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



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FORM 10-Q

[LOGO OF SSP SOLUTIONS]

(MARK ONE)



|[X] | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2002,
|--- | -------------------------------------------------------------------------------------------------------------------------------------

OR



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

COMMISSION FILE NO. 000-26227



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SSP SOLUTIONS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

|                                                                        |  |                                               
|----------------------------------------------------------------------- |  | ----------------------------------------------
|DELAWARE
(STATE OR OTHER JURISDICTION
OF INCORPORATION OR ORGANIZATION) |  | 33-0757190
(I.R.S EMPLOYER
IDENTIFICATION NO.)

17861 CARTWRIGHT ROAD, IRVINE, CALIFORNIA 92614
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)

(949) 851-1085
(REGISTRANTS TELEPHONE NUMBER, INCLUDING AREA CODE)



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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 [   ]

As of May 15, 2002, the registrant had 20,664,832 shares of common stock
outstanding.



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TABLE OF CONTENTS



|                              |                                                                                               |                                                      |  |  |  |  |  | 
|----------------------------- | --------------------------------------------------------------------------------------------- | ---------------------------------------------------- |  |  |  |  |  | 
|PART I. FINANCIAL INFORMATION
|                              | ITEM 1. FINANCIAL STATEMENTS                                                                 
|                              |                                                                                               | CONDENSED CONSOLIDATED BALANCE SHEETS               
|                              |                                                                                               | CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS     
|                              |                                                                                               | CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS     
|                              |                                                                                               | NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|                              | ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|                              | ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS                          
|PART II. OTHER INFORMATION   
|                              | ITEM 1. LEGAL PROCEEDINGS                                                                    
|                              | ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS                                            
|                              | ITEM 3. DEFAULTS UPON SENIOR SECURITIES                                                      
|                              | ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                                  
|                              | ITEM 5. OTHER INFORMATION                                                                    
|                              | ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K                                                     
|SIGNATURES                   



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SSP SOLUTIONS, INC.

INDEX

|         |  |                                                                                       |  |                                                                                            |    |      |   | 
|-------- |  | ------------------------------------------------------------------------------------- |  | ------------------------------------------------------------------------------------------ | -- | ---- | - | 
|         |  |                                                                                       |  |                                                                                            |    | PAGE
|         |  |                                                                                       |  |                                                                                            |    |     
|PART I.  |  | FINANCIAL INFORMATION                                                                 |  |                                                                                            |    |     
|Item 1.  |  | Financial Statements                                                                  |  |                                                                                            | 3  |     
|         |  |                                                                                       |  | Condensed Consolidated Balance Sheets-December 31, 2001 and March 31, 2002                 |    |      | 3 | 
|         |  |                                                                                       |  | Condensed Consolidated Statements of Operations-Three months ended
March 31, 2001 and 2002 |    |      | 4 | 
|         |  |                                                                                       |  | Condensed Consolidated Statements of Cash Flows-Three months ended March 31, 2001 and 2002 |    |      | 5 | 
|         |  |                                                                                       |  | Notes to Condensed Consolidated Financial Statements                                       |    |      | 6 | 
|Item 2.  |  | Managements Discussion and Analysis of Financial Condition and Results of Operations |  |                                                                                            | 16 |     
|Item 3.  |  | Quantitative and Qualitative Disclosures
About Market Risks                           |  |                                                                                            | 33 |     
|PART II. |  | OTHER INFORMATION                                                                     |  |                                                                                            | 34 |     
|Item 1.  |  | Legal Proceedings                                                                     |  |                                                                                            | 34 |     
|Item 2.  |  | Changes in Securities and Use of Proceeds                                             |  |                                                                                            | 34 |     
|Item 3.  |  | Defaults upon Senior Securities                                                       |  |                                                                                            | 34 |     
|Item 4.  |  | Submission of Matters to a Vote of Security Holders                                   |  |                                                                                            | 34 |     
|Item 5.  |  | Other Information                                                                     |  |                                                                                            | 34 |     
|Item 6.  |  | Exhibits and Reports on Form 8-K                                                      |  |                                                                                            | 34 |     

2



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PART I. FINANCIAL INFORMATION




ITEM 1. FINANCIAL STATEMENTS




SSP SOLUTIONS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)

(UNAUDITED)

|                                     |                                                                                                                                                                            |                                            |        |              |        |           |        |          |        | 
|------------------------------------ | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | ------ | ------------ | ------ | --------- | ------ | -------- | ------ | 
|                                     |                                                                                                                                                                            |                                            |        | DECEMBER 31, |        | MARCH 31,
|                                     |                                                                                                                                                                            |                                            |        | 2001         |        | 2002     
|                                     |                                                                                                                                                                            |                                            |        |              |        |          
|Current assets:                      |                                                                                                                                                                            |                                            |        |              |        |           |        |         
|                                     | Cash and cash equivalents                                                                                                                                                  |                                            | $      | 3,257        |        |           | $      | 723      |       
|                                     | Investment in trading securities                                                                                                                                           |                                            |        | 1,360        |        |           |        | 442      |       
|                                     | Accounts receivable (net of allowance for doubtful accounts of $254 as of December 31,
2001 and March 31, 2002)                                                            |                                            |        | 4,358        |        |           |        | 1,249    |       
|                                     | Inventories                                                                                                                                                                |                                            |        | 436          |        |           |        | 370      |       
|                                     | Prepaid expenses                                                                                                                                                           |                                            |        | 601          |        |           |        | 400      |       
|                                     | Other current assets                                                                                                                                                       |                                            |        | 401          |        |           |        | 456      |       
|                                     |                                                                                                                                                                            |                                            |        |              |        |           |        |         
|                                     |                                                                                                                                                                            | Total current assets                       |        |              | 10,413 |           |        |          | 3,640  | 
|Property and equipment, net          |                                                                                                                                                                            |                                            | 361    |              |        |           | 230    |         
|Other assets                         |                                                                                                                                                                            |                                            | 28     |              |        |           | 11     |         
|Goodwill and other intangibles, net  |                                                                                                                                                                            |                                            | 26,621 |              |        |           | 26,598 |         
|                                     |                                                                                                                                                                            |                                            |        |              |        |           |        |         
|                                     |                                                                                                                                                                            | $                                          | 37,423 |              |        | $         | 30,479 |         
|                                     |                                                                                                                                                                            |                                            |        |              |        |           |        |         
|LIABILITIES AND STOCKHOLDERS EQUITY |                                                                                                                                                                            |                                            |        |              |        |           |        |         
|Current liabilities:                 |                                                                                                                                                                            |                                            |        |              |        |           |        |         
|                                     | Current installments of long-term debt                                                                                                                                     |                                            | $      | 1,695        |        |           | $      | 363      |       
|                                     | Accounts payable                                                                                                                                                           |                                            |        | 9,495        |        |           |        | 7,780    |       
|                                     | Accrued liabilities                                                                                                                                                        |                                            |        | 3,343        |        |           |        | 4,060    |       
|                                     | Note payable to related party                                                                                                                                              |                                            |        | 392          |        |           |        |         |       
|                                     | Deferred revenue                                                                                                                                                           |                                            |        | 203          |        |           |        | 197      |       
|                                     | Accrued rent                                                                                                                                                               |                                            |        | 1,064        |        |           |        | 798      |       
|                                     |                                                                                                                                                                            |                                            |        |              |        |           |        |         
|                                     |                                                                                                                                                                            | Total current liabilities                  |        |              | 16,192 |           |        |          | 13,198 | 
|                                     |                                                                                                                                                                            |                                            |        |              |        |           |        |         
|                                     | Long-term debt, less current installments                                                                                                                                  |                                            |        | 2,500        |        |           |        | 2,500    |       
|                                     | Deferred revenue                                                                                                                                                           |                                            |        | 46           |        |           |        |         |       
|                                     | Accrued rent                                                                                                                                                               |                                            |        | 1,107        |        |           |        | 1,066    |       
|                                     |                                                                                                                                                                            |                                            |        |              |        |           |        |         
|                                     |                                                                                                                                                                            | Total liabilities                          |        |              | 19,845 |           |        |          | 16,764 | 
|Stockholders equity:                |                                                                                                                                                                            |                                            |        |              |        |           |        |         
|                                     | Preferred stock, $.01 par value; Authorized 5,000,000 shares; no shares issued or outstanding                                                                              |                                            |        |             |        |           |        |         |       
|                                     | Common stock, $.01 par value; Authorized 100,000,000 shares; issued and outstanding 20,630,754
and 20,664,832 shares at December 31, 2001 and March 31, 2002, respectively |                                            |        | 206          |        |           |        | 207      |       
|                                     | Additional paid-in capital                                                                                                                                                 |                                            |        | 118,608      |        |           |        | 118,364  |       
|                                     | Note receivable from stockholder                                                                                                                                           |                                            |        | (500         | )      |           |        | (500     | )     
|                                     | Deferred compensation                                                                                                                                                      |                                            |        | (1,193       | )      |           |        | (786     | )     
|                                     | Accumulated deficit                                                                                                                                                        |                                            |        | (99,543      | )      |           |        | (103,570 | )     
|                                     |                                                                                                                                                                            |                                            |        |              |        |           |        |         
|                                     |                                                                                                                                                                            | Commitments
& contingencies (Notes 8 & 11) |        |              |        |           |        |          |        | 
|
|                                    
|                                     |                                                                                                                                                                            | Total stockholders equity                 |        |              | 17,578 |           |        |          | 13,715 | 
|                                     |                                                                                                                                                                            |                                            |        |              |        |           |        |         
|                                     |                                                                                                                                                                            | Subsequent Events (Note 12)                |        |              |        |           |        |          |        | 
|                                     |                                                                                                                                                                            | $                                          | 37,423 |              |        | $         | 30,479 |         
|                                     |                                                                                                                                                                            |                                            |        |              |        |           |        |         

See accompanying notes to condensed consolidated financial statements.

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SSP SOLUTIONS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)

(UNAUDITED)

|                                                         |                                     |                |        |                    |       |           |        |       |       | 
|-------------------------------------------------------- | ----------------------------------- | -------------- | ------ | ------------------ | ----- | --------- | ------ | ----- | ----- | 
|                                                         |                                     |                |        | THREE MONTHS ENDED
|                                                         |                                     |                |        |                   
|                                                         |                                     |                |        | MARCH 31,          |       | MARCH 31,
|                                                         |                                     |                |        | 2001               |       | 2002     
|                                                         |                                     |                |        |                    |       |          
|Revenues:                                                |                                     |                |        |                    |       |           |        |      
|                                                         | Product                             |                | $      | 4,144              |       |           | $      | 1,453 |      
|                                                         | License and service                 |                |        | 334                |       |           |        | 656   |      
|                                                         |                                     |                |        |                    |       |           |        |      
|                                                         |                                     | Total revenues |        |                    | 4,478 |           |        |       | 2,109 | 
|                                                         |                                     |                |        |                    |       |           |        |      
|Costs and expenses:                                      |                                     |                |        |                    |       |           |        |      
|                                                         | Cost of sales product              |                |        | 3,066              |       |           |        | 881   |      
|                                                         | Cost of sales license and service  |                |        | 133                |       |           |        | 282   |      
|                                                         | Selling, general and administrative |                |        | 1,773              |       |           |        | 2,318 |      
|                                                         | Research and development            |                |        | 1,843              |       |           |        | 2,489 |      
|                                                         | Amortization of intangibles         |                |        | 23                 |       |           |        | 23    |      
|                                                         |                                     |                |        |                    |       |           |        |      
|Operating loss                                           |                                     |                | (2,360 | )                  |       |           | (3,884 | )    
|Other expense, net                                       |                                     |                | 16     |                    |       |           | 140    |      
|                                                         |                                     |                |        |                    |       |           |        |      
|Loss before income taxes                                 |                                     |                | (2,376 | )                  |       |           | (4,024 | )    
|Provision for income taxes                               |                                     |                |       |                    |       |           | 3      |      
|                                                         |                                     |                |        |                    |       |           |        |      
|Net loss                                                 |                                     | $              | (2,376 | )                  |       | $         | (4,027 | )    
|                                                         |                                     |                |        |                    |       |           |        |      
|Net loss per share basic and diluted                    |                                     | $              | (0.24  | )                  |       | $         | (0.19  | )    
|                                                         |                                     |                |        |                    |       |           |        |      
|Shares used in per share computations basic and diluted |                                     |                | 9,747  |                    |       |           | 20,651 |      
|                                                         |                                     |                |        |                    |       |           |        |      

See accompanying notes to condensed consolidated financial statements.

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SSP SOLUTIONS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)

(UNAUDITED)

|                                                                                                |                                                                                           |                                     |                                                     |        |       |                    |       |           |        |        |   | 
|----------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------- | ----------------------------------- | --------------------------------------------------- | ------ | ----- | ------------------ | ----- | --------- | ------ | ------ | - | 
|                                                                                                |                                                                                           |                                     |                                                     |        |       | THREE MONTHS ENDED
|                                                                                                |                                                                                           |                                     |                                                     |        |       |                   
|                                                                                                |                                                                                           |                                     |                                                     |        |       | MARCH 31,          |       | MARCH 31,
|                                                                                                |                                                                                           |                                     |                                                     |        |       | 2001               |       | 2002     
|                                                                                                |                                                                                           |                                     |                                                     |        |       |                    |       |          
|Cash flows from operating activities:                                                           |                                                                                           |                                     |                                                     |        |       |                    |       |          
|                                                                                                | Net loss                                                                                  |                                     | $                                                   | (2,376 | )     |                    | $     | (4,027    | )     
|                                                                                                | Adjustments to reconcile net loss to net cash
provided by (used in) operating activities: |                                     |                                                     |        |       |                    |       |           |       
|                                                                                                |                                                                                           | Provision for losses on receivables |                                                     |        | 61    |                    |       |           | 12     |       
|                                                                                                |                                                                                           | Depreciation and amortization       |                                                     |        | 218   |                    |       |           | 156    |       
|                                                                                                |                                                                                           | Deferred compensation               |                                                     |        |      |                    |       |           | 104    |       
|                                                                                                |                                                                                           | Realized loss on trading securities |                                                     |        |      |                    |       |           | 1      |       
|Changes in assets and liabilities:                                                              |                                                                                           |                                     |                                                     |        |       |                    |       |          
|                                                                                                |                                                                                           | Accounts receivable                 |                                                     |        | 2,357 |                    |       |           | 3,097  |       
|                                                                                                |                                                                                           | Inventories                         |                                                     |        | (33   | )                  |       |           | 66     |       
|                                                                                                |                                                                                           | Prepaid expenses                    |                                                     |        | 26    |                    |       |           | 201    |       
|                                                                                                |                                                                                           | Other current assets                |                                                     |        | (60   | )                  |       |           | (55    | )     
|                                                                                                |                                                                                           | Other assets                        |                                                     |        | 139   |                    |       |           | 17     |       
|                                                                                                |                                                                                           | Accounts payable                    |                                                     |        | 473   |                    |       |           | (1,715 | )     
|                                                                                                |                                                                                           | Accrued liabilities                 |                                                     |        | (97   | )                  |       |           | 717    |       
|                                                                                                |                                                                                           | Accrued rent                        |                                                     |        |      |                    |       |           | (307   | )     
|                                                                                                |                                                                                           | Deferred revenue                    |                                                     |        | (52   | )                  |       |           | (52    | )     
|                                                                                                |                                                                                           |                                     |                                                     |        |       |                    |       |          
|                                                                                                |                                                                                           |                                     | Net cash provided by (used in) operating activities |        |       | 656                |       |           |        | (1,785 | )
|                                                                                                |                                                                                           |                                     |                                                     |        |       |                    |       |          
|Cash flows used in investing activities:                                                        |                                                                                           |                                     |                                                     |        |       |                    |       |          
|                                                                                                | Purchases of property and equipment                                                       |                                     |                                                     | (38    | )     |                    |       | (2        | )     
|                                                                                                | Proceeds from sale of trading securities                                                  |                                     |                                                     |       |       |                    |       | 917       |       
|                                                                                                |                                                                                           |                                     |                                                     |        |       |                    |       |          
|                                                                                                |                                                                                           |                                     | Net cash provided by (used in) investing activities |        |       | (38                | )     |           |        | 915    |  
|                                                                                                |                                                                                           |                                     |                                                     |        |       |                    |       |          
|Cash flows from financing activities:                                                           |                                                                                           |                                     |                                                     |        |       |                    |       |          
|                                                                                                | Stock options exercised                                                                   |                                     |                                                     | 3      |       |                    |       | 60        |       
|                                                                                                | Borrowings on revolving note payable                                                      |                                     |                                                     | 5,395  |       |                    |       | 1,103     |       
|                                                                                                | Repayment of insurance financing                                                          |                                     |                                                     | (130   | )     |                    |       | (173      | )     
|                                                                                                | Principal payments on revolving line of credit                                            |                                     |                                                     | (6,121 | )     |                    |       | (2,262    | )     
|                                                                                                | Principal payments on note payable to related party                                       |                                     |                                                     |       |       |                    |       | (392      | )     
|                                                                                                |                                                                                           |                                     |                                                     |        |       |                    |       |          
|                                                                                                |                                                                                           |                                     | Net cash used in financing activities               |        |       | (853               | )     |           |        | (1,664 | )
|                                                                                                |                                                                                           |                                     |                                                     |        |       |                    |       |          
|                                                                                                | Net increase (decrease) in cash                                                           |                                     |                                                     | (235   | )     |                    |       | (2,534    | )     
|Cash and cash equivalents at beginning of period                                                |                                                                                           |                                     | 4,120                                               |        |       |                    | 3,257 |          
|                                                                                                |                                                                                           |                                     |                                                     |        |       |                    |       |          
|Cash and cash equivalents at end of period                                                      |                                                                                           | $                                   | 3,885                                               |        |       | $                  | 723   |          
|                                                                                                |                                                                                           |                                     |                                                     |        |       |                    |       |          
|Supplemental disclosures of cash flow information:                                              |                                                                                           |                                     |                                                     |        |       |                    |       |          
|                                                                                                | Cash paid during the period for:                                                          |                                     |                                                     |        |       |                    |       |           |       
|                                                                                                |                                                                                           |                                     | Interest                                            |        | $     | 17                 |       |           | $      | 92     |  
|                                                                                                |                                                                                           |                                     | Income taxes                                        |        |       |                   |       |           |        | 3      |  
|                                                                                                |                                                                                           |                                     |                                                     |        |       |                    |       |          
|Supplemental
disclosure of non-cash financing activities
information:     Deferred Compensation |                                                                                           | $                                   |                                                    |        |       | $                  | 303   |          
|                                                                                                |                                                                                           |                                     |                                                     |        |       |                    |       |          

See accompanying notes to condensed consolidated financial statements.

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SSP SOLUTIONS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2001 AND 2002
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)

(1) GENERAL INFORMATION:

Condensed Consolidated Financial Statements

In the opinion of SSP Solutions, Inc. (the Company), the accompanying
unaudited condensed consolidated financial statements contain all adjustments
(which are normal recurring accruals) necessary to present fairly the financial
position as of March 31, 2002; the results of operations for the
three months ended
March 31, 2001 and 2002; and the statements of cash flows for the three months
ended March 31, 2001 and 2002. Interim results for the three months ended March
31, 2002, are not necessarily indicative of the results that may be expected
for the year ending December 31, 2002. The interim financial statements should
be read in conjunction with the Companys consolidated financial statements for
the year ended December 31, 2001, included in the Companys Form 10-K/A, filed
in April 2002.

These condensed consolidated financial statements have been prepared
assuming that the Company will continue as a going concern, which contemplates
the realization of assets and satisfaction of liabilities in the normal course
of business. The Company has incurred significant operating losses, has used
cash in operating activities, has an accumulated deficit, and deficit working
capital. The Company currently anticipates that existing resources will not be
sufficient to satisfy contemplated working capital requirements for the next
twelve months.

Liquidity and Capital Resources

At March 31, 2002, the Company had deficit working capital of $9,558 and
the Company incurred a loss from operations for the three months then ended of
$3,884. The Company expects to continue to incur substantial additional losses
in 2002. Given the March 31, 2002 cash balance and the projected operating cash
requirements, the Company anticipates that existing capital resources will not
be adequate to satisfy cash flow requirements through December 31, 2002. The
Company will require additional funding. The Companys cash flow estimates are
based upon achieving certain levels of sales, reductions in operating expenses
and liquidity available under the accounts receivable financing. Should sales
be less than forecast, expenses be higher than forecast or the liquidity not be
available under the accounts receivable financing or through additional
financings of debt and/or equity, the Company will not have adequate resources
to fund its operations. During the past quarter, the Company incurred defaults
under both the Companys accounts receivable financing and the long-term
convertible notes. The Company obtained waivers for its accounts receivable
financing for defaults through March 31, 2002 and for the long-term convertible
notes through January 1, 2003. However, there is no guarantee the lenders will
continue to waive defaults in the future, should they occur, and the lenders
may declare amounts owed by the Company due and payable. Subsequent to March
31, 2002, the Company remained in default under the accounts receivable
financing and has not obtained a waiver of such default. The Company does not
expect future fixed obligations to be paid from operations and intends to
satisfy fixed obligations from additional financings, use of the accounts
receivable financing, extending vendor payments, selling investments and
issuing stock as payment on obligations.

The Companys current financial condition is the result of several factors
including the following:



| |  |  | Operating results in 2001 and first
quarter of
2002 were below expectations.                                                                                                                                                                                   
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | The events of September 11, 2001 affected the operations and delayed
the decisions of the U.S. government. This caused sales the Company had
anticipated to be delayed. The events may also affect potential
investors and related terms of investment capital.
|
| |  |  | Sales of products through channels acquired in the acquisition
(Acquisition) of BIZ Interactive Zone, Inc. (BIZ) are taking longer
than originally anticipated to develop.                                                                                 

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| |  |  | Market demand for the Companys Xboard product (formerly known as
CipherServer product line) did not materialize as anticipated and
therefore the Companys 2001 sales were below forecast and the Company
is not forecasting future sales of the Xboard product.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Reduced credit line availability and the unwillingness of vendors to
sell additional products to the Company on account affected the sales
volume of the Companys Pulsar subsidiary in 2001 and will continue to
have an impact on sales volume in 2002.        
|
| |  |  | Research and development expenses from the Acquisition increased
costs.                                                                                                                                                                                          

The Company currently has a need for a substantial amount of capital to
meet its liquidity requirements. The amount of capital that the Company will
need in the future will depend on many factors including, but not limited, to:



| |  |  | the ability to extend vendor payment terms                                                                                                             
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | the market acceptance of products and services                                                                                                         
|
| |  |  | the levels of promotion and advertising that will be required to
launch new products and services and attain a competitive position in
the market place
|
| |  |  | research and development plans                                                                                                                         
|
| |  |  | levels of inventory and accounts receivable                                                                                                            
|
| |  |  | technological advances                                                                                                                                 
|
| |  |  | competitors responses to the Companys products and services                                                                                          
|
| |  |  | relationships with partners, suppliers and customers                                                                                                   
|
| |  |  | projected capital expenditures                                                                                                                         
|
| |  |  | reduction in the valuation of marketable investment securities                                                                                         
|
| |  |  | national and international economic conditions                                                                                                         
|
| |  |  | defaults on financing that will impact the availability of borrowings                                                                                  

In addition to the Companys current deficit working capital situation,
current operating plans show a shortfall of cash during 2002. The Company
intends to mitigate its position through one or more of the following:



| |  |  | Additional equity capital  The Company will seek additional equity
capital, if available. Equity capital will most likely be issued at a
discount to market and require the issuance of warrants causing a
dilution to current stockholders. In addition, providers of new equity
capital may require additional concessions in order for them to provide
needed capital to the Company.                                                                                                                                                                                                                                                                                                    
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Additional convertible debt  Depending upon the market conditions,
the Company may issue additional debt instruments. The types of
instruments demanded by the market would likely contain a provision for
the issuance of warrants and may also be convertible into equity. On
April 16, 2002, simultaneous with the filing of Form 10-K for 2001, the
Company completed a private placement of $5,000 in the form of $4,000 in
10% secured convertible promissory notes, $653 in secured
non-convertible promissory notes ($153 held by co-chairman Kris Shah and
$500 held by co-chairman Marvin Winkler) and the pre-payment of a $500
note due from Kris Shah, less a discount of $153.
|
| |  |  | Off balance sheet financing  The Companys operations are not
relatively capital intensive. However, should the Company need to add
equipment or decide to expand the facilities, the Company may use an
operating lease transaction to acquire the use of capital assets. An
operating lease would not appear on the Companys balance sheet and
would be charged as an expense as payments accrue.                                                                                                                                                                                                                                                                                        

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| |  |  | Receivables financing  The Company plans to continue to finance
receivables in conjunction with its Wells Fargo Business Credit (WFBC)
agreements to generate cash. In the past the Company has triggered
events of default under the terms of the WFBC agreements. The events
of default have related to not forwarding misdirected payments to WFBC
within the timeframe provided for in the WFBC agreements and not paying
obligations to vendors as they become due. The Company has received
waivers for all known instances of misdirected payments not being
forwarded to WFBC in a timely manner. The Company received a waiver
from WFBC through March 31, 2002, related to not paying vendor
obligations in a timely manner. However, since March 31, 2002, the
Company has continued to be delinquent in paying vendor obligations and
is therefore currently in default of the WFBC agreements. The Company
has not obtained a waiver from WFBC for this continuing default.
Without waivers for existing or future defaults the Company may not have
funds available under its credit line. There is no assurance that WFBC
will provide waivers now or in the future.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Liquidate investments  The Company will sell investments to generate
cash. The market value of trading securities at December 31, 2001 and
March 31, 2002, was $1,360 and $442, respectively. During the three
months ended March 31, 2002, the Company generated $917 through the
sales of these trading securities.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|
| |  |  | Vendor negotiations  The Company is negotiating with vendors
regarding payment of existing accounts payable over extended terms of
forty eight (48) months with no interest. The Company has reached a
verbal agreement with one large vendor and is working with remaining
vendors. The Company previously executed term out agreements with a
number of vendors that must now be further extended.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|
| |  |  | Project suspensions   The Company may defer cash payments through
suspension of development projects.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|
| |  |  | Issuance of stock as payment for
existing and future obligations  The Company anticipates paying $2,222 of accrued liabilities as of
March 31, 2002, by the future issuance of common stock.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|
| |  |  | Issuance of stock to pay interest  The Company may issue common stock to pay interest on long term debt.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|
| |  |  | Reductions in work force  The Company may further reduce its workforce.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              

Should the Company not receive adequate financing, it could be forced to
merge with another company or cease operations.

Ultimately, the Companys ability to continue as a going concern is
dependent upon its ability to successfully launch its new products, increase
revenue, improve operating efficiencies, sustain a profitable level of
operations and attract new sources of capital.

BIZ Acquisition

On August 24, 2001, pursuant to an Agreement and Plan of Reorganization
dated July 3, 2001 with BIZ, the Company completed the Acquisition, whereby BIZ
became a wholly-owned subsidiary of the Company. In connection with the
Acquisition, the Company issued an aggregate of 10,875 shares of its common
stock in exchange for all of the outstanding shares of BIZ common stock and
preferred stock. In addition, the Company reserved for issuance an aggregate of
approximately 860 shares of its common stock for issuance upon exercise of BIZ
options and warrants assumed by the Company.

The Acquisition has been accounted for under the purchase method of
accounting in accordance with generally accepted accounting principles. The
Company recorded a one-time charge for purchased in-process research and
development (IPR&D) expenses of $1,600.

The total purchase price and allocation among the fair value of tangible
and intangible assets and liabilities (including purchased in-process research
and development) are summarized as follows:

|                                |                                     |   |       |       | 
|------------------------------- | ----------------------------------- | - | ----- | ----- | 
|Tangible assets                 |                                     | $ | 3,231 |      
|Liabilities                     |                                     |   | 3,047 |      
|                                |                                     |   |       |      
|Net tangible assets             |                                     |   | 184   |      
|Identifiable intangible assets: |                                     |   |       |      
|                                | In-process research and development |   |       | 1,600 | 
|                                | Completed technology                |   |       | 6,200 | 

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|                        |  |   |        |  | 
|----------------------- |  | - | ------ |  | 
|Strategic relationships |  |   | 2,800  | 
|Goodwill                |  |   | 53,882 | 
|Deferred compensation   |  |   | 29     | 
|                        |  |   |        | 
|                        |  | $ | 64,695 | 
|                        |  |   |        | 

The Company believes the assumptions used in
determining the income forecast associated with the IPR&D
products were
reasonable. No assurance can be given, however, that the underlying assumptions
used to estimate the income forecast, the ultimate revenues and costs on such
projects, or the events associated with such projects, will transpire as
estimated. During the fourth quarter of 2001, the Company terminated its
development on one of the technologies classified as IPR&D. To date, the
Company has spent approximately $1,112 on the
IPR&D projects and the estimated cost to complete the two on-going projects
is $4,025.

As the markets for the Companys products are characterized by rapidly
changing technology, evolving industry standards, and the frequent introduction
of new products and enhancements, it is reasonably possible that the estimates
of the anticipated future gross revenues, the remaining estimated economic
life, or both, will be reduced within the next year. Reasonably possible is
defined as more than remote but less than likely. As a result, the remaining
goodwill of $25,930 related to the Acquisition at March 31, 2001, may be
reduced within the next year.

Goodwill and Other Intangibles

The Company adopted
Statements of Financial Accounting Standards, (Statement) 141 and 142, Business Combinations
and Goodwill and Other Intangible Assets for the Acquisition that was
completed on August 24, 2001. In accordance with Statement 142 goodwill is not
amortized for business acquisitions that were completed after June 30, 2001,
but rather will be evaluated at least annually for impairment. Other
identifiable intangible assets acquired from business acquisitions that were
completed after June 30, 2001, are amortized over
their estimated useful lives. Accordingly, the
Company has not recorded amortization of goodwill related to the Acquisition.

The Company has begun performing the first step of
the required impairment tests as required by Statement 142, but has
not yet determined the effect, if any, the impairment tests will have
on its results of operations and financial condition. If impairment
is indicated as a result of these tests, the Company will record such
impairment in its 2002 annual financial statements as a cumulative
effect of a change in accounting principle effective January 1,
2002.

As required under Statement 142 the Company
performed an analysis of undiscounted cash flows under
Statement 121 in order to evaluate
the recoverability of the intangible asset related to Pulsar Data
Systems, Inc. (Pulsar). Based on
this analysis the Company determined that the carrying value of the
remaining identifiable intangible was recoverable. Therefore, the
Company will continue amortizing the
Pulsar related intangible over its estimated useful life.

The Company amortizes intangible assets relating to businesses acquired
and costs in excess of the fair value of net assets of businesses acquired
using the straight-line method over the estimated useful lives of the
intangible assets. The straight-line amortization reflects the
consumption pattern of the economic benefit
of the intangible assets.

During the fourth quarter of 2001, the Company determined that certain
identifiable technology and developed technology acquired in connection with
the Acquisition were no
longer going to be pursued. Additionally, the Company delayed or indefinitely
reduced the projected revenues from the Acquisition. Accordingly, the Company
performed analyses for identifiable intangible assets and goodwill in
accordance with Statement 121 and Accounting Principle Board Opinion No. 17.

In evaluating identifiable intangibles assets, the Company utilized a
discounted cash flow analysis and, due to the uncertainties surrounding the
Companys ability to fund its operations, concluded all identified intangibles
assets associated with the Acquisition should be written-off. In evaluating the
goodwill associated with the Acquisition, the Company utilized a fair value
approach. The fair value was measured utilizing the most recent indicator of
fair value, which was the secured convertible promissory notes (note 12).
Consequently, the Company recorded an impairment charge of $36,299 in the
fourth quarter of 2001 related to all identifiable intangible assets and
developed technology, as well as a portion of the goodwill acquired in
connection with the Acquisition. After this impairment charge, goodwill
is the only remaining intangible asset.

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Amortization of identifiable intangible assets was $23, for the
three months ended March 31, 2001 and 2002.

(2) INVESTMENTS

The Company has an investment that is classified as trading securities.
The securities consist of Class A common stock of Wave Systems Corp.
(Wave) received in the Acquisition. The investment is presented and recorded
in accordance with Statement 115. Management determines the appropriate
classification of its investments in debt and marketable equity securities at
the time of purchase and reevaluates such designation as of each balance sheet
date. Available-for-sale securities are carried at fair value, with the
unrealized gains and losses, net of taxes, reported as a component of
stockholders equity. Trading securities are carried at fair value with the
unrealized gains and losses, net of applicable taxes, reported in earnings in
the statement of operations. The cost of securities sold is based upon the
specific identification method. As of December 31, 2001 and
March 31, 2002, the Company owned 607 shares with a value of
$1,360 and 181 shares with a value
of $442, respectively.

(3) INVENTORIES

A summary of inventories follows:

|                |  |              |     |           |  |   |     | 
|--------------- |  | ------------ | --- | --------- |  | - | --- | 
|                |  | December 31, |     | March 31,
|                |  | 2001         |     | 2002     
|                |  |              |     |          
|Raw materials   |  | $            | 112 |           |  | $ | 93  | 
|Work-in-process |  |              | 8   |           |  |   | 8   | 
|Finished goods  |  |              | 316 |           |  |   | 269 | 
|                |  |              |     |           |  |   |     | 
|                |  | $            | 436 |           |  | $ | 370 | 
|                |  |              |     |           |  |   |     | 

(4) LONG TERM DEBT

A summary of long-term debt follows:

|                                                                                                                                                          |  |              |       |           |  |   |       | 
|--------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------ | ----- | --------- |  | - | ----- | 
|                                                                                                                                                          |  | December 31, |       | March 31,
|                                                                                                                                                          |  | 2001         |       | 2002     
|                                                                                                                                                          |  |              |       |          
|Note payable for insurance financing due in
eighteen monthly payments beginning July 9, 2000
at an annual percentage rate of 8.18%                        |  |              | 173   |           |  |   |      | 
|Well Fargo Business Credit accounts receivable financing, discount rate of 1.25% of the
receivables factored, interest payable upon
payment of receivable |  |              | 1,522 |           |  |   | 363   | 
|Subordinated convertible note due December 17,
2004 with interest rate at 8.0% per annum
compounded annually, interest payable quarterly                  |  |              | 2,500 |           |  |   | 2,500 | 
|                                                                                                                                                          |  |              |       |           |  |   |       | 
|                                                                                                                                                          |  |              | 4,195 |           |  |   | 2,863 | 
|Less current installments                                                                                                                                 |  |              | 1,695 |           |  |   | 363   | 
|                                                                                                                                                          |  |              |       |           |  |   |       | 
|                                                                                                                                                          |  | $            | 2,500 |           |  | $ | 2,500 | 
|                                                                                                                                                          |  |              |       |           |  |   |       | 

On November 2, 2001, both the Company and its wholly owned subsidiary,
Pulsar, entered into separate financing agreements with WFBC, which provides
for the factoring of accounts receivable. The agreements contain no limit on
the dollar volume of receivable financing, but provides for WFBCs approval of
credit limits for non-government customers. The discount rate charged is 1.25%
of the gross receivable, which may be increased by .0625% per day for accounts
that do not pay within thirty days of the receivable purchase. At the time of
purchase, terms call for WFBC to advance 85% of the gross receivable, with the
balance remitted after collection of the invoice less the discount and any
other charges. The agreement contains loan covenants and requires minimum quarterly fees and discounts totaling $63. The
Company received a waiver from WFBC through March 31, 2002. However, since
March 31, 2002,
the Company has continued to incur a default and has
not obtained a waiver from WFBC. The balance due
WFBC is guaranteed by Kris Shah and Marvin Winkler, the Companys co-chairmen
and co-chief executive officers.

Gross receivables
transferred to WFBC amounted to $0 and $1,298 for the three months
ended March 31, 2001 and
2002, respectively. The Company is obligated to repurchase certain accounts
receivable under the program and, therefore, the transaction does not qualify
as a sale under the terms of Statement 140.

Factored receivables included in the accounts receivable balance as of
March 31, 2001 and 2002 were $0 and $495, respectively.

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The Company previously entered into insurance premium financing agreements
with Cananwill, Inc. for the payment of certain insurance premiums. The
premiums being financed cover policy periods from twelve to twenty four months.
The Acquisition caused the re-write of some policies carried by the Company. As
a result, the premium financing agreements were re-written to provide for five
monthly installments covering policy periods ending June 30, 2002. These
insurance premium financing agreements are secured by the proceeds of the
policies being financed.

During December 2001,
the Company issued four separate subordinated
convertible notes (the Notes) totaling $2,500 with similar terms and
conditions. The Notes were due on December 17, 2004 and bear 8% interest per
annum payable quarterly. In connection with the issuance of the Notes the Company incurred approximately $28 of issuance costs,
which primarily consisted of legal and other professional fees, which
were paid at a later date. All Notes were to mature December 17,
2004; bore interest at a rate of 8% per annum, which was due quarterly in
cash. These Notes are convertible at the election of the holders at any time
into such number of shares of the Companys common stock as is determined by dividing the
outstanding principal amount of the Note being converted by the conversion
price in effect at that time. The initial conversion price provided for in the Notes is $3.60 per share and is subject to adjustment under certain
conditions. In addition, upon the closing of a qualified financing as defined
in the Notes, the then outstanding principal and any accrued and unpaid
interest on these Notes will automatically convert into such number of shares
of the type of equity securities sold in that qualified financing as is
determined by dividing the amount of principal and interest remaining on the
Note being converted by the lesser of (a) the price at which the equity
securities are being sold in the qualified financing or (b) the conversion
price provided in the Note being converted in effect at the time. After
December 17, 2003, the Company may call for mandatory conversion of the
Notes prior to maturity if the Companys common shares
trade at or above an average price of 300% of the conversion price
with an average volume of 200 shares per day for
twenty (20) consecutive trading days. Two of the Notes totaling $750 were
issued to the Companys co-chairmen and co-chief executive officers. The Company was in default under the
Notes and obtained waivers for its default under the Notes through
January 1, 2003. Portions of the Notes were exchanged for new
securities in April 2002. The remaining Notes were amended to extend
the maturity date to December 31, 2005 and provide for the
conversion price to be a 25% or less discount to the trading price of the
Companys stock (note 12).

(5) BUSINESS SEGMENTS AND PRODUCT LINES

The Company operates in two industry segments, the information security
segment and the network solutions segment. Following are the revenues, cost of
sales, and identifiable assets of these segments as of and for the three ended
March 31, 2001 and 2002.

|              |                                            |                                            |   |                    |       |           |   |       |     | 
|------------- | ------------------------------------------ | ------------------------------------------ | - | ------------------ | ----- | --------- | - | ----- | --- | 
|              |                                            |                                            |   | THREE MONTHS ENDED
|              |                                            |                                            |   |                   
|              |                                            |                                            |   | MARCH 31,          |       | MARCH 31,
|              |                                            |                                            |   | 2001               |       | 2002     
|              |                                            |                                            |   |                    |       |          
|Revenue       |                                            |                                            |   |                    |       |           |   |      
|              | Information Security Products and Services |                                            | $ | 1,950              |       |           | $ | 1,727 |    
|              | Network Solutions Market                   |                                            |   | 2,528              |       |           |   | 382   |    
|              |                                            |                                            |   |                    |       |           |   |      
|Cost of sales |                                            |                                            |   |                    |       |           |   |      
|              |                                            | Information Security Products and Services |   |                    | 922   |           |   |       | 784 | 
|              |                                            | Network Solutions Market                   |   |                    | 2,277 |           |   |       | 379 | 
|              |                                            |                                            |   |                    |       |           |   |      

|                    |                                            |  |              |        |           |  |   |        | 
|------------------- | ------------------------------------------ |  | ------------ | ------ | --------- |  | - | ------ | 
|                    |                                            |  | DECEMBER 31, |        | MARCH 31,
|                    |                                            |  | 2001         |        | 2002     
|                    |                                            |  |              |        |          
|Identifiable assets |                                            |  |              |        |           |  |   |       
|                    | Information Security Products and Services |  | $            | 27,553 |           |  | $ | 27,065 | 
|                    | Network Solutions Market                   |  |              | 3,862  |           |  |   | 1,012  | 
|                    |                                            |  |              |        |           |  |   |       

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As the Chief Operating Decision Maker does not review operating expenses
by segment beyond cost of sales or assets, except as identified, additional
segment information is not available.

During the three months ended March 31, 2001 and 2002, the Company had
three distinct product lines: network deployment products, data security
products and license and service. Following is a summary of total revenues by
product line.

|                            |                                                 |   |                    |       |           |   |       |       | 
|--------------------------- | ----------------------------------------------- | - | ------------------ | ----- | --------- | - | ----- | ----- | 
|                            |                                                 |   | THREE MONTHS ENDED
|                            |                                                 |   |                   
|                            |                                                 |   | MARCH 31,          |       | MARCH 31,
|                            |                                                 |   | 2001               |       | 2002     
|                            |                                                 |   |                    |       |          
|Network deployment products |                                                 | $ | 2,528              |       |           | $ | 382   |      
|Data security products      |                                                 |   | 1,616              |       |           |   | 1,071 |      
|License and service         |                                                 |   | 334                |       |           |   | 656   |      
|                            |                                                 |   |                    |       |           |   |       |      
|                            | Total net product, license and service revenues |   | $                  | 4,478 |           |   | $     | 2,109 | 
|                            |                                                 |   |                    |       |           |   |       |      

(6) RELATED PARTY TRANSACTIONS

KRDS Real Property Lease

During a prior year,
certain stockholders of the Company including the Companys co-chairman, Kris Shah, formed KRDS,
Inc. (KRDS)
for the sole purpose of purchasing real estate property. KRDSs operations
primarily consisted of a mortgage obligation, interest, depreciation and rental
income from the Company related to the real estate property.

In February 2000, KRDS leased a building to the Company for its corporate
headquarters. The lease expires in February 2007. The facility has an annual
rent of approximately $429. In April 2002, the Company and KRDS entered into an
agreement whereby upon sixty (60) days notice, the Company may cancel the
remaining balance of the facility lease with no future liability. The Company
has not exercised the exit clause, but anticipates doing so in connection with
the lease of a new facility.

Note Receivable From Stockholder

The note receivable
from stockholder consists of a note acquired as part
of the Acquisition. The $500 note was received by BIZ from the
Companys co-chairman,
Kris Shah, in conjunction with the issuance to him of BIZ common shares in July 2000,
and therefore is shown as a reduction of stockholders equity until paid.
The note has a stated interest rate of 5% per annum and is due on July 24,
2005. On April 12, 2002, in a transaction approved by the Companys board of
directors, Mr. Shah prepaid the note by paying to the Company $347 and the
Company recording a discount of $153 which was charged against income in the
second quarter of 2002. The discount was computed based upon a present value
calculation using a discount rate of 20%.

Notes Receivable  Related Party

The notes receivable primarily consists of two promissory notes that were
acquired as part of the Acquisition. As part of a hiring package, an employee
received a $10 advance and executed a demand promissory note that included
interest at 6%. Subsequently, as part of a loan agreement, the same employee
executed a separate promissory note for $37 including interest at 8% due May 3,
2002. The Company is in discussions with the employee on extending the May 3
due date of this note. The balance of the related party notes includes accrued
interest. These balances are included in other current assets in the
consolidated financial statements.

Notes Payable To Related Party

On July 31, 2001, Chase Manhattan Bank (Chase) advanced $1,000 to the
Companys co-chairman, Mr. Winkler, who then advanced that amount to BIZ for
the re-purchase of preferred stock held by an investor in BIZ. Mr. Winkler
executed a $1,000 demand note with Chase and BIZ executed a $1,000 demand note
due September 15, 2001 with J.A.W. Financial, L.P. (JAW), an entity
controlled by Mr. Winkler. The demand note contained an interest charge of
prime plus 1% through the maturity date and prime plus 3% after the maturity
date. On October 11, 2001, the Company made a principal payment of $30, paid
accrued interest, and executed a new promissory note to JAW for $970. The terms
of the promissory note call for interest of prime plus 3% payable monthly,
together with five monthly payments of principal in the amount of $160 and one
final payment on April 15, 2002 in the amount of $170. The promissory note
provides Chase a security interest in the shares of Wave owned by
the Company, and subject to Chases loan security guidelines the rights to
proceeds from any sales of those shares. At December 31, 2001, the note payable
to related party was $304. On March 8, 2002, the promissory note was paid in
full ahead of scheduled maturity.

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During 2001, a related party periodically advanced amounts required for
the operations of BIZ, which was acquired in the Acquisition. As of December
31, 2001, the Company owed the related party a balance of $88 for such
advances. No interest has been paid, accrued or due on such advances. This
obligation was paid in full during January 2002.

The combined total payable to the related party at December 31, 2001 and
March 31, 2002, were $392 and $0, respectively.

Subordinated Convertible 8% Notes

In December 2001, the Companys co-chairmen each purchased a
$375, 8% Note, in a private placement of $2,500
of such Notes. In April 2002, the Notes of the
co-chairmen were amended to provide that their Notes can only be
converted in
a subsequent financing if the financing is for $5,000 or more in equity or convertible securities in a private
placement to institutional investors at a conversion price that represents a
25% or less discount to trading price of the Companys stock (see note 4). As of March 31,
2002, the Company was in violation of certain provisions of the Notes, but had
previously requested and received a waiver for these violations. On April 16,
2002, concurrent with the initial filing of the Companys annual
report on Form 10-K for 2001,
the Company closed a financing whereby, with the exception of the Companys
co-chairmen, the noteholders exchanged their Notes
for 10% secured convertible promissory notes and warrants (see
note 12).

New Facilities Related Party Leasing

During 2001, the Company arranged for the lease of two buildings
approximating 63 square feet that were under construction and have subsequently
been completed. The Companys co-chairman, Mr. Shah, has a 25% ownership
interest in the entity that owns the two buildings. The leases have an
aggregate monthly rental totaling approximately $115, plus common area costs
for seven years. On one building totaling 23 square feet, the Company sublet
one half of the building on terms and conditions matching the underlying lease.
The sublease is with a related party company owned by our
co-chairman, Mr. Winkler. The sub-lessee is currently delinquent on its rent payments to the
Company. No payments have been received and the Company has no
information as to when payments may be received. The Company is in negotiations with the landlord regarding being
released from obligations under the lease for the second building totaling 40
square feet. The Company intends to release the sub-tenant from
future obligations under the sublease and occupy
the 23 square foot building. During the year ended
December 31, 2001, the Company accrued
$2,171 as
an estimate for anticipated costs relative to the disposition of the
40 square
foot building net of anticipated offsetting sublease income. The
amount accrued but unpaid at March 31, 2002, is classified as
accounts payable in the amount of $225, and remaining accrued rent
obligation was $1,864.

(7) CONCENTRATION OF RISK AND SIGNIFICANT CUSTOMERS

Financial instruments that potentially subject the Company to
concentration of credit risk are trade receivables. Credit risk on trade
receivables is limited as a result of the Companys customer base. As of
December 31, 2001 and March 31, 2002, accounts receivable included $3,498 and
$842, respectively, due from the U.S. Government and related agencies. Sales to
federal government agencies represented 55% and 33% of the Companys revenues
for the three months ended March 31, 2001 and 2002, respectively.

The Company had sales to one customer that represented 11% of the total
revenues for the three months ended March 31, 2001. The Company had sales to
one customer, which represented 21% of total revenues
for the three months ended March 31, 2002. No other customers accounted for
more than 10% of total revenues during the three months ended March 31, 2001
and March 31, 2002. Trade accounts receivable totaled $103 and
$232 from these
major customers as of December 31, 2001 and March 31, 2002 respectively.

At March 31, 2002, the Companys trading securities consisted of Class A
common stock of Wave (Stock), which was acquired in the
Acquisition. The Stock is traded on The Nasdaq National Market, and the value of the Stock is
subject to changes in the daily market prices. In accordance with its policy,
the Company adjusts the carrying value of the Stock at the end of each
reporting period.

(8) COMMITMENTS

SSP Gaming, LLC

In January 2002 the
Company formed a wholly owned subsidiary now known as SSP Gaming, LLC, a Nevada limited liability
company (SSP Gaming). The entity was formed with the intention of having it
conduct all business and any required financing activities on behalf of the
Company relative to the gaming industry. Also, in January
2002,

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SSP Gaming and the Venetian Hotel based in Las Vegas, Nevada, (Venetian)
executed an agreement regarding the formation of a joint venture for the
development and conduct of on-line gaming portal(s) (Joint Venture) in venues
where such activity complies with all regulatory requirements.

While SSP Gaming and the Venetian made initial estimates of development costs,
operating costs and timing, the agreement provides for the parties to work
together to refine and finalize the initial estimates. The Joint Venture was
revised in May 2002 and contains a revised estimate by the parties indicating
that the development and start-up costs will not exceed $3,000. The Venetian
has expressed the desire to market its current product offering and the on-line
gaming venture through a separate hospitality program. As currently
contemplated, the hospitality program will be developed under separate contract
by the Company and build upon current Venetian processes and customer
interfaces. The deployed hospitality program will then be used as a platform to
launch into on-line gaming capabilities in order to help absorb device costs
and lower customer acquisition costs.

The Joint Venture creates no legal liability for the Company to provide
financing or working capital. The Company intends to offer outside investors a
financing instrument that will reduce the Companys ownership in SSP Gaming to
less than 100%. The amount of the financing is not currently known, but the
Company intends that SSP Gaming will be a self-financing entity, and that
financial obligations will not extend to the Company.

(9) LOSS PER SHARE

The computation of diluted net loss per share for the three months ended
March 31, 2001 and 2002 excluded the dilutive effect of approximately 909 and
1,861, respectively, of incremental common shares attributable to the exercise of
outstanding common stock options and warrants as a result of the antidilutive
effect. In addition, computation for the three months ended
March 31, 2002, also excluded the dilutive effect of
approximately 694 incremental common shares attributable the
potential conversion of the notes.

(10) STOCK OPTIONS

During the quarter
ended March 31, 2002, the Company granted 25 options.

(11) CONTINGENCIES

As the Company provides engineering and other services to various
government agencies, it is subject to retrospective audits, which may result in
adjustments to amounts recognized as revenues, and the Company may be subject
to investigation by governmental entities. Failure to comply with the terms of
any government contracts could result in civil and criminal fines and
penalties, as well as suspension from future government contracts. The Company
is not aware of any adjustments, fines or penalties, which could have
an adverse effect on its financial position or results of operations.

The Company has cost
reimbursable type contracts with the federal
government. Consequently, the Company is reimbursed based upon the direct
expenses attributable to the contract, plus a percentage based upon overhead,
material handling and general administrative expenses. The overhead, material
handling, and general administrative rates are estimates. Accordingly, if the
actual rates as determined by the Defense Contract Audit Agency are below the
Companys estimates, a refund for the difference would be due to
the federal
government. It is managements opinion that no material liability will result
from any contract audits.

The Company is
involved from time to time in various litigation that arises
in the ordinary course of business. The Company does not believe there is any
current litigation that will have a material impact on the Companys results of
operations, financial condition or liquidity.

In April 2002, there was a lawsuit filed against us by Dell Marketing, LLC
pertaining to overdue amounts for computer products purchased for resale
through Pulsar. The suit asserted a claim in the amount of approximately
$322,000. Subsequently the past due invoices were satisfied in full and
the parties have executed settlement papers that have been submitted
to the court.

The Company currently
holds multiple contracts with the federal
government. In particular, three of these contracts permit the Company to
provide goods and services to various federal government agencies. Although
these contracts are currently up for renewal, it is possible they may not be
renewed or may be cancelled by the federal government due to the Companys
inability to perform as required under the contracts. The Company is currently in negotiations with the various government
contracting agencies to initiate and implement the corrective measures
necessary to insure the uninterrupted continuity of the contracts. If the contracts are not renewed or if they are cancelled, then a significant
portion of the Companys revenues will be lost, which would have
an adverse impact on the Companys financial condition, results of operations and
liquidity.

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As of March 31, 2002, accounts payable totaled $7,780. Of that amount,
$5,879 are aged at least 90 days. Certain vendors have threatened collection action. Unless payment is made or
satisfactory payment plans agreed to, it is likely that the remainder of the
vendors will eventually initiate legal actions to collect the amounts owed to
them. Currently, the Company intends to satisfy its vendor obligations
through a combination of payment negotiations, which include extending the
terms over time, partial payments of the obligations due as payment in full and
converting obligations to long term notes payable.

(12) Subsequent Events

Secured Convertible Promissory Notes

On April 16, 2002, the Company completed a private financing of $5,000 in the
form of $4,000 in 10% secured convertible promissory notes, $653 in unsecured
non-convertible promissory notes ($153 held by co-chairman Kris Shah and $500
held by co-chairman Marvin Winkler) and the pre-payment of a $500 note due from
Kris Shah, less a discount of $153 (see note 6). The discount was based upon a
present value using the rate of 20% for early payment and will be charged
against earnings in the second quarter of 2002. In connection with the issuance
of the secured convertible promissory notes the Company incurred approximately
$390 of issuance costs, which primarily consisted of investment banker fees,
legal and other professional fees. All promissory notes mature December 31,
2005; bear interest at a rate of 10% per annum, which will be paid quarterly in
cash, or at the Companys discretion, in common shares based upon the trailing
thirty (30) day average prior to the interest due date; and the
$4,000 secured convertible promissory notes, in whole or in part, are convertible at the
option of the holder into an aggregate of approximately 4,000 shares of the
Companys common stock at any time prior to maturity, at a conversion price of
$1.00 per share, subject to adjustment under certain conditions; and the
secured convertible promissory notes have detachable warrants exercisable for three (3)
years to purchase up to an additional 2,400 shares at $1.30 per share. In conjunction with the April 16 closing of the 10% secured convertible
promissory notes, $1,750 of principal and $46 of accrued interest of the Notes were exchanged for the 10% secured convertible
promissory notes and detachable warrants to purchase 1,078 shares at $1.30 per share. The secured convertible
promissory notes automatically convert prior to
maturity if the Companys common shares trade at or above an average price of
$3.00 per share with average volume of
100,000 shares per day for twenty (20) consecutive trading days. The Company is
subject to restrictive covenants related to the secured convertible
and unsecured non-convertible promissory notes that prevents the Company from pledging
intellectual property as collateral.

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

FORWARD-LOOKING STATEMENTS

This report contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended and Section 21E of the
Securities Exchange Act of 1934, as amended. These statements are based on our
current expectations, estimates and projections about our industry,
managements beliefs and certain assumptions we have made. Words such as
anticipates, expects, intend, plans, believes, may, will, or
similar expressions are intended to identify forward-looking statements. In
addition, any statements that refer to expectations, projections, forecasts or
other predictions regarding future events or circumstances, including any
underlying assumptions, are forward-looking statements. These statements may
include, but are not limited to, statements concerning projected revenues,
expenses and income or loss, the need for additional capital, acceptance of our
products, growth of the Internet, our ability to realize the anticipated
benefits of the Acquisition, our ability to identify and consummate
acquisitions and integrate these operations successfully, our ability to
integrate previously acquired businesses successfully, the status of evolving
technologies and their growth potential, our production capacity, and the
outcome of pending and threatened litigation. These statements are not
guarantees or assurances of future performance and are subject to various
risks, uncertainties, and assumptions that are difficult to predict. Therefore,
our actual results could differ materially and adversely from those expressed
in any forward-looking statements. The section entitled Risk Factors set
forth in this Form 10-Q and similar sections in our other filings with the
Securities and Exchange Commission, (SEC), discuss some of the important risk
factors that may affect our business, results of operations and financial
condition. You should carefully consider those risks, in addition to the other
information in this report and in our other SEC filings, before deciding to buy
or sell our common stock. We undertake no obligation to revise or update
publicly any forward-looking statements for any reason.

The information contained in this report is not a complete description of
our business or the risks associated with an investment in our common stock.
You should carefully review and consider the various disclosures made by us in
this report and in our materials filed with the SEC that discuss our business
in greater detail and that also disclose various risks, uncertainties and other
factors that may affect our business, results of operations or financial
condition.

GENERAL

We provide physical access and electronic security solutions and services
for protecting, distributing and monetizing digital content via the Internet
and Internet protocol based networks. Our primary technology offerings use
public key infrastructure (PKI), which is the standard technology for
securing Internet-based commerce and communications. We also provide real-time solutions for electronic
commerce and communications. By licensing and acquiring best of breed
technologies and combining them with our own leading-edge technologies, SSP is
developing the SSP Solution Suite. This suite provides security from the Core
to the Edge of the Internet, across any digital platform. By moving the
transaction location from the Internet website (Core), to the customers access
device (Edge), SSP has returned control of security to the customer.

By offering the SSP Solution Suite as well as additional stand-alone
products and services, we provide security products and services. We are
uniquely positioned to deliver a complete range of highly customizable data
security solutions across a broad range of industries. It is our intent to
become the Trusted Symbol of the Digital Economy.

On August 24, 2001, pursuant to an Agreement and Plan of Reorganization
dated July 3, 2001 with BIZ, we completed the Acquisition whereby BIZ became
our wholly-owned subsidiary. BIZ was a development stage enterprise devoting
substantially all of its efforts to develop, design, and market security
solutions for the financial, government, healthcare, education, and
entertainment industries. Concurrent with the Acquisition, we changed our name from
Litronic Inc. to SSP Solutions, Inc. SSP stands for Secure Service Provider. We have combined the businesses of
Litronic and BIZ into a single operating unit under the name SSP Solutions,
Inc. The combined company will continue to focus on a complete range of
solutions for physical access, electronic commerce, and communications, from
the Core to the Edge.

Our wholly-owned subsidiary, Pulsar,
operates independently as a network solutions company specializing in solutions
requiring the deployment of large-scale networks and secure PCs. Capitalizing
on 18 years of government distribution experience, Pulsar offers unique
competitive advantages by selling secure computers using elements of SSPs
products. Given increased public awareness and the increasing demand for
security in the government sector, we intend to add products to Pulsar
sales that contain our security offerings, which will raise the
average selling price
of those products sold by Pulsar. This strategy will decrease Pulsar
sales volume.

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\

RESULTS OF OPERATIONS

The following table sets forth the percentage of total revenues
represented by selected items from the unaudited Condensed Consolidated
Statements of Operations. This table should be read in conjunction with the
Condensed Consolidated Financial Statements included elsewhere herein.

|                                    |  |                    |       |           |  |  |        |   
|----------------------------------- |  | ------------------ | ----- | --------- |  |  | ------ | --
|                                    |  | PERCENTAGE OF     
|                                    |  | TOTAL REVENUES    
|                                    |  |                   
|                                    |  | THREE MONTHS ENDED
|                                    |  |                   
|                                    |  | MARCH 31,          |       | MARCH 31,
|                                    |  | 2001               |       | 2002     
|                                    |  |                    |       |          
|Revenues:                           |  |                    |       |           |  |  |        |   
|Product                             |  |                    | 92.5  | %         |  |  | 68.9   | % 
|License and service                 |  |                    | 7.5   |           |  |  | 31.1   |   
|                                    |  |                    |       |           |  |  |        |   
|Total revenues                      |  |                    | 100.0 |           |  |  | 100.0  |   
|                                    |  |                    |       |           |  |  |        |   
|Costs and expenses:                 |  |                    |       |           |  |  |        |   
|Cost
of salesproduct               |  |                    | 68.5  |           |  |  | 41.8   |   
|Cost
of saleslicense and service   |  |                    | 3.0   |           |  |  | 13.4   |   
|Selling, general and administrative |  |                    | 39.6  |           |  |  | 109.9  |   
|Research and development            |  |                    | 41.1  |           |  |  | 118.0  |   
|Amortization of intangibles         |  |                    | 0.5   |           |  |  | 1.1    |   
|                                    |  |                    |       |           |  |  |        |   
|Operating loss                      |  |                    | (52.7 | )         |  |  | (184.2 | ) 
|Other expense, net                  |  |                    | 0.3   |           |  |  | 6.6    |   
|                                    |  |                    |       |           |  |  |        |   
|Loss before income taxes            |  |                    | (53.0 | )         |  |  | (190.8 | ) 
|Provision for income taxes          |  |                    | 0.0   |           |  |  | 0.1    |   
|                                    |  |                    |       |           |  |  |        |   
|Net loss                            |  |                    | (53.0 | )%        |  |  | (190.9 | )%
|                                    |  |                    |       |           |  |  |        |   

RESULTS OF OPERATIONS  COMPARISON OF THE THREE MONTHS ENDED MARCH 31,
2001 AND 2002

TOTAL REVENUES. Total revenues decreased 53% from $4.5 million during the
three months ended March 31, 2001 to $2.1 million during the three months ended
March 31, 2002. The change was primarily attributable to a decrease in product
revenues of $2.1 million related to network deployment products, a decrease in
product revenues of $545,000 related to data security products and an increase
in license and service revenue of $322,000.

During the three months ended March 31, 2001, we derived 11% of our
revenues from sales to Gradkell Computers, Inc. During the three months ended
March 31, 2002, we derived 21% of our revenues from sales to General Dynamics. Sales to government agencies accounted for approximately 55%
and 34%
of our sales during the three months ended March 31, 2001 and 2002,
respectively.

PRODUCT REVENUE. Product revenue decreased $2.7 million or 65% from $4.1
million during the three months ended March 31, 2001 to $1.5 million during the
three months ended March 31, 2002. The decrease was primarily attributable to a
$2.1 million decrease in revenues related to network deployment products and a
decrease of $545,000 related to data security products. The decrease in
revenues related to network deployment products was primarily attributable to
our inability to accept and fulfill a large number of customer orders due to
reduced accounts receivable financing availability and our primary vendors
were unwilling to sell additional product to us on open account because of
significant past due amounts for goods we had previously purchased from them.
The decrease in revenues related to data security products was primarily
attributable to $495,000 in revenues recorded in the first quarter of 2001
related to shipments not made prior to December 31, 2000 due to a
parts delay for one our security
reader products.

LICENSE AND SERVICE REVENUE. License and service revenue increased 96%
from $334,000 during the three months ended March 31, 2001 to $656,000 during
the three months ended March 31, 2002. The increase was primarily attributable
to revenues related to a sub-contract with General Dynamics that
began in the fourth quarter of 2001. This initial
sub-contract runs through the fourth quarter of 2002.

PRODUCT GROSS MARGIN. Product gross margins increased as a percentage of
net product revenue from 26% during the three months ended March 31, 2001 to
39% during the three months ended March 31, 2002. The increase was primarily
attributable to the decrease in revenues related to low margin network
deployment products.

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LICENSE AND SERVICE GROSS MARGIN. License and service gross margin
decreased as a percentage of license and service revenue from 60% during the
three months ended March 31, 2001 to 57% during the three months ended March
31, 2002. This decrease was primarily attributable to higher costs associated
with the sub-contract with General Dynamics.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative (S,G&A) expenses increased 31% from $1.8 million during the
three months ended March 31, 2001 to $2.3 million during the three months ended
March 31, 2002. The increase was primarily attributable to the additional
ongoing expenses associated with the Acquisition. As a percentage of
revenue, S,G&A expenses increased from 40% during the three months ended March
31, 2001 to 110% during the three months ended March 31, 2002. The percentage
increase was primarily attributable to an increase in S,G&A expenses due to the
Acquisition combined with a decrease in total revenues.

RESEARCH AND DEVELOPMENT EXPENSES. Research and development (R&D)
expenses increased 35% from $1.8 million during the three months ended March
31, 2001 to $2.5 million during the three months ended March 31, 2002. The
increase was primarily attributable to the Wave development agreement
that we assumed in conjunction with the Acquisition. As a percentage of revenue,
R&D expenses increased from 41% during the three months ended March 31, 2001 to
118% during the three months ended March 31, 2002. The percentage increase was
primarily attributable to an increase in R&D spending combined with a decrease
in total revenue.

AMORTIZATION OF INTANGIBLES. Amortization of intangibles was $23,000 for the three-month periods ended March 31, 2001 and 2002. The amortization in
both periods was related to the remaining intangible assets recorded in
connection with the acquisition of Pulsar in June 1999.
Intangibles related to the Acquisition were written off at December
31, 2001.

OTHER EXPENSE, NET. Other expense, net increased 775% from $16,000
during the three months ended March 31, 2001 to $140,000 during the three
months ended March 31, 2002. The change was primarily attributable to a
decrease in interest income of $40,000 and an increase in interest expense of
$71,000. The decrease in interest income was primarily the result of lower cash
balances in interest bearing accounts and the increase in interest expense was
primarily the result of increased borrowings.

INCOME TAXES. Tax expense for the three months ended March 31, 2001 was
zero as compared to $3,000 for the three months ended March 31, 2002. The tax
expense for the three months ended March 31, 2002, related to minimum franchise
taxes for the State of California.

Critical Accounting Policies

Managements Discussion and Analysis of Financial Condition and Results of
Operations discusses our consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States. The preparation of these financial statements requires us to
make estimates and assumptions that affect the reported amounts of assets and
liabilities, revenues and expenses, and related disclosure of contingent assets
and liabilities at the date of our financial statements.

We based our estimates and judgments on historical experience and on
various other factors that we believe to be reasonable under the circumstances,
the results of which form the basis for making judgments about the carrying
values of assets and liabilities that are not readily apparent from other
sources. Actual results may differ from these estimates under different
assumptions or conditions.

Critical accounting policies are defined as those that are reflective of
significant judgments and uncertainties, and potentially result in materially
different results under different assumptions and conditions. We believe the
following critical accounting policies, among others, affect significant
judgments and estimates used in the preparation of our consolidated financial
statements. For a detailed discussion of the application of these and other
accounting policies, see notes to the consolidated financial statements.



| |  |  | Revenue Recognition.We recognize revenue from product sales,
including hardware (with embedded software) and software, upon shipment
unless contract terms call for a later date. Revenue from network
deployment products is recognized upon transfer of title, generally upon
delivery. We record an allowance to cover estimated warranty costs in
cost of sales. Customers do not have the right of return except for
product defects, and product sales are not contingent upon customer
testing, approval and/or acceptance. The costs of providing post
contract customer support are not significant. Revenue under service and
development contracts is recorded as services are rendered. Revenue from
time and material, network deployment service contracts is recognized on
the basis of man-hours incurred plus other reimbursable contract costs
incurred during the period.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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| |  |  | Allowance for Doubtful Accounts.We maintain an allowance for
doubtful accounts for estimated losses resulting from the inability of
our customers to make payments for services. We analyze accounts
receivable, customer credit-worthiness, current economic trends and
changes in our customer payment terms when evaluating the adequacy of
the allowance for doubtful accounts. If the financial condition of our
customers deteriorates, resulting in an impairment of their ability to
make payments, additional allowances may be required.                                                                                                                                                                                                                                                                
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Valuation of Goodwill and Other Intangible Assets. We assess the
impairment of goodwill and other intangible assets whenever events or
changes in circumstances indicate that the carrying value may not be
recoverable. Factors we consider important which could trigger an
impairment review include significant underperformance relative to
expected historical or projected future operating results, significant
changes in the manner of our use of the acquired assets or the strategy
for our overall business, and significant negative industry or economic
trends. The net carrying value of goodwill and other intangible assets
not recoverable is reduced to fair value. In accordance with
Statements 141 and 142, goodwill and other intangible assets will be
reviewed for impairment annually.

During the fourth quarter of 2001, we determined that certain identifiable
technology and developed technology acquired in connection with the Acquisition
were no longer going to be pursued. Additionally, we anticipate a delay or
indefinite reduction in projected revenues from the Acquisition. Accordingly,
we performed an impairment analysis.

As the result of that
analysis, we recorded an impairment charge of $36.3
million in the fourth quarter of 2001 related to $2.6 million in identifiable
technology, $5.8 million in developed technology and $27.8 million in goodwill
acquired in connection with the Acquisition. After this impairment charge,
goodwill is the only remaining intangible asset.

Changes in assumptions and estimates included within the analysis could
result in significantly different results than those identified above and those
recorded in the consolidated financial statements.

LIQUIDITY AND CAPITAL RESOURCES

At March 31, 2002, we had deficit working capital of $9.6 million and we
incurred a net loss of $4.0 million for the three months then ended. We expect to
continue to incur substantial additional losses in 2002. Given the March 31,
2002 cash balance and the projected operating cash requirements, we anticipate
that existing capital resources will not be adequate to satisfy cash flow
requirements through December 31, 2002. We will require additional funding. Our
cash flow estimates are based upon achieving certain levels of sales,
reductions in operating expenses and liquidity available under the accounts
receivable financing. Should sales be less than forecast, expenses be higher
than forecast or the liquidity not be available under the accounts receivable
financing or through additional financings of debt and/or equity, we will not
have adequate resources to fund our operations. During the past quarter, we
incurred defaults under both our accounts receivable financing and the
long-term convertible notes. We obtained waivers for our accounts receivable
financing through March 31, 2002 and for the long-term convertible notes
through January 1, 2003. However, there is no guarantee the lenders will
continue to waive defaults in the future, should they occur, and the lenders
may declare amounts owed by us due and payable. Subsequent to March 31, 2002,
we remained in default under the accounts receivable financing and has not
obtained a waiver of such default. We do not expect future fixed obligations
to be paid from operations and intend to satisfy fixed obligations from
additional financings, use of the accounts receivable financing, extending
vendor payments, selling investments and issuing stock as payment on
obligations.

Cash used in
operations increased by $2.4 million during the three months
ended March 31, 2002 when compared to the three months ended March 31, 2001.
Cash used in operations for the three months ended March 31, 2002 was $1.8
million compared to cash provided by operations during the three months ended
March 31, 2001 of $656,000. The increase in cash used in operations was
primarily attributable to an increase of the net loss and a larger reduction of
accounts payable. The increased uses of cash were partially offset by larger
reductions of accounts receivable and prepaid expenses and a larger increase in
accrued liabilities. At March 31, 2002 the balance in accounts receivable was
$1.2 million and the balance in accounts payable was $7.8 million, of which
approximately $5.9 million has aged 90 days or more. As a result, significant
reductions in accounts receivable will not be available to provide us with cash
to meet our future cash needs and we will need to continue using cash to reduce
accounts payable.

Cash provided by investing activities increased by $953,000 during the
three months ended March 31, 2002 when compared to the three months ended March
31, 2001. Cash provided by investing activities for the three months ended
March 31, 2002 was $915,000 compared to cash used in investing activities
during the three months ended March 31, 2001 of $38,000. The increase in cash
provided by investing activities was primarily attributable to proceeds from the
sale of trading securities of $917,000. The market value of trading securities
held at March 31, 2002 is approximately $442,000. We anticipate
that these
trading securities will all be sold during the three months ending June 30,
2002 and will no longer be available to provide us with additional cash to meet
our future cash needs.

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Cash used in financing activities increased by $811,000 during the three
months ended March 31, 2002 when compared to the three months ended March 31,
2001. Cash used in financing activities for the three months ended March 31,
2002 was $1.7 million compared to cash used in financing activities during the
three months ended March 31, 2001 of $853,000. The increase in cash used in
financing activities was primarily attributable to the repayment of principal
on a note payable to a related party and an increase in the reduction of net
borrowings.

We have experienced net losses and negative cash flows for the last
several years, and as of March 31, 2002, had an accumulated deficit of
$103.6 million. We have financed our past operations principally through the
issuance of common stock in a public offering and the issuance of
convertible debt. The net proceeds from our public
offering were approximately $35.3 million and the proceeds from
the issuance of convertible debt were $2.5 million.

On July 31, 2001, Chase Manhattan Bank (Chase) advanced to our
co-chairman, Mr. Winkler, $1.0 million which Mr. Winkler advanced to BIZ for
the re-purchase of preferred stock held by an investor in BIZ. Mr. Winkler
executed a $1.0 million demand note with Chase and BIZ executed a $1.0 million
demand note due September 15, 2001 with J.A.W. Financial, L.P. (JAW), an
entity controlled by Mr. Winkler. The demand note contained an interest charge
of prime plus 1% through the maturity date and prime plus 3% after the maturity
date. On October 11, 2001, we made a principal payment of $30,000, paid accrued
interest, and executed a new promissory note to JAW for $970,000. The terms of
the promissory note call for interest of prime plus 3% payable monthly,
together with five monthly payments of principal in the amount of $160,000 and
one final payment on April 15, 2002 in the amount of $170,000. The promissory
note provided Chase a security interest in the shares in Wave owned by us and, subject to Chases loan security guidelines,
including the rights to proceeds from any sales of those shares. The loan was
paid in full on March 8, 2002, ahead of the scheduled maturity.

During October and November 2001 we and our wholly owned subsidiary,
Pulsar, entered into financing agreements with WFBC, which provide for the factoring of accounts receivable. The
agreements contain no limit on the dollar volume of receivable financing, but
does provide for WFBCs approval of credit limits for non-government customers.
The discount rate charged is 1.25% of the gross receivable, which may be
increased by .0625% per day for accounts that do not pay within 30 days of the
receivable purchase. Terms call for WFBC to advance
85% of the gross receivable at the time of purchase, with the balance remitted after collection of the
invoice less the discount and any other charges. We were in violation of the
covenant to pay debts and obligations as they come due and delays in
misdirected payments. We requested a waiver of these defaults and received a
waiver through March 31, 2002 and January 31, 2002, respectively. We are in
default and anticipate being in default of this provision in the future unless
we raise sufficient working capital. The balances due WFBC are guaranteed by
Mr. Shah and Mr. Winkler, our co-chairmen and co-chief executive officers.

In December 2001, our co-chairmen each purchased a $375,000 Note in a total private placement of $2.5 million
of such Notes. The Notes were intended to convert into a subsequent
financing, which is described below. In connection with the issuance of the Notes we incurred approximately $25,000 of issuance
costs, which primarily consisted of legal and other professional fees, and
which are to be paid upon completion of the subsequent financing described
below. All Notes mature December 17, 2004; bear
interest at a rate of 8% per annum, which will be paid quarterly in cash or
rolled into the subsequent financing described below; upon a financing of $5.0
million or more in equity or convertible securities in a private placement to
institutional investors, the Notes are convertible
into such financing on the same terms and conditions; at the election of the
holders, Notes are convertible into common

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stock at a conversion price of $3.60 per share, subject to adjustment
under certain conditions. In April 2002, the Notes of
our co-chairmen were amended to provide that their Notes can only be converted
into a subsequent financing if the financing is for $5.0 million or more in equity or convertible securities in
a private placement to institutional investors at a conversion price that
represents a 25% or less discount to the trading price of the Companys stock
and extended their term to December 31, 2005. After December 11, 2003, we may
call for mandatory conversion of the notes prior to
maturity if the Companys common shares trade at or above an average price of
300% of the conversion price with average volume
of 200,000 shares per day for 20 consecutive trading days. As of March 31,
2002, we were in violation of certain provisions of the Notes pertaining to: (i) payment of debts and obligations as they
come due; (ii) violation of provisions within the WFBC agreements; and (iii)
payment of interest on these notes due March 31, 2002. We requested and
received a waiver for these violations through January 1, 2003.
(See notes to
consolidated financial statements). On April 16, 2002, we closed a financing whereby, with
the exception of Mr. Winkler and Mr. Shah, the noteholders converted their Notes into 10% secured convertible promissory notes
convertible at $1.00 per share, with detachable warrants. We issued a total of
3,477,666 warrants in the offering.

Over the past three years, we have spent substantial sums on research and
development (R&D) activities. During that time period, we incurred
substantial losses from continuing operations. As a result of these and other
changes, we currently have a deficit in working capital and an accumulated
deficit. While we believe the R&D expenditures created significant future
revenue producing opportunities, some of the related products are just entering
production. We are currently involved in sales pursuits relative to these
products that, if successful, will generate significant revenues. However,
unless we receive orders for these new products and receive significant
financing, we can no longer support the current level of research and
development activity. While we have reduced our staffing levels, if sales fail
to materialize, we will need to further reduce expenses through additional
reductions in staff.

The combination of reduced accounts receivable financing availability and the primary vendors
of our network deployment business being unwilling to sell additional product to us on open account because of
significant past due amounts caused a substantial reduction in the sales and related cost of sales
during the year ended December 31, 2001, as well as the quarter ended March 31,  2002, which in turn reduced cashflow. The reduced cashflow impaired
our ability to meet vendor commitments as they became due.

In October 2000, we signed a development agreement with Wave for the
integration of EMBASSY based systems with set-top box master reference designs
of Broadcom Corporation. Wave owns approximately 15% of our issued and
outstanding common stock. The development agreement was amended in May 2001.
Under this agreement, as amended, we are required to pay Wave $278,000 per
month beginning June 1, 2001 through December 1, 2002 for work to be performed,
for a total of $5.0 million. Should we not make the required monthly payments,
Wave may request payment in the form of common stock. As of March 31, 2002, we
owed $2.2 million to Wave for which Wave has tendered monthly notices of
default in the amount of $1.7 million. Under the terms of the agreement, if the
default notices are not cured within 30 days of written notice, the unpaid
installment converts the obligation for delinquent installments from a cash
obligation into a stock acquisition right (SAR). A SAR gives Wave the right
to acquire a number of fully paid, nonassessable shares of our common stock
determined by dividing the fair market value (the average closing price of our
common stock for the ten trading-day period prior to the date of exercise) of a
share of our common stock on the date of exercise of the SAR into the aggregate
portion of the installment payments declared to be in default and such default
was not cured. To date, Wave has made no request for issuance of stock. The
$2.2 million obligation is carried as an accrued liability as of March 31, 2002.
Further, to conserve cash we do not intend to pay in cash the monthly billings
due under the agreement. In January 2002, we gave written notice to suspend the
work under the agreement along with the related billings. The suspension does
not decrease the obligation to purchase development services in the future. We
have reserved 1,150,000 shares of common stock for issuance under the
agreement. In addition, should we not purchase $5.0 million of goods or
services from Wave by June 30, 2003, our exclusivity related to certain
customers will, at Waves option, become non-exclusive.

In November 2000, we executed an Alliance Agreement with EDS for the
marketing of our products to EDS customers (Alliance). The Alliance calls for
a joint working relationship between the two companies, is non-exclusive and
has a term of ten years. In February 2001, we and EDS executed an
engagement letter for EDS to provide certain information technology and
consulting services for both our organizational structure and for a specific
customer project. Under these engagements, EDS billed $1.2 million, of which
$458,000 remained unpaid as of December 31, 2001. On August 27, 2001, EDS and
we executed a letter of intent and temporary working agreement whereby EDS
supplied software and hardware for re-sale to Pulsar customers (Pulsar
Agreement). Under the Pulsar Agreement, as of December 31, 2001, $1.5 million
remained outstanding and unpaid to EDS for purchases of hardware and software.
We and EDS executed a Master Services Agreement dated as of November 14, 2001
(MSA) whereby beginning December 1, 2001 and ending December 31, 2006, we and
EDS established a strategic teaming relationship to implement, sell and deliver
a set of secure transaction processing offerings based upon a Trust Assurance Network (TAN). The MSA task
order 001 (Task Order)requires that we pay a monthly fee of $44,000 for account,
test and lab management services beginning January 1, 2002. The

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obligations for these services can be terminated beginning January 1, 2003
by giving 90 days prior written notice and payment of $400,000, or
beginning January 1, 2004 by giving 90 days prior written notice and
payment of $200,000. Further, the Task Order provides for EDS to provide TAN
hosting and implementation in exchange for an implementation fee of $45,000
payable October 1, 2002. Once installation of the production environment TAN is
complete, EDS agrees to host the TAN in exchange for a monthly service fee of
$59,000 for 36 months and $60,000 per month for the remaining
months of the MSA. We may delay implementation of the TAN by paying a fee of
$200,000 prior to January 31, 2003. We may terminate the Task Order without
cause by paying $400,000 after January 1, 2004 and providing 90 days
prior written notice. In the event we are unable to obtain intellectual
property rights or licensing consents that may be required, if any, prior to
January 1, 2003, and the parties determine there are no software alternatives,
then after giving 90 days prior written notice we may terminate the
Task Order by paying $450,000.

We arranged for the lease of two buildings approximating 63,000 square
feet that were under construction. Our co-chairman, Mr. Shah, has a 25%
ownership interest in the entity that owns the two buildings. The leases have
an aggregate monthly rental totaling approximately $115,000, plus common area
costs for seven years. On one building totaling approximately 23,000 square
feet, we sublet one half of the building on terms and conditions matching the
underlying lease. The sublease is with a related party company owned by our
co-chairman, Mr. Winkler. While that company made a lease deposit, it has not
made any monthly rent payment and accordingly is currently delinquent on its
rent payments to us. We are in negotiations with the landlord regarding being
released from obligations under the lease for the second building totaling
40,000 square feet. We intend to release the sub-tenant from future
obligations under the sublease and occupy the 23,000
square foot building. During the year ended December 31, 2001, we accrued $2.2 million as an estimate for anticipated costs
relative to the disposition of the 40,000 square foot building net of
anticipated offsetting sublease income, which may be partially
recovered. The amount accrued but unpaid at March 31, 2002, is
classified as accounts payable in the amount of $225, and accrued
rent of $1,864.

Our significant fixed commitments with respect to leases and inventory
purchases as of May 17, 2002 are as follows:

|                                          |  |                                          |            |      |  |             |           |             |  |              |           |  |  |   |            |  |  |   |           | 
|----------------------------------------- |  | ---------------------------------------- | ---------- | ---- |  | ----------- | --------- | ----------- |  | ------------ | --------- |  |  | - | ---------- |  |  | - | --------- | 
|                                          |  | Payments for the Year Ended December 31,
|                                          |  |                                         
|                                          |  | TOTAL                                    |            | 2002 |  | 2003 & 2004 |           | 2005 & 2006 |  | 2007 & after
|                                          |  |                                          |            |      |  |             |           |             |  |             
|Contractual Obligations
Convertible Notes |  | $                                        | 7,654,680  |      |  | $           | 0         |             |  | $            | 455,790   |  |  | $ | 7,198,890  |  |  | $ | 0         | 
|Operating Leases                          |  |                                          | 12,013,760 |      |  |             | 1,725,410 |             |  |              | 3,786,370 |  |  |   | 3,696,410  |  |  |   | 2,805,570 | 
|Unconditional Purchase
Obligations        |  |                                          | 8,837,190  |      |  |             | 4,474,350 |             |  |              | 2,303,160 |  |  |   | 2,059,680  |  |  |   | 0         | 
|                                          |  |                                          |            |      |  |             |           |             |  |              |           |  |  |   |            |  |  |   |           | 
|Total Contractual Cash
Obligations        |  | $                                        | 28,505,630 |      |  | $           | 6,199,760 |             |  | $            | 6,545,320 |  |  | $ | 12,954,980 |  |  | $ | 2,805,570 | 
|                                          |  |                                          |            |      |  |             |           |             |  |              |           |  |  |   |            |  |  |   |           | 

With our deficit working capital position, we will not be able to meet
existing obligations as they become due. We will use receivables and
investments to generate liquidity and are in negotiations with vendors for
extended terms on current obligations. To reduce the working capital
deficiency, we raised $5.0 million through convertible notes, non-convertible
notes and pre-payment of an existing note, on April 16, 2002.

We currently have a need for a substantial amount of capital to meet our
liquidity requirements. The amount of capital that we will need in the future
will depend on many factors including, but not limited, to:



| |  |  | the ability to extend terms of payment to vendors;                                                                                                      
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | the market acceptance of products and services;                                                                                                         
|
| |  |  | the levels of promotion and advertising that will be required to
launch new products and services and attain a competitive position in
the market place;
|
| |  |  | research and development plans;                                                                                                                         
|
| |  |  | levels of inventory and accounts receivable;                                                                                                            
|
| |  |  | technological advances;                                                                                                                                 
|
| |  |  | competitors responses to our products and services;                                                                                                    

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| |  |  | relationships with partners, suppliers and customers;                     
| | - |  | --------------------------------------------------------------------------
|
| |  |  | projected capital expenditures;                                           
|
| |  |  | national and international economic
conditions;                           
|
| |  |  | defaults on financing that will impact the availability of borrowings; and
|
| |  |  | reductions in the valuation of
investment in trading securities.          

Our current financial condition is the result of several factors including the following:



| |  |  | Our operating results were below expectations.                                                                                                                                                                                                                      
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Sales of products through channels acquired in the Acquisition are taking longer than originally anticipated to develop.                                                                                                                                            
|
| |  |  | Market demand for our Xboard product (formerly known as CipherServer
product line) did not materialize as anticipated and therefore our sales
were below forecast.                                                                                                  
|
| |  |  | Reduced credit line availability affected the sales volume of our Pulsar subsidiary.                                                                                                                                                                                
|
| |  |  | Research and development expenses from the Acquisition increased our costs.                                                                                                                                                                                         
|
| |  |  | The events of September 11, 2001 affected the operations and delayed
the decisions of the U.S. government. This caused sales we had
anticipated to be substantially delayed. The events may also affect
potential investors and related terms of investment capital.

In addition to our current deficit working capital situation, current
operating plans show a shortfall of cash during 2002. We intend to mitigate our
position through one or more of the following:



| |  |  | Additional Equity Capital.We will seek additional equity capital, if
available. Equity capital will most likely be issued at a discount to
market, and require the issuance of warrants causing a dilution to
current shareholders. In addition, providers of new equity capital may
require additional concessions in order for them to provide needed
capital to us.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Additional Convertible Debt. Depending upon the market conditions, we
may issue an additional debt instrument. The types of instruments
available in the market would likely contain a provision for the
issuance of warrants and may also be convertible into equity. On April
16, 2002, we completed a
private placement of $5.0 million in the form of $4.0 million in 10%
secured convertible promissory notes in exchange for cash; $652,776 in
secured non-convertible promissory notes ($152,776 held by co-chairman
Mr. Shah and $500,000 held by co-chairman Mr. Winkler) and the
pre-payment of a $500,000 note due from Kris Shah, less a discount of
$152,776. The discount was based upon a present value using an annual
rate of 20% for early payment and will be charged against earnings
during the second quarter of 2002. In addition to the $5.0 million
private placement for new funds, we also exchanged $1.8 million in
existing debt for 10% secured convertible promissory
notes to replace such debt. In connection with the issuance of the
secured convertible promissory notes, we incurred approximately $390,000
of issuance costs, which primarily consisted of investment banker fees,
legal and other professional fees. These promissory notes mature
December 31, 2005; bear interest at a rate of 10% per annum, which will
be paid quarterly in cash or, at our discretion should we need to
conserve cash, in common shares based upon the trailing 30-day average
closing price of our common stock prior to the interest due date; and
approximately $5.8 million of convertible promissory notes are convertible in whole or
in part, at the option of the holder into an aggregate
of approximately 5,800,000 shares of our common stock at any time prior
to maturity, at a conversion price of $1.00 per share, subject to
adjustment under certain conditions; and the convertible promissory
notes have detachable warrants exercisable for three years to purchase
an aggregate of 3,477,666 shares of common stock at the initial exercise
price of $1.30 per share. The principal balances of the convertible
notes, and at our option, any accrued and unpaid interest, automatically
will convert into common stock prior to maturity if our common shares
trade at or above an average price of $3.00 per share with average volume of 100,000 shares per day for 20
consecutive trading days and the registration statement that we file to
cover the resale of the shares underlying the convertible promissory
notes and warrants is effective each day during the 20 trading day
period. We are not subject to

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| |   |  | restrictive covenants related to the secured convertible or non-convertible
promissory notes, other than not being allowed to pledge intellectual
property as collateral.                                                                                                                                                                                                                                                                        
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Off Balance Sheet Financing. Our operations are not relatively
capital intensive. However, should we need to add equipment or decide to
expand our facilities, we may use an operating lease transaction to
acquire the use of capital assets. An operating lease would not appear
on our balance sheet and would be charged as an expense as payments
accrue.                                                                                   
|
| |  |  | Financing of Receivables. We will finance receivables in conjunction
with the WFBC agreement to generate cash. In the past we incurred
defaults under the WFBC line for late payments to vendors, for which we
received waivers through range from January 31, 2002 through March 31,
2002. We are in default and anticipate defaults in the future, and we
may not receive the required waivers and may not have funds available
under the line.
|
| |  |  | Sale of Investments. We will sell investments to generate cash. The
market value of trading securities was $442,000 at March 31, 2002. Since that date, we have generated approximately $204,000
through the sales of securities.                                                                                                                                                                                                                
|
| |  |  | Negotiate with Vendors. We are negotiating with vendors regarding
payment of existing accounts payable over extended terms of 48 months
with no interest. We have reached a verbal agreement with one large
vendor and are working with remaining vendors. We previously executed
term out agreements with a number of vendors that must now be further
extended.                                                                                
|
| |  |  | Deferral of Cash Payments. We may defer cash payments through
suspension of development projects.                                                                                                                                                                                                                                                                                                                                                
|
| |  |  | Issuance of Stock as Payment for Existing and Future Obligations. We
anticipate paying the Wave accrued liabilities of $2.2 million as of
March 31, 2002 from future issuances of common stock to Wave.                                                                                                                                                                                                                                          
|
| |  |  | Issuance of Stock to Pay Interest.We may issue stock to pay interest on long term debt.                                                                                                                                                                                                                                                                                                                                                          
|
| |  |  | Reductions in Work Force. We may reduce our work force.                                                                                                                                                                                                                                                                                                                                                                                          

Should we not receive adequate financing, we could be forced to merge with
another company or cease operations.

While we have a history of selling products in the government markets, new
products just entering production after years of development have no sales
history. Additionally, we are entering commercial markets with our products and
are still developing acceptance of our offerings. Considerable uncertainty
currently exists with respect to the adequacy of current funds to support our
activities beyond December 31, 2002. This uncertainty will continue until a
positive cash flow from operations is achieved. Additionally, we are uncertain
as to the availability of financing from other sources to fund any cash
deficiencies.

In order to reduce this uncertainty, we continue to evaluate additional
financing options and may therefore elect to raise capital, from time to time,
through equity or debt financings in order to capitalize on business
opportunities and market conditions and to insure the continued marketing of
current product offerings together with development of new technology, products
and services. There can be no assurance that we can raise additional financing
in the future.

Based upon forecast
sales and expense levels, we currently anticipate that existing cash, cash equivalents, investments, term out arrangements with
vendors, the proceeds of a $5.0 million financing on April 16, 2002 and the current availability under our WFBC factoring agreements will not
be sufficient to satisfy our contemplated cash requirements for the next twelve
months. However, our forecast is based upon certain assumptions, which may
differ than actual future outcomes. We have incurred defaults under
our
financing agreements in the past. If we incur a default in the future under our
accounts receivable line of credit or other financing instruments, we may not
be able to draw funds, thereby affecting our ability to fund operations. At this
time we are currently in default and anticipate that we will continue to be in
default unless we are able to raise sufficient capital to pay debts and
obligations as they become due. Additionally, without a substantial increase in
sales or a reduction in expenses, we will continue to incur operating losses.
On April 16, 2002, we closed the
round of secured convertible promissory notes financing described above to
provide $5.0 million in additional working capital and are in discussions with
several sources regarding up to an additional $5.0 million on
the same or similar terms and conditions.

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RISK FACTORS

Risks Related to our Business

We have a history of losses and may incur future losses

We may not become profitable or significantly increase our revenue. We
incurred net losses of $41.4 million, $53.2 million and
$4.0 million for the years 2000, 2001 and the three months ended
March 31, 2002, respectively. To achieve profitability, we will need to generate and
sustain sufficient revenues while maintaining reasonable cost and expense
levels. We expect to continue to incur significant operating expenses primarily
to support research and development and expansion of our sales and marketing
efforts. These expenditures may not result in increased revenues or customer
growth. We do not know when or if we will become profitable. We may not be able
to sustain or increase profitability on a quarterly or annual basis.

Our stock price is extremely volatile

The trading price of our common stock is highly volatile as a result of
factors specific to us or applicable to our market and industry in general.
These factors, include:



| |  |  | variations in our annual or quarterly financial results or those of our competitors;                                                                                                 
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | company issued earnings announcements that vary from consensus analyst estimates;                                                                                                    
|
| |  |  | changes by financial research analysts in their recommendations or estimates of our earnings;                                                                                        
|
| |  |  | conditions in the economy in general or in the information technology service sector in particular;                                                                                  
|
| |  |  | announcements of technological innovations or new products or services by us or our competitors; and                                                                                 
|
| |  |  | unfavorable publicity or changes in applicable laws and regulations,
or their judicial or administrative interpretations, affecting us or the
information technology service sectors.

In addition, the stock market has recently been subject to extreme price
and volume fluctuations. This volatility has significantly affected the market
prices of securities issued by many companies for reasons unrelated to the
operating performance of these companies. In the past, following periods of
volatility in the market price of a companys securities, some companies have
been sued by their stockholders. If we were sued, it could result in
substantial costs and a diversion of managements attention and resources,
which could adversely affect our business.



| |  | We have not generated any sales to date of our SSP Solution Suite, which
makes it difficult to evaluate our current business performance and future
prospects
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------

To date, we have not had any sales of our SSP Solution Suite and have not
established a sales and marketing force to promote this product. Although we
have had some success selling our security solutions to government agencies, we
are just beginning to enter the complex and competitive commercial market for
digital commerce and communication security solutions. We believe that many
potential customers in our target markets are not fully aware of the need for
security products and services in the digital economy. Historically, only
enterprises having substantial resources developed or purchased security
solutions for Internet or other means of delivering digital content. Also,
there is a perception that security in delivering digital content is costly and
difficult to implement. Therefore, we will not succeed unless we can educate
our target markets about the need for security in delivering digital content
and convince potential customers of our ability to provide this security in a
cost-effective and easy-to-use manner.

Even if we convince our target markets about the importance of and need
for such security, we do not know if this will result in the sale of our
products. We may be unable to establish sales and marketing operations to
levels necessary for us to grow this portion of our business, especially if we
are unsuccessful at selling this product into vertical markets. We may not be
able to support the promotional programs required by selling simultaneously
into several markets. If we are unable to develop an efficient sales system, or
if our products or components do not achieve wide market acceptance, then our
operating results will suffer.

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Late payments may have damaged relationships with our vendors

Should we not be able to utilize our accounts receivable financing line,
we will not have adequate cash available to pay vendors. We have incurred
defaults on our line in the past, are currently in default and anticipate we
will continue to be in default on the line unless we are able to raise
sufficient capital to pay debts and obligations as they become due. Should our
financial source not waive the defaults, the financial source may not advance
additional funds. Slow and delinquent payments may cause vendors not to sell
products to us, or only with advance payment. Should this occur, we will not be
able to obtain products for resale or components for our products.



| |  | The average selling price of our products may decrease, which may reduce
gross margins
| |  | --------------------------------------------------------------------------------------

The average selling prices for our products may decline as a result of
competitive pricing pressures, promotional programs and customers who negotiate
price reductions in exchange for longer term purchase commitments. The pricing
of products depends on the specific features and functions of the products,
purchase volumes and the level of sales and service support required. We expect
competition to increase in the future. As we experience pricing pressure, we
anticipate that the average selling prices and gross margins for our products
will decrease over product life cycles. These same competitive pressures may
require us to write down the carrying value of inventory on hand, if any.



| |  | We derive a substantial portion of our revenue from a small number of
customers and, therefore, the loss of even one of these customers could
significantly and negatively impact our operating results
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

We depend on a limited number of customers for a substantial portion of
our revenue and many of our contracts with our significant customers are
short-term contracts. The non-renewal of any significant contract upon
expiration, or a substantial reduction in sales to any of our significant
customers, would adversely affect our business unless we were able to replace
the revenue we received from these customers. During the twelve month period
ended December 31, 2000, we derived 42% of our consolidated revenue from one
customer and during the twelve month period ended December 31, 2001, we derived
20% of our consolidated net revenue from one customer. During the
three months ended March 31, 2002, we derived 21% of our
consolidated net revenue from one customer.

Our auditors opinion could adversely affect our stock price

The independent auditors report for fiscal year 2001 indicated there is
substantial doubt about our ability to continue as a going concern. This may
adversely affect our stock price and prevent us from obtaining funding.



| |  | Our reliance on third party technologies for the continuing development of
the SSP Solution Suite products and our reliance on third parties for
manufacturing may delay product launch, impair our ability to develop and
deliver products or hurt our ability to compete in the market
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

We have licensed the rights to use a broad array of technology components
from third parties to develop the SSP Solution Suite and we face many risks
associated with our reliance on third parties as follows:



| |  |  | a third party may develop or enable
others to develop a solution to digital communication security issues
similar to the SSP Solution
Suite thereby eroding our market share; and                                                                                                     
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | dependence on the patent protection of third parties may not afford
us any control over the protection of the technologies we rely on, and,
thus, if the patent protection of any of these third parties were
compromised, our ability to compete in the market would also be
impaired.



| |  | Our inability to maintain and develop new relationships with partners and
suppliers could impact our ability to obtain or sell our products including
the SSP Solution Suite and result in a failure to generate revenues
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

We plan to obtain certain of our products, have products built to
specifications and sell products through alliance and supplier agreements.
While we will have direct sales channels, we currently anticipate that many of
our products will be sold through alliance and supplier partners. If alliance
or supplier agreements are cancelled, modified or delayed, if alliance or
supplier partners decide not to purchase our products or purchase only limited
quantities of our products, or if we are unable to enter into additional
alliance or supplier agreements, our ability to produce and sell our products
and, therefore, our ability to generate revenues, could be adversely affected.

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Failure to license new technologies could impair our new product
development

Our SSP Solution Suite is a collection of technologies, some of which are
licensed from our alliance and supplier partners. As a result, our ability to
license new technologies from third parties is and will continue to be critical
to our ability to offer a complete suite of products that meets customer needs
and technological requirements. Some of our licenses do not run for the length
of the patent for the technology. We may not be able to renew our existing
licenses on favorable terms, or at all. If we lose the rights to a patented
technology, we may need to stop selling certain of our products or redesign our
products or lose a competitive advantage. Potential competitors could license
technologies that we fail to license and potentially erode our market share for
certain products.

If PKI technology is compromised, our business would be adversely affected

Many of our products are based on PKI technology. The security afforded by
this technology depends on the integrity of a users private key, which depends
in part, on the application of algorithms, or advanced mathematical factoring
equations. The occurrence of any of the following could result in a decline in
demand for our data security products:



| |  |  | Any significant advance in techniques for attacking PKI systems,
including the development of an easy factoring method or faster, more
powerful computers;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | publicity of the successful decoding of cryptographic messages or the misappropriation of private keys; and                                               
|
| |  |  | government regulation limiting the use, scope or strength of PKI.                                                                                         



| |  | Should our stated stockholders equity fall below $10 million or our stock
price trade below $1.00 we may be de-listed by The Nasdaq National Market
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------

The listing requirements of The Nasdaq National Market require a company
to maintain a minimum net stockholders equity and a minimum trading price. At
March 31, 2002 our stockholders equity was
$13.7 million and on May 17, 2002,
closing sale price of a share of our common stock was $1.78. Should our
stockholders equity be decreased by further losses or should our stock price
fall below $1.00, Nasdaq may take steps to de-list our stock from The Nasdaq
National Market.



| |  | Recently issued securities contain full ratchet anti-dilution provisions
which could cause large numbers of shares of our common stock to be issued in
the future
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------

Convertible notes issued by us in December 2001 and April 2002 contain
full ratchet anti-dilution provisions, and we are currently seeking to raise
additional capital on similar terms. This means that if we issue common stock
or securities convertible into or exercisable for common stock at an effective
price less than the conversion price, the conversion price of the notes is
automatically reduced to the effective price of the newly issued securities.
While we have no current plans to do so, future market conditions and cash
needs may require us to issue securities at a lower price. If we do so, the
new, lower effective conversion price of the convertible notes would cause even
more shares of our common stock to be issuable, creating the possibility of
significant dilution of our earnings per share.



| |  | If use of the Internet and other communication networks based on Internet
protocols does not continue to grow, demand for our products may not increase
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------

Increased demand for our products depends in large part on the continued
growth of the Internet and Internet protocol-based networks and the widespread
acceptance and use of these mediums for electronic commerce and communications.
Because electronic commerce and communications over these networks are
evolving, we cannot predict the size of the market and its sustainable growth
rate. A number of factors may affect market size and growth rate, including:



| |  |  | the use of electronic commerce and communications may not increase,
or may increase more slowly than we expect;                                                                                                                         
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | the Internet infrastructure and communications services to support
electronic commerce may not be able to continue to support the demands
placed on it by continued growth; and                                                         
|
| |  |  | the growth and reliability of electronic commerce and communications
could be harmed by delays in development or adoption of new standards
and protocols to handle increased levels of activity or by increased
governmental regulation.

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We face intense competition from a number of sources

The markets for our products and services are intensely competitive and,
as a result, we face significant competition from a number of different
sources. We may be unable to compete successfully as many of our competitors
are more established, benefit from greater name recognition and have
substantially greater financial, technical and marketing resources than we
have. In addition, there are smaller companies and start-up companies that we
compete with from time to time. We also expect competition to increase as a
result of consolidation in the information security technology and product
reseller industries.



| |  | Third parties could obtain access to our proprietary information or
independently develop similar technologies because of the limited protection
for our intellectual property
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Our business, financial condition and operating results could be adversely
affected if we are unable to protect our intellectual property rights.
Notwithstanding the precautions we take, third parties may copy or obtain and
use our proprietary technologies, ideas, know-how and other proprietary
information without authorization or independently develop technologies similar
or superior to our technologies. In addition, the confidentiality and
non-competition agreements between us and our employees, distributors and
clients may not provide meaningful protection of our proprietary technologies
or other intellectual property in the event of unauthorized use or disclosure.
Policing unauthorized use of our technologies and other intellectual property
is difficult, particularly because the global nature of the Internet makes it
difficult to control the ultimate destination or security of software or other
data transmitted. Furthermore, the laws of other jurisdictions may afford
little or no effective protection of our intellectual property rights.



| |  | If we are unable to raise additional capital to fund our future operations,
our business will be harmed
| |  | -------------------------------------------------------------------------------------------------------

If we are unable to obtain additional capital to fund operations when
needed, our product development efforts would be adversely affected, causing
our business, operating results, financial condition and prospects to be
materially harmed. If we undertake or accelerate significant research and
development projects for new products, we may require additional outside
financing. We expect that, to meet our long-term needs, we will need to raise
substantial additional funds through the sale of equity securities or the
incurrence of additional debt or through collaborative arrangements. Any
additional equity financing may be dilutive to stockholders, and debt
financing, if available, may involve restrictive covenants. Collaborative
arrangements, if necessary to raise additional funds, may require us to
relinquish rights to certain technologies, products or marketing territories.
We have forecast operations for the year 2002 and project a need for cash in
excess of $10.0 million. While we closed a financing of $5.0 million
on
April 16, 2002, this will not be adequate if we cannot access our accounts
receivable credit line, receive extended terms from vendors, or raise
additional capital. Additionally, if our sales are less than forecast or
expenses higher than forecast, our cash needs may be higher than our current
forecast. Our failure to raise capital when needed could have an
adverse effect on our business, operating results, financial condition and
prospects.



| |  | If we do not respond to rapid technological changes, our product and service
offerings could become obsolete
| |  | ------------------------------------------------------------------------------------------------------------

If we are unable to modify existing products and develop new products that
are responsive to changing technology and standards and meet customer needs in
a timely and cost effective manner, our business could be adversely affected.
The markets we serve are characterized by rapidly changing technology, emerging
industry standards and frequent introduction of new products. The introduction
of products embodying new technologies and the emergence of new industry
standards may render our products obsolete or less marketable. The process of
developing our products and services is extremely complex and requires
significant continuing development efforts.



| |  | If we fail to establish and maintain strategic relationships, our ability to
develop and market our products would be adversely affected
| |  | ----------------------------------------------------------------------------------------------------------------------------------------

The loss of any of our existing strategic relationships, or the inability
to create new strategic relationships in the future, could adversely affect our
ability to develop and market our products. We depend upon our partners to
develop and market products and to fund and perform their obligations as
contemplated by our agreements with them. We do not control the time and
resources devoted by our partners to these activities. These relationships may
not continue or may require us to spend significant financial, personnel and
administrative resources from time to time. We may not have the resources
available to satisfy our commitments, which may adversely affect our strategic
relationships. Further, our products and services may compete with the products
and services of our strategic partners. This competition may adversely affect
our relationships with our strategic partners, which could adversely affect our
business.

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We may face claims of infringement of proprietary rights

There is a risk that our products infringe the proprietary rights of third
parties. In addition, whether or not our products infringe on proprietary
rights of third parties, infringement or invalidity claims may be asserted or
prosecuted against us and we could incur significant expense in defending them.
If any claims or actions are asserted against us, we may be required to modify
our products or seek licenses for these intellectual property rights. We may
not be able to modify our products or obtain licenses on commercially
reasonable terms, in a timely manner or at all. Our failure to do so could
adversely affect our business.



| |  | A security breach of our internal systems or those of our customers could
harm our business
| |  | -------------------------------------------------------------------------------------------

Since we provide security for Internet and other digital communication
networks, we may become a greater target for attacks by computer hackers. We
will not succeed unless the marketplace is confident that we provide effective
security protection for Internet and other digital communication networks.
Networks protected by our products may be vulnerable to electronic break-ins.
Because the techniques used by computer hackers to access or sabotage networks
change frequently and generally are not recognized until launched against a
target, we may be unable to anticipate these techniques. Although we have not
experienced any act of sabotage or unauthorized access by a third party of our
internal network to date, if an actual or perceived breach of security for
Internet and other digital communication networks occurs in our internal
systems or those of our end-user customers, regardless of whether we caused the
breach, it could adversely affect the market perception of our products and
services. This could cause us to lose customers, resellers, alliance partners
or other business partners.



| |  | Our business may be the target of cyber terrorist activities, or our revenues
may be affected by the affect of cyber terrorist activities on our customers
and/or employees
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The full effects of the events on September 11, 2001 have not been
determined. The ripple effects throughout the economy may have an affect on our
potential commercial customers, or their ability to purchase our products and
services. Additionally, because we provide security products to the United
States government, we may be targeted by cyber terrorist groups for the
follow-up activities threatened against the United States based targets.



| |  | Doing business with the U.S. government entails many risks, which could
adversely affect us
| |  | -------------------------------------------------------------------------------------------

Sales to U.S.
government agencies accounted for 72% and 34% of our consolidated
revenue for the twelve month period ended December 31, 2001 and
the three month period ended March 31, 2002, respectively. Our sales to these
agencies are subject to risks, including:



| |  |  | early termination of our contracts;                                                                                                                  
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | disallowance of costs upon audit; and                                                                                                                
|
| |  |  | the necessity to participate in competitive bidding and proposal
processes, which is costly, time consuming and may result in
unprofitable contracts.

In addition, the government may be in a position to obtain greater rights
with respect to our intellectual property than we would grant to other
entities. Government agencies also have the power, based on financial
difficulties or investigations of its contractors, to deem contractors
unsuitable for new contract awards. Because we engage in the government
contracting business, we have been and will be subject to audits and may be
subject to investigation by governmental entities. Failure to comply with the
terms of any of our governmental contracts could result in substantial civil
and criminal fines and penalties, as well as our suspension from future
government contracts for a significant period of time, any of which could
adversely affect our business.

Our quarterly operating results may fluctuate significantly

Our quarterly operating results may fluctuate significantly as a result of
a variety of factors, many of which are outside our control. These factors
include:



| |  |  | the length of our customer commitments;                  
| | - |  | ---------------------------------------------------------
|
| |  |  | patterns of information technology spending by customers;

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| |  |  | the timing, size, mix and customer acceptance of our product and service offerings and those of our competitors;
| | - |  | ----------------------------------------------------------------------------------------------------------------
|
| |  |  | the timing and magnitude of required capital expenditures; and                                                  
|
| |  |  | the need to use outside contractors to complete some assignments.                                               



| |  | Delays in deliveries from our suppliers or defects in goods or components
supplied by our vendors could cause revenues to decline and adversely affect
our operating results
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------

We rely on a limited number of vendors for certain components for the
products we are developing that will comprise the SSP Solution Suite. If we
are unable to purchase these components, this may delay or prevent product
shipments and result in a loss of sales. In addition, if any components have
undetected flaws, this could lead to unanticipated costs to repair or replace
these parts. This could cause a loss of revenue, which would adversely affect
our results of operations. We may not be able to replace any of our supply
sources on economically advantageous terms. Further, if we experience price
increases for the components for our products, we will experience declines in
our gross margins.



| |  | A default under our secured credit arrangements could result in a foreclosure
of our assets by our creditors
| |  | ------------------------------------------------------------------------------------------------------------

All of our assets are pledged as collateral to secure portions of our
debt. This means that if we default on our secured debt obligations, our
indebtedness could become immediately due and payable and the lenders could
foreclose on our assets.



| |  | Our inability to find alternative suppliers of components may adversely
affect our business
| |  | -------------------------------------------------------------------------------------------

Some of the components incorporated into our products are produced by
other vendors. We currently purchase some of these components from a single
supplier, thus presenting a risk that they may not be available on commercially
reasonable terms in the future or at all. Our inability to develop alternative
sources, if necessary, may require us to re-design certain products, which
could result in delays or reductions in product shipments that could adversely
affect our business.

We depend on key management personnel

Our success will depend largely on the continuing efforts of our executive
officers and senior management. Our business may be adversely affected if the
services of any of our key personnel become unavailable to us. There is a risk
that these individuals will not continue to serve for any particular period of
time. While we have obtained a $3 million key person life insurance policy on
the life of Kris Shah, our co-chairman and co-chief executive officer, this
amount may not be sufficient to offset the loss of his service. We have not yet
obtained any such policies on the lives of our other key executives.



| |  | There is significant competition in our industry for highly skilled
employees, and our failure to attract and retain technical personnel would
adversely affect our business
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------

We may not be able to attract or retain highly skilled employees. Our
inability to hire or retain highly qualified individuals may impede our ability
to develop, install, implement and service our software and hardware systems,
customers and potential customers or efficiently conduct our operations, all of
which may adversely affect our business. The data security and networking
solution industries are characterized by a high level of employee mobility, and
the market for highly qualified individuals in the computer-related fields is
intense. This competition means there are fewer highly qualified employees
available to hire and the costs of hiring and retaining these individuals are
high. Even if we are able to hire these individuals, we may be unable to retain
them. Furthermore, there is increasing pressure to provide technical employees
with stock options and other equity interests, which may dilute earnings per
share.



| |  | We may be exposed to potential liability for actual or perceived failure to
provide required products or services
| |  | -----------------------------------------------------------------------------------------------------------------

Products as complex as those we offer may contain undetected errors or
result in failures when first introduced or when new versions are released.
Despite our product testing efforts and testing by current and potential
customers, it is possible that errors will be found in new products or
enhancements after commencement of commercial shipments. The occurrence of
product defects or errors could result in adverse publicity, delay in product
introduction, diversion of resources to remedy defects, loss of or a delay in
market acceptance or claims by customers against us, or could cause us to incur
additional costs, any of which could adversely affect our business.

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Because our customers rely on our products for critical security
applications, we may be exposed to potential liability claims for damage caused
to an enterprise as a result of an actual or perceived failure of our products.
An actual or perceived breach of enterprise network or data security systems of
one of our customers, regardless of whether the breach is attributable to our
products or solutions, could adversely affect our business reputation.

Furthermore, our failure or inability to meet a customers expectations in
the performance of our services, or to do so in the time frame required by the
customer, regardless of our responsibility for the failure, could:



| |  |  | result in a claim for substantial damages against us by the customer;
| | - |  | ---------------------------------------------------------------------
|
| |  |  | discourage customers from engaging us for these services; and        
|
| |  |  | damage our business reputation.                                      

In addition, as a professional services provider, a portion of our
business involves employing people and placing them in the workplace of other
businesses. Therefore, we are also exposed to liability for actions taken by
our employees while on assignment.



| |  | Our efforts to expand international operations are subject to a number of
risks
| |  | -------------------------------------------------------------------------------

We are currently seeking to increase our international sales. Our
inability to maintain or to obtain federal or foreign regulatory approvals
relating to the import or export of our products on a timely basis could
adversely affect our ability to expand our international business.
Additionally, our international operations could be subject to a number of
risks, any of which could adversely affect our future international sales,
including:



| |  |  | increased collection risks;                                   
| | - |  | --------------------------------------------------------------
|
| |  |  | trade restrictions;                                           
|
| |  |  | export duties and tariffs;                                    
|
| |  |  | uncertain political, regulatory and economic developments; and
|
| |  |  | inability to protect our intellectual property rights.        



| |  | Our ability to produce the Forté PKI card on a timely and cost-effective
basis depends on the availability of a computer chip from a third-party
supplier, with whom we do not expect to maintain a supply agreement
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Any inability to receive adequate supplies of Atmel Corporations
specially designed Forté microprocessor would adversely affect our ability to
sell the Forté PKI card. We do not anticipate maintaining a supply agreement
with Atmel for the Forté microprocessor. If Atmel were unable to deliver the
Forté microprocessor for a lengthy period of time or terminated its
relationship with us, we would be unable to produce the Forté PKI card until we
could design a replacement computer chip for the Forté microprocessor. We
anticipate this would take substantial time and resources to complete.



| |  | There is a lawsuit pending against our wholly-owned subsidiary,
Pulsar, that, if resolved against Pulsar, could adversely affect our business
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------

There is a lawsuit
pending against Pulsar that, if resolved against Pulsar, could
materially and adversely affect our financial condition. This suit
was brought by G2 Resources, Inc. alleging breach of contract by
Pulsar. This suit was dismissed for lack of prosecution, but G2
Resources, Inc. has refiled the suit.

In addition, during
the second quarter of 2001 Microsoft notified us regarding the alleged
sales of unlicensed copies of Microsoft Office. The software in
question was purchased from a major computer hardware manufacturer
and was resold to one of our customers in a package that included
both hardware and software. We are currently investigating the
matter, and do not anticipate that the outcome will have a material
impact on our results of operations, financial condition or liquidity.

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| |  | We have anti-takeover defenses that could delay or prevent an acquisition and
could adversely affect the price of our common stock
| |  | ----------------------------------------------------------------------------------------------------------------------------------

Our certificate of incorporation and bylaws contain provisions that may
deter a takeover or a change in control or prevent an acquisition not approved
by our board of directors, or that may adversely affect the price of our common
stock.



| |  | Governmental regulations affecting security of Internet and other digital
communication networks could limit the market for our products and services
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------

The United States and other foreign governments have imposed controls,
export license requirements and restrictions on the import or export of some
technologies, including encryption technology. Any additional governmental
regulation of imports or exports or failure to obtain required export approval
of our encryption technologies could delay or prevent the acceptance and use of
encryption products and public networks for secure communications and could
limit the market for our products and services. In addition, some foreign
competitors are subject to less rigorous controls on exporting their encryption
technologies and, as a result, they may be able to compete more effectively
than us in the United States and in international security markets for Internet
and other digital communication networks. In addition, certain governmental
agencies, such as the Federal Communications Commission, periodically issue
regulations governing the conduct of business in telecommunications markets
that may negatively affect the telecommunications industry and us.



| |  | A small number of stockholders, who include certain of our officers and
directors, have the ability to control stockholder votes
| |  | --------------------------------------------------------------------------------------------------------------------------------

Kris Shah, Marvin Winkler, their affiliates and certain family members
own, in the aggregate, approximately 63.3% of our outstanding common stock.
These stockholders, if acting together, have the ability to elect our directors
and to determine the outcome of corporate actions requiring stockholder
approval, irrespective of how our other stockholders may vote. This
concentration of ownership may also have the effect of delaying or preventing a
change in control of our company.

Risks Related to the Acquisition

The anticipated benefits of the Acquisition may not be realized

The anticipated
benefits of the Acquisition may not be realized for a variety of
reasons. For example, the anticipated increase in sales resulting
from the combined efforts and combined distribution channels may not
be realized because the delay in global economic recovery has caused
the postponement of buying decisions on the part of many commercial
customers and potential customers. This, in turn, has caused us to
make a number of personnel cutbacks, the effect of which may be that
we will be unable to devote the resources to the combined
distribution channels that we had expected.

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| |  | Unanticipated costs relating to
the Acquisition could reduce our
future earnings or increase our future losses.
| |  | ---------------------------------------------------------------------------------------------------------------

We believe that we reasonably estimated the likely costs of integrating
our operations with the operations of BIZ and the incremental costs of
operating as a combined company. It is possible, however, that unexpected
costs or unexpected
future operating expenses, such as increased personnel costs, as well as other
types of unanticipated developments, could adversely impact our business and
profitability.



| |  | Acquisition-related accounting charges may delay or reduce our profitability
| |  | ----------------------------------------------------------------------------

We have accounted for the Acquisition as a purchase. Under the purchase
method of accounting, the purchase price is allocated to the fair value of the
identifiable tangible and intangible assets and liabilities that we acquired
from BIZ. The excess of the purchase price over BIZs tangible net assets
results in intangible assets for us that will have to be amortized over their
useful lives with the exception of goodwill based on Statement 142 which we
adopted at the beginning of fiscal year 2002. In addition, we incurred an
in-process research and development charge of $1.6 million in connection with
the Acquisition. As a result, we will incur accounting charges from the
Acquisition that may delay and reduce our profitability. We also incurred
charges of $36.3 million to record the impairment in value of assets acquired.



| |  | Recently issued FASB statements require us to evaluate the fair values of
intangible assets and goodwill that we acquired in the Acquisition that could
result in significant charges to our earnings and may adversely affect the
market price of our common stock
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

In July 2001, the Financial Accounting Standards Board (FASB) issued
Statement 141, Business Combinations, and Statement 142, Goodwill and Other
Intangible Assets. The changes included in these statements require companies
to perform impairment tests on goodwill and certain intangibles using a fair
value approach rather than allowing companies to amortize goodwill and certain
intangibles over their estimated useful lives. We are now required to evaluate
periodically whether intangible assets and goodwill that we acquired in the
Acquisition have fair values that meet or exceed the amounts recorded on our
balance sheet. We cannot predict whether or when there will be an
additional impairment
charge, or the amount of such charge, if any. However, if the charge is
significant, it could cause the market price of our common stock to decline. In
addition, beginning in fiscal 2002, Statement 142 eliminated recurring
amortization charges which removes certain intangible assets and goodwill from
our balance sheet, and such amounts will remain permanently on our balance
sheet unless future evaluations require us to record impairment charges.




ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We own Class A
common stock of Wave, which is
classified as trading securities. Waves Class A common stock is
traded on The Nasdaq National Market and the increase or decrease in
value of the stock is included in our
statement of operations, together with the gain or loss on sales of
the Wave shares.

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PART II. OTHER INFORMATION




ITEM 1. LEGAL PROCEEDINGS

We are involved from time to time in routine litigation that arises in the
ordinary course of business.

In April 2002, there was a lawsuit filed against us by Dell Marketing, LLC
pertaining to overdue amounts for computer products purchased for resale
through Pulsar. The suit asserted a claim in the amount of approximately
$322,000. Subsequently the past due invoices were satisfied in full and
the parties have executed settlement papers that have been submitted
to the court.




ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

None.




ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.




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

None.




ITEM 5. OTHER INFORMATION

None.




ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K



| | (a) |  | Exhibits.           
| | --- |  | --------------------
|
| |     |  | None.               
|
| | (b) |  | Reports on Form 8-K.
|
| |     |  | None.               

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SIGNATURES

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

|                   |                                                                                                                                      |     |                  
|------------------ | ------------------------------------------------------------------------------------------------------------------------------------ | --- | -----------------
|Date: May 20, 2002 | SSP SOLUTIONS, INC.                                                                                                                 
|                  
|                   | By                                                                                                                                   | /s/ | MARVIN J. WINKLER
|                   |                                                                                                                                     
|                   | Marvin J. Winkler
Co-Chairman of the Board of Directors,
Director and Co-Chief Executive Officer
(Principal Executive Officer)      
|                  
|                   | By                                                                                                                                   | /s/ | KRIS SHAH        
|                   |                                                                                                                                     
|                   | Kris Shah
Co-Chairman of the Board of Directors,
Director and Co-Chief Executive Officer
(Principal Executive Officer)              
|                  
|                   | By                                                                                                                                   | /s/ | THOMAS E. SCHIFF 
|                   |                                                                                                                                     
|                   | Thomas E. Schiff
Executive Vice President and Chief Financial Officer
(Principal Financial Officer and Principal Accounting Officer)

35