**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, 2005**




**OR**





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


For
      the transition period from ____ to
      ____.




**Commission
      file number 0-29794**




**PUBLICARD,
      INC.**


(Exact
      Name of Registrant as Specified in Its Charter)





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





**One
                Rockefeller Plaza, 14th 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 if the registrant is a well-known seasoned issuer, as defined
      by
      Rule 405 of the Securities Act. Yes o No
      x




Indicate
      by check mark if the registrant is not required to file reports pursuant Section
      13 or Section 15(d) of the Act. Yes o No x





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
o





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 a large accelerated filer, an
      accelerated filer, or a non-accelerated filer. See definition of “accelerated
      filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.
      (Check one):




Large
      accelerated filer o            
Accelerated filer o          Non-accelerated
      filer x





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





As
      of
      June 30, 2005, the aggregate market value of the voting Common Stock held by
      non-affiliates of the registrant was approximately $615,000.




Number
      of
      shares of Common Stock outstanding as of March 24, 2006: 24,940,902





**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,” the “Company,” “we,” “us” and
“our,” as the context requires) preceded by, followed by or that include
      forward-looking words or phrases, including “believes,” “expects,”
“anticipates,” “estimates,” “may,” “should,” “would,” “could,” “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 the possible consequences of “Risk
      Factors” and statements contained 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. Today,
      PubliCARD’s sole operating activities are conducted through its wholly-owned
      Infineer Ltd. (“Infineer”) subsidiary. Infineer designs smart card solutions for
      educational and corporate sites. This market includes institutions such as
      corporate campuses, secondary schools and universities. Infineer’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. Infineer sells its products and solutions to value-added
      resellers and distributors, and directly to end-users.





Infineer
      has continued to incur operating losses and negative cash flow. During 2003,
      2004 and 2005, the Company contributed additional capital to Infineer of
      $70,000, $225,000 and $150,000, respectively. It is likely that Infineer will
      require additional capital and the Company does not have the financial resources
      to provide such support. Given the Company’s lack of available resources,
      continued operating losses and debt position, the Company has begun to consider
      various alternatives. In 2006, with the assistance of an investment banker,
      the Company commenced an assessment of the value of Infineer, developed an
      information memorandum and has begun to obtain offers for Infineer’s potential
      for sale. This process is ongoing and no firm offers have been received to
      date.
      A determination whether to consummate such a sale has not been made nor is
      it
      certain whether an acceptable offer will materialize. Any such determination
      would depend upon, among other things, the amount of potential proceeds of
      any
      such sale and satisfactory arrangements with the Pension Benefit Guaranty
      Corporation (the “PBGC”) regarding the use of those proceeds, pursuant to the
      Company’s obligations to the PBGC described below.





The
      Company sponsored a defined benefit pension plan (the “Plan”) that was frozen in
      1993. In January 2003, the Company filed a notice with the PBGC seeking a
“distress termination” of the Plan. Pursuant to the Agreement for Appointment of
      Trustee and Termination of Plan between the PBGC and the Company, effective
      September 30, 2004, the PBGC proceeded to terminate the Plan and was appointed
      as the Plan’s trustee. As a result, the PBGC has assumed responsibility for
      paying the obligations to Plan participants. As a result of the Plan
      termination, the Company’s 2003 and 2004 funding requirements due to the Plan
      amounting to $3.4 million through September 15, 2004 were eliminated.





Under
      the
      terms of the Settlement Agreement, effective September 23, 2004, between the
      PBGC and the Company (the “Settlement Agreement”), the Company is liable to the
      PBGC for the unfunded guaranteed benefit payable by the PBGC to Plan
      participants in the amount of $7.5 million. The Company satisfied this liability
      by issuing a non-interest bearing note (the “Note”), dated September 23, 2004,
      payable to the PBGC with a face amount of $7.5 million. Pursuant to the Security
      Agreement and Pledge Agreement, both dated September 23, 2004, the Note is
      secured by (a) all presently owned or hereafter acquired real or personal
      property and rights to property of the Company and (b) the common and preferred
      stock of Infineer and TecSec, Incorporated (“TecSec”) owned by the Company. The
      Company has an approximately 5% ownership interest in TecSec, on a fully diluted
      basis.





The
      Note
      matures on September 23, 2011. The first payment will be equal to $1.0 million
      and will become due 30 days after the Company has received a total of $4.0
      million in Net Recoveries. “Net Recoveries,” as defined in the Settlement
      Agreement, means the net cash proceeds received by the Company with respect
      to
      transactions consummated after March 31, 2003 from (a) the sale of the Company’s
      interest in Infineer and TecSec, real property in Louisiana and any other real
      or personal property assets and (b) any recoveries from the Company’s historic
      insurance program. Thereafter, on each anniversary of the first payment, the
      Company is required to pay the PBGC an amount equal to 25% of the Net Recoveries
      in excess of $4.0 million (less the sum of all prior payments made in accordance
      with this sentence in prior years). As of December 31, 2005, Net Recoveries
      was
      approximately $3.6 million. The Company expects to realize additional Net
      Recoveries of approximately $270,000 in 2006 relating to the release of certain
      funds currently held in escrow.





2


If
      the
      Company defaults under the Settlement Agreement, the PBGC may declare the
      outstanding amount of the Note to be immediately due and payable, proceed with
      foreclosure of the liens granted in favor of the PBGC and exercise any other
      rights available under applicable law.





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 $1.1 million at
      December 31, 2005. The Company also had a shareholders’ deficiency of $7.2
      million December 31, 2005.





Absent
      a
      sale of Infineer and satisfaction of any obligation to the PBGC created by
      such
      sale, management believes that existing cash and short-term investments will
      not
      be sufficient to permit the Company to continue operating past the third quarter
      of 2006 and the Company would likely seek bankruptcy protection or otherwise
      cease operations. If a sale of Infineer is consummated, the Company will not
      thereafter have any ongoing business operations. In either case, the Company
      does not expect that any funds will be available for distribution to its
      shareholders.





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. As a result of the factors described above, it is unlikely that
      the
      Company will be able to continue as a going concern. The consolidated financial
      statements do not include any adjustments that might result from the outcome
      of
      this uncertainty. The independent auditors’ reports on the Company’s
      Consolidated Financial Statements for the years ended December 31, 2005, 2004,
      2003 and 2002 contain emphasis paragraphs concerning substantial doubt about
      the
      Company’s ability to continue as a going concern.





**PubliCARD
      Products and Solutions**





PubliCARD,
      through its Infineer subsidiary, designs smart card solutions for campus
      environments. Infineer ’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 700 sites, primarily in educational and corporate
      sites in the United Kingdom and Ireland. Infineer’s products and solutions
      include the following:





·
            **ChipNet3.**Using a single smart card, ChipNet3 users gain access to, and tender
                payment for, a wide variety of services typically found on both corporate
                and educational sites. ChipNet3 delivers applications such as photo
                identification, payment for cafeteria, vending machine, photocopy
                and
                printing purchases, and access control on a single card platform.Each
                time a transaction takes place, all details are recorded, such as
                the date
                and time, user and item purchased. The transaction details are then
                processed by a back office software package, utilizing a tracking
                tool
                that delivers accurate management information regarding sales and
                card
                activity.





ChipNet3
      has the ability to accept a range of both contact and contactless smart cards.
      The solution is scalable and can run in a networked or non-networked
      environment. The ChipNet3 solution has been structured to allow integration
      with
      existing third party applications such as payroll, stock control, physical
      access control, PC log-on and time and attendance reporting.





ChipNet3
      solution is comprised of smart cards, application software and hardware. Each
      user has a personalized smart card which may feature photo identification,
      a bar
      code, magnetic stripe or signature panel, if required. The chip on the card
      carries the cardholder’s personal permission file and may be loaded and reloaded
      with a cash value which is used for purchasing needs. Hardware includes
      point-of-sale terminals and mini-tills, vending station card readers and
      add-value or card reload stations.





Infineer
      recently introduced ChipNetID which allows corporate sites the ability to extend
      the use of their existing identification cards to include payment at cafeteria
      and vending stations. ChipNetID can operate with a range of contactless smart
      cards issued by Mifare and HID. Corporate sites can benefit from deploying
      cashless payments in a facility without the need to replace existing in-use
      identification and access control cards.





·
            **EasySmart.**EasySmart is designed to deliver a first experience with smart cards
                for
                locations that do not want to pay or do not need a multi-application
                card
                system, and has been developed to fill a gap in the market for an
                entry-level smart card solution providing an administration-free
                payment
                system. EasySmart is a stand-alone solution operating with a low
                cost
                smart card and is useful for a wide range of locations including
                colleges,
                cafeterias and libraries. EasySmart offers card acceptance for PC
                log-on,
                cafeteria point-of-sale, self-service centers, networked printing,
                photocopying and encoding stations. Although EasySmart offers the
                capacity
                to run without being networked, it also contains a built-in upgrade
                path
                to ChipNet3.





3


·
            **EasyCard.**The EasyCard product line delivers a flexible magnetic stripe based
                solution across a range of applications, including copying, printing,
                point-of-sale, vending and Internet access. Operating with either
                disposable or rechargeable thin magnetic stripe cards, EasyCard is
                a
                simple to use solution, useful for schools, colleges, libraries and
                copy
                shops as well as corporate and government facilities and business
                parks.
                Users carry cards, featuring either a cash or unit value, and the
                appropriate amount is deducted each time a service is used. 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
                self-service card centers and encoding stations.





·
            **Pcounter.**Pcounter is a scalable network server-based print management and
                accounting solution that provides a range of cost control and cost
                recovery capabilities. Pcounter aims to eliminate waste and misuse
                and
                help rationalize and reallocate print resources by providing usage
                accountability. Pcounter is marketed to schools, colleges, professional
                services firms, the public sector and
                corporations.





**Sales
      and Marketing**





Infineer
      sells and distributes its products directly to end-users in the United Kingdom
      through its direct sales force. Infineer has approximately 12 employees directly
      engaged in the sale, distribution and support of its products in the United
      Kingdom. Outside of the United Kingdom, Infineer is represented by over 30
      independent distributors and value-added resellers. Key markets include, among
      others, the United States, the Netherlands, France and Australia. In support
      of
      its sales strategies, Infineer also makes use of direct mail campaigns to its
      customers, advertising in targeted trade media and at trade shows and
      conferences.





**Research
      and Development**





Infineer
      maintains a 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 existing solutions. Development expenses were
      $624,000, $716,000 and $584,000 in 2005, 2004 and 2003,
      respectively.





**Competition**





Competition
      in the markets in which Infineer operates is intense and is characterized by
      rapidly changing technologies, evolving industry standards, frequent new product
      introductions and rapid changes in customer requirements. The principal
      competitive factors affecting the market for Infineer’s technology products are
      the product’s technical characteristics and price, customer service and
      competitor reputation, as well as positioning and resources. Infineer’s primary
      competition currently comes from companies offering campus environment
      solutions, including small value electronic cash systems and database management
      solutions, such as Moneybox (Girovend), Counter Solutions, Uniware, Cunninghams,
      Plastic Card Services, MARS, Diebold and Schlumberger.





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





**Intellectual
      Property**





Infineer
      relies on a combination of copyright and trademark laws, trade secrets,
      confidentiality agreements and contractual provisions to protect its proprietary
      rights. Infineer seeks to protect its software, documentation and other written
      materials under trade secret and copyright laws, which afford only limited
      protection. Infineer generally enters into confidentiality and non-disclosure
      agreements with its employees and with key vendors and suppliers. Despite
      Infineer’s efforts to protect its proprietary rights, unauthorized parties may
      attempt to copy aspects of Infineer’s products or to obtain and use information
      that Infineer 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 Infineer’s proprietary technology
      more likely. The steps taken by Infineer 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 Infineer’s products.





4


**Employees**





As
      of
      March 24, 2006, the Company had approximately 31 employees, of which 29 are
      employed by Infineer. At Infineer, there are 12 employees involved in sales,
      marketing and customer support, seven employees in product development, seven
      employees in manufacturing and three employees 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,
      2005, 2004 and 2003 are as follows (in thousands):




**2005**
            
            **2004**
            
            **2003**United
                Kingdom
            
            $
            2,422
            
            $
            2,948
            
            $
            2,871United
                States
            
            
            398
            
            
            540
            
            
            869Europe
                (excluding United Kingdom)
            
            
            677
            
            
            683
            
            
            596Rest
                of world
            
            
            120
            
            
            224
            
            
            445$
            3,617
            
            $
            4,395
            
            $
            4,781





The
      Company has operations in the United States and United Kingdom. Identifiable
      tangible assets by country as of December 31, 2005 and 2004 are as follows
      (in
      thousands):




**2005**
            
            **2004**United
                States
            
            $
            1,647
            
            $
            2,770United
                Kingdom
            
            
            995
            
            
            1,521$
            2,642
            
            $
            4,291




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





**Available
      Information**





The
      Securities and Exchange Commission (the “SEC”) maintains an Internet site that
      contains reports, proxy and information statements, and other Company related
      information at http://www.sec.gov. In addition, the public may read and copy
      any
      materials filed by the Company with the SEC at the SEC’s Reference Room, which
      is located at 100 F Street, N.E., Washington, D.C., 20549. Interested parties
      may call (800) SEC-0330 for further information on the Reference
      Room.





**ITEM
      1A. RISK FACTORS**





***We
      do not expect to continue as a going concern.*** We
      have
      incurred losses, a substantial decline in working capital and negative cash
      flow
      from operations for a number of years. We have also experienced a substantial
      reduction in our cash and short term investments, which declined from $17.0
      million at December 31, 2000 to $1.1 million at December 31, 2005. We also
      had a
      shareholders’ deficiency of $7.2 million December 31, 2005.





Infineer
      has continued to incur operating losses and negative cash flow. During 2003,
      2004 and 2005, we contributed additional capital to Infineer of $70,000,
      $225,000 and $150,000, respectively. It is likely that Infineer will require
      additional capital and we do not have the financial resources to provide such
      support. Given our lack of available resources, continued operating losses
      and
      debt position, we have begun to consider various alternatives. In 2006,
      with the assistance of an investment banker, we commenced an assessment
      of  the value of Infineer, developed an information memorandum and have
      begun to obtain offers for Infineer’s potential for sale. This process is
      ongoing and no firm offers have been received to date. A determination whether
      to consummate such a sale has not been made nor is it certain whether an
      acceptable offer will materialize. Any such determination would depend upon,
      among other things, the amount of potential proceeds of any such sale and
      satisfactory arrangements with the PBGC regarding the use of those proceeds,
      pursuant to the Company’s obligations to the PBGC described elsewhere
      herein.





5


Absent
      a
      sale of Infineer and satisfaction of any obligation to the PBGC created by
      such
      sale, management believes that existing cash and short-term investments will
      not
      be sufficient to permit us to continue operating past the third quarter of
      2006
      and we would likely seek bankruptcy protection or otherwise cease operations.
      If
      a sale of Infineer is consummated, we will not thereafter have any ongoing
      business operations. In either case, we do not expect that any funds will be
      available for distribution to its shareholders.





Accordingly,
      it is unlikely that we will be able to continue as a going concern. Our
      consolidated financial statements do not include any adjustments that might
      result from the outcome of this uncertainty. The independent auditors’ reports
      on the our consolidated financial statements for the years ended December 31,
      2005, 2004, 2003 and 2002 contain emphasis paragraphs concerning substantial
      doubt about the Company’s ability to continue as a going concern.





***We
      have obligations to the PBGC that we may not be able to satisfy.*** We
      sponsored a defined benefit pension plan which was frozen in 1993. In January
      2003, we filed a notice with the PBGC seeking a “distress termination” of that
      Plan. Pursuant to the Agreement for Appointment of Trustee and Termination
      of
      Plan between the PBGC and us effective September 30, 2004, the PBGC proceeded
      to
      terminate the Plan and was appointed as the Plan’s trustee. As a result, the
      PBGC has assumed responsibility for paying the obligations to Plan participants.
      Under the terms of the Settlement Agreement effective September 23, 2004 between
      the PBGC and us, we were liable to the PBGC for the unfunded guaranteed benefit
      payable by the PBGC to Plan participants in the amount of $7.5 million. We
      satisfied this liability by issuing the Note dated September 23, 2004 payable
      to
      the PBGC with a face amount of $7.5 million.





Pursuant
      to the Security Agreement and Pledge Agreement, both dated September 23, 2004,
      the Note is secured by (a) all of our presently owned or hereafter acquired
      real
      or personal property and rights to property and (b) the common and preferred
      stock of Infineer and TecSec we own.





The
      Note
      matures on September 23, 2011. The first payment will be equal to $1.0 million
      and will become due 30 days after we have received a total of $4.0 million
      in
      Net Recoveries. Thereafter, on each anniversary of the first payment, we are
      required to pay the PBGC an amount equal to 25% of the Net Recoveries in excess
      of $4.0 million (less the sum of all prior payments made in accordance with
      this
      sentence in prior years). As of December 31, 2005, Net Recoveries was
      approximately $3.6 million. The Company expects to realize additional Net
      Recoveries of approximately $270,000 in 2006 relating to the release of certain
      funds currently held in escrow.





If
      we
      default under the Settlement Agreement, the PBGC may declare the outstanding
      amount of the Note to be immediately due and payable, proceed with foreclosure
      of the liens granted in favor of the PBGC and exercise any other rights
      available under applicable law.





**ITEM
      1B. UNRESOLVED STAFF COMMENTS**





None





**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
            2007
            3,600Bangor,
                Northern
            Office
                and manufacturing for Infineer
            2008
            12,000Ireland




Balfour
      Investors Inc. (“Balfour”) and Balfour Investment Management (“BIM”) occupy 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 officers and principal
      shareholders of Balfour and BIM. Collectively, Balfour and BIM pay 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 and
      BIM
      is approximately $9,500 per month.





6





**ITEM
      3. LEGAL PROCEEDINGS**





Various
      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.





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





None


7


**PART
      II**





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





(a)
                PubliCARD’s
                    common stocktrades
                    on the OTC Bulletin Board.The
                    following table sets forth the high and low closing sale prices
                    of
                    PubliCARD’s common stock for the calendar periods indicated (in
                    dollars):





******2005**
            
            ******2004****High**
            
            **Low**
            
            **High**
            
            **Low**First
                Quarter
            
            
            .04
            
            
            .03
            
            
            .09
            
            
            .05Second
                Quarter
            
            
            .03
            
            
            .02
            
            
            .10
            
            
            .05Third
                Quarter
            
            
            .05
            
            
            .02
            
            
            .06
            
            
            .03Fourth
                Quarter
            
            
            .05
            
            
            .02
            
            
            .06
            
            
            .02





(b)
            There
                were approximately 2,300 registered holders of record of common stock
                of
                the Company as of March 24, 2006.





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





(d)
            See
                “Item 12. Security Ownership of Certain Beneficial Owners and Management
                and Related Stockholder Matters” for the table covering certain equity
                compensation plan information.





8


**ITEM
      6. SELECTED FINANCIAL DATA**





The
      selected financial data of the Company presented below for the five year period
      ended December 31, 2005 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****2005**
            
            **2004**
            
            **2003**
            
            **2002**
            
            **2001**(in
                thousands, except per share amounts)**Statement
                of Operations Data:**Revenues
            
            $
            3,617
            
            $
            4,395
            
            $
            4,781
            
            $
            4,605
            
            $
            5,652Cost
                of revenues
            
            
            1,661
            
            
            2,010
            
            
            2,316
            
            
            2,455
            
            
            2,875Inventory
                adjustment
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            1,661Gross
                margin
            
            
            1,956
            
            
            2,385
            
            
            2,465
            
            
            2,150
            
            
            1,116Operating
                expenses:General
                and administrative
            
            
            2,017
            
            
            2,330
            
            
            2,708
            
            
            3,235
            
            
            4,625Sales
                and marketing
            
            
            1,173
            
            
            1,671
            
            
            1,844
            
            
            1,877
            
            
            3,413Product
                development
            
            
            624
            
            
            716
            
            
            584
            
            
            605
            
            
            2,442Stock
                compensation expense
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            86Amortization
                of goodwill and intangibles
            
            
            -
            
            
            40
            
            
            40
            
            
            576
            
            
            1,824Impairment
                of goodwill and intangibles
            
            
            782
            
            
            -
            
            
            -
            
            
            1,365
            
            
            -Repositioning
                and other special charges
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            5,6564,596
            
            
            4,757
            
            
            5,176
            
            
            7,658
            
            
            18,046Loss
                from operations
            
            
            (2,640
            )
            
            (2,372
            )
            
            (2,711
            )
            
            (5,508
            )
            
            (16,930
            )Other
                income (expenses):Interest
                income
            
            
            27
            
            
            27
            
            
            15
            
            
            71
            
            
            476Interest
                expense
            
            
            (26
            )
            
            (22
            )
            
            (12
            )
            
            (39
            )
            
            (65
            )Cost
                of retirement benefits - non-operating
            
            
            -
            
            
            (405
            )
            
            (903
            )
            
            (795
            )
            
            (788
            )Loss
                on pension settlement
            
            
            -
            
            
            (2,739
            )
            
            -
            
            
            -
            
            
            -Write-down
                of minority investment
            
            
            -
            
            
            -
            
            
            (3,000
            )
            
            (2,068
            )
            
            -Gain
                on insurance recoveries
            
            
            -
            
            
            647
            
            
            4,590
            
            
            -
            
            
            -Other
                income, net
            
            
            350
            
            
            5
            
            
            428
            
            
            80
            
            
            136351
            
            
            (2,487
            )
            
            1,118
            
            
            (2,751
            )
            
            (241
            )Loss
                from continuing operations
            
            
            (2,289
            )
            
            (4,859
            )
            
            (1,593
            )
            
            (8,259
            )
            
            (17,171
            )Gain
                on disposition of discontinued operations
            
            
            258
            
            
            -
            
            
            -
            
            
            1,066
            
            
            2,350Net
                loss
            
            $
            (2,031
            )
            $
            (4,859
            )
            $
            (1,593
            )
            $
            (7,193
            )
            $
            (14,821
            )Basic
                and diluted earnings (loss) per common share:Continuing
                operations
            
            $
            (.09
            )
            $
            (.20
            )
            $
            (.07
            )
            $
            (.34
            )
            $
            (.71
            )Discontinued
                operations
            
            
            .01
            
            
            -
            
            
            -
            
            
            .04
            
            
            .10$
            (.08
            )
            $
            (.20
            )
            $
            (.07
            )
            $
            (.30
            )
            $
            (.61
            )





**As
                of December 31****2005**
            
            **2004**
            
            **2003**
            
            **2002**
            
            **2001**(in
                thousands)**Balance
                Sheet Data:**Working
                capital (deficiency)
            
            $
            530
            
            $
            1,405
            
            $
            (987
            )
            $
            (548
            )
            $
            2,631Total
                assets
            
            
            2,642
            
            
            5,073
            
            
            7,399
            
            
            7,939
            
            
            17,397Other
                non-current liabilities
            
            
            7,728
            
            
            7,869
            
            
            3,552
            
            
            4,990
            
            
            5,328Shareholders'
                equity (deficiency)
            
            
            (7,151
            )
            
            (5,159
            )
            
            (2,928
            )
            
            (1,002
            )
            
            7,484





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





9





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





**Overview**




PubliCARD’s
      sole operating activities are conducted through its wholly-owned Infineer Ltd.
      subsidiary. Infineer designs smart card solutions for educational and corporate
      sites.





Infineer
      has continued to incur operating losses and negative cash flow. During 2003,
      2004 and 2005, the Company contributed additional capital to Infineer of
      $70,000, $225,000 and $150,000, respectively. It is likely that Infineer will
      require additional capital and the Company does not have the financial resources
      to provide such support. Given the Company’s lack of available resources,
      continued operating losses and debt position, the Company has begun to consider
      various alternatives. In 2006, with the assistance of an investment banker,
      the Company commenced an assessment of  the value of Infineer,
      developed an information memorandum and has begun to obtain offers for
      Infineer’s potential for sale. This process is ongoing and no firm offers have
      been received to date. A determination whether to consummate such a sale has
      not
      been made nor is it certain whether an acceptable offer will materialize. Any
      such determination would depend upon, among other things, the amount of
      potential proceeds of any such sale and satisfactory arrangements with the
      PBGC
      regarding the use of those proceeds, pursuant to the Company’s obligations to
      the PBGC described below.





The
      Company sponsored a defined benefit pension plan that was frozen in 1993. In
      January 2003, the Company filed a notice with the PBGC seeking a “distress
      termination” of the Plan. Pursuant to the Agreement for Appointment of Trustee
      and Termination of Plan between the PBGC and the Company, effective September
      30, 2004, the PBGC proceeded to terminate the Plan and was appointed as the
      Plan’s trustee. As a result, the PBGC has assumed responsibility for paying the
      obligations to Plan participants. As a result of the Plan termination, the
      Company’s 2003 and 2004 funding requirements due to the Plan amounting to $3.4
      million through September 15, 2004 were eliminated.





Under
      the
      terms of the Settlement Agreement, effective September 23, 2004, between the
      PBGC and the Company, the Company is liable to the PBGC for the unfunded
      guaranteed benefit payable by the PBGC to Plan participants in the amount of
      $7.5 million. The Company satisfied this liability by issuing the Note, dated
      September 23, 2004, payable to the PBGC with a face amount of $7.5 million.
      Pursuant to the Security Agreement and Pledge Agreement, both dated September
      23, 2004, the Note is secured by (a) all presently owned or hereafter acquired
      real or personal property and rights to property of the Company and (b) the
      common and preferred stock of Infineer and TecSec owned by the Company.





The
      Note
      matures on September 23, 2011. The first payment will be equal to $1.0 million
      and will become due 30 days after the Company has received a total of $4.0
      million in Net Recoveries. “Net Recoveries,” as defined in the Settlement
      Agreement, means the net cash proceeds received by the Company with respect
      to
      transactions consummated after March 31, 2003 from (a) the sale of the Company’s
      interest in Infineer and TecSec, real property in Louisiana and any other real
      or personal property assets and (b) any recoveries from the Company’s historic
      insurance program. Thereafter, on each anniversary of the first payment, the
      Company is required to pay the PBGC an amount equal to 25% of the Net Recoveries
      in excess of $4.0 million (less the sum of all prior payments made in accordance
      with this sentence in prior years). As of December 31, 2005, Net Recoveries
      was
      approximately $3.6 million. The
      Company expects to realize additional Net Recoveries of approximately $270,000
      in 2006 relating to the release of certain funds currently held in
      escrow.





If
      the
      Company defaults under the Settlement Agreement, the PBGC may declare the
      outstanding amount of the Note to be immediately due and payable, proceed with
      foreclosure of the liens granted in favor of the PBGC and exercise any other
      rights available under applicable law.





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 $1.1 million at
      December 31, 2005. The Company also had a shareholders’ deficiency of $7.2
      million December 31, 2005.





Absent
      a
      sale of Infineer and satisfaction of any obligation to the PBGC created by
      such
      sale, management believes that existing cash and short-term investments will
      not
      be sufficient to permit the Company to continue operating past the third quarter
      of 2006 and the Company would likely seek bankruptcy protection or otherwise
      cease operations. If a sale of Infineer is consummated, the Company will not
      thereafter have any ongoing business operations. In either case, the Company
      does not expect that any funds will be available for distribution to its
      shareholders.





10





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. As a result of the factors described above, it is unlikely that
      the
      Company will be able to continue as a going concern. The consolidated financial
      statements do not include any adjustments that might result from the outcome
      of
      this uncertainty. The independent auditors’ reports on the Company’s
      Consolidated Financial Statements for the years ended December 31, 2005, 2004,
      2003 and 2002 contain emphasis paragraphs concerning substantial doubt about
      the
      Company’s ability to continue as a going concern.





**Results
      of Operations**





The
      following table is derived from the Consolidated Financial Statements and sets
      forth the Company’s consolidated results of operations for the years ended
      December 31, 2005, 2004 and 2003 (in thousands).




******2005**
            
            **2004**
            
            **2003**Revenues
            
            $
            3,617
            
            $
            4,395
            
            $
            4,781Cost
                of revenues
            
            
            1,661
            
            
            2,010
            
            
            2,316Gross
                margin
            
            
            1,956
            
            
            2,385
            
            
            2,465Gross
                margin percentage
            
            
            54
            %
            
            54
            %
            
            52
            %Operating
                expenses:General
                and administrative
            
            
            2,017
            
            
            2,330
            
            
            2,708Sales
                and marketing
            
            
            1,173
            
            
            1,671
            
            
            1,844Product
                development
            
            
            624
            
            
            716
            
            
            584Impairment
                of goodwill
            
            
            782
            
            
            -
            
            
            -Amortization
                of intangibles
            
            
            -
            
            
            40
            
            
            404,596
            
            
            4,757
            
            
            5,176Loss
                from operations
            
            
            (2,640
            )
            
            (2,372
            )
            
            (2,711
            )Other
                income (expenses):Interest
                income
            
            
            27
            
            
            27
            
            
            15Interest
                expense
            
            
            (26
            )
            
            (22
            )
            
            (12
            )Cost
                of retirement benefits - non-operating
            
            
            -
            
            
            (405
            )
            
            (903
            )Loss
                on pension settlement
            
            
            -
            
            
            (2,739
            )
            
            -Write-down
                of minority investment
            
            
            -
            
            
            -
            
            
            (3,000
            )Gain
                on insurance recoveries
            
            
            -
            
            
            647
            
            
            4,590Other
                income
            
            
            350
            
            
            5
            
            
            428351
            
            
            (2,487
            )
            
            1,118Loss
                from continuing operations
            
            
            (2,289
            )
            
            (4,859
            )
            
            (1,593
            )Income
                from discontinued operations
            
            
            258
            
            
            -
            
            
            -Net
                loss
            
            $
            (2,031
            )
            $
            (4,859
            )
            $
            (1,593
            )




**Year
      Ended December 31, 2005 Compared to Year Ended December 31,
      2004**





**Revenues.** Revenues
      are generated from product sales, technology and software license fees,
      installation and maintenance contracts. Consolidated revenues decreased to
      $3.6
      million in 2005 compared to $4.4 million for 2004 driven by a decline of
      $526,000 in direct sales to customers located in the United Kingdom as well
      as a
      $142,000 decline in shipments to distribution partners located in the United
      States. In the first several months of 2005, Infineer reduced sales and customer
      support headcount by a total of eight people to reduce operating expenses and
      reflect lower revenue expectations.





**Gross
      margin.** Cost of
      revenues consists primarily of material, personnel costs and overhead. Gross
      margin as a percentage of revenues was 54% in both 2005 and 2004.





**Sales
      and marketing expenses.** Sales
      and
      marketing expenses consist primarily of personnel and travel costs, trade shows
      and marketing materials. Sales and marketing expenses were $1.2 million in
      2005
      compared to $1.7 million in 2004. The decrease is primarily attributable to
      a
      $434,000 reduction in wages, benefits and employee business expense resulting
      from headcount reductions.





11





**Product
      development expenses.** Product
      development expenses consist primarily of personnel, 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 $624,000 in 2005 compared
      to
      $716,000 in 2004. The decrease in expenses is mainly attributable to a $62,000
      decline in wages, benefits and employee business expense associated with
      headcount reductions.




**General
      and administrative expenses.** General
      and administrative expenses consist primarily of personnel and related costs
      for
      general corporate functions, including finance and accounting, risk management
      and legal. General and administrative expenses for the year ended December
      31,
      2005 decreased to $2.0 million from $2.3 million for 2004. The decrease in
      expenses is mainly attributable to a decline of $409,000 in corporate wages
      and
      benefits and $87,000 in corporate outside services (including insurance, legal
      and shareholder reporting) offset by a $239,000 increase in directors
      fees.





**Impairment
      of goodwill and 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”), goodwill is no longer amortized. Goodwill and other
      intangibles are subject to an annual review for impairment or earlier if
      circumstances or events indicate that impairment has occurred. In performing
      its
      annual goodwill impairment test at the end of the fourth quarter of 2005, the
      Company determined that goodwill had been impaired. Infineer has continued
      to
      incur operating losses and revenues declined substantially in 2005. In addition,
      in 2005 PubliCARD contributed an additional $150,000 in capital to Infineer.
      Without such contributions, Infineer would not have been able to fund its
      operations. Also, the Company recently initiated a process of soliciting third
      party offers for the sale of the Infineer business. While this process is
      incomplete, expressions of interest thus far indicate that goodwill has been
      impaired. As a result of these factors, the Company recorded an impairment
      loss
      of $782,000 in the fourth quarter of 2005. Amortization of intangibles of
      $40,000 in 2004 related to the continuing amortization of definite life
      intangibles, which have been fully amortized as of December 31,
      2004.





**Interest
      income and expense.** Interest
      income was $27,000 in both 2005 and 2004. Interest expense increased slightly
      from $22,000 in 2004 to $26,000 in 2005 due to higher average borrowings under
      the overdraft facility.





**Cost
      of pensions - non-operating.** Cost
      of
      pensions in 2004 of $405,000 principally relates to pension expense associated
      with the Company’s frozen defined benefit pension plan. As a result of the
      pension settlement in September 2004, cost of pensions - non-operating
      subsequent to September 2004 will be zero.





**Loss
      on pension settlement.** The
      Company sponsored a defined benefit pension plan that was frozen in 1993. In
      January 2003, the Company filed a notice with the PBGC seeking a “distress
      termination” of the Plan. Pursuant to the Agreement for Appointment of Trustee
      and Termination of Plan between the PBGC and the Company effective September
      30,
      2004, the PBGC proceeded to terminate the Plan and was appointed as the Plan’s
      trustee. As a result, the PBGC has assumed responsibility for paying the
      obligations to Plan participants. Under the terms of the Settlement Agreement,
      the Company was liable to the PBGC for the unfunded guaranteed benefit payable
      by the PBGC to Plan participants in the amount of $7.5 million. The Company
      satisfied this liability by issuing the Note to the PBGC with a face amount
      of
      $7.5 million. A loss on the termination of the Plan of $2.7 million was recorded
      in the third quarter of 2004.





**Gain
      on insurance recoveries.** 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. In July
      2004, the assignment was supplemented to include several additional insurers.
      The claims involve several historic general liability policies of insurance
      issued to the Company. As a result of the assignment, after allowance for
      associated expenses and offsetting adjustments, the Company received net
      proceeds of approximately $477,000 in May 2004 and an additional $170,000 in
      October 2004. The Company recognized a gain of $477,000 in the first quarter
      of
      2004 and an additional gain of $170,000 in the third quarter of
      2004.





**Other
      income.** **** In
      November 2005, the Company recovered previously unclaimed property in the amount
      of $350,000. The receipt was recognized as income in 2005.





**Discontinued
      operations.** In
      October 1996, the Company sold substantially all of the assets of its Masterview
      Window Company, Inc. (“Masterview”) subsidiary. At closing, a portion of the
      sales proceeds amounting to $476,000 were deposited into escrow to cover certain
      environmental remediation activities relating to a leaking underground storage
      tank at the former Masterview site in Arizona. The disposition of Masterview
      was
      accounted for as a discontinued operation in 1996 and a reserve of $476,000
      was
      established against the gain on the disposition recorded at that time. In 2005,
      the remedial activities at the site were satisfied and the remaining funds
      held
      in escrow amounting to $289,000 were released to the Company. A gain of $258,000
      was recorded in 2005 and reported as “Income from discontinued
      operations”.





12





**Year
      Ended December 31, 2004 Compared to Year Ended December 31,
      2003**





**Revenues.** Consolidated
      revenues decreased to $4.4 million in 2004 compared to $4.8 million for 2003.
      Foreign currency changes had the effect of increasing revenues by a 10%.
      Excluding the impact of foreign currency changes, revenues in 2004 decreased
      by
      18% driven principally by a decline in shipments to distribution partners
      located in the United States and elsewhere outside of Europe.





**Gross
      margin.** Gross
      margin as a percentage of sales increased to 54% in 2004 from 52% in 2003.
      The
      gross margin improvement resulted from a higher percentage of revenues derived
      from direct sales in the United Kingdom.





**Sales
      and marketing expenses.** Sales
      and
      marketing expenses were $1.7 million in 2004 compared to $1.8 million in 2003.
      The decrease is primarily attributable to a reduction in employee business
      expense and employee termination expense resulting from headcount reductions
      in
      2003. Also, the 2004 expenses reflect a reimbursement of $47,000 of marketing
      costs under a grant with a government agency in Northern Ireland.





**Product
      development expenses.** Product
      development expenses amounted to $716,000 in 2004 compared to $584,000 in 2003.
      The 2003 expenses included a $75,000 reimbursement of certain development costs
      under a grant with a government agency in Northern Ireland. This reimbursement,
      coupled with a $73,000 increase in wages and third party engineering costs,
      primarily accounted for the increase in product development
      expense.




**General
      and administrative expenses.** General
      and administrative expenses for the year ended December 31, 2004 decreased
      to
      $2.3 million from $2.7 million for 2003. The decrease in expenses is mainly
      attributable to a $196,000 decline in corporate legal, public reporting costs
      and other corporate costs as well as a $43,000 favorable bad debt allowance
      adjustment.





**Amortization
      of intangibles.** Amortization
      expense associated with definite lived intangible assets was $40,000 in both
      2004 and 2003.





**Interest
      income and expense.** Interest
      income increased to $27,000 from $15,000 in the prior year principally due
      to
      higher investment balances. Interest expense increased from $12,000 to $22,000
      due to higher average borrowings under the overdraft facility.





**Cost
      of pensions - non-operating and pension settlement loss.** Cost
      of
      pensions declined from $903,000 in 2003 to $405,000 in 2004. The decline was
      principally caused by the pension settlement in September 2004. As discussed
      above, a loss on the termination of the Plan of $2.7 million was recorded in
      2004.





**Gain
      on insurance recoveries.** As
      discussed above, in 2004 the Company recognized a gain of $647,000 relating
      to
      the assignment to a third party of certain insurance claims against a group
      of
      historic insurers. 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
      was
      placed in escrow to secure the payment of certain indemnification obligations.
      Absent any indemnity claims, amounts will be released from escrow beginning
      September 30, 2004 and ending June 30, 2006. The Company recognized
      a gain from these settlements of approximately $4.6 million in 2003.





**Other
      income.** 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 income (expenses)”.





**Liquidity**





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. As a result of the factors described above, it is unlikely that
      the
      Company will be able to continue as a going concern. The consolidated financial
      statements do not include any adjustments that might result from the outcome
      of
      this uncertainty. The independent auditors’ reports on the Company’s
      Consolidated Financial Statements for the years ended December 31, 2005, 2004,
      2003 and 2002 contain emphasis paragraphs concerning substantial doubt about
      the
      Company’s ability to continue as a going concern.





13





The
      Company has financed its operations over the last several years primarily
      through funds received from the sale of a non-core businesses in 2000 and
      insurance and other recoveries in 2003, 2004 and 2005. For the year ended
      December 31, 2005, cash, including short-term investments, decreased by $871,000
      to $1.1 million as of December 31, 2005.





Operating
      activities utilized cash of $1.7 million in 2005 and principally consisted
      of
      the net loss of $2.0 million plus the gains from discontinued operations and
      receipt of unclaimed property totaling $608,000 and the non-cash goodwill
      impairment charge of $782,000 offset by depreciation and amortization of
      $77,000.





Investing
      activities generated cash of $773,000 for the year ended December 31, 2005
      and
      consisted principally of the release of funds held in escrow pursuant to a
      2003
      insurance settlement of $136,000, the release of previously escrowed funds
      relating to the satisfaction of an environmental matter of $289,000 and the
      receipt of certain unclaimed property of $350,000. The Company does not expect
      to generate any significant amounts form these sources during 2006 beyond the
      expected release of $270,000 from escrow pursuant to the 2003 insurance
      settlement.





Financing
      activities generated cash of $95,000 for the year ended December 31, 2005 and
      consisted of an increase in the overdraft facility at Infineer.





The
      Company has experienced negative cash flow from operating activities in the
      past
      and expects to experience negative cash flow in 2006 and beyond.





Infineer
      has continued to incur operating losses and negative cash flow. During 2003,
      2004 and 2005, the Company contributed additional capital to Infineer of
      $70,000, $225,000 and $150,000, respectively. It is likely that Infineer will
      require additional capital and the Company does not have the financial resources
      to provide such support. Given the Company’s lack of available resources,
      continued operating losses and debt position, the Company has begun to consider
      various alternatives. In 2006, with the assistance of an investment banker,
      the Company commenced an assessment of  the value of Infineer,
      developed an information memorandum and has begun to obtain offers for
      Infineer’s potential for sale. This process is ongoing and no firm offers have
      been received to date. A determination whether to consummate such a sale has
      not
      been made nor is it certain whether an acceptable offer will materialize. Any
      such determination would depend upon, among other things, the amount of
      potential proceeds of any such sale and satisfactory arrangements with the
      PBGC
      regarding the use of those proceeds, pursuant to the Company’s obligations to
      the PBGC described below.





The
      Company sponsored a defined benefit pension plan that was frozen in 1993. In
      January 2003, the Company filed a notice with the PBGC seeking a “distress
      termination” of the Plan. Pursuant to the Agreement for Appointment of Trustee
      and Termination of Plan between the PBGC and the Company, effective September
      30, 2004, the PBGC proceeded to terminate the Plan and was appointed as the
      Plan’s trustee. As a result, the PBGC has assumed responsibility for paying the
      obligations to Plan participants. As a result of the Plan termination, the
      Company’s 2003 and 2004 funding requirements due to the Plan amounting to $3.4
      million through September 15, 2004 were eliminated.





Under
      the
      terms of the Settlement Agreement, effective September 23, 2004, between the
      PBGC and the Company, the Company is liable to the PBGC for the unfunded
      guaranteed benefit payable by the PBGC to Plan participants in the amount of
      $7.5 million. The Company satisfied this liability by issuing the Note, dated
      September 23, 2004, payable to the PBGC with a face amount of $7.5 million.
      Pursuant to the Security Agreement and Pledge Agreement, both dated September
      23, 2004, the Note is secured by (a) all presently owned or hereafter acquired
      real or personal property and rights to property of the Company and (b) the
      common and preferred stock of Infineer and TecSec owned by the Company.





The
      Note
      matures on September 23, 2011. The first payment will be equal to $1.0 million
      and will become due 30 days after the Company has received a total of $4.0
      million in Net Recoveries. “Net Recoveries,” as defined in the Settlement
      Agreement, means the net cash proceeds received by the Company with respect
      to
      transactions consummated after March 31, 2003 from (a) the sale of the Company’s
      interest in Infineer and TecSec, real property in Louisiana and any other real
      or personal property assets and (b) any recoveries from the Company’s historic
      insurance program. Thereafter, on each anniversary of the first payment, the
      Company is required to pay the PBGC an amount equal to 25% of the Net Recoveries
      in excess of $4.0 million (less the sum of all prior payments made in accordance
      with this sentence in prior years). As of December 31, 2005, Net Recoveries
      was
      approximately $3.6 million. The Company expects to realize additional Net
      Recoveries of approximately $270,000 in 2006 relating to the release of certain
      funds currently held in escrow.





If
      the
      Company defaults under the Settlement Agreement, the PBGC may declare the
      outstanding amount of the Note to be immediately due and payable, proceed with
      foreclosure of the liens granted in favor of the PBGC and exercise any other
      rights available under applicable law.





14


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 $1.1 million at
      December 31, 2005. The Company also had a shareholders’ deficiency of $7.2
      million December 31, 2005.





Absent
      a
      sale of Infineer and satisfaction of any obligation to the PBGC created by
      such
      sale, management believes that existing cash and short-term investments will
      not
      be sufficient to permit the Company to continue operating past the third quarter
      of 2006 and the Company would likely seek bankruptcy protection or otherwise
      cease operations. If a sale of Infineer is consummated, the Company will not
      thereafter have any ongoing business operations. In either case, the Company
      does not expect that any funds will be available for distribution to its
      shareholders.





**Contractual
      Obligations**




The
      following is a summary of the Company’s commitments as of December 31, 2005 (in
      thousands):





******Payments
                Due by Period****Total**
            
            **Less
                than****1
                year**
            
            **1
                to 3****years**
            
            **3
                to 5****years**
            
            **More
                than**
              **5
                years**Operating
                lease obligations
            
            $
            488
            
            $
            308
            
            $
            180
            
            $
            -
            
            $
            -Other
                long-term liabilities:Note
                payable to PBGC
            
            
            7,501
            
            
            -
            
            
            -
            
            
            -
            
            
            7,501Other
                long-term obligations
            
            
            227
            
            
            -
            
            
            134
            
            
            40
            
            
            53Total
            
            $
            8,216
            
            $
            308
            
            $
            314
            
            $
            40
            
            $
            7,554





**Critical
      Accounting Policies**




The
      Company’s significant accounting policies are more fully described in the Notes
      to the Consolidated Financial Statements included this Annual Report on Form
      10-K for the year ended December 31, 2005. 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 and valuation of goodwill 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. A decrease in future
      demand for current products could result in an increase in the amount of excess
      inventories on hand.





**Impairment
      of goodwill.** 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 determines 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 relies 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 flow valuation include 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. ****





15


**Recent
      Accounting Pronouncements**




In
      December 2004, the FASB issued SFAS No. 123R (revised 2004), “Share-Based
      Payment”. This statement requires compensation costs related to share-based
      payment transactions to be recognized in financial statements. Generally,
      compensation cost will be measured based on the grant-date fair value of the
      equity or liability instruments issued. In addition, liability awards will
      be
      remeasured each reporting period. Compensation cost will be recognized over
      the
      requisite service period, generally as the award vests. The Company will adopt
      SFAS No. 123R in the first quarter of 2006. SFAS No. 123R applies to all awards
      granted after the effective date and to previously-granted awards unvested
      as of
      the adoption date. The adoption of the statement is not expected to have a
      material impact on Company’s
      consolidated financial position, results of operations and cash flows.





In November 2004, the FASB issued SFAS No. 151, “Inventory Cost, an
      amendment of ARB No. 43, Chapter 4.” This statement amends Accounting Research
      Bulletin No. 43 to clarify the accounting for abnormal amounts of idle
      facility expense, freight, handling costs and wasted material (spoilage). The
      provision of the statement is effective for inventory costs incurred during
      fiscal years beginning after June 15, 2005. The adoption of the statement
      is not expected to have a material effect on the Company’s consolidated
      financial position, results of operations and cash flows.





In
      December 2004, the FASB issued SFAS No. 153, “Exchanges of Nonmonetary
      Assets, an amendment of APB Opinion No. 29.” This statement amends APB
      No. 29, “Accounting for Nonmonetary Transactions,” to eliminate the
      exception for nonmonetary exchanges of similar productive assets under
      APB No. 29 and replaces it with a general exception for exchanges of
      nonmonetary assets that do not have commercial substance. The statement is
      effective for financial statements for fiscal years beginning after
      June 15, 2005. The adoption of the statement is not expected to have a
      material effect on the Company’s consolidated financial position, results of
      operations and cash flows.





In
      May
      2005, the FASB issued SFAS No. 154, "Accounting Changes and Error Corrections,
      a
      replacement of APB Opinion No. 20 and FASB Statement No. 3". This statement
      provides guidance on the accounting for and reporting of accounting changes
      and
      error corrections. It establishes, unless impracticable, retrospective
      application as the required method for reporting a change in accounting
      principle in the absence of explicit transition requirements specific to the
      newly adopted accounting principle. This statement also provides guidance for
      determining whether retrospective application of a change in accounting
      principle is impracticable and for reporting a change when retrospective
      application is impracticable. SFAS No. 154 is effective for accounting changes
      and correction of errors made in fiscal years beginning after December 15,
      2005. The
      adoption of the statement is not expected to have a material effect on the
      Company’s consolidated financial position, results of operations and cash flows.





**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, 2005, short-term investments (principally U.S.
      Treasury bills) were $1.0 million and borrowing under the overdraft facility
      amounted to $406,000. 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.





16





**ITEM
      8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA**





The
      Company's consolidated financial statements, the report of the Company’s
      independent registered public accounting firm 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**





**Evaluation
      of Disclosure Controls and Procedures**





The
      Company maintains disclosure controls and procedures designed to ensure that
      the
      information the Company must disclose in its filings with the SEC is recorded,
      processed, summarized and reported on a timely basis. 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 defined in Rules 13a-15(e) and 15(d)-15(e) under the Securities
      Exchange Act of 1934, as amended (the “Exchange Act”)) 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.





**Changes
      in Internal Control over Financial Reporting**





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.





**Internal
      Control Over Financial Reporting**





The
      Company is not an “accelerated filer” as defined in Rule 12b-2 under the
      Exchange Act. Accordingly, pursuant to SEC Release No. 33-8545, the Company
      is
      not required to include in this Annual Report on Form 10-K a management report
      on internal control over financial reporting or the related registered public
      accounting firm attestation imposed by Section 404 of the Sarbanes-Oxley Act
      of
      2002.





**ITEM
      9B. OTHER INFORMATION**





In
      the
      fourth quarter of 2005, the Company reported all required disclosures on Form
      8-K.





17


**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, 2006), 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 66; Director of PubliCARD since April 12, 1985, Chairman of the
      Board of Directors since December 1985 and Chairman of PubliCARD from October
      1998 to January 1, 2005. Mr. Freund has been Chairman of Balfour, a
      merchant-banking firm that had previously been engaged in a general brokerage
      business, since 1975. Mr. Freund is also Vice Chairman of Glasstech,
      Inc.





JAY
      S.
      GOLDSMITH: Age 62; Director of PubliCARD since April 12, 1985, Vice Chairman
      of
      the Board of Directors since December 1985 and Vice Chairman of PubliCARD from
      October 1998 to January 1, 2005. Mr. Goldsmith has been President of Balfour
      since 1975. Mr. Goldsmith is also Chairman of Glasstech, Inc.





ANTONIO
      L. DELISE: Age 44; 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 54; 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 67; 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., Co-Liquidating Trustee of the Banyan Strategic
      Realty Trust and Director of Worldspace, Inc. and was Chairman of the Board
      and
      Co-Chief Executive Officer of Delta-Omega Technologies, Inc.





EMIL
      VOGEL: Age 62; 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.





Mr.
      DeLise is the sole executive officer of the Company. Effective January 1, 2005,
      Harry I. Freund and Jay S. Goldsmith resigned their officer positions as
      Chairman and Vice Chairman, respectively. Mr. Freund and Mr. Goldsmith remain
      Chairman and Vice Chairman of the Board of Directors, respectively. The business
      address of the executive officer is the address of the Company, One Rockefeller
      Plaza, New York, New York 10020.  Officers
      are elected to serve for a term ending with the next annual meeting of
      shareholders.




On
      January 11, 2006, the National Association of Securities Dealers, Inc. (the
      “NASD”) found that, in their capacities as principals of Balfour, a
      broker-dealer registered with the SEC and a member of the NASD, Messrs. Freund
      and Goldsmith caused Balfour to violate certain books and records and net
      capital requirements applicable to Balfour. As a result, Balfour and Messrs.
      Freund and Goldsmith were jointly and severally fined $10,000.




**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 financial expert” as defined by the SEC, and is
“independent,” as that term is used in Item 7(d)(3)(iv) of Schedule 14A under
      the Exchange Act.





18


**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 SEC will
      be
      posted to the Company’s website.





**Section
      16(a) Beneficial Ownership Reporting Compliance**





Section
      16(a) of 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 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, 2005 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**
              **Compensation****Name
                and Principal Position**
            
            **Year**
            
            **Annual
                Compensation**
            
            **Securities
                Underlying******
            
            **All
                Other****Salary
                ($)**
            
            **Bonus
                ($) (1)**
            
            **Options/
                SARs (#) (2)**
            
            **Compensation
                ($)**Antonio
              L. DeLise (3)
            
            
            2005
            
            
            275,000
            
            
            100,000
            
            
            -
            
            
            8,559
                (4
            )President,
              Chief Executive Officer,
            
            
            2004
            
            
            275,000
            
            
            115,168
            
            
            -
            
            
            9,059
                (4
            )Chief
              Financial Officer and
            
            
            2003
            
            
            275,000
            
            
            84,832
            
            
            -
            
            
            8,706
                (4
            )SecretaryHarry
              I. Freund (5)
            
            
            2005
            
            
            -
            
            
            -
            
            
            -
            
            
            -Chairman
              of the Board of
            
            
            2004
            
            
            150,000
            
            
            -
            
            
            -
            
            
            -Directors
                and Chairman
            
            
            2003
            
            
            150,000
            
            
            -
            
            
            -
            
            
            -Jay
              S. Goldsmith (5)
            
            
            2005
            
            
            -
            
            
            -
            
            
            -
            
            
            -Vice
              Chairman of the Board of
            
            
            2004
            
            
            150,000
            
            
            -
            
            
            -
            
            
            -Directors
                and Vice Chairman
            
            
            2003
            
            
            150,000
            
            
            -
            
            
            -
            
            
            -





(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)
            Consists
                of $6,000, $6,500 and $7,000 in contributions to PubliCARD’s 401(k) plan
                for 2003, 2004 and 2005, respectively, and $2,706, $2,559 and $1,559
                for
                term life and disability insurance payments paid on behalf of Mr.
                DeLise
                for 2003, 2004 and 2005,
                respectively.


(5)
            Effective
                January 1, 2005, Mr. Freund and Mr. Goldsmith resigned their officer
                positions as Chairman and Vice Chairman, respectively. Mr. Freund
                and Mr.
                Goldsmith remain as Chairman and Vice Chairman of the Board of Directors.
                Beginning January 1, 2005, Mr. Freund and Mr. Goldsmith each received
                compensation of $100,000 per year in their capacity as Chairman and
                Vice
                Chairman of the Board of Directors. The annual retainer was reduced
                to
                $66,667 effective April 1, 2006.





19


**Option
      Grants in Last Fiscal Year**





During
      the fiscal year ended December 31, 2005, there were no options granted to Mr.
      DeLise, the named executive officer. Mr. Freund and Mr. Goldsmith each received
      30,000 stock options on August 4, 2005 as non-employee directors pursuant to
      the
      1999 Stock Option Plan for Non-employee Directors. The stock options have an
      exercise price of $.025 per share, are immediately exercisable and expire on
      August 4, 2010.





**Aggregate
      Stock Option Exercises in Fiscal Year 2005 and Fiscal Year-End Option
      Values**





The
      following table sets forth certain information as of December 31, 2005
      concerning exercisable and unexercisable stock options held by the following
      persons:




**Shares**
              **Acquired
                on**
            
            **Value**
            
            **Number
                of Securities Underlying Unexercised**
              **Options
                at Fiscal**
              **Year
                End**
            
            **Value
                of Unexercised In-the-Money Options at Fiscal**
              **Year
                End (1)********Name**
            
            **Exercise**
            
            **Realized**
            
            **Exercisable**
            
            **Unexercisable**
            
            **Exercisable**
            
            **Unexercisable**Antonio
                L. DeLise
            
            
            -
            
            
            -
            
            
            270,000
            
            
            -
            
            
            -
            
            
            -Harry
                I. Freund
            
            
            -
            
            
            -
            
            
            530,000
            
            
            -
            
            
            150
            
            
            -Jay
                S. Goldsmith
            
            
            -
            
            
            -
            
            
            530,000
            
            
            -
            
            
            150
            
            
            -


(1)  These
      values are based on the December 30, 2005 closing price for PubliCARD’s
      common stock on the Over-the-counter Bulletin Board of
      $.03
      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, 2005, a total of 2,043,650 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
      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. The remaining options expired in January
      2006.





20





**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 $506,000 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, 2005 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 attended without regard
      to the number of meetings attended each day. Effective October 1, 2000, the
      monthly retainer and per diem fees were suspended. Effective May 1, 2005, the
      Company reinstituted compensation for non-employee directors, excluding the
      Chairman and Vice Chairman of the Board of Directors, at the rate of $2,000
      per
      month, which amount will be reduced by 33% to $1,333 per month effective April
      1, 2006. 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.





On
      January 1, 2005, Mr. Freund, Chairman of the Company, and Mr. Goldsmith, Vice
      Chairman of the Company, resigned their officer positions with the Company.
      Mr.
      Freund and Mr. Goldsmith remain as Chairman and Vice Chairman of the Board
      of
      Directors of the Company, respectively. From October 1998 through December
      2004,
      Mr. Freund and Mr. Goldsmith received compensation in respect of their officer
      positions as Chairman and Vice Chairman of the Company, respectively. For the
      year ended December 31, 2004, annual compensation in such capacity was $150,000
      each. Effective January 1, 2005, Mr. Freund and Mr. Goldsmith each began to
      receive annual compensation at the rate of $100,000 per year as Chairman and
      Vice Chairman of the Board of Directors, respectively, and for providing certain
      services as described below. The Board of Directors approved a 33% reduction
      in
      compensation to all non-employee directors effective April 1, 2006, such that
      the annual retainer for Mr. Freund and Mr. Goldsmith will be reduced to $66,667.
      These arrangements have indefinite terms and are terminable at any time by
      either party.





21


Mr.
      Freund and Mr. Goldsmith provide advice and counsel to the Company on a variety
      of strategic and financial matters, including business acquisitions and
      divestitures, raising capital and shareholder relations. Mr. Freund and Mr.
      Goldsmith do not render any services in connection with the day-to-day
      operations of the Company. Services are provided on a less than full time basis,
      with the amount of time varying depending on the activities in which the Company
      is engaged from time to time. The arrangements with the Company do not provide
      for a minimum amount of time to be spent on Company matters by Messrs. Freund
      and Goldsmith.




On
      May
      17, 2005, the Directors Compensation Committee recommended, and the Board of
      Directors approved, the compensation for non-employee directors, including
      such
      amounts received by Mr. Freund and Mr. Goldsmith.





Mr.
      Freund and Mr. 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."





Balfour
      and BIM occupy 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
      officers and principal shareholders of Balfour and BIM. Collectively, Balfour
      and BIM pay 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 and BIM is approximately $9,500 per month.





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 AND RELATED
      STOCKHOLDER MATTERS**





The
      following information is furnished as of March 24, 2006 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. ****




**Name**
              
              **Position**
              
              **Beneficial
                  Ownership of Shares of Common Stock as of**
                **March
                  24, 2006 (1)**
              
              **Percent
                  of****Class (1)**Taube
                  Hodson Stonex
                Partners
                  Limited
                27
                  St. James Place
                London
                  SW1A INR
                United
                  Kingdom
              
              
              N/A
              
              
              2,735,500
                  (2
              )
              
              11.0%Harry
                  I. Freund
              
              
              Director,
                  Chairman of the Board of Directors
              
              
              1,054,957
                  (3
              )
              
              4.1%Jay
                  S. Goldsmith
              
              
              Director,
                  Vice Chairman of the Board of Directors
              
              
              1,266,553
                  (4
              )
              
              5.0%Antonio
                  L. DeLise
              
              
              Director,
                  President, Chief Executive Officer, Chief Financial Officer and
                  Secretary
              
              
              297,000
                  (5
              )
              
              1.1%Clifford
                  B. Cohn
              
              
              Director
              
              
              150,314
                  (6
              )
              
              Less
                  than 1%L.G.
                  Schafran
              
              
              Director
              
              
              264,050
                  (7
              )
              
              1.1%Emil
                  Vogel
              
              
              Director
              
              
              198,800
                  (8
              )
              
              Less
                  than 1%All
                  directors, nominees and officers as a group (6 persons)
              
              
              
              
              
              3,218,674
                  (9
              )
              
              12.1%


22





(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
                530,000 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
                530,000 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
                270,000 shares which may be acquired by Mr. DeLise within 60 days
                through the exercise of stock
                options.


(6)
            Includes
                150,000 shares which may be acquired by Mr. Cohn within 60 days through
                the exercise of stock options.


(7)
            Includes
                150,000 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
                140,000 shares which may be acquired by Mr. Vogel within 60 days
                through the exercise of stock options.


(9)
            Includes
                1,770,000 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, 2005.





**Plan
                category**
            
            **Number
                of securities to be issued upon exercise of outstanding options,
                warrants
                and rights**
              **(a)**
            
            **Weighted-average
                exercise price of outstanding options, warrants and
                rights**
              **(b)**
            
            **Number
                of securities remaining available for future issuance under equity
                compensation plans (excluding securities reflected in column
                (a))**
              **(c)**Equity
                compensation plans approved by security holders
            
            
            2,267,350
            
            $
            .33
            
            
            2,043,650Equity
                compensation plans not approved by security holders
            
            
            160,000
            
            $
            2.50
            
            
            -Total
            
            
            2,427,350
            
            $
            .48
            
            
            2,043,650





23


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:




**2005**
            
            **2004**Audit
                fees
            
            $
            185,107
            
            $
            177,041Audit-related
                fees
            
            
            -
            
            
            15,645Tax
                fees
            
            
            -
            
            
            -All
                other fees
            
            
            -
            
            
            -




Audit-related
      fees in 2004 consisted 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 2005 and 2004. 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
      2005 and 2004.


24


**PART
      IV**





**ITEM
      15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES**








(a)
            Financial
                Statements and Financial Statement
                Schedules.





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.





(b)
            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.





10.6
            Settlement
                Agreement, dated as of September 23, 2004, by and between the Pension
                Benefit Guaranty Corporation and PubliCARD, Inc. Incorporated by
                reference
                from PubliCARD’s Current Report on Form 8-K filed on October 14, 2004.





25


10.7
            Promissory
                Note, dated as of September 23, 2004 made by PubliCARD, Inc. to the
                Pension Benefit Guaranty Corporation. Incorporated by reference from
                PubliCARD’s Current Report on Form 8-K filed on October 14, 2004.





10.8
            Security
                Agreement, dated as of September 23, 2004, made by PubliCARD, Inc.
                to the
                Pension Benefit Guaranty Corporation. Incorporated by reference from
                PubliCARD’s Current Report on Form 8-K filed on October 14, 2004.





10.9
            Pledge
                Agreement, dated as of September 23, 2004, made by PubliCARD, Inc.
                in
                favor of the Pension Benefit Guaranty Corporation. Incorporated by
                reference from PubliCARD’s Current Report on Form 8-K filed on October 14,
                2004.





10.10
            Description
                of the registrant’s compensation and reimbursement practices for its
                directors. Incorporated by reference from PubliCARD’s Current Reports on
                Form 8-K, dated November 14, 2005 and March 20,
                2006.





21.1
            Subsidiaries
                of PubliCARD. Filed herewith.





23.1
            Consent
                letter from Independent Registered Public Accounting Firm. Filed
                herewith.





31(i).1
            Rule
                13a-14(a)/15d-14(a) certification. Filed
                herewith.





32.1
            
            Section
                1350 certification. Filed herewith.




26





**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)DateMarch 30,
              2006
            By:
            /s/
              ANTONIO L. DELISEAntonio 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.


DateMarch 30,
                  2006
              By:
              /s/
                  ANTONIO L. DELISEAntonio
                  L. DeLise, President,Chief
                  Executive Officer, Chief FinancialOfficer
                  and DirectorDateMarch 30,
                  2006
              By:
              /s/
                  CLIFFORD B. COHNClifford
                  B. Cohn, DirectorDateMarch 30,
                  2006
              By:
              /s/
                  HARRY I. FREUNDHarry
                  I. Freund, Chairman of the Board and DirectorDateMarch 30,
                  2006
              By:
              /s/
                  JAY S. GOLDSMITHJay
                  S. Goldsmith, Vice Chairman of the Board and DirectorDateMarch 30,
                  2006
              By:
              /s/
                  L. G. SCHAFRANL.
                  G. Schafran, DirectorDateMarch 30,
                  2006
              By:
              /s/
                  EMIL VOGELEmil
                  Vogel, Director




27


**PUBLICARD,
        INC.**
 **AND
        SUBSIDIARY COMPANIES**
 
 **INDEX
        TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES**
 
 Financial
                  StatementsReport
                  of Independent Registered Public Accounting Firm
              F-2Consolidated
                  balance sheets as of December 31, 2005 and 2004
              F-3Consolidated
                  statements of operations for the years ended December 31,
                  2005,2004
                  and 2003
              F-4Consolidated
                  statements of shareholders' equity (deficiency) for the years
                  endedDecember
                  31, 2005, 2004 and 2003
              F-5Consolidated
                  statements of cash flows for the years endedDecember
                  31, 2005, 2004 and 2003
              F-6Notes
                  to consolidated financial statements
              F-7
                  through F-22ScheduleSchedule
                  II - Valuation and qualifying accounts
              F-23
 
 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**
 
 **REPORT
        OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**
 
 To
        the
        Board of Directors and Stockholders of
 PubliCARD,
        Inc.
 New
        York,
        New York
 
 We
        have
        audited the accompanying consolidated balance sheets of PubliCARD, Inc. and
        subsidiaries (the “Company”) as of December 31, 2005 and 2004, and the related
        consolidated statements of operations, stockholders' deficiency, and cash
        flows
        for each of the three years in the period ended December 31, 2005. Our audits
        also included the financial statement schedule listed in the Index at Item
        15.
        These financial statements and financial statement schedule are the
        responsibility of the Company's management. Our responsibility is to express
        an
        opinion on the financial statements and financial statement schedule based
        on
        our audits.
 
 We
        conducted our audits in accordance with the standards of the Public Company
        Accounting Oversight Board (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. The Company is not required
        to
        have, nor were we engaged to perform, an audit of its internal control over
        financial reporting. Our audits included consideration of internal control
        over
        financial reporting as a basis for designing audit procedures that are
        appropriate in the circumstances, but not for the purpose of expressing an
        opinion on the effectiveness of the Company's internal control over financial
        reporting. Accordingly, we express no such opinion. An audit also includes
        examining, on a test basis, evidence supporting the amounts and disclosures
        in
        the financial statements, 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, such consolidated financial statements present fairly, in all material
        respects, the financial position of PubliCARD, Inc. and subsidiaries as of
        December 31, 2005 and 2004, and the results of their operations and their
        cash
        flows for each of the three years in the period ended December 31, 2005,
        in
        conformity with accounting principles generally accepted in the United States
        of
        America. Also, in our opinion, such financial statement schedule, when
        considered in relation to the basic consolidated financial statements taken
        as a
        whole, present fairly in all material respects the information set forth
        therein.
 
 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 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 Notes 1 and 12. The financial
        statements do not include any adjustments that might result from the outcome
        of
        these uncertainties.
 
 /s/DELOITTE
        & TOUCHE LLP
 New
        York,
        New York
 March
        30,
        2006
 F-2
 
 **PUBLICARD,
        INC.**
 **AND
        SUBSIDIARY COMPANIES**
 
 **CONSOLIDATED
        BALANCE SHEETS**
 **DECEMBER
        31, 2005 AND 2004**
  ******2005**
              
              **2004**(in
                  thousands, except share data)**ASSETS**Current
                  assets:Cash,
                  including short-term investments of $989 and $1,837 in 2005
                  and2004,
                  respectively
              
              $
              1,072
              
              $
              1,943Trade
                  receivables, less allowance for doubtful accounts of $16 and $48
                  in
                  2005and
                  2004, respectively
              
              
              647
              
              
              827Inventories
              
              
              303
              
              
              558Other
                  current assets
              
              
              573
              
              
              440Total
                  current assets
              
              
              2,595
              
              
              3,768Equipment
                  and leasehold improvements, net
              
              
              47
              
              
              127Goodwill
              
              
              -
              
              
              782Other
                  assets
              
              
              -
              
              
              396$
              2,642
              
              $
              5,073**LIABILITIES
                  AND SHAREHOLDERS’ DEFICIENCY**Current
                  liabilities:Overdraft
                  payable
              
              $
              406
              
              $
              347Trade
                  accounts payable
              
              
              592
              
              
              1,011Accrued
                  liabilities
              
              
              1,067
              
              
              1,005Total
                  current liabilities
              
              
              2,065
              
              
              2,363Note
                  payable
              
              
              7,501
              
              
              7,501Other
                  non-current liabilities
              
              
              227
              
              
              368Total
                  liabilities
              
              
              9,793
              
              
              10,232Commitments
                  and contingencies (Note 7)Shareholders’
                  deficiency:Class
                  A Preferred Stock, Second Series, no par value: 1,000 shares authorized;
                  465and
                  565 shares issued and outstanding as of December 31, 2005and
                  2004, respectively
              
              
              2,325
              
              
              2,825Common
                  shares, $0.10 par value: 40,000,000 shares authorized; 24,940,902and
                  24,690,902 shares issued and outstanding as of December 31, 2005and
                  2004, respectively
              
              
              2,494
              
              
              2,469Additional
                  paid-in capital
              
              
              108,594
              
              
              108,119Accumulated
                  deficit
              
              
              (120,507
              )
              
              (118,476
              )Other
                  comprehensive loss
              
              
              (57
              )
              
              (96
              )Total
                  shareholders’ deficiency
              
              
              (7,151
              )
              
              (5,159
              )$
              2,642
              
              $
              5,073
 The
          accompanying notes to consolidated financial statements are an integral
          part of
          these statements.
 F-3
 
 **PUBLICARD,
        INC.**
 **AND
        SUBSIDIARY COMPANIES**
 
 **CONSOLIDATED
        STATEMENTS OF OPERATIONS**
 **FOR
        THE YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003**
  ******2005**
              
              **2004**
              
              **2003**(in
                  thousands, except share data)Revenues
              
              $
              3,617
              
              $
              4,395
              
              $
              4,781Cost
                  of revenues
              
              
              1,661
              
              
              2,010
              
              
              2,316Gross
                  margin
              
              
              1,956
              
              
              2,385
              
              
              2,465Operating
                  expenses:General
                  and administrative
              
              
              2,017
              
              
              2,330
              
              
              2,708Sales
                  and marketing
              
              
              1,173
              
              
              1,671
              
              
              1,844Product
                  development
              
              
              624
              
              
              716
              
              
              584Impairment
                  of goodwill
              
              
              782
              
              
              -
              
              
              -Amortization
                  of intangibles
              
              
              -
              
              
              40
              
              
              404,596
              
              
              4,757
              
              
              5,176Loss
                  from operations
              
              
              (2,640
              )
              
              (2,372
              )
              
              (2,711
              )Other
                  income (expenses):Interest
                  income
              
              
              27
              
              
              27
              
              
              15Interest
                  expense
              
              
              (26
              )
              
              (22
              )
              
              (12
              )Cost
                  of retirement benefits - non-operating
              
              
              -
              
              
              (405
              )
              
              (903
              )Loss
                  on pension settlement
              
              
              -
              
              
              (2,739
              )
              
              -Write-down
                  of minority investment
              
              
              -
              
              
              -
              
              
              (3,000
              )Gain
                  on insurance recoveries
              
              
              -
              
              
              647
              
              
              4,590Other
                  income
              
              
              350
              
              
              5
              
              
              428351
              
              
              (2,487
              )
              
              1,118Loss
                  from continuing operations
              
              
              (2,289
              )
              
              (4,859
              )
              
              (1,593
              )Income
                  from discontinued operations
              
              
              258
              
              
              -
              
              
              -Net
                  loss
              
              $
              (2,031
              )
              $
              (4,859
              )
              $
              (1,593
              )Basic
                  and diluted earnings (loss) per common share:Continuing
                  operations
              
              $
              (.09
              )
              $
              (.20
              )
              $
              (.07
              )Discontinued
                  operations
              
              
              .01
              
              
              -
              
              
              -$
              (.08
              )
              $
              (.20
              )
              $
              (.07
              )Weighted
                  average common shares outstanding
              
              
              24,767,825
              
              
              24,690,902
              
              
              24,469,748
  The
          accompanying notes to consolidated financial statements are an integral
          part of
          these statements.
  F-4
  **PUBLICARD,
        INC.**
 **AND
        SUBSIDIARY COMPANIES**
 
 **CONSOLIDATED
        STATEMENTS OF SHAREHOLDERS' DEFICIENCY**
 **FOR
        THE YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003**
 
 Class
                  A
                Preferred
                  Stock
              
              Common
                  Shares
              
              Additional
              
              
              
              Other
              
              Share-Shares
              
              
              
              Shares
              
              
              
              Paid-in
              
              Accumulated
              
              Comprehensive
              
              holders’Issued
              
              Amount
              
              Issued
              
              Amount
              
              Capital
              
              Deficit
              
              Loss
              
              Deficiency(in
                  thousands, except share data)Balance
                  - January 1, 2003
              
              
              765
              
              $
              3,825
              
              
              24,190,902
              
              $
              2,419
              
              $
              107,169
              
              $
              (112,024
              )
              $
              (2,391
              )
              $
              (1,002
              )Conversion
                  of preferred stock
              
              
              (200
              )
              
              (1,000
              )
              
              500,000
              
              
              50
              
              
              950
              
              
              -
              
              
              -
              
              
              -Comprehensive
                  loss:Net
                  loss
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (1,593
              )
              
              -
              
              
              (1,593
              )Foreign
                  currency translationadjustment
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              10
              
              
              10Minimum
                  pension liability
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (343
              )
              
              (343
              )Total
                  comprehensive loss
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (1,926
              )Balance
                  - December 31, 2003
              
              
              565
              
              
              2,825
              
              
              24,690,902
              
              
              2,469
              
              
              108,119
              
              
              (113,617
              )
              
              (2,724
              )
              
              (2,928
              )Comprehensive
                  loss:Net
                  loss
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (4,859
              )
              
              -
              
              
              (4,859
              )Foreign
                  currency translationadjustment
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (21
              )
              
              (21
              )Pension
                  settlement
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              2,649
              
              
              2,649Total
                  comprehensive loss
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (2,231
              )Balance
                  - December 31, 2004
              
              
              565
              
              
              2,825
              
              
              24,690,902
              
              
              2,469
              
              
              108,119
              
              
              (118,476
              )
              
              (96
              )
              
              (5,159
              )Conversion
                  of preferred stock
              
              
              (100
              )
              
              (500
              )
              
              250,000
              
              
              25
              
              
              475
              
              
              -
              
              
              -
              
              
              -Comprehensive
                  loss:Net
                  loss
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (2,031
              )
              
              -
              
              
              (2,031
              )Foreign
                  currency translationadjustment
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              39
              
              
              39Total
                  comprehensive loss
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (1,992
              )Balance
                  - December 31, 2005
              
              
              465
              
              $
              2,325
              
              
              24,940,902
              
              $
              2,494
              
              $
              108,594
              
              $
              (120,507
              )
              $
              (57
              )
              $
              (7,151
              )
 
 The
        accompanying notes to the consolidated financial statements are an integral
        part
        of these financial statements.
 
 F-5
  **PUBLICARD,
        INC.**
 **AND
        SUBSIDIARY COMPANIES**
 
 **CONSOLIDATED
        STATEMENTS OF CASH FLOWS**
 **FOR
        THE YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003**
 
 **2005**
              
              **2004**
              
              **2003**(in
                  thousands)**Cash
                  flows from operating activities:**Net
                  loss
              
              $
              (2,031
              )
              $
              (4,859
              )
              $
              (1,593
              )Adjustments
                  to reconcile net loss to net cash usedin
                  operating activities:Impairment
                  of goodwill
              
              
              782
              
              
              -
              
              
              -Loss
                  on pension settlement
              
              
              -
              
              
              2,739
              
              
              -Gain
                  from discontinued operations
              
              
              (258
              )
              
              -
              
              
              -Gain
                  from receipt of unclaimed property
              
              
              (350
              )
              
              -
              
              
              -Gain
                  on insurance recoveries
              
              
              -
              
              
              (647
              )
              
              (4,590
              )Write-down
                  of minority investment
              
              
              -
              
              
              -
              
              
              3,000Amortization
                  of intangibles
              
              
              -
              
              
              40
              
              
              40Depreciation
                  and amortization
              
              
              77
              
              
              116
              
              
              153Gain
                  on disposal of property and fixed assets
              
              
              -
              
              
              -
              
              
              (286
              )Changes
                  in assets and liabilities:Trade
                  receivables
              
              
              112
              
              
              397
              
              
              (239
              )Inventories
              
              
              215
              
              
              132
              
              
              281Other
                  current assets
              
              
              62
              
              
              102
              
              
              37Other
                  assets
              
              
              -
              
              
              -
              
              
              293Trade
                  accounts payable
              
              
              (382
              )
              
              (233
              )
              
              133Accrued
                  liabilities
              
              
              63
              
              
              541
              
              
              2,455Other
                  non-current liabilities
              
              
              (28
              )
              
              (701
              )
              
              (1,999
              )Net
                  cash used in operating activities
              
              
              (1,738
              )
              
              (2,373
              )
              
              (2,315
              )**Cash
                  flows from investing activities:**Capital
                  expenditures
              
              
              (3
              )
              
              (48
              )
              
              (11
              )Proceeds
                  from insurance recoveries, net of funds held in escrow
              
              
              136
              
              
              727
              
              
              4,118Proceeds
                  from discontinued operations
              
              
              289
              
              
              -
              
              
              -Proceeds
                  from receipt of unclaimed property and sale of propertyand
                  fixed assets
              
              
              350
              
              
              5
              
              
              371Other
              
              
              1
              
              
              2
              
              
              (3
              )Net
                  cash provided by investing activities
              
              
              773
              
              
              686
              
              
              4,475**Cash
                  flows from financing activities:******Increase
                  in overdraft payable
              
              
              95
              
              
              48
              
              
              125Effect
                  of exchange rate changes on cash and cash equivalents
              
              
              (1
              )
              
              2
              
              
              5Net
                  increase (decrease) in cash
              
              
              (871
              )
              
              (1,637
              )
              
              2,290Cash
                  - beginning of period
              
              
              1,943
              
              
              3,580
              
              
              1,290Cash
                  - end of period
              
              $
              1,072
              
              $
              1,943
              
              $
              3,580
 Cash
                  paid for interest
              
              $
              26
              
              $
              22
              
              $
              12Cash
                  paid for taxes
              
              $
              8
              
              $
              -
              
              $
              -
 
 The
        accompanying notes to the consolidated financial statements are an integral
        part
        of these financial statements.
 
 F-6
  **PUBLICARD,
        INC.**
 **AND
        SUBSIDIARY COMPANIES**
 
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
  **Note
        1 - LIQUIDITY AND GOING CONCERN CONSIDERATIONS AND 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.
        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.
 
 **Liquidity
        and Going Concern Considerations**
  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. As a result of the factors described below, it is unlikely that
        the
        Company will be able to continue as a going concern. The consolidated financial
        statements do not include any adjustments that might result from the outcome
        of
        this uncertainty. The independent auditors’ reports on the Company’s
        Consolidated Financial Statements for the years ended December 31, 2005,
        2004,
        2003 and 2002 contain emphasis paragraphs concerning substantial doubt about
        the
        Company’s ability to continue as a going concern.
 
 Infineer
        has continued to incur operating losses and negative cash flow. During 2003,
        2004 and 2005, the Company contributed additional capital to Infineer of
        $70,000, $225,000 and $150,000, respectively. It is likely that Infineer
        will
        require additional capital and the Company does not have the financial resources
        to provide such support. As discussed in Note 12, given the Company’s lack of
        available resources, continued operating losses and debt position, the Company
        has begun to consider various alternatives. In 2006, with the assistance of
        an investment banker, the Company commenced an assessment of the value
        of Infineer, developed an information memorandum and has begun to obtain
        offers
        for Infineer’s potential for sale. This process is ongoing and no firm offers
        have been received to date. A determination whether to consummate such a
        sale
        has not been made nor is it certain whether an acceptable offer will
        materialize. Any such determination would depend upon, among other things,
        the
        amount of potential proceeds of any such sale and satisfactory arrangements
        with
        the Pension Benefit Guaranty Corporation (the “PBGC”) regarding the use of those
        proceeds, pursuant to the Company’s obligations to the PBGC described
        below.
 
 The
        Company sponsored a defined benefit pension plan (the “Plan”) that was frozen in
        1993. In January 2003, the Company filed a notice with the PBGC seeking a
        “distress termination” of that Plan. Pursuant to the Agreement for Appointment
        of Trustee and Termination of Plan between the PBGC and the Company, effective
        September 30, 2004, the PBGC proceeded to terminate the Plan and was appointed
        as the Plan’s trustee. As a result, the PBGC has assumed responsibility for
        paying the obligations to Plan participants. As a result of the Plan
        termination, the Company’s 2003 and 2004 funding requirements due to the Plan
        amounting to $3.4 million through September 15, 2004 were eliminated.
 
 Under
        the
        terms of the Settlement Agreement, effective September 23, 2004, between
        the
        PBGC and the Company (the “Settlement Agreement”), the Company is liable to the
        PBGC for the unfunded guaranteed benefit payable by the PBGC to Plan
        participants in the amount of $7.5 million. The Company satisfied this liability
        by issuing a non-interest bearing note (the “Note”), dated September 23, 2004,
        payable to the PBGC with a face amount of $7.5 million. Pursuant to the Security
        Agreement and Pledge Agreement, both dated September 23, 2004, the Note is
        secured by (a) all presently owned or hereafter acquired real or personal
        property and rights to property of the Company and (b) the common and preferred
        stock of Infineer and TecSec, Incorporated (“TecSec”) owned by the Company. The
        Company has an approximately 5% ownership interest in TecSec, on a fully
        diluted
        basis.
 
 The
        Note
        matures on September 23, 2011. The first payment will be equal to $1.0 million
        and will become due 30 days after the Company has received a total of $4.0
        million in Net Recoveries. “Net Recoveries,” as defined in the Settlement
        Agreement, means the net cash proceeds received by the Company with respect
        to
        transactions consummated after March 31, 2003 from (a) the sale of the Company’s
        interest in Infineer and TecSec, real property in Louisiana and any other
        real
        or personal property assets and (b) any recoveries from the Company’s historic
        insurance program. Thereafter, on each anniversary of the first payment,
        the
        Company is required to pay the PBGC an amount equal to 25% of the Net Recoveries
        in excess of $4.0 million (less the sum of all prior payments made in accordance
        with this sentence in prior years). As of December 31, 2005, Net Recoveries
        was
        approximately $3.6 million. The Company expects to realize additional Net
        Recoveries of approximately $270,000 in 2006 relating to the release of certain
        funds currently held in escrow.
 
 F-7
 
  **PUBLICARD,
            INC.**
 **AND
            SUBSIDIARY COMPANIES**
 
 **NOTES
            TO CONSOLIDATED FINANCIAL STATEMENTS**
 If
        the
        Company defaults under the Settlement Agreement, the PBGC may declare the
        outstanding amount of the Note to be immediately due and payable, proceed
        with
        foreclosure of the liens granted in favor of the PBGC and exercise any other
        rights available under applicable law.
 
 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 $1.1 million at
        December 31, 2005. The Company also had a shareholders’ deficiency of $7.2
        million December 31, 2005.
 
 Absent
        a
        sale of Infineer and satisfaction of any obligation to the PBGC created by
        such
        sale, management believes that existing cash and short-term investments will
        not
        be sufficient to permit the Company to continue operating past the third
        quarter
        of 2006 and the Company would likely seek bankruptcy protection or otherwise
        cease operations. If a sale of Infineer is consummated, the Company will
        not
        thereafter have any ongoing business operations. In either case, the Company
        does not expect that any funds will be available for distribution to its
        shareholders.
 
 **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 in-cluding 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, 2005 and 2004 consisted of the following (in thousands):
 
 **2005**
              
              **2004**Raw
                  materials and work-in-process
              
              $
              262
              
              $
              468Finished
                  goods
              
              
              41
              
              
              90$
              303
              
              $
              558
 
 **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, 2005 and 2004 consisted of the following (in
        thousands):
 
 F-8
 
  **PUBLICARD,
            INC.**
 **AND
            SUBSIDIARY COMPANIES**
 
 **NOTES
            TO CONSOLIDATED FINANCIAL STATEMENTS**
 **2005**
              
              **2004**Equipment,
                  furniture and fixtures
              
              $
              975
              
              $
              1,123Leasehold
                  improvements
              
              
              58
              
              
              58Accumulated
                  depreciation and amortization
              
              
              (986
              )
              
              (1,054
              )$
              47
              
              $
              127
 
 Depreciation
        and amortization expense was $77,000, $116,000 and $153,000 in 2005, 2004
        and
        2003, 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
        Company determines 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 relies 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. The Company
        performs its annual goodwill impairment test during the fourth quarter absent
        any interim impairment indicators.
 
 In
        performing its annual goodwill impairment test at the end of the fourth quarter
        of 2005, the Company determined that goodwill had been impaired. Infineer
        has
        continued to incur operating losses and revenues declined substantially in
        2005.
        In addition, in 2005 PubliCARD contributed an additional $150,000 in capital
        to
        Infineer. Without such contributions, Infineer would not have been able to
        fund
        its operations. Also, as discussed in Note 12, the Company recently initiated
        a
        process of soliciting third party offers for the sale of the Infineer business.
        While this process is incomplete, expressions of interest thus far and the
        Company's calculation of future cash flows indicate that goodwill has been
        impaired. As a result of these factors, the Company recorded an impairment
        loss
        of $782,000 in the fourth quarter of 2005.
 
 The
        changes in the carrying value of goodwill for the year ended December 31,
        2005
        and 2004 was as follows (in thousands):
  **2005**
              
              **2004**Balance,
                  beginning of year
              
              $
              782
              
              $
              782Impairment
                  loss
              
              
              (782
              )
              
              -Balance,
                  end of year
              
              $
              -
              
              $
              782
 **** ****
 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. Intangible assets were fully amortized as of December 31, 2004.
        Amortization of intangibles was $40,000 for both 2004 and 2003.
 
 F-9
 
  **PUBLICARD,
            INC.**
 **AND
            SUBSIDIARY COMPANIES**
 
 **NOTES
            TO CONSOLIDATED FINANCIAL STATEMENTS**
 **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.
 
 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.
 
 **Stock-Based
        Compensation**
  The
        Company accounts for employee stock-based compensation cost using the intrinsic
        value method of accounting prescribed by Accounting Principles Board Opinion
        (“APB”) No. 25, “Accounting for Stock Issued to Employees” (“APB No. 25”). The
        Company has adopted the disclosure-only provisions of SFAS No. 123, “Accounting
        for Stock-Based Compensation” (“SFAS No. 123”) and SFAS No. 148, “Accounting for
        Stock-Based Compensation—Transition and Disclosure”.
  At
        December 31, 2005, 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 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):
  **2005**
              
              **2004**
              
              **2003**Net
                  loss, as reported
              
              $
              (2,031
              )
              $
              (4,859
              )
              $
              (1,593
              )Deduct:
                  Total stock-based compensationStock-based
                  compensation expensedetermined
                  under fair value based method
              
              
              (4
              )
              
              (126
              )
              
              (490
              )Pro
                  forma net loss
              
              $
              (2,035
              )
              $
              (4,985
              )
              $
              (2,083
              )Basic
                  and diluted loss per share:As
                  reported
              
              $
              (.08
              )
              $
              (.20
              )
              $
              (.07
              )Pro
                  forma
              
              $
              (.08
              )
              $
              (.20
              )
              $
              (.09
              )
 
 F-10
  **PUBLICARD,
          INC.**
 **AND
          SUBSIDIARY COMPANIES**
 
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 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:
 
 **2005**
              
              **2004**
              
              **2003**Expected
                  option term (years)
              
              
              5.0
              
              
              5.0
              
              
              5.0Expected
                  volatility
              
              
              165.0
              %
              
              353.0
              %
              
              93.0
              %Risk-free
                  interest rate
              
              
              4.1
              %
              
              3.7
              %
              
              3.4
              %Weighted
                  average fair value per option
              
              $
              .02
              
              $
              .06
              
              $
              .05
 
 **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 the Company’s 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 and valuation of goodwill 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 2005, 2004 and 2003
        since
        the effect of stock options and convertible preferred stock were anti-dilutive.
        Shares issuable pursuant to stock options and convertible preferred stock
        were
        3,589,850, 3,841,975 and 4,057,475 as of December 31, 2005, 2004 and 2003,
        respectively.
 
 **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 shareholders' equity.
  **Fair
        Value of Financial Instruments and Concentration of Credit
        Risk**
  The
        carrying amount of financial instruments, including cash and short-term
        investments, accounts receivable, accounts payable and accrued liabilities,
        approximates fair value. The fair value of long-term debt is estimated based
        on
        current rates which could be offered to the Company for debt of the same
        remaining maturity. The estimated fair value of the Company’s long term debt as
        of December 31, 2005 was approximately $2.3 million.
 
 Financial
        instruments that subject the Company to concentrations of credit risk consist
        primarily of cash and short-term investments and accounts receivable. The
        Company maintains all of its cash and short-term investments with high-credit
        quality financial institutions. The Company’s customer base consists of
        businesses principally in Europe (with a concentration in the United Kingdom)
        and the United States. For the years ended December 31, 2005 and 2004, no
        one
        customer accounted for more than 10% of revenues. Balances due from two
        customers accounted for 12% and 11%, respectively, of the accounts receivable
        balance as of December 31, 2005.
 
 F-11
 
  **PUBLICARD,
            INC.**
 **AND
            SUBSIDIARY COMPANIES**
 
 **NOTES
            TO CONSOLIDATED FINANCIAL STATEMENTS**
 **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, 2005, 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, it is unlikely that the future benefit of these losses
        will
        be recognized. Thus, a full valuation allowance has been recorded.
 
 **Recent
          Accounting Pronouncements** **
  In
          December 2004, the FASB issued SFAS No. 123R (revised 2004), “Share-Based
          Payment.” This statement requires compensation costs related to share-based
          payment transactions to be recognized in financial statements. Generally,
          compensation cost will be measured based on the grant-date fair value of
          the
          equity or liability instruments issued. In addition, liability awards will
          be
          remeasured each reporting period. Compensation cost will be recognized
          over the
          requisite service period, generally as the award vests. The Company will
          adopt
          SFAS No. 123R in the first quarter of 2006. SFAS No. 123R applies to all
          awards
          granted after the effective date and to previously-granted awards unvested
          as of
          the adoption date. The adoption of the statement is not expected to have
          a
          material impact on Company’s
          consolidated financial position, results of operations and cash flows.
  In November 2004, the FASB issued SFAS No. 151, “Inventory Cost, an
        amendment of ARB No. 43, Chapter 4.” This statement amends Accounting Research
        Bulletin No. 43 to clarify the accounting for abnormal amounts of idle
        facility expense, freight, handling costs and wasted material (spoilage).
        The
        provision of the statement is effective for inventory costs incurred during
        fiscal years beginning after June 15, 2005. The adoption of the statement
        is not expected to have a material effect on the Company’s consolidated
        financial position, results of operations and cash flows.
 
 In
        December 2004, the FASB issued SFAS No. 153, “Exchanges of Nonmonetary
        Assets, an amendment of APB Opinion No. 29.” This statement amends APB
        No. 29, “Accounting for Nonmonetary Transactions,” to eliminate the
        exception for nonmonetary exchanges of similar productive assets under
        APB No. 29 and replaces it with a general exception for exchanges of
        nonmonetary assets that do not have commercial substance. The statement is
        effective for financial statements for fiscal years beginning after
        June 15, 2005. The adoption of the statement is not expected to have a
        material effect on the Company’s consolidated financial position, results of
        operations and cash flows.
 
 In
        May
        2005, the FASB issued SFAS No. 154, "Accounting Changes and Error Corrections,
        a
        replacement of APB Opinion No. 20 and FASB Statement No. 3". This statement
        provides guidance on the accounting for and reporting of accounting changes
        and
        error corrections. It establishes, unless impracticable, retrospective
        application as the required method for reporting a change in accounting
        principle in the absence of explicit transition requirements specific to
        the
        newly adopted accounting principle. This statement also provides guidance
        for
        determining whether retrospective application of a change in accounting
        principle is impracticable and for reporting a change when retrospective
        application is impracticable. SFAS No. 154 is effective for accounting changes
        and correction of errors made in fiscal years beginning after December 15,
        2005. The
        adoption of the statement is not expected to have a material effect on the
        Company’s consolidated financial position, results of operations and cash flows.
 F-12
 
  **PUBLICARD,
            INC.**
 **AND
            SUBSIDIARY COMPANIES**
 
 **NOTES
            TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **Reclassifications**
  For
        the
        years ended December 31, 2004 and 2003, the Company reported the change in
        the
        overdraft facility as a component of operating activities in the Consolidated
        Statement of Cash Flows. In order to conform to the current period presentation,
        the Company has reclassified the increase in the overdraft for the years
        ended
        December 31, 2004 and 2003 of $48,000 and $125,000, respectively, to a component
        of financing activities. This was a correction of an error which management
        believes was not material to the Company’s Consolidated Statement of Cash
        Flows.
 
 **Note
        2 - INVESTMENTS**
 
 In
        December 2000, the Company acquired an ownership interest in 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 income (expenses)”. TecSec is currently
        evaluating alternative sources of financing to meet ongoing capital and
        operating needs, 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.
 
 **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 2005 and 2003,
        100
        shares and 200 shares of Class A Preferred Stock were converted at the stated
        rate into 250,000 shares and 500,000 shares, respectively, of PubliCARD’s common
        stock. As of December 31, 2005 and 2004 there were 465 shares and 565 shares,
        respectively, of Class A Preferred Stock outstanding. The Class A Preferred
        Stock has a liquidation preference of $5,000 per share.
 
 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.
 
 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-13
 
  **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):
 
 **2005**
              
              **2004**
              
              **2003**United
                  States
              
              $
              (928
              )
              $
              (3,927
              )
              $
              (508
              )Foreign
              
              
              (1,361
              )
              
              (932
              )
              
              (1,085
              )$
              (2,289
              )
              $
              (4,859
              )
              $
              (1,593
              )
 
 A
        reconciliation of taxes computed at the U.S. Federal statutory tax rate to
        income tax expense follows (in thousands):
  **2005**
              
              **2004**
              
              **2003**Federal
                  taxes, at statutory rate
              
              $
              (801
              )
              $
              (1,701
              )
              $
              (558
              )Effect
                  of domestic and foreign losses with notax
                  benefit
              
              
              526
              
              
              1,686
              
              
              543Impairment
                  of goodwill
              
              
              274
              
              
              -
              
              
              -Amortization
                  of intangibles and othernon-deductible
                  expenses
              
              
              1
              
              
              15
              
              
              15Income
                  tax expense
              
              $
              -
              
              $
              -
              
              $
              -
 
 The
        components of net deferred taxes are as follows (in thousands):
 
 **2005**
              
              **2004**Net
                  operating loss carryforward
              
              $
              21,600
              
              $
              23,671Pension
                  expense
              
              
              2,540
              
              
              2,540Other,
                  net
              
              
              (1
              )
              
              (51
              )24,139
              
              
              26,160Less
                  valuation allowance
              
              
              (24,139
              )
              
              (26,160
              )Net
                  deferred taxes
              
              $
              -
              
              $
              -
 
 As
        of
        December 31, 2005, approximately $61.7 million of U.S. tax loss carryforwards
        (subject to review by the Internal Revenue Service), expiring from 2006 through
        2025, were available to offset future taxable income. The carryforwards expire
        as follows (in thousands):
  **Year
                  ending****December
                  31,**
              
              **Amount**2006
              
              $
              2,4002007
              
              
              4,3002008
              
              
              5,0002009
              
              
              2,3002010
              
              
              1,5002018
                  - 2025
              
              
              46,200$
              61,700
 
 F-14
 
  **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. It is unlikely 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, 2005, the Company’s foreign subsidiary had a net operating loss
        carryforward for income tax purposes of approximately $4.5 million. The
        operating loss carryforward has no expiration period. For financial reporting
        purposes, a valuation allowance of $1.3 million has been recognized to offset
        the deferred tax asset relating to this carryforward.
 
 **Note
        5 - EMPLOYEE BENEFITS**
 
 **Defined
        contribution plan**
  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 $11,000, $10,000 and $9,000 in 2005,
        2004 and 2003, respectively.
 
 **Defined
        benefit plan**
  As
        discussed in Note 1, the Company sponsored a defined benefit pension plan
        that
        was frozen in 1993. In January 2003, the Company filed a notice with the
        PBGC
        seeking a “distress termination” of the Plan. Pursuant to the Agreement for
        Appointment of Trustee and Termination of Plan between the PBGC and the Company,
        effective September 30, 2004, the PBGC proceeded to terminate the Plan and
        was
        appointed as the Plan’s trustee. As a result, the PBGC has assumed
        responsibility for paying the obligations to Plan participants. Under the
        terms
        of the Settlement Agreement, effective September 23, 2004, between the PBGC
        and
        the Company, the Company is liable to the PBGC for the unfunded guaranteed
        benefit payable by the PBGC to Plan participants in the amount of $7.5 million.
        The Company satisfied this liability by issuing a non-interest bearing note,
        dated September 23, 2004, payable to the PBGC with a face amount of $7.5
        million. A loss on the termination of the Plan of $2.7 million was recorded
        in
        the third quarter of 2004.
  Cost
        of
        retirement benefits - non-operating of $405,000 and $903,000 in 2004 and
        2003,
        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):
 
 **2004**
              
              **2003**Interest
                  cost
              
              $
              348
              
              $
              531Expected
                  return on plan assets
              
              
              (87
              )
              
              (162
              )Amortization
                  of transition obligation
              
              
              -
              
              
              293Amortization
                  of net (gain) loss
              
              
              83
              
              
              86Net
                  periodic pension cost
              
              $
              344
              
              $
              748
 
 The
        unrecognized transition obligation was zero at December 31, 2003 and,
        accordingly, there was no further amortization expense related to this component
        of net periodic pension cost in 2004. As a result of the termination of the
        Plan, net periodic pension cost subsequent to September 2004 will be
        zero.
 
 F-15
 
  **PUBLICARD,
            INC.**
 **AND
            SUBSIDIARY COMPANIES**
 
 **NOTES
            TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 The
        change in the minimum liability included in other comprehensive income was
        as
        follows (in thousands):
 
 **2004**
              
              **2003**Other
                  comprehensive income
              
              $
              (2,649
              )
              $
              343
 
 The
        assumptions used to determine the net periodic pension cost for the years
        ended
        December 31, 2004 and 2003 were are follows:
 
 ******Net
                  periodic pension cost****2004**
              
              **2003**Discount
                  rate
              
              
              5.0
              %
              
              6.0
              %Long-term
                  rate of return
              
              
              5.0
              %
              
              6.0
              %
 
 As
        discussed above, in January 2003 the Company filed a notice with the PBGC
        seeking a distress termination of the Plan. The discount rate and long-term
        rate
        of return assumptions were decreased in 2004 to reflect the Plan’s short time
        horizon due to the pending termination request.
 
 **Note
        6 - STOCK OPTIONS**
 
 The
        Company has issued stock options pursuant to four fixed stock-based compensation
        plans and made special stock option awards to certain directors, consultants
        and
        employees. A summary of shares purchasable upon the exercise of stock options
        as
        of December 31, 2005, 2004 and 2003 are as follows:
 
 **2005**
              
              **2004**
              
              **2003**Fixed
                  stock-based compensation plans
              
              
              2,267,350
              
              
              2,269,475
              
              
              2,292,975Special
                  stock options
              
              
              160,000
              
              
              160,000
              
              
              352,0002,427,350
              
              
              2,429,475
              
              
              2,644,975
 
 **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 and vest over three or four years. As of December 31, 2005, there were
        2,043,650 shares available for grant under the fixed stock-based compensation
        plans.
 
 F-16
 
 **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, 2005, 2004 and 2003 and changes during the years then
        ended
        is presented below:
 
 **2005**
              
              **2004**
              
              **2003****Weighted**
              
              
              
              **Weighted**
              
              
              
              **Weighted****average**
              
              
              
              **average**
              
              
              
              **average****exercise**
              
              
              
              **exercise**
              
              
              
              **exercise****Shares**
              
              **price**
              
              **Shares**
              
              **price**
              
              **Shares**
              
              **price**Balance
                  at January 1
              
              
              2,269,475
              
              $
              .51
              
              
              2,292,975
              
              $
              .79
              
              
              2,939,175
              
              $
              1.01Granted
              
              
              150,000
              
              
              .025
              
              
              90,000
              
              
              .05
              
              
              90,000
              
              
              .07Exercised
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -Canceled
              
              
              (152,125
              )
              
              2.72
              
              
              (113,500
              )
              
              5.67
              
              
              (736,200
              )
              
              1.58Balance
                  at December 31
              
              
              2,267,350
              
              
              .33
              
              
              2,269,475
              
              
              .51
              
              
              2,292,975
              
              
              .79
 
 A
        summary
        of the Company's stock options outstanding and exercisable issued pursuant
        to
        the fixed stock-based compensation plans as of December 31, 2005, is as
        follows:
 
 **Outstanding**
              
              **Exercisable****Weighted**
              
              
              
              **Weighted****average**
              
              
              
              **average****Range
                  of**
              
              ****
              
              **Contractual**
              
              **exercise**
              
              
              
              **exercise****exercise
                  price**
              
              **Shares**
              
              **life**
              
              **price**
              
              **Shares**
              
              **price**$.025
                  to $.07
              
              
              330,000
              
              
              3.8
              
              $
              .05
              
              
              330,000
              
              $
              .05$.25
              
              
              90,000
              
              
              1.6
              
              
              .25
              
              
              90,000
              
              
              .25$.35
                  to $.40
              
              
              1,847,350
              
              
              3.5
              
              
              .39
              
              
              1,847,350
              
              
              .39$.025
                  to $.40 (all options)
              
              
              2,267,350
              
              
              3.4
              
              
              .33
              
              
              2,267,350
              
              
              .33
 
 **Special
        stock options**
  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. The remaining options expired in
        January
        2006.
 
 **Note
        7 - COMMITMENTS AND CONTINGENCIES**
 
 **Leases**
  The
        Company leases certain office space, vehicles and office equipment under
        operating leases that expire over the next four 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 $231,000 in 2005, $254,000
        in
        2004 and $241,000 in 2003.
 
 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**2006
              
              $
              308
              
              $
              114
              
              $
              1942007
              
              
              141
              
              
              38
              
              
              1032008
              
              
              39
              
              
              -
              
              
              39Total
                  minimum lease payments
              
              $
              488
              
              $
              152
              
              $
              336
 
 Balfour
        Investors Inc. (“Balfour”) and Balfour Investment Management (“BIM”) occupy 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 officers and principal
        shareholders of Balfour and BIM. Collectively, Balfour and BIM pay 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 and
        BIM
        is approximately $9,500 per month.
 
 F-17
 
  **PUBLICARD,
            INC.**
 **AND
            SUBSIDIARY COMPANIES**
 
 **NOTES
            TO CONSOLIDATED FINANCIAL STATEMENTS**
 **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, 2005, the Company has a contingent
        liability to repay, in whole or part, grants received of approximately $256,000
        in the event the Company becomes insolvent or otherwise violates the terms
        of
        such grants. As of December 31, 2005, the Company is in compliance with the
        terms of the grants.
 
 Infineer
        has an overdraft facility with a bank in Northern Ireland, which allows for
        the
        maximum borrowing of 320,000 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 6.50% at December 31, 2005). As of December 31, 2005, Infineer
        had borrowings outstanding under this facility totaling 236,000 British pounds
        (or the equivalent of $406,000).
 
 **Legal**
  On
        May
        28, 2002, a lawsuit was filed against the Company and four of its current
        and
        former directors and executive officers 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”). The plaintiffs sought compensatory and punitive damages for
        alleged actions of the defendants in order to induce the plaintiff to purchase,
        hold or refrain from selling shares of the Company’s common stock. The
        plaintiffs alleged 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.
 
 In
        November 2002, the Company and the individual defendants served with the
        Lawsuit
        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 parties
        to the Lawsuit subsequently began the document discovery process and responded
        to interrogatories.
 
 The
        parties to the Lawsuit agreed to engage in non-binding mediation and on July
        20, 2005,
        reached an agreement to settle the
        Lawsuit. Pursuant to this agreement, in exchange for a payment, the plaintiffs
        dismissed the case with prejudice and the parties executed mutual general
        releases. The Company’s primary directors and officers liability insurance
        carrier sreparties
        to the Lawsuit subsequently began the document discovery process and responded
        to interrogatories. funded
        the full cost of the settlement.
 
 The
        Company incurred approximately $200,000 in defense costs in 2002. No additional
        costs have been incurred in 2005, 2004 and 2003. The
        Company’s primary directors and officers liability insurance carrier sreparties
        to the Lawsuit subsequently began the document discovery process and responded
        to interrogatories. funded
        the additional costs of defending this Lawsuit.
 
 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.
 
 F-18
  **PUBLICARD,
          INC.**
 **AND
          SUBSIDIARY COMPANIES**
 
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
  **Change
        of control agreements**
  The
        Company is a party to change of control agreements, which provide for payments
        to certain directors 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 was to occur at the present time, payments of $506,000
        each
        would be made to the Chairman and Vice Chairman of the Company’s Board of
        Directors. 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.
 
 **Note
        8 - OTHER INCOME AND DISCONTINUED OPERATIONS**
 
 **Insurance
        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 $476,000 was placed in escrow to secure the payment
        of
        certain indemnification obligations. Absent any indemnity claims, amounts
        will
        be released from escrow beginning September 30, 2004 and ending June 30,
        2006.
        During 2005 and 2004, net cash released from escrow amounted to approximately
        $136,000 and $84,000, respectively. The Company recognized a gain from these
        settlements of approximately $4.6 million in 2003.
 
 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. In July
        2004, the assignment was supplemented to include several additional insurers.
        The claims involve several historic general liability policies of insurance
        issued to the Company. As a result of the assignment, after allowance for
        associated expenses and offsetting adjustments, the Company received net
        proceeds of approximately $647,000 in 2004. The Company recognized a gain
        from
        this assignment of $647,000 in 2004.
 
 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.
 
 **Other
        recoveries**
  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 income (expenses)”.
 
 In
        November 2005, the Company recovered previously unclaimed property in the
        amount
        of $350,000. The receipt was recognized as income in 2005 and included within
        “Other income” in the Consolidated Statements of Operations.
 
 F-19
 
  **PUBLICARD,
            INC.**
 **AND
            SUBSIDIARY COMPANIES**
 
 **NOTES
            TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **Discontinued
        operations**
  In
        October 1996, the Company sold substantially all of the assets of its Masterview
        Window Company, Inc. (“Masterview”) subsidiary. At closing, a portion of the
        sales proceeds amounting to $476,000 were deposited in to escrow to cover
        certain environmental remediation activities relating to a leaking underground
        storage tank at the former Masterview site in Arizona. The disposition of
        Masterview was accounted for as a discontinued operation in 1996 and a reserve
        of $476,000 was established against the gain on the disposition recorded
        at that
        time. In 2005, the remedial activities at the site were satisfied and the
        remaining funds held in escrow amounting to $289,000 were released to the
        Company. A gain of $258,000 was recorded in 2005 and reported as “Income from
        discontinued operations” in the Consolidated Statements of
        Operations.
 
 **Note
        9 - SEGMENT DATA**
 
 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,
        2005, 2004 and 2003 are as follows (in thousands):
  **2005**
              
              **2004**
              
              **2003**United
                  Kingdom
              
              $
              2,422
              
              $
              2,948
              
              $
              2,871United
                  States
              
              
              398
              
              
              540
              
              
              869Europe
                  (excluding United Kingdom)
              
              
              677
              
              
              683
              
              
              596Rest
                  of world
              
              
              120
              
              
              224
              
              
              445$
              3,617
              
              $
              4,395
              
              $
              4,781
 
 The
        Company has operations in the United States and United Kingdom. Identifiable
        tangible assets by country as of December 31, 2005 and 2004 are as follows
        (in
        thousands):
  **2005**
              
              **2004**United
                  States
              
              $
              1,647
              
              $
              2,770United
                  Kingdom
              
              
              995
              
              
              1,521$
              2,642
              
              $
              4,291
 
 **Note
        10 - SUPPLEMENTAL INFORMATION**
 
 Other
        current assets as of December 31, 2005 and 2004 consisted of the following
        (in
        thousands):
 
 **2005**
              
              **2004**Prepaid
                  insurance
              
              $
              111
              
              $
              147Escrow
                  deposit- current
              
              
              397
              
              
              200Other
              
              
              65
              
              
              93$
              573
              
              $
              440
 
 Other
        assets (non-current) as of December 31, 2004 of $396,000 consisted of the
        non-current portion of an escrow deposit account.
 
 F-20
 
 **PUBLICARD,
          INC.**
 **AND
          SUBSIDIARY COMPANIES**
 
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 Accrued
        liabilities as of December 31, 2005 and 2004 consisted of the following (in
        thousands):
 
 **2005**
              
              **2004**Payroll
                  and other employee benefits
              
              $
              197
              
              $
              259Deferred
                  revenue
              
              
              334
              
              
              363Professional
                  fees
              
              
              185
              
              
              177Other
              
              
              351
              
              
              206$
              1,067
              
              $
              1,005
 
 Other
        non-current liabilities as of December 31, 2005 and 2004 consisted of the
        following (in thousands):
 
 **2005**
              
              **2004**Retiree
                  life insurance
              
              $
              133
              
              $
              135Other
              
              
              94
              
              
              233$
              227
              
              $
              368
 
 Other
        comprehensive loss reported in the Company’s Consolidated Balance Sheet as of
        December 31, 2005 and 2004 of $57,000 and $96,000, respectively, consisted
        of
        the foreign currency translation adjustment.
 
 Comprehensive
        net loss for years ended December 31, 2005, 2004 and 2003 was composed of
        the
        following (in thousands):
 
 **2005**
              
              **2004**
              
              **2003**Net
                  loss
              
              $
              (2,031
              )
              $
              (4,859
              )
              $
              (1,593
              )Minimum
                  pension liability
              
              
              -
              
              
              2,649
              
              
              (343
              )Foreign
                  currency translation adjustments
              
              
              39
              
              
              (21
              )
              
              10Comprehensive
                  loss
              
              $
              (1,992
              )
              $
              (2,231
              )
              $
              (1,926
              )
  **Note
        11 - SELECTED QUARTERLY FINANCIAL DATA (unaudited)**
 
 The
        unaudited consolidated financial statements for each of the quarterly periods
        in
        the years ended December 31, 2005 and 2004 are as follows (in thousands,
        except
        per share data):
 
 **Mar.
                  31**
              
              **Jun.
                  30**
              
              **Sep.
                  30**
              
              **Dec.
                  31****2005**Net
                  sales
              
              $
              751
              
              $
              909
              
              $
              1,029
              
              $
              928Gross
                  margin
              
              
              383
              
              
              485
              
              
              601
              
              
              487Loss
                  from continuing operations
              
              
              (719
              )
              
              (453
              )
              
              (312
              )
              
              (805
              )Income
                  from discontinued operations
              
              
              -
              
              
              -
              
              
              -
              
              
              258Net
                  income (loss)
              
              
              (719
              )
              
              (453
              )
              
              (312
              )
              
              (547
              )Basic
                  and diluted earnings (loss) per shareContinuing
                  operations
              
              $
              (.03
              )
              $
              (.02
              )
              $
              (.01
              )
              
              (.03
              )Discontinued
                  operations
              
              
              -
              
              
              -
              
              
              -
              
              
              .01$
              (.03
              )
              $
              (.02
              )
              $
              (.01
              )
              $
              (.02
              )
  **2004**Net
                  sales
              
              $
              828
              
              $
              1,028
              
              $
              1,260
              
              $
              1,279Gross
                  margin
              
              
              422
              
              
              548
              
              
              730
              
              
              685Net
                  loss
              
              
              (503
              )
              
              (783
              )
              
              (3,082
              )
              
              (491
              )Basic
                  and diluted loss per share
              
              $
              (.02
              )
              $
              (.03
              )
              $
              (.12
              )
              $
              (.02
              )
 
 F-21
 
 **PUBLICARD,
            INC.**
 **AND
            SUBSIDIARY COMPANIES**
 
 **NOTES
            TO CONSOLIDATED FINANCIAL STATEMENTS**
 **Note
        12 - SUBSEQUENT EVENT**
 
 Given
        the
        Company’s lack of available resources, continued operating losses and debt
        position, the Company has begun to consider various  alternatives. In 2006,
        with the assistance of an investment banker, the Company commenced an
        assessment of the value of Infineer, developed an information memorandum
        and has begun to obtain offers for Infineer’s potential for sale. This process
        is ongoing and no firm offers have been received to date. A determination
        whether to consummate such a sale has not been made nor is it certain whether
        an
        acceptable offer will materialize. Any such determination would depend upon,
        among other things, the amount of potential proceeds of any such sale and
        satisfactory arrangements with the PBGC regarding the use of those proceeds,
        pursuant to the Company’s obligations to the PBGC. As discussed in Note 1, the
        Company is obligated to make payments to the PBGC once Net Recoveries exceed
        $4
        million. The Company believes the first payment to the PBGC equal to $1 million
        would become due if the net cash proceeds from the possible disposition of
        Infineer exceeded $150,000. In addition, any such sale would require the
        approval of the Company’s shareholders. Absent a sale of Infineer and
        satisfaction of any obligation to the PBGC created by such sale, management
        believes that existing cash and short-term investments will not be sufficient
        to
        permit the Company to continue operating past the third quarter of 2006 and
        the
        Company would likely seek bankruptcy protection or otherwise cease operations.
        If a sale of Infineer is consummated, the Company will not thereafter have
        any
        ongoing business operations. In either case, the Company does not expect
        that
        any funds will be available for distribution to its shareholders.
 F-22
 
 **PUBLICARD,
        INC.**
 **AND
        SUBSIDIARY COMPANIES**
 
 **SCHEDULE
        II - VALUATION AND QUALIFYING ACCOUNTS**
 **FOR
        THE YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003**
  AdditionsCharged(Credited)
                  toBalance
              
              Costs
                  and
              
              
              
              
              
              BalanceJanuary
                  1
              
              Expenses
                  (1)
              
              Other
              
              Deductions
                  (2)
              
              December
                  31(in
                  thousand of dollars)Year
                  ended December 31, 2005:Allowance
                  for doubtful accounts
              
              
              48
              
              
              -
              
              
              -
              
              
              (32
              )
              
              16Reserve
                  for discontinued operations
              
              
              377
              
              
              (258
              )
              
              -
              
              
              (25
              )
              
              94Year
                  ended December 31, 2004:Allowance
                  for doubtful accounts
              
              
              115
              
              
              (43
              )
              
              2
              
              
              (26
              )
              
              48Reserve
                  for discontinued operations
              
              
              406
              
              
              -
              
              
              -
              
              
              (29
              )
              
              377Year
                  ended December 31, 2003:Allowance
                  for doubtful accounts
              
              
              103
              
              
              5
              
              
              7
              
              
              -
              
              
              115Reserve
                  for discontinued operations
              
              
              429
              
              
              -
              
              
              -
              
              
              (23
              )
              
              406
 
 (1)
        Credit to cost and expenses for discontinued operations represents the reversal
        to income of the remaining discontinued operations reserve subsequent to
        the
        final resolution of an environmental matter.
 
 (2)
        Deductions for allowance for doubtful accounts represent the write-offs of
        account receivable. Deductions for discontinued operations represent charges
        for
        payments net of receipts credited to reserves.
  F-23