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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

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FORM 10-K

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

FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998

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

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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 POST ROAD, FAIRFIELD, CONNECTICUT 06430
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)


REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (203) 254-3900

SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:



TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
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NONE NONE


SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT
COMMON STOCK ($.10 PAR VALUE)
RIGHTS TO PURCHASE CLASS A PREFERRED STOCK, FIRST SERIES

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

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

As of March 25, 1999, the aggregate market value of the voting common stock
held by non-affiliates of the registrant was approximately $150,000,000.

Number of shares of Common Stock outstanding as of March 25, 1999:
18,253,303.

DOCUMENTS INCORPORATED BY REFERENCE

PART III, ITEMS 10, 11, 12 AND 13 ARE INCORPORATED BY REFERENCE FROM THE
REGISTRANT'S DEFINITIVE PROXY STATEMENT TO BE FILED PURSUANT TO REGULATION 14A
FOR THE 1999 ANNUAL MEETING OF SHAREHOLDERS.
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PART I

ITEM 1. BUSINESS

BACKGROUND

PubliCARD, Inc. (together with its subsidiaries, "PubliCARD" or the
"Company") designs, develops, manufactures and markets products and technologies
used in niche areas of the smart card industry. Applications for PubliCARD's
products and technologies include conditional access and security systems,
payment systems and data storage. PubliCARD is developing smart card solutions
for the information technology, wireless communications, pay television,
transportation, commercial laundry, identification and loyalty program
industries. PubliCARD's smart card products include smart cards, smart card
readers, value transfer stations, operating systems and application software.

In PubliCARD's other technology business, it develops and manufactures
PCMCIA products, hard disk duplicators and digital camera flash film readers for
original equipment manufacturers ("OEMs"), systems integrators, value-added
resellers ("VARs"), value-added distributors ("VADs") and end users. In
addition, PubliCARD, through its subsidiary Greenwald Industries, Inc., is the
leading designer and manufacturer of coin meter systems used in the commercial
laundry appliance industry.

Recent Acquisitions

Beginning in 1998, PubliCARD acquired several businesses offering or
developing unique smart card applications in order to take advantage of the
growing smart card industry. PubliCARD intends to continue acquiring businesses
that develop smart card technologies for niche applications. Through these
acquisitions, PubliCARD believes that it is well-positioned to become a leading
provider of smart card products and solutions.

In February 1998, PubliCARD acquired, through a joint venture arrangement
in Greenwald Intellicard, Inc., the assets and intellectual property of
Intellicard Systems. Greenwald Intellicard develops smart card readers, value
transfer stations, card management software and machine interface boards for the
commercial laundry appliance and parking industries. PubliCARD currently owns
65% of Greenwald Intellicard, and has an option exercisable beginning in
February 2000 to acquire the remaining 35%.

In November 1998, PubliCARD acquired Tritheim Technologies, Inc., which
develops security products for software, computers and the electronic
information industry. Through Tritheim, PubliCARD provides smart card readers
and writers, and has developed software for secure electronic commerce, Internet
security, computer security and software copy protection.

In February 1999, PubliCARD acquired Amazing Smart Card Technologies, Inc.,
a developer of consumer smart card solutions for the Internet and loyalty
programs. Amazing also manufactures smart cards for customers requiring rapid
turnaround and smaller volumes. In addition, PubliCARD, through Amazing, offers
web filtering software, which permits parents, public institutions, libraries
and schools to limit children's access to websites by defining each child's use
profile on a smart card.

In February 1999, PubliCARD also acquired Greystone Peripherals, Inc., a
developer of PCMCIA products, hard disk duplicators and digital camera flash
film readers. Through Greystone, PubliCARD designs, manufactures and markets
these proprietary computer peripherals for OEMs, system integrators, VARs, VADs
and end users.

SMART CARD OVERVIEW

A smart card is similar in appearance to a traditional credit card, but
unlike a traditional credit card, stores information on an integrated circuit
chip embedded within the card, rather than on a magnetic stripe on the surface.
While a typical magnetic stripe card stores approximately 212 bytes of
information, generally consisting of a user's name, account and personal
identification number offset, a smart card can store 64 kilobytes or more of
information, which is 300 times that of a magnetic stripe card such as a
traditional credit card. The intelligence of the integrated circuit chip allows
smart cards to protect the information stored from damage or theft. For this
reason, smart cards are more secure than magnetic stripe cards, which carry
information on the outside of the card and can therefore be more easily copied
or accidentally erased.

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There are two basic types of smart cards. An "intelligent" smart card
contains a central processing unit that has the ability to store, secure and
process information in accordance with the issuer's specific applications.
Intelligent smart cards offer a read/write capability, which permits new
information to be added and processed after the smart card is initially issued.
The microprocessor chip on an intelligent smart card has the ability to perform
complex computing operations that require decision-making and data manipulation
capabilities. The second type of smart card is a memory card, which is primarily
an information storage card that contains stored value which the user can
"spend."

Smart cards are further characterized as contact, contactless or
dual-interface. A contact smart card must be inserted into a reader or writer in
order to acquire or permit the processing of data. A contactless smart card
receives its power through an embedded antenna, and therefore, need not
physically contact a reader or writer in order for the embedded chip to perform
applications. A dual interface smart card can function as either a contact smart
card or a contactless smart card.

Smart Card Technology

CHIPs. The chips used in smart cards are fundamentally the same as chips
that are used in computers, and are manufactured in the same way by many of the
same manufacturers. The type of chip used depends on the complexity of the
application the smart card is designed to perform. Chips of different types are
sometimes used in a single smart card called a combi-card. In recent years,
technological advances in the design of smart card chips have occurred at a
rapid rate, resulting in substantially enhanced storage and processing
capabilities. At the same time, the costs of chip production are declining.

SMART CARD PRODUCTION. The manufacture of smart cards involves the
production of chip modules in which wire leads are attached to chips and those
leads are attached to the gold contact on the surface of the card that is its
most recognizable characteristic. The module is then either embedded into a
plastic card or the card is moulded around the module. Cards may be produced
with both contact and contactless chips and may also incorporate magnetic
stripes. During the manufacture of the smart card, the operating system to be
used by the card is installed and the card is also personalized for security
purposes.

OPERATING SYSTEMS AND STANDARDS. Historically, smart cards have been
single application cards built on the proprietary operating systems of major
card manufacturers. As a result, a card issuer had to justify its investment in
a smart card product solely on the basis of a single application. In addition,
because the application was dependent on the card manufacturer's proprietary
operating system, the issuer tended to be tied to a specific card manufacturer.
Since 1997, however, advancements have been made in the development of open
multi-application operating systems, which permit an application and an
operating system to be clearly separated in the smart card chip. As a result,
card issuers will be able to move freely between card manufacturers without
being required to re-write their applications. In addition, these operating
systems will permit applications to be added to and deleted from smart cards
after the cards have been issued.

A clear standard for operating systems has yet to emerge in the smart card
industry. For the most part, each operating system has developed its own
standard, and there has been very little uniformity among operating systems.
However, certain standards have begun to develop, such as ISO7816 for contact
chip technology, which is used by global payment associations. ISO7816
standardizes the voltage used and the number of electrical contacts between the
card and reader, the position of the chip on the card and security requirements,
among other things. Europay, MasterCard and Visa jointly developed the "EMV
Specifications," which define chip specifications for cards, terminals and
readers for payment transactions. The EMV Specifications select the options
available in ISO specifications to determine the method in which a payment
transaction will occur. The EMV Specifications are mandated on all bank-issued
smart cards and terminals carrying the MasterCard or Visa logo.

The European Telecommunications Standards Institute has developed the
Global System for Mobile Telecommunication ("GSM") as the standard for the
mobile telephone market in Europe. The GSM standards cover radio techniques for
speech coding algorithms, network architecture, signaling protocols and
conditions of internetworking between other networks. GSM also specifies the
requirements for the subscriber

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identification module ("SIM") card, which is an intelligent smart card which
manages the initialization and personalization of a telephone to individual
subscribers.

Microsoft has led the development of the PC/SC specifications, which define
the use of smart cards within the personal computer environment. PC/SC
specifications are designed to ensure interoperability among smart cards,
readers and computers made by different manufacturers.

For the pay television market, the Society of Cable TV Engineers published
the DVS Specifications, which are subject to revisions, but form a stable base
from which the industry can begin to migrate to digital television broadcasting.
The DVS Specifications define the hardware and software requirements and
communications protocols for the set-top box market and will allow different
manufacturers to develop interoperable solutions.

SMART CARD TERMINALS AND INTERFACE DEVICES. Smart card terminals
incorporate interface devices such as smart card readers and writers and value
transfer stations that interact with smart cards to permit the processing and
modification of stored data. Terminals may be used in banking, attended and
unattended points of sale, satellite and cable television set-top boxes, public
telephones and as peripheral equipment on personal computers. Smart card
terminals, together with smart cards, perform card authentication and cardholder
verification procedures at the point of use, while similar magnetic stripe card
transactions require contact with a central host system. For this reason,
terminals incorporate sophisticated software programs and security algorithms
for the secure processing of smart card transactions. To enhance the process of
cardholder verification, terminals may also utilize personal identification
numbers and biometrics, such as fingerprinting. In addition to the more common
terminals used for contact type cards, terminals designed to work with
contactless smart cards are used in such applications as transit and access
control. Terminal technology is expected to continue to change to meet the new
demands of smart cards. Readers, writers and other interface devices are
frequently designed to be upgradable to accommodate new applications and
security enhancements.

Smart Card Applications

Smart card technology permits applications such as conditional access and
security, payment systems and data storage to be performed in a low cost,
easy-to-use, secure manner. Conditional access and security applications include
those that restrict the use of products and services, and access to proprietary
content, software, networks and physical properties. Payment system applications
include the use of smart cards in connection with credit and debit card systems,
as well as coin and currency replacement, couponing and electronic commerce.
Data storage applications utilize the data storage capacity of smart cards to
provide the secure storage of data in a durable, portable form. Data storage
applications include consumer loyalty programs and patient identification and
medical record storage and retrieval.

Industry Overview

Dataquest estimates that approximately 962 million smart cards were sold in
1997, and the size of the market will increase to 4.7 billion units by 2002, a
compound annual growth rate of approximately 38%. This amounts to revenues of
approximately $6.8 billion in 2002, representing the revenues from card sales
only. PubliCARD estimates that the total size of the smart card market,
including hardware, software and integration services, will be approximately
three times the market for smart cards alone, or approximately $20 billion.

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Although smart cards have historically been most popular outside of the
United States, Dataquest expects that 198.3 million units will be sold in the
U.S. in 2002, up from 19.5 million units in 1997. Dataquest expects smart card
units sold and the resulting revenues to increase worldwide as follows:



1997 2000 2002
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REVENUE UNITS REVENUE UNITS REVENUE UNITS
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(IN MILLIONS)

Europe.......................... $1,055.8 692.2 $2,163.2 1,459.7 $3,257.3 2,080.4
Asia/Pacific.................... 154.2 102.6 1,106.4 768.4 2,052.4 1,383.0
Americas (not including the
U.S.)......................... 131.0 152.6 382.1 491.8 583.7 790.4
United States................... 19.5 6.6 189.7 76.0 532.2 198.3
Japan........................... 14.0 8.4 132.7 90.6 390.9 264.5


Source: Dataquest (August 1998)

To date, a number of factors have limited the broad adoption of smart cards
in the United States. These factors include the requirement for special purpose
readers which have been expensive and therefore not widely deployed. These
factors have deferred the adoption of smart card systems and have often resulted
in the deployment of proprietary, closed, smart card reader systems that are not
compatible with other systems.

Smart Card Markets

PubliCARD has begun to penetrate the following markets, which are among the
first to begin to adopt smart card technology:

INFORMATION TECHNOLOGY. Smart cards are capable of performing several key
functions in association with computers and computer networks. A basic function
is security and identification of users. Information technology cards can
contain personal identification numbers and biometric data that can firmly
establish the identity of a user and prevent unauthorized entry into computer
networks and access of data. A smart card can also contain multiple passwords
and configuration settings, which eliminates the need for users to enter
passwords manually. In addition, information technology cards can also serve as
the cornerstone of security for electronic commerce. According to Dataquest,
unit sales of information technology smart cards are expected to increase to 41
million in 2002 from a few thousand in 1997, and revenues are expected to grow
to $115 million from less than $1 million over that same period.

WIRELESS COMMUNICATIONS. Wireless communications smart cards are primarily
used outside of the United States with GSM telephones, as SIMs, which identify
the user of a telephone. Smart card SIMs help eliminate cellular telephone fraud
because the telephone number and identity of the user remains on the card,
ensuring that the person making the call is authorized to use the account. GSM
telephones are becoming increasingly sophisticated by adding data access and
electronic commerce capabilities. SIM cards can store information such as speed
dialing numbers and payment data, and act as a security, identification and data
storage device for such applications. SIM cards are useful for U.S. business
travelers, who, when traveling abroad, can obtain a SIM card programmed with
their U.S. wireless number and billing information. This permits them to make
and receive local, long distance and international calls using their U.S.
wireless numbers. According to Dataquest, the GSM/SIM market is expected to
increase to 330 million units in 2002 from 69 million in 1997, and revenues are
expected to grow to $924 million from $234 million over that same period.

PAY TELEVISION. Smart cards can provide security and identification
functions for pay television systems, such as analog and digital satellite
set-top boxes and digital cable set-top boxes. In May 1997, the Federal
Communications Commission (the "FCC") adopted service rules to implement digital
television with the intended effect of promoting rapid conversion to and
implementation of digital television. Digital Video Broadcast ("DVB") involves
the transmission of video signals in a digital format. In contrast to the
traditional analog approach, digital signals allow content providers to deliver
very high resolution, high quality video images. DVB makes it possible to
provide a broader range of private content and ancillary services than
previously available. For example, these ancillary services can permit users to
access web browsers, video on

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demand and interactive menus, among others, each of which can be accessed
through smart cards. The viability of DVB will require millions of Americans to
use digital television equipment, such as digital set-top boxes to replace
traditional analog set-top boxes. As digital television receivers evolve into
interactive devices, PubliCARD believes the pay television smart card will be
the key to data and communications services and that digital set-top boxes will
likely incorporate smart card readers when manufactured. Dataquest expects the
market for pay television cards to increase to $187 million in 2002 from $129
million in 1997, and unit sales are expected to grow at a compound rate of 12.1%
to 67 million, from 38 million over that same period.

TRANSPORTATION. Transportation systems worldwide are beginning to make use
of smart card technology for subways, buses and mass transit. For example, the
Bay Area Rapid Transit Authority announced its intention to adopt a smart card
system. The New York metropolitan area utilizes EZ Pass, a contactless smart
card, to permit the payment of many highway and bridge tolls. Dataquest expects
the market for transportation cards to grow to 308 million units in 2002, from
16 million in 1997, a growth rate of 81.4%, and revenue is expected to increase
at a compound annual rate of 69.2% to $738 million from $53 million over that
same period. Smart cards are also well-suited to replace coin-operated parking
meters.

IDENTIFICATION. Applications for identification smart cards include
passports and drivers' licenses, as well as other kinds of identification cards.
Identification cards are used in businesses, college campuses, governments and
other institutions. When smart cards are used in lieu of traditional
identification cards, they can provide additional functions such as storing
employee records, providing or denying access to specific areas of facilities
and storing value for payment transactions. In a campus environment, smart cards
can store value for vending and food services transactions and student records
and billing information, and can be used in lieu of traditional library and
access cards. Dataquest expects the market for identification cards to increase
to 274 million units in 2002 from 14 million in 1997, and revenues are expected
to rise to $280 million from $11 million over that same period.

LOYALTY PROGRAMS. Loyalty program smart cards are designed to tie users to
specific retailers and service providers. They can be used to identify buying
patterns in order to target customers for special discounts. By tracking
purchases, retailers can target marketing to specific individuals. Retailers and
service providers can use loyalty cards to give "frequent buyer" points to
customers, allowing customers to accrue value that can be used to buy additional
merchandise and services from such retailers and service providers.

In addition to the foregoing markets, PubliCARD expects smart card
technology to develop in markets it does not currently serve, and therefore
intends to develop technology and consummate acquisitions to penetrate markets
such as the healthcare industry which, with its millions of participants and
voluminous and individualized information and payment requirements, can benefit
significantly from smart card technology. Smart cards can provide patient
identification and medical record storage and retrieval, as well as electronic
benefit transfers, determination of benefit eligibility and drug interaction
information. This will be particularly beneficial in an emergency situation,
when a quick assessment of vital information such as allergies, prescriptions
and immunizations is required. Additionally, smart cards can take the form of
patient cards, which can be used to improve and streamline administrative and
billing procedures, as well as insurance reimbursements. Dataquest expects unit
sales of health cards to increase to 180 million units in 2002 from 51 million
in 1997, and revenues are expected to rise to $281 million from $126 million
over that same period.

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The table below sets forth Dataquest's estimate of the size of the
worldwide smart card market, taking into account cards only, by certain of the
applications described above:



1997 2000 2002
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APPLICATION REVENUE UNITS REVENUE UNITS REVENUE UNITS
- ----------- ------- ----- ------- ----- ------- -----
(IN MILLIONS)

Information Technology.................... 0 0 22 8 115 41
Wireless Communications................... 234 69 593 204 924 330
Pay Television............................ 129 38 119 41 187 67
Transportation............................ 53 16 375 165 738 308
Identification............................ 11 14 139 166 280 274
Health.................................... 126 51 175 126 281 180


Source: Dataquest (August 1998)

STRATEGY

PubliCARD's objective is to become a leading provider of smart card
solutions across a wide range of early adopter niche markets. Key elements of
PubliCARD's strategy include the following:

- FOCUS ON DIFFERENTIABLE, VALUE-ADDED PRODUCTS AND
TECHNOLOGIES. PubliCARD intends to focus on the hardware, software and
systems integration services aspects of its smart card solutions rather
than on the production of commodity items such as banking cards and
prepaid telephone cards for which profitability is largely dependent on
maintaining high volume production. For example, in November 1998,
PubliCARD acquired Tritheim, which provides smart card readers and
writers and has developed software for secure electronic commerce,
Internet security, computer security and software copy protection.

- BUILD TECHNOLOGY BASE. PubliCARD has acquired significant intellectual
property and technical expertise in many aspects of the smart card
industry. PubliCARD intends to leverage its existing technology to
develop new products, enhance existing product offerings and reduce its
reliance on outside suppliers. PubliCARD intends to utilize the
upgradability of its existing hardware applications to provide its
customers with the benefits of the latest technology. PubliCARD intends
to adopt and meet all industry standards as they emerge, and to use those
standards in its future smart card applications.

- EXPAND RANGE OF EXISTING PRODUCT APPLICATIONS. Many of PubliCARD's
existing products are designed to provide smart card-related functions
specific to particular customer needs. PubliCARD intends to devote
ongoing hardware and software engineering efforts to adapt existing
products to new uses and to fulfill the requirements of new customer
opportunities. For example, PubliCARD has adopted its commercial laundry
appliance smart card solution to applications in the parking, vending and
building access markets.

- BUILD BRAND RECOGNITION. PubliCARD has begun to create recognition of
the unified PubliCARD brand identity through participation in trade shows
and corporate-level advertising programs. While PubliCARD maintains the
separate identity of its subsidiaries, it has linked their identities to
the PubliCARD brand name. Over time, PubliCARD intends to migrate the
identities of its technology-related subsidiaries to the PubliCARD name.

- INCREASE PENETRATION OF EXISTING CUSTOMER BASE. PubliCARD intends to
exploit the customer bases of its individual subsidiaries by
cross-selling additional technologies, products and services.

- BUILD STRATEGIC ALLIANCES AND RELATIONSHIPS. PubliCARD intends to form
strategic relationships with a number of key industry players in order to
gain access to leading edge technology and for marketing and sales
distribution.

- ACQUIRE COMPANIES WITH COMPLEMENTARY TECHNOLOGIES, PRODUCTS AND CUSTOMER
BASES. PubliCARD intends to acquire businesses that have developed smart
card products, services and technologies which

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can be cross-sold to its existing customer base and/or which broaden and
strengthen its presence in its distribution channels and new markets.
Since February 1998, PubliCARD has acquired four companies which have
enabled it to develop a meaningful presence in the smart card industry.

- LEVERAGE MANUFACTURING CAPABILITIES. PubliCARD has begun to utilize
Greenwald Industries' Chester, Connecticut manufacturing facility to meet
the manufacturing requirements of certain of its other subsidiaries.
PubliCARD manufactures Greenwald Intellicard's value transfer stations at
the Chester, Connecticut facility, and will continue to evaluate future
opportunities to relocate other manufacturing operations to this
facility.

THE PUBLICARD SOLUTION

PubliCARD has developed smart card solutions for the information
technology, wireless communications, pay television, transportation and
identification smart card markets, and intends to penetrate other markets, such
as healthcare, among others, through the development of new technology and the
acquisition of complementary businesses. PubliCARD believes that it will be able
to provide total smart card solutions for these and other markets because of the
common technologies utilized in each of them and PubliCARD's continual
development of such technologies.

Smart card solutions are available to perform a variety of distinct
functions, including conditional access or security functions, payment or coin
replacement functions and data storage functions, as well as a combination of
these and other functions.

CONDITIONAL ACCESS OR SECURITY. Individuals and corporations increasingly
rely upon computer networks, the Internet, intranets and direct broadcast
systems to access information, entertainment and data in a digital form from
their homes and workplaces. This increasing proliferation and reliance upon
digital data has caused data security to become a paramount concern to
businesses, government, educational institutions and consumers. Content
providers, network and data managers and users of digital data are concerned
with controlling access to data and maintaining data security, controlling
access to proprietary or confidential information and limiting access to DVBs to
paying subscribers. Data has become increasingly vulnerable to unauthorized
access as enterprises move toward distributed computing and data is made more
accessible to internal and external users. According to Computer Security
Institute, 64% of respondents to its 1998 CSI/ FBI Computer Crime and Security
Survey acknowledged that they had experienced security breaches with respect to
their computer systems within the prior 12 months, an increase of 16% over 1997
and 22% over 1996. The total financial losses reported by the organizations that
could quantify them in the CSI/FBI survey totaled approximately $13.7 million in
1998, a 36% increase over 1997 reported losses. Unauthorized access can range
from users who are authorized to access portions of an enterprise's computing
resources accessing portions for which they are not authorized, to hackers
breaking into a network and stealing or corrupting data. The consequences of
unauthorized access, which can often go undetected, can range from theft of
proprietary information or other assets to the alteration or destruction of
stored data. As a result of the consequences of unauthorized access, many
enterprises have been reluctant to make their computing resources as open as may
be otherwise desirable, and those that allow access are adopting various
security measures to guard against unauthorized access. PubliCARD believes that
enterprises seek solutions which will allow them to expand access to data while
maintaining adequate security.

Conditional access and security is also integral to DVBs. In light of the
FCC's deregulation of the cable television industry discussed above, services
such as digital cable services and direct broadcast digital television are
expected to be introduced in the near future, which would permit various
interactive products and services to be provided via the DVB medium. PubliCARD
believes that a primary challenge for broadcasters will be to limit access to
their content to the intended users such as those who have purchased appropriate
subscriptions or event-by-event pay-per-view privileges.

The key to any security system is the ability to reliably identify users in
order to prevent unauthorized access to information and resources.
Authentication of a user's identification has traditionally been accomplished by
(a) passwords, which are codes known only by specific users, and (b) tokens,
which are user-specific physical devices that only authorized users possess.
Passwords are the least secure because they tend
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to be short and static, and are often transmitted without encryption. Tokens are
more secure, because they typically permit access only when coupled with an
associated personal identification number. However, tokens have historically
been implemented using magnetic stripe cards which are subject to
counterfeiting, tampering and inadvertent data deletion, and can only hold a
very limited amount of information.

PubliCARD believes that the most secure method of securing digital data is
through smart card applications because they contain an embedded microprocessor,
memory and a secure operating system. PubliCARD believes that smart cards
provide the easiest, most flexible, most cost-effective way to achieve the key
benefits of a secure, authenticated transaction between two or more parties
regardless of the specific infrastructure between them. As a result, PubliCARD
has developed a number of smart card solutions to provide conditional access and
security for a variety of markets.

For the information technology market, PubliCARD has developed technology
that permits Internet users to insert their smart cards into their WebTV boxes
to automatically travel to their desired websites. In addition, Amazing believes
that it is the first to develop and market a smart card application for the
Internet that offers web filtering software, which permits parents, public
institutions, libraries and schools to limit websites that will be available to
children by defining each child's use profile on a smart card. PubliCARD is
currently marketing smart card-enabled software that enables personal computers
to encrypt and decrypt computer files and e-mail. This software is capable of
securing personal computers as well as computers linked to a network.

For the wireless communications market, PubliCARD has developed a GSM
compliant chip which can be incorporated into GSM telephones by their
manufacturers to permit the performance of security, identification and storage
applications.

For the pay television market, in light of the recently-adopted FCC
regulations discussed above, PubliCARD is currently marketing an application
specific integrated circuit (an "ASIC") to certain OEMs of set-top boxes. This
is a chip that will permit such OEMs to incorporate smart card readers into the
set-top boxes they manufacture. When inserted into the reader, a smart card will
"unlock" the specific services to which a consumer has subscribed. When
consumers subscribe to different or additional content services or parents seek
to limit the viewing privileges of their children, the service providers will
need only to provide the appropriate smart card to allow access to the new or
additional services.

For the identification card market, PubliCARD can add individual
identifying data to smart cards that function with other of its smart card
applications. For example, PubliCARD is able to provide a laundry smart card
that permits the user access to the laundry room as well as serves a coin
replacement function.

PAYMENT SYSTEMS. Smart cards may contain stored value which the user can
"spend" to make purchases. Unlike traditional magnetic stripe credit and debit
cards, a smart card payment system does not require communication with a central
system at the time of use, or billing or posting to an account, because the
value is stored on the smart card prior to the time the transaction is made.
This makes the use of smart cards especially advantageous for small
transactions, in which using traditional magnetic stripe credit and debit cards
would be impractical. Smart cards could be used to make small transactions
feasible in environments such as the Internet where cash cannot be used and the
transaction fees of credit cards make their use uneconomical. The appeal of
stored value cards to merchants, service providers and governmental bodies is
that they reduce cost, eliminate fraud and increase efficiency. In addition,
these implementers will have the benefit of the value stored on the smart cards
until spent.

PubliCARD develops and sells a variety of stored value applications for
payment systems. For the pay television market, PubliCARD is currently marketing
software that will permit analog and digital television subscribers to conduct
transactions via smart cards through the PCMCIA readers (also manufactured by
PubliCARD) installed in set-top boxes. Subscribers will be able to perform
transactions such as purchase merchandise over home shopping networks and order
video on demand services via their smart card-operated set-top boxes. In
addition, this software, together with related readers, chips and other
intellectual property, is being marketed to replace store coupons. This
application would enable consumers to download coupons onto a smart card, and
redeem them at supermarkets and other retailers. This would reduce
counterfeiting and

8
10

other forms of fraud typically associated with store coupons, would facilitate
targeted marketing to consumers and would reduce handling costs incurred by
retailers and manufacturers.

For the transportation market, PubliCARD produces software and card
transfer stations which permit municipalities to replace coin-operated parking
meters with meters that read smart cards.

For the commercial laundry appliance, parking and vending industries,
PubliCARD manufactures and markets smart card readers, value transfer stations,
card management software and machine interface boards. A value transfer station
is installed at an issuer's site, such as a laundromat, which dispenses and adds
value to smart cards, thus alleviating the need for the issuer's customers to
use cash when utilizing laundry machines. Issuers are able to audit transactions
conducted at value transfer stations through PubliCARD's readers and software to
determine, among other things, accountability, inventory, usage data and
diagnostic data.

DATA STORAGE. The ability of smart cards to store data is enabling
PubliCARD to develop a total smart card solution for retailers in the form of a
consumer loyalty program. Retailers and service providers can use loyalty cards
to give "frequent buyer" points to customers, allowing customers to accrue value
that can be used to buy additional merchandise and services. PubliCARD's loyalty
program will permit a smart card to be incorporated into a traditional point of
sale application, enabling a retailer to track all aspects of the sales process
and reward repeat customers with premiums or discounts through the use of their
smart cards. PubliCARD expects that its consumer loyalty program will permit
retailers to use the data accumulated to develop customized and focused consumer
marketing programs.

PubliCARD expects that the data storage capabilities of smart cards will
permit it to integrate smart card technology into its other businesses. For
example, PubliCARD currently manufactures digital camera flash film readers for
OEMs. This market consists of software and hardware interfaces that allow the
transfer of digital content between two devices and into a digital format for
alteration, distribution or examination, such as the transfer of digital
photographs from a digital camera to a personal computer or laptop. This market
shares many of the same distribution channels and similar technology with smart
cards and their associated interface devices. PubliCARD intends to leverage its
experience in the digital camera market to develop smart card technology that
will enable consumers to transfer digital images for printing. The smart card
technology utilized in this transaction would also include a payment system,
such that a consumer could develop film at a retailer's location and pay for the
transaction using the same smart card. PubliCARD also offers common PCMCIA
products for use in desktop, laptop, notebook and palmtop computers using PC
Cards. These products enable total interchangeability of PC Cards for the
sharing of peripherals, updating files, modifying and loading software onto PC
Cards, as well as loading pictures from digital cameras.

PRODUCTS

PubliCARD has developed smart card products for conditional access, payment
systems and data storage applications for the following markets:



CONDITIONAL ACCESS PAYMENT SYSTEMS DATA STORAGE
------------------ --------------- ------------

Information Technology X X
Wireless Communications X
Pay Television X X
Transportation X
Identification X X
Loyalty X


Smart Cards

PubliCARD currently manufactures and sells smart cards for niche
applications for a variety of industries. PubliCARD manufactures all types of
smart cards, including intelligent, memory, contact and contactless smart cards.
Through subcontractors, PubliCARD customizes smart cards for its customers, such

9
11

as printing, holograms and special coatings. However, PubliCARD does not intend
to focus on the manufacture of smart cards, since it believes profitability is
too dependent on high volume production.

Readers/Writers

PubliCARD manufacturers stand-alone card readers for desktop computers and
card readers for laptop and mobile computers. PubliCARD also manufactures and
markets serial readers, internal readers and PCMCIA readers, as well as smart
card readers for the commercial laundry, vending and parking industries.
PubliCARD has also developed readers for access control and secure Internet
transactions. In addition, PubliCARD manufactures value transfer stations, which
permit the transfer of value from cash, credit cards, debit cards, ATM cards and
currency to smart cards.

Software and Applications

PubliCARD has developed the following software and application products:



SmartGuardian - Provides Internet access control for children;
denies the user access to certain websites as
predetermined by the user's parent or guardian
- Targeted toward public institutions,
libraries, schools and households
PCDEFENDER - Enables personal computers to encrypt and
decrypt computer files and e-mail
SmartCommerce - Internet purchase terminal software
- Enables secure electronic value transfer for
retail, paid television and banking transactions
SmartPassky* - Storage of multiple passwords for Internet
accounts
Gator - Smart card operating system designed for
multiple applications
GSM Operating System - Smart card operating system designed for
cellular telephones
SCOS - Operating system that organizes a smart card's
memory into data files and provides file
protection via authentication keys
Smart Card Management System Version - Enables accountability and audit trail for
II smart card transactions conducted in various
vending applications
Smart Card Reader ASIC - Facilitates the integration of smart card
readers into television set-top boxes and
personal computers


* Distributed under license.

PubliCARD's SmartGuardian software allows children to surf the Internet
without continuous supervision at public institutions, libraries and schools and
at home because the access key to the Internet is a smart card which contains
the coded list of website types the user is authorized to access, as
predetermined by the child's guardian. The card issuing station which encodes
the smart card can only be operated by authorized personnel. Therefore, children
are able to access the Internet without adult supervision because they will be
largely unable to access sites deemed undesirable. PubliCARD is in the process
of implementing SmartGuardian in one public library, and intends to aggressively
market SmartGuardian to other libraries, schools, public institutions and
households.

PCDEFENDER, developed by Tritheim in conjunction with Norman Data Defense
Systems, is smart card-enabled software that enables personal computers to
encrypt and decrypt computer files and e-mail. PCDEFENDER is capable of securing
desktop, laptop and personal computers as well as computers linked to a network
through a central administrator.

10
12

SmartCommerce is Internet purchase terminal software that is capable of
linking merchants to banks and permitting merchants to accept electronic cash
from their customers over the Internet. In addition, SmartCommerce could be sold
to cable broadcasters to permit consumers to make smart card purchases of
services over the television once cable and digital set-top boxes are equipped
with smart card readers. SmartCommerce will permit banking customers to download
electronic cash from their banks via the Internet onto a bank-issued smart card.
SmartCommerce is expected to be released over the next nine to twelve months.

PubliCARD believes SmartPassky is the first smart card application designed
to facilitate access to all password-protected Internet accounts. PubliCARD
markets SmartPassky under license. SmartPassky stores multiple passwords for
Internet accounts. When a website address is selected by the user, this product
automatically takes the user to the login screen of that website and prepares
the user identification and password for automatic login. The user need only
click in the appropriate field to complete the login procedure.

PubliCARD's operating systems include (a) Gator, an operating system for
handling multiple applications, (b)a GSM operating system, a phase II cellular
telephone operating system and (c) SCOS (Smart Card Operating System), which
organizes a smart card's memory into data files and provides protection for such
files with authentication keys.

SmartCard Management System Version II allows accountability and audit of
all smart card transactions conducted in laundry or other vending machines. This
software performs functions such as taking inventory of readers and creating
special price profiles, as well as a variety of management control functions.

PubliCARD is currently marketing ASICs to OEMs of set-top television boxes
and personal computers. These ASIC chips will permit such OEMs to incorporate
smart card readers into the set-top boxes and personal computers they
manufacture.

COMPLEMENTARY TECHNOLOGY

In addition to products relating to its smart card business, PubliCARD has
developed the following products:



High Speed Disk Duplicators - Duplicates master disk drives to multiple
target disk drives in low, medium and high
volume applications
Digital Media Readers and Writers - PCMCIA, compact flash memory card and
miniature disk drive readers and writers
Adapters - PCMCIA, compact flash, smart card and other
memory form factor reader/writer adapters


PubliCARD manufactures high-speed disk duplicators for use by OEMs, system
integrators, VARs, VADs and end users, including the United States government.
PubliCARD's disk duplicators duplicate master disk drives to target disk drives
in low, medium and high volume applications. PubliCARD believes that its disk
duplicators, which use high-speed technology certified by Microsoft, are the
fastest on the market.

In addition, PubliCARD designs and manufactures digital camera and compact
flash accessories, which read and write to PCMCIA and compact flash cards. Such
products enable digital camera users to download images to laptops or desktop
computers more rapidly than other interface methods.

PubliCARD also offers common PCMCIA products for use in desktop, laptop,
notebook and palmtop computers using PC Cards. These products enable total
interchangeability of PC Cards for the sharing of peripherals, updating files,
modifying and loading software onto PC Cards, as well as loading pictures from
digital cameras.

11
13

Commercial Laundry Products

PubliCARD designs and manufactures coin chutes, dryer timers, electronic
drop meters, electronic circuit boards and coin boxes used primarily in the
commercial laundry appliance industry. PubliCARD also manufactures and sells
value transfer stations that issue and add value to smart cards for use in
laundromats, and which can be used in the vending, parking and building access
industries.

SALES AND MARKETING

PubliCARD sells and distributes its products through a broad range of
distribution channels, including VARs, VADs and distributors. PubliCARD also
sells and distributes its products directly to OEMs and end-users through its
direct sales force and the Internet. PubliCARD selects a distribution channel
for a product based on its particular characteristics.

In addition to more traditional sales channels, PubliCARD is making use of
the Internet as a means of driving cost-effective sales across a broad front.
PubliCARD intends to seize the opportunities provided by this channel both for
sales and marketing purposes and for providing enhanced after-sales support.

PubliCARD uses a combination of full-time employee sales personnel and
sales representatives to optimize market potential and geographic coverage.
PubliCARD has fifteen employees directly engaged in sales and distribution in
the United States and two in Europe, through its office in the United Kingdom.
During 1999 and thereafter, PubliCARD plans to expand both its employee and
representative sales forces in the U.S. and abroad to capitalize on the forecast
market demand for smart card products.

PubliCARD intends to form strategic relationships with a number of key
industry players that it hopes will provide it with access to leading edge
technology, marketing and sales leverage and access to key customers and
accounts. PubliCARD intends to continue to leverage these relationships and to
identify additional key industry players with which to form strategic
relationships. For example, PubliCARD has a manufacturing agreement with a
Singapore-based smart card company and plans to use this relationship to access
smart card opportunities for its entire product range in the Asia Pacific
market.

In support of its sales strategies, PubliCARD also makes extensive use of
direct mail campaigns to its customer databases, advertising in targeted trade
media and a continuous program of representation at the world's leading trade
shows and conferences.

CUSTOMERS

PubliCARD's primary customer base consists of OEMs, systems integrators,
service providers, application developers, VARs, VADs, public institutions,
governmental bodies, route operators, equipment distributors and end users.

PubliCard's major customers for its smart card products include the
Microsoft (Web TV), Racal, Lucent Technologies, Aurora Barcode, Keri Systems,
ERG, Citibank, Siemens, the Englewood, Colorado Public Library, and the City of
San Diego. PubliCard's customers in its disk duplication business include IBM,
Compaq, Gateway, Dell Computer Corporation and Sun Microsystems. PubliCard's
customers for its PCMCIA products include agencies of the U.S. Government, EDS,
Kodak Digital Cameras, Polaroid, Nikon, Vobis and Acer.

PubliCARD's customers in its coin products business include Whirlpool
Corp., which accounted for approximately 13% of PubliCARD's revenues on a
consolidated basis in 1998, as well as General Electric, Maytag, Web Service,
Canadian Coinamatic, CoinMach, Sears and Roebuck, Alliance Laundry Systems and
Mac-Gray.

MANUFACTURING

PubliCARD conducts manufacturing operations in its own facilities and on an
outsourced basis using contract manufacturers. Contract manufacturing is used to
produce smart card readers and PCMCIA cards, chip sets, ASICs, smart cards and a
variety of peripheral equipment. PubliCARD also manufactures smart
12
14

cards, smart card readers, value transfer stations and machine interface boards.
In addition, PubliCARD manufactures coin chutes, dryer timers, electronic drop
meters and coin boxes used primarily in the commercial laundry appliance
industry. These products are manufactured in PubliCARD's facilities in Santa
Clara, California and Chester, Connecticut. PubliCARD will continually evaluate
the cost/benefit relationship of manufacturing its products in its own
facilities versus using contract manufacturing. The Chester, Connecticut
manufacturing facility contains surplus capacity and provides a favorable
opportunity for reducing overall manufacturing costs of fabricated and assembled
products.

RESEARCH AND DEVELOPMENT

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

In addition, PubliCARD has established a Technology Committee comprised of
internal technology specialists together with leading industry experts drawn
from both commerce and academia. The role of the Technology Committee is to
provide PubliCARD with a long-term strategic perspective on developments likely
to shape the future of smart card technology.

PubliCARD strives to develop and maintain close relationships with key
suppliers of components and technologies in order to enable it to quickly
introduce new products that incorporate the latest technological advances.
PubliCARD's future success will depend upon its ability to develop and to
introduce new products on a timely basis that keep pace with technological
developments and emerging industry standards and address the increasingly
sophisticated needs of its customers.

PubliCARD's expenses for research and development were approximately
$740,000, $441,000 and $235,000 for the years ended December 31, 1998, 1997 and
1996, respectively.

COMPETITION

Competition in the smart card market is intense and is characterized by
rapidly changing technologies, evolving industry standards, frequent new product
introductions and rapid changes in customer requirements. To maintain and
improve its competitive position, PubliCARD must continue to develop and
introduce, on a timely and cost-effective basis, new products and product
features that keep pace with technological developments and emerging industry
standards and address the increasingly sophisticated needs of its customers. The
principal competitive factors affecting the market for PubliCARD's smart card
products are product reputation, the extent to which products support industry
standards and provide interoperability, technical features, reliability, level
of security, strength of distribution channels, quality, performance, price,
customer support and product features such as adaptability, ability to integrate
with other products, functionality and ease of use. PubliCARD believes that it
currently competes favorably overall with respect to these factors, but there
can be no assurance that PubliCARD will be able to compete as to these or other
factors or that competitive pressures will not have a material adverse effect on
PubliCARD's business and operating results. PubliCARD will be required to
continue to respond promptly and effectively to the challenges of technological
changes and its competitors' innovations.

PubliCARD currently experiences competition from a number of sources.
PubliCARD competes with Gemplus, GPT Card Technology, Oberthur, ODS Landis &
Gyr, Orga and Schlumberger Technologies, among others, in the manufacture and
sale of smart cards. PubliCARD's competitors for its readers and writers include
VeriFone, Hypercom, Ingenico, Diebold, Schlumberger Technologies, SCM
Microsystems and Gemplus.

PubliCARD's competitors include SCM Microsystems and Actiontec in the
electronic digital media industry. PubliCARD's competitors in the disk
duplication business include Symantec, Wytron and ICS.

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15

PubliCARD believes that the principal competitive factors affecting its
coin products business are:

- quality of product;

- delivery times;

- ease of use; and

- price.

PubliCARD competes with ESD, Monarch and Set-O-Matic, as well as
alternative technologies including electronic systems and smart card products in
the coin products segment of its business.

PubliCARD also experiences indirect competition from certain of its
customers which currently offer alternative products or are expected to
introduce competitive products in the future. PubliCARD may in the future face
competition from developers of smart card products that are based upon
approaches similar to or different from those employed by PubliCARD.

Many of PubliCARD's current and potential competitors have longer operating
histories in the smart card market and significantly greater financial,
technical, sales, customer support, marketing and other resources, as well as
greater name recognition and a larger installed base of their products and
technologies than PubliCARD. In addition, as the smart card market develops, a
number of companies with significantly greater resources than PubliCARD could
attempt to increase their presence in the market by acquiring or forming
strategic alliances with competitors of PubliCARD, resulting in increased
competition.

INTELLECTUAL PROPERTY

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

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

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

14
16

PubliCARD expects that software product developers will be increasingly
subject to infringement claims as the number of products and competitors in
PubliCARD's industry segments grow and the functionality of products in
different industry segments overlaps. Any such claims, with or without merit,
could be time-consuming, result in costly litigation and diversion of technical
and management personnel, cause product shipment delays or require PubliCARD to
develop non-infringing technology or enter into royalty or licensing agreements.
Such royalty or licensing agreements, if required, may not be available on terms
acceptable to PubliCARD or at all. In the event of a successful claim of product
infringement against PubliCARD and failure or inability of PubliCARD to develop
non-infringing technology or license the infringed or similar technology,
PubliCARD's business, financial condition and results of operations could be
materially adversely affected.

GOVERNMENT REGULATION

Market needs and competitive pressures will require that PubliCARD's
products contain regulated cryptographic algorithms in order to protect
information and cash substitutes stored in smart cards. Export, import and usage
of such cryptographic algorithms are subject to a large and changing body of
regulations in the United States. PubliCARD's failure to comply with any
regulations that may be enacted with respect to these cryptographic algorithms
would have a material adverse affect on its business.

Federal, state and local regulations impose various environmental controls
on the discharge of chemicals and gases which may be used in PubliCARD's present
or future assembly processes. Moreover, changes in such environmental rules and
regulations may require PubliCARD to invest in capital equipment and implement
compliance programs in the future. Any failure by PubliCARD to comply with
environmental rules and regulations, including the discharge of hazardous
substances, would subject PubliCARD to liabilities and would materially
adversely affect PubliCARD's operations.

DISCONTINUED OPERATIONS

In March 1999, the Company's Board of Directors adopted a plan to dispose
of its engineering services subsidiary, Orr-Schelen-Mayeron & Associates
("OSM"). No significant gain or loss is expected on the disposition.

EMPLOYEES

As of February 28, 1999, the Company had approximately 175 employees
engaged in manufacturing operations, engineering, marketing, sales, service, and
administrative activities at its continuing operations. Of these, 80 are
employed in the technology products segment and 85 are employed in the coin
products segment. OSM had approximately 101 employees as of February 28, 1999.

SEGMENT INFORMATION

During 1998, the Company operated in two business segments: coin products
and technology products. Information about the Company's operations by segment
for the years ended December 31, 1998, 1997 and 1996 is presented in the
following table. For 1998, 1997 and 1996 the Company had export sales of
approximately $1,435,000, $1,003,000 and $805,000, respectively. The majority of
such sales were to Canada.

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FINANCIAL INFORMATION RELATING TO
SEGMENTS AND CLASSES OF PRODUCTS
(IN THOUSANDS)



1998 1997 1996
-------- ------- -------

Net sales to unaffiliated customers:
Coin products....................................... $ 15,372 $17,039 $15,486
Technology products................................. 1,147 -- --
-------- ------- -------
$ 16,519 $17,039 $15,486
======== ======= =======
Income (loss) from operations:(1)
Coin products(2).................................... $ 2,920 $ 3,090 $ (286)
Technology products................................. (814) -- --
Corporate and other(3).............................. (6,538) (4,338) (4,866)
-------- ------- -------
$ (4,432) $(1,248) $(5,152)
======== ======= =======
Identifiable assets:
Coin products....................................... $ 9,601 $ 9,614 $ 8,823
Technology products................................. 8,918 -- --
Corporate and other................................. 21,410 16,315 22,100
-------- ------- -------
$ 39,929 $25,929 $30,923
======== ======= =======
Depreciation and amortization expense:
Coin products....................................... $ 329 $ 432 $ 350
Technology products................................. 197 -- --
Corporate and other................................. 228 80 189
-------- ------- -------
$ 754 $ 512 $ 539
======== ======= =======
Capital expenditures:
Coin products....................................... $ 180 $ 312 $ 1,109
Technology products................................. 50 -- --
Corporate and other................................. 88 19 38
-------- ------- -------
$ 318 $ 331 $ 1,147
======== ======= =======


- ---------------
(1) Before interest income, interest expense and items of a nonoperating nature.

(2) The 1996 loss from operations for the coin products segment includes a
special charge of $1,596,000 associated with Greenwald's plant relocation.

(3) The 1998 loss from operations for Corporate and other includes a charge of
$2,800,000 to expense in-process research and development associated with
the Tritheim acquisition. The 1997 loss from operations includes a non-cash
charge of $768,000 related to the modification and extension of certain
common stock purchase warrants.

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

The following table sets forth information about the executive officers of
the Company as of February 28, 1999. The business address of each executive
officer is the address of the Company, One Post Road, Fairfield, Connecticut
06430, and each executive officer is a United States citizen.



NAME AGE OFFICE AND POSITION
- ---- --- -------------------

Harry I. Freund............. 58 Director, Chairman of the Board and Chairman
Jay S. Goldsmith............ 55 Director, Vice Chairman of the Board and Vice
Chairman
James J. Weis............... 50 President, Chief Executive Officer and Director
M. Richard Phillimore....... 52 Executive Vice President -- Smart Card Business
Antonio L. DeLise........... 37 Vice President, Chief Financial Officer and
Secretary


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

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

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

Mr. Weis joined the Company in September 1984 as Assistant to the
President. Mr. Weis was elected Vice President in November 1984, Chief Financial
Officer and Secretary in April 1986, Executive Vice President-Finance in August
1989 and President, Chief Executive Officer and Director on March 8, 1995.

Mr. Phillimore was appointed Executive Vice President -- Smart Card
Business in January 1999. He was formerly Senior Vice President/Chip Business
Development with MasterCard International from February 1997 until December
1998, where he led the department responsible for MasterCard's global chip
strategy. From October 1989 until January 1997, Mr. Phillimore was Senior
Manager Chip Business Development at Europay International where he was
responsible inter alia for development of chip and e-cash strategy for the
European market.

Mr. DeLise, a Certified Public Accountant, joined the Company in April 1995
as Vice President, Chief Financial Officer and Secretary. Prior to joining the
Company, Mr. DeLise was employed as a Senior Manager with the firm of Arthur
Andersen LLP and had been with such firm from July 1983 through March 1995.

ITEM 2. PROPERTIES

The total size of all facilities owned and leased by PubliCARD is
approximately 186,000 square feet. The largest of these consists of a building
of approximately 119,000 square feet containing manufacturing and office space
in Chester, Connecticut that is owned by Greenwald Industries. This facility
includes 27 acres of land. The building and land are subject to a mortgage
securing a promissory note. Greenwald Intellicard leases approximately 5,000
square feet of office space in Boynton Beach, Florida under a lease expiring in
2000. Amazing leases approximately 9,000 square feet of manufacturing and office
space in Santa Clara, California under a lease expiring in November 1999 and
leases a sales office in London, England. Greystone leases approximately 7,000
square feet of manufacturing and office space in Los Gatos, California under a
lease expiring in 2001. Tritheim leases approximately 2,000 square feet of
office space in Tarpon Springs, Florida. The Company's executive offices are
located in approximately 1,000 square feet of space in Fairfield, Connecticut,
under a lease expiring in 2000 and approximately 4,500 square feet of office
space in New York City under a lease expiring in 2004. OSM leases approximately
38,000 square feet of office space in Minneapolis, Minnesota under a lease
expiring in 2002. The Company believes that the properties owned and leased by
it are suitable and adequate for its present needs.

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19

ITEM 3. LEGAL PROCEEDINGS

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

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

None.

PART II

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

(a) PubliCARD's common stock has been traded on the Nasdaq National Market
under the symbol "CARD" since December 22, 1998. The following table sets forth
the high and low closing sale prices of PubliCARD's common stock, as reported by
the Nasdaq National Market, for the calendar period indicated (in dollars):



HIGH LOW
---- ----

1998
Fourth Quarter.............................................. 14 1/4 8 1/4


From August 1, 1996 to December 21, 1998, PubliCARD's common stock was
quoted on the Over-the-Counter Bulletin Board. The following table sets forth
the high and low bid quotations for PubliCARD's common stock, as quoted in the
Over-the-Counter Bulletin Board, for the calendar periods indicated (in
dollars):



HIGH(1) LOW(1)
------- ------

1997
First Quarter.............................................. 1 1/2 1 3/8
Second Quarter............................................. 1 3/8 1 3/16
Third Quarter.............................................. 1 11/16 1 1/4
Fourth Quarter............................................. 1 11/16 1 5/16
1998
First Quarter.............................................. 1 1/2 1 1/4
Second Quarter............................................. 1 3/4 1 1/2
Third Quarter.............................................. 3 3/8 1 5/8
Fourth Quarter............................................. 8 1/4 3 3/8


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(1) Such Over-the-Counter market quotations reflect inter-dealer prices, without
retail mark-up, mark-down or commission and may not necessarily represent
actual transactions.

(b) There were approximately 2,600 registered holders of record of common
stock of the Company as of March 23, 1999.

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

RECENT SALES OF UNREGISTERED SECURITIES.

On November 23, 1998, the Company completed the offer and sale of 2,059,000
shares of its common stock, at a price of $5.00 per share in cash, for aggregate
cash consideration of $10,295,000 (the "Private Placement"). Of the shares
issued and sold in the Private Placement, 560,000 shares of common stock were
sold for aggregate consideration of $2,800,000 to non-U.S. persons in offshore
transactions pursuant to Regulation S under the Securities Act. Such non-U.S.
persons made certain representations to the Company

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20

regarding their status and actions necessary to comply with Regulation S. The
remaining 1,499,000 shares of common stock were issued and sold in the Private
Placement for aggregate consideration of $7,495,000 pursuant to Regulation D
under the Securities Act. The Company intends to register the shares issued and
sold pursuant to the Private Placement under the Securities Act when it becomes
eligible to effect such a registration on Form S-3.

On November 24, 1998, the Company issued 1,495,037 shares of common stock
to former employees and shareholders of Tritheim in connection with the
acquisition of Tritheim by the Company. In addition, options to purchase 354,616
shares of Tritheim common stock outstanding immediately prior to the closing of
the acquisition were converted into options to purchase 83,270 shares of common
stock of the Company with an exercise price of $2.00 per share (subject to
anti-dilution adjustments). These options are exercisable for five years
beginning on November 24, 1998. Furthermore, the Company issued options to
purchase 250,000 shares of its common stock to all of the Tritheim salaried
employees. These options have an exercise price of $2.00 per share (subject to
anti-dilution adjustments) and will be exercisable from November 24, 2001
through November 24, 2006. The Company is required to register 241,266 shares of
its common stock issued to former shareholders of Tritheim pursuant to a shelf
registration statement under the Securities Act. In the event the shelf
registration statement is not effective on May 24, 1999, the holders of the
shares entitled to such registration rights will have the right, for a specified
period of time, to cause the Company to repurchase their shares for a cash
purchase price equal to the fair market value of the shares on the date of the
repurchase.

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ITEM 6. SELECTED FINANCIAL DATA

The selected financial data of the Company presented below for the five
year period ended December 31, 1998, have been derived from the consolidated
financial statements of the Company, which have been audited by Arthur Andersen
LLP. The information set forth below should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Company's Consolidated Financial Statements and the Notes
thereto included elsewhere in this report. The selected financial data for years
prior to 1998 have been restated to reflect OSM as a discontinued operation. See
Note 10 to the Notes to Consolidated Financial Statements.



YEAR ENDED DECEMBER 31,
---------------------------------------------------
1998 1997 1996 1995 1994
------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

INCOME STATEMENT DATA:
Net sales................................ $16,519 $17,039 $15,486 $16,680 $16,015
Income (loss) from operations(1)......... (4,432)(2) (1,248)(3) (5,152)(4) (1,959) (2,498)
Income (loss) from continuing
operations............................. (6,087)(2) (1,903)(3) (3,513)(4) (4,732)(5) (5,752)(6)
Income from discontinued operations...... 12 215 1,725 4,441 3,463
Gain on sale of discontinued operations,
net.................................... -- 609 12,783 -- --
Net income (loss)........................ (6,075) (1,079) 10,995 (291) (2,289)
Per common share:
Income (loss) from continuing
operations............................. $ (.44) $ (.14) $ (.23) $ (.32) $ (.39)
Income and gains from discontinued
operations............................. -- .06 .95 .30 .24
------- ------- ------- ------- -------
Net income (loss)........................ $ (.44) $ (.08) $ (.72) $ (.02) $ (.15)
======= ======= ======= ======= =======




DECEMBER 31,
---------------------------------------------------
1998 1997 1996 1995 1994
------- ------- ------- ------- -------
(IN THOUSANDS)

BALANCE SHEET DATA:
Working capital.......................... $19,417 $14,807 $18,679 $ 3,689 $17,771
Total assets............................. 39,928 25,929 30,923 33,832 36,857
Total debt(7)............................ 1,138 1,272 1,714 10,226 14,869
Other non-current liabilities............ 7,780 9,167 10,220 11,245 16,433
Shareholders' equity(8).................. 21,917 10,873 13,996 (2,594) (2,616)


- ---------------
(1) Represents income (loss) before interest income, interest expense and items
of a nonoperating nature.

(2) The 1998 loss from operations includes a charge of $2,800,000 to expense
in-process research and development associated with the Tritheim
acquisition. The loss from continuing operations also includes cost of
pensions -- nonoperating of $846,000 and other costs of $1,021,000.

(3) The 1997 loss from operations includes a non-cash charge of $768,000 related
to the modification and extension of certain common stock purchase warrants.
The loss from continuing operations also includes cost of
pensions -- nonoperating of $768,000 and other costs of $200,000.

(4) The 1996 loss from operations includes a special charge of $1,596,000
associated with Greenwald Industries' plant relocation. The loss from
continuing operations also includes cost of pensions -- nonoperating of
$769,000 and other income of $203,000.

(5) Includes cost of pensions -- nonoperating of $744,000, other costs of
$365,000 and a gain from repurchase of notes of $75,000.

(6) Includes cost of pensions -- nonoperating of $768,000, other costs of
$409,000 and a gain from repurchase of notes of $640,000.

(7) Includes current maturities of long term debt and revolving credit line
borrowings.

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

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ITEM 7. 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-K 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 the words "believes," "expects," "anticipates," "estimates,"
"intends," "plans" or similar expressions. For those statements, we claim the
protection of the safe harbor for forward-looking statements contained in the
U.S. Private Securities Litigation Reform Act of 1995. Forward-looking
statements are not guarantees of future performance. They involve risks,
uncertainties and assumptions. You should understand that such statements made
under "Factors That May Affect Future Results" and elsewhere in this document
could affect our future results and could cause those results to differ
materially from those expressed in such forward-looking statements.

OVERVIEW

PubliCARD designs, develops, manufactures and markets products and
technologies used in niche areas of the smart card industry. Applications for
PubliCARD's products and technologies include conditional access and security
systems, payment systems and data storage. PubliCARD is developing smart card
solutions for the information technology, wireless communications, pay
television, transportation, commercial laundry, identification and loyalty
program industries. PubliCARD's smart card products include smart cards, smart
card readers, value transfer stations, operating systems and application
software.

In PubliCARD's other technology business, it develops and manufactures
PCMCIA products, hard disk duplicators and digital camera flash film readers for
original equipment manufacturers, systems integrators, value-added resellers,
value-added distributors and end users. In addition, PubliCARD, through
Greenwald Industries, is the leading designer and manufacturer of coin meter
systems used in the commercial laundry appliance industry.

Recent Acquisitions

Beginning in 1998, PubliCARD acquired several business offering or
developing unique smart card applications in order to take advantage of the
growing smart card industry. PubliCARD intends to continue acquiring businesses
that develop smart card technologies for niche applications. Through these
acquisitions, PubliCARD believes that it is well-positioned to become a leading
provider of smart card products and solutions.

In February 1998, PubliCARD acquired, through a joint venture arrangement
in Greenwald Intellicard, Inc., the assets and intellectual property of
Intellicard Systems. Greenwald Intellicard develops smart card readers, value
transfer stations, card management software and machine interface boards for the
commercial laundry appliance and parking industries. PubliCARD currently owns
65% of Greenwald Intellicard, and has an option exercisable beginning in
February 2000 to acquire the remaining 35%.

In November 1998, PubliCARD acquired Tritheim Technologies, Inc., which
develops security products for software, computers and the electronic
information industry. Through Tritheim, PubliCARD provides smart card readers
and writers, and has developed software for secure electronic commerce, Internet
security, computer security and software copy protection.

In February 1999, PubliCARD acquired Amazing Smart Card Technologies, Inc.,
a developer of consumer smart card solutions for the Internet and loyalty
programs. Amazing also manufactures smart cards for customers requiring rapid
turnaround and smaller volumes. In addition, PubliCARD, through Amazing, offers
web filtering software, which permits parents, public institutions, libraries
and schools to limit children's access to websites by defining each child's use
profile on a smart card.

In February 1999, PubliCARD also acquired Greystone Peripherals, Inc., a
developer of PCMCIA products, hard disk duplicators and digital camera flash
film readers. Through Greystone, PubliCARD designs, manufactures and markets
these proprietary computer peripherals for OEMs, system integrators, VARs, VADs
and end users.
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Discontinued operation

In March 1999, PubliCARD's Board of Directors adopted a plan to dispose of
its engineering services subsidiary, Orr-Schelen-Mayeron & Associates, Inc.
("OSM"). No significant gain or loss is expected on the disposition.

Presentation

The results of operations for the three years ended December 31, 1998 have
been restated to reflect OSM as a discontinued operation. In addition, the
results of operations for Greenwald Intellicard and Tritheim have been reflected
in the 1998 financial statements from the respective acquisition dates.

RESULTS OF OPERATIONS

The following table presents, as a percentage of sales, selected consolidated
statements of income data for each of the three years in the period ended
December 31, 1998.



1998 1997 1996
---- ---- ----

Net sales:
Coin products(1).......................................... 93 100 100
Technology products(2).................................... 7 -- --
Total net sales................................... 100 100 100
Cost of sales(1)
Coin products(2).......................................... 64 66 75
Technology products....................................... 90 -- --
Total cost of sales............................... 66 66 75
Gross margin
Coin products............................................. 36 34 25
Technology products....................................... 10 -- --
Total gross margin................................ 34 34 25
Operating expenses
General and administrative................................ 33 29 41
Sales and marketing....................................... 5 5 5
Product development....................................... 4 3 2
In-process research and development....................... 17 -- --
Goodwill amortization..................................... 1 -- --
Warrant expense........................................... -- 5 --
Relocation charge......................................... -- -- 10
Total operating expenses.......................... 61 41 58
Income (loss) from operations............................... (27) (7) (33)
Other (expense) income, net................................. (10) (4) (6)
Income (loss) from continuing operations before income
taxes..................................................... (37) (11) (39)


- ---------------

(1) Expressed as a percentage of coin products segment sales.

(2) Expressed as a percentage of technology products segment sales.

Year Ended December 31, 1998 Compared to Year Ended December 31, 1997

Sales. Consolidated sales decreased by 3% to $16,519,000 compared to
$17,039,000 for 1997. Sales for the coin products segment decreased by 10%. Coin
products are principally sold to the commercial laundry industry which is
experiencing a migration of equipment from electro-mechanical to electronic and
smart card based. Sales for the technology products segment were $1,147,000 in
1998 and principally related to the sale of readers, card transaction stations
and cards to the commercial laundry industry.

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24

Gross margin. Gross margin as a percentage of sales was 34% in 1998 and
1997. Gross margins for the coin products segment was 36% in 1998 compared to
34% in 1997. An improvement in manufacturing labor productivity accounted for
the increase in the gross margin percentage. Gross margin for the technology
segment was 10% in 1998. Beginning in the fourth quarter of 1998, the production
of certain smart card products was transferred from Greenwald Intellicard's
operations in Florida to Greenwald Industries' facility in Connecticut. The
Company expects to transfer the remainder of Greenwald Intellicard's production
effort to Connecticut in 1999.

Operating expenses. General and administrative expenses for the year ended
December 31, 1998 increased by approximately 10% to $5,488,000 from $4,976,000
for 1997. The majority of the increase was due to $388,000 of general and
administrative expenses, mainly salaries and benefits, at the Company's
technology businesses.

Sales and marketing expenses were $792,000 in 1998 compared to $796,000 in
1997.

Product development expenses include expenses associated with the
development of new products and enhancements to existing products. Product
development expenses increased in 1998 primarily due to the smart card business
acquisitions in 1998. Product development expenses amounted to $740,000 in 1998.
The Company believes that a significant level of development expenditures are
required in order to enable it to quickly introduce new products that
incorporate the latest technological advances and to develop and maintain close
relationships with key suppliers of components and technologies. The Company's
future success will depend upon its ability to develop and to introduce new
products on a timely basis that keep pace with technological developments and
emerging industry standards and address the increasingly sophisticated needs of
its customers.

Upon consummation of the Tritheim acquisition in November 1998, the Company
immediately expensed $2,800,000 representing purchased in-process research and
development projects that had not yet reached technological feasibility and had
no alternative future use. Tritheim had several projects in progress at the time
of the acquisition including (i) a smart card-enabled software product that
enables a personal computer to encrypt and decrypt computer files and e-mail and
secures personal computer access and (ii) development of ASICs (application
specific integrated circuit) which will incorporate multiple chip set
functionality into a single integrated circuit board. Estimated costs to
complete these projects aggregate approximately $450,000 and such costs are
expected to be incurred in 1999. The Company expects to complete development of
the in-process projects at various dates in 1999.

The value assigned to in-process technology was determined by estimating
the costs to develop the purchased in-process technology into commercially
viable products, estimating the percentage of completion of each project,
estimating the resulting net cash flows from such projects and discounting the
net cash flows back to their present values. The discount rate includes a factor
that takes into account the uncertainty surrounding the successful development
of the purchased in-process technology. The following assumptions were used,
among others, to estimate discounted net cash flows:

- The projected revenues were based on management's estimates of total
market size, penetration rate and life expectancy for each particular
product. The estimated revenues projected average compounded annual
growth rates of 40% to 82% during 1999-2003, depending on the product
area, with the single largest product having projected sales in 2003 of
approximately $11,000,000. Estimated total revenue from the purchased
in-process products were expected to peak in year 2003 and decline
rapidly in 2004-2006 as other new products were expected to enter the
market.

- The projected cost of sales, sales and marketing expenses, general and
administrative expenses and income taxes were estimated by management
based on expected and historical operating characteristics. Products
which were more software oriented were projected to have a higher gross
margin than products containing a hardware element.

- A risk-adjusted discount rate was used to discount the net cash flows
back to their present value. Giving primary consideration to rates of
return required for venture capital investments, an overall 30% after-tax
discount rate was selected as the basis for discounting net cash flows to
arrive at indications of

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25

value for determining the appropriate discount rate to be used in the
valuation of specific projects. The discount rate for a specific project
incorporated the likelihood of success of each product based on the
estimated percentage completed as of the date of the acquisition. The
discount rate used ranged from 25% to 40%.

If these projects are not successfully developed, the revenue and
profitability of the Company may be adversely affected in future periods.
Management believes that the assumptions used in the valuation of the purchased
in-process research and development reasonably estimated the future benefits
attributable to the purchased in-process technology. However, no assurance can
be given that commercial or technological viability of these projects will be
achieved or that actual results will not deviate from those assumptions in
future periods.

Other income and expense. Interest income decreased to $551,000 for 1998
compared to $683,000 for 1997 due to lower amounts of cash investments. Interest
expense decreased to $339,000 during 1998 compared to $370,000 for 1997. Other
expense in 1998 includes a $954,000 charge associated with the termination of a
letter of intent to purchase five businesses.

Year Ended December 31, 1997 Compared to Year Ended December 31, 1996

For the year ended December 31, 1997, the Company operated solely in the
coin products segment.

Sales. Consolidated sales increased by 10% to $17,039,000 compared to
$15,486,000 for 1996. The increase was primarily due to coin chute, money box
and meter case volume improvements. In addition, the revenues for 1996 were
negatively impacted by Greenwald Industries' plant relocation.

Gross margin. Gross margin as a percentage of sales was 34% in 1997
compared to 25% in 1996. Manufacturing labor productivity improvements primarily
accounted for the increase in the gross margin percentage. In addition, cost of
sales in 1996 included a $372,000 write down of certain obsolete inventories and
a disruption in manufacturing activities caused by the plant relocation.

Operating expenses. General and administrative expenses for the year ended
December 31, 1997 decreased by approximately 21% to $4,976,000 from $6,338,000
for 1996. The decrease was primarily attributable to a reduction in corporate
headcount and overhead expenses.

Sales and marketing expenses were $796,000 in 1997 compared to $768,000 in
1996.

The 1997 operating expenses included a non-cash charge of $768,000 related
to the extension and modification of certain common stock purchase warrants. The
1996 operating expenses included a special charge of $1,596,000 associated with
Greenwald Industries' plant relocation which included $627,000 in severance
costs associated with 110 terminated employees, $246,000 for lease termination
costs and $723,000 for costs related to plant and employee relocation,
recruiting and training new personnel and for temporary living allowances. The
move was completed by April 30, 1996.

Other income and expense. Interest income increased to $683,000 for 1997
compared to $476,000 for 1996 due to higher amounts of cash investments.
Interest expense decreased to $370,000 during 1997 compared to $815,000 for 1996
due to repayments of certain subordinated notes and revolver and term notes in
1996 and 1997.

Discontinued operations. In 1996, the Company completed the sale of
substantially all of the assets of Masterview Window Company, Inc., Fenwal
Electronics, Inc. and Bright Star Industries Incorporated. The aggregate sales
price for the dispositions was $47,771,000. The aggregate pre-tax gain on sale
of discontinued operations recorded in 1996 of $22,042,000 was offset by a
provision for income taxes of $9,259,000, of which $6,468,000 was credited
directly to paid-in-capital due to the utilization of pre-corporate
reorganization tax loss carryforwards.

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26

LIQUIDITY

During the year ended December 31, 1998, cash, including short-term
investments, increased by $5,405,000 to $18,482,000 at December 31, 1998. The
increase in cash was principally due to the November 1998 issuance of 2,059,000
shares of common stock through a private placement. The shares were sold at
$5.00 per share for net proceeds of $10,285,000.

Operating activities consumed cash of $3,315,000 in 1998 and principally
consisted of the loss from continuing operations coupled with the environmental
payments to the United States and Commonwealth of Pennsylvania (see below)
offset by the non-cash charge associated with acquired in-process research and
development. Investing activities consumed cash of $1,754,000 in 1998 and
consisted principally of cash paid, including debt assumed and immediately
repaid, in connection with the acquisitions of Tritheim and Greenwald
Intellicard of $1,467,000.

Financing activities provided cash of $10,474,000 in 1998 and consisted of
the net proceeds from the private placement of common stock of $10,285,000 and
proceeds from the exercise of options to purchase common stock of $649,000
offset by treasury stock purchases of $326,000. In April 1998, the Company
concluded a common stock buy-back program under which a total of 3,094,100
shares were purchased for an aggregate cost since inception (August 1996) of the
program of $4,270,000.

The Company believes that its current cash will be sufficient to meet its
anticipated cash needs for working capital, capital expenditures and business
expansion for at least the next 12 months. Future uses of cash include the
following:

- In February 1999, the Company completed the acquisitions of Amazing and
Greystone. Closing costs and cash paid to repay assumed debt is
anticipated to be approximately $2,100,000.

- Certain of the recently acquired smart card companies have generated
operating losses and in some cases have products which are commercially
viable, but to date have not generated a significant volume of sales. It
is expected that the smart card companies will require ongoing funding to
support the expansion of sales and marketing, administration and
continuing new product development.

- In connection with the acquisition of Tritheim, the Company is required
to register 241,266 shares of common stock issued as merger consideration
under a shelf registration statement under the Securities Act of 1933. In
the event that the shelf registration statement is not effective by May
24, 1999, the holders of these shares are entitled, for a specified
period of time, to cause the Company to repurchase their shares for a
cash purchase price equal to the fair market value of the shares on the
date of repurchase.

- In April 1996, a Consent Decree among the Company, the United States
Environmental Protection Agency and the Pennsylvania Department of
Environmental Protection ("PADEP") was entered by the court which
resolved all of the United States' and PADEP's claims against the Company
for recovery of costs incurred in responding to releases of hazardous
substances at a facility previously owned and operated by the Company.
Pursuant to the Consent Decree, the Company will pay a total of
$14,350,000 plus interest to the United States and Commonwealth of
Pennsylvania. Through December 31, 1998, the Company has made principal
payments aggregating $10,992,000. Further payments totaling $3,358,000
plus interest will be made to the United States and Commonwealth of
Pennsylvania over the next four years.

- The Company sponsors a defined benefit pension plan which was frozen in
1993. As of December 31, 1998, the actuarial present value of accrued
liabilities exceeded the plan assets by approximately $6,000,000. The
annual contribution to the plan is expected to be approximately
$1,000,000 in 1999.

During 1998, the Company's capital expenditures totaled $318,000. The
Company anticipates that its level of capital expenditures for 1999 will be
comparable to those of 1998. The Company has not entered into any material
commitments for acquisitions or capital expenditures and has the ability to
increase or decrease capital expenditure levels as required. The Company
anticipates that it will be able to fund its capital

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27

expenditures during 1999 with its available cash resources and its other cash
flows as well as through capital equipment financing.

At December 31, 1998, approximately $77,000,000 of U.S. tax loss
carryforwards (subject to review by the Internal Revenue Service), expiring from
1999 through 2018, were available to offset future taxable income. Due to the
"change of ownership" provisions of the Internal Revenue Code of 1986, the
availability of net operating loss carryforwards to offset federal taxable
income in future periods could be subject to an annual limitation if a change in
ownership for income tax purposes occur.

FACTORS THAT MAY AFFECT FUTURE RESULTS

THE MARKET FOR SMART CARD PRODUCTS IS STILL EMERGING. The existing level
of demand for smart card products in the United States is not sufficient for all
the companies seeking to engage in the smart card business to succeed. Current
participants in the smart card business rely upon anticipated growth in demand,
which may not occur. The success of the smart card industry depends, in large
part, on the ability of market participants, including our company, to convince
governmental authorities, commercial enterprises and other potential system
sponsors to adopt a smart card system in lieu of existing or alternative systems
such as magnetic stripe card and paper-based systems. In addition, smart
card-based systems may not prove economically feasible for some potential system
sponsors. For example, municipal transit authorities and colleges and
universities, which have legacy systems in use often associated with magnetic
stripe cards, may resist the introduction of smart card products. We cannot
assure you that there will be significant market opportunities for smart card
systems in the United States or that the acceptance of smart card systems in
other countries will be sustained. Moreover, a portion of the sales of smart
card products will depend upon public switched networks, such as the Internet.
We cannot assure you that the infrastructure or complementary products necessary
to make these networks into viable commercial marketplaces will be developed or,
if developed, that these networks will become viable commercial marketplaces.

THE MARKET'S ACCEPTANCE OF OUR PRODUCTS IS UNCERTAIN. Demand for and
market acceptance of our products is subject to a high level of uncertainty.
Factors that subject our products to this uncertainty include rapidly changing
technology, new product introductions and changes in customer requirements and
preferences. The success of our products also depends in part upon end users'
demand and upon our ability to enhance our existing products and to develop and
introduce new products and technologies that meet customer requirements.

Smart card-based security systems are able to provide protection in the
form of conditional access to, for example, intranets and wide area networks, as
well as to provide protection for electronic commerce transactions. There can be
no assurance that our conditional access smart card products will become an
accepted substitute for existing security applications. Similarly, existing
smart card products for the payment system and data storage markets also face
the risk that smart card technology generally, and our products specifically,
will not be chosen to replace existing technology in those markets. With respect
to our digital flash camera products, the market for digital photography is
still in the early stages of development and there has not yet been broad
acceptance of our products developed for that market. To the extent that a
specific method other than ours is adopted as a solution in any of the markets
we currently serve or target, sales of our existing and planned products may be
adversely impacted.

OUR FUTURE SUCCESS DEPENDS ON OUR ABILITY TO KEEP PACE WITH TECHNOLOGICAL
CHANGES AND INTRODUCE NEW PRODUCTS IN A TIMELY MANNER. The smart card industry
is subject to rapid technological change and new product introductions and
enhancements. Because new product development commitments must be made well in
advance of sales, new product decisions must anticipate the future demand for
the products under development. Our ability to remain competitive will depend in
part upon our ability to develop in a timely and cost effective manner new and
enhanced products at competitive prices. This, in turn, will be partially
dependent upon the success of our research and development efforts in developing
new technology. Our research and development expenditures for 1998 were
$740,000. We cannot assure you that these expenditures will lead to the
development of viable products or that we will not have to devote substantially
more resources to our research and development efforts in the future. In
addition, new product introductions or enhancements

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28

by our competitors could cause a decline in sales or loss of market acceptance
of our existing products and lower profit margins. Our success in developing,
introducing and selling new and enhanced products depends upon a variety of
factors, including:

- product selections;

- timely and efficient completion of product design and development;

- timely and efficient implementation of manufacturing processes;

- effective sales, service and marketing; and

- product performance in the field.

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 and believe that competition
is likely to intensify as a result of increasing demand for smart card products
and alternative technologies. We cannot assure you that we will be able to
compete with those or other companies or that competitive pressures will not
have a material adverse effect on our business and operating results. There can
be no assurance that competitors with:

- significantly greater financial, technical, marketing, purchasing and
other resources;

- the ability to respond more quickly to new or emerging technologies and
to changes in customer requirements;

- the ability to devote greater resources to the development, promotion and
sale of products; or

- the ability to deliver competitive products at a lower end user price

will not enter our business segments. Furthermore, increased competition would
likely result in price reductions, reduced margins and loss of market share, any
of which would have a material adverse effect on our business and operating
results. We believe that the principal competitive factors affecting the smart
card market are:

- the extent to which products support industry standards and provide
interoperability;

- technical features and level of security;

- strength of distribution channels;

- price;

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

- product features such as adaptability, ability to integrate with other
products, functionality and ease of use.

We currently experience competition from a number of sources. We compete
with Gemplus, GPT Card Technology, Oberthur, ODS Landis & Gyr, Orga and
Schlumberger Technologies, among others, in the manufacture and sale of smart
cards. Competitors for our readers and writers include VeriFone, Hypercom,
Ingenico, Diebold, Schlumberger Technologies, SCM Microsystems and Gemplus.

Our competitors include SCM Microsystems and Actiontec in the electronic
digital media industry. Our competitors in the disk duplication business include
Symantec, Wytron and ICS.

We believe that the principal competitive factors affecting our coin
products business are:

- quality of product;

- delivery times;

- ease of use; and

- price.

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We compete with ESD, Monarch and Set-O-Matic, as well as alternative
technologies including electronic systems and smart card products in the coin
products segment of our business.

We also experience indirect competition from certain of our customers which
currently offer alternative products or are expected to introduce competitive
products in the future. We may in the future face competition from developers of
smart card products that are based upon approaches similar to or different from
ours.

Many of our current and potential competitors have longer operating
histories in the smart card industry 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. In addition, as the smart card market develops, a
number of companies with significantly greater resources than ours could attempt
to enter or increase their presence in the market by acquiring or forming
strategic alliances with our competitors, resulting in increased competition.

WE HAVE LIMITED EXPERIENCE IN THE SMART CARD MARKET. We acquired our first
smart card company in February 1998, and in September 1998, our board of
directors decided to significantly expand our presence in the smart card
industry. We are therefore subject to many of the risks inherent in the
establishment of a new business enterprise. The companies we have acquired have
no prior history of operating as one combined enterprise. To address these
risks, we must, among other things, integrate the operations of our recent
acquisitions, enter into and maintain key strategic alliances, respond to
competitive developments, attract, retain and motivate qualified personnel and
significantly broaden our customer base.

WE FACE RISKS ASSOCIATED WITH ACQUISITIONS. An important element of our
growth strategy has been and continues to be the acquisition of businesses that
complement, enhance or geographically expand our existing business segments,
product lines or channels of distribution. In February 1998, we acquired,
through a joint venture arrangement in Greenwald Intellicard the assets and
intellectual property of Intellicard Systems. Greenwald Intellicard develops,
manufactures and markets smart card readers, value transfer stations, card
management software and machine interface boards for the commercial laundry
appliance industry. We currently own 65%, and have an option exercisable
beginning in 2000 to acquire the remaining interest. In November 1998, we
acquired Tritheim, a provider of security products for software, computers and
the electronic information industry. In February 1999, we acquired Amazing, a
developer of smart card solutions for the Internet, electronic commerce,
consumer loyalty programs, access control, finance and telecommunications
industries. That same month, we acquired Greystone, a provider of personal
computer card products, hard disk duplicators and digital flash camera film
readers.

Additional acquisitions would require us to invest financial resources and
may have a dilutive effect on our earnings or book value per share of common
stock. We cannot assure you that we will consummate any acquisitions in the
future, that any financing required for such acquisitions will be available on
acceptable terms or at all, or that any past or future acquisitions will not
materially adversely affect our results of operations and financial condition.

Our recently completed acquisitions, and our acquisition strategy
generally, present a number of significant risks and uncertainties, including
the risks that:

- we will not be able to retain the employees or business relationships of
the acquired company;

- we will fail to realize any synergies or other cost reduction objectives
expected from the acquisition;

- we will not be able to integrate the operations, products, personnel and
facilities of acquired companies;

- management's attention will be diverted to pursuing acquisition
opportunities and integrating acquired products, technologies or
companies and will be distracted from performing its regular
responsibilities;

- we will incur or assume liabilities, including liabilities that are
unknown or not fully known to us at the time of the acquisition; and

- we will enter markets in which we have no direct prior experience.

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OUR LONG PRODUCT SALES CYCLES SUBJECTS 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. A feature of the latter category is that these products
tend to be newly developed technologies that can represent major investments for
the customer. We are reliant on the potential customers' internal review
processes and systems requirements. Further, the implementation will often
involve deliveries of small quantities for a pilot program before a firm order
is received for production volumes. For these more complex products, the sales
process can take as long as one year, during which time we may expend
significant financial, technical and management resources, without any certainty
of a sale.

WE HAVE A HISTORY OF OPERATING LOSSES AND NEGATIVE CASH FLOW, AND WE HAVE
ONGOING FUNDING OBLIGATIONS. 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 flows from operating activities in 1999. We cannot
assure you that we will not incur losses or negative operating cash flows in the
future or that available cash will be sufficient to support our operating or
expansion needs. We incurred losses from continuing operations in 1998, 1997 and
1996 of approximately $6,087,000, $1,903,000 and $3,513,000, respectively. In
addition, we experienced negative cash flow from operating activities of
$3,315,000, $3,096,000 and $14,989,000 in 1998, 1997 and 1996, respectively.

In connection with our recent acquisitions, we have been and may continue
to be obligated to assume or extinguish obligations of the acquired companies.
Certain of the acquired companies have products which we believe are viable, but
to date have not generated a significant volume of sales and therefore have been
generating operating losses. We expect that the acquired companies will require
ongoing funding to support the expansion of sales and marketing, administration
and continuing new product development.

We also have continuing obligations to fund payments due under an
environmental consent decree and an underfunded pension plan. As of December 31,
1998, we were required to make future aggregate payments of $3,358,000, plus
interest, through April 2002, in connection with the environmental consent
decree to which we are subject. Consistent with the general practices of
environmental enforcement agencies, the consent decree does not eliminate our
potential liability for remediation of contamination that had not been known at
the time of the settlement. As of December 31, 1998, the actuarial present value
of the accrued liabilities of our pension plan exceeded the plan's assets by
approximately $6,000,000. In addition to the cash contribution of approximately
$1,000,000 we expect to make to the plan in 1999, we are obligated to make
continued contributions to the plan in accordance with the rules and regulations
prescribed by the Employee Retirement Income Security Act of 1974. Future
contributions levels are dependent in large measure on the mortality rate of
plan participants and the investment return on the plan assets.

WE MAY BECOME OBLIGATED TO REPURCHASE THE SHARES OF CERTAIN OF OUR
SHAREHOLDERS. In connection with our acquisition of Tritheim, we issued 241,266
shares of our common stock to employees and former shareholders of Tritheim. We
agreed that if we failed to register such shares under the Securities Act by May
24, 1999, those shareholders would be entitled to require us to repurchase their
shares for a cash purchase price equal to the fair market value of the shares as
of the date of repurchase. Since we do not expect to register those shares by
May 24, 1999, this put right will become exercisable. This right will be
outstanding until the earlier of the date the shares are registered or the
applicable holding period expires. If such shareholders exercise this put right,
our financial condition will be materially adversely affected.

WE MAY BE LIMITED IN OUR USE OF OUR FEDERAL NET OPERATING LOSS
CARRYFORWARDS. Section 382 of the Internal Revenue Code provides that when a
corporation undergoes an "ownership change," the corporation'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. In
addition, a portion of our federal net operating loss carryforwards are subject
to expiration each year. As of December 31, 1998, we had federal net operating
loss carryforwards totaling approximately $77,000,000 for federal income tax
purposes, approximately $6,000,000 of which will expire at the end of 1999,
$12,000,000 of which will

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expire at the end of 2000, $9,000,000 of which will expire at the end of 2001
and $25,000,000 of which will expire at the end of in 2002. A net operating loss
can generally be carried back two or three years and then forward fifteen or
twenty years (depending on the year in which the loss was incurred), and used to
offset taxable income earned by a company (and thus reduce its income tax
liability). We intend to issue a substantial number of shares of our common
stock in connection with future acquisitions and public offerings. In addition,
the exercise of outstanding warrants and certain options to purchase shares of
our common stock may require us to issue further shares of our common stock. If
we were to experience such an "ownership change," we estimate that we would not
be able to use a substantial amount of our available net operating losses to
reduce our taxable income.

Furthermore, the extent of the actual future use of our net operating
losses 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 actually use any of our net
operating losses 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 currently 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 currently have a number of patent applications pending. We cannot
assure you that any of such 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 or that the patents of
others will not have a material adverse effect on our business and operating
results.

If our technology or products are determined to infringe upon the rights of
others, we would be required to obtain licenses to utilize that technology,
which we may not be able to obtain in a timely manner on acceptable terms or at
all. Our failure to do so would have a material adverse effect on us and our
financial condition and results of operations.

In addition, patent disputes are common in the smart card and computer
industries and 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 our target markets grows, the likelihood
of infringement claims also increases. Any claims or litigation may be
time-consuming and costly, cause product shipment delays or require us to
redesign our products or require us to 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 to
as great an extent as do the laws of the United States. Our means of protecting
our proprietary and intellectual property rights may not be adequate. There is a
risk that our competitors will independently develop similar technology,
duplicate our products or design around patents or other intellectual property
rights.

THE NATURE OF OUR PRODUCTS SUBJECTS US TO PRODUCT LIABILITY RISKS. Our
customers may rely on certain of our current products and products in
development to prevent unauthorized access to computer networks, personal
computers, computer files, cellular telephones, DVB , websites and other
applications. 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

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

YEAR 2000 COMPLIANCE ISSUES COULD NEGATIVELY IMPACT OUR BUSINESS.

Year 2000 Issue

The Year 2000 issue concerns the potential exposures we and other companies
have because certain computer systems, computer chips and hardware use two
digits, rather than four, to define the applicable year. On January 1, 2000,
these systems and programs may recognize the date as January 1, 1900 and may
process data incorrectly or stop processing data altogether.

Status of Remediation

Our assessment of the impact of the Year 2000 issue focuses on three
functional areas:

- information technology, which includes computer systems and related
application software;

- embedded chips, which are hidden internal components of many
non-computer devices and equipments as well as our own products; and

- business partners, which include suppliers, vendors, third party
manufacturers and customers.

In the coin products segment of its business, we have performed an
assessment of potential Year 2000 exposures to our business processes,
infrastructure and communications. Substantially all of our internal information
systems, communications systems, building security systems and embedded chips in
areas such as its manufacturing processes in this segment have been identified,
assessed and categorized for Year 2000 compliance. Computer hardware and
software, operating systems and utilities, desktop applications, computer
peripherals, suppliers, business partners, embedded chips and plant facilities
have been included in the project scope. The products manufactured by this
segment have been tested and we believe that they are Year 2000 compliant. The
only items for which Year 2000 compliance are not known are low-risk devices,
such as an alarm system, which would not materially impact normal operations if
they malfunctioned. We have identified two devices that are non-compliant: the
application program used for certain critical functions such as order entry,
inventory management and accounting, which will undergo remediation during the
second quarter of 1999, and the network used to communicate with one significant
customer. We have contacted that customer to discuss possible alternatives, but
a solution has not yet been identified. In addition, certain older generation
personal computers have been identified as requiring Year 2000 software upgrades
or will need to be replaced. While we expect all systems in the coin products
segment to be Year 2000 compliant, we can give no assurance that compliance will
be achieved with respect to those items not currently compliant or for which
compliance is not known. In addition, there can be no assurance that the failure
to ensure Year 2000 compliance will not have a material adverse impact on our
business and operating results.

In the technology products segment of our business, the status of its Year
2000 compliance assessment varies by subsidiary. Greystone's Year 2000
compliance program is currently in the assessment phase. To date, Greystone has
compiled an inventory of it's information technology and non-information
technology systems and is currently determining a methodology to achieve
compliance or develop contingency plans for those systems identified as
non-compliant. We believe that Greystone's products are Year 2000 ready.
However, there are two software applications that are deemed critical to
Greystone's business that have not yet been evaluated specifically for Year 2000
compliance. There can be no assurance that such software applications or that
Greystone's information technology or non-information technology systems are or
will be Year 2000 compliant. We will be materially adversely affected if
Greystone fails to be Year 2000 compliant.

We are in the early stages of assessment with respect to the Year 2000
compliance of Greenwald Intellicard, Tritheim and Amazing. We initiated limited
Year 2000 readiness efforts and have performed some due diligence with respect
to the products of these subsidiaries, but we have not performed a comprehensive
assessment of the Year 2000 compliance of their internal systems, products,
vendors or business partners. We believe that Greenwald Intellicard's and
Amazing's products are Year 2000 ready. Tritheim has entered into agreements
with two of its main suppliers in which it ensured its business continuity into
the Year 2000, but

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we have not yet evaluated its Year 2000 readiness. Tritheim's failure to achieve
Year 2000 compliance could therefore have a material adverse effect on our
business and financial condition. To address the limited state of Year 2000
assessment efforts at each of the technology products businesses, we intend to
compile an inventory of items with possible Year 2000 implications with respect
to these businesses, and to prepare, prioritize and assess an inventory of
critical suppliers and business partners. We have created a partial inventory of
computer hardware and software, which is in the process of being assessed for
possible Year 2000 problems. We expect to identify and remediate non-compliant
Year 2000 information technology and embedded chips by the end of 1999, but
there can be no assurance that compliance will be achieved or that the failure
to ensure Year 2000 compliance will not have a material adverse impact on our
business and financial condition. Furthermore, there can be no assurance that
use of any of our products in connection with other products that are not Year
2000 compliant, including non-compliant hardware and software, will not result
in the inaccurate exchange of dates and result in performance problems or system
failures.

Third Party Compliance

Our Year 2000 project scope extends to assessing issues affecting
suppliers' and customers' products, services, systems and operations. We have
contacted approximately 200 suppliers and business partners in our coin products
segment with requests for Year 2000 status updates, have received responses from
approximately 40% of those contacted and are following up on all unsatisfactory
responses. In our technology products segment, we have contacted 20 vendors and
business partners, 50% of whom have responded. We intend to prepare, prioritize
and assess an inventory of additional critical suppliers and business partners
in our technology products segment and to contact them regarding their Year 2000
status by the end of 1999.

Contingency Plans

We are currently in the process of developing contingency plans for
potential Year 2000 failures. With respect to our coin products segment, we have
conducted research on the possible consequences of a broken supply chain
resulting from the Year 2000 issue and how to work around a failure. We intend
to rely on our existing disaster recovery plan in the event of an significant
impact to our coin products business resulting from the Year 2000 issue. We
intend to develop, where practicable, contingency plans for all mission critical
processes by the end of 1999.

Estimated Costs

Although the costs of Year 2000 remediation projects have not historically
been separately accounted for, we currently estimate that the costs for its Year
2000 remediation projects for our coin products segment will be less than
$100,000. For our technology products segment, our Year 2000 assessment is in
the very early stages. As such, we have not yet determined an estimate of the
costs for any Year 2000 remediation projects that may be required for this
segment. Year 2000 expenditures are financed through cash on hand and funds
generated from operations, and are capitalized to the extent they enhance the
capabilities and useful life of the underlying systems.

We have not assessed the specific financial impact of not being Year 2000
compliant. In connection with our acquisitions of each of Tritheim, Amazing and
Greystone, certain of the sellers gave us representations and warranties with
respect to the Year 2000 compliance of the applicable company's information
technology. Subject to certain financial limitations, certain of the sellers are
required to indemnify us for any losses we may incur as a result of any breach
of such representations and warranties. These indemnification obligations of
such sellers expire in May 2000. However, any failure to be Year 2000 compliant
could have a material adverse effect on our business, result of operations and
financial condition.

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WE MAY NOT BE ABLE TO ATTRACT AND RETAIN MANAGEMENT AND TECHNICAL
PERSONNEL. Our future success depends in large part on our ability to attract
and retain operating management and technical personnel. We cannot assure you
that we will be able to do so.

Our ability to execute our acquisition and growth plan is dependent upon
the continued services of Harry I. Freund, Chairman, Jay S. Goldsmith, Vice
Chairman, James J. Weis, President and Chief Executive Officer and Richard
Phillimore, Executive Vice President/Smart Card Business. Our ability to execute
our strategic plan could be materially adversely affected should the service of
these individuals cease to be available to us. None of these employees is
subject to an agreement not to compete with us in the event their services are
terminated. Accordingly, we cannot guarantee that we will be able to attract and
retain our key personnel in the future. Failure to attract and retain key
personnel could have an adverse effect on our operations.

WE DEPEND ON A RELATIVELY SMALL NUMBER OF CUSTOMERS FOR A MAJORITY OF OUR
REVENUES. We rely on a limited number of customers in the coin products segment
of our business. Whirlpool Corp. accounted for approximately 13% of our revenues
on a consolidated basis in 1998. We expect to continue to depend upon a
relatively small number of customers in our coin products segment for a majority
of our revenue.

Generally, we do not enter into long-term supply commitments with our
customers. Instead, we bid on a project basis and have supply contracts in place
for each project. Significant reductions in sales to any of our largest
customers would have a material adverse effect on us. 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 the
products provided by us could have a material adverse effect on our results of
operations. As of December 31, 1998, our four largest accounts represented
approximately 38% in the aggregate of our consolidated accounts receivable.

WE DEPEND ON A RELATIVELY SMALL NUMBER OF SUPPLIERS IN OUR COIN PRODUCTS
SEGMENT. In our coin products segment, we rely on a limited number of suppliers
of several key components utilized in the assembly of our products. For example,
we purchase mechanical coin chutes using our patented designs and proprietary
tooling exclusively from one supplier in Taiwan. Our reliance on sole source
suppliers involves several risks including a potential inability to obtain an
adequate supply of required components, price increases, late deliveries and
poor component quality. Although to date we have been able to source our
requirements of such components, we cannot assure you that we will be able to
obtain our full requirements of such components in the future, that prices of
such components will not increase and that problems with respect to quality and
timely delivery will not occur. Disruption or termination of the supply of these
components could delay shipments of our products, have a material adverse effect
on our business and operations and damage relationships with customers and our
reputation.

FLUCTUATIONS IN THE CURRENCY EXCHANGE RATE BETWEEN THE U.S. DOLLAR AND THE
NEW TAIWAN DOLLAR COULD HAVE AN ADVERSE EFFECT ON OUR OPERATING RESULTS. One of
our principal suppliers is located in Taiwan. Our purchases from this supplier
amounted to approximately $2,100,000 in 1998 and are expected to continue at
that level in the future. As a result, a portion of our purchases is subject to
certain risks, including tariffs and other trade barriers, currency exchange
risks and exchange controls. These factors could have a material adverse effect
on our business and operating results.

Also, as a result of our Taiwanese purchases, a portion of our supply costs
are subject to significant fluctuations based upon changes in the exchange rate
of the new Taiwan dollar, in relation to the U.S. dollar. We do not currently
engage in hedging activities with respect to this foreign currency exposure. Our
management will continue to monitor our exposure to currency fluctuations and,
when appropriate, may use financial hedging techniques in the future to minimize
the effect of these fluctuations.

WE ARE VULNERABLE TO THE POTENTIAL OBSOLESCENCE OF THE MECHANICAL COIN
METER SYSTEMS THAT WE MANUFACTURE. We design and manufacture mechanical coin
meter systems used primarily in the commercial laundry appliance industry.
During 1998, sales of mechanical coin meter systems accounted for approximately
93.1% of our revenue. Our sales of mechanical coin meter systems were
$15,372,000, $17,039,000 and $15,486,000 in 1998, 1997 and 1996, respectively.
We are vulnerable to the potential obsolescence of the coin

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handling equipment that we manufacture, as advances are made towards the
development of equipment utilizing electronic and smart card technologies.

WE COULD BE SUBJECT TO GOVERNMENT REGULATION. Market needs and competitive
pressures will require that our products contain certain regulated cryptographic
algorithms in order to protect information and cash substitutes stored in smart
cards. Export, import and usage of such cryptographic algorithms are subject to
a large and changing body of regulations in the United States. Our failure to
comply with any regulations that may be enacted with respect to these
cryptographic algorithms would have a material adverse affect on our business.

Federal, state and local regulations impose various environmental controls
on the discharge of chemicals and gases which may be used in our present or
future assembly 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 our company to comply with
environmental rules and regulations, including the discharge of hazardous
substances, would subject us to liabilities and would materially adversely
affect our operations.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company is exposed to market risk primarily through its short-term
investments. The Company's investment policy calls for investment in short-term,
low risk instruments. As of December 31, 1998, short-term investments
(principally treasury bills) were $17,547,000. Due to the nature of these
investments, any decrease in rates would not have a material impact on the
Company's financial condition and results of operations. Foreign exchange rate
risk principally relates to supply costs denominated in the new Taiwan dollar.
Such supply costs amounted to approximately $2,100,000 in 1998. The Company does
not currently engage in hedging activities with respect to foreign currency
exposure. The Company will continue to monitor exposure to currency fluctuations
and, when appropriate, may use financial hedging techniques in the future to
minimize the effect of these fluctuations.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

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

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

None.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The information called for by this item is hereby incorporated by reference
from the Company's definitive proxy statement to be filed pursuant to Regulation
14A for the 1999 Annual Meeting of Shareholders.

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

SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act") requires the Company's directors and officers and persons who
own more than 10 percent of a registered class of the Company's equity
securities, to file reports of ownership and changes in ownership with the
Securities and Exchange Commission (the "SEC"). Officers, directors and greater
than 10% shareholders are required by SEC regulations to furnish the Company
with copies of all Section 16(a) forms they file. To the Company's

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knowledge, based solely upon the Company's review of the copies of such forms
received by it during the fiscal year ended December 31, 1998 and
representations that no other reports were required, the Company believes that
each person who, at any time during such fiscal year, was a director, officer or
beneficial owner of more than 10% of the Company's common stock complied with
all Section 16(a) filing requirements during such fiscal year except that David
L. Herman filed a late report on Form 5 covering one late Form 4 transaction.

ITEM 11. EXECUTIVE COMPENSATION

The information called for by this item is hereby incorporated by reference
from the Company's definitive proxy statement to be filed pursuant to Regulation
14A for the 1999 Annual Meeting of Shareholders.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The information called for by this item is hereby incorporated by reference
from the Company's definitive proxy statement to be filed pursuant to Regulation
14A for the 1999 Annual Meeting of Shareholders.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information called for by this item is hereby incorporated by reference
from the Company's definitive proxy statement to be filed pursuant to Regulation
14A for the 1999 Annual Meeting of Shareholders.

PART IV

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

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

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

2) Financial Statement Schedules -- None

3) Exhibits:

3.1 Amended and Restated Articles of Incorporation, amended and
restated through November 2, 1998. Incorporated by reference from
the Registrant's Form 10-Q for the quarter ended September 30,
1996, dated November 9, 1998.

3.2 By-Laws as amended through July 17, 1990. Incorporated by
reference from the Registrant's Form 10-K for the year ended
December 31, 1990, dated March 28, 1991.

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

4.1 Form of option to purchase common stock of the Registrant issued
in connection with the Stock Purchase Agreement dated April 12,
1985, among the Registrant, Balfour Securities Corporation and
the Purchasers. Incorporated by reference from the Registrant's
Form 10-K for the year ended December 31, 1994, dated March 31,
1995.

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

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

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

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

4.6 Rights Agreement, dated as of August 9, 1988, between the
Registrant and Mellon Financial Services Corporation #17, as
Rights Agent. Incorporated by reference from the Registrant's
Registration Statement on Form 8-A, dated September 26, 1988.

10.1 Agreements dated as of August 1987 between the Registrant and
Harry I. Freund, Jay S. Goldsmith, David L. Herman, and James J.
Weis concerning a change in control of the Registrant.
Incorporated by reference from the Registrant's Form 8 Amendment
to the Registrant's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1987, dated December 7, 1987, filed on
December 18, 1987.

10.2 Publicker Industries Inc. 1991 Stock Option Plan. Incorporated by
reference from the Registrant's Form 8 Amendment to the
Registrant's Form 10-K for the year ended December 31, 1991,
dated August 14, 1992.

10.3 Employment Agreement between the Registrant and James J. Weis
dated February 17, 1987. Incorporated by reference from the
Registrant's Form 8 Amendment to the Registrant's Form 10-K for
the year ended December 31, 1991, dated August 14, 1992.

10.4 Publicker Industries Inc. 1993 Long-Term Incentive Plan.
Incorporated by reference from the Registrant's Form 10-K for the
year ended December 31, 1993, dated March 29, 1994.

10.5 Publicker Industries Inc. Non-employee Director Stock Option
Plan. Incorporated by reference from the Registrant's Form 10-K
for the year ended December 31, 1993, dated March 29, 1994.

10.6 Consulting Arrangement between the Registrant and Harry I. Freund
and Jay S. Goldsmith. Incorporated by reference from the
Registrant's Form 10-K/A for the year ended December 31, 1995,
dated May 15, 1996.

10.7 Asset Purchase Agreement dated August 16, 1996 among Masterview
Window Company, Inc., Registrant, Hanten Acquisition Co., as
sellers, and Masterview Acquisition Corp., as buyer. Incorporated
by reference from the Registrant's Form 10-Q for the quarter
ended September 30, 1996, dated November 14, 1996.

10.8 Agreement and Plan of Merger dated as of October 30, 1998 among
Registrant, Publicker Smart Card Acquisition Co., Tritheim
Technologies, Inc. and the Security Holders of Tritheim
Technologies, Inc. Incorporated by reference from the
Registrant's Form 8-K, filed on December 7, 1998.

10.9 Agreement and Plan of Merger dated as of February 11, 1999, among
Registrant, ASCT Acquisition Corp., Amazing! Controls, Inc. and
the Security Holders of Amazing! Controls, Inc. Incorporated by
reference from the Registrant's form 8-K, filed on February 26,
1999.

10.10 Agreement and Plan of Merger dated as of February 22, 1999, among
Registrant, GPI Acquisition, Inc. Greystone Peripherals, Inc. and
Security Holders of Greystone Peripherals, Inc. Incorporated by
reference from the Registrant's Form 8-K, filed on March 8, 1999.

21.1 Subsidiaries of Registrant. Filed herewith.

23.1 Consent letter from Independent Public Accountants. Filed
herewith.

27.1 Financial Data Schedule (EDGAR version only). Filed herewith.

(b) Reports on Form 8-K

Form 8-K dated November 6, 1998 regarding a change in the Registrant's
name from Publicker Industries Inc. to PubliCARD, Inc.

Form 8-K dated December 7, 1998 relating to the acquisition of Tritheim
Technologies, Inc.

36
38

SIGNATURES

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

PUBLICARD, INC.

------------------------------------
(Registrant)

By: /s/ JAMES J. WEIS

------------------------------------
James J. Weis, President,
Chief Executive Officer and Director

Date: March 29, 1999

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




Date: March 29, 1999 By: /s/ JAMES J. WEIS
------------------------------------------
James J. Weis, President,
Chief Executive Officer and Director

Date: March 29, 1999 By: /s/ ANTONIO L. DELISE
------------------------------------------
Antonio L. Delise, Vice President,
Chief Financial Officer, Secretary and
Principal Financial and Accounting Officer

Date: March 29, 1999 By: /s/ CLIFFORD B. COHN,
------------------------------------------
Clifford B. Cohn, Director

Date: March 29, 1999 By: /s/ HARRY I. FREUND
------------------------------------------
Harry I. Freund, Director

Date: March 29, 1999 By: /s/ JAY S. GOLDSMITH
------------------------------------------
Jay S. Goldsmith, Director

Date: March 29, 1999 By: /s/ DAVID L. HERMAN
------------------------------------------
David L. Herman, Director

Date: March 29, 1999 By: /s/ L. G. SCHAFRAN
------------------------------------------
L. G. Schafran, Director

Date: March 29, 1999 By: /s/ HATIM A. TYABJI
------------------------------------------
Hatim A. Tyabji, Director


37
39

PUBLICARD, INC.
AND SUBSIDIARY COMPANIES

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE



FINANCIAL STATEMENTS
Report of independent public accountants.................... F-2
Consolidated balance sheets as of December 31, 1998 and
1997...................................................... F-3
Consolidated statements of income (loss) for the years ended
December 31, 1998, 1997 and 1996.......................... F-4
Consolidated statements of shareholders' equity for the
years ended December 31, 1998, 1997 and 1996.............. F-5
Consolidated statements of cash flows for the years ended
December 31, 1998, 1997 and 1996.......................... F-6
Notes to consolidated financial statements.................. F-7 through F-21
SCHEDULE
Report of independent public accountants on schedule........ F-22
Schedule II -- Valuation and qualifying accounts............ F-23


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

F-1
40

PUBLICARD, INC.
AND SUBSIDIARY COMPANIES

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To PubliCARD, Inc.:

We have audited the accompanying consolidated balance sheets of PubliCARD,
Inc. (a Pennsylvania corporation) and subsidiary companies as of December 31,
1998 and 1997, and the related consolidated statements of income (loss),
shareholders' equity and cash flows for each of the three years in the period
ended December 31, 1998. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.

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

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of PubliCARD, Inc. and
subsidiary companies as of December 31, 1998 and 1997, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1998, in conformity with generally accepted accounting principles.

/s/ ARTHUR ANDERSEN LLP

Stamford, Connecticut
March 26, 1999

F-2
41

PUBLICARD, INC.
AND SUBSIDIARY COMPANIES

CONSOLIDATED BALANCE SHEETS AS OF
DECEMBER 31, 1998 AND 1997



1998 1997
-------- --------
(IN THOUSANDS
EXCEPT SHARE DATA)

ASSETS
Current assets:
Cash, including short-term investments of $17,547 in 1998
and $11,779 in 1997 (Note 1)........................... $ 18,482 $ 13,077
Trade receivables, less allowance for doubtful accounts
(1998 -- $74; 1997 -- $36) (Note 1).................... 1,988 2,136
Inventories (Note 1)...................................... 2,810 2,461
Net assets of discontinued operations (Note 10)........... 1,518 1,292
Other..................................................... 481 592
-------- --------
Total current assets.............................. 25,279 19,558
-------- --------
Property, plant and equipment (Note 1):
Land...................................................... 234 234
Buildings and leasehold improvements...................... 2,377 2,331
Machinery and equipment................................... 2,656 2,306
Less -- accumulated depreciation.......................... (1,661) (1,289)
-------- --------
3,606 3,582
-------- --------
Goodwill (Note 1)........................................... 9,781 1,376
Other assets (Note 6)....................................... 1,262 1,413
-------- --------
$ 39,928 $ 25,929
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt (Note 3)............. $ 147 $ 134
Trade accounts payable.................................... 1,331 810
Accrued liabilities (Notes 6 and 8)....................... 4,384 3,807
-------- --------
Total current liabilities......................... 5,862 4,751
Long-term debt (Note 3)..................................... 991 1,138
Other non-current liabilities (Notes 6 and 8)............... 7,780 9,167
-------- --------
Total liabilities................................. 14,633 15,056
-------- --------
Redeemable shares (Note 2).................................. 3,378 --
-------- --------
Shareholders' equity (Notes 4 and 7):
Common shares, $0.10 par value, Authorized -- 40,000,000
shares Issued -- 20,300,954 shares in 1998 and
16,551,849 shares in 1997.............................. 2,030 1,655
Additional paid-in capital................................ 67,091 49,915
Accumulated deficit....................................... (38,891) (32,816)
Common shares held in treasury, at cost................... (8,207) (7,881)
Unearned compensation..................................... (106) --
-------- --------
Total shareholders' equity........................ 21,917 10,873
-------- --------
$ 39,928 $ 25,929
======== ========


The accompanying notes to consolidated financial statements are an integral part
of these balance sheets.
F-3
42

PUBLICARD, INC.
AND SUBSIDIARY COMPANIES

CONSOLIDATED STATEMENTS OF INCOME (LOSS)
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996



1998 1997 1996
---------- ---------- ----------
(IN THOUSANDS EXCEPT PER SHARE DATA)

Net sales................................................... $16,519 $17,039 $15,486
Cost of sales............................................... 10,906 11,264 11,659
------- ------- -------
Gross margin.............................................. 5,613 5,775 3,827
------- ------- -------
Operating expenses:
General and administrative................................ 5,488 4,976 6,338
Sales and marketing....................................... 792 796 768
Product development....................................... 740 441 235
In-process research and development....................... 2,800 -- --
Goodwill amortization..................................... 225 42 42
Warrant expense (Note 7).................................. -- 768 --
Relocation charge (Note 11)............................... -- -- 1,596
------- ------- -------
10,045 7,023 8,979
------- ------- -------
Income (loss) from operations............................... (4,432) (1,248) (5,152)
------- ------- -------
Other income (expenses):
Interest income........................................... 551 683 476
Interest expense.......................................... (339) (370) (815)
Cost of pensions -- nonoperating (Note 6)................. (846) (768) (769)
Other (expense) income (Note 11).......................... (1,021) (200) 203
------- ------- -------
(1,655) (655) (905)
------- ------- -------
Income (loss) from continuing operations before income
taxes..................................................... (6,087) (1,903) (6,057)
Income tax benefit.......................................... -- -- 2,544
------- ------- -------
Income (loss) from continuing operations.................... (6,087) (1,903) (3,513)
Discontinued operations (Note 10):
Income from discontinued operations, net of income
taxes.................................................. 12 215 1,725
Gain on sale of discontinued operations, net of income
taxes.................................................. -- 609 12,783
------- ------- -------
Net income (loss)........................................... $(6,075) $(1,079) $10,995
======= ======= =======
Basic earnings (loss) per common share (Note 1):
Continuing operations..................................... $ (.44) $ (.14) $ (.23)
Discontinued operations................................... -- .06 .95
------- ------- -------
$ (.44) $ (.08) $ .72
======= ======= =======


The accompanying notes to consolidated financial statements are an integral part
of these statements.
F-4
43

PUBLICARD, INC.
AND SUBSIDIARY COMPANIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996



COMMON SHARES
------------------- ADDITIONAL ACCUMULATED COMMON
SHARES PAID-IN DEFICIT TREASURY UNEARNED SHAREHOLDERS'
ISSUED AMOUNT CAPITAL SINCE 1-1-84 SHARES(1) COMPENSATION EQUITY
---------- ------ ---------- ------------ --------- ------------ -------------
(IN THOUSANDS EXCEPT SHARE DATA)

Balance -- December 31, 1995..... 15,405,937 $1,541 $42,488 $(42,732) $(3,891) $ -- $(2,594)
Common shares issued under stock
option plans................... 632,000 63 583 -- -- -- 646
Purchase of common shares........ -- -- -- -- (220) -- (220)
Net income....................... -- -- -- 10,995 -- -- 10,995
Charge in lieu of income taxes
(Note 5)....................... -- -- 5,169 -- -- -- 5,169
---------- ------ ------- -------- ------- ----- -------
Balance -- December 31, 1996..... 16,037,937 1,604 48,240 (31,737) (4,111) -- 13,996
Common shares issued under stock
option plans................... 27,000 2 29 -- -- -- 31
Common shares issued pursuant to
exercise of stock purchase
warrants....................... 486,912 49 878 -- -- -- 927
Expense related to extension of
common stock purchase
warrants....................... -- -- 768 -- -- -- 768
Purchase of common shares........ -- -- -- -- (3,770) -- (3,770)
Net loss......................... -- -- -- (1,079) -- -- (1,079)
---------- ------ ------- -------- ------- ----- -------
Balance -- December 31, 1997..... 16,551,849 1,655 49,915 (32,816) (7,881) -- 10,873
Common shares issued under stock
option plans................... 433,000 43 606 -- -- -- 649
Common shares issued in a private
placement...................... 2,059,000 206 10,079 -- -- -- 10,285
Common shares issued for a
business acquisition........... 1,253,771 126 8,261 -- -- -- 8,387
Issuance of restricted shares and
grant of stock options to
consultants.................... 3,334 -- 251 -- -- (251) --
Amortization of unearned
compensation................... -- -- -- -- -- 145 145
Market adjustment to redeemable
shares......................... -- -- (2,021) -- -- -- (2,021)
Purchase of common shares........ -- -- -- -- (326) -- (326)
Net loss......................... -- -- -- (6,075) -- -- (6,075)
---------- ------ ------- -------- ------- ----- -------
Balance -- December 31, 1998..... 20,300,954 $2,030 $67,091 $(38,891) $(8,207) $(106) $21,917
========== ====== ======= ======== ======= ===== =======


- ---------------
(1) Represents common shares held in treasury of 3,660,252 at December 31, 1998,
3,440,252 at December 31, 1997 and 678,352 at December 31, 1996.

The accompanying notes to consolidated financial statements are an integral part
of these statements.
F-5
44

PUBLICARD, INC.
AND SUBSIDIARY COMPANIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996



1998 1997 1996
------- ------- --------
(IN THOUSANDS)

CASH FLOWS FROM OPERATING ACTIVITIES:
Loss from continuing operations........................... $(6,087) $(1,903) $ (3,513)
Adjustments to reconcile loss to net cash used in
continuing operations:
In-process research and development.................... 2,800 -- --
Amortization of goodwill............................... 225 42 42
Amortization of unearned compensation.................. 145 -- --
Depreciation........................................... 384 470 497
Warrant expense........................................ -- 768 --
Income tax benefit..................................... -- -- (2,544)
Gain on sale of assets................................. -- -- (290)
Changes in operating assets and liabilities (Note
12).................................................. (537) (2,424) (5,634)
------- ------- --------
Net cash used in continuing operations............... (3,070) (3,047) (11,442)
------- ------- --------
Income from discontinued operations....................... 12 824 14,508
Adjustments to reconcile income to net cash used in
discontinued operations:
Gain on sale of discontinued operations................ -- (609) (19,251)
Charge in lieu of income taxes......................... -- -- 7,713
Change in net assets of discontinued operations........ (257) (264) (6,517)
------- ------- --------
Net cash used in discontinued operations............. (245) (49) (3,547)
------- ------- --------
Net cash used in operating activities................ (3,315) (3,096) (14,989)
------- ------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of businesses, net of cash acquired........... (1,467) -- --
Proceeds from sale of discontinued operations............. 31 1,488 45,852
Proceeds from sale of assets.............................. -- -- 601
Capital expenditures...................................... (318) (331) (1,147)
------- ------- --------
Net cash provided by (used in) investing
activities........................................ (1,754) 1,157 45,306
------- ------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from private placement of common shares.......... 10,285 -- --
Repurchase or redemption of 13% Subordinated Notes........ -- -- (7,500)
Repayments under revolving credit lines................... -- -- (3,502)
Repayment of term loans and notes payable................. (134) (490) (2,297)
Issuance of common shares pursuant to stock option
exercises.............................................. 649 958 646
Purchase of treasury shares............................... (326) (3,770) (220)
------- ------- --------
Net cash provided by (used in) financing
activities........................................ 10,474 (3,302) (12,873)
------- ------- --------
NET INCREASE (DECREASE) IN CASH............................. 5,405 (5,241) 17,444
CASH -- BEGINNING OF PERIOD................................. 13,077 18,318 874
------- ------- --------
CASH -- END OF PERIOD....................................... $18,482 $13,077 $ 18,318
======= ======= ========


The accompanying notes to consolidated financial statements are an integral part
of these statements.
F-6
45

PUBLICARD, INC.
AND SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

DESCRIPTION OF THE BUSINESS

PubliCARD, Inc. ("PubliCARD") was incorporated in the Commonwealth of
Pennsylvania in 1913. The Company was known as Publicker Industries Inc. until
1998, when its name was changed to PubliCARD, Inc. During 1998, the Company
operated in two segments: technology products and coin products. For 1998, the
Company's technology products segment consisted of two subsidiary companies,
Greenwald Intellicard, Inc. ("Greenwald Intellicard") and Tritheim Technologies,
Inc. ("Tritheim"), which design, manufacture and market smart card readers and
writers, value transfer stations, card management and other software
applications designed for a wide variety of applications including commercial
laundry, electronic commerce and computer security. The Company's coin products
segment consists of one subsidiary company, Greenwald Industries, Inc.
("Greenwald Industries") which designs and manufactures coin meter systems used
primarily in the commercial laundry appliance industry. The term "Company"
refers to PubliCARD, Greenwald Intellicard, Tritheim, Greenwald Industries and
PubliCARD's other consolidated subsidiaries.

PRINCIPLES OF CONSOLIDATION

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

SHORT-TERM INVESTMENTS

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

INVENTORIES

Inventories are recorded at cost, determined on a first-in, first-out, or
FIFO, basis and do not exceed net realizable values. Inventories at December 31,
1998 and 1997 consisted of the following:



1998 1997
------ ------
(IN THOUSANDS)

Raw materials and supplies................................. $1,756 $1,407
Work in process............................................ 214 282
Finished goods............................................. 840 772
------ ------
$2,810 $2,461
====== ======


DEPRECIATION AND AMORTIZATION

Property, plant and equipment are stated at cost. Improvements and
replacements are capitalized, while expenditures for maintenance and repairs are
charged to expense as incurred. Depreciation and amortization is computed using
the straight-line method over estimated useful lives of 3 to 7 years for
machinery and equipment and 7 to 39 years for buildings and leasehold
improvements.

Goodwill is the excess of the purchase price and related costs over the
value assigned to the net tangible assets of the businesses acquired. Goodwill
is amortized on a straight-line basis over periods ranging from five to forty
years. Accumulated amortization was $525,000 and $300,000 as of December 31,
1998 and 1997, respectively. At each balance sheet date, the Company evaluates
the realizability of goodwill based upon expectations of non-discounted cash
flows and operating income for each subsidiary having a goodwill balance.

F-7
46
PUBLICARD, INC.
AND SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Based upon its most recent analysis, the Company believes that no impairment of
goodwill exists at December 31, 1998.

REVENUE RECOGNITION

Sales from product sales are recorded upon shipment of the product.
Provisions are recorded for estimated warranty repairs, returns and bad debts at
the time the products are shipped.

STOCK-BASED COMPENSATION

The Company measures compensation expense for its stock-based employee
compensation plans using the intrinsic value method and has provided in Note 7
the pro forma disclosures of the effect on net income (loss) and earnings (loss)
per common share as if the fair value-based method had been applied in measuring
compensation expense.

USE OF ESTIMATES

The preparation of these financial statements required the use of certain
estimates by management in determining the Company's assets, liabilities,
revenues and expenses. While all available information has been considered,
actual amounts could differ from those reported.

COMPREHENSIVE INCOME

In 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 130 Reporting Comprehensive Income,
which establishes standards for reporting and display of comprehensive income
and its components in a full set of general purpose financial statements. This
standard is effective for the Company's 1998 fiscal year. The adoption of SFAS
130 had no impact on the Company's 1998 consolidated results of operations,
financial position or cash flows.

SEGMENT DATA

During 1998, the Company adopted SFAS No. 131 Disclosures about Segments of
an Enterprise and Related Information. SFAS 131 supersedes SFAS 14, Financial
Reporting for Segments of a Business Enterprise, replacing the "industry
segment" approach with the "management" approach. The management approach
designates the internal reporting that is used by management for making
operating decisions and assessing performance as the source of the Company's
reportable segments. The adoption of SFAS 131 did not affect results of
operations or the financial position of PubliCARD but did affect the disclosure
of segment information (See Note 9).

EARNINGS (LOSS) PER COMMON SHARE

During 1997, the Company adopted SFAS No. 128 Earnings Per Share. Basic net
income (loss) per common share is based on net income divided by the weighted
average number of common shares outstanding during each year (13,716,243 in
1998, 14,057,396 in 1997 and 15,294,504 in 1996). Diluted net income (loss) per
common share assumes issuance of the net incremental shares from stock options
and warrants at the later of the beginning of the year or date of issuance.
Diluted net income (loss) per share was not computed for 1998, 1997 and 1996 as
the effect of stock options and warrants were antidilutive.

FINANCIAL INSTRUMENTS

The carrying amount of financial instruments including cash and short-term
investments, accounts receivable and accounts payable approximated fair value as
of December 31, 1998, because of the relatively
F-8
47
PUBLICARD, INC.
AND SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

short maturity of these instruments. The Company maintains all of its cash and
short-term investments with high-credit quality financial institutions.
Concentrations of credit risk with respect to accounts receivable are limited
because the Company's customer base consists primarily of numerous large, well
known corporations with no history of bad debts.

RECENT ACCOUNTING PRONOUNCEMENTS

In March 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-1, Accounting for Costs of Computer Software
Developed or Obtained for Internal Use ("SOP 98-1"). SOP 98-1 provides guidance
over accounting for computer software developed or obtained for internal use,
including the requirement to capitalize specific costs and amortization of such
costs. The Company does not believe that the adoption of SOP 98-1 will have a
material impact on its results of operations or financial position.

In June 1998, the FASB issued SFAS No. 133 Accounting for Derivative
Instruments and Hedging Activities which establishes accounting and reporting
standards for derivative instruments, including derivative instruments embedded
in other contracts, and for hedging activities. SFAS 133 is effective for all
fiscal quarters of fiscal years beginning after June 15, 1999. This statement is
not expected to affect the Company as the Company currently does not have
derivative instruments or hedging activities.

RECLASSIFICATIONS

Certain prior year amounts have been reclassified to conform to the 1998
presentation.

NOTE 2 -- ACQUISITIONS

In February 1998, the Company purchased, through a joint venture
arrangement in Greenwald Intellicard, the assets and intellectual property of
Intellicard Systems, Ltd. Greenwald Intellicard develops, manufactures and
markets smart card systems for the commercial laundry and other industries. The
initial cash investment in Greenwald Intellicard, all of which was provided by
the Company, was $314,000. The Company has two fixed price options aggregating
$400,000 plus 33,000 shares of common stock to increase its ownership to 100%.
The Company exercised the first option on February 17, 1999 thereby increasing
its ownership interest to 65% and intends on exercising the second option which
is exercisable beginning February 1, 2000. Since the Company has funded all of
Greenwald Intellicard's operations and losses, it intends to exercise the
purchase options, its venture partner has limited financial resources and it has
significant managerial and financial influence, the operations of Greenwald
Intellicard have been consolidated with the Company's since inception of the
joint venture.

On November 24, 1998, the Company acquired 100% of the common stock of
Tritheim, a Florida company that designs, develops, and sells technologies used
in smart card and other token-based network security, conditional access systems
and secure electronic commerce over the Internet. The aggregate purchase price
was approximately $10,150,000 and included the issuance of 1,495,037 shares of
common stock and options to purchase a total of 333,270 shares of common stock
at an exercise price of $2.00 per share. The

F-9
48
PUBLICARD, INC.
AND SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

amount and components of the estimated purchase price along with the preliminary
allocation of the estimated purchase price are as follows (in thousands):



Purchase price:
Value of common stock and stock options..................... $ 9,743
Acquisition expenses........................................ 407
-------
$10,150
=======
Allocation of purchase price:
Net liabilities of Tritheim................................. $ (713)
In-process research and development......................... 2,800
Goodwill.................................................... 8,063
-------
$10,150
=======


The assets and liabilities of Tritheim were recorded at their fair values
as of the acquisition date. The aggregate fair value of Tritheim's research and
development efforts that had not reached technological feasibility and had no
alternative future uses was determined by appraisal to be $2,800,000, and was
expensed at the date of the acquisition. Goodwill represents the excess of the
purchase price over the fair value of identifiable tangible and intangible
assets acquired and is amortized using the straight-line method over its
estimated life of five years.

The acquisition has been accounted for as a purchase and, accordingly,
Tritheim's results are included in the consolidated financial statements of the
Company since the date of acquisition. The following summarized unaudited pro
forma financial information assumes that the acquisition had occurred as of
January 1 of each period (in thousands except per share data):



1998 1997
------- -------

Net sales................................................ $16,739 $17,100
Net loss from continuing operations...................... (5,236) (3,857)
Net loss per share from continuing operations............ (.35) (.25)


The summarized pro forma information omits the non-recurring charge for
acquired in-process research and development. The pro forma information is not
necessarily indicative of the results that would have been reported had such
event actually occurred on the dates specified, nor is it intended to project
the Company's results of operations or financial position for any future period
or date.

The Company is required to register 241,266 shares of Company common stock
issued as the merger consideration under a shelf registration statement under
the Securities Act of 1933. In the event that the shelf registration statement
is not effective by May 24, 1999, the holders of these shares are entitled, for
a specified period of time, to cause the Company to repurchase their shares for
a cash purchase price equal to the fair market value of the shares on the date
of repurchase. As such, these shares have been reflected in the accompanying
consolidated balance sheet under the caption "Redeemable shares". Subsequent
adjustments to the value of the redemption obligation will be charged or
credited to additional paid-in capital.

On February 11, 1999, the Company acquired 100% of the common stock of
Amazing! Controls, Inc., a California company that provides smart card solutions
and smart cards for the Internet, electronic commerce, loyalty programs, access
control, finance and telecom. The aggregate purchase price was approximately
$5,700,000 and included the issuance of 350,000 shares of common stock and
options to purchase a total of 457,503 shares of common stock. On February 22,
1999, the Company also acquired 100% of the common stock of Greystone
Peripherals, Inc., a California company that designs, manufactures and markets
PC Card

F-10
49
PUBLICARD, INC.
AND SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(PCMCIA) products, digital camera flash film readers and hard disk duplicators.
The aggregate purchase price was approximately $9,000,000 and included the
issuance of 746,401 shares of common stock and options to purchase a total of
132,388 shares of common stock. The acquisitions will be accounted for as
purchases. Accordingly, the assets and liabilities will be recorded at their
fair values as of the acquisition dates. The fair value of research and
development efforts that had not reached technological feasibility and had no
alternative future uses will be allocated to in-process research and development
and expensed at the date of the acquisition. The balance of the purchase price
will be recorded as goodwill. The Company is currently in the process of
preparing the purchase price allocation and determining the useful lives of the
assets acquired.

NOTE 3 -- DEBT

Debt at December 31, 1998 and 1997, consisted solely of a note payable
entered in December 1995 in connection with the purchase of a building and land
in Chester, Connecticut. The note amortizes on a 120 month straight-line basis,
is secured by the building and land and bears a 9% interest rate. The annual
maturities are $147,000 in 1999, $160,000 in 2000, $176,000 in 2001, $192,000 in
2002 and $210,000 in 2003.

In December 1986, the Company issued $30 million of 13% Subordinated Notes
due December 1996. In April 1996, the Company redeemed all of its remaining 13%
Subordinated Notes. The redemption price was equal to the principal amount of
$7,500,000, plus accrued interest to the redemption date.

NOTE 4 -- SHAREHOLDERS' EQUITY

In November 1998, the Company completed the issuance of 2,059,000 shares of
common stock through a private placement. The shares were sold at $5.00 per
share for net proceeds of $10,285,000.

The Company has 1,000,000 shares of authorized and unissued Class A
Preferred Stock, without par value. On August 9, 1988, the Company declared a
dividend of one Right for each outstanding share of its common stock. Each Right
entitles the holder to purchase one one-hundredth of a share of a new series of
Class A Preferred Stock at an exercise price of $7.50, subject to adjustment to
prevent dilution. The Rights become exercisable 10 days after a person or group
acquires 20% or more of the Company's common stock or announces a tender or
exchange offer for 30% or more of the Company's common stock. If, after the
Rights become exercisable, the Company is party to a merger or similar business
combination transaction, each Right not held by a party to such transaction may
be used to purchase common stock having a market value of two times the exercise
price. The Rights, which have no voting power, may be redeemed by the Company at
$.01 per Right. In July 1998, the Company's Board of Directors approved the
extension of the rights plan to August 8, 2008.

In August 1996, the Board of Directors of the Company authorized the
repurchase of up to 1,000,000 shares of the Company's common stock and, in 1997,
increased the Company's share repurchase authorization to 3,300,000 shares. In
April, 1998, the Company announced the conclusion of the common stock buy-back
program. The Company repurchased 3,094,100 shares of common stock under the
buy-back program for an aggregate cost of $4,270,000.

In March 1998, the Company initiated an odd-lot buy-back offer allowing
holders of less than 100 shares a convenient method of selling their shares of
the Company's common stock. A total of 7,990 shares were tendered under the
offer which expired on April 3, 1998.

F-11
50
PUBLICARD, INC.
AND SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 5 -- INCOME TAXES

As of December 31, 1998, approximately $77,000,000 of U.S. tax loss
carryforwards (subject to review by the Internal Revenue Service), expiring from
1999 through 2018, were available to offset future taxable income. The
carryforwards expire as follows (in thousands):



YEAR
- ----

1999....................................................... $ 6,000
2000....................................................... 12,000
2001....................................................... 9,000
2002....................................................... 25,000
2005....................................................... 7,000
2006 - 2018................................................ 18,000
-------
$77,000
=======


Due to the "change of ownership" provisions of the Internal Revenue Code of
1986, the availability of net operating loss carryforwards to offset federal
taxable income in future periods could be subject to an annual limitation if a
change in ownership for income tax purposes occurs. If such change in ownership
were to occur, management estimates that the Company would not be able to use a
substantial amount of the available net operating loss carryforwards to reduce
its income tax liability. Furthermore, the extent of the actual future use of
the net operating loss carryforwards is subject to inherent uncertainty, because
it depends on the amount of otherwise taxable income the Company may earn. No
assurance can be given that the Company will have sufficient taxable income in
future years to use the net operating losses before they would otherwise expire.

As a result of a corporate revaluation during 1984, tax benefits resulting
from the utilization in subsequent years of net operating loss carryforwards
existing as of the date of the corporate revaluation were excluded from the
results of operations and directly credited to additional paid-in capital when
realized. As of December 31, 1998, none of the tax loss carryforward predated
the corporate revaluation. Approximately $16,000,000 of the Company's U.S. tax
loss carryforwards were utilized in 1996.

No income tax provision or benefit was recognized in 1998 and 1997 because
the tax benefit associated with the Company's operating losses were offset in
full by an increase in the valuation allowance. In 1997, the Company reversed
$609,000 of tax reserves provided in 1996 relating to the sales of certain
subsidiaries. The consolidated provision for income taxes for the year ended
December 31, 1996, consisted of the following (in thousands):



Current provision
Federal................................................... $ 358
State..................................................... 2,433
------
2,791
------
Deferred provision
Federal................................................... (623)
State..................................................... (117)
Change in valuation allowance............................. 740
------
--
------
Charge in lieu of income taxes.............................. 5,169
------
Total consolidated income tax provision..................... $7,960
======


F-12
51
PUBLICARD, INC.
AND SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The difference between the federal statutory tax rate and the effective tax
rate for 1996 was as follows:



Federal statutory tax rate.................................. 35.0%
State taxes, net of federal benefit......................... 5.8
Other, net.................................................. 1.2
----
Actual tax rate............................................. 42.0%
====


The significant temporary differences which gave rise to the deferred tax
provision were as follows (in thousands):



Discontinued operations reserves............................ $(893)
Pension expense............................................. 236
Other, net.................................................. (83)
-----
$(740)
=====


The components of net deferred taxes are as follows:



1998 1997
-------- --------
(IN THOUSANDS)

Net operating loss carryforward........................ $ 26,832 $ 27,749
Pension expense........................................ 1,737 1,845
Discontinued operations reserves....................... 287 178
Depreciation........................................... 203 175
Other, net............................................. 174 144
-------- --------
29,233 30,091
Less valuation allowance............................... (29,233) (30,091)
-------- --------
Net deferred taxes..................................... $ -- $ --
======== ========


NOTE 6 -- EMPLOYEE BENEFITS

The Company and its subsidiaries maintain a 401(k) plan for substantially
all of the Company's employees. The assets of the Company's 401(k) plan are held
by an outside fund manager and are invested in accordance with the instructions
of the individual plan participants. The Company's 401(k) contributions totaled
$197,000, $190,000 and $156,000 in 1998, 1997 and 1996, respectively.

The Company sponsors a defined benefit pension plan which was frozen in
1993. The assets of the defined benefit pension plan are managed by an outside
trustee and invested primarily in a short duration bond fund. Consolidated
pension expense includes amounts related to discontinued product lines and
related plant

F-13
52
PUBLICARD, INC.
AND SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

closings in prior years totaling $846,000, $768,000 and $769,000 in 1998, 1997
and 1996, respectively. Information regarding the defined benefit pension plan
is as follows:



1998 1997
------- -------
(IN THOUSANDS)

Change in benefit obligation:
Benefit obligation at beginning of year..................... $10,775 $11,230
Interest cost............................................. 749 766
Benefit payments.......................................... (1,164) (1,190)
Actuarial (gain) or loss.................................. 541 (31)
------- -------
Benefit obligation at end of year........................... 10,901 10,775
------- -------
Change in plan assets:
Fair value of plan assets at beginning of year.............. 4,253 4,247
Actual return on plan assets.............................. 762 252
Employer contributions.................................... 1,032 944
Benefit payments.......................................... (1,164) (1,190)
------- -------
Fair value of plan assets at end of year.................... 4,883 4,253
Funded status............................................... (6,018) (6,522)
Unrecognized transition obligation.......................... 1,469 1,775
Unrecognized net gains...................................... (414) (524)
------- -------
$(4,963) $(5,271)
======= =======
Amounts recognized in statement of financial position
consist of:
Accrued benefit liability................................... $(6,018) $(6,522)
Intangible asset............................................ 1,055 1,251
------- -------
Net amount recognized....................................... $(4,963) $(5,271)
======= =======


A discount rate of 6.75% and 7.25% were used as of December 31, 1998 and
1997, respectively. The expected return on plan assets was 8%.

The components of the net periodic pension cost were as follows:



1998 1997 1996
----- ----- ------
(IN THOUSANDS)

Interest cost............................................. $ 749 $ 766 $1,228
Expected return on plan assets............................ (331) (327) (759)
Amortization of transition obligation..................... 306 306 290
----- ----- ------
Net periodic pension cost................................. $ 724 $ 745 $ 759
===== ===== ======


As of December 31, 1998, the accrued pension liability was $6,018,000, of
which $1,032,000 was included in accrued liabilities and $4,986,000 was included
in other noncurrent liabilities. As of December 31, 1997, the accrued pension
liability was $6,522,000, of which $1,032,000 was included in accrued
liabilities and $5,490,000 was included in other noncurrent liabilities. Accrued
liabilities also included accrued payroll and other employment related accruals
of approximately $1,173,000 and $1,003,000 as of December 31, 1998 and 1997,
respectively.

F-14
53
PUBLICARD, INC.
AND SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 7 -- STOCK OPTIONS AND WARRANTS

At December 31, 1998, the Company has several fixed stock option plans,
which are described below. The Company applies APB Opinion 25 Accounting for
Stock Issued to Employees and related interpretations in accounting for its
plans. The exercise price of each option granted was equal to the market price
of the Company's common stock on the date of grant. Accordingly, no compensation
cost has been recognized for the fixed stock option plans. Had compensation cost
been determined based on the fair value at the grant dates for awards under the
fixed option plans consistent with the method of FASB Statement 123 Accounting
for Stock-Based Compensation, the Company's net income and earnings per share
would have been reduced to the pro forma amounts indicated below:



1998 1997 1996
---------- ---------- ----------
(IN THOUSANDS EXCEPT PER SHARE DATA)

Net income (loss)
As reported......................................... $(6,075) $(1,079) $10,995
Pro forma........................................... $(6,684) $(1,253) $10,470
Earnings per share
As reported......................................... $ (.44) $ (.08) $ .72
Pro forma........................................... $ (.49) $ (.09) $ .68


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



1998 1997 1996
----- ----- -----

Expected option term (years)................................ 5 5 5
Expected volatility......................................... 52.7% 53.7% 64.3%
Risk-free interest rate..................................... 4.9% 6.0% 6.0%
Weighted average fair value per option...................... $1.08 $ .70 $1.21


Under the stock option plans for directors, officers and key employees
adopted by shareholders of the Company, the Company may grant stock options,
restricted stock options, stock appreciation rights, performance awards and
other stock-based awards equivalent to up to 4,300,000 shares of common stock.
The plans are administered by the Board of Directors of the Company. Subject to
the express provisions of the plans, the Board has full and final authority to
determine the terms of options granted to key employees under the plans
including (a) the purchase price of the shares covered by each option, (b)
whether any payment will be required upon grant of the option, (c) the
individuals to whom, and the time at which, options shall be granted, (d) the
number of shares to be subject to each option, (e) when an option can be
exercised and whether in whole or in installments, (f) whether the options are
immediately transferable, (g) whether the exercisability of the options is
subject to risk of forfeiture or other condition and (h) whether the stock
issued upon exercise of an option is subject to repurchase by the Company, and
the terms of such repurchase. The term of the options granted during 1998, 1997
and 1996 was five years from the date of grant and such options were immediately
exercisable. The exercise price of each option granted was equal to the market
price of the Company's common stock on the date of grant.

F-15
54
PUBLICARD, INC.
AND SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

A summary of the Company's fixed stock option plans as of December 31,
1998, 1997 and 1996 and changes during the years then ending is presented below:



1998 1997 1996
--------------------- --------------------- ---------------------
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
--------- -------- --------- -------- --------- --------

Balance at January 1.......... 2,130,500 $1.65 1,938,500 $1.69 2,068,500 $1.45
Granted..................... 565,000 2.10 250,000 1.31 525,000 1.85
Exercised..................... (433,000) 1.50 (27,000) 1.15 (592,000) 1.09
Canceled.................... (30,000) 1.50 (31,000) 1.58 (63,000) .89
--------- --------- ---------
Balance at December 31........ 2,232,500 1.80 2,130,500 1.65 1,938,500 1.69
========= ========= =========


All of the options outstanding granted under the fixed stock option plans
are immediately exercisable when granted. The exercise price of stock options
outstanding at December 31, 1998 ranges from $1.31 to $5.69 and the weighted
average contractual life is approximately 2.6 years.

In April 1985, the Company issued 1.6 million shares of common stock at
$2.50 per share in a private placement. Under the terms of this agreement, the
agent for the purchasers received options to buy 400,000 shares of the Company's
common stock at a price of $2.50 per share for five years, which period was
subsequently extended by ten years. These options are held by two members of the
Company's Board of Directors. In January 1996, the Company issued options to two
members of the Company's Board of Directors to buy 200,000 shares of the
Company's common stock at a price of $2.50 per share for five years. None of
these options have been exercised as of December 31, 1998.

In 1998, a consultant received options to purchase 25,000 shares of common
stock at an exercise price of $7.75 per share. These options are immediately
exercisable. The Company also granted in 1998 to another consultant options to
purchase 25,000 shares of common stock at an exercise price of $8.25 per share
and a stock award of 10,000 shares of common stock. The options and stock award
vest over a two year period. The fair value of the awards to the two consultants
at the date of grant was $251,000. The expense for these awards will be charged
to earnings over the vesting period, if any, and amounted to $145,000 in 1998.

In connection with the acquisition of Tritheim, the Company granted options
to purchase 333,270 shares of common stock to the employees of Tritheim. These
options have an exercise price of $2.00 per share, vest through November 24,
2001 and expire on November 24, 2006. The fair value of the stock options
granted in the Tritheim acquisition was included in the purchase price.

In December 1986, the Company issued $30 million of 13% Subordinated Notes
together with detachable warrants ("Warrants") to purchase 3,600,000 shares of
the Company's common stock for five years, which period was subsequently
extended by five years. In addition, the Company issued 1,200,000 Underwriter's
Warrants to purchase the Company's common stock for five years, which period was
subsequently extended by five years. Each Warrant and Underwriter Warrant
entitles its holder to purchase 1.024 shares of common stock for $1.95 per share
(subject to adjustment in certain circumstances). Unexercised warrants were to
expire on December 15, 1996 (December 17, 1996, in the case of the Underwriter's
Warrants).

On November 8, 1996, the Company's Board of Directors, acting upon the
recommendation of a special committee of disinterested directors, determined it
would be in the Company's best interests to modify the Warrants and
Underwriter's Warrants owned by any holder who exercises, at the current
exercise price of $1.95 per share of common stock, 25% of the warrants owned on
December 15, 1996 (December 17, 1996, in the case of the Underwriter's
Warrants). Shareholders of the Company subsequently approved the modifica-

F-16
55
PUBLICARD, INC.
AND SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

tion on July 2, 1997 ("the Approval Date"). As of July 2, 1997, a total of
2,257,050 warrants were outstanding entitling the warrant holders to purchase an
aggregate of 2,311,220 shares of common stock.

The modification resulted in the following changes to the holder's
unexercised Warrants and Underwriter's Warrants (i.e., the 75% balance of the
warrants owned on December 15, 1996 or December 17, 1996, as the case may be)
(the "Remaining Modified Warrants"):

(a) Five-Year Extension The expiration date of the holder's Remaining
Modified Warrants was extended to July 2, 2002.

(b) Increased Exercise Price The exercise price of the holder's
Remaining Modified Warrants was increased from $1.95 per share to (i) $2.00
per share, during the year ending on the first anniversary of the Approval
Date, (ii) $2.10 per share, during the year ending on the second
anniversary of the Approval Date, (iii) $2.20 per share, during the year
ending on the third anniversary of the Approval Date, (iv) $2.30 per share,
during the year ending on the fourth anniversary of the Approval Date, and
(v) $2.40 per share, during the year ending on the fifth anniversary of the
Approval Date.

In September 1997, a total of 486,912 shares of common stock were issued
pursuant to the exercise of 475,500 warrants. The net proceeds received amounted
to $927,000. As of December 31, 1998, there are 1,426,500 Remaining Modified
Warrants. Members of the Company's Board of Directors hold 1,417,500 of the
Remaining Modified Warrants. A non-cash charge to income of $768,000 was
recorded in 1997 based on the fair value of the Remaining Modified Warrants. In
January 1999, pursuant to the terms of the Warrant and Underwriter Warrant
agreements, the number of shares of common stock purchasable upon the exercise
of each warrant increased to 1.037 and the exercise price per share decreased to
$2.07.

NOTE 8 -- COMMITMENTS AND CONTINGENCIES

The Company leases certain office space, vehicles and office equipment
under operating leases that expire over the next seven years. Certain of these
operating leases provide the Company with the option, after the initial lease
term, to either purchase the property or renew the lease. Total rent expense for
all operating leases amounted to approximately $328,000 in 1998, $283,000 in
1997, and $416,000 in 1996.

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



YEAR
- ----

1999........................................................ $ 318
2000........................................................ 297
2001........................................................ 268
2002........................................................ 253
2003........................................................ 242
Remainder................................................... 121
------
Total minimum lease payments................................ $1,499
======


The Company and Balfour Investors Inc. ("Balfour"), are parties to a
License Agreement, dated as of October 26, 1994, with respect to a portion of
the office space leased by the Company in New York City. The Chairman and Vice
Chairman of the Company's Board of Directors are the only shareholders of
Balfour. The term of the License Agreement commenced on January 1, 1995 and will
expire on June 30, 2004, unless sooner terminated pursuant to law or the terms
of the License Agreement. The License Agreement provides for Balfour to pay the
Company an amount equal to 40% of the rent paid by the Company under its lease,
including base rent, electricity, water, real estate tax escalations and
operation and maintenance escalations. In

F-17
56
PUBLICARD, INC.
AND SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

addition, Balfour has agreed to reimburse the Company for 40% of the cost of
insurance which the Company is obligated to maintain under the terms of its
lease with respect to the premises. In November of 1998, Balfour's share of rent
and other costs was reduced to 20% due to an increase in the space utilized by
the Company. The base rent payable by Balfour under the License Agreement is
$3,745 per month through September 30, 1999 and $4,030 per month thereafter.

In April 1996, a Consent Decree among the Company, the United States
Environmental Protection Agency and the Pennsylvania Department of Environmental
Protection ("PADEP") was entered by the court which resolved all of the United
States' and PADEP's claims against the Company for recovery of costs incurred in
responding to releases of hazardous substances at a facility previously owned
and operated by the Company. Pursuant to the Consent Decree, the Company will
pay a total of $14,350,000 plus interest to the United States and Commonwealth
of Pennsylvania. Through December 31, 1998, the Company has made principal
payments aggregating $10,992,000. Further payments totaling $3,358,000 plus
interest will be made to the United States and Commonwealth of Pennsylvania over
the next four years. The annual principal payments are $846,000 in 1999,
$946,000 in 2000, $783,000 in 2001 and $783,000 in 2002.

The Company's coin products segment relies on a limited number of suppliers
of several key components utilized in the assembly of its products. For example,
mechanical coin chutes using the Company's patented designs and proprietary
tooling are purchased exclusively from one supplier in Taiwan. Reliance on sole
source suppliers involves several risks including a potential inability to
obtain an adequate supply of required components, price increases, late
deliveries and poor component quality. Although to date the Company has been
able to source requirements of such components, there is no assurance that the
Company will be able to obtain the full requirements of such components in the
future, that prices of such components will not increase and that problems with
respect to quality and timely delivery will not occur. Disruption or termination
of the supply of these components could delay product shipments, have a material
adverse effect on the business and operations and damage relationships with
customers and the Company's reputation.

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

NOTE 9 -- BUSINESS SEGMENT INFORMATION

The Company manages its business segments based on the nature of products
sold. The Company's reportable segments are comprised of coin products and
technology products. Each operating segment provides products as further
described in Note 1. The accounting policies of the various segments are the
same as those described in Note 1. The Company evaluates the performance of its
segments based on segment operating income. Operating income for each segment
includes sales and marketing expenses, product development expenses and
non-corporate general and administrative expenses. Costs excluded from segment
operating income primarily consists of corporate expenses, including income
taxes, as well as certain non-recurring charges such as purchased in-process
research and development. Corporate expenses are comprised principally of
general and administrative expenses and marketing expenses which are separately
managed. Segment assets exclude corporate assets. Corporate assets include cash
and short-term investments and net assets of discontinued operations.

F-18
57
PUBLICARD, INC.
AND SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Segment information is as follows (in thousands):



1998 1997 1996
------- ------- -------

Net sales to unaffiliated customers:
Coin products............................................. $15,372 $17,039 $15,486
Technology products....................................... 1,147 -- --
------- ------- -------
$16,519 $17,039 $15,486
======= ======= =======
Income (loss) from operations:(1)
Coin products(2).......................................... $ 2,920 $ 3,090 $ (286)
Technology products....................................... (814) -- --
Corporate and other(3).................................... (6,538) (4,338) (4,866)
------- ------- -------
$(4,432) $(1,248) $(5,152)
======= ======= =======
Identifiable Assets:
Coin products............................................. $ 9,601 $ 9,614 $ 8,823
Technology products....................................... 8,918 -- --
Corporate and other....................................... 21,410 16,315 22,100
------- ------- -------
$39,929 $25,929 $30,923
======= ======= =======
Depreciation and Amortization Expense:
Coin products............................................. $ 329 $ 432 $ 350
Technology products....................................... 197 -- --
Corporate and other....................................... 228 80 189
------- ------- -------
$ 754 $ 512 $ 539
======= ======= =======
Capital Expenditures:
Coin products............................................. $ 180 $ 312 $ 1,109
Technology products....................................... 50 -- --
Corporate and other....................................... 88 19 38
------- ------- -------
$ 318 $ 331 $ 1,147
======= ======= =======


- ---------------
(1) Before interest income, interest expense and items of a nonoperating nature.

(2) The 1996 loss from operations for the coin products segment includes a
special charge of $1,596,000 associated with Greenwald Industries' plant
relocation.

(3) The 1998 loss from operations for Corporate and other includes a charge of
$2,800,000 to expense in-process research and development associated with
the Tritheim acquisition. The 1997 loss from operations includes a non-cash
charge of $768,000 related to the modification and extension of certain
common stock purchase warrants.

For 1998, 1997 and 1996 the Company had export sales of approximately
$1,435,000, $1,003,000 and $805,000, respectively. The majority of such sales
were to Canada. One customer of the Company's coin products segment accounted
for 13%, 14% and 13% of consolidated revenues during 1998, 1997 and 1996,
respectively.

F-19
58
PUBLICARD, INC.
AND SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 10 -- DISCONTINUED OPERATIONS

In March 1999, the Company's Board of Directors adopted a plan to dispose
of its engineering services subsidiary, Orr-Schelen-Mayeron & Associates
("OSM"). No significant gain or loss is expected on the disposition. In 1996,
the Company completed the sale of substantially all of the assets of Masterview
Window Company, Inc. ("Masterview"), Fenwal Electronics, Inc. ("Fenwal") and
Bright Star Industries Incorporated ("Bright Star"). The aggregate sales price
for the dispositions was $47,771,000. A portion of the sales prices were held in
escrow to cover potential purchase price adjustments, indemnity claims and
certain environmental remediation activities. During 1997 and 1998, an
additional $1,519,000 in cash was received principally relating to the
finalization of the Masterview purchase price adjustment.

OSM, Masterview, Fenwal and Bright Star have been reflected as discontinued
operations in the accompanying financial statements. Net sales of discontinued
operations for the years ended December 31, 1998, 1997 and 1996 were $8,888,000,
$9,095,000 and $36,362,000 respectively. The aggregate pre-tax gain on sale of
discontinued operations recorded in 1996 of $22,042,000 was offset by a
provision for income taxes of $9,259,000, of which $6,468,000 was credited
directly to paid-in-capital due to the utilization of pre-corporate
reorganization tax loss carryforwards. The pre-tax income from discontinued
operations in 1996 of $2,970,000 was offset by a provision for income taxes of
$1,245,000 which was also credited directly to paid-in-capital (see Note 5).

NOTE 11 -- RELOCATION CHARGE AND OTHER EXPENSES

During the fourth quarter of 1995, the Company decided to move Greenwald
Industries' operations from a leased facility in Brooklyn, New York to a newly
acquired facility in Chester, Connecticut. A special charge of $1,596,000 was
recorded in 1996 which included $627,000 in severance costs associated with 110
terminated employees, $246,000 for lease termination costs and $723,000 for
costs related to plant and employee relocation, recruiting and training new
personnel and for temporary living allowances. The move was completed by April
30, 1996.

In April 1998, the Company executed a letter of intent to purchase
substantially all of the assets of a group of five businesses from Katy
Industries, Inc. On August 5, 1998, the Company announced that the letter of
intent terminated due to the inability of the parties to reach agreement on
certain aspects of the transaction. Included in "Other (expense) income" is a
charge of $954,000 relating to legal, environmental and financing related fees.

F-20
59
PUBLICARD, INC.
AND SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 12 -- SUPPLEMENTAL CASH FLOW INFORMATION

Changes in operating assets and liabilities are net of acquisitions of
businesses and consisted of the following:



1998 1997 1996
------- ------- -------
(IN THOUSANDS)

Restricted cash....................................... $ -- $ -- $ 4,500
Trade receivables..................................... 207 (563) 270
Inventories........................................... (268) 45 381
Other current assets.................................. 126 (34) 79
Other assets.......................................... 151 209 123
Trade accounts payable................................ 482 (586) (1,865)
Accrued liabilities................................... 152 (442) (8,097)
Other non-current liabilities......................... (1,387) (1,053) (1,025)
------- ------- -------
$ (537) $(2,424) $(5,634)
======= ======= =======


Acquisition of businesses in the consolidated statement of cash flows is
net of cash acquired and includes debt assumed and immediately repaid in
acquisitions. Cash paid for interest during 1998, 1997 and 1996 was $340,000,
$402,000, and $623,000, respectively. Cash paid for income taxes during 1996 was
$1,912,000. No income taxes were paid in 1998 and 1997. Noncash investing
activities include the acquisition of Tritheim for shares of common stock and
options valued at $9,743,000 described in Note 2.

F-21
60

PUBLICARD, INC.
AND SUBSIDIARY COMPANIES

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULE

To PubliCARD, Inc.:

We have audited in accordance with generally accepted auditing standards,
the consolidated financial statements of PubliCARD, Inc. and subsidiary
companies included in this Form 10-K and have issued our report thereon dated
March 26, 1999. Our audits were made for the purpose of forming an opinion on
those statements taken as a whole. The schedule listed in the index to
consolidated financial statements and schedule is the responsibility of the
Company's management and is presented for purposes of complying with the
Securities and Exchange Commission's rules and is not part of the basic
consolidated financial statements. This schedule has been subjected to the
auditing procedures applied in the audits of basic consolidated financial
statements and, in our opinion, fairly states in all material respects the
financial data required to be set forth therein in relation to the basic
consolidated financial statements taken as a whole.

/s/ ARTHUR ANDERSEN LLP

Stamford, Connecticut
March 26, 1999

F-22
61

PUBLICARD, INC.
AND SUBSIDIARY COMPANIES

SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996



ADDITIONS
---------------------
CHARGED TO
BALANCE COSTS AND BALANCE
JANUARY 1 EXPENSES OTHER(1) DEDUCTIONS(2) DECEMBER 31
--------- ---------- -------- ------------- -----------
(IN THOUSAND OF DOLLARS)

Year ended December 31, 1998:
Allowance for doubtful accounts..... 36 -- 39 (1) 74
Reserve for discontinued
operations....................... 921 -- 31 (158) 794
Year ended December 31, 1997:
Allowance for doubtful accounts..... 36 4 -- (4) 36
Reserve for discontinued
operations....................... 142 -- 1,488 (709) 921
Year ended December 31, 1996:
Allowance for doubtful accounts..... 34 11 -- (9) 36
Reserve for discontinued
operations....................... -- 142 -- -- 142


- ---------------
(1) Other changes for the reserve for discontinued operations represents the
receipt of cash principally relating to the finalization of certain
disposition price adjustments. Other changes for the allowance for doubtful
accounts represents reserves established against receivables of certain
acquired businesses at the date of acquisition.

(2) Represents write-offs of receivables and charges/payments against
discontinued operations reserve balances.

F-23