<PAGE>
                       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, 2001
                                                                 OR

| |      TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
         SECURITIES EXCHANGE ACT OF 1934
         For the transition period from ____ to ____.

   COMMISSION FILE NUMBER 0-29794

                                 PUBLICARD, INC.
             (Exact name of registrant as specified in its charter)

          PENNSYLVANIA                                  23-0991870
(State or other jurisdiction of             (I.R.S. Employer Identification No.)
 incorporation or organization)

        620 FIFTH AVENUE, 7TH FLOOR, NEW YORK, NY                  10020
        (Address of principal executive offices)                 (Zip code)

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

           Securities Registered Pursuant to Section 12(b) of the Act:

Title of each class                    Name of each exchange on which registered
-------------------                    -----------------------------------------
       NONE                                               NONE

           Securities Registered Pursuant To Section 12(g) of the Act
                          COMMON STOCK ($.10 PAR VALUE)
            RIGHTS TO PURCHASE CLASS A PREFERRED STOCK, FIRST SERIES

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES |X| No | |.

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

AS OF MARCH 15, 2002, THE AGGREGATE MARKET VALUE OF THE VOTING COMMON STOCK HELD
BY NON-AFFILIATES OF THE REGISTRANT WAS APPROXIMATELY $2,720,000.

 NUMBER OF SHARES OF COMMON STOCK OUTSTANDING AS OF MARCH 15, 2002: 24,153,402

                       Documents Incorporated By Reference

PART III, ITEMS 10, 11, 12 AND 13, ARE INCORPORATED BY REFERENCE FROM THE
REGISTRANT'S DEFINITIVE PROXY STATEMENT TO BE FILED PURSUANT TO REGULATION 14A
FOR THE 2002 ANNUAL MEETING OF SHAREHOLDERS.
<PAGE>

                                     PART I

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

ITEM 1. BUSINESS

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

      In addition to designing and integrating smart card technology that
enables secure electronic transactions for closed environments, PubliCARD also
licenses smart card reader technology and the integrated circuit technology
within readers. These readers facilitate secure access to PCs, networks and the
Internet, as well as secure Internet transactions, by enabling the use of
cryptographic and other security applications. PubliCARD licenses this
technology to Mako Technologies LLC, an affiliate in which PubliCARD has a
minority interest.

INDUSTRY

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

      A smart card is similar in appearance to a traditional credit card, but
unlike a traditional credit card, stores information on an integrated circuit
chip embedded within the card, rather than on a magnetic stripe on the surface.
While a typical magnetic stripe card stores approximately 212 bytes of
information, generally consisting of a user's name, account and personal
identification number, a smart card can store 64 kilobytes or more of
information, which is 300 times that of a traditional magnetic stripe credit
card. Additionally, the integrated circuit within a smart card serves as a
central processing unit which, combined with its memory capacity, facilitates
the use of encryption applications, which secure data and value exchanges within
networks and the Internet. Smart cards also permit bi-directional authentication
in which the smart card can authenticate the validity of the intended party or
device prior to exchanging information or value.


                                       1
<PAGE>

      The rollout of smart card technology started in the telecommunication
sector, specifically to facilitate the use of public payphones (replacing coins)
and mobile phones (Subscriber Identification Modules). Of the 2 billion smart
cards issued in 2000, half of them were issued in this sector. The deployment of
smart card technology in this sector demonstrates the security and adaptability
of the technology and evidences that smart cards are a unique media to store,
transport and process personal information, access keys and other information.

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

      Demand for smart card solutions are being further driven by governments
and financial institutions. The U.S. Government Paperwork Elimination Act of
1995 requires that all federal agencies offer electronic exchange of mandatory
data by October 2003. The European Commission ("EC") is also supporting the
adoption of smart card technology in their continuing efforts to create a more
efficient and competitive economy within the European community. Through the
eEurope program, the EC is sponsoring programs to standardize smart card
infrastructure devices and harmonize system platforms. Finally, smart card
technology is rapidly becoming a key facilitator of financial transactions. The
financial and banking community in Asia and Europe is using smart card
technology to support credit, debit and e-purse cards (cards that store cash
values), multi-application services and services dealing with coupons and/or
tickets. Several large U.S. financial institutions, including American Express,
MasterCard and Visa International, have introduced smart cards as part of their
financial card systems.

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

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

STRATEGY

BACKGROUND

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

-     In February 1998, PubliCARD acquired, through a joint venture arrangement
      in Greenwald Intellicard, Inc. ("Greenwald Intellicard"), the assets and
      intellectual property of Intellicard Systems, Ltd. Greenwald Intellicard
      provided smart cards, smart card readers, value transfer


                                       2
<PAGE>

      stations, card management software and machine interface boards for the
      commercial laundry appliance industry. PubliCARD initially owned 50% of
      Greenwald Intellicard, and acquired the remaining 50% in February 1999 and
      February 2000.

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

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

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

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

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

-     high growth potential existed;

-     PubliCARD had established relationships;

-     PubliCARD had already deployed products and gained credibility; and

-     PubliCARD possessed core technologies and competencies.

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

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

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

      In July 2001, after evaluating the timing of potential future revenues,
PubliCARD's Board decided to shift the Company's strategic focus. While the
Board remained confident in the long-term prospects of the smart card business,
the timing of public sector and corporate initiatives in wide-scale, broadband
environments utilizing the Company's smart card reader and chip products had
become more uncertain.


                                       3
<PAGE>

Given the lengthened time horizon, the Board did not believe it would be prudent
to continue to invest the Company's current resources in the ongoing development
and marketing of these technologies. Accordingly, the Board determined that
shareholders' interests will be best served by pursuing strategic alliances with
one or more companies that have the resources to capitalize more fully on the
Company's smart card reader and chip-related technologies. In connection with
this shift in the Company's strategic focus, workforce reductions and other
measures were implemented to achieve cost savings.

      In September 2001, the Company formed a new minority-owned affiliate, Mako
to market its smart card reader and chip technologies. The move is consistent
with the Company's decision to explore strategic transactions that would enable
the Company to reduce or eliminate its ongoing cash funding requirements for
its smart card reader and chip business while retaining an interest in the
upside potential for these technologies. The Company contributed certain
inventories and equipment valued at $238,000, in exchange for a 31% fully
diluted ownership interest in Mako. The Company has also granted a perpetual
license of its reader and chip technology to Mako in exchange for royalties
based on sales over the next two years. Based on current market conditions, the
Company does not expect to receive significant royalties.  In February 2002,
Mako reduced its headcount and is currently reassessing its business plan,
which may result in its liquidation in the near future. If Mako is not
successful in executing its business plan or in obtaining sufficient capital on
acceptable terms or at all, the Company's investment in Mako could be
permanently impaired and subject to a write-down.

CURRENT STRATEGY

      At present, PubliCARD's sole operating activities are conducted through
its Infineer subsidiary, which designs smart card platform solutions for
educational and corporate sites. The Company's future plans revolve around an
acquisition strategy focused on businesses in areas outside the high technology
sector while continuing to support the expansion of the Infineer business. Key
elements of our strategy include the following:

-    GROW PUBLICARD BUSINESS THROUGH ACQUISITIONS. An important element of the
     Company's new strategic plan involves the acquisition of businesses in
     areas outside the technology sectors in which the Company has recently been
     engaged, so as to diversify its asset base. The Company made a series of
     successful acquisitions in the 1980's and early 1990's and will endeavor to
     replicate this success by seeking out businesses meeting a targeted
     profile.

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

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

PUBLICARD PRODUCTS AND SOLUTIONS

     PubliCARD designs and develops smart card software and hardware solutions
for campus environments. The Company's solutions facilitate card-based payment
for a wide variety of services typically found on both corporate and education
sites. The Company's products and solutions include the following:

-    CHIPNET. The Company provides transaction solutions using a single smart
     card that facilitate smart card based payments for a wide variety of
     services typically found on both corporate and educational sites.
     Implementing a cashless system has many benefits including improved cash
     flow, enhanced service levels and superior management information. Uniquely
     adapted to the campus environment


                                       4
<PAGE>

      and users, ChipNet enables identification, payment at cafeteria, vending
      machines, photocopiers and printers, and network access to PCs. ChipNet
      also integrates with third party library management, campus wide access
      control and time and attendance tracking. The ChipNet solution comprises
      application software, hardware and smart cards.

      On ChipNet sites, card holders load money onto an Infineer
      multi-application smart card. The card can then be used to pay for a
      cafeteria and vending machine purchases, as well as for copier and
      networked printer usage. Each time a transaction takes place, all details
      are recorded, such as the date and time, user and item purchased. These
      are then processed by a robust back office software package, utilizing a
      powerful tracking tool that delivers accurate management information on
      sales and card activity. As the ChipNet solution is based around an open
      database platform, integration with third party cards, applications and
      electronic purses can be facilitated quickly and easily. ChipNet is
      currently installed in over 110 educational and corporate sites, primarily
      in the United Kingdom.

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

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

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

-     LICENSED TECHNOLOGY. PubliCARD licenses smart card reader and chip
      technology to Mako. The Company does not expect the revenue stream from
      licensing to be significant in the future. PubliCARD developed a line of
      chips that provide solutions for adding smart car support to a variety of
      OEM products such as cable set-top boxes, Interne appliances, personal
      computers, keyboards, and ATMs. These solutions drive the smart card
      reader in any smart card accepting device, enabling any smart card
      application and payment transactions to take place. Such devices include
      smart card readers, either stand-alone or embedded into other devices.
      PubliCARD's chips drive and manage these smart card readers by reading
      the chip embedded in the card and permitting the stored data to access
      the proper application. PubliCARD also developed intelligent smart card
      readers designed for electronic commerce, financial services, access
      control, security, and a variety of other applications. The reader line
      included a laptop reader as well as desktop solutions with either a serial
      or USB interface.


                                       5
<PAGE>

SALES AND MARKETING

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

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

RESEARCH AND DEVELOPMENT

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

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

COMPETITION

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

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

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


                                       6
<PAGE>

marketplace by acquiring or forming strategic alliances with competitors of
PubliCARD, resulting in increased competition.

INTELLECTUAL PROPERTY

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

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

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

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

EMPLOYEES

      As of March 15, 2002, PubliCARD had approximately 53 employees, of which
20 are involved in sales and marketing, 9 in product development, and 12 in
manufacturing. The Company considers its employee relations to be good.


                                       7
<PAGE>

SEGMENT INFORMATION

      As a result of the disposition of certain operations and because the
Company operates in one industry, that being the deployment of smart card
solutions which facilitate secure access and transactions, the Company reports
as a single segment. Sales by geographical areas for the years ended December
31, 2001, 2000 and 1999 are as follows (in thousands):

<TABLE>
<CAPTION>

                                                            2001                  2000                 1999
                                                            ----                  ----                 ----
<S>                                                       <C>                   <C>                  <C>
     United States                                        $ 1,727               $ 1,160              $ 1,245
     Europe                                                 3,671                 4,029                  614
     Rest of world                                            254                   354                   71
                                                          -------               -------              -------
                                                          $ 5,652               $ 5,543              $ 1,930
                                                          =======               =======              =======
</TABLE>

      The Company has operations in the United States and United Kingdom.
Identifiable assets by country as of December 31, 2001 and 2000 are as follows
(in thousands):

<TABLE>
<CAPTION>
                                                            2001                  2000
                                                            ----                  ----
<S>                                                       <C>                   <C>
     United States                                        $12,037               $25,547
     United Kingdom                                         2,557                 2,866
                                                           -----                 -----
                                                          $14,594               $28,413
                                                          =======               =======
</TABLE>

ITEM 1A. EXECUTIVE OFFICERS OF THE REGISTRANT (SEE ITEM 10 HEREIN)

      The following table sets forth information about the executive officers of
the Company as of March 15, 2002. The business address of each executive officer
is the address of the Company, 620 Fifth Avenue, New York, New York 10020.

<TABLE>
<CAPTION>
             Name                                Age                      Office and Position
             ----                                ---                      -------------------
<S>                                              <C>                      <C>
        Harry I. Freund                          62                       Director, Chairman of the Board
                                                                          and Chairman

        Jay S. Goldsmith                         58                       Director, Vice Chairman of the
                                                                          Board and Vice Chairman

        Antonio L. DeLise                        40                       Director, President, Chief Operating Officer,
                                                                          Chief Financial
                                                                          Officer and Secretary

        Robert J. Caldaroni                      38                       Vice President and Controller
</TABLE>

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

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

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


                                       8
<PAGE>

      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 and Chief
Operating Officer in February 2002.

      Mr. Caldaroni, a Certified Public Accountant, joined the Company in April
1999 as Director of Financial Reporting. He was appointed Vice President,
Controller in November 2001. Prior to joining the Company, Mr. Caldaroni was
the Controller of the Precious Metals Products Division of Handy & Harman.

ITEM 2. PROPERTIES

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

<TABLE>
<CAPTION>
                                                                                LEASE            SQUARE
    PREMISES                           PURPOSE                                EXPIRATION        FOOTAGE
    --------                           -------                                ----------        -------
<S>                           <C>                                             <C>               <C>
New York, NY                  Executive offices for PubliCARD                    2004             4,500

Bangor, Northern              Office and manufacturing                           2008            12,000
Ireland
</TABLE>

      The Company and Balfour are parties to a License Agreement, dated as of
October 26, 1994, with respect to a portion of the office space leased by the
Company in New York City. The Chairman and Vice Chairman of the Company are the
only shareholders of Balfour. The term of the License Agreement commenced on
January 1, 1995 and will expire on June 30, 2004, unless sooner terminated
pursuant to law or the terms of the License Agreement. The License Agreement
provides for Balfour to pay to the Company a portion of the rent paid by the
Company under its lease, including base rent, electricity, water, real estate
tax escalations and operation and maintenance escalations. Effective March 1,
2002, Balfour's share of rent and other costs was 50% of the total costs
incurred. The base rent payable by Balfour under the License Agreement is
approximately $11,000 per month.

ITEM 3. LEGAL PROCEEDINGS

      Various legal proceedings are pending against the Company. The Company
considers all such 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.

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

      On November 21, 2001, an annual meeting of shareholders of the Company was
held at which directors were elected to serve until their successors shall have
been elected and shall have qualified. The appointment of the Company's outside
auditors for the year ending December 31, 2001 was also ratified. The voting
results were as follows:

<TABLE>
<CAPTION>

                                                                 For            Against       Abstain
                                                                 ---            -------       -------
<S>                                                           <C>               <C>          <C>
Election of directors
  Harry I. Freund                                             17,524,655             --      1,784,072
  Jay S. Goldsmith                                            17,525,055             --      1,783,672
  Clifford B. Cohn                                            18,124,014             --      1,184,713
  Jan-Erik Rottinghuis                                        18,124,004             --      1,184,723
  L.G. Schafran                                               18,123,920             --      1,184,807
  Emil Vogel                                                  18,124,420             --      1,184,307
  Antonio L. DeLise                                           18,124,014             --      1,184,713

Ratification of auditors                                      18,238,725         74,108        995,894
</TABLE>

      In February 2002, Jan-Erik Rottinghuis resigned as President and Chief
Executive Officer of the Company and from PubliCARD's Board of Directors.


                                       9


<PAGE>
                                     PART II

ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER
MATTERS

(a)   PubliCARD's common stock is listed on the Nasdaq National Market under the
      symbol "CARD" . The following table sets forth the high and low closing
      sale prices of PubliCARD's common stock, as reported by the Nasdaq
      National Market, for the calendar periods indicated (in dollars):

<TABLE>
<CAPTION>
                                                            2001                                2000
                                                            ----                                ----
                                                  HIGH             LOW                   HIGH          LOW
                                                  ----             ---                   ----          ---
<S>                                              <C>              <C>                   <C>           <C>
       First Quarter                             2.875            1.437                 14.75          5.00
       Second Quarter                             1.63              .85                 9.125         2.625
       Third Quarter                               .88              .25                 3.625          1.75
       Fourth Quarter                              .45              .24                  4.25         1.125
</TABLE>

(b)   There were approximately 2,500 registered holders of record of common
      stock of the Company as of March 15, 2002.

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

RECENT SALES OF UNREGISTERED SECURITIES.

      In December 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 pursuant to Regulations D and S under the Securities Act
of 1933, as amended (the "Securities Act"). 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 a 3.5% ownership interest in
TecSec. The Company registered the shares of common stock issued and the shares
of common stock underlying the Class A Preferred Stock for resale under the
Securities Act through a registration statement on Form S-3, which became
effective on January 22, 2001.

      In connection with the December 2000 private placement, the Company issued
100 rights equally to the participants in the private placement pursuant to
Regulations D and S under the Securities Act. 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. See Note 2 to the Company's Consolidated Financial
Statements for details regarding the Company's investment in TecSec.

      On July 17, 2000 and October 16, 2000, the Company issued 60,000 and
55,000 shares of common stock, respectively, to the Publicker Industries Inc.
Retirement Income Plan pursuant to Regulations D and S under the Securities Act
in respect of a $365,000 required contribution to that Plan. The Company
registered the shares issued to such Plan for resale under the Securities Act
through a registration statement on Form S-3, which became effective on January
22, 2001.

      On February 29, 2000, the Company issued 66,333 shares of common stock for
the remaining 35% interest in Greenwald Intellicard not already owned by the
Company. The Company registered the shares issued for resale under the
Securities Act through a registration statement on Form S-3, which became
effective on April 12, 2000.


                                       10
<PAGE>


      On January 4, 2000, the Company issued 32,500 shares of common stock to a
former employee as part of the separation agreement dated December 3, 1999. The
Company registered the shares issued for resale under the Securities Act through
a registration statement on Form S-3, which became effective on April 12, 2000.

      On December 6, 1999, the Company issued 200,000 shares of common stock to
Jan-Erik Rottinghuis, its former President and Chief Executive Officer, pursuant
to the Employment Agreement, dated as of November 2, 1999, between the Company
and Mr. Rottinghuis. These shares were issued pursuant to Regulation D under the
Securities Act.

      On November 16, 1999, the Company issued 388,209 shares of common stock to
the shareholder of Absec in connection with the acquisition of Absec by the
Company. In addition, the Company issued options to purchase 300,000 shares of
its common stock to certain employees of Absec.

      On October 14, 1999, the Company issued 18,000 shares of common stock to
the Publicker Industries Inc. Retirement Income Plan pursuant to Regulation D
under the Securities Act in respect of a $144,000 required contribution to that
Plan. The Company registered the shares issued to such Plan for resale under the
Securities Act through a registration statement on Form S-3, which became
effective on November 10, 1999.

      On October 6, 1999, the Company completed the offer and sale of 3,269,500
shares of its common stock at a price of $5.91 per share in cash, for aggregate
cash consideration of $19.2 million. Of the shares issued and sold in this
private placement, 2,300,000 shares of common stock were sold for aggregate
consideration of approximately $13.5 million to non-U.S. persons in offshore
transactions pursuant to Regulation S under the Securities Act. Such non-U.S.
persons made certain representations to the Company regarding their status and
actions necessary to comply with Regulation S. The remaining 969,500 shares of
common stock were issued and sold in this private placement for aggregate
consideration of approximately $5.7 million pursuant to Regulation D under the
Securities Act. The Company registered the shares issued and sold pursuant to
this private placement under the Securities Act through a registration statement
on Form S-3, which became effective October 5, 1999.

      In June 1999, the Company issued 25,000 shares of common stock plus
$75,000 to acquire certain intellectual property rights from Passky LLC. The
Company registered the shares issued for resale under the Securities Act through
a registration statement on Form S-1, which became effective on July 21, 1999,
and was subsequently amended by a registration statement on Form S-3, which
became effective on August 24, 1999.

      On February 22, 1999, the Company issued 746,401 shares of common stock
for 100% of the common stock of Greystone. The Company also issued 132,388
options to purchase common stock to certain employees of Greystone. The Company
registered the shares issued for resale under the Securities Act through a
registration statement on Form S-1, which became effective on July 21, 1999, and
was subsequently amended by a registration statement on Form S-3, which became
effective on August 24, 1999.

      On February 11, 1999, the Company issued 350,000 shares of common stock
for 100% of the common stock of Amazing. In addition, the Company issued 457,503
options to purchase common stock to certain employees of Amazing. The Company
registered the shares issued for resale under the Securities Act through a
registration statement on Form S-1, which became effective on July 21, 1999, and
was subsequently amended by a registration statement on Form S-3, which became
effective on August 24, 1999.


                                       11
<PAGE>

ITEM  6. SELECTED FINANCIAL DATA

      The selected financial data of the Company presented below for the five
year period ended December 31, 2001 have been derived from the consolidated
financial statements of the Company, which have been audited by Arthur Andersen
LLP. 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 .

<TABLE>
<CAPTION>
                                                                 Year Ended December 31
                                        -----------------------------------------------------------------------
                                           2001          2000           1999           1998             1997
                                        ---------     ---------      ----------      ----------      ----------
                                                      (in thousands, except per share amounts)
<S>                                     <C>           <C>            <C>             <C>             <C>
STATEMENT OF INCOME DATA:
Net sales                               $   5,652     $   5,543      $    1,930      $        3      $       --
Cost of sales                               2,875         2,913             978               7              --
Inventory adjustment                        1,661            --              --              --              --
                                        ---------     ---------      ----------      ----------      ----------
     Gross margin                           1,116         2,630             952              (4)             --
                                        ---------     ---------      ----------      ----------      ----------

Operating expenses:
     General and administrative             4,625         6,664           5,713           3,694           3,570
     Sales and marketing                    3,413         7,562           2,862              21              --
     Product development                    2,442         4,364           1,318              53              --
     In-process research and
         development                           --            --              --           2,800              --
     Stock compensation expense                86         1,116           2,759             145              --
     Goodwill amortization                  1,824         2,638           1,749             128              --
     Repositioning and other
       special charges                      5,656            --           1,895              --             768
                                        ---------     ---------      ----------      ----------      ----------
                                           18,046        22,344          16,296           6,841           4,338
                                        ---------     ---------      ----------      ----------      ----------
     Loss from operations                 (16,930)      (19,714)        (15,344)         (6,845)         (4,338)
                                        ---------     ---------      ----------      ----------      ----------

Other income (expenses):
     Interest income                          476           936             561             528             667
     Interest expense                         (65)         (100)           (158)           (191)           (234)
     Cost of retirement benefits -
         non-operating                       (788)         (812)         (1,028)           (846)           (768)
     Other (expense) income                   136            15            (751)         (1,023)             31
                                        ---------     ---------      ----------      ----------      ----------
                                             (241)           39          (1,376)         (1,532)           (304)

Loss from continuing
     operations                           (17,171)      (19,675)        (16,720)         (8,377)         (4,642)
                                        ---------     ---------      ----------      ----------      ----------

Discontinued operations:
     Income (loss) from
         discontinued operations               --            --         (13,999)          2,302           2,954
     Gain (loss) on disposition of
         discontinued operations            2,350         4,275          (5,000)             --             609
                                        ---------     ---------      ----------      ----------      ----------
Net loss                                $ (14,821)    $ (15,400)     $  (35,719)     $   (6,075)     $   (1,079)
                                        =========     =========      ==========      ==========      ==========

Basic earnings (loss) per common share:
     Continuing operations              $    (.71)    $    (.84)     $     (.88)     $     (.61)     $     (.33)
     Discontinued operations                  .10           .18           (1.00)            .17             .25
                                        ---------     ---------      ----------      ----------      ----------
                                        $    (.61)    $    (.66)     $    (1.88)     $     (.44)     $     (.08)
                                        =========     =========      ==========      ==========      ==========
</TABLE>


                                       12
<PAGE>

<TABLE>
<CAPTION>
                                                    Year Ended December 31
                                        -----------------------------------------------
                                          2001      2000     1999       1998      1997
                                        -------   -------   -------   -------   -------
                                                        (in thousands)
<S>                                     <C>       <C>       <C>       <C>       <C>
BALANCE SHEET DATA:
 Working capital                        $ 2,631   $13,168   $23,889   $23,420   $18,219
 Total assets                            17,397    37,179    45,488    36,875    23,130
 Other non-current liabilities            5,328     6,010     6,674     7,689     9,043
 Shareholders' equity                     7,484    23,578    30,399    21,917    10,873
</TABLE>

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

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

OVERVIEW

      PubliCARD was incorporated in the Commonwealth of Pennsylvania in 1913.
PubliCARD entered the smart card industry in early 1998, and began to develop
solutions for the conditional access, security, payment system and data storage
needs of industries utilizing smart card technology. In 1998 and 1999, the
Company made a series of acquisitions to enhance its position in the smart card
industry. In March 2000, PubliCARD's Board of Directors (the "Board"), together
with its management team, determined to integrate its operations and focus on
deploying smart card solutions, which facilitate secure access and transactions.
To effect this new business strategy, in March 2000, the Board adopted a plan of
disposition pursuant to which the Company divested its non-core operations. See
Note 10 to the Consolidated Financial Statements for a discussion on the
disposition plan.

      In July 2001, after evaluating the timing of potential future revenues,
PubliCARD's Board decided to shift the Company's strategic focus. While the
Board remained confident in the long-term prospects of the smart card business,
the timing of public sector and corporate initiatives in wide-scale, broadband
environments utilizing the Company's smart card reader and chip products had
become more uncertain. Given the lengthened time horizon, the Board did not
believe it would be prudent to continue to invest the Company's current
resources in the ongoing development and marketing of these technologies.
Accordingly, the Board determined that shareholders' interests will be best
served by pursuing strategic alliances with one or more companies that have the
resources to capitalize more fully on the Company's smart card reader and
chip-related technologies. In connection with this shift in the Company's
strategic focus, workforce reductions and other measures were implemented to
achieve cost savings. See Note 11 to the Consolidated Financial Statements for a
discussion on the repositioning charge associated with this action.

      At present, PubliCARD's sole operating activities are conducted through
its Infineer Ltd. ("Infineer") subsidiary, which designs smart card platform
solutions for educational and corporate sites. The Company's future plans
revolve around an acquisition strategy focused on businesses in areas outside
the high technology sector while continuing to support the expansion of the
Infineer business.

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


                                       13
<PAGE>

RESULTS OF OPERATIONS

YEAR ENDED DECEMBER 31, 2001 COMPARED TO YEAR ENDED DECEMBER 31, 2000

      SALES. Revenues are generated from product sales, licenses of software
products, maintenance contracts and software development services. Revenue from
product sales is recorded upon shipment of the product. Provisions are recorded
for estimated warranty repairs, returns and bad debts at the time the product is
shipped. Software license fees are recognized upon shipment if a signed contract
exists, the fee is fixed and determinable and the collection of the resulting
receivable is probable. Revenue from maintenance and support fees is recognized
ratably over the contract period. Consolidated sales increased to $5.7 million
in 2001 compared to $5.5 for 2000. The increase is primarily attributed to sales
of smart card readers for security applications.

      GROSS MARGIN. Cost of sales consists primarily of material, personnel
costs, overhead and third-party contract manufacturing costs. Gross margin as a
percentage of sales was 20% for 2001 (49% excluding the inventory adjustment
discussed below) compared to 47% for 2000. Excluding the inventory adjustment,
the gross margin percentage increase is principally due to improved margins on
smart card reader sales.

      SALES AND MARKETING EXPENSES. Sales and marketing expenses consist
primarily of personnel and travel costs, public relations, trade shows and
marketing materials. Sales and marketing expenses were $3.4 million in 2001
compared to $7.6 million in 2000. The decrease is attributed to the July 2001
repositioning action, additional headcount reductions throughout 2000 and 2001
and lower consulting expenses for market research and corporate branding.

      PRODUCT DEVELOPMENT EXPENSES. Product development expenses consist
primarily of personnel and travel costs, independent consultants and contract
engineering services. The Company believes that a significant level of
development expenditures are required to enable it to quickly introduce new
solutions that incorporate the latest technological advances and to develop and
maintain close relationships with key suppliers of components and technologies.
The Company's future success will depend upon its ability to develop and to
introduce new solutions on a timely basis that keep pace with technological
developments and emerging industry standards and address the increasingly
sophisticated needs of its customers. Product development expenses include
expenses associated with the development of new products and enhancements to
existing products. Product development expenses amounted to $2.4 million in
2001 compared to $4.4 million in 2000. The decrease in expense is attributed to
the July 2001 repositioning action, headcount reductions throughout 2000 and
2001 and lower contract engineering services costs.

      GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
consist primarily of personnel and related costs for general corporate
functions, including finance and accounting, human resources, risk management
and legal. General and administrative expenses for the year ended December 31,
2001 decreased to $4.6 million from $6.7 million for 2000. The decrease in
expense is attributed to the July 2001 repositioning action, headcount
reductions and lower corporate expenditures, which consisted primarily of legal,
consulting and professional fees.

      STOCK COMPENSATION EXPENSE. Stock-based compensation recorded in 2001 and
2000 principally relates to the issuance of stock awards and below market stock
option grants to two executives hired in 2000 and 1999.

      GOODWILL AMORTIZATION. Goodwill is amortized on a straight-line basis over
five years. Amortization decreased to $1.8 million in 2001 from $2.6 million in
2000 due to the write-off of the remaining goodwill associated with the smart
card reader and chip business in the second quarter of 2001.

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


                                       14
<PAGE>

termination of 36 employees. The repositioning activities were substantially
completed by December 31, 2001.

      OTHER INCOME AND EXPENSE. Interest income decreased to $476,000 from
$936,000 in the prior year due to lower interest rates and investment balances.
Interest expense principally relates to interest on the remaining environmental
obligation (see below) and decreased to $65,000 in 2001 from $100,000 in 2000.
Cost of pensions principally relates to pension expense associated with the
Company's frozen defined benefit pension plan.

YEAR ENDED DECEMBER 31, 2000 COMPARED TO YEAR ENDED DECEMBER 31, 1999

      SALES. Consolidated sales increased to $5.5 million in 2000 compared to
$1.9 million for 1999. The increase in sales for 2000 is primarily attributable
to the Company's acquisition of Absec in late 1999 offset by lower smart card
chip sales.

      GROSS MARGIN. Gross margin as a percentage of sales was 47% for 2000
compared to 49% for 1999. The decrease in gross margin is attributed to lower
chip sales, which carried a higher gross margin, in 2000 compared to 1999.

      SALES AND MARKETING EXPENSES. Sales and marketing expenses were $7.6
million in 2000 compared to $2.9 million in 1999. The increase was due to the
expenses associated with Absec operations acquired in late 1999 and additional
headcount increases throughout 1999 and 2000.

      PRODUCT DEVELOPMENT EXPENSES. Product development expenses amounted to
$4.4 million in 2000 compared to $1.3 million in 1999. Expenses increased in
2000 primarily due to the Absec operations acquired in late 1999 and ongoing
smart card chip, reader and other development efforts.

      GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
for the year ended December 31, 2000 increased by approximately 17% to $6.7
million from $5.7 million for 1999. The increase was primarily due to $737,000
of expenses, mainly salaries and benefits, associated with the Absec operations
acquired in late 1999.

      STOCK COMPENSATION EXPENSE. Stock-based compensation recorded in 2000
principally relates to the change in terms of stock options awarded to two
former employees of the Company, the issuance of stock awards and below market
stock option grants to executives hired in 1999 and 2000 and the issuance of
stock options for consulting services. Stock-based compensation for 1999
principally relates to the issuance stock awards and below market stock option
grants to two company executives hired in 1999.

      GOODWILL AMORTIZATION. Amortization amounted to $2.6 million and $1.7
million in 2000 and 1999, respectively.

      OTHER INCOME AND EXPENSE. Interest income increased to $936,000 from
$561,000 in the prior year due to higher cash balances resulting from proceeds
from the sale of discontinued operations. Interest expense principally relates
to interest on the remaining environmental obligation (see below) and decreased
to $100,000 in 2000 from $158,000 in 1999. Other expense in 1999 includes
$357,000 associated with a stock sale price guarantee.

LIQUIDITY

      The Company has financed its operations over the last three years
primarily through the sale of capital stock and the sale of non-core businesses.
During the year ended December 31, 2001, cash, including short-term investments,
decreased by $12.6 million to $4.5 million as of December 31, 2001.

      Operating activities from continuing operations utilized cash of $12.2
million in 2001 and principally consisted of the loss from continuing operations
of $17.2 million and a decrease in net operating assets and liabilities of $4.6
million, offset by non-cash charges of $9.6 million for the repositioning
charge, goodwill amortization, stock compensation expense and depreciation.
Operating activities from discontinued


                                       15
<PAGE>

operations utilized cash of $424,000.

      Investing activities provided cash of $146,000 in 2001 and consisted
principally of proceeds from the sale of discontinued operations offset in part
by capital expenditures.


      Financing activities utilized cash of $43,000 in 2001 and consisted of
closing costs in connection with the Company's December 2000 private placement
of common and preferred stock.

      The Company has experienced negative cash flow from operating activities
in the past and expects to experience negative cash flow in 2002. In addition to
funding operating and capital requirements and corporate overhead, future uses
of cash include the following:

      -     The Company sponsors a defined benefit pension plan, which was
            frozen in 1993. As of December 31, 2001, the actuarial present value
            of accrued liabilities exceeded the plan assets by approximately
            $5.5 million. The annual contribution to the plan is expected to be
            approximately $1.6 million in 2002. Since the plan is significantly
            underfunded, the Company expects that the annual contribution
            requirements beyond 2002 will continue to be significant.

      -     In April 1996, a Consent Decree among the Company, the United States
            Environmental Protection Agency ("EPA") and the Pennsylvania
            Department of Environmental Protection ("PADEP") was entered by the
            court which resolved all of the United States' and PADEP's claims
            against the Company for recovery of costs incurred in responding to
            releases of hazardous substances at a facility previously owned and
            operated by the Company. Pursuant to the Consent Decree, the Company
            will pay a total of $14.4 million plus interest to the United States
            and the Commonwealth of Pennsylvania. Through December 31, 2001, the
            Company has made principal payments aggregating $13.2 million. In
            January 2002, the Company and the EPA reached an agreement to extend
            the due date on the remaining unpaid balance. In return, the EPA was
            granted a security interest in certain assets held in escrow. The
            remaining payments totaling $1.3 million, including interest, will
            be made to the EPA over the next three years and consist of $450,000
            in 2002, $431,000 in 2003 and $411,000 in 2004.

      -     The Company leases certain office space, vehicles and office
            equipment under operating leases that expire over the next eight
            years. Minimum payments for operating leases having initial or
            remaining non-cancelable terms in excess of one year are $421,000 in
            2002, $412,000 in 2003, $387,000 in 2004 and $248,000 thereafter.

      The Company will need to raise additional capital that may not be
available to it. Although management believes that existing cash and short term
investments may be sufficient to meet the Company's operating and capital
requirements at the currently anticipated level through December 31, 2002,
additional working capital will be necessary in order to fund the current
business plan and to ensure the Company is able to fund the pension and
environmental obligations. While the Company is actively considering various
funding alternatives, it has not secured or entered into any arrangements to
obtain additional capital. There can be no assurance that the Company will be
able to obtain additional funding on acceptable terms or at all. If the Company
cannot raise additional capital to continue its present level of operations it
may not be able to meet its obligations, take advantage of future acquisition
opportunities or further develop or enhance its product offering, any of which
could have a material adverse effect on its business and results of operations.

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

      The Company also currently fails to meet certain requirements for the
continued listing of its common stock on the Nasdaq National Market ("National
Market"). The Company is eligible to apply to transfer the listing of its common
stock to the Nasdaq SmallCap Market ("SmallCap Market"). However, there is no
assurance (i) that the Company will remedy the identified deficiencies and
continue to meet other National


                                       16
<PAGE>

Market quantitative or qualitative listing criteria, (ii) that any application
to list its common stock on the SmallCap Market will be successful and, if
successful, that it will continue to meet the SmallCap Market continued
maintenance requirements, (iii) that any appeal in the event of non-compliance
of its common stock will be successful or (iv) that its common stock will not be
delisted. Should the Company's common stock be delisted, the liquidity of the
common stock would be adversely affected. This could impair the Company's
ability to raise capital in the future. If additional capital is raised through
the issuance of equity securities, the Company's stockholder' percentage
ownership of the common stock will be reduced and stockholders may experience
dilution in net book value per share, or the new equity securities may have
rights, preferences or privileges senior to those of its commons stockholders.

      If the Company's liquidity does not improve, it may be unable to continue
as a going concern and could be required to seek bankruptcy protection. Such an
event may result in the Company's common and preferred stock being negatively
affected or becoming worthless.

CRITICAL ACCOUNTING POLICIES

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

      REVENUE RECOGNITION AND ACCOUNTS RECEIVABLE. Revenue from product sales
are recorded upon shipment of the product. Provisions are recorded for estimated
warranty repairs, returns and bad debts at the time the products are shipped.
Software license fees are recognized upon shipment if a signed contract exists,
the fee is fixed and determinable and the collection of the resulting receivable
is probable. Revenue from maintenance and support fees is recognized ratably
over the contract period. 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 guarantee 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 evaluates the need to record adjustments for
impairment of inventory on a quarterly basis. Inventory in excess of the
Company's estimated usage requirements is written down to its estimated net
realizable value. Inherent in the estimates of net realizable value are
management's estimates related to the Company's production schedules, customer
demand, possible alternative uses and the ultimate realization of potentially
excess inventory. During 2001, the decision to exit the smart card reader and
chip business resulted in a significant inventory realizability adjustment.
While management deems this adjustment to be non-recurring, a decrease in future
demand for current products could result in an increase in the amount of excess
inventories on hand.

      VALUATION OF INVESTMENTS. The Company periodically reviews the carrying
value of its minority-owned investments for impairment. This review is based
upon projections of anticipated future cash flows and independent market data,
if available. While management believes that the current carrying values of such
investments has not been impaired, different assumptions could affect the
evaluations.

      IMPAIRMENT OF GOODWILL. The Company periodically evaluates acquired
businesses for potential impairment indicators. Judgments regarding the
existence of impairment indicators are based on market conditions and
operational performance of the acquired businesses. Future events could cause
the


                                       17
<PAGE>

conclusion that impairment indicators exist and that goodwill associated with
acquired businesses is impaired. Any resulting impairment loss could have an
adverse impact on the Company's financial condition and results of operations.

      PENSION OBLIGATIONS. The determination of obligations and expense for
pension benefits is dependent on the selection of certain assumptions used by
actuaries in calculating such amounts. Those assumptions are described in Note 6
to the Consolidated Financial Statements and include, among others, the discount
rate and the expected rate of return on plan assets. In accordance with
generally accepted accounting principles, actual results that differ from
assumptions are accumulated and amortized over future periods and therefore,
generally affect the recognized expense and recorded obligation in such future
periods. While management believes that the assumptions are appropriate,
differences in actual experience or significant changes in assumptions may
materially affect the pension obligation and future expense.

RECENT ACCOUNTING PRONOUNCEMENTS

      In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 141, "Business Combinations" ("SFAS No. 141")
and Statement of Financial Accounting Standards No. 142, "Goodwill and Other
Intangible Assets" ("SFAS No. 142").

      SFAS No. 141 addresses financial accounting and reporting for business
combinations. This new statement requires that all business combinations be
accounted for using one method (the purchase method), intangible assets be
recognized apart from goodwill if they meet certain criteria and disclosure of
the primary reasons for a business combination and the allocation of the
purchase price paid to the assets acquired and liabilities assumed by major
balance sheet caption. The provisions of this statement apply to all business
combinations initiated after June 30, 2001.

      SFAS No. 142 addresses financial accounting and reporting for acquired
goodwill and other intangible assets. Under this new statement, goodwill and
intangible assets that have indefinite useful lives will not be amortized, but
rather will be tested at least annually for impairment based on the specific
guidance of this statement. In addition, this statement requires disclosure of
information about goodwill and other intangible assets in the years subsequent
to their acquisition that was not previously required. The provisions of this
statement are required to be applied starting with fiscal years beginning after
December 15, 2001. However, goodwill and intangible assets acquired after June
30, 2001 will be subject immediately to the non-amortization and amortization
provisions of this statement. The Company will adopt this statement on January
1, 2002. In accordance with this statement, no amortization expense for goodwill
will be recorded in future periods. The Company has not determined whether a
goodwill impairment charge will be recorded in 2002.

FACTORS THAT MAY AFFECT FUTURE RESULTS

      WE HAVE A HISTORY OF OPERATING LOSSES AND NEGATIVE CASH FLOW, WE HAVE
ONGOING FUNDING OBLIGATIONS AND WE NEED TO RAISE ADDITIONAL CAPITAL THAT MAY NOT
BE AVAILABLE TO US. We have incurred losses and experienced negative cash flow
from operating activities in the past, and we expect to incur losses and
experience negative cash flow from operating activities in the foreseeable
future. We incurred losses from continuing operations in 1999, 2000 and 2001 of
approximately $16.7 million, $19.7 million and $17.2 million, respectively. In
addition, we experienced negative cash flow from continuing operating activities
of $8.5 million, $18.7 million and $12.2 million in 1999, 2000 and 2001,
respectively.

      We also have continuing obligations to fund payments due under the Consent
Decree and an underfunded pension plan. As of December 31, 2001, we were
required to make future aggregate payments of $1.3 million through April 2004 in
connection with the Consent Decree. Consistent with the general practices of
environmental enforcement agencies, the Consent Decree does not eliminate our
potential liability for remediation of contamination that had not been known at
the time of the settlement. We sponsor a defined benefit pension plan, which was
frozen in 1993. As of December 31, 2001, the present value of the accrued
benefit liabilities of our pension plan exceeded the plan's assets by
approximately $5.5 million. In addition to the $1.6 million we expect to
contribute to the plan in 2002, we are obligated to make continued contributions
to the plan in accordance with the rules and regulations prescribed by the


                                       18
<PAGE>

Employee Retirement Income Security Act of 1974. Since the plan is significantly
underfunded, the Company expects that the annual contribution requirements
beyond 2002 will continue to be significant. Future contribution levels depend
in large measure on the mortality rate of plan participants, discount rate and
the expected return on the plan assets.

      We will need to raise additional capital that may not be available to us.
Although we believe existing cash and short term investments may be sufficient
to meet our operating and capital requirements at the currently anticipated
level through December 31, 2002, additional working capital will be necessary in
order to fund our current business plan and to ensure we are able to fund our
pension and environmental obligations. While we are actively considering various
funding alternatives, no arrangement to obtain additional funding has been
secured or entered into. There can be no assurance that we will be able to
obtain additional funding, on acceptable terms or at all. If we cannot raise
additional capital to continue at our present level of operations we may not be
able to meet our obligations, take advantage of future acquisition opportunities
or further develop or enhance our product offering, any of which could have a
material adverse effect on our business and results of operations and could lead
to our being required to seek bankruptcy protection.

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

      WE FACE RISKS ASSOCIATED WITH ACQUISITIONS. An important element of our
new strategic plan involves the acquisition of businesses in areas outside the
technology sectors in which we have recently been engaged, so as to diversify
our asset base. Acquisitions would require us to invest financial resources and
may have a dilutive effect on our earnings or book value per share of common
stock. We cannot assure you that we will consummate any acquisitions in the
future, that any financing required for such acquisitions will be available on
acceptable terms or at all, or that any past or future acquisitions will not
materially adversely affect our results of operations and financial condition.

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

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

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

      OUR TECSEC INVESTMENT MAY BE IMPAIRED OR SUBJECT TO A SIGNIFICANT
WRITE-DOWN IN THE FUTURE. As of December 31, 2001, the carrying value of our
investment in TecSec, a privately held company, was $5.1 million. This
investment has been accounted for at cost and could be subject to write-down in
future periods if it is determined that the investment is permanently impaired
and not recoverable. If TecSec is not successful in executing its business plan
or in obtaining sufficient capital on acceptable terms or at all, our investment
in TecSec could be permanently impaired and subject to a significant write-down.

      THE MARKET'S ACCEPTANCE OF OUR PRODUCTS IS UNCERTAIN. Demand for, and
market acceptance of, our software solutions and products are subject to a high
level of uncertainty due to rapidly changing


                                       19
<PAGE>
technology, new product introductions and changes in customer requirements and
preferences. The success of our products or any future products depends upon our
ability to enhance our existing products and to develop and introduce new
products and technologies to meet customer requirements. We face the risk that
our current and future products will not achieve market acceptance.

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

      WE DEPEND ON A RELATIVELY SMALL NUMBER OF CUSTOMERS FOR A MAJORITY OF OUR
REVENUES. We rely on a limited number of customers in our business. We expect to
continue to depend upon a relatively small number of customers for a majority of
the revenues in our business. For the year ended December 31, 2001, one customer
represented approximately 17% of the Company's sales and 17% of the accounts
receivable balance as of December 31, 2001.

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

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

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

      -     product selections;

      -     timely and efficient completion of product design and development;

      -     timely and efficient implementation of manufacturing processes;

      -     effective sales, service and marketing;

      -     price; and

      -     product performance in the field.

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

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


                                       20
<PAGE>

      We believe that the principal competitive factors affecting us are:

      -     the extent to which products support industry standards and are
            capable of being operated or integrated with other products;

      -     technical features and level of security;

      -     strength of distribution channels;

      -     price;

      -     product reputation, reliability, quality, performance and customer
            support;

      -     product features such as adaptability, functionality and ease of
            use; and

      -     competitor reputation, positioning and resources.

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

      Our primary competition currently comes from companies offering closed
environment solutions, including small value electronic cash systems and
database management solutions, such as Girovend, MARS, Diebold, CyberMark and
Schlumberger.

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

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

      WE MAY BE LIMITED IN OUR USE OF OUR FEDERAL NET OPERATING LOSS
CARRYFORWARDS. As of December 31, 2001, we had federal net operating loss
carryforwards, subject to review by the Internal Revenue Service, totaling
approximately $86.0 million for federal income tax purposes, approximately $25.0
million of which will expire at the end of 2002. We do not expect to earn any
significant taxable income in the next several years, and may not do so until
much later. A federal net operating loss can generally be carried back two or
three years and then forward fifteen or twenty years (depending on the year in
which the loss was incurred), and used to offset taxable income earned by a
company (and thus reduce its income tax liability).

      Section 382 of the Internal Revenue Code provides that when a company
undergoes an "ownership change," that company's use of its net operating losses
is limited in each subsequent year. An


                                       21
<PAGE>

"ownership change" occurs when, as of any testing date, the sum of the increases
in ownership of each shareholder that owns five percent or more of the value of
a company's stock as compared to that shareholder's lowest percentage ownership
during the preceding three-year period exceeds fifty percentage points. For
purposes of this rule, certain shareholders who own less than five percent of a
company's stock are aggregated and treated as a single five-percent shareholder.
We may issue a substantial number of shares of our stock in connection with
public and private offerings, acquisitions and other transactions in the future.
In addition, the exercise of outstanding warrants and options to purchase shares
of our common stock may require us to issue additional shares of our common
stock. The issuance of a significant number of shares of stock could result in
an "ownership change." If we were to experience such an "ownership change," we
estimate that virtually all of our available federal net operating loss
carryforwards could not be used to reduce our taxable income.

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

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

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

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

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


                                       22
<PAGE>

whether any breach is attributable to our products. This could result in a
decline in demand for our products, which would have a material adverse effect
on our business and operating results.

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

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

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

      OUR INTERNATIONAL OPERATIONS SUBJECT US TO RISK ASSOCIATED WITH OPERATING
IN FOREIGN MARKETS, INCLUDING FLUCTUATIONS IN CURRENCY EXCHANGE RATES, WHICH
COULD ADVERSELY AFFECT OUR OPERATIONS AND FINANCIAL CONDITION. International
sales represented approximately 69% of total sales for the year ended December
31, 2001. Because we derive a substantial portion of our business outside the
United States, we are subject to certain risks associated with operating in
foreign markets including the following:

      -     tariffs and other trade barriers;

      -     difficulties in staffing and managing foreign operations;

      -     currency exchange risks;

      -     export controls related to encryption technology;

      -     unexpected changes in regulatory requirements;

      -     changes in economic and political conditions;

      -     potentially adverse tax consequences; and

      -     burdens of complying with a variety of foreign laws.

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

      WE ARE SUBJECT TO GOVERNMENT REGULATION. Federal, state and local
regulations impose various environmental controls on the discharge of chemicals
and gases, which have been used in our past assembly processes and may be used
in future processes. Moreover, changes in such environmental rules and
regulations may require us to invest in capital equipment and implement
compliance programs in the


                                       23
<PAGE>

future. Any failure by us to comply with environmental rules and regulations,
including the discharge of hazardous substances, would subject us to liabilities
and would materially adversely affect our operations.

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

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

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

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

      The change of control agreements provide that, if the services of any
person party to a change of control agreement are terminated within three years
following a change of control, that individual will be entitled to receive, in a
lump sum within 10 days of the termination date, a payment equal to 2.99 times
that individual's average annual compensation for the shorter of the five years
preceding the change of control and the period the individual received
compensation from us for personal services. Assuming a change of control were to
occur at the present time, payments in the following amounts would be required:
Mr. Harry I. Freund of $934,000 and Mr. Jay S. Goldsmith of $934,000. If any
such payment, either alone or together with others made in connection with the
individual's termination, is considered to be an excess parachute payment under
the Internal Revenue Code, the individual will be entitled to receive an
additional payment in an amount which, when added to the initial payment, would
result in a net benefit to the individual, after giving effect to excise taxes
imposed by Section 4999 of the Internal Revenue Code and income taxes on such
additional payment, equal to the initial payment before such additional payment
and we would not be able to deduct these initial or additional payments for
income tax purposes.

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

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

      -     continued listing of our common stock on the National Market or
            SmallCap Market (see "Our stock may be delisted from the Nasdaq
            National Market" below);

      -     the volume of activity for our common stock is minimal and therefore
            a large number of shares placed for sale or purchase could increase
            its volatility;

      -     our ability to effectively manage our business, including our
            ability to raise capital;


                                       24
<PAGE>

      -     variations in our annual or quarterly financial results or those of
            our competitors;

      -     general economic conditions, in particular, the technology service
            sector;

      -     expected or announced relationships with other companies;

      -     announcements of technological advances innovations or new products
            by us or our competitors;

      -     patents or other proprietary rights or patent litigation; and

      -     product liability or warranty litigation.

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

      OUR STOCK MAY BE DELISTED FROM THE NASDAQ NATIONAL MARKET. On February 14,
2002, we received notice from The Nasdaq Stock Market ("Nasdaq") that our common
stock had failed to maintain a minimum closing bid price of $1.00 over the last
30 consecutive trading days as required by Nasdaq Marketplace rules. We received
a second notice on February 27, 2002, that our common stock also failed to
maintain a market value of public float of $5 million. The Nasdaq had previously
suspended the minimum bid price and market value of public float requirements in
response to market conditions following the September 11 terrorists attacks. The
Nasdaq reinstated these requirements effective January 2, 2002.

      In accordance with the Nasdaq rules, we will be provided 90 calendar days,
or until May 15, 2002, to regain compliance with the minimum bid price
requirement and until May 28, 2002 to regain compliance with the market value of
public float requirement. If at any time before May 15, 2002, the closing bid
price of our common stock is at least $1.00 for a minimum of 10 consecutive
trading days, Nasdaq will determine if we are in compliance. However, if we are
unable to demonstrate compliance on or before May 15, 2002, Nasdaq will provide
written notification that our securities will be delisted. At that time, we may
appeal the decision to a Nasdaq Listing Qualification Panel.

      We are eligible to apply to transfer the listing of our common stock to
the SmallCap Market. If we choose to make such an application and the
application is approved, we will be afforded an additional 90-day grace period
to comply with the $1.00 minimum bid price requirement, which will extend the
delisting determination until August 14, 2002. We may also be eligible for an
additional 180-day grace period provided that we meet certain SmallCap Market
initial listing criteria. If we should move to the SmallCap Market and meet the
minimum bid price requirement for 30 consecutive trading days and maintain
compliance with all other National Market listing requirements, we may be
eligible to transfer our listing back to the National Market.

      If we are unable to meet the National Market minimum maintenance
requirements during the initial 90-day grace period or if we should move to the
SmallCap Market and be unable to meet the minimum maintenance requirements
during the extended grace period, then we would be subject to delisting from the
Nasdaq system. In that event, after receiving notification that our securities
would be delisted, we may appeal the delisting determination.

      We cannot assure you (i) that we will remedy the identified deficiencies
and continue to meet other National Market quantitative or qualitative listing
criteria, (ii) that any application to list our common stock on the SmallCap
Market will be successful and, if successful, that we will continue to meet the
SmallCap Market continued maintenance requirements, (ii) that any appeal in the
event of non-compliance of our common stock will be successful or (iv) that our
common stock will not be delisted.

      Should our common stock be delisted, the liquidity of our common stock
would be adversely affected. This could impair our ability to raise capital in
the future. If we are not successful in raising additional capital when required
in sufficient amounts and on terms acceptable to us or at all, we may be
required to scale back the scope of our business plan, which would have a
material adverse effect on our financial condition and results of operations,
and be unable to fund our pension and environmental obligations.


                                       25
<PAGE>

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.
Our investment policy calls for investment in short-term, low risk instruments.
As of December 31, 2001, short-term investments (principally U.S. Treasury
bills) were $4.2 million. Due to the nature of these investments, any decrease
in rates would not have a material impact on our financial condition or results
of operations.

Investment Risk

      As of December 31, 2001, the carrying value of our investment in TecSec, a
privately held company, was $5.1 million. This investment has been accounted for
at cost and could be subject to write-downs in future periods if it is
determined that the investment is permanently impaired and is not recoverable.
If TecSec is not successful in executing its business plan or in obtaining
sufficient capital on acceptable terms or at all, our investment could be
permanently impaired and subject to a significant write-down.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

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

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

None.


                                       26
<PAGE>

                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

      The information called for by this item is hereby incorporated by
reference from the Company's definitive proxy statement to be filed pursuant to
Regulation 14A for the 2002 Annual Meeting of Shareholders.

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

SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

      Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), requires the Company's directors and officers and persons who
own more than 10 percent of a registered class of the Company's equity
securities, to file reports of ownership and changes in ownership with the
Securities and Exchange Commission (the "SEC"). Officers, directors and greater
than 10% shareholders are required by SEC regulations to furnish the Company
with copies of all Section 16(a) forms they file. To the Company's knowledge,
based solely upon the Company's review of the copies of such forms received by
it during the fiscal year ended December 31, 2001 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,
except for one late Form 4 transaction for Larry G. Schafran filed on September
19, 2001 relating to an August 4, 2001 transaction.

ITEM 11. EXECUTIVE COMPENSATION

      The information called for by this item is hereby incorporated by
reference from the Company's definitive proxy statement to be filed pursuant to
Regulation 14A for the 2002 Annual Meeting of Shareholders.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

      The information called for by this item is hereby incorporated by
reference from the Company's definitive proxy statement to be filed pursuant to
Regulation 14A for the 2002 Annual Meeting of Shareholders.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

      The information called for by this item is hereby incorporated by
reference from the Company's definitive proxy statement to be filed pursuant to
Regulation 14A for the 2002 Annual Meeting of Shareholders.


                                       27
<PAGE>

                                     PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

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

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

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

      3)    Exhibits:

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

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

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

      4.2   Form of Warrant Agreement, dated 1986, between PubliCARD and J.
            Henry Schroder Bank & Trust Company, as Warrant Agent. Incorporated
            by reference from PubliCARD's Registration Statement on Form S-1,
            dated October 8, 1986.

      4.3   Form of Amendment No. 1 to Warrant Agreement, dated August 13, 1997,
            between PubliCARD and Publicker Industries Inc., successor to J.
            Henry Schroder Bank & Trust Company, as Warrant Agent. Incorporated
            by reference from PubliCARD's Current Report on Form 8-K, filed on
            August 15, 1997.

      4.4   Form of Warrant Agreement, dated 1986, between PubliCARD and Drexel
            Burnham Lambert Incorporated. Incorporated by reference from
            PubliCARD's Registration Statement on Form S-1, dated October 8,
            1986.

      4.5   Form of Amendment No.1 to Warrant Agreement, dated August 13, 1997,
            between PubliCARD and Harry I. Freund and Jay S. Goldsmith.
            Incorporated by reference from PubliCARD's Current Report on Form
            8-K, filed on August 15, 1997.

      4.6   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.

      4.7   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.

      4.8   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


                                       28
<PAGE>

            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  Employment Agreement, dated as of November 2, 1999, between
            PubliCARD and Jan-Erik Rottinghuis. 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  Asset Purchase Agreement, dated June 29, 2000, among Greenwald
            Industries, Inc., Greenwald Intellicard, Inc., The Eastern Company,
            and PubliCARD, Inc. Incorporated by reference from PubliCARD's
            Current Report on Form 8-K, filed on July 10, 2000.

      10.6  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.

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

      21.1  Subsidiaries of PubliCARD . Filed herewith.

      23.1  Consent letter from Independent Public Accountants. Filed herewith.

      99.1  Letter from PubliCARD regarding Arthur Andersen LLP representations.
            Filed herewith.


      (b)   Reports on Form 8-K

            None.


                                       29
<PAGE>

                                   SIGNATURES

         Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.


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

Date  March 20, 2002              By: /s/ ANTONIO L. DELISE
      -------------------             --------------------------------
                                      Antonio L. DeLise, President,
                                      Chief Operating Officer, Chief Financial
                                      Officer and Director

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

Date  March 20, 2002              By: /s/ ANTONIO L. DELISE
      -------------------            ------------------------------------------
                                     Antonio L. DeLise, President,
                                     Chief Operating Officer, Chief Financial
                                     Officer and Director

Date March 20, 2002               By: /s/ ROBERT J. CALDARONI
     --------------------             ------------------------------------------
                                      Robert J. Caldaroni , Vice President,
                                      Controller

Date March 20, 2002               By: /s/ CLIFFORD B. COHN
     --------------------             ------------------------------------------
                                      Clifford B. Cohn, Director

Date March 20, 2002               By: /s/ HARRY I. FREUND
     --------------------             ------------------------------------------
                                      Harry I. Freund, Chairman and Director

Date March 20, 2002               By: /s/ JAY S. GOLDSMITH
     --------------------             ------------------------------------------
                                      Jay S. Goldsmith, Vice Chairman
                                      and Director

Date March 20, 2002               By: /s/ L. G. SCHAFRAN
     --------------------             ------------------------------------------
                                      L. G. Schafran, Director

Date March 20, 2002               By: /s/ EMIL VOGEL
     --------------------             ------------------------------------------
                                      Emil Vogel, Director


                                       30
<PAGE>

                                 PUBLICARD, INC.
                            AND SUBSIDIARY COMPANIES

             INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE

<TABLE>
<CAPTION>
Financial Statements
--------------------
<S>                                                                                            <C>
Report of independent public accountants                                                             F-2

Consolidated balance sheets as of December 31, 2001  and 2000                                        F-3

Consolidated statements of income (loss) for the years ended December 31, 2001,
   2000 and 1999                                                                                     F-4

Consolidated statements of shareholders' equity for the years ended
   December 31, 2001, 2000 and 1999                                                              F-5 and F-6

Consolidated statements of cash flows for the years ended
   December 31, 2001, 2000 and 1999                                                                  F-7

Notes to consolidated financial statements                                                     F-8 through F-22

Selected quarterly financial data                                                                    F-23

Schedule
--------

Report of independent public accountants on schedule                                                 F-24

Schedule II - Valuation and qualifying accounts                                                      F-25
</TABLE>

      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
<PAGE>

                                 PUBLICARD, INC.
                            AND SUBSIDIARY COMPANIES

                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Shareholders of PubliCARD, Inc.:

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

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

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

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


/s/ Arthur Andersen LLP

Stamford, Connecticut
March 20, 2002


                                       F-2
<PAGE>

                                 PUBLICARD, INC.
                            AND SUBSIDIARY COMPANIES

                        CONSOLIDATED BALANCE SHEETS AS OF
                           DECEMBER 31, 2001 AND 2000

<TABLE>
<CAPTION>
                                                                                            2001         2000
                                                                                         ---------    ---------
                                                                                    (in thousands except share data)
<S>                                                                                      <C>          <C>
                                             ASSETS

Current assets:
     Cash, including short-term investments of $4,199 in 2001 and $16,820 in 2000        $   4,479    $  17,049
     Trade receivables, less allowance for doubtful accounts
       (2001 - $216, 2000 - $89)                                                             1,410        1,632
     Inventories                                                                               557        1,617
     Other                                                                                     770          461
                                                                                         ---------    ---------
          Total current assets                                                               7,216       20,759
                                                                                         ---------    ---------

Equipment and leasehold improvements, net                                                      596        1,623
Goodwill                                                                                     2,803        8,766
Other assets                                                                                 6,782        6,031
                                                                                         ---------    ---------
                                                                                         $  17,397    $  37,179
                                                                                         =========    =========

                              LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities:
     Trade accounts payable                                                              $   1,206    $   1,215
     Accrued liabilities                                                                     3,379        6,376
                                                                                         ---------    ---------
          Total current liabilities                                                          4,585        7,591

Other non-current liabilities                                                                5,328        6,010
                                                                                         ---------    ---------

          Total liabilities                                                                  9,913       13,601
                                                                                         ---------    ---------

Shareholders' equity:
     Class A Preferred Stock, Second Series, no par value:
           1,000 shares authorized; 780 and 790 issued and outstanding
           as of December 31, 2001 and 2000, respectively                                    3,900        3,950
     Common shares, $0.10 par value: 40,000,000 shares authorized;
          24,153,402 and 24,237,402 shares issued as of
          December 31, 2001 and 2000, respectively                                           2,415        2,424
     Additional paid-in capital                                                            107,098      107,300
     Accumulated deficit                                                                  (104,831)     (90,010)
     Other comprehensive loss                                                               (1,098)          --
     Unearned compensation                                                                      --          (86)
                                                                                         ---------    ---------
          Total shareholders' equity                                                         7,484       23,578
                                                                                         ---------    ---------
                                                                                         $  17,397    $  37,179
                                                                                         =========    =========
</TABLE>

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


                                       F-3
<PAGE>

                                 PUBLICARD, INC.
                            AND SUBSIDIARY COMPANIES

                    CONSOLIDATED STATEMENTS OF INCOME (LOSS)
              FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999

<TABLE>
<CAPTION>

                                                                                      2001        2000        1999
                                                                                    --------    --------    --------
                                                                                  (in thousands except per share data)
<S>                                                                                 <C>         <C>         <C>
Net sales                                                                           $  5,652    $  5,543    $  1,930

Cost of sales                                                                          2,875       2,913         978
Inventory adjustment                                                                   1,661          --          --
                                                                                    --------    --------    --------
     Gross margin                                                                      1,116       2,630         952
                                                                                    --------    --------    --------

Operating expenses:
     General and administrative                                                        4,625       6,664       5,713
     Sales and marketing                                                               3,413       7,562       2,862
     Product development                                                               2,442       4,364       1,318
     Stock compensation expense                                                           86       1,116       2,759
     Goodwill amortization                                                             1,824       2,638       1,749
     Repositioning and other special charges                                           5,656          --       1,895
                                                                                    --------    --------    --------
                                                                                      18,046      22,344      16,296
                                                                                    --------    --------    --------
Loss from operations                                                                 (16,930)    (19,714)    (15,344)
                                                                                    --------    --------    --------
Other income (expenses):
     Interest income                                                                     476         936         561
     Interest expense                                                                    (65)       (100)       (158)
     Cost of retirement benefits - non-operating                                        (788)       (812)     (1,028)
     Other (expense) income                                                              136          15        (751)
                                                                                    --------    --------    --------
                                                                                        (241)         39      (1,376)
                                                                                    --------    --------    --------

Loss from continuing operations                                                      (17,171)    (19,675)    (16,720)

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

Basic earnings (loss) per common share:
     Continuing operations                                                          $   (.71)   $   (.84)   $   (.88)
     Discontinued operations                                                             .10         .18       (1.00)
                                                                                    --------    --------    --------
                                                                                    $   (.61)   $   (.66)   $  (1.88)
                                                                                    ========    ========    ========
</TABLE>

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


                                       F-4
<PAGE>

                                 PUBLICARD, INC.
                            AND SUBSIDIARY COMPANIES

                 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
              FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999

<TABLE>
<CAPTION>
                                                   Class A
                                                Preferred Stock               Common Shares
                                               ----------------        ---------------------------
                                                                                                         Additional
                                               Shares                    Shares                           Paid-in       Accumulated
                                               Issued    Amount          Issued           Amount          Capital          Deficit
                                               ------    ------        -----------      ----------       ----------     ------------
                                                                    (in thousands except per share data)
<S>                                            <C>       <C>           <C>              <C>              <C>            <C>
Balance - December 31, 1998                     --       $   --         20,300,954        $  2,030        $  67,091        $(38,891)
Shares issued:
    Stock option plans                          --           --            685,655              68            1,822              --
    Private placement                           --           --          3,269,500             327           18,859              --
    Business acquisitions                       --           --          1,509,610             151           17,635              --
    Pension plan contribution                   --           --             18,000               2              142              --
    Restricted shares and below
    market stock options                        --           --            208,333              21            3,072              --
Amortization of unearned compensation           --           --                 --              --               --              --
Market adjustment to redeemable shares          --           --                 --              --              846              --
Reclassification of redeemable shares           --           --            199,137              20            2,009              --
Net loss                                        --           --                 --              --               --         (35,719)
                                               ---       ------        -----------        --------        ---------        --------
Balance - December 31, 1999                     --           --         26,191,189           2,619          111,476         (74,610)
                                               ---       ------        -----------        --------        ---------        --------
Shares issued:
     Stock option plans                         --           --          1,177,501             118            2,824              --
     Private placement                         790        3,950            525,000              53              945              --
     Business acquisitions                      --           --             66,333               7              689              --
     Pension plan contribution                  --           --            115,000              11              352              --
Shares issued for employment
  and separation agreements                     --           --            251,500              25            1,177              --
Amortization of unearned compensation           --           --                 --              --               --              --
Cancellation of treasury shares                 --           --         (4,089,121)           (409)         (10,163)             --
Net loss                                        --           --                 --              --               --         (15,400)
                                               ---       ------        -----------        --------        ---------        --------
Balance - December 31, 2000                    790       $3,950         24,237,402        $  2,424        $ 107,300        $(90,010)
                                               ===       ======        ===========        ========        =========        ========
</TABLE>

<TABLE>
<CAPTION>
                                                           Comprehensive      Treasury           Unearned        Shareholders'
                                                               Loss           Shares(1)        Compensation         Equity
                                                           -------------      ---------        ------------      -------------
<S>                                                        <C>                <C>              <C>               <C>
Balance - December 31, 1998                                   $    --          $ (8,207)        $   (106)          $ 21,917
Shares issued:
    Stock option plans                                             --             (442)              --              1,448
    Private placement                                              --               --               --             19,186
    Business acquisitions                                          --               --               --             17,786
    Pension plan contribution                                      --               --               --                144
    Restricted shares and below
    market stock options                                           --               --           (1,614)             1,479
Amortization of unearned compensation                              --               --            1,283              1,283
Market adjustment to redeemable shares                             --               --               --                846
Reclassification of redeemable shares                              --               --               --              2,029
Net loss                                                           --               --               --            (35,719)
                                                             --------         --------         --------           --------
Balance - December 31, 1999                                        --           (8,649)            (437)            30,399
                                                             --------         --------         --------           --------
Shares issued:
     Stock option plans                                            --           (1,923)              --              1,019
     Private placement                                             --               --               --              4,948
     Business acquisitions                                         --               --               --                696
     Pension plan contribution                                     --               --               --                363
Shares issued for employment
  and separation agreements                                        --               --               --              1,202
Amortization of unearned compensation                              --               --              351                351
Cancellation of treasury shares                                    --           10,572               --                 --
Net loss                                                           --               --               --            (15,400)
                                                             --------         --------         --------           --------
Balance - December 31, 2000                                  $     --         $     --         $    (86)          $ 23,578
                                                             ========         ========         ========           ========
</TABLE>

                            (continued on next page)


                                       F-5
<PAGE>

                                 PUBLICARD, INC.
                            AND SUBSIDIARY COMPANIES

                 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
              FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999

<TABLE>
<CAPTION>
                                                   Class A
                                                Preferred Stock               Common Shares
                                               ----------------        ---------------------------
                                                                                                         Additional
                                               Shares                    Shares                           Paid-in       Accumulated
                                               Issued    Amount          Issued           Amount          Capital          Deficit
                                               ------    ------        -----------      ----------       ----------     ------------
                                                                    (in thousands except per share data)
<S>                                            <C>       <C>           <C>              <C>              <C>            <C>
Balance - December 31, 2000                    790       $3,950         24,237,402        $  2,424        $ 107,300       $ (90,010)

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

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

Balance - December 31, 2001                    780       $3,900         24,153,402        $  2,415        $ 107,098       $(104,831)
                                               ===       ======         ==========        ========        =========       =========
</TABLE>

<TABLE>
<CAPTION>
                                                           Comprehensive      Treasury           Unearned        Shareholders'
                                                               Loss           Shares(1)        Compensation         Equity
                                                           -------------      ---------        ------------      -------------
<S>                                                        <C>                <C>              <C>               <C>
Balance - December 31, 2000                                  $     --               --           $    (86)          $ 23,578

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

Comprehensive loss:
    Net loss                                                       --               --                 --            (14,821)
    Foreign currency translation adjustment                      (197)              --                 --               (197)
    Minimum pension liability                                    (901)              --                 --               (901)
                                                             --------         --------           --------           --------
       Comprehensive loss                                                                                            (15,919)
                                                                                                                    --------
Balance - December 31, 2001                                  $ (1,098)        $     --           $     --           $  7,484
                                                             ========         ========           ========           ========
</TABLE>

(1)   Represents common shares held in treasury of 3,725,024 at December 31,
      1999 and 3,660,252 at December 31, 1998.

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


                                       F-6
<PAGE>

                                 PUBLICARD, INC.
                            AND SUBSIDIARY COMPANIES

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
              FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999

<TABLE>
<CAPTION>
                                                                              2001        2000        1999
                                                                            --------    --------    --------
                                                                                     (in thousands)
<S>                                                                         <C>         <C>         <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
     Loss from continuing operations                                        $(17,171)   $(19,675)   $(16,720)
     Adjustments to reconcile loss to net cash used
       in continuing operations:
          Goodwill amortization                                                1,824       2,638       1,749
          Stock compensation expense                                              86       1,116       3,763
          Depreciation                                                           308         314         185
          Repositioning charge and inventory adjustment                        7,317          --          --
          Changes in operating assets and liabilities                         (4,610)     (3,088)      2,563
                                                                            --------    --------    --------
              Net cash used in continuing operations                         (12,246)    (18,695)     (8,460)

     Income (loss) from discontinued operations                                2,350       4,275     (18,999)
     Adjustments to reconcile income to net cash used
       in discontinued operations:
          (Gain) loss from discontinued operations                            (2,350)     (4,275)      5,000
          Non-cash charges for discontinued operations                            --          --      12,042
          Change in net assets of discontinued operations                       (424)     (3,260)     (1,211)

               Net cash used in discontinued operations                         (424)     (3,260)     (3,168)
                                                                            --------    --------    --------
                   Net cash used in operating activities                     (12,670)    (21,955)    (11,628)
                                                                            --------    --------    --------

CASH FLOWS FROM INVESTING ACTIVITIES:
     Acquisition of businesses, net of cash acquired                              --          --      (3,689)
     Investment in minority owned affiliates                                      (5)     (5,044)         --
     Capital expenditures                                                        (72)       (874)       (480)
                                                                            --------    --------    --------
               Net cash used in continuing operations                            (77)     (5,918)     (4,169)

     Acquisition of businesses, net of cash acquired                              --          --      (2,442)
     Proceeds from discontinued operations                                       223      21,835         107
     Capital expenditures of discontinued operations                              --        (168)     (1,465)
                                                                            --------    --------    --------
               Net cash provided by (used in) discontinued operations            223      21,667      (3,800)
                                                                            --------    --------    --------
                    Net cash provided by (used in) investing activities          146      15,749      (7,969)
                                                                            --------    --------    --------

CASH FLOWS FROM FINANCING ACTIVITIES:
     Proceeds from private placement of Class A Preferred Stock                  (43)      3,950          --
     Proceeds from private placement of common shares                             --         998      19,186
     Issuance of common shares pursuant to stock option exercises                 --       1,011         815
     Purchase of redeemable shares                                                --          --        (503)
     Repayment of notes payable from discontinued operations                      --        (940)       (147)
                                                                            --------    --------    --------
                    Net cash (used in) provided by financing activities          (43)      5,019      19,351
                                                                            --------    --------    --------

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

Net decrease in cash                                                         (12,570)     (1,187)       (246)
Cash - beginning of period                                                    17,049      18,236      18,482
                                                                            --------    --------    --------
Cash - end of period                                                        $  4,479    $ 17,049    $ 18,236
                                                                            ========    ========    ========
</TABLE>

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


                                       F-7
<PAGE>

                                 PUBLICARD, INC.
                            AND SUBSIDIARY COMPANIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

DESCRIPTION OF THE BUSINESS

      PubliCARD, Inc. ("PubliCARD" or the "Company") was incorporated in the
Commonwealth of Pennsylvania in 1913. PubliCARD entered the smart card industry
in early 1998, and began to develop solutions for the conditional access,
security, payment system and data storage needs of industries utilizing smart
card technology. In 1998 and 1999, the Company made a series of acquisitions to
enhance its position in the smart card industry. In March 2000, PubliCARD's
Board of Directors (the "Board"), together with its management team, determined
to integrate its operations and focus on deploying smart card solutions, which
facilitate secure access and transactions. To effect this new business strategy,
in March 2000, the Board adopted a plan of disposition pursuant to which the
Company divested its non-core operations. See Note 10 for a discussion on the
disposition plan.

      In July 2001, after evaluating the timing of potential future revenues,
PubliCARD's Board decided to shift the Company's strategic focus. While the
Board remained confident in the long-term prospects of the smart card business,
the timing of public sector and corporate initiatives in wide-scale, broadband
environments utilizing the Company's smart card reader and chip products had
become more uncertain. Given the lengthened time horizon, the Board did not
believe it would be prudent to continue to invest the Company's current
resources in the ongoing development and marketing of these technologies.
Accordingly, the Board determined that shareholders' interests will be best
served by pursuing strategic alliances with one or more companies that have the
resources to capitalize more fully on the Company's smart card reader and
chip-related technologies. In connection with this shift in the Company's
strategic focus, workforce reductions and other measures were implemented to
achieve cost savings. See Note 11 for a discussion on the repositioning charge
associated with this action.

      At present, PubliCARD's sole operating activities are conducted through
its Infineer Ltd. subsidiary ("Infineer"), which designs smart card platform
solutions for educational and corporate sites. The Company's future plans
revolve around an acquisition strategy focused on businesses in areas outside
the high technology sector while continuing to support the expansion of the
Infineer business.

LIQUIDITY AND GOING CONCERN CONSIDERATIONS

      These consolidated financial statements contemplate the realization of
assets and the satisfaction of liabilities in the normal course of business. The
Company has incurred operating losses, a substantial decline in working capital
and negative cash flow from operations for the years 2001, 2000 and 1999. 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 $4.5
million at December 31, 2001, and has an accumulated deficit of $104.8 million
at December 31, 2001.

      Although the Company believes that existing cash and short term
investments may be sufficient to meet the Company's obligations and capital
requirements at its currently anticipated levels of operations through December
31, 2002, additional working capital will be necessary in order to fund the
Company's current business plan and to ensure it is able to fund its pension and
environmental obligations. See Notes 6 and 8. While the Company is actively
considering various funding alternatives, the Company has not secured or entered
into any arrangements to obtain additional funds. There can be no assurance that
the Company will be able to obtain additional funding on acceptable terms or at
all. If the Company cannot raise additional capital to continue its present
level of operations it may not be able to meet its obligations, take advantage
of future acquisition opportunities or further develop or enhance its product
offering, any of which could have a material adverse effect on its business and
results of operations and could lead the Company being required to seek
bankruptcy protection. These conditions raise substantial doubt about the
Company's ability to continue as a going concern. The consolidated financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.


                                       F-8
<PAGE>
                                 PUBLICARD, INC.
                            AND SUBSIDIARY COMPANIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

PRINCIPLES OF CONSOLIDATION

      The consolidated financial statements include the accounts of PubliCARD
and its majority-owned subsidiaries. All significant intercompany transactions
are eliminated in consolidation.

SHORT-TERM INVESTMENTS

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

INVENTORIES

      Inventories are stated at lower of cost (first-in, first-out method) or
market. The Company evaluates the need to record adjustments for impairment of
inventory on a quarterly basis. 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, 2001 and 2000 consisted of the following (in
thousands):

<TABLE>
<CAPTION>
                                                       2001             2000
                                                      ------          -------
<S>                                                   <C>             <C>
           Raw materials and supplies                 $  389          $  690
           Work-in-process                                37              62
           Finished goods                                131             865
                                                      ------          ------
                                                      $  557          $1,617
                                                      ======          ======
</TABLE>

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 3 to 7 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, 2001 and 2000 consisted of the following (in thousands):

<TABLE>
<CAPTION>
                                                         2001           2000
                                                        ------         ------
<S>                                                     <C>           <C>
      Equipment                                         $ 931         $2,144
      Leasehold improvements                              237            237
      Accumulated depreciation and amortization          (572)          (758)
                                                        -----         ------
                                                        $ 596         $1,623
                                                        =====         ======
</TABLE>

      Goodwill is the excess of the purchase price and related costs over the
value assigned to the net tangible assets of the businesses acquired. Goodwill
is amortized on a straight-line basis over five years. Accumulated amortization
was $2.1 million and $4.5 million as of December 31, 2001 and 2000,
respectively. At each balance sheet date, the Company evaluates the
realizability of goodwill based upon expectations of non-discounted cash flows
and operating income for each subsidiary having a goodwill balance. In 2001,
goodwill amortization, including a write-off of goodwill associated with the
July 2001 repositioning action, amounted to $6.0 million.  See Note 11. Based
upon its most recent analysis, the Company believes that no impairment of
goodwill existed as of December 31, 2001. See Recent Accounting Pronouncements
below.

REVENUE RECOGNITION

      Revenue from product sales are recorded upon shipment of the product.
Provisions are recorded for estimated warranty repairs, returns and bad debts at
the time the products are shipped. Software license fees are recognized upon
shipment if a signed contract exists, the fee is fixed and determinable and the
collection of the resulting receivable is probable. Revenue from maintenance and
support fees is recognized ratably over the contract period.

STOCK-BASED COMPENSATION

      The Company measures compensation expense for its stock-based employee
compensation plans using the intrinsic value method. Compensation cost for stock
options, if any, is measured as the excess of the quoted market price of the
Company's common stock at the date of grant over the exercise price. Restricted
stock or stock awards are recorded as compensation expense over the vesting
period, if any, based on the market value on

                                       F-9
<PAGE>

                                 PUBLICARD, INC.
                            AND SUBSIDIARY COMPANIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

the date of grant. The Company has provided in Note 7 the pro forma disclosures
of the effect on net income (loss) and earnings (loss) per common share as if
the fair value-based method had been applied in measuring compensation expense.

USE OF ESTIMATES

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

RECENT ACCOUNTING PRONOUNCEMENTS

      In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 141, "Business Combinations" ("SFAS No. 141")
and Statement of Financial Accounting Standards No. 142, "Goodwill and Other
Intangible Assets" ("SFAS No. 142").

      SFAS No. 141 addresses financial accounting and reporting for business
combinations. This new statement requires that all business combinations be
accounted for using one method (the purchase method), intangible assets be
recognized apart from goodwill if they meet certain criteria and disclosure of
the primary reasons for a business combination and the allocation of the
purchase price paid to the assets acquired and liabilities assumed by major
balance sheet caption. The provisions of this statement apply to all business
combinations initiated after June 30, 2001.

      SFAS No. 142 addresses financial accounting and reporting for acquired
goodwill and other intangible assets. Under this new statement, goodwill and
intangible assets that have indefinite useful lives will not be amortized, but
rather will be tested at least annually for impairment based on the specific
guidance of this statement. In addition, this statement requires disclosure of
information about goodwill and other intangible assets in the years subsequent
to their acquisition that was not previously required. The provisions of this
statement are required to be applied starting with fiscal years beginning after
December 15, 2001. However, goodwill and intangible assets acquired after June
30, 2001 will be subject immediately to the non-amortization and amortization
provisions of this statement. The Company will adopt this statement on January
1, 2002. In accordance with this statement, no amortization expense for goodwill
will be recorded in future periods. The Company has not determined whether a
goodwill impairment charge will be recorded in 2002.

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
(24,188,325 in 2001; 23,295,121 in 2000; and 18,978,519 in 1999). 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 not presented for 2001, 2000 and 1999 as the effect of stock options,
warrants and convertible preferred stock were anti-dilutive.

FOREIGN CURRENCY TRANSLATION

      Assets and liabilities of the Company's foreign affiliate are translated
at current exchange rates, while revenue and expenses are translated at average
rates prevailing during the year. The translation adjustment recorded for 2000
and 1999 did not have a material effect on the Company's financial statements.

CONCENTRATION OF CREDIT RISK

      The carrying amount of financial instruments including cash and short-term
investments, accounts receivable and accounts payable approximated fair value as
of December 31, 2001, because of the relatively short maturity of these
instruments. The Company maintains all of its cash and short-term investments
with high-credit quality financial institutions. For the year ended December 31,
2001, one customer represented approximately 17% of the Company's sales and 17%
of the accounts receivable balance as of December 31, 2001.


                                      F-10
<PAGE>

                                 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, 2001, such costs eligible for
capitalization were insignificant. Accordingly, all such costs have been charged
to product development expenses.

RECLASSIFICATIONS

      Certain prior period amounts have been reclassified to conform to the
current year presentation.

NOTE 2 - INVESTMENTS

      In December 2000, the Company acquired an ownership interest in TecSec,
Incorporated, a Virginia corporation ("TecSec"), for $5.1 million. TecSec
develops and markets encryption products and solutions, which are designed to
enable the next generation information security for the enterprise,
multi-enterprise e-business and other markets. The TecSec investment, amounting
to a 5% ownership interest on a fully diluted basis, has been accounted for at
cost and could be subject to write-down in future periods if it is determined
that the investment is impaired and not recoverable. The Company has certain
anti-dilutive rights whereby its ownership interest may be increased following
contributions of additional third-party capital. If TecSec is not successful in
executing its business plan or in obtaining sufficient capital on acceptable
terms or at all, the Company's investment in TecSec could be permanently
impaired and subject to a significant write-down.

      Summarized unaudited operating information for TecSec for the years ended
December 31, 2001 and 2000 is as follows (in thousands):

<TABLE>
<CAPTION>
                                                   2001             2000
                                                 -------           -------
<S>                                              <C>               <C>
          Sales                                  $   829           $   675
          Gross margin                               779              (139)
          Operating expenses                       9,646             4,750
          Net loss                                (8,617)           (5,752)
</TABLE>

      Summarized unaudited balance sheet information for TecSec as of December
31, 2001 and 2000 is as follows (in thousands):

<TABLE>
<CAPTION>
                                                   2001             2000
                                                 -------           -------
<S>                                              <C>               <C>
          Cash                                  $ 5,391            $ 4,702
          Total assets                            6,442              5,381
          Total liabilities                       1,802              1,968
          Equity                                  4,640              3,414
</TABLE>

      In September 2001, the Company formed a new minority-owned affiliate, Mako
Technologies LLC ("Mako"), to market its smart card reader and chip
technologies. The move is consistent with the Company's decision to explore
strategic transactions that would enable the Company to reduce or eliminate its
ongoing cash funding requirements for its smart card reader and chip business
while retaining an interest in the upside potential for these technologies. The
Company contributed certain inventories and equipment valued at $238,000, in
exchange for a 31% fully diluted ownership interest in Mako. The Company has
also granted a perpetual license of its reader and chip technology to Mako in
exchange for royalties based on sales over the next two years. Based on current
market conditions, the Company does not expect to receive significant royalties.
In February 2002, Mako reduced its headcount and is currently reassessing its
business plan, which may result in its liquidation in the near future. If Mako
is not successful in executing its business plan or in obtaining sufficient
capital on acceptable terms or at all, the Company's investment in Mako could be
permanently impaired and subject to a write-down.


                                      F-11
<PAGE>

                                 PUBLICARD, INC.
                            AND SUBSIDIARY COMPANIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 3 - ACQUISITIONS

      On November 16, 1999, the Company acquired 100% of the common stock of
Absec Ltd. (now known as Infineer Ltd.), a Northern Ireland company that
designs, closed environment solutions including, small value electronic cash
systems and database management solutions. The aggregate purchase price was
approximately $5.4 million and included the issuance of 388,209 shares of common
stock and options to purchase a total of 300,000 shares of common stock at an
exercise price of $6.19 per share. The amount and components of the purchase
price along with the allocation of the purchase price are as follows
(in thousands):

<TABLE>
<S>                                                             <C>
     Purchase price:
     Value of common stock and stock options                    $   3,455
     Cash paid                                                      1,561
     Acquisition expenses                                             423
                                                                ---------
                                                                $   5,439
                                                                =========

     Allocation of purchase price:
     Net assets (liabilities)                                   $     498
     Goodwill                                                       4,941
                                                                ---------
                                                                $   5,439
                                                                =========
</TABLE>

      The assets and liabilities of Infineer were recorded at their estimated
fair value as of the acquisition date. An appraisal was performed to determine
the aggregate fair value of the research and development efforts that had not
reached technological feasibility and had no alternative future use. This
resulted in no additional charge. Goodwill represents the excess of the purchase
price over the fair value of identifiable tangible and intangible assets
acquired and was amortized through December 31, 2001, using the straight-line
method over its estimated life of five years.

      The Infineer acquisition was accounted for as a purchase and, accordingly,
the results are included in the consolidated financial statements of the Company
from the date of acquisition. The following summarized unaudited pro forma
financial information for the year ended December 31, 1999 assumes that the
acquisition had occurred as of January 1, 1999 (in thousands except per share
data):

<TABLE>
<S>                                                             <C>
     Net sales                                                  $   6,144
     Net loss from continuing operations                          (17,563)
     Net loss per share from continuing operations                   (.91)
</TABLE>

     The pro forma information is not necessarily indicative of the results that
would have been reported had the Infineer acquisition actually occurred on
January 1, 1999, nor is it intended to project the Company's results of
operations or financial position for any future period or date.

NOTE 4 - SHAREHOLDERS' EQUITY

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

      On 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
August 2001, 10 shares of Class A Preferred Stock were converted into 25,000
shares of PubliCARD's common stock.

      In connection with the December 2000 private placement, the Company issued
100 rights equally to the participants in the private placement. These rights
entitle the participating holders of common stock and Class A Preferred stock to
receive an aggregate of ten percent of any increase in value of the TecSec
investment realized


                                      F-12
<PAGE>

                                 PUBLICARD, INC.
                            AND SUBSIDIARY COMPANIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

by the Company. The Company has performed an internal valuation of the
participation rights and concluded their value on the issuance date to be
de minimus.

      In December 2000, the Company returned 4.1 million shares of treasury
stock to the status of unissued shares of common stock. An amount was charged to
common shares at par value with the remainder being charged to additional
paid-in capital.

      In October 1999, the Company completed the issuance of 3,269,500 shares of
common stock through a private placement. The shares were sold at $5.91 per
share for net proceeds of $19.2 million. In November 1998, the Company completed
the issuance of 2,059,000 shares of common stock through a private placement.
The shares were sold at $5.00 per share for net proceeds of $10.3 million.

      The Company was required to register 241,266 shares of Company common
stock issued as a portion of the merger consideration in the November 1998
acquisition of Tritheim Technologies, Inc. ("Tritheim") under a shelf
registration statement under the Securities Act of 1933, as amended. If the
shelf registration statement was not effective by May 24, 1999, the holders of
these shares were entitled, for a specified period of time, to cause the Company
to repurchase their shares for a cash purchase price equal to the fair market
value of the shares on the date of repurchase. As such, these shares were
reflected in the consolidated balance sheet as of December 31, 1998, under the
caption "Redeemable shares" and subsequent adjustments to the value of the
redemption obligation were charged or credited to additional paid-in capital. On
July 21, 1999, a registration statement covering the registration of these
shares, to the extent not previously redeemed, was declared effective by the
Securities and Exchange Commission. Prior to that date, holders caused the
Company to repurchase 42,129 shares for $503,000. The repurchase right
terminated upon registration of the shares.

      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.

NOTE 5 - INCOME TAXES

      As of December 31, 2001, approximately $86 million of U.S. tax loss
carryforwards (subject to review by the Internal Revenue Service), expiring from
2002 through 2021, were available to offset future taxable income. The
carryforwards expire as follows (in thousands):

<TABLE>
<CAPTION>

              YEAR                                                 AMOUNT
              ----                                                 ------
<S>                                                               <C>
              2002                                                $  25,000
              2005                                                    7,000
              2006                                                    2,000
              2007                                                    4,000
              2008                                                    5,000
              2009 - 2021                                            43,000
                                                                  ---------
                                                                  $  86,000
                                                                  =========
</TABLE>

      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 could not be used 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


                                      F-13
<PAGE>

                                 PUBLICARD, INC.
                            AND SUBSIDIARY COMPANIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

the Company may earn. No assurance can be given that the Company will have
sufficient taxable income in future years, if any, to use the net operating
losses before they would otherwise expire.

      No income tax provision or benefit was recognized in 2001, 2000 and 1999
because the tax benefit associated with the Company's operating losses were
offset in full by an increase in the valuation allowance.

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

<TABLE>
<CAPTION>
                                                                2001                2000
                                                            ------------        -----------
<S>                                                         <C>                 <C>
                   Net operating loss carryforward          $    29,985         $   33,453
                   Pension expense                                1,305              1,467
                   Discontinued operations                          303                529
                   Other, net                                       243                464
                                                            ------------        -----------
                                                                 31,836             35,913
                   Less valuation allowance                     (31,836)           (35,913)
                                                            ------------        -----------
                   Net deferred taxes                       $        --         $        --
                                                            ============        ===========
</TABLE>

NOTE 6 - EMPLOYEE BENEFITS

      The Company and its subsidiaries maintain a 401(k) plan for substantially
all of the Company's 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 401(k)
contributions totaled $68,000, $86,000 and $189,000 in 2001, 2000 and 1999,
respectively.

      The Company sponsors a defined benefit pension plan that was frozen in
1993. The assets of the defined benefit pension plan are managed by an outside
trustee and invested primarily in equity and fixed income securities. PubliCARD
common stock represented 1.2% of plan assets as of December 31, 2001. The
Company's present funding policy is to contribute amounts sufficient to meet the
minimum funding requirements as set forth in employee benefit and tax laws.
Contributions to the plan were $1.1 million and $1.2 million in fiscal 2001 and
2000, respectively. For 2002, the minimum required contributions are expected to
be $1.6 million. Cost of retirement benefits - non-operating includes amounts
related to discontinued product lines and related plant closings totaling
$788,000, $812,000, and $1.0 million in 2001, 2000 and 1999, respectively.
Information regarding the defined benefit pension plan is as follows (in
thousands):

<TABLE>
<CAPTION>
                                                            2001             2000
                                                          -------          -------
<S>                                                       <C>              <C>
Change in benefit obligation:
Benefit obligation at beginning of year                   $ 9,320          $ 9,800
       Interest cost                                          648              695
       Benefit payments                                      (993)          (1,152)
       Actuarial (gain) or loss                                88              (23)
                                                          -------          -------
Benefit obligation at end of year                           9,063            9,320
                                                          -------          -------

Change in plan assets:
Fair value of plan assets at beginning of year              3,914            4,256
       Actual return on plan assets                          (407)            (345)
       Employer contributions                               1,087            1,155
       Benefit payments                                      (993)          (1,152)
                                                          -------          -------
Fair value of plan assets at end of year                    3,601            3,914
                                                          -------          -------

Funded status                                              (5,462)          (5,406)
Unrecognized transition obligation                            589              882
Unrecognized net loss                                         901               89
                                                          -------          -------
                                                          $(3,972)         $(4,435)
                                                          =======          =======
</TABLE>


                                      F-14
<PAGE>

                                 PUBLICARD, INC.
                            AND SUBSIDIARY COMPANIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

      Amounts recognized in statement of financial position consist of:

<TABLE>
<S>                                                         <C>            <C>
      Accrued benefit liability                             $ (5,462)      $ (5,406)
      Intangible asset                                           589            971
      Accumulated comprehensive loss                             901             --
                                                            --------       --------
      Net amount recognized                                 $ (3,972)      $ (4,435)
                                                            ========       ========
</TABLE>

     A discount rate of 7.50% was used for December 31, 2001 and 2000. The
expected return on plan assets was 8%.

     The components of the net periodic pension cost were as follows (in
thousands):

<TABLE>
<CAPTION>
                                                         2001               2000               1999
                                                       -------             -------            ------
<S>                                                    <C>                 <C>                <C>
      Interest cost                                    $   648             $   695            $  689
      Expected return on plan assets                      (317)               (341)             (384)
      Amortization of transition obligation                293                 294               294
                                                       -------             -------            ------
      Net periodic pension cost                        $   624             $   648            $  599
                                                       =======             =======            ======
</TABLE>

NOTE 7 - STOCK OPTIONS AND WARRANTS

      The Company has issued stock options pursuant to several fixed stock
option plans, made special stock option awards to certain directors, consultants
and employees and also issued common stock purchase warrants in connection with
certain subordinated notes. A summary of shares purchasable upon the exercise of
stock options and common stock purchase warrants as of December 31, 2001, 2000
and 1999 are as follows:

<TABLE>
<CAPTION>
                                                          2001                 2000              1999
                                                        ---------            ---------         ---------
<S>                                                     <C>                  <C>               <C>
     Fixed stock option plans                           4,608,450            3,543,750         2,771,167
     Special stock options                                535,011            1,824,031         2,676,218
     Common stock purchase warrants                     1,523,573            1,523,573         1,523,573
                                                        ---------            ---------         ---------
                                                        6,667,034            6,891,354         6,970,958
                                                        =========            =========         =========
</TABLE>

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

FIXED STOCK OPTION PLANS

      The Company has several stock option 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 the stock option plans
adopted by shareholders of the Company, the Company may grant up to 7,300,000
shares of common stock. The plans are administered by either the Board of
Directors of the Company or the Compensation Committee of the Board of
Directors. The exercise price of each option granted was equal to the market
price of the Company's common stock on the date of grant. Stock options granted
to non-employee directors expire five years from the date of grant and vest
immediately. Stock options granted to employees generally expire five or ten
years from the date of grant. Prior to 1999, stock options granted to employees
vested immediately. Grants subsequent to 1998 generally vest over three or four
years. As of December 31, 2001, there were 575,050 shares available for grant
under the fixed stock option plans.


                                      F-15
<PAGE>

                                 PUBLICARD, INC.
                            AND SUBSIDIARY COMPANIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

      A summary of the stock options issued pursuant to the fixed stock option
plans as of December 31, 2001, 2000 and 1999 and changes during the years then
ending is presented below:

<TABLE>
<CAPTION>
                                            2001                            2000                              1999
                                 -------------------------        -------------------------        -------------------------
                                                  Average                          Average                          Average
                                                  exercise                         exercise                         exercise
                                   Shares           price          Shares            price          Shares            price
                                 ---------       ---------        ---------        --------        ---------        --------
<S>                             <C>              <C>              <C>              <C>             <C>              <C>
Balance at January 1             3,543,750         $4.63          2,771,167          $4.15          2,232,500        $1.80
Granted                          4,171,400           .69          2,322,375           5.31          1,232,000         7.35
Exercised                               --            --           (594,167)          1.81           (631,333)        1.59
Canceled                        (3,106,700)         4.63           (955,625)          6.60            (62,000)        9.50
                                ----------          ----          ---------           ----          ---------         ----
Balance at December 31           4,608,450          1.07          3,543,750           4.63          2,771,167         4.15
                                ==========          ====          =========           ====          =========         ====
</TABLE>

      A summary of the Company's stock options outstanding and exercisable
issued pursuant to the fixed stock option plans as of December 31, 2001, is as
follows:

<TABLE>
<CAPTION>
                                                    OUTSTANDING                           EXERCISABLE
                                       --------------------------------------       ---------------------
                                                                      Average                     Average
Range of                                               Contractual   exercise                    exercise
exercise price                           Shares           life         price          Shares       price
--------------                         ---------       -----------   --------       ---------    --------
<S>                                    <C>             <C>           <C>            <C>          <C>
$.35-$.40                              3,468,450           7.9         $.39         1,722,175       $.39
$1.31-$2.00                              336,000            .9         1.43           325,000       1.41
$2.06-$4.00                              691,500           3.4         3.20           451,458       3.17
$6.31-$12.19                             112,500           2.2         7.81           110,938       7.83
--------------------------------------------------------------------------------------------------------
$.35-$12.19                            4,608,450           6.5         1.07         2,609,571       1.31
                                       =========                                    =========
</TABLE>

SPECIAL STOCK OPTIONS AND STOCK AWARDS

      The Company has issued special stock options outside of the fixed stock
option plans. As of December 31, 2001, there are a total of 535,011 special
stock options outstanding. These options have exercise prices ranging from $2.00
to $9.75 per share and all of such options are currently exercisable. In 2000, a
total of 583,334 special stock options were exercised with an average exercise
price of $3.22. No options were exercised in 2001.

      In 2000, pursuant to various employment and separation agreements, the
Company issued 50,000 shares of common stock and changed the terms of certain
stock options. The fair value of the stock award and the change in terms of the
stock options was $758,000 and was charged to earnings in 2000.

      In November 1999, pursuant to an employment agreement with the appointment
of a new President and Chief Executive Officer, the Company issued 200,000
shares of common stock and options to purchase 400,000 shares of common stock at
an exercise price of $6.75 per share. The stock options vest over three years
and expire after five years. Options to purchase an additional 400,000 shares of
common stock were also issued which will become exercisable upon the achievement
of certain performance-based goals. The options were granted at an exercise
price below fair market value on the date of grant. The fair value of the stock
award and stock options was $1.7 million and is being charged to earnings over
the vesting period, if any. These stock options were cancelled pursuant to the
stock option re-pricing program.

      In January 1999, the Company issued 50,000 restricted shares and options
to purchase 200,000 shares of common stock at an exercise price of $5.50 per
shares to a newly hired executive. The Company also awarded 5,000 shares and
options to purchase a total of 4,000 shares of common stock at an exercise price
of $5.50 per share to several employees. The restricted stock vested over a
one-year period and the stock options generally vest over a two year period and
expire five years from the grant date. The options were granted at exercise
prices below fair market value on the date of grants. The fair value of the
stock awards and stock options was $1.4 million and was charged to earnings over
the vesting period, if any.

      In connection with the Company's business acquisitions in 1998 and 1999,
the Company granted options to purchase an aggregate of 1,223,161 shares of
common stock to certain employees and owners of the acquired businesses. These
options had exercise prices ranging from $2.00 to $10.75 per share, generally
vest over three


                                      F-16
<PAGE>

                                 PUBLICARD, INC.
                            AND SUBSIDIARY COMPANIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

years and expire five years from the date of grant. Of these options, 410,000
were granted pursuant to the Company's fixed stock option plans. The fair value
of stock options granted amounting to $5.0 million, was included in the
acquisition purchase price.

      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 was subsequently extended by five
years to January 2006.

      In March 1999, the Company issued options to a newly appointed member of
the Board of Directors to purchase 250,000 shares of the Company's common stock
at a price of $9.75 per share. These options vest over a two year period and
expire five years from the grant date. These stock options were cancelled
pursuant to the stock option re-pricing program.

PRO FORMA DISCLOSURE

      The Company applies APB Opinion 25 "Accounting for Stock Issued to
Employees" and related interpretations in accounting for its plans. The exercise
price of each option granted pursuant to the fixed stock option plans is
typically equal to the market price of the Company's common stock on the date of
grant. Accordingly, 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 of SFAS No. 123 "Accounting for
Stock-Based Compensation", the Company's net income and earnings per share would
have been reduced to the pro forma amounts indicated below (in thousands except
per share data):

<TABLE>
<CAPTION>
                                                    2001            2000            1999
                                                    ----            ----            ----
<S>                      <C>                     <C>            <C>              <C>
         Net loss        As reported             $ (14,821)     $ (15,400)       $ (35,719)
                         Pro forma               $ (16,122)     $ (21,111)       $ (38,293)

         Loss per share  As reported             $   (.61)      $   (.66)        $   (1.88)
                         Pro forma               $   (.67)      $   (.91)        $   (2.02)
</TABLE>

      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:

<TABLE>
<CAPTION>
                                                     2001            2000           1999
                                                     ----            ----           ----
<S>                                                 <C>             <C>             <C>
     Expected option term (years)                    7.85            5               5
     Expected volatility                            85.0%           82.2%           60.4%
     Risk-free interest rate                         6.2%            5.8%            5.9%
     Weighted average fair value per option          $.31           $3.60           $4.69
</TABLE>

COMMON STOCK PURCHASE WARRANTS

      In December 1986, the Company issued $30 million of 13% Subordinated Notes
together with detachable warrants and underwriter's warrants to purchase a total
of 4,800,000 shares of the Company's common stock for five years, which period
was subsequently extended by five years. In 1997, the shareholders of the
Company approved an additional five year extension and certain modifications to
the warrants. As of December 31, 2001, there are 1,426,500 warrants outstanding
entitling the warrant holders to purchase 1,523,573 shares of common stock at an
exercise price of $2.30 per share. Members of the Company's Board of Directors
hold 1,380,000 of the remaining warrants. The warrants expire on July 2, 2002.
The shares of common stock purchasable upon the exercise of each warrant and the
exercise price per share are subject to adjustment in the event of certain below
market equity transactions.


                                      F-17
<PAGE>

                                 PUBLICARD, INC.
                            AND SUBSIDIARY COMPANIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 8 - COMMITMENTS AND CONTINGENCIES

      The Company leases certain office space, vehicles and office equipment
under operating leases that expire over the next eight 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 $481,000 in 2001, $490,000 in
2000 and $381,000 in 1999.

      Minimum payments for operating leases having initial or remaining
non-cancelable terms in excess of one year are as follows (in thousands):

<TABLE>
<CAPTION>
      YEAR
      ----
<S>                                                <C>
      2002                                         $   421
      2003                                             412
      2004                                             387
      2005                                             198
      2006                                              55
      Remainder                                         95
                                                   -------
               Total minimum lease payments          1,568
               Less sub-rental income                 (685)
                                                   -------
               Net minimum lease payments          $   883
                                                   =======
</TABLE>

      The Company and Balfour Investors Inc. ("Balfour") are parties to a
License Agreement, dated as of October 26, 1994, with respect to a portion of
the office space leased by the Company in New York City. The Chairman and Vice
Chairman of the Company are the only shareholders of Balfour. The term of the
License Agreement commenced on January 1, 1995 and will expire on June 30,
2004, unless sooner terminated pursuant to law or the terms of the License
Agreement. The License Agreement provides for Balfour to pay to the Company a
portion of the rent paid by the Company under its lease, including base rent,
electricity, water, real estate tax escalations and operation and maintenance
escalations. Effective March 1, 2002, Balfour's share of rent and other costs
was 50% of the total costs incurred. The base rent payable by Balfour under the
License Agreement is approximately $11,000 per month.

      In April 1996, a Consent Decree among the Company, the United States
Environmental Protection Agency ("EPA") and the Pennsylvania Department of
Environmental Protection ("PADEP") was entered by the court which resolved all
of the United States' and PADEP's claims against the Company for recovery of
costs incurred in responding to releases of hazardous substances at a facility
previously owned and operated by the Company. Pursuant to the Consent Decree,
the Company will pay a total of $14.4 million plus interest to the United States
and the Commonwealth of Pennsylvania. Through December 31, 2001, the Company has
made principal payments aggregating $13.2 million. In January 2002, the Company
and the EPA reached an agreement to extend the due date on the remaining unpaid
balance. In return, the EPA was granted a security interest in certain assets
held in escrow. The remaining payments totaling $1.3 million, including
interest, will be made to the EPA over the next three years and consist of
$450,000 in 2002, $431,000 in 2003 and $411,000 in 2004.

      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, 2001, the
Company has a contingent liability to repay, in whole or part, grants received
of approximately $550,000 in the event the Company becomes insolvent or
otherwise violates the terms of such grants.

      Infineer has an overdraft facility with a bank in Northern Ireland, which
allows for the maximum borrowing of 130,000 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 6.5% at December 31, 2001). As of December 31,
2001, Infineer had borrowings outstanding under this facility totaling 27,000
British pounds (or the equivalent of $39,000).

      Various legal proceedings are pending against the Company. The Company
considers all such proceedings to be ordinary litigation incident to the
character of its businesses. Certain claims are covered by liability


                                      F-18
<PAGE>

                                 PUBLICARD, INC.
                            AND SUBSIDIARY COMPANIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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.

NOTE 9 - SEGMENT DATA

      As a result of the disposition of certain operations (See Note 10) and
because the Company operates in one industry, that being the deployment of smart
card solutions which facilitate secure access and transactions, the Company
reports as a single segment. Sales by geographical areas for the years ended
December 31, 2001, 2000 and 1999 are as follows (in thousands):

<TABLE>
<CAPTION>

                                                        2001               2000                   1999
                                                       ------             ------                 ------
<S>                                                    <C>                <C>                    <C>
       United States                                   $1,727             $1,160                 $1,245
       Europe                                           3,671              4,029                    614
       Rest of world                                      254                354                     71
                                                       ------             ------                 ------
                                                       $5,652             $5,543                 $1,930
                                                       ======             ======                 ======
</TABLE>

      The Company has operations in the United States and United Kingdom.
Identifiable assets by country as of December 31, 2001 and 2000 are as follows
(in thousands):

<TABLE>
<CAPTION>

                                                        2001              2000
                                                      -------             -------
<S>                                                   <C>                 <C>
       United States                                  $12,037             $25,547
       United Kingdom                                   2,557              2,866
                                                      -------             -------
                                                      $14,594             $28,413
                                                      =======             =======
</TABLE>

NOTE 10 - DISCONTINUED OPERATIONS

ACQUISITION ACTIVITIES

      During 1999, the Company acquired Amazing! Smart Card Technologies, Inc.
("Amazing") and Greystone Peripherals, Inc. ("Greystone") and increased its
ownership interest in Greenwald Intellicard, Inc. ("Greenwald Intellicard"). In
March 2000, the Company's Board of Directors adopted a plan to dispose of these
businesses.

      On February 11, 1999, the Company acquired 100% of the common stock of
Amazing, a California company that developed smart card solutions and
manufactured smart cards. The aggregate purchase price was approximately $5.9
million and included the issuance of 350,000 shares of common stock and options
to purchase a total of 457,503 shares of common stock. On February 22, 1999, the
Company acquired 100% of the common stock of Greystone, a California company
that principally developed and distributed hard disk duplicators. The aggregate
purchase price was approximately $9.1 million and included the issuance of
746,401 shares of common stock and options to purchase a total of 132,388 shares
of common stock. The amount and components of the purchase price along with the
allocation of the purchase price were as follows (in thousands):

<TABLE>
<CAPTION>
                                                                        AMAZING         GREYSTONE
                                                                       ---------        ---------
<S>                                                                    <C>              <C>
     Purchase price:
     Value of common stock and stock options                           $   5,327        $   8,729
     Acquisition expenses                                                    597              414
                                                                       ---------        ---------
                                                                       $   5,924        $   9,143
                                                                       ---------        ---------
     Allocation of purchase price:
     Net assets (liabilities) of acquired businesses                   $  (1,371)       $     306
     In-process research and development                                   1,509            1,410
     Goodwill                                                              5,786            7,427
                                                                       ---------        ---------
                                                                       $   5,924        $   9,143
                                                                       =========        =========
</TABLE>

      The assets and liabilities of Amazing and Greystone were recorded at their
fair values as of the respective acquisition dates. The aggregate fair value of
research and development efforts that had not reached technological feasibility
and had no alternative future uses was determined by appraisal to be $1.5
million and


                                      F-19
<PAGE>

                                 PUBLICARD, INC.
                            AND SUBSIDIARY COMPANIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

$1.4 million for Amazing and Greystone, respectively, and was expensed at the
respective acquisition dates. Goodwill represents the excess of the purchase
price over the fair value of identifiable tangible assets acquired and was
amortized using the straight-line method over its estimated life of five years.
The acquisitions of Amazing and Greystone have been accounted for under the
purchase method of accounting and, accordingly, their results are included in
the consolidated financial statements of the Company since the respective
acquisition dates.

      In February 1998, the Company purchased, through a joint venture
arrangement in Greenwald Intellicard, the assets and intellectual property of
Intellicard Systems, Ltd. Greenwald Intellicard developed, manufactured and
marketed smart card systems for the commercial laundry appliance industry. The
initial cash investment in Greenwald Intellicard, all of which was provided by
the Company, was $314,000. The Company had two fixed price options aggregating
$150,000 plus 66,333 shares of common stock to increase its ownership to 100%.
The Company exercised these options in February 1999 and February 2000.

DISPOSITION ACTIVITIES

      In March 1999, the Company's Board of Directors adopted a plan to dispose
of its engineering services subsidiary, Orr-Schelen-Mayeron & Associates
("OSM"). During 1999, the Company revised its estimates of expected operating
results and wind-down costs and recorded a loss provision of $3.0 million.
Approximately $1.2 million related to the write-off of OSM's goodwill. The
wind-down of OSM has been substantially completed.

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

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

      In the second quarter of 2001, the Company revised its estimates of
proceeds and expenses associated with the wind-down of Amazing and Greystone,
which has been substantially completed, and recognized a gain of $2.4 million,
which had been previously deferred pending resolution of certain contingencies.
The amounts the Company will ultimately realize from its discontinued operations
could differ from the amounts estimated and could therefore result in additional
charges or gains in future periods.

      The results of the operations of Greenwald, Greenwald Intellicard,
Amazing, Greystone and OSM have been reflected as discontinued operations.
Summarized balance sheet information with respect to the discontinued operations
as of December 31, 2001 is as follows (in thousands):

<TABLE>
<S>                                                             <C>
     Non-current assets (cash held in escrow)                   $ 2,131
     Disposition reserves                                        (1,245)
                                                                -------
     Net assets of discontinued operations                      $   886
                                                                =======
</TABLE>


NOTE 11 - REPOSITIONING AND OTHER SPECIAL CHARGES

     As discussed in Note 1, in July 2001, after evaluating the timing of
potential future revenues, PubliCARD's Board decided to shift the Company's
strategic focus. The Company recorded a charge aggregating $7.3 million in the
second and third quarters of 2001 associated with the departure from the smart
card reader and chip business. The charge consisted of write-offs of goodwill of
$4.1 million and fixed assets of $554,000, an inventory realizability adjustment
of $1.7 million (included in cost of sales) as a result of the business closure,


                                      F-20
<PAGE>

                                 PUBLICARD, INC.
                            AND SUBSIDIARY COMPANIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

and severance and other costs of $1.0 million principally related to the
termination of 36 employees. The repositioning activities were substantially
completed by December 31, 2001.

      In December 1999, the Company entered into a separation and termination
agreement with its former President and Chief Executive Officer. Pursuant to the
agreement, the former executive receivedsalary and benefit continuation through
June 2001. In addition, the former executive received 32,500 shares of common
stock and the exercise period of certain stock options, which otherwise would
have accelerated in connection with his termination, was extended. A charge of
$1.7 million was recorded in 1999 to reflect the costs associated with this
agreement, of which $1.0 million related to the non-cash impact of the stock
award and change in the stock option terms.

NOTE 12 - SUPPLEMENTAL INFORMATION

      Changes in operating assets and liabilities reflected in the Consolidated
Statements of Cash Flows are net of acquisitions of businesses and consisted of
the following for the years ended December 31, 2001, 2000 and 1999 (in
thousands):

<TABLE>
<CAPTION>
                                                   2001                2000             1999
                                                 --------            --------        ----------
<S>                                              <C>                 <C>             <C>
     Trade receivables                           $    122            $     88        $     (387)
     Inventories                                     (830)               (714)              (84)
     Other current assets                            (450)                152               (32)
     Other assets                                     340                (374)              649
     Trade accounts payable                            15              (1,333)            1,175
     Accrued liabilities                           (2,227)               (607)            2,307
     Other non-current liabilities                 (1,580)               (300)           (1,065)
                                                 --------            --------         ---------
                                                 $ (4,610)           $ (3,088)        $   2,563
                                                 ========            ========         =========
</TABLE>

      Acquisition of businesses in the Consolidated Statements of Cash Flows is
net of cash acquired and includes debt assumed and immediately repaid. Cash paid
for interest during 2001, 2000 and 1999 was $79,000, $137,000 and $191,000,
respectively. No income taxes were paid in 2001, 2000 and 1999. Non-cash
investing activities include the acquisitions of Amazing, Greystone, Infineer
and Greenwald Intellicard for shares of common stock and options valued at
$696,000 and $17.8 million in 2000 and 1999, respectively, as described in Notes
3 and 10.

      Other assets as of December 31, 2001 and 2000 consisted of the following
(in thousands):

<TABLE>
<CAPTION>
                                                                 2001                2000
                                                               --------            --------
<S>                                                            <C>                 <C>
     Investment in minority owned affiliates                   $  5,307            $  5,044
     Intangible pension asset                                       589                 971
     Net assets of discontinued operations                          886                  --
     Deposits                                                        --                  16
                                                               --------            --------
                                                               $  6,782            $  6,031
                                                               ========            ========
</TABLE>

     Accrued liabilities as of December 31, 2001 and 2000 consisted of the
following (in thousands):

<TABLE>
<CAPTION>
                                                                 2001                2000
                                                               --------            --------
<S>                                                            <C>                 <C>
     Pension liability                                         $  1,586            $  1,032
     Payroll and other employee benefits                            409               1,302
     Net liabilities of discontinued operations                      --               1,447
     Environmental obligation                                       434                 839
     Other                                                          950               1,756
                                                               --------            --------
                                                               $  3,379            $  6,376
                                                               ========            ========
</TABLE>


                                      F-21
<PAGE>

                                 PUBLICARD, INC.
                            AND SUBSIDIARY COMPANIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

       Other non-current liabilities as of December 31, 2001 and 2000 consisted
of the following (in thousands):

<TABLE>
<CAPTION>
                                                                 2001                2000
                                                               --------            --------
<S>                                                            <C>                 <C>
     Pension liability and other retiree benefits              $  4,448            $  5,074
     Environmental obligation                                       783                 783
     Other                                                           97                 153
                                                               --------            --------
                                                               $  5,328            $  6,010
                                                               ========            ========
</TABLE>

       The components of other comprehensive loss as of December 31, 2001
consisted of the following (in thousands):

<TABLE>
<CAPTION>
                                                               2001
                                                               --------
<S>                                                            <C>
     Foreign currency translation adjustment                   $    197
     Minimum pension liability                                      901
                                                               --------
                                                               $  1,098
                                                               ========
</TABLE>


                                      F-22
<PAGE>

                                 PUBLICARD, INC.
                            AND SUBSIDIARY COMPANIES


                SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)

<TABLE>
<CAPTION>
                                           MAR. 31      JUN. 30      SEP. 30      DEC. 31
                                           -------      -------      -------      -------
                                                          (in thousands)
<S>                                        <C>          <C>          <C>          <C>
2001
Net sales                                  $ 1,520      $ 1,339      $ 1,575      $ 1,218
Gross margin                                   688         (635)         506          557
Loss from continuing operations             (3,509)      (9,510)      (2,799)      (1,353)
Income from discontinued operations             --        2,350           --           --

Basic earnings (loss) per share
    Continuing operations                  $  (.14)     $  (.40)     $  (.12)     $  (.06)
    Discontinued operations                     --          .10           --           --

2000
Net sales                                  $ 1,551 $      1,091      $ 1,573      $ 1,328
Gross margin                                   813          470          803          544
Loss from continuing operations             (4,771)      (5,489)      (5,172)      (4,243)
Income from discontinued operations             --           --        4,275           --

Basic earnings (loss) per share
    Continuing operations                  $  (.21)     $  (.24)     $  (.22)     $  (.18)
    Discontinued operations                     --           --          .18           --
</TABLE>

      In the second and third quarters of 2001, a repositioning charge
aggregating $7.3 million was recorded to operating expenses. A portion of the
charge amounting to $1.7 million related to an inventory realizability
adjustment. The second and third quarter financial data has been reclassified to
reflect the inventory adjustment as a charge to cost of sales.


                                      F-23
<PAGE>

                                 PUBLICARD, INC.
                            AND SUBSIDIARY COMPANIES

              REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULE

To the Shareholders of PubliCARD, Inc.:

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

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


/s/ Arthur Andersen LLP

Stamford, Connecticut
March 20, 2002


                                      F-24
<PAGE>

                                 PUBLICARD, INC.
                            AND SUBSIDIARY COMPANIES

                 SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
              FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999

<TABLE>
<CAPTION>
                                                                       Additions
                                                          ----------------------
                                                          Charged to
                                              Balance      Costs and                                    Balance
                                             January 1     Expenses    Other (1)     Deductions (2)    December 31
                                             ---------    ----------   ---------     --------------    -----------
                                                                  (in thousand of dollars)
<S>                                          <C>          <C>          <C>           <C>               <C>
Year ended December 31, 2001 :
     Allowance for doubtful accounts              89           31           158            (62)             216

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

Year ended December 31, 2000:
     Allowance for doubtful accounts              92           28            12            (43)              89

     Reserve for discontinued operations       4,141       (4,275)           --          4,047            3,913

Year ended December 31, 1999:
     Allowance for doubtful accounts              38           53             9             (8)              92

     Reserve for discontinued operations       1,218        5,000            --         (2,077)           4,141
</TABLE>

(1)   Other changes for the allowance for doubtful accounts represent a reclass
      of previous year receivable reserves included in other operating accounts
      in 2000 and 2001.

(2)   Deductions for allowance for doubtful accounts represent the write-offs of
      account receivable. Deductions for discontinued operations represent
      charges and payments to reserves offset by net gains credited to reserves
      for asset dispositions in 2000.


                                      F-25