with the option, after the initial lease
term, to either purchase the property or renew the lease. Total rent expense for
all operating leases amounted to approximately $241,000 in 2003, $221,000 in
2002 and $481,000 in 2001.

Minimum payments for operating leases having initial or remaining
non-cancelable terms in excess of one year are as follows (in thousands):
MINIMUM
YEAR ENDING LEASE SUBLEASE
DECEMBER 31, PAYMENTS INCOME NET
------------ -------- -------- -------
2004 $ 356 $ 116 $ 240
2005 332 114 218
2006 299 114 185
2007 137 37 100
2008 40 - 40
Remainder - - -
------- ------- -------
Total minimum lease payments $ 1,164 $ 381 $ 783
======= ======= =======

Balfour Investors Inc. ("Balfour") occupies a portion of the office space
leased by the Company in New York City. The Chairman and Vice Chairman of the
Company's Board of Directors are the only shareholders of Balfour. Balfour pays
to the Company 50% of the rent and occupancy costs paid by the Company under its
lease, including base rent, electricity, water, real estate tax escalations and
operation and maintenance escalations. The base rent payable by Balfour is
approximately $11,000 per month.

ENVIRONMENTAL
In April 1996, a consent decree (the "Consent Decree") among the Company,
the United States Environmental Protection Agency ("EPA") and the Pennsylvania
Department of Environmental Protection ("PADEP") was entered by the court which
resolved all of the United States' and PADEP's claims against the Company for
recovery of costs incurred in responding to releases of hazardous substances at
a facility in Philadelphia previously owned and operated by the Company.
Pursuant to the Consent Decree, the Company was obligated to pay a total of
$14.4 million plus interest to the United States and the Commonwealth of
Pennsylvania. In January 2002, the Company and the EPA reached an agreement to
extend the due date on the remaining unpaid balance through April 2004. In
return, the EPA was granted a security interest in certain assets held in escrow
("Greenwald Escrow").

As discussed in Note 9, in September 2002, the Company reached an
agreement pursuant to which the Greenwald Escrow was terminated and net proceeds
of approximately $1.3 million were disbursed to the Company. Upon termination of
the Greenwald Escrow in October 2002, the Company satisfied the remaining
obligation to the EPA amounting to $806,000, which included accrued interest.

GRANTS AND BANK FINANCING
The Company has received grants from several government agencies in the
United Kingdom. These grants have been used for marketing, research and
development and other governmental business incentives such as general
employment. Such grants require the Company to maintain certain levels of
operations and employment in Northern Ireland. As of December 31, 2003, the
Company has a contingent liability to repay, in whole or part, grants received
of approximately $535,000 in the event the Company becomes insolvent or
otherwise violates the terms of such grants. As of December 31, 2003, the
Company is in compliance with the terms of the grants.

F-21

PUBLICARD, INC.
AND SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Infineer has an overdraft facility with a bank in Northern Ireland, which
allows for the maximum borrowing of 240,000 British pounds. This facility is
secured by all of Infineer's assets and bears an interest rate at the bank's
base rate plus 2% (approximately 5.75% at December 31, 2003). As of December 31,
2003, Infineer had borrowings outstanding under this facility totaling 153,000
British pounds (or the equivalent of $271,000).

LEGAL
On May 28, 2002, a lawsuit was filed against the Company in the Superior
Court of the State of California, in the County of Los Angeles by Leonard M.
Ross and affiliated entities alleging, among other things, misrepresentation and
securities fraud. The lawsuit names the Company and four of its current and
former executive officers and directors as the defendants. The plaintiffs seek
monetary and punitive damages for alleged actions made by the defendants in
order to induce the plaintiff to purchase, hold or refrain from selling
PubliCARD common stock. The plaintiffs allege that the defendants made a series
of material misrepresentations, misleading statements, omissions and
concealments, specifically and directly to the plaintiffs concerning the nature,
existence and status of contracts with certain purchasers, the nature and
existence of investments in the Company by third parties, the nature and
existence of business relationships and investments by the Company. The Company
believes it has meritorious defenses to the allegations and intends to defend
vigorously.

Various other legal proceedings are pending against the Company. The
Company considers all such other proceedings to be ordinary litigation incident
to the character of its businesses. Certain claims are covered by liability
insurance. The Company believes that the resolution of those claims, to the
extent not covered by insurance, will not, individually or in the aggregate,
have a material adverse effect on the financial position or results of
operations of the Company.

CHANGE OF CONTROL AGREEMENTS
The Company is a party to change of control agreements, which provide for
payments to certain directors and executive officers under certain circumstances
following a change of control. Since the change of control agreements require
large cash payments to be made by any person effecting a change of control,
these agreements may discourage takeover attempts. The change of control
agreements provide that, if the services of any person party to a change of
control agreement are terminated within three years following a change of
control, that individual will be entitled to receive, in a lump sum within 10
days of the termination date, a payment equal to 2.99 times that individual's
average annual compensation for the shorter of the five years preceding the
change of control and the period the individual received compensation from us
for personal services. Assuming a change of control were to occur at the present
time, payments of $738,000 each would be made to the Company's Chairman and Vice
Chairman. If any such payment, either alone or together with others made in
connection with the individual's termination, is considered to be an excess
parachute payment under the Internal Revenue Code, the individual will be
entitled to receive an additional payment in an amount which, when added to the
initial payment, would result in a net benefit to the individual, after giving
effect to excise taxes imposed by Section 4999 of the Internal Revenue Code and
income taxes on such additional payment, equal to the initial payment before
such additional payment and the Company would not be able to deduct these
initial or additional payments for income tax purposes.

F-22

PUBLICARD, INC.
AND SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

INSURANCE AND OTHER RECOVERIES
During 2003, the Company entered into three binding settlements with
various historical insurers that resolved certain claims (including certain
future claims) under policies of insurance issued to the Company by those
insurers. As a result of the settlements, after allowance for associated
expenses, offsetting adjustments and amounts held in escrow, the Company
received net proceeds of approximately $4.1 million in 2003. Pursuant to one of
the settlements, an additional net amount of approximately $470,000 will be held
in escrow for up to three years. The Company recognized a gain from these
settlements of approximately $4.6 million in 2003. See Note 13 for a discussion
regarding an additional insurance recovery agreement reached subsequent to
December 31, 2003.

The Company is also in discussions with other insurance markets regarding
the status of certain policies of insurance. It cannot be determined whether any
additional amounts may be recovered from these other insurers nor can the timing
of any such additional recoveries be determined.

In October 2003, the Company sold a parcel of land in Louisiana resulting
in net proceeds of approximately $370,000. The Company recognized a gain of
approximately $330,000 in 2003 relating to the land sale which is included in
"Other (expense) income".

NOTE 8 - SEGMENT DATA

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

United States $ 869 $1,029 $1,727
Europe 3,467 3,445 3,671
Rest of world 445 131 254
------ ------ ------
$4,781 $4,605 $5,652
====== ====== ======

The Company has operations in the United States and United Kingdom.
Identifiable tangible assets by country as of December 31, 2003 and 2002 are as
follows (in thousands):

2003 2002
---- ----

United States $4,542 $4,842
United Kingdom 2,035 2,235
------ ------
$6,577 $7,077
====== ======

NOTE 9 - DISCONTINUED OPERATIONS

In March 2000, the Company's Board adopted a plan to dispose of the
operations of the Company's Greenwald Industries Inc. ("Greenwald"), Greenwald
Intellicard, Inc ("Greenwald Intellicard"), Greystone Peripherals, Inc
("Greystone") and Amazing Smart Card Technologies, Inc ("Amazing") subsidiaries.
These subsidiaries designed, manufactured and distributed mechanical and smart
card laundry solutions, hard disk duplicators and smart cards. In the fourth
quarter of 1999, the Company recorded a loss of $2.0 million related to the
disposition plan, net of the expected gain on the disposition of these
businesses. The loss provision was based on estimates of the proceeds expected
to be realized on the dispositions and the results of operations through the
disposition or wind-down dates.

F-23

PUBLICARD, INC.
AND SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

On June 29, 2000, the Company completed the sale of substantially all of
the assets of Greenwald and Greenwald Intellicard to The Eastern Company
("Eastern") for $22.5 million in cash, less $1.75 million held in escrow to
secure the payment of certain indemnification obligations. As part of the
transaction, Eastern assumed certain liabilities of Greenwald and Greenwald
Intellicard, including certain contractual liabilities, accounts payable and
accrued liabilities. In the third quarter of 2000, the Company recognized a gain
of $4.3 million principally related to the sale of Greenwald and Greenwald
Intellicard.

In the second quarter of 2001, the Company revised its estimates of
proceeds and expenses associated with the wind-down of Amazing and Greystone and
recognized a gain of $2.4 million, which had been previously deferred pending
resolution of certain contingencies.

On September 30, 2002, the Company reached an agreement ("Escrow
Termination Agreement") pursuant to which the Greenwald Escrow was terminated
and net proceeds of approximately $1.3 million were disbursed to the Company.
Pursuant to the Escrow Termination Agreement, Eastern acknowledged that there
were no indemnification claims outstanding under the applicable asset purchase
agreement. A gain of $1.1 million was recognized in the third quarter of 2002,
principally relating to the release of reserves upon the resolution of the
Greenwald Escrow. The amounts the Company will ultimately realize from its
discontinued operations could differ from the amounts estimated and could
therefore result in additional charges or gains in future periods. The results
of the operations of Greenwald, Greenwald Intellicard, Amazing and Greystone
have been reflected as discontinued operations.

NOTE 10 - REPOSITIONING CHARGE

As discussed in Note 1, in July 2001, after evaluating the timing of
potential future revenues, PubliCARD's Board decided to shift the Company's
strategic focus. The Company recorded a charge aggregating $7.3 million in the
second and third quarters of 2001 associated with the departure from the smart
card reader and chip business. The charge consisted of write-offs of goodwill
and intangibles of $4.1 million and fixed assets of $554,000, an inventory
realizability adjustment of $1.7 million (included in cost of sales) as a result
of the business closure, and severance and other costs of $1.0 million
principally related to the termination of 36 employees. The repositioning
activities were substantially completed by December 31, 2001.

NOTE 11 - SUPPLEMENTAL INFORMATION

Other assets as of December 31, 2003 and 2002 consisted of the following
(in thousands):

2003 2002
---- ----

Investment in minority owned affiliates $ - $ 3,000
Escrow deposit - non current 596 -
Intangible pension asset 2 295
------ -------
$ 598 $ 3,295
====== =======

Accrued liabilities as of December 31, 2003 and 2002 consisted of the
following (in thousands):

2003 2002
---- ----

Pension liability $ 3,866 $ 1,505
Payroll and other employee benefits 260 292
Deferred revenue 585 402
Other 495 483
------- -------
$ 5,206 $ 2,682
======= =======

F-24

PUBLICARD, INC.
AND SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Other non-current liabilities as of December 31, 2003 and 2002 consisted
of the following (in thousands):

2003 2002
---- ----

Pension liability and other retiree benefits $ 3,256 $ 4,872
Other 296 118
------- -------
$ 3,552 $ 4,990
======= =======

The components of other comprehensive loss as of December 31, 2003 and
2002 consisted of the following (in thousands):

2003 2002
---- ----

Foreign currency translation adjustment $ 75 $ 85
Minimum pension liability 2,649 2,306
------- -------
$ 2,724 $ 2,391
======= =======

Comprehensive loss for the Company includes foreign currency translation
adjustments and minimum pension liability, as well as net loss reported in the
Company's Statements of Operations. Comprehensive loss for years ended December
31, 2003, 2002 and 2001 was as follows (in thousands):

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

Net loss $(1,593) $(7,193) $(14,821)
Minimum pension liability (343) (1,405) (901)
Foreign currency translation adjustments 10 112 (197)
------- ------- --------

Comprehensive loss $(1,926) $(8,486) $(15,919)
======= ======= ========

NOTE 12 - SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)

The unaudited consolidated financial statements for each of the quarterly
periods in the years ended December 31, 2003 and 2002 are as follows (in
thousands, except per share data):

MAR. 31 JUN. 30 SEP. 30 DEC. 31
------- ------- ------- -------
2003

Net sales $ 1,413 $ 1,193 $ 1,417 $ 758
Gross margin 794 581 772 318
Net income (loss) 1,000 (929) (749) (915)
Basic and diluted earnings (loss) per share $ .04 $ (.04) $ (.03) $ (.04)

2002
Net sales $ 1,199 $ 1,016 $ 1,298 $ 1,092
Gross margin 563 496 650 441
Loss from continuing operations (1,269) (1,227) (3,409) (2,354)
Income from discontinued operations - - 1,066 -
Net loss (1,269) (1,227) (2,343) (2,354)
Basic and diluted earnings (loss) per share
Continuing operations $ (.05) $ (.05) $ (.14) $ (.10)
Discontinued operations - - .04 -
-------- ------- ------- -------
$ (.05) $ (.05) $ (.10) $ (.10)
======== ======= ======= =======

F-25

PUBLICARD, INC.
AND SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 13 - SUBSEQUENT EVENT

In February 2004, the Company entered into a binding agreement to assign
to a third party certain insurance claims against a group of historic insurers.
The claims involve several historic general liability policies of insurance
issued to the Company. As a result of the settlement, after allowance for
associated expenses and offsetting adjustments, the Company expects to receive
net proceeds of approximately $475,000 by April 19, 2004.

F-26

PUBLICARD, INC.
AND SUBSIDIARY COMPANIES

INDEPENDENT AUDITORS' REPORT ON SCHEDULE II

To the Board of Directors and Shareholders of
PubliCARD, Inc.
New York, New York

We have audited the consolidated financial statements of PubliCARD, Inc. and
subsidiary companies (the "Company") as of and for the years ended December 31,
2003 and 2002, and have issued our report thereon dated March 22, 2004 (which
report expresses an unqualified opinion and includes explanatory paragraphs
relating to the Company's ability to continue as a going concern and the
application of procedures performed in regards to certain disclosures in the
2001 financial statements that were audited by other auditors who have ceased
operations and for which we have expressed no opinion or other form of assurance
other than with respect to such disclosures). Our audits also included the
consolidated financial statement schedule of the Company as of and for the years
ended December 31, 2003 and 2002 listed in Item 15. This consolidated financial
statement schedule is the responsibility of the Company's management. Our
responsibility is to express an opinion based on our audits. In our opinion,
such consolidated financial statement schedule, when considered in relation to
the basic 2003 consolidated financial statements taken as a whole, present
fairly in all material respects the information set forth therein. The
consolidated financial statements and consolidated financial statement schedule
of the Company as of December 31, 2001 and for the year ended December 31, 2001
were audited by other auditors who have ceased operations. Those other auditors
expressed an unqualified opinion on those consolidated financial statements and
consolidated financial statement schedule in their report dated March 20, 2002.

The aforementioned financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
consolidated financial statements, the Company has experienced recurring losses
from operations, a substantial decline in working capital and negative cash
flows from operations, and requires additional capital to meet its obligations,
which raises substantial doubt about its ability to continue as a going concern.
The consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.

/s/ DELOITTE & TOUCHE LLP

New York, New York
March 22, 2004

F-27

PUBLICARD, INC.
AND SUBSIDIARY COMPANIES

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULE

To the Shareholders of PubliCARD, Inc.:

We have audited in accordance with generally accepted auditing standards, the
consolidated financial statements of PubliCARD, Inc. and subsidiary companies
included in this Form 10-K and have issued our report thereon dated March 20,
2002. Our audits were made for the purpose of forming an opinion on those
statements taken as a whole. The schedule listed in the index to consolidated
financial statements and schedule is the responsibility of the Company's
management and is presented for purposes of complying with the Securities and
Exchange Commission's rules and is not part of the basic consolidated financial
statements. This schedule has been subjected to the auditing procedures applied
in the audits of basic consolidated financial statements and, in our opinion, is
fairly stated in all material respects in relation to the basic consolidated
financial statements taken as a whole.

The aforementioned financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has incurred operating losses and requires
additional capital to meet its obligations and accomplish the Company's business
plan, which raises substantial doubt about its ability to continue as a going
concern. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.

/s/ Arthur Andersen LLP

Stamford, Connecticut
March 20, 2002

F-28

PUBLICARD, INC.
AND SUBSIDIARY COMPANIES

SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001

Additions
---------------------
Charged to
Balance Costs and Balance
January 1 Expenses Other(1) Deductions (2) December 31
--------- -------- -------- -------------- -----------
(in thousand of dollars)

Year ended December 31, 2003:
Allowance for doubtful accounts 103 5 7 - 115

Reserve for discontinued operations 429 - - (23) 406

Year ended December 31, 2002:
Allowance for doubtful accounts 216 - - (113) 103

Reserve for discontinued operations 1,245 (457) - (359) 429

Year ended December 31, 2001:
Allowance for doubtful accounts 89 31 158 (62) 216

Reserve for discontinued operations 3,913 (2,350) - (318) 1,245

(1) Other changes for the allowance for doubtful accounts in 2001 represents
reclassifications of previous year receivable reserves included in other
operating accounts.

(2) Deductions for allowance for doubtful accounts represent the write-offs of
account receivable. Deductions for discontinued operations represent charges and
payments to reserves net of gains and receipts credited to reserves.

F-29