UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION

                             WASHINGTON, D.C. 20549
                                -----------------

                                    FORM 10-Q

          (Mark One)

           |X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
                         SECURITIES EXCHANGE ACT OF 1934

                  FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2004

                                       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
 incorporation or organization)                              Identification No.)

ONE ROCKEFELLER PLAZA, 14TH FLOOR, NEW YORK, NY                    10020
(Address of principal executive offices)                         (Zip code)

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

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 whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).

YES |_|   No |X|.

 Number of shares of Common Stock outstanding as of August 13, 2004: 24,690,902




PART I.  FINANCIAL INFORMATION
ITEM 1.  FINANCIAL STATEMENTS

                                 PUBLICARD, INC.
                            AND SUBSIDIARY COMPANIES

                   CONDENSED CONSOLIDATED BALANCE SHEETS AS OF
                       JUNE 30, 2004 AND DECEMBER 31, 2003
                        (IN THOUSANDS, EXCEPT SHARE DATA)


                                                                                         JUNE 30,
                                     ASSETS                                                2004      DECEMBER 31,
                                                                                        (unaudited)      2003
                                                                                         ---------    ---------
                                                                                                 
Current assets:
     Cash, including short-term investments of $2,606 and $3,501 in 2004
          and 2003, respectively                                                          $   2,794    $   3,580
     Trade receivables, less allowance for doubtful accounts of $89 and $115
          in 2004 and 2003, respectively                                                      1,031        1,133
     Inventories                                                                                657          635
     Prepaid insurance and other                                                                461          440
                                                                                          ---------    ---------
          Total current assets                                                                4,943        5,788
                                                                                          ---------    ---------
Equipment and leasehold improvements, net                                                       162          191
Goodwill and intangibles                                                                        802          822
Other assets                                                                                    498          598
                                                                                          ---------    ---------
                                                                                          $   6,405    $   7,399
                                                                                          =========    =========
                      LIABILITIES AND SHAREHOLDERS' DEFICIT

Current liabilities:
     Trade accounts payable and overdraft                                                 $   1,571    $   1,569
     Accrued liabilities                                                                      6,303        5,206
                                                                                          ---------    ---------
          Total current liabilities                                                           7,874        6,775
Other non-current liabilities                                                                 2,747        3,552
                                                                                          ---------    ---------
          Total liabilities                                                                  10,621       10,327
                                                                                          ---------    ---------
Commitments and contingencies (Note 4)

Shareholders' deficit:
     Class A Preferred Stock, Second Series, no par value: 1,000 shares authorized; 565
          shares issued and outstanding as of June 30, 2004 and December 31, 2003             2,825        2,825
     Common shares, $0.10 par value: 40,000,000 shares authorized; 24,690,902
          shares issued and outstanding as of June 30, 2004 and December 31, 2003             2,469        2,469
     Additional paid-in capital                                                             108,119      108,119
     Accumulated deficit                                                                   (114,903)    (113,617)
     Other comprehensive loss                                                                (2,726)      (2,724)
                                                                                          ---------    ---------
          Total shareholders' deficit                                                        (4,216)      (2,928)
                                                                                          ---------    ---------
                                                                                          $   6,405    $   7,399
                                                                                          =========    =========


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


                                       1


                                 PUBLICARD, INC.
                            AND SUBSIDIARY COMPANIES

                 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
              FOR THREE AND SIX MONTHS ENDED JUNE 30, 2004 AND 2003
                        (IN THOUSANDS, EXCEPT SHARE DATA)
                                   (UNAUDITED)



                                                    THREE MONTHS ENDED              SIX MONTHS ENDED
                                                         JUNE 30,                       JUNE 30,
                                                    ------------------              ----------------
                                                  2004             2003           2004            2003
                                               ------------    ------------    ------------    ------------
                                                                                   
Revenues                                       $      1,028    $      1,193    $      1,856    $      2,606

Cost of revenues                                        480             612             886           1,231
                                               ------------    ------------    ------------    ------------
     Gross margin                                       548             581             970           1,375
                                               ------------    ------------    ------------    ------------

Operating expenses:
     General and administrative                         609             687           1,272           1,391
     Sales and marketing                                406             523             825           1,005
     Product development                                171             156             349             245
     Amortization of intangibles                         10              10              20              20
                                               ------------    ------------    ------------    ------------
                                                      1,196           1,376           2,466           2,661
                                               ------------    ------------    ------------    ------------
     Loss from operations                              (648)           (795)         (1,496)         (1,286)
                                               ------------    ------------    ------------    ------------

Other income (expenses):
     Interest income                                      6               4              12               7
     Interest expense                                    (6)             (2)            (10)             (5)
     Cost of pensions - non-operating                  (130)           (225)           (264)           (442)
     Gain on insurance recoveries                        --              --             477           1,707
     Other income (expenses), net                        (5)             89              (5)             90
                                               ------------    ------------    ------------    ------------
                                                       (135)           (134)            210           1,357
                                               ------------    ------------    ------------    ------------

Net (loss) income                              $       (783)   $       (929)   $     (1,286)   $         71
                                               ============    ============    ============    ============


Basic and diluted (loss) earnings per common   $       (.03)   $       (.04)   $       (.05)   $         --
                                               ============    ============    ============    ============
share

Weighted average common shares outstanding
      Basic                                      24,690,902      24,440,902      24,690,902      24,369,473
                                               ============    ============    ============    ============
      Diluted                                    24,690,902      26,103,402      24,690,902      26,103,402
                                               ============    ============    ============    ============


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


                                       2


                                 PUBLICARD, INC.
                            AND SUBSIDIARY COMPANIES

            CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' DEFICIT
                     FOR THE SIX MONTHS ENDED JUNE 30, 2004
                        (IN THOUSANDS, EXCEPT SHARE DATA)
                                   (UNAUDITED)



                                               Common Shares
                             Class A      ----------------------   Additional                   Other         Total
                            Preferred      Shares                   Paid-in     Accumulated   Comprehensive Shareholders'
                              Stock        Issued       Amount      Capital      Deficit         Loss        Deficit
                            ----------    ----------   ----------   ----------   ----------    ----------    ----------
                                                                                         
Balance - January 1, 2004   $    2,825    24,690,902   $    2,469   $  108,119   $ (113,617)   $   (2,724)   $   (2,928)

Comprehensive loss:
 Net loss                           --            --           --           --       (1,286)           --        (1,286)

 Foreign currency
    translation
    adjustment                      --            --           --           --           --            (2)           (2)
                            ----------    ----------   ----------   ----------   ----------    ----------    ----------
    Comprehensive loss                                                                                           (1,288)

Balance - June 30, 2004     $    2,825    24,690,902   $    2,469   $  108,119   $ (114,903)   $   (2,726)   $   (4,216)
                            ==========    ==========   ==========   ==========   ==========    ==========    ==========


The accompanying notes to unaudited condensed consolidated financial statements
are an integral part of this statement.


                                       3


                                 PUBLICARD, INC.
                            AND SUBSIDIARY COMPANIES

                 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                   FOR SIX MONTHS ENDED JUNE 30, 2004 AND 2003
                                 (IN THOUSANDS)
                                   (UNAUDITED)



                                                                     2004      2003
                                                                   -------    -------
                                                                        
CASH FLOWS FROM OPERATING ACTIVITIES:
     Net (loss) income                                              (1,286)   $    71
     Adjustments to reconcile net (loss) income to net
         cash used in operating activities:
          Gain on insurance recoveries                                (477)    (1,707)
          Loss on disposal of fixed assets                               5         --
          Amortization of intangibles                                   20         20
          Depreciation and amortization                                 68         83
          Changes in assets and liabilities:
             Trade receivables                                         111       (170)
             Inventories                                               (17)       264
             Prepaid insurance and other current assets                (21)       131
             Other assets                                              100         --
             Trade accounts payable and overdraft                       (7)      (147)
             Accrued liabilities                                     1,088         18
             Other non-current liabilities                            (805)       271
                                                                   -------    -------
                     Net cash used in operating activities          (1,221)    (1,166)
                                                                   -------    -------

CASH FLOWS FROM INVESTING ACTIVITIES:
     Capital expenditures                                              (38)       (11)
     Proceeds from insurance recoveries                                477      1,707
     Other                                                              (5)        20
                                                                   -------    -------
                     Net cash provided by investing activities         434      1,716
                                                                   -------    -------

CASH FLOWS FROM FINANCING ACTIVITIES                                    --         --
                                                                   -------    -------

Effect of exchange rate changes on cash and cash equivalents             1          1
                                                                   -------    -------

Net (decrease) increase in cash                                       (786)       551
Cash - beginning of period                                           3,580      1,290
                                                                   -------    -------
Cash - end of period                                               $ 2,794    $ 1,841
                                                                   =======    =======
Cash paid for interest                                             $    10    $     5
                                                                   =======    =======


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


                                       4


                                 PUBLICARD, INC.
                            AND SUBSIDIARY COMPANIES

         NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND LIQUIDITY AND GOING
CONCERN CONSIDERATIONS

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.

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

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

LIQUIDITY AND GOING CONCERN CONSIDERATIONS

      These unaudited condensed consolidated financial statements contemplate
the realization of assets and the satisfaction of liabilities in the normal
course of business. The Company has incurred operating losses, a substantial
decline in working capital and negative cash flow from operations for a number
of years. The Company has also experienced a substantial reduction in its cash
and short term investments, which declined from $17.0 million at December 31,
2000 to $2.8 million at June 30, 2004. The Company also had a working capital
deficiency of $2.9 million and an accumulated deficit of $114.9 million at June
30, 2004.

      If the distress termination of the Company's defined benefit pension plan
for which the Company has applied is completed (see Note 3), as to which no
assurance can be given, the Company's 2003 and 2004 funding requirements to the
plan could be eliminated, in which case management believes that existing cash
and short term investments may be sufficient to meet the Company's operating and
capital requirements at the currently anticipated levels through December 31,
2004. However, additional capital will be necessary in order to operate beyond
December 2004 and to fund the current business plan and other obligations. While
the Company is considering various funding alternatives, the Company has not
secured or entered into any arrangements to obtain additional funds. There can
be no assurance that the Company will eliminate the 2003 or 2004 funding
requirements for the defined benefit pension plan or be able to obtain
additional funding on acceptable terms or at all. If the Company cannot raise
additional capital to continue its present level of operations it is not likely
to be able to meet its obligations, take advantage of future acquisition
opportunities or further develop or enhance its product offering, any of which
would have a material adverse effect on its business and results of operations
and is likely to lead the Company to seek bankruptcy protection. These
conditions raise substantial doubt about the Company's ability to continue as a
going concern. The consolidated financial statements do not include any
adjustments that might result from the outcome of this uncertainty. The
independent auditors' reports on the Company's Consolidated Financial Statements
for the years ended December 31, 2003 and 2002 contained emphasis paragraphs
concerning substantial doubt about the Company's ability to continue as a going
concern.


                                       5


                                 PUBLICARD, INC.
                            AND SUBSIDIARY COMPANIES

         NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

PRINCIPLES OF CONSOLIDATION

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

BASIS OF PRESENTATION

      The accompanying unaudited consolidated financial statements reflect all
normal and recurring adjustments that are, in the opinion of management,
necessary to present fairly the financial position of the Company and its
subsidiary companies as of June 30, 2004 and the results of their operations and
cash flows for the three and six months ended June 30, 2004. Certain information
and footnote disclosures normally included in financial statements prepared in
accordance with accounting principles generally accepted in the United States of
America have been omitted. These financial statements should be read in
conjunction with the financial statements and notes thereto included in the
Company's Annual Report on Form 10-K for the year ended December 31, 2003.

EARNINGS (LOSS) PER COMMON SHARE

      Basic net income (loss) per common share is based on net income (loss)
divided by the weighted average number of common shares outstanding during each
period. Diluted net income (loss) per common share assumes issuance of the net
incremental shares from stock options and convertible preferred stock at the
later of the beginning of the year or date of issuance. For the three and six
months ended June 30, 2004, diluted net income (loss) per share was the same as
basic net income (loss) per share since the effect of stock options and
convertible preferred stock were antidilutive.

REVENUE RECOGNITION AND ACCOUNTS RECEIVABLE.

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

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

INVENTORIES

      Inventories are stated at lower of cost (first-in, first-out method) or
market. The Company periodically evaluates the need to record adjustments for
impairment of inventory. Inventory in excess of the Company's estimated usage
requirements is written down to its estimated net realizable value. Inherent in
the estimates of net realizable value are management's estimates related to the
Company's production schedules, customer demand, possible alternative uses and
the ultimate realization of potentially excess inventory. Inventories as of June
30, 2004 and December 31, 2003 consisted of the following (in thousands):

                                                              2004          2003
                                                              ----          ----
Raw materials and work-in-process                             $425          $486
Finished goods                                                 232           149
                                                              ----          ----
                                                              $657          $635
                                                              ====          ====


                                       6


                                 PUBLICARD, INC.
                            AND SUBSIDIARY COMPANIES

         NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

GOODWILL AND INTANGIBLES

      Goodwill is the excess of the purchase price and related costs over the
value assigned to the net tangible and intangible assets relating to the
November 1999 acquisition of Infineer. Through December 31, 2001, goodwill had
been amortized over a five year life. Effective January 1, 2002, the Company
adopted Financial Accounting Standards Board ("FASB") Statement of Financial
Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets"
("SFAS No. 142"). In accordance with the guidelines of this statement, goodwill
and indefinite lived intangible assets are no longer amortized but will be
assessed for impairment on at least an annual basis. SFAS No. 142 also requires
that intangible assets with estimable useful lives be amortized over their
respective estimated useful lives and reviewed for impairment.

      The Company determines the fair value of its sole reporting unit primarily
using two approaches: a market approach technique and a discounted cash flow
valuation technique. The market approach relies primarily on the implied fair
value using a multiple of revenues for several entities with comparable
operations and economic characteristics. Significant assumptions used in the
discounted cash valuation included estimates of future cash flows, future
short-term and long-term growth rates and estimated cost of capital for purposes
of arriving at a discount factor. The Company performs its annual goodwill
impairment test during the fourth quarter absent any interim impairment
indicators. The carrying value of goodwill as of June 30, 2004 and December 31,
2003 was $782,000.

      Intangible assets consist of completed technology identified as of the
Infineer acquisition date and are amortized over a five year life. Long-lived
assets and certain identifiable intangible assets to be held and used are
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of such assets may not be recoverable. Determination of
recoverability is based on an estimate of undiscounted future cash flows
resulting from the use of the asset and its eventual disposition. Measurement of
any impairment loss for long-lived assets and certain identifiable intangible
assets that management expects to hold and use is based on the net realizable of
the asset. The gross carrying amount and accumulated amortization of intangible
assets at June 30, 2004 and December 31, 2003 was as follows (in thousands):

                                                      2004             2003
                                                      -------           -------
Gross carrying amount                                 $ 1,881           $ 1,881
Accumulated amortization                               (1,861)           (1,841)
                                                      -------           -------
                                                      $    20           $    40
                                                      =======           =======

      Amortization of intangibles was $20,000 for both the six months ended June
30, 2004 and 2003. The estimated annual amortization expense for intangibles is
$40,000 for 2004.

STOCK-BASED COMPENSATION

      The Company accounts for employee stock-based compensation cost using the
intrinsic value method of accounting prescribed by Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB No. 25"). The
Company has adopted the disclosure-only provisions of Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS
No. 123") and Statement of Financial Accounting Standards No. 148, "Accounting
for Stock-Based Compensation--Transition and Disclosure" ("SFAS No. 148").

      At June 30, 2004, the Company had four fixed stock-based compensation
plans. The exercise price of each option granted pursuant to these plans is
equal to the market price of the Company's common stock on the date of grant.
Accordingly, pursuant to APB No. 25, no compensation cost has been recognized
for such grants. Had compensation cost been determined based on the fair value
at the grant dates for such awards consistent with the method prescribed by SFAS
No. 123, the Company's net (loss) income and (loss) income per share for the
three and six months ended June 30, 2004 and 2003 would have been as follows (in
thousands except per share data):


                                       7


                                 PUBLICARD, INC.
                            AND SUBSIDIARY COMPANIES

         NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS



                                                        THREE MONTHS ENDED       SIX MONTHS ENDED
                                                        ------------------       ----------------
                                                            JUNE 30,                JUNE 30,
                                                            --------                --------
                                                       2004        2003         2004         2003
                                                    ---------    ---------    ---------    ---------
                                                                               
Net (loss) income, as reported                      $    (783)   $    (929)   $  (1,286)   $      71
Deduct: Total stock-based compensation expense
        determined under fair value based  method         (30)        (121)         (60)        (243)
                                                    ---------    ---------    ---------    ---------
Pro forma net loss                                  $    (813)   $  (1,050)   $  (1,346)   $    (172)
                                                    =========    =========    =========    =========
Basic (loss) earnings per share:
    As reported                                     $    (.03)   $    (.04)   $    (.05)   $      --
                                                    =========    =========    =========    =========
    Pro forma                                       $    (.03)   $    (.04)   $    (.05)   $    (.01)
                                                    =========    =========    =========    =========
Diluted (loss) earnings per share:
    As reported                                     $    (.03)   $    (.04)   $    (.05)   $      --
                                                    =========    =========    =========    =========
    Pro forma                                       $    (.03)   $    (.04)   $    (.05)   $    (.01)
                                                    =========    =========    =========    =========


      The weighted-average fair value of each stock option included in the
preceding pro forma amounts was estimated using the Black-Scholes option-pricing
model and is amortized over the vesting period of the underlying options.

USE OF ESTIMATES

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

RECENT ACCOUNTING PRONOUNCEMENTS

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


                                       8


                                 PUBLICARD, INC.
                            AND SUBSIDIARY COMPANIES

         NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

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

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

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


                                       9


                                 PUBLICARD, INC.
                            AND SUBSIDIARY COMPANIES

         NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE  2 - SEGMENT DATA

      The Company's sole operating activities involve the deployment of smart
card solutions for educational and corporate sites. As such, the Company reports
as a single segment. Sales by geographical areas for the three and six months
ended June 30, 2004 and 2003 are as follows (in thousands):


                                          THREE MONTHS ENDED  SIX MONTHS ENDED
                                                JUNE 30           JUNE 30,
                                            2004     2003     2004      2003
                                           ------   ------    ------   ------
United States                              $  111   $  326    $  171   $  554
Europe                                        816      761     1,525    1,853
Rest of world                                 101      106       160      199
                                           ------   ------    ------   ------
                                           $1,028   $1,193    $1,856   $2,606
                                           ======   ======    ======   ======

      The Company has operations in the United States and United Kingdom
Identifiable tangible assets by country as of June 30, 2004 and December 31,
2003 are as follows (in thousands):

                                                        2004               2003
                                                       ------             ------
United States                                          $3,777             $4,542
United Kingdom                                          1,826              2,035
                                                       ------             ------
                                                       $5,603             $6,577
                                                       ======             ======

NOTE  3 - UNDERFUNDED PENSION PLAN

      The Company sponsors a defined benefit pension plan (the "Plan") that was
frozen in 1993. As of December 31, 2003, the actuarial present value of accrued
liabilities exceeded the plan assets by approximately $6.9 million (determined
on an ongoing basis). The assets of the Plan are managed by an outside trustee
and invested primarily in equity and fixed income securities. PubliCARD common
stock represented less than 1% of plan assets as of December 31, 2003.

      In January 2003, the Company filed a notice with the Pension Benefit
Guaranty Corporation (the "PBGC") seeking a "distress termination" of the Plan.
If the PBGC determines that the Company meets one of the tests for such a
termination, the Plan will terminate and the PBGC will become responsible for
meeting future retirement obligations of participants (within certain
limitations). The Company would be liable to the PBGC for the amount of the
unfunded guaranteed benefit obligation. The Company believes that on a
termination basis, the Plan's liabilities could exceed the value of its assets
by in excess of $7.5 million. In addition, the Company did not make the required
quarterly contributions during 2003 and 2004 which aggregate approximately $2.6
million through July 15, 2004. The Company has initiated discussions with the
PBGC concerning the termination of the Plan and its obligation to the PBGC if
the Plan is terminated (including the timing of its repayment obligation). If
the Plan is not terminated, the Company would be obligated to make minimum
contributions of approximately $3.9 million in 2004, which includes the 2003
funding deficiency. It is not possible to predict the outcome of such
discussions.


                                       10


                                 PUBLICARD, INC.
                            AND SUBSIDIARY COMPANIES

         NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

      Cost of retirement benefits - non-operating of $264,000 and $442,000 for
the six months ended June 30, 2004 and 2003, respectively, includes the net
periodic pension cost and other Plan related expenses. The components of the net
periodic pension cost for the six months ended June 30, 2004 and 2003 were as
follows (in thousands):
                                                            2004           2003
                                                            -----         -----
Interest cost                                               $ 232         $ 266
Expected return on plan assets                                (58)         (109)
Amortization of transition obligation                          --           146
Amortization of net (gain) loss                                56            41
                                                            -----         -----
 Net periodic pension cost                                  $ 230         $ 344
                                                            =====         =====

      The unrecognized transition obligation was zero at December 31, 2003 and,
accordingly, there will be no further amortization expense related to this
component of net periodic pension cost.

NOTE  4 - COMMITMENTS AND CONTINGENCIES

LEGAL

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

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

      The Company incurred approximately $200,000 in defense costs in 2002. No
additional costs have been incurred in 2004 and 2003. Notice of the commencement
of this action has been given to the Company's directors and officers liability
insurance carriers. The Company's directors and officers liability insurance
carriers are funding the additional costs of defending this action, subject to
the carriers' reservation of rights.


                                       11


                                 PUBLICARD, INC.
                            AND SUBSIDIARY COMPANIES

         NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

INSURANCE RECOVERIES

      In February and March 2003, the Company entered into two binding
settlements with various historical insurers that resolve certain claims
(including certain future claims) under policies of insurance issued to the
Company by those insurers. As a result of the settlements, after allowance for
associated expenses and offsetting adjustments, the Company received net
proceeds of approximately $1.0 million in February 2003 and an additional
$682,000 in April 2003. The Company recognized a gain from these settlements of
$1.7 million in the first quarter of 2003.

      In February 2004, the Company entered into a binding agreement to assign
to a third party certain insurance claims against a group of historic insurers.
In July 2004, the assignment was supplemented to include several additional
insurers. The claims involve several historic general liability policies of
insurance issued to the Company. As a result of the assignment, after allowance
for associated expenses and offsetting adjustments, the Company received net
proceeds of approximately $477,000 in May 2004 and expects to receive an
additional $170,000 in October 2004. The Company recognized a gain of $477,000
in the first quarter of 2004 and will record further income of $170,000 in the
third quarter of 2004.

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

LEASES

      The Company leases certain office space, vehicles and office equipment
under operating leases that expire over the next five years. Minimum payments
for operating leases having initial or remaining non-cancelable terms in excess
of one year aggregates approximately $1.0 million.

NOTE  5- COMPREHENSIVE LOSS

      Comprehensive (loss) income for the Company includes foreign currency
translation adjustments, as well as the net (loss) income reported in the
Company's Condensed Consolidated Statements of Operations. Comprehensive (loss)
income for the three and six months ended June 30, 2004 and 2003 was as follows
(in thousands):



                                            THREE MONTHS ENDED   SIX MONTHS  ENDED
                                                JUNE 30,               JUNE 30,
                                            2004       2003       2004         2003
                                           -------    -------    -------    -------
                                                                
Net (loss) income                          $  (783)   $  (929)   $(1,286)   $    71
Foreign currency translation adjustments
                                                --          9         (2)         8
                                           -------    -------    -------    -------
Comprehensive (loss) income                $  (783)   $  (920)   $(1,288)   $    79
                                           =======    =======    =======    =======



                                       12


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

      "Management's Discussion and Analysis of Financial Condition and Results
of Operations" and other sections of this Form 10-Q contain forward-looking
statements, including (without limitation) statements concerning possible or
assumed future results of operations of PubliCARD preceded by, followed by or
that include forward-looking words or phrases, including "believes," "expects,"
"anticipates," "estimates," "may," "should," "would," "could," "intends,"
"plans" or similar expressions. For those statements, we claim the protection of
the safe harbor for forward-looking statements contained in the U.S. Private
Securities Litigation Reform Act of 1995. Forward-looking statements are not
guarantees of future performance. They involve risks, uncertainties and
assumptions. You should understand that the possible consequences of events
described under 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.

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, 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.

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

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

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


                                       13


RESULTS OF OPERATIONS

THREE MONTHS ENDED JUNE 30, 2004 COMPARED TO THREE MONTHS ENDED JUNE 30, 2003

      REVENUES. Revenues are generated from product sales, technology and
software license fees, installation and maintenance contracts. Consolidated
revenues decreased to $1.0 million in 2004 compared to $1.2 million for 2003.
The decrease in revenues was mainly attributable to a $215,000 decline in sales
to distribution partners located in the United States. The 2003 revenues
included $197,000 of sales to a customer in the U.S. relating to a magnetic
stripe product that was phased-out in 2003.

      COST OF REVENUES. Cost of revenues consists primarily of material,
personnel costs and overhead. Gross margin, as a percentage of net sales, was
53% in 2004 and 49% in 2003.

      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 $406,000 in 2004 compared
to $523,000 in 2003. The decrease is primarily attributable to a $90,000
reduction in salaries, employee business expense and employee termination
expense resulting from headcount reductions.

      PRODUCT DEVELOPMENT EXPENSES. Product development expenses include costs
associated with the development of new products and enhancements to existing
products. Product development expenses consist primarily of personnel and travel
costs and contract engineering services. Product development expenses amounted
to $171,000 in 2004 compared to $156,000 in 2003.

      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 were $609,000 in 2004 compared to
$687,000 in 2003. The decrease in expenses is mainly attributable to a decline
in corporate legal and employee benefit costs.

      AMORTIZATION OF INTANGIBLES. In accordance with SFAS No. 142, "Goodwill
and Other Intangible Assets" ("SFAS No. 142"), effective January 1, 2002,
goodwill is no longer amortized. Goodwill and other intangibles will be subject
to an annual review for impairment or earlier if circumstances or events
indicate that impairment has occurred. This may result in future write-downs or
the write-off of such assets. Amortization of intangibles relates to the
continuing amortization of definite life intangibles. Amortization expense was
$10,000 in both 2004 and 2003.

      OTHER INCOME AND EXPENSE. Cost of pensions, which represents amounts
related to discontinued product lines and related plant closings in prior years,
principally relates to pension expense associated with the Company's frozen
defined benefit pension plan. The original unrecognized transition obligation
was fully amortized at December 31, 2003. As such, beginning in 2004 there will
be no further amortization expense related to this component of net periodic
pension cost. Cost of pensions therefore declined from $225,000 in 2003 to
$130,000 in 2004.

SIX MONTHS ENDED JUNE 30, 2004 COMPARED TO SIX MONTHS ENDED JUNE 30, 2003

      REVENUES. Consolidated revenues decreased to $1.9 million in 2004 compared
to $2.6 million for 2003. As a result of several customer implementation and
procurement delays, direct sales in the United Kingdom declined by over $300,000
versus the prior year. Also, sales to distribution partners located in the U.S.
declined by $383,000 in 2004 as compared to 2003. The 2003 revenues included
$250,000 of sales to a customer in the U.S. relating to a magnetic stripe
product that was phased-out.

      COST OF REVENUES. Gross margin, as a percentage of net sales, decline
slightly to 52% in 2004 compared to 53% in 2003.


                                       14


      SALES AND MARKETING EXPENSES. Sales and marketing expenses were $825,000
in 2004 compared to $1.0 million in 2003. The decrease is primarily attributable
to a $148,000 reduction in salaries, employee business expense and employee
termination expense resulting from headcount reductions. Also, the 2004 expenses
reflect a reimbursement of $47,000 of marketing costs under a grant with a
government agency in Northern Ireland.

      PRODUCT DEVELOPMENT EXPENSES. Product development expenses amounted to
$349,000 in 2004 compared to $245,000 in 2003. The 2003 expenses included a
$60,000 reimbursement of certain development costs under a grant with a
government agency in Northern Ireland. This reimbursement coupled with a $25,000
increase in wages and employee business expense primarily accounted for the
increase in product development expense.

      GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
for the six months ended June 30, 2004 decreased to $1.3 million from $1.4
million for 2003. The decrease in expenses is mainly attributable to a decline
in corporate legal, consulting and public reporting costs.

      AMORTIZATION OF GOODWILL AND INTANGIBLES. Amortization expense associated
with definite lived intangible assets was $20,000 in both 2004 and 2003.

      OTHER INCOME AND EXPENSE. Cost of pensions declined from $442,000 in 2003
to $264,000 in 2004. The decrease is attributable to the cessation of the
amortization of the transition obligation component of net period pension
expense effective December 31, 2003.

      In February and March 2003, the Company entered into two binding
settlements with various historical insurers that resolve certain claims
(including certain future claims) under policies of insurance issued to the
Company by those insurers. As a result of the settlements, after allowance for
associated expenses and offsetting adjustments, the Company received net
proceeds of approximately $1.0 million in February 2003 and an additional
$682,000 in April 2003. The Company recognized a gain from these settlements of
$1.7 million in the first quarter of 2003.

      In February 2004, the Company entered into a binding agreement to assign
to a third party certain insurance claims against a group of historic insurers.
The claims involve several historic general liability policies of insurance
issued to the Company. As a result of the assignment, after allowance for
associated expenses and offsetting adjustments, the Company received net
proceeds of approximately $477,000 in May 2004. The Company recognized a gain of
$477,000 in the first quarter of 2004.

LIQUIDITY

      The Company has financed its operations over the last several years
primarily through funds received from the sale of a non-core businesses in 2000
and insurance recoveries in 2003 and 2004. For the six months ended June 30,
2004, cash, including short-term investments, decreased by $786,000 to $2.8
million as of June 30, 2004.

      Operating activities utilized cash of $1.2 million in 2004 and principally
consisted of the net loss of $1.3 million plus a gain on insurance recoveries of
$477,000 offset by depreciation and amortization of $88,000 and a reduction in
assets and liabilities of $449,000.

      Investing activities for the six months ended June 30, 2004 principally
consisted of cash received from insurance recoveries of $477,000 offset by
capital expenditures of $38,000.

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

o     The Company sponsors a defined benefit pension plan, which was frozen in
      1993. As of December 31, 2003, the actuarial present value of accrued
      liabilities exceeded the plan assets by approximately $6.9 million
      (determined on an ongoing basis). If the plan is continued, the required
      contribution to the plan is approximately $3.9 million in 2004. Absent
      some action by the Company, the annual contribution requirements beyond
      2004 would continue to be significant. In view of its financial condition,
      in January 2003, the Company filed a notice with the PBGC seeking a
      "distress termination" of the Plan. If the PBGC determines that the
      Company meets one of the tests for such a termination, the Plan will
      terminate and the PBGC will become responsible for meeting future
      retirement obligations to participants (within certain limitations). The
      Company would be liable to the PBGC for the amount of the unfunded
      guaranteed benefit obligation. The Company believes that on a termination
      basis, the Plan's liabilities could exceed the value of its assets by in
      excess of $7.5 million. In addition, the Company did not make the required
      contributions during 2003 and 2004 which aggregate approximately $2.6
      million through July 15, 2004. The Company has initiated discussions with
      the PBGC concerning the termination of the Plan and its repayment
      obligation to the PBGC if the Plan is terminated (including the timing of
      its repayment obligation). It is not possible to predict the outcome of
      such discussions.


                                       15


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

o     The Company leases certain office space, vehicles and office equipment
      under operating leases that expire over the next five years. Minimum
      future payments for operating leases having initial or remaining
      non-cancelable terms in excess of one year aggregates approximately $1.0
      million.

      The Company will need to raise additional capital that may not be
available to it. If the distress termination of the Company's defined benefit
pension plan for which the Company has applied is completed (see Note 3 to the
Notes to Unaudited Condensed Consolidated Financial Statements), the Company's
2003 and 2004 funding requirements to the plan could be eliminated, in which
case management believes that existing cash and short-term investments may be
sufficient to meet the Company's operating and capital requirements at the
currently anticipated levels through December 31, 2004. However, additional
capital will be necessary in order to operate beyond December 2004 and to fund
the current business plan and other obligations. While the Company is
considering various funding alternatives, it has not secured or entered into any
arrangements to obtain additional capital. There can be no assurance that the
Company will be able to eliminate the 2003 or 2004 funding requirements for the
defined benefit pension plan or be able to obtain additional funding on
acceptable terms or at all. If the Company cannot raise additional capital to
continue its present level of operations, it is not likely to be able to meet
its obligations, take advantage of future acquisition opportunities or further
develop or enhance its product offering, any of which would have a material
adverse effect on its business and results of operations.

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

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


                                       16


      If the Company's liquidity does not improve, it may be unable to continue
as a going concern and is likely to seek bankruptcy protection. Such an event
may result in the Company's common and preferred stock being negatively affected
or becoming worthless. The auditors' reports on the Company's Consolidated
Financial Statements for the years ended December 31, 2003 and 2002 contained an
emphasis paragraph concerning substantial doubt about the Company's ability to
continue as a going concern.

CONTRACTUAL OBLIGATIONS

      The following is a summary of the Company's commitments as of June 30,
2004 (in thousands):



                                                                        PAYMENTS DUE BY  PERIOD
                                                                        -----------------------
                                                     LESS THAN     1 TO 3       3 TO 5     MORE THAN
                                          TOTAL       1 YEAR       YEARS        YEARS        5 YEARS
                                         ------       ------       ------       ------       ------
                                                                              
Operating lease obligations              $1,018       $  350       $  550       $  118       $   --
Other long-term liabilities:
    Pension liability and other
    retiree benefits                      7,336        4,882        2,380           60           14
    Other long-term obligations             262           --          262           --           --
                                         ------       ------       ------       ------       ------
      Total                              $8,616       $5,232       $3,192       $  178       $   14
                                         ======       ======       ======       ======       ======


CRITICAL ACCOUNTING POLICIES

      The Company's significant accounting policies are more fully described in
the Notes to the Company's Unaudited Condensed Consolidated Financial Statements
included herein and the Notes to the Consolidated Financial Statements included
the Company's Form 10-K for the year ended December 31, 2003. 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
goodwill and intangibles and pension accounting to be critical policies due to
the estimation processes involved.

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

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

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


                                       17


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

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

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

RECENT ACCOUNTING PRONOUNCEMENTS

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


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


                                       18


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


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

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

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

FACTORS THAT MAY AFFECT FUTURE RESULTS

      WE HAVE A HISTORY OF OPERATING LOSSES AND NEGATIVE CASH FLOW, WE HAVE
ONGOING FUNDING OBLIGATIONS AND WE NEED TO RAISE ADDITIONAL CAPITAL THAT MAY NOT
BE AVAILABLE TO US, ALL OF WHICH COULD LEAD US TO SEEK BANKRUPTCY PROTECTION. We
have incurred losses and experienced negative cash flow from operating
activities in the past, and we expect to incur losses and experience negative
cash flow from operating activities in the foreseeable future. We incurred
losses from continuing operations in 2001, 2002, 2003 and the six months ended
June 30, 2004 of approximately $17.2 million, $8.3 million, $1.6 million and
$1.3 million, respectively. In addition, we experienced negative cash flow from
operating activities of $12.7 million, $5.1 million, $2.2 million and $1.2
million in 2001, 2002, 2003 and the six months ended June 30, 2004 respectively,
and have a working capital deficiency of $2.9 million as of June 30, 2004.


                                       19


      We sponsor a defined benefit pension plan which was frozen in 1993. As of
December 31, 2003, the present value of the accrued liabilities of our plan
exceeded its assets by approximately $6.9 million. (determined on an ongoing
basis). If the Plan is continued, the required contribution to the Plan is
approximately $3.9 million for 2004 and we will be obligated to make continued
contributions in future years which, absent some action by us, we expect that
the annual contribution requirements beyond 2004 will continue to be
significant. Future contribution levels depend in large measure on the mortality
rate of plan participants, the discount rate required, and the expected return
on the plan assets. In April 2002, we failed to make the required quarterly
contribution to the Plan due April 15, 2002, in the amount of $253,000. We made
this contribution on June 11, 2002 and quarterly contributions of $253,000 were
made on a timely basis in July 2002 and October 2002. In view of our financial
condition, in January 2003, we filed a notice with the PBGC seeking a "distress
termination" of the Plan and did not make the contributions due to the Plan
during 2003 and 2004 which aggregate approximately $2.6 million through July 15,
2004. If the PBGC determines that we meet one of the tests for such termination,
the Plan will terminate and the PBGC will become responsible for meeting future
retirement obligations to participants (within certain limitations). We would be
liable to the PBGC for the amount of the unfunded benefit obligation. We believe
that, on a termination basis, the Plan's liabilities could exceed the value of
its assets by in excess of $7.5 million. We have initiated discussions with the
PBGC concerning the termination of the Plan and our repayment obligation to the
PBGC if the Plan is terminated (including the timing of our repayment
obligation). It is not possible to predict the outcome of such discussions.

      We and certain current and former officers are defendants in a lawsuit
alleging, among other things, misrepresentation and securities fraud. We believe
that we have meritorious defenses to the allegations and intend to defend
ourselves vigorously. The cost of defending against this action could be
significant, and if the Company is not successful in defending itself, the
Company may be required to pay the plaintiff's damages, which could have a
material adverse effect on the Company's business and operations. See "We are
unable to predict the extent to which the resolution of lawsuits pending against
us could adversely affect our business". In addition, we have future
non-cancelable operating lease obligations for office space, vehicles and office
equipment aggregating $1.0 million.

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

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

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


                                       20


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

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

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

      WE ARE UNABLE TO PREDICT THE EXTENT TO WHICH THE RESOLUTION OF LAWSUITS
PENDING AGAINST US COULD ADVERSELY AFFECT OUR BUSINESS. On May 28, 2002, a
lawsuit was filed against us in the Superior Court of the State of California,
in the County of Los Angeles by Leonard M. Ross and affiliated entities
alleging, among other things misrepresentation and securities fraud. The lawsuit
names four of our current and former executive officers and directors and us as
the defendants. The plaintiffs seek monetary and punitive damages for alleged
actions made by the defendants in order to induce the plaintiff to purchase,
hold or refrain from selling our common stock. The plaintiffs allege that the
defendants made a series of material misrepresentations, misleading statements,
omissions and concealments, specifically and directly to the plaintiffs
concerning the nature, existence and status of contracts with certain
purchasers, the nature and existence of investments in us by third parties, the
nature and existence of business relationships and investments by us. We believe
we have meritorious defenses to the allegations and intend to defend vigorously.

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

      We incurred approximately $200,000 in defense costs in 2002. No additional
costs have been incurred in 2004 and 2003. Notice of the commencement of this
action has been given to our directors and officers liability insurance
carriers. Our directors and officers liability insurance carriers are funding
the additional costs of defending this action, subject to the carriers'
reservation of rights.

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


                                       21


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

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

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

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

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

      WE DEPEND ON A RELATIVELY SMALL NUMBER OF CUSTOMERS FOR A MAJORITY OF OUR
REVENUES. We rely on a limited number of customers in our business. We expect to
continue to depend upon a relatively small number of customers for a majority of
the revenues in our business. For the year ended December 31, 2003 and the six
months ended June 30, 2004, no one customer accounted for more than 10% of our
revenues. Amounts due from three customers represented approximately 14%, 13%
and 12%, respectively, of the accounts receivable balance as of June 30, 2004.

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

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


                                       22


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

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

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

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

      We believe that the principal competitive factors affecting us are:

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

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

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

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

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


                                       23


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

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

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

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

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

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


                                       24


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

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

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

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

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

      OUR INTERNATIONAL OPERATIONS SUBJECT US TO RISKS ASSOCIATED WITH OPERATING
IN FOREIGN MARKETS, INCLUDING FLUCTUATIONS IN CURRENCY EXCHANGE RATES, WHICH
COULD ADVERSELY AFFECT OUR OPERATIONS AND FINANCIAL CONDITION. Sales outside the
U.S. represented approximately 82% and 91% of total sales for the year ended
December 31, 2003 and six months ended June 30, 2004, respectively. 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:


                                       25


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

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

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

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

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

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

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

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


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

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

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

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

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


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ITEM  3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Foreign currency exchange rate risk

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

Market Risk

      We are exposed to market risk primarily through short-term investments and
an overdraft facility. Our investment policy calls for investment in short-term,
low risk instruments. As of June 30, 2004, short-term investments (principally
U.S. Treasury bills and money-market accounts) were $2.6 million and borrowing
under the overdraft facility amounted to $470,000. Due to the nature of the
short-term investments and the amount of the overdraft facility, any change in
rates would not have a material impact on our financial condition or results of
operations.

ITEM  4. CONTROLS AND PROCEDURES

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

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


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PART  II. OTHER INFORMATION

ITEM  1. LEGAL PROCEEDINGS

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

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

      The Company incurred approximately $200,000 in defense costs in 2002. No
additional costs have been incurred in 2004 and 2003. Notice of the commencement
of this action has been given to the Company's directors and officers liability
insurance carriers. The Company's directors and officers liability insurance
carriers are funding the additional costs of defending this action, subject to
the carriers' reservation of rights.

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


ITEM  6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits

31.1 Certification  of the Chief Executive  Officer and Chief Financial  Officer
     filed herewith pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1 Certification  of the Chief Executive  Officer and Chief Financial  Officer
     filed herewith pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

(b) Report on Form 8-K

Form 8-K dated May 14, 2004, reporting of the Registrant's results of operations
for the first quarter of 2004.


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                                   SIGNATURES

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

                                     PUBLICARD, INC.
                                     (Registrant)


Date: August 13, 2004                /s/ Antonio L. DeLise
                                     -----------------------------
                                     Antonio L. DeLise, President,
                                     Chief Executive Officer,
                                     Chief Financial Officer


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