Edgar Filing: SSP SOLUTIONS INC

U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-KSB
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(MARK ONE)

[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2003.
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ____________ TO
____________.

COMMISSION FILE NUMBER 000-26227

SSP SOLUTIONS, INC.
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(exact name of registrant as specified in its charter)

DELAWARE 33-0757190
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

17861 CARTWRIGHT ROAD, IRVINE, CALIFORNIA 92614
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(Address Of Principal Executive Offices) (Zip Code)

(949) 851-1085
(Issuer's telephone number, including area code)

Securities registered under Section 12(b) of the Exchange Act: NONE

Securities registered pursuant to Section 12(g) of the Exchange Act:

COMMON STOCK
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(Title Of Class)

Check whether the issuer: (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 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 [ ]

Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [ ]

The registrant's total revenues for the year ended December 31, 2003 were
$13,345,000.

The aggregate market value of the voting and non-voting common equity held by
non-affiliates computed by reference to the price of the common equity, as of
the close of business on March 23, 2004, was $25,193,882. The registrant has
no non-voting common equity.

As of March 23, 2004 the number of outstanding shares of the registrant's common
stock was 38,138,998.

DOCUMENTS INCORPORATED BY REFERENCE: NONE.

PAGE
PART I

Item 1. Description of Business........................................... 3

Item 2. Description of Property........................................... 18

Item 3. Legal Proceedings................................................. 19

Item 4. Submission of Matters to a Vote of Security Holders............... 20

PART II

Item 5. Market for Common Equity, Related Stockholder Matters and
Small Business Issuer Purchases of Equity Securities.............. 21

Item 6. Management's Discussion and Analysis or Plan of Operation......... 23

Item 7. Financial Statements ............................................. 46

Item 8. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure ............................................. 46

Item 8A. Controls and Procedures .......................................... 47

PART III

Item 9. Directors and Executive Officers of the Registrant ............... 47

Item 10. Executive Compensation ........................................... 51

Item 11. Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters.................................... 56

Item 12. Certain Relationships and Related Transactions.................... 58

Item 13. Exhibits, List and Reports on Form 8-K............................ 61

Item 14. Principal Accountant Fees and Services............................ 63

PART I

ITEM 1. DESCRIPTION OF BUSINESS

INTRODUCTORY NOTE

For purposes of this report, unless the context indicates otherwise,
references to "we," "us," "our," "SSP" and the "Company" shall mean or refer to
SSP Solutions, Inc. In addition, unless the text indicates otherwise, the term
"SSP" refers to SSP Solutions, Inc. and its subsidiaries. We own a number of
trademarks and have rights to trademarks owned by others. Any trademarks or
trade names referred to in this report are the property of their respective
owners.

CORPORATE OVERVIEW

We are a leading provider of high-grade information security solutions.
We are a Delaware corporation formed January 30, 1997 and own Litronic
Industries, Inc., a California corporation that has helped set the standard for
high assurance in communications, information protection and network security
since its incorporation in 1970.

During the past three years, our other subsidiaries engaged in various
activities that have been discontinued, as described below under the heading
"Other Business Activities During the Past Three Years." These activities
included the sale of computer hardware, software, peripheral equipment, and
support services to governmental agencies and commercial enterprises throughout
the United States and the development of online gaming Internet web sites. As a
result, we currently operate in one business segment: information security.

As described below under the heading "Proposed Merger with SAFLINK
Corporation," we are preparing to engage in a merger and reorganization that, if
consummated, would result in SSP Solutions, Inc. becoming a wholly-owned
subsidiary of SAFLINK Corporation.

INDUSTRY BACKGROUND

Consumers, businesses and government agencies are increasingly
dependent on the Internet and Internet protocol-based networks to conduct
electronic commerce and communications. The increasing reliance on shared
electronic information has caused information security to become a paramount
concern for both government and private industry. Continued expansion of
electronic commerce and communications, including instant messaging, and recent
world events necessitate improved security measures to irrefutably verify the
identity of a party over a communication channel and to ensure the maintenance
of confidentiality when transmitting information. Many client operating systems
and Internet protocol-based networks lack fundamental, yet critical, security
features such as information privacy and integrity, identification,
authentication, non-repudiation, and auditing. Internet protocol, or IP, is a
protocol developed to enable the transmission of information in packets from a
source to a recipient using dynamically changing routes, with the information
being reassembled at the recipient's location into the original format.

End-to-end information security concerns can be addressed in a variety
of ways. Historically, enterprises relied heavily on passwords to restrict
access to proprietary information and materials. However, because of the risk of
loss or theft, more advanced protective measures have been developed to include
combinations of passwords and tokens with message encryption and biometric
devices. Biometric devices are hardware devices that incorporate fingerprint
identification, voice, hand geometry, facial recognition, iris scan or other
methods to positively identify an individual. A token based upon instructions or
permissions authorized by administration can take any number of forms (a ring, a
key, a credit card-sized piece of plastic), into which an electronic device can
be embedded. The token carrying the electronic device can then be used for any
number of purposes: to access a facility; to access a computer network or
desktop; or to validate the identity of the token holder. Regardless of the form
of the information security device, the level of security provided is evaluated
based on a set of fundamental principles, which include the following:

o IDENTIFICATION AND AUTHENTICATION. Verifies the identity of the
authorized users to prevent unauthorized access to proprietary
information and resources.

o CONFIDENTIALITY. Ensures privacy by encrypting data transmissions
and stored data so that only the intended recipient can access the
information.

o INFORMATION INTEGRITY. Ensures that information is not compromised
or manipulated. Confirms that the file received is exactly the
same as the file transmitted.

o NON-REPUDIATION. Prevents the sender of data transmissions from
disclaiming or repudiating authorship so that the sender cannot
deny the occurrence of the transaction.

o AUDIT CONTROL. Retraces information access and facilities use over
a particular time period. This action is performed at a system
administration level so that an enterprise can monitor and record
authorized and unauthorized user activity.

o SECURE SYSTEM ADMINISTRATION. Maintains and controls corporate
intranets centrally through file encryption, password maintenance,
audit control, certificate and cryptographic key management, and
device accessibility control.

o PRIVACY CONTROL. Protects the digital information stored on a
computer and safeguards network access, online communications, and
digital transactions from malicious attempts to compromise a
system. Removes any trace of digital information from discarded
devices.

The process of implementing appropriately stringent, best-in-class
information security solutions requires specialized skills that generally are
not resident within corporate information technology departments. We provide the
technology, products and services necessary for most companies to implement or
manage their information security infrastructure. The open architecture of our
products makes them compatible with virtually all commonly used network hardware
and enables them to operate independently of algorithms, platforms, applications
and tokens. We believe that as the use of the Internet and Internet-based
networks grows, the need for security solutions will fuel demand for our
products and services.

OUR SOLUTION

We provide information security solutions for network communication
systems, including secure instant messaging. We have provided innovative
information security solutions for government communications systems for more
than thirty years. We provide software, a secure operating system and hardware
products. Following are examples of the uses for these products:

o software for the for the authorization, authentication, and
administration of an organization's security protocols;

o tokens and card reader products that can be used by an
organization and its members to protect digital information,
thereby securing the transmission of that digital information via
encryption or decryption of that information on a real-time basis;
and

o privacy control technology to protect the user's digital identity,
personal information, email, passwords, and files.

In addition to selling hardware and software products, we develop
technologies and provide support and maintenance services for specific
government communications programs. Our products sold to government are designed
and developed in the United States.

Our products are based upon an open standards platform, public key
infrastructure ("PKI") technology. PKI is the standard for securing
Internet-based commerce and communications. PKI uses encryption algorithms
that provide strong and persistent protection of digital content and
information. Our tokens can take nearly any form that meets a customer's
requirements, but most often take the form of a smart card, which makes the
token portable. Our smart card token combines a secure operating system and
software within the hardware device. Our card reader products include software
that allows secure communications between a smart card and a client device, such
as a desktop or laptop computer.

Our products target the authorization, authentication, and
administration security marketplace, which is referred to as the "AAA" market
space. We developed Profile Manager(TM) to service AAA requirements. Originally
developed for use within the federal government, the Profile Manager product
provides digital identity management administration for either a public or
private organization. This administration includes the ability to verify the
identity of an individual (authentication); assign the permitted activities or
access rights of that particular individual (authorization); and track or modify
the digital identity and authorizations of the individual (administration).

To provide a high-level assurance token for use in government programs
and commercial markets, we developed the Forte(TM) chip. Evaluation copies of
the Forte(TM) chip were delivered in the fall of 2003 to several government
agencies and a private sector customer for testing. Combining our Universal
Secure Access Operating Security System(TM) ("USA OSS") with the Forte chip, we
created an embedded security system on a chip that can encrypt and decrypt
streaming digital information, such as music or voice over IP ("VOIP"). By
placing the Forte chip and the USA OSS onto a smart card, we created the
Universal Secure Access Card(TM) ("USA Card") that allows the streaming of audio
content to wireless devices and personal computers, or PCs, without the need for
storage and redundant data processing. Through the flexibility of its design,
our USA Card allows the management of multiple digital IDs, passwords,
certificates and credentials. This means our USA Card is programmable and
addressable, and can securely support and store multiple applications and can be
updated from a remote location. Based upon an open standards platform, our
Forte/USA OSS technology can secure the transmission and authorized access of
digital content, regardless of the method of transmission or method of
encryption. Our USA Card contains our patented universal serial bus ("USB")
interface that recognizes and automatically adjusts to high-speed USB data
transmission or to the slower International Standards Organization ("ISO")
standard of legacy systems.

Building on our history of supplying robust security products for the
intelligence community, we believe our NetSign(R), Profile Manager and the USA
Forte chip core technologies, are positioned to become a part of the standard
for secure government communications. Profile Manager and the USA Forte chip,
together with the services we provide to support government secure
communications programs, may form the building blocks for the Department of
Defense ("DoD") next generation PKI initiative. We anticipate that over time,
this next generation PKI initiative will touch nearly every application and
security measure used by members of the intelligence community - both inside
and outside of federal and state governments.

In addition, our NetSign line of middleware has been expanded to
include a new version called NetSign Privacy Agent(TM) that addresses the
privacy concerns of both the consumer and business user. NetSign Privacy Agent
is an easy to install and easy to use set of applications that uses privacy
control technology to obtain a verified digital identity and protect that user's
digital identity, personal information, instant messaging, e-mail, passwords,
and files. The applications include Secure Email, Secure Instant Messenger,
Password Manager, File Shredder, File Encryption and Decryption, and Spam Agent.
NetSign Privacy Agent can generate a transcript of private or instant message
communications and file this transcript with an audit log to an area designated
by the user.

To communicate securely with governments in the future, non-government
organizations may need to use elements of security that we have developed for
government programs. By building our products on open standards platforms, we
enable organizations to incorporate our security products with other security
solutions in a manner similar to adding a utility function to their current
application programs. Alternatively, an organization may license and install our
entire robust PKI-based system as its internal secure communications and use it
to communicate with government entities. Organizations can use our USA Card with
the Forte chip as the security token used by their members, and our Profile
Manager product can administer and manage the card issuance, authorization, and
authentication functions. Adoption by customers of our recently developed
products is part of the continuing migration of secure communications to ever
increasing levels of trust as outlined below.

We are a supplier of products and services to the Defense Messaging
System ("DMS") and Common Access Card ("CAC") programs described below. The
products we supply to those programs can be migrated, without replacing entire
systems, into planned evolutions to higher assurance levels and more flexible
systems also outlined below.

DMS/FORTEZZA PROGRAM

DMS is one of the largest PKI implementations in the world. DMS
messages travel over the Defense Information Systems Network, which distributes
voice, video and data messages. FORTEZZA(R), Italian for "fortress," is a family
of security encryption products trademarked by the U.S. government's National
Security Agency ("NSA"). DMS is a worldwide effort to secure DoD communications,
and is designed for sending classified and top-secret information and delivering
messages to DoD users as well as to other agencies and contractors.

Our hardware products that support DMS include the ARGUS(TM) line of
readers and smart cards. Products sold by us and other vendors for use in DMS
must be FORTEZZA compliant, meaning the products must be based upon FORTEZZA
encryption standards. We are the sole source of support services for FORTEZZA
compliant products used in the DMS, whether the products are sold by us or by
any other vendor. While widely used by U.S. government agencies, the U.S.
government has identified the need to migrate many FORTEZZA users to more
flexible levels of higher security developed under the next generation PKI
initiative outlined below.

CAC PROGRAM

CAC is a DoD access card badge that provides government employees and
designated contractors with secure physical and logical access. Logical access
is an industry term for using a card to access files on a computer. CAC also
manages individual benefits, such as medical benefits, for government employees.
Our NetSign CAC middleware for the armed forces is an easy to use, complete
smart card client package that provides network security and desktop protection
for CAC users. To date, we have been chosen by two branches of the armed
services to deliver NetSign CAC software for smart card integration. We began
delivering shipments of this software in 2003 for initial deployment to one of
the armed services. Based upon deployment within the DoD, there are
approximately 4.5 million potential users of this product. We anticipate there
will be sufficient demand to migrate many, if not all, CAC users to our next
generation PKI products.

DOD NEXT GENERATION PKI AND EXTENSION INITIATIVES

We were selected to develop the architecture for the next generation
PKI and related extension initiatives for the DoD. This PKI initiative is a
single framework for modernizing and unifying the management of keys used to
encode and decode information for government departments and agencies throughout
the entire national security community, including the Department of Homeland
Security ("DHS"). The federal government's PKI initiative program uses our
Profile Manager and NetSign solutions, and may eventually incorporate our USA
Card.

FORTE-BASED USA CARD

Although the USA Card Forte chip was developed to government
specifications, its processing power and flexibility are suitable for a variety
of government and commercial applications. The USA Card using the Forte chip
will be compatible with our NetSign CAC product, which will allow migration of
CAC users and FORTEZZA-based security users to higher assurance levels. At the
same time, the flexible design of the USA Card will allow for multiple uses of
the card. For example, while functioning as a CAC card, the USA Card can provide
secure processing of VOIP and secure access to commercial functions, including
financial services. The USA Card can support multiple applications, all
partitioned or separated from other applications resident on the card. The USA
Card can provide an interface or crossover between processing government
security needs and can serve as a platform for secure commercial applications.

When used in conjunction with biometrics, such as a fingerprint or an
iris scan, the USA Card provides three levels of authentication consisting of
identifying: something you have (the USA Card), something you know (a personal
identification number or PIN), and something you are (a biometric, such as a
thumbprint). An authentication occurs when all three items are present
simultaneously. This provides a high level of authentication and protection in
the commercial and government markets. We are working under a development
contract to enable the USA Card to work with Java, a high-level programming
language developed by Sun Microsystems. This will allow the USA Card to support
commercial users, which frequently use Java-based applications. Adding Java to
our USA OSS will increase number of potential USA Card users.

PLANNED COMMERCIAL AND PUBLIC AGENCY INITIATIVES

Building on our success with secure government communications and
organizations communicating with government agencies, we are developing
independent initiatives to make our products available to both commercial and
public agency markets.

We view future extension of our core technologies into the private
sector as follows:

o PROFILE MANAGER ENTERPRISE. Profile Manager Enterprise is our
comprehensive management tool that controls smart card and digital
certificate lifecycles. The product handles every step of a smart
card's life cycle, from enrolling new members and issuing cards
and certificates, to replacing lost or damaged cards, updating
cards, and renewing and revoking certificates. Profile Manager
Enterprise can be deployed with NetSign Enterprise middleware to
provide a comprehensive PKI solution. Both products integrate with
existing employee and customer databases.

o USA CARD. The USA Card is based upon our Forte chip, which is
scheduled to be released for limited production in the second
quarter of 2004. The USA Card can serve as an identity card and
support multiple applications in disparate markets. The USA Card
will combine a sophisticated operating system with a tamper proof,
patented USB interface having transfer speeds of up to 12 megabits
(millions of bits) per second. If a USB interface is not available
on the device that is connected to the USA Card, the card will
automatically adjust to the slower ISO standard speed.

o USA JAVA CARD. The USA JAVA Card is a special version of our USA
Card designed to incorporate Java-based applications. This product
is still in development.

o THE ENTERPRISE CREDENTIAL MANAGEMENT SYSTEM. The Enterprise
Credential Management System is an integrated combination of our
Profile Manager Enterprise and NetSign Enterprise products. Based
on tested and proven technologies, the Enterprise Credential
Management System offers a full range of support for PKI
activities, including certificate issuance and revocation, key
recovery, and certificate update, re-key and renewal. A web-based
architecture and interface offers both administrators and users
multiple options for card use, service and support.

o NETSIGN PRIVACY AGENT. NetSign Privacy Agent is an easy to install
and easy to use application that uses privacy control technology
to obtain and protect the user's digital identity, personal
information, email, passwords, and files. The applications include
Secure Email, Secure Instant Messenger, Password Manager, File
Shredder, File Encryption and Decryption, and Spam Agent. NetSign
Privacy Agent supports enterprises striving to meet the security
requirements of the Health Insurance Portability and
Accountability Act ("HIPAA") and the Gramm-Leach-Bliley Act.
Feature sets of NetSign Privacy Agent can be configured to meet
the specific requirements of individual clients. This product is
in beta testing and scheduled for release into pilot tests during
the second quarter of 2004.

The following examples illustrate our information security offerings in
government and commercial settings:

CASE 1: PKI PRODUCTS. The DoD's next generation PKI initiative involves
undertaking a comprehensive communications program to redesign a secure
infrastructure for both physical and virtual environments. This initiative is
designed to be deployed across a broad range of applications, including
financial transactions, e-commerce, personnel records, tactical operations, and
command and control functions. The DoD needs to secure its own internal
electronic communications activities, as well as electronic communications
activities with federal agencies, allies and coalition forces, military and
civilian personnel, and business partners in the U.S. and abroad. The next
generation PKI initiative elements include system hardware and software

architecture, cryptographic tokens and cards, and the management elements of
policies and procedures for issuing and managing the cryptographic keys and
cards. PKI is a major constituent of the program. The next generation PKI
initiative includes the rights to the application program interface ("API") to
communicate with organizations outside of government. Having to use the API to
communicate with government users may stimulate demand by the private sector for
the commercial versions of next generation PKI products based upon the same open
standards platform. This type of adoption of next generation PKI products should
bring a higher level of secure digital protection into the commercial market.

CASE 2: CAC MIDDLEWARE PRODUCTS. The CAC is the electronic
identification card for the DoD is designed to give employees and contractors
access, both physically and electronically, to DoD infrastructure such as
facilities and secure e-mail. Our CAC middleware allows the CAC to utilize a PKI
token in the DoD electronic infrastructure. The CAC middleware then interfaces
with the e-mail system to enable several key functions, including digital
signatures for e-mail and encryption of e-mail content. These products also
allow the CAC to be used for web-based Secure Socket Layer, or SSL, sessions and
for PKI-based computer log-on. Under existing purchase contracts, our middleware
products may be used throughout the DoD and other government civilian agencies.

CASE 3: NETSIGN PRIVACY AGENT. The cost of identity theft is in the
billions of dollars. NetSign Privacy Agent uses privacy control technology to
protect the digital information stored on a user's computer and the user's
communications with other parties. The tools included with NetSign
Privacy Agent can help protect users from becoming victims. Whether online or
off, NetSign Privacy Agent protects a user's personal digital information and
privacy. The applications include Secure Email, Private Messenger, Password
Manager, File Shredder, File Guard, and Spam Agent. For use by professional
services providers such as attorneys, accountants and consultants, within their
firms and in communication with their customers.

CASE 4: DIGITAL/SATELLITE SERVICE PROVIDERS AND THE USA CARD. Industry
periodicals estimate there are currently over 200 million pay television
subscribers around the world and a large untapped market in China. Generating
billions of dollars in annual revenues, pay television has the associated
problem of widespread signal piracy. To combat this piracy, network operators
have implemented a security technology known as conditional access ("CA") to
protect their networks. CA is implemented via smart card technology. The USA
Card's high level of assurances and tamper resistant design, and the ability to
download secure upgrades to previously issued USA Cards, creates a flexible
platform for security. The addition of Java to the USA Card will build a
competitive advantage by allowing for commercial applications that today are
limited by slow speed data transmission over phone lines.

PRODUCTS AND SERVICES

The following sections describe our individual products and their
functions. These products are used within the FORTEZZA and CAC programs
described above, and are designed to be used as migration tools for users who
upgrade to the DoD's next generation PKI initiative. Our Internet information
security products provide a high level of security for secure e-mail, secure
instant messaging, secure file transport, file protection, and remote access,
authentication and authorization in an open standards platform so they can
operate independently of encryption algorithms, platforms, applications and
tokens.

SOFTWARE

NETSIGN CAC. NetSign CAC is a complete smart card client package that
provides network security and desktop protection for users of the General
Services Administration ("GSA") CAC. With a NetSign CAC-enabled system, users
can be assured of strong authentication, confidentiality and non-repudiation at
speeds substantially faster than those available with competitors' products.
Non-repudiation means that the identity of the user is established in such away
that the user cannot deny that he or she participated in or initiated a
particular transaction. NetSign CAC allows users to digitally sign and encrypt
e-mail and access secure web sites via Microsoft and Netscape e-mail and browser
packages. By supporting Windows 2000 certificate-based logon and workstation
locking through the use of CAC smart cards issued by DoD, NetSign CAC offers a
high level of desktop security. We have collaborated with prime contractors in
bidding on some CAC programs and have bid directly on other CAC programs. In
2002, we were awarded one direct bid $9 million indefinite-delivery,
indefinite-quantity contract and in 2003, we were awarded one $9 million
indefinite-delivery, indefinite-quantity contract as a sub-contractor. The
pricing of our products is the same under both bidding processes.

NETSIGN PRIVACY AGENT. NetSign Privacy Agent builds on the improvements
implemented in NetSign CAC and for the first time brings to the commercial
business world features developed to meet rigorous government specifications.
NetSign Privacy Agent has many new features that enable consumers and businesses
to take charge of their privacy and digital assets. NetSign Privacy Agent is
specifically designed to be a full-featured integrated middleware solution.

NETSIGN. This software integrates smart cards and digital certificate
technology to enhance security in electronic commerce software systems and can
be used for e-mail, Internet access, file access, and web browsers like Netscape
Communicator and Microsoft Explorer. NetSign software products are bundled, or
packaged, with a smart card reader/writer and with smart cards.

PROFILE MANAGER. Profile Manager is a complete PKI lifecycle management
solution. Profile Manager provides token-based security systems management from
initialization to secure archive and recovery of information. For the recovery
of token-based information, Profile Manager provides an optional integration
with a secured database of private keys and other user identification data, and
the use of third-party certificate authorities. Profile Manager integrates with
NetSign, and other token-enabled products to provide a complete solution for a
company's security requirements. Profile Manager includes secure Internet
access, digitally signed and encrypted e-mail, desktop file encryption and
secure remote network access.

ENTERPRISE CREDENTIAL MANAGEMENT SYSTEM. The Enterprise Credential
Management System is an integrated combination of our Profile Manager Enterprise
and NetSign Enterprise products. Both Profile Manager Enterprise and NetSign
Enterprise are based on tested and proven technologies and together provide a
comprehensive solution for issuing and managing the lifecycles of digital
certificates, secure credentials, and smart cards.

MAESTRO(TM) CRYPTOGRAPHIC LIBRARY. Maestro is a multi-protocol
cryptographic library that enables software developers to incorporate secure
token-based, symmetric-key and asymmetric-key cryptography into their
application software. Maestro is a multi/concurrent access, cross-platform
system that supports multiple types of tokens such as smart cards, Personal
Computer Memory Card International Association (" PCMCIA") cards and
cryptographic algorithms. Coupled with token readers/writers, Maestro supports
devices over commonly used interfaces, including keyboard, serial, small
computer system interface, or SCSI, parallel port and USB. Maestro currently
supports two commonly used cryptographic interface protocols. For Maestro
development, we are currently concentrating on cryptOS development to expand the
functionality of Maestro. CryptOS is a smart card middleware library that
connects applications requiring cryptographic services with the smart cards
supporting those services. CryptOS acts as a cryptographic service provider
for Microsoft's Cryptographic Application Interface. Maestro is compatible
with Windows 95, 98, 2000 and NT operating systems as well as all popular UNIX
platforms.

TOKENS AND TOKEN READERS

THE USA CARD FAMILY. In cooperation with Atmel Corporation and the NSA,
we have completed the development of, and are preparing for initial limited
production of, a next generation secure chip, the Forte, which can support PKI
cards. Forte, the newest member of the USA Card family, is a high-speed 32-bit
system on a chip microprocessor that is designed with a high-speed USB interface
in addition to the ISO interface. USA Cards will have a larger storage capacity
and faster processing speed than existing smart cards. Forte offers PCMCIA level
of performance at a price competitive with less expensive PKI smart cards. We
expect shipments of the Forte based USA Card will begin in the third quarter of
2004.

OTHER LEGACY SECURITY TOKENS. In addition to the USA family of smart
cards, we offer commercial off-the-shelf ISO standard smart cards ranging from
data storage-only cards to cards containing cryptographic capabilities. Because
our readers/writers and software are open-architecture, open-platform and
open-token, as well as algorithm and API independent, they work with third-party
tokens, such as PCMCIA cards, smart cards, rings, proximity cards and plastic
keys and other commercially available tokens.

SSP 210 SMART CARD READER. Our NetSignia 210 Smart Card Reader is an
ISO 7816-compliant device enabling direct communication between the host
computer and the smart card.

SSP 250 BIOMETRIC SMART CARD READER. Our 250 Biometric Smart Card
Reader integrates fingerprint biometrics to secure data transmissions, protect
communications and transactions, and prove identity in networked and physical
environments. With its embedded fingerprint verification system, this reader
represents a significant advance in digital security, bringing the same level of
protection, authentication and non-repudiation to virtual transactions. Our 250
card reader also enables strong levels of physical access and verification of
identity, promising powerful security for employee verification, funds transfer,
encrypted communications and granting of physical and electronic access to
personal records, documents or transactions.

ARGUS 3015 DUAL CARD READER. Our 3015 Dual Card Reader is a USB device
that can simultaneously accommodate a DMS FORTEZZA card and a CAC card. Our 3015
Dual Card Reader is plug-n-play solution that provides full functionality for a
variety of DMS applications and is available as an internal bay-mounted unit and

as an external freestanding device. While supporting both DMS FORTEZZA and CAC,
this reader provides an interface to PC systems. Our 3015 Dual Card Reader is
forward compatible with 64K memory capacity smart cards that have a USB
connector, which will be a feature of the next generation of secure USA Card.

ARGUS 300. The ARGUS 300 consists of a tamper-resistant industry
standard architecture ("ISA") or peripheral component interconnect ("PCI") bus
board and external reader/writer and is connected to the keyboard. The ARGUS 300
incorporates data encryption standard ("DES") encryption technologies and offers
additional security features such as boot protection, electronic commerce
security and protected PIN path directly through the board rather than through
an external device that might be tampered with by an unauthorized user. The
ARGUS 300 is validated for electronic signature by the National Institute of
Standards and Technology, the U.S. Treasury Department and the U.S. General
Accounting Office.

PCMCIA CLIENT READER/WRITER. We offer a series of single and
dual-socket PCMCIA card readers/writers for both internal and external
application, that interface via various ports such as SCSI, ISA bus, PCI bus,
USB and parallel port. These readers/writers incorporate our proprietary device
drivers, which provide the interface between the reader/writer and its
application software, such as Maestro and third-party application software.

ARGUS 2108. We offer a reader/writer that contains sockets for up to
eight PCMCIA cards, is used on the enterprise's server side and incorporates the
device drivers and other technologies of our other PCMCIA readers. The Argus
2108 interfaces with the host server to enable the host server to provide
rapid/simultaneous processing of cryptographic functions received from numerous
clients.

SERVICES

JFORTE DEVELOPMENT. In 2003, we were awarded a
development contract to add the Java operating system to the USA Cards's USA
OSS. Once complete, the addition of a Java operating system will allow existing
Java applications to run in the secure USA Card environment. This will make the
USA Card interoperable for government or commercial markets, and will broaden
the status of USA Card as a flexible and secure standard for identification and
processing of encrypted digital information. Work on this program is a fixed
price, milestone delivery contract with scheduled completion at the end of the
second quarter of 2004.

FORTEZZA SUPPORT SERVICES. We are the sole source for support of the
cryptologic interface ("CI") library for FORTEZZA cards. This library can be
linked into an application, giving FORTEZZA cryptographic capabilities such as
encryption, hashing, and digital signatures. The CI Library relieves the
developer from the complexity of interacting with the device drivers and PCMCIA
readers on the various platforms and input/output ("I/O") buses. Our
multiple-access library was designed to meet the needs of the most demanding
applications. These include sophisticated applications such as web and database
servers, firewalls, mail transport agents, and other high-availability,
high-performance systems. The contract for these services is awarded annually,
with work performed on a cost-plus-award-fee basis.

NEXT GENERATION PKI INITIATIVE. We perform development work for this
program under firm-fixed price, cost-plus-award-fee, and time-and-materials
contracts. We may sell site licenses for the completed web-enabled technology to
both government and private sector users.

SUPPORT AND MAINTENANCE. Purchasers of site licenses will be required
to separately purchase annual support contracts for those licenses in order to
maintain support services for the operating systems.

LICENSING

NEXT GENERATION PKI INITIATIVE. We license the web-enabled software
package in two different forms of per site license: either an unlimited number
of users per server or 50,000 users per server. Each requires the separate
purchase of annual maintenance at the time a site license is executed or at a
later date. To date, we have sold two site licenses to a federal government
user, together with a maintenance contract.

USA OSS. Certain large-scale original equipment manufacturers ("OEMs")
may license this technology for inclusion in their design in lieu of purchasing
a chip set containing the USA OSS. Potential users are in the wireless chip
manufacturing and design and hardware security module manufacturing areas.
Wireless can include cell phones, personal data assistants and wireless laptop
computers. As of March 23, 2004, we have not entered into any licensing
arrangements, but we may do so in the future.

PROFESSIONAL SERVICES. Designed to complement in-house resources and
meet an organization's security requirements, our professional services team
develops solutions that address the lifecycle of a security system from
planning, installation and training through deployment and maintenance. On a
contract basis, we periodically customize software or device drivers according
to a customer's needs.

BUSINESS STRATEGY

Our objective is to become the leading provider of information security
solutions for the digital economy. We intend to build upon our open standards
core technologies, Profile Manager, NetSign and the Forte(TM) chip, originally
developed for government deployment. Organizations supporting or communicating
with government agencies that adopt the next generation PKI initiatives will be
heavily influenced to adopt those same standards for their own communications.
We believe the ability of the Forte chip or USA OSS to add existing applications
to a product already deployed to millions of users will be of great appeal to
providers of commercial products and services, as they will be able to instantly
present their products or services to new targeted markets. Key elements of our
strategy include:

o MAINTAIN TECHNICAL LEADERSHIP IN SECURED COMMUNICATIONS. We plan
to continue to innovate and maintain a leadership position in the
digital security arena. We have provided innovative information
security solutions for several leading government programs. For
instance, our NetSign CAC smart card client package and Argus
FORTEZZA products have been chosen by the DoD to provide network
security and desktop protection for many of its organizations. We
were also selected by General Dynamics to participate in
developing the next generation PKI driven identity management
framework for the U.S. government. By adapting current products
produced under these programs for commercial requirements, we
believe our open architecture approach can potentially become a
standard for the private sector.

o PRODUCTIZE OUR INTELLECTUAL PROPERTY. Over the past thirty years
we have developed a large portfolio of intellectual property. We
are implementing a plan to develop standard products incorporating
this intellectual property for sale into the government,
commercial, and small business markets. By leveraging our
experience at creating custom solutions for government contracts,
we believe we will be able to create, market, distribute, and sell
commercial off the shelf ("COTS") products. As part of this plan,
we have created NetSign Privacy Agent based on our NetSign CAC
middleware. Development plans are underway to create commercial
products from our projects with the DoD.

o EXPAND OUR TARGETED CUSTOMER BASE. Our business strategy is to
continue deployment of our core technology in the government
market. We will then leverage that deployment, together with our
expertise in driving Internet security solutions, into various
commercial and consumer markets.

o STRENGTHEN RELATIONSHIPS WITH STRATEGIC PARTNERS, SYSTEMS
INTEGRATORS, AND OEMS. We intend to continue developing
relationships with strategic partners, systems integrators, and
OEMs to further penetrate government and commercial information
security markets. As digital security becomes an imperative, our
large-scale solutions will enable systems integrators and OEMs to
create value-added solutions for their customers. We believe that
by leveraging these types of relationships, we will have the
greatest opportunity to be included in large-scale installations.

o PROMOTE SALES OF STAND-ALONE COMPONENTS. We have created the first
open embedded, portable security architecture that simultaneously
supports PKI and multiple standards of digital rights management.
Our open standards approach will enable our various products to be
sold as individual components. For example, by connecting a smart
card reader through a USB port, a PC user can incorporate a secure
device for accessing music and digital information, paying for
products, or securing data transmission.

o PROMOTE COMMERCIAL SALES OF NETSIGN PRIVACY AGENT AND PROFILE
MANAGER ENTERPRISE. We have created a commercial version of our
NetSign CAC software and have developed sales and marketing plans
for releasing the new product during the second quarter of 2004.
In addition, the enterprise version of our identity management
solution, Profile Manager, is scheduled to be available for
commercial sales during the third quarter of 2004.

o EXPAND AWARENESS OF OUR BRAND NAME. It is our goal to establish a
brand name equated with assurance and security. We intend to build
our brand by emphasizing our assurance capabilities in our sales
message, and through joint marketing efforts with strategic
partners.

SALES, MARKETING AND DISTRIBUTION

We market, sell and distribute our information security products and
services via the Internet, our direct sales force, sales representatives and
other targeted sales channels. Our targeted channels include systems
integrators, value added resellers ("VARs"), OEMs, strategic alliances, and
international distributors. We intend to devote significant resources toward
marketing efforts and business development activities designed to build our
brand name and expand our business distribution channels.

DIRECT MARKETING

As of March 23, 2004, we employed 10 full-time personnel to perform
direct sales, technical sales support, business development and marketing. This
sales force targets markets that include: enterprises, consumers, home
entertainment, various vertical markets, and federal, state, local and foreign
government agencies. Our sales force is responsible for soliciting prospective
customers and providing technical and application advice and support for our
products and services. We intend to further penetrate these target markets by
using direct sales personnel with significant expertise.

INDIRECT MARKETING

In addition to our direct sales force and key strategic relationships,
our sales strategy includes the development of supplemental sales channels.
These channels include systems integrators, value-added network service
providers, VARs, and OEMs. We anticipate that these third parties will provide
us with contacts to prospective customers to which we would not otherwise have
access. As part of our expansion strategy, we will seek to develop relationships
with additional third-party sales channels.. It is our intention that these
sales channels will also be used as supplemental distribution channels to
augment our current distribution efforts.

ADVERTISING AND PUBLIC RELATIONS

Our advertising efforts include our web site, print product materials,
events, sales presentation tools, and corporate marketing materials. Our current
public relations efforts include press kits and press releases. These efforts
are designed to complement our sales and marketing efforts. We have hired an
independent firm to supplement our internal advertising and public relations
efforts.

TRADE SHOWS AND PRESENTATIONS

We attend and exhibit our products and services at selected trade shows
in the U.S. and around the world. We intend to continue attending selected trade
shows and to join with strategic partners in presenting our products and
services to prospective customers. In February 2004, at the RSA security trade
show held in San Francisco, we made a joint presentation of our NetSign CAC
product together with biometric products from SAFLINK Corporation. As discussed
later in this report, we subsequently executed a definitive merger agreement
with SAFLINK Corporation.

COMMERCIAL SALES

To drive our commercial product sales effectively, we will need to
expand our commercial sales force. Should we complete the recently announced
merger with SAFLINK, we will gain access to an in-place sales force having an
existing account base. We believe this will accelerate our ability to achieve
sale in the commercial market space. We anticipate that some of our commercial
products will create demand for delivery of our software based products via the
Internet. We will also use re-seller agreements with selected sales
representatives, and other sales channels, such as systems integrators, VARs,
OEMs, strategic alliances, chip manufacturers or designers and international
distributors. Our target market includes enterprises, consumers, home
entertainment, and selected vertical markets. We recently hired personnel
targeted at positioning our products in the commercial markets, and we are
currently evaluating various target markets and their potential return.

GOVERNMENT SALES

We distribute our information security and PKI-based products to the
federal, and state governments through our direct sales force. Our sales force
also works with strategic accounts and programs, as well as with large prime
contractors and systems integrators such as General Dynamics, Northrup Grumman,
Gateway, Lockheed Martin Corporation, and OEM's such as Micron PC, LLC and
Gateway.

The government information technology market is highly structured, with
strict procurement rules and procedures. Government projects often have large
contracts with relatively long sales cycles, and significant barriers to entry,
but low collection risks. Several of our products, such as the Argus 300 reader
and NetSign CAC, have received high levels of government certifications. As a
result, we have created a highly respected and positive relationship with many
government agencies and their systems integrators, OEMs, and preferred
suppliers.

A significant amount of computer products and services purchased by the
federal government are made under contracts or purchase orders awarded through
formal competitive bids and negotiated procurements. Most bids are awarded based
on a number of factors that determine the best value to the government. These
factors are generally a combination of price, technical expertise, and past
performance on other government contracts. Major procurements can exceed
millions of dollars in total revenue for the supplier or systems integrator, and
can span many years.

CUSTOMERS

We work hard to meet the needs of our varied customers. Our customers

represent a wide range of enterprises, consumers and vertical markets, as well
as federal, state, local and foreign government agencies. A representative list
of our customers includes:

CDW Computer Centers, Inc. Lockheed Martin Corporation
Booz Allen & Hamilton Inc. Micron PC, LLC
Department of the Air Force National Security Agency
Department of Defense Northrop Grumman Corp.
Department of the Navy TRW Systems, Inc.
Gateway Inc. U.S. Army Corps of Engineers
General Dynamics U.S. Department of State
Gradkell Computers, Inc. U.S. Joint Forces Command
Itochu Techno-Science Corp. VeriSign

During 2003, agencies of the DoD, General Dynamics and Micron PC, LLC
accounted for 28%, 18% and 12% of our revenues, respectively. No other
individual customer accounted for more than 10% of our revenues during 2003.

BACKLOG

As of March 23, 2004, we had backlog of $1.8 million, of which
$1.3 million, or 77%, was related to licenses and services and $406,000,
or 23%, was related to information security products. The license and service
backlog consisted of $640,000 related to our contracts or sales to government
agencies and $601,000 related to our subcontract with General Dynamics. As of
December 31, 2003, we had backlog of $1.9 million, of which $1.5 million, or
83%, was related to licenses and services and $313,000, or 17%, was related to
information security products. The license and service backlog at December 31,
2003 consisted of $938,000 related to our contracts with the DoD and $602,000
related to our subcontract with General Dynamics.

CUSTOMER SERVICE AND SUPPORT

As of March 23, 2004, our customer service and support staff consisted
of 38 persons, including 36 engineers and technical support personnel. Our
customer service department works closely with customers and prospective
customers to provide comprehensive service and support for our products and
systems.

SUPPLIERS

Third party vendors produce some of the components we incorporate into
our products. We also integrate third-party products and components into the
networks we design and develop for our customers. To maintain quality control
and enhance working relationships, we generally rely on multiple vendors for
these products. However, in some cases, products or services are procured from
single sources.

STRATEGIC ALLIANCES

We plan to increase our vertical market penetration and enhance our
product line by continuing to develop strategic alliances with other companies
in the information security and network integration industries. We have
developed strategic alliances with companies in an effort to:

o incorporate our components into third party products;
o develop additional products and services;
o increase research and development efforts;
o generate more proposals and presentations for products and
services; and
o license technology.

We intend to pursue and develop strategic alliances with systems
integrators for the marketing, sale and distribution of our products in the
information security market. Strategic alliances assist in expanding our
marketing and technical capabilities. They are intended to increase the
distribution and market acceptance of our information security products.

We anticipate that strategic alliances will allow us to integrate
third-party products into our product offerings in a cost effective manner and
provide our clients with customized information technology solutions. We believe
that strategic alliances also will allow us to incorporate our products into
third parties' products thereby accelerating the adoption of our products into
the market. This enhances and helps to establish the SSP brand name. Our
strategic alliances currently include the following:

o NETSCAPE AND MICROSOFT. We provide enhanced e-mail security
features to Netscape and Microsoft browser programs through
integration of our NetSign product lines;

o VERISIGN. We have a marketing agreement with VeriSign; and

o ATMEL CORPORATION AND THE NATIONAL SECURITY AGENCY. We have an
alliance with Atmel Corporation and the NSA. Through this
alliance, we jointly developed Forte, an advanced 32-bit system on
a chip microprocessor, which will be embedded in our USA Card next
generation PKI cards. We signed a teaming agreement with Atmel
Corporation to further exploit the technologies incorporated in
the Forte product.

RESEARCH AND DEVELOPMENT

We will continue to devote research and development ("R&D") resources
to enhance our information security product line. We conduct extensive research
and development focusing on cryptographic embedded systems, software, and
hardware products, including cryptographic token reader/writer devices and
cryptographic tokens such as smart cards. These products can be readily
integrated and adapted to meet the expanding security requirements of the
Internet, intranets and extranets.

Our R&D team has broad expertise in the development of cryptographic
products, with an emphasis on products that meet leading industry security
standards for global markets. Furthermore, our R&D team is experienced in
implementing our information security hardware and software solutions for an
extensive family of Windows and Unix operating systems. We also have expertise
in bringing our products to a variety of sectors, such as government, finance
and system integrators. During 2002 and 2003, we spent $4.9 million and $4.2
million, respectively, on research and development projects. The development of
the Forte chip constituted the major focus of our R&D efforts, together with the
related operating system, and enhancements to other software and hardware
projects. In accordance with accounting principles generally accepted in the
United States, R&D amounts have been expensed against operations and are shown
on separate line items in the consolidated statements of operations for the
respective years.

Our current R&D efforts include:

o We have recently completed work as a core technology provider for
the first phase of a contract awarded to General Dynamics C4
Systems Next Generation PKI Initiative Team for the DoD. Through
our Profile Manager product, we provided smart card and digital
certificate management software and engineering services to
implement the secure next generation PKI initiative, a significant
element of the DoD long-term roadmap for information assurance
strategy. This contract, known as CI-1, encompasses the first
capability increment of the DoD next generation PKI initiative and
includes the development and fielding of a system for providing
high-assurance digital certificates to the DoD and other
government agency users. Profile Manager, a comprehensive smart
card and digital certificate issuance and lifecycle management
application, was used to satisfy certificate and token management
requirements, as the DoD high-grade digital certificates have
strict criteria for the distribution and use of certificates,
protection and recovery of keys, and stringent auditing
requirements. The first phase of the contract is now complete, and
evaluation of the next phase of this program is underway. As of

March 23, 2004, the second phase of program work had not yet been
awarded.

o The R&D team will be supporting a product rollout of Forte. The
pre-production run of the Forte smart card has been delivered to
both government and commercial users for evaluation, and the
production version is scheduled for release in the second quarter
of 2004. In addition to the smart card version of our Forte
product, we are investigating other markets for the chip, and for
embedding the USA OSS in various integrated circuit form-factors
manufactured by other parties.

o Under a development contract, we are developing a Java version of
Forte. This design, JForte, supports the standard Java card and
Visa open platform protocols. JForte is scheduled for production
release toward the end of 2004.

o Based upon market feedback, we continue to develop a series of USB
interface readers/writers, some of which include fingerprint
biometric capability.

o We are developing technologies to incorporate a number of
biometric technologies (fingerprint, iris scan, voice recognition,
handwriting recognition) into our PKI products to provide further
advanced identification and authentication protection. In
addition, future versions of both NetSign Privacy Agent and the
Enterprise Certificate Management System will have biometric
capabilities.

o We are beta testing a new commercial product offering based on
NetSign CAC called NetSign Privacy Agent. The applications being
integrated into NetSign Privacy Agent are the result of market
research conducted with large enterprises. An updated product is
scheduled to be available for delivery in the second quarter of
2004. A number of organizations in different industries have
requested to conduct pilot programs for this product.

o We are developing commercial versions of both the server and
client components of the KMI project. The server side component is
called Profile Manager Enterprise, and the client side component
is called NetSign Enterprise. By leveraging our development work
under the next generation PKI initiative program, we believe that
we can bring commercial versions to market that will be
state-of-the-art in network-based PKI.

o We plan to expand Maestro to offer additional application program
interfaces, including an interface to the GSA CAC protocol,
enabling the Maestro to function on a number of Unix operating
system platforms, and to add to the suite of tokens supported by
Maestro.

INTELLECTUAL PROPERTY

To date, we have developed and protected intellectual property for a
number of information security products. Due to the rapid pace of technological
innovation in the information security market, our ability to maintain a
position of technology leadership is dependent upon the skills of our
development personnel more than upon the legal protections afforded to our
existing and future technology. When protecting our proprietary technology, we
rely on a combination of trademarks, patents, copyrights, trade secret laws,
non-disclosure agreements, technical measures, and other methods. In addition,
we employ shrink-wrap license agreements with end users. Since these license
agreements are not signed, they may not always be enforceable.

We currently have patents issued by and applications pending with the
U.S. Patent and Trademark Office. All of our patents and patent applications
cover aspects of our information security technology that enable competitive
advantages. In addition, we have foreign patent applications pending approval.
Prosecution of these patent applications and any other patent applications that
we may later file may require us to expend substantial resources.

We initially developed Forte under a task order issued under a contract
with the NSA. The contract incorporates the standard licenses for technical data
and computer software from the DoD, commonly known as the data rights clauses.
Data rights clauses are only applicable to data or software actually delivered
to the federal government under a contract. If the data rights clause, or the
government purpose rights license, is applicable to our agreement with the NSA,
it would permit the federal government to create second supply sources without
paying us royalties. We do not believe the data rights clause or the government
purpose license applies to Forte because our contract with the NSA does not
provide for the delivery of this product to the federal government. However, the
task order does allow NSA to obtain detailed design information about Forte.

COMPETITION

We compete in numerous markets, including:

o Internet and intranet electronic security;

o access control and token authentication;

o smart card-based security applications and rights management; and

o electronic commerce applications.

The markets for our products and services are intensely competitive and
are characterized by rapidly changing technology and industry standards,
evolving user needs and frequent introduction of new products. We believe that
the main factors affecting competition in our key markets include:

o ease of use, performance and product functionality - our products
have been in the marketplace for over thirty years and generally
have performed to the expectations of their users.

o flexibility and features - our products are designed with the
features requested by our customers with the functionality and
flexibility to meet the operating requirements of field personnel.

o use of open standards - by using open standards architecture, our
products are compatible with most operating platforms and
applications developed by other vendors.

o quality of service support - our services and products have
consistently received high ratings from post contract reviewers.

o corporate reputation - based upon over thirty years of operation,
we have a reputation for developing innovative and sophisticated
solutions for digital security needs.

o ease of installation - to the extent technologically possible, we
design products for ease of use and installation by the end user.

o enterprise wide management of applications and tokens - our
products are scalable to service users located throughout the
world by web-enabled client side products; and

o price - our products are priced to provide the best value to our
customers.

Based upon the combination of all these competitive factors, we believe
we maintain a strong position in the security market for government digital
communications. We are based in the U.S., while certain competitors, such as
ActivCard and Schlumberger, have products based upon foreign-developed
technology despite having offices in the U.S. In providing security solutions to
sensitive U.S. government agencies and branches of the armed forces, this may be
a significant competitive advantage. We face significant competition from a
number of different sources. We believe that the competition will likely
increase as a result of higher demand for security products and consolidation in
the information security technology market. Many of our competitors are large
firms that have several advantages, including greater name recognition and
greater financial, technical and marketing resources.

Some of our significant information security competitors include
Datakey, RSA Data Security, SCM Microsystems, and ActivCard. In addition, there
are several start-up companies with whom we compete from time to time.

We believe that our existing relationships and the relationships we
intend to pursue with systems integrators and OEMs provide us with an important
competitive advantage in the information security industry. We also have
extensive experience in developing hardened security solutions for government
projects and have been used in several leading government programs.

GOVERNMENT REGULATION

Because we sell our products internationally as well as domestically,
we must comply with federal laws regulating the export, and applicable foreign
government laws regulating the import, of our products. The U.S. government has
recently relaxed the export restrictions for our NetSign and Profile Manager
products. However, the U.S. government may rescind these approvals at any time.
Under current regulations, these products can be exported without a license to
most countries for use by banks, healthcare and insurance organizations, and
overseas subsidiaries of U.S. companies.

Additionally, we may apply for export approval, on a specific criteria
basis, for future products. It is possible that we will not receive changes to
export future products on a timely basis, on the basis we request, or at all. As
a result of government regulation of our products, we may be at a disadvantage
when competing for international sales with foreign companies that are not
subject to these restrictions.

OTHER BUSINESS ACTIVITIES DURING THE PAST THREE YEARS

COMBINATION WITH BIZ INTERACTIVE ZONE, INC.

In August 2001, in a stock for stock transaction we acquired BIZ
Interactive Zone, Inc. ("BIZ"), a Delaware corporation that had developed,
designed, and was in the process of marketing security solutions for the
financial, government, healthcare, education, and entertainment industries, and
we changed our name to SSP Solutions, Inc. We have combined the businesses of
Litronic Industries and BIZ into a single operating unit, which operates under
the names SSP Solutions, Inc. and SSP-Litronic.

PULSAR PRODUCT RESELLING

In June 1999, we acquired Pulsar Data Systems, Inc., a Delaware
corporation ("Pulsar"), in a stock for stock transaction. Pulsar operated
independently as a separate business segment. Pulsar specialized in solutions
that required the deployment of large-scale networks and secure PCs. Pulsar
offered secure computers using elements of our product offering. Due to the
intensive capital requirements and low margin returns, as of March 28, 2003,
we decided to exit this line of business. As a result, we stopped accepting
new orders and discontinued the operations of Pulsar.

VENETIAN INTERACTIVE ONLINE GAMING

In January 2002, we formed SSP Gaming, LLC, a Nevada limited liability
company ("SSP Gaming"). In June 2002, SSP Gaming and the Venetian Casino Resort,
LLC, a Nevada limited liability company based in Las Vegas, Nevada ("Venetian"),
executed an operating agreement to form Venetian Interactive, LLC ("VI"), a
Nevada limited liability company that was to provide management services,
consulting services, financial services, intellectual property licensing
services, and equipment to the online gaming industry and to develop and operate
Venetian-branded casino Internet sites. Due to a dispute regarding funding of
VI, the VI operating agreement was terminated in August 2003 by the Venetian,
and we are no longer engaged in this business.

PROPOSED MERGER WITH SAFLINK CORPORATION

In March 2004, we entered into an Agreement and Plan of Merger and
Reorganization with SAFLINK Corporation, an unaffiliated Delaware corporation
("SAFLINK") that offers biometric software solutions that protect intellectual
property, secure information assets and eliminate passwords. SAFLINK's biometric
software provides Identity Assurance Management(TM), allowing administrators to
verify the identity of users and control their access to computer networks,
physical facilities, applications, manufacturing process control systems, and
time and attendance systems.

The merger agreement with SAFLINK contemplates that SSP Solutions will
merge with a newly-formed wholly-owned subsidiary of SAFLINK and become as a
wholly-owned subsidiary of SAFLINK, with each share of our common stock being
exchanged for 0.6 shares of SAFLINK common stock. The consummation of the merger
is subject to the adoption by our stockholders of the merger agreement, the
approval by SAFLINK stockholders of the issuance of shares of SAFLINK common
stock in the merger, and other customary closing conditions.

EMPLOYEES

As of March 23, 2004, we employed 75 people, of which 73 were full-time
and 2 were part-time, including 36 in research, development, and support; 10 in
operations, sales, marketing and MIS; 2 in technical support, and 21 in
executive management, finance, human resources, legal, and administration. Our
employees are not represented by labor unions. While we have reduced our
staffing levels, if sales fail to materialize, we will need to further reduce
expenses through additional reductions in staff.

ITEM 2. DESCRIPTION OF PROPERTY

We are headquartered in Irvine, California, where we currently lease
approximately 20,702 square feet of office space for our executive offices under
a seven-year lease that expires on February 28, 2007, and we have an option to
renew the lease for a five-year period, which we may exercise by providing
notice to the landlord not less than six months prior to the expiration of the
initial seven-year term. The facility has a current annual rent of $429,000,
which is subject to future annual increases of 4%, and is leased to us by KRDS,
Inc., an entity owned in part by Kris Shah, our co-chairman.

We lease a 5,200-square foot information security products sales office
in Reston, Virginia to service our government accounts located in the
Washington, D.C. area. The Reston lease provides for a monthly base rent of
$9,600, subject to an annual 3% increase, plus prorated portions of increased
building operation costs. The lease expires in February 2009, subject to our
right to terminate the lease in March 2007 by paying an early termination fee of
approximately $10,500.

ITEM 3. LEGAL PROCEEDINGS

G2 Resources, Inc. ("G2") and Classical Financial Services, LLC
("Classical") have filed complaints against one of our subsidiaries, Pulsar Data
Systems, Inc. ("Pulsar"), alleging that Pulsar breached a contract by failing to
make payments to G2 in connection with services allegedly provided by G2. In
April 2001, the court dismissed, for lack of prosecution activity for more than
twelve months, the original complaint that G2 had filed against Pulsar in
January 1998. G2 re-filed the action in May 2001. In 2002, the court moved this
case into the same division handling other matters related to G2 and Classical,
and stayed any further action in this case pending the resolution of matters
between G2 and Classical. We have been vigorously defending ourselves against
the plaintiffs' claims and have asserted defenses and counterclaims.

Research Venture, LLC filed a complaint against us on June 4, 2002 and
filed first amended complaints against us on August 6 and August 7, 2002 in the
Superior Court for the State of California, County of Orange, Central Justice
Center (Case Nos. 02CC10109 and 02CC10111) alleging unlawful detainer and
seeking possession of two leased properties, alleged damages and lost rent. We
surrendered possession of both properties and negotiated a restructuring of our
obligations under the leases. The restructuring involved, among other terms, our
entry on October 23, 2002 into a stipulation for entry of judgment that would
have permitted Research Venture to file a judgment against us in the maximum
aggregate amount of $3.1 million, less consideration we paid prior to any entry
of the judgment, if we did not comply with the terms of the restructuring
arrangement for the next two years. We issued 959,323 shares of common stock
with an agreed upon value of $1.2 million as payment toward the maximum
aggregate amount. The first payment of $75,000 was made as scheduled in December
2002, with additional scheduled payments of $100,000 due in March 2003, $150,000
due in June 2003 and $175,000 due in September 2003. We did not timely make the
full $150,000 payment that was due in March 2003. We subsequently paid the
balance of the March payment but did not pay the full $150,000 due in June 2003.
Research Venture claimed a default under the facilities settlement agreement. On
August 11, 2003, Research Venture obtained a judgment against us per prior
stipulation in the amount of $2.7 million.

On August 29, 2003, we entered into an agreement of settlement on
stipulated judgment with Research Venture. Under that settlement agreement,
Research Venture retained 959,323 shares of common stock initially issued in
connection with the restructuring arrangement and 96,919 shares of common stock
issued upon conversion of $126,000 of the principal balance of a $360,000
non-interest bearing note that we had issued as prepaid rent, and we registered
those shares for resale by Research Venture. In addition, Research Venture
canceled and surrendered the note, we paid to Research Venture cash in the
amount of $865,000 and issued to Research Venture 414,450 shares of common stock
that were to be registered for resale under a separate registration statement on
or prior to November 30, 2003, and the building lease agreement was terminated.
The settlement agreement contained mutual general release language, and the
August 11, 2003 stipulated judgment was vacated. Because we did not timely
obtain effectiveness of the registration statement covering the 414,450 shares
of common stock we issued in the August 2003 settlement, Research Venture may be
entitled to entry of a stipulated judgment against us in an amount up to
$373,000 less the product of $.90 multiplied by the number of those shares that
Research Venture sells prior to entry of the stipulated judgment. If the
stipulated judgment is entered, any unsold shares will be returned to us for
cancellation upon payment of the judgment.

Shane Brophy, an ex-employee, filed a complaint against us on December
5, 2003, in the Superior Court for the State of California, County of Orange,
Central Justice Center (Case Nos. 03CC14345) alleging causes of action for
breach of employment contract, unpaid wages and wrongful termination in
violation of public policy arising from our termination of his employment in
July 2003. We have responded to the complaint, but no discovery has been
conducted. Therefore, we cannot quantify the outcome or exposure. However, we
strongly deny the claims and believe the complaint is without merit. We intend
to assert claims for damages against Mr. Brophy and parties affiliated with him.
Legal counsel for both parties have agreed to dismiss the complaint against us
and have this matter settled through binding arbitration. As of March 25, 2004,
there had been no dismissal entered or arbitration hearing set in this matter.

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

We held our 2003 annual meeting of stockholders on December 19, 2003.
At the meeting, four proposals were presented and voted on:

(1) to elect two Class I directors to our board of directors:

o Gregg Amber was re-elected by a vote of 20,675,154 shares
"for" and 69,400 shares "withheld."

o Joel K. Rubenstein was re-elected by a vote of 20,740,154
shares "for" and 3,400 shares "withheld."

(2) to ratify and approve the adoption of our Second Amended and
Restated 1999 Stock Option Plan in order to increase the number of
shares of common stock authorized for issuance from 4,000,000 to
10,000,000; provide our board of directors or the committee that
administers the plan added flexibility with regard to
post-employment exercises of plan options (including options
granted to our executive officers or directors); clarify the
classes of persons eligible to participate in the plan; and make
other changes as are necessary or desirable to ensure the plan is
in compliance with existing rules and regulations:

o This proposal was approved by a vote of 20,624,032 "for" and
119,622 shares "against."

(3) to ratify and approve the issuance of securities in certain
financing transactions as described in the proxy statement
relating to the annual meeting:

o This proposal was approved by a vote of 18,674,973 shares
"for" and 96,212 shares "against."

(4) to ratify the selection of Haskell & White LLP, independent
auditors, to audit our consolidated financial statements for the
year ending December 31, 2003:

o This proposal was approved by a vote of 20,739,154 "for" and
4,400 shares "against."

The terms of our Class I directors (Messrs. Amber and Rubenstein) will
expire upon the election and qualification of directors at our 2006 annual
stockholders' meeting. However, Mr. Rubenstein passed away in February 2004, and
his seat remains vacant. The terms of our Class II directors (Marvin J. Winkler
and David A. Janes) will expire upon the election and qualification of directors
at our 2004 annual stockholders' meeting; and the terms of our Class III
directors (Kris Shah and Ron R. Goldie) will expire upon the election and
qualification of directors at our 2005 annual stockholders' meeting.

PART II

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

MARKET PRICE AND HOLDERS

Our common stock is listed on The Nasdaq National Market under the
symbol "SSPX." The following table sets forth, for the quarters indicated, the
high and low closing sale prices per share of our common stock as reported on
The Nasdaq National Market.

HIGH LOW
---- ---

Quarter ended March 31, 2002....................... $ 4.40 $ 2.31
Quarter ended June 30, 2002........................ $ 1.93 $ .98
Quarter ended September 30, 2002................... $ 1.54 $ .95
Quarter ended December 31, 2002.................... $ 1.05 $ .59
Quarter ended March 31, 2003....................... $ 1.06 $ .54
Quarter ended June 30, 2003........................ $ 1.02 $ .50
Quarter ended September 30, 2003................... $ 1.17 $ .73
Quarter ended December 31, 2003.................... $ 1.84 $ .94

On March 23, 2004, the last reported sale price for our common stock on
The Nasdaq National Market was $1.47. As of March 23, 2004, the approximate
number of holders of record of our common stock was 38,138,998.

DIVIDEND POLICY

We have not paid dividends on our common stock to date. We do not
anticipate declaring dividends on our common stock in the foreseeable future.
Most of our debt instruments prohibit us from paying dividends on our common
stock.

Each outstanding share of our Series A Convertible Preferred Stock
("Series A Preferred Stock") has a face amount of $7,000. The holders of Series
A Preferred Stock are entitled to a dividend payable semi-annually on June 30
and December 31 of each year, commencing December 31, 2003. The initial dividend
rate of 8% per annum will be adjusted to 12% per annum on May 19, 2005. The
dividend is payable in cash or, at our option if there are a sufficient number
of shares of common stock available, in shares of our common stock valued at the
arithmetic mean of the closing sales price of our common stock for the 30-day
period ending on the day prior to the day the dividend payment is due. Dividends
declared on our Series A Preferred Stock as of December 31, 2003 were paid on
various dates in 2004 through the issuance of an aggregate of 101,915 shares of
common stock valued at $139,000.

RECENT SALES OF UNREGISTERED SECURITIES

In November 2003, we sold 2,150 shares of Series A Preferred Stock and
related investor warrants for a total amount of $15,050,000, of which $9,510,000
represented new capital and $5,540,000 represented cancellation of previously
issued promissory notes.

The shares of Series A Preferred Stock have an initial conversion price
of $0.70 per common share and initially were convertible into an aggregate of
21,500,000 shares of common stock. The warrants provide for the purchase of up
to an additional 10,750,000 shares of common stock. The holders of shares of
Series A Preferred Stock are entitled to dividends as described above under
"Dividend Policy." We reflected the Series A Preferred Stock outside of
permanent equity, and recorded the value of the warrants and beneficial
conversion feature as an increase in additional paid in capital.

The purchasers of Series A Preferred Stock received a five-year A-1
Warrant to purchase 2,500 shares of common stock and a five-year A-2 Warrant to
purchase 2,500 shares of common stock for each share of Series A Preferred Stock
purchased. The A-1 Warrants have an initial exercise price of $1.25 per share,
which increases to $1.50 on July 24, 2004. The A-2 Warrants have an initial
exercise price of $1.50 per share, which increases to $1.75 on July 24, 2004.
Beginning on December 19, 2003, the date of our 2003 annual meeting of the
stockholders, the A-1 and A-2 Warrants became exercisable for up to an aggregate
total of 10,750,000 shares of common stock, subject to weighted average
anti-dilution provisions if we issue shares of common stock or securities
convertible into or exercisable for common stock, other than excluded
securities, at per share prices less than the then effective exercise price.

On April 16, 2002, we issued $5,796,000 of 10% Convertible Notes (see
note 9 to the consolidated financial statements included in this report) to
investors in exchange for cash and previously issued notes. In 2003, we issued
714,383 common shares in payment of interest on the 10% Convertible Notes.
Between November 2002 and October 2003, we issued bridge notes totaling
$3,140,000. The principal amount outstanding under the 10% Convertible Notes and
the bridge notes totaled $8,936,000 ("Total Notes") immediately prior to the
closing of the Series A Preferred Stock financing. As part of the Series A
Preferred Stock financing, we issued 791 shares of Series A Preferred Stock and
issued related A-1 and A-2 Warrants in exchange for cancellation of $5,540,000
of the principal amount of the Total Notes ("Exchanged Notes"), leaving
outstanding a $1,986,000 principal balance of 10% Convertible Notes. In
addition, we cancelled 10% Convertible Notes in the principal amount of
$1,500,000 held by Richard P. Kiphart, Crestview Capital Fund, L.P., Crestview
Capital Fund II, L.P., and Crestview Offshore Fund, Inc. in exchange for the
issuance of notes with identical terms except that the replacement notes
automatically converted into 2,153,589 shares of common stock at a conversion
price of $0.70 per common share after our 2003 annual stockholders' meeting on
December 19, 2003. The replacement notes were accompanied by warrants to
purchase up to 1,071,429 shares of common stock, which warrants are identical to
the A-1 Warrants except that their exercise price is $1.00 per common share.

On August 26, 2003, we executed an engagement letter with Burnham Hill
Partners ("BHP") to act as our exclusive placement agent for the Series A
Preferred Stock financing. As compensation related to the Series A Preferred
Stock financing, we agreed to pay BHP a cash fee equal to 3.5% of the gross
proceeds received by us in connection with the cash exercise of 1,500,000
Registered Warrants (see note 9 to the consolidated financial statements
included in this report). We also agreed to pay to BHP approximately 7.6% of the
gross cash proceeds of new capital in connection with the Series A Preferred
Stock financing and 4% of the gross proceeds received by us in connection with
the future exercise of the A-1 Warrants and A-2 Warrants. We issued to BHP
warrants to purchase up to 1,102,389 shares of common stock, which number was
equal to 7% of the common shares underlying the aggregate number of shares of
Series A Preferred Stock issued for new capital ("Placement Warrants"). We also
issued to BHP warrants to purchase up to 192,004 shares of common stock, which
number was equal to 2.5% of the common shares underlying the aggregate number of
shares of Series A Preferred Stock issued in exchange for the cancellation of
notes ("Exchange Warrants"). The Placement Warrants are exercisable at the
conversion price of the Series A Preferred Stock, expire five years from the
issuance date, have standard piggyback registration rights, have a cashless
exercise provision and have the right to have the underlying shares of common
stock registered for resale in connection with the Series A Preferred Stock
financing. The Exchange Warrants have the same terms as the Placement Warrants,
except that their exercise price is $.01 per share. As part of the engagement
letter with BHP, we agreed to execute a separate letter indemnifying BHP and
its related parties for services provided under the engagement letter. The term
of the engagement letter with BHP is twelve months.

In conjunction with a bridge note agreement entered into during
September 2003, we repriced warrants to purchase up to 2,055,000 shares of
common stock, which warrants had per share exercise prices ranging from $.60 to
$1.30, to a new exercise price of $.50 per share. Of the repriced warrants,
1,500,000 shares of common stock were issued in exchange for warrants exercised
for cash. The remaining repriced warrants to purchase up to 555,000 shares of
common stock, which warrants had been issued in previous bridge financings, were
exercised on a net exercise cashless basis in exchange for the issuance of
262,895 shares of common stock. We recorded a $925,000 non-cash financing
expense in connection with the repricing.

In November 2003, the bridge notes held by our co-chairmen, Kris Shah
and Marvin Winkler, totaling $40,000 were repaid using proceeds from the Series
A Preferred Stock financing. On October 21, 2003, warrants to purchase up to
40,000 shares of our common stock, which warrants had been issued in
accompaniment with the bridge notes and had an exercise price to be determined,
had their exercise price set on terms identical to those established for other,
unaffiliated warrant holders. As a result, the warrants' exercise price was set
at $.50 in consideration for a waiver of certain penalties and the immediate
exercise of the warrants on a cashless basis. Messrs. Shah and Winkler received
an aggregate of 9,474 shares of common stock pursuant to the cashless exercise.

Exemption from the registration provisions of the Securities Act of
1933 for the transactions described above is claimed under Section 4(2) of the
Securities Act of 1933, among others, on the basis that such transactions did
not involve any public offering and the purchasers were sophisticated or
accredited with access to the kind of information registration would provide. In
each case, appropriate investment representations were obtained, and the
securities were issued with appropriate restrictive legends.

ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION

FORWARD-LOOKING STATEMENTS

The following discussion and analysis should be read in conjunction
with our consolidated financial statements and notes to financial statements
included elsewhere in this report. This report contains forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933, as
amended ("Securities Act"), and Section 21E of the Securities Exchange Act of
1934, as amended ("Exchange Act"). We intend that the forward-looking statements
be subject to the safe harbors created by those sections.

The forward-looking statements generally include our management's plans
and objectives for future operations, including plans, objectives and
expectations relating to our future economic performance, business prospects,
revenues, working capital, liquidity, ability to obtain financing, generation of
income and actions of secured parties not to foreclose on our assets. The
forward-looking statements may also relate to our current beliefs regarding
revenues we might earn if we are successful in implementing our business
strategies. The forward-looking statements generally can be identified by the
use of the words "believe," "intend," "plan," "expect," "forecast," "project,"
"may," "should," "could," "seek," "pro forma," "estimates," "continues,"
"anticipate" and similar words. The forward-looking statements and associated
risks may include, relate to, or be qualified by other important factors,
including, without limitation:

o anticipated trends in our financial condition and results of
operations (including expected changes in our gross margin and
general, administrative and selling expenses);

o the projected growth or contraction in the information security
products and services markets in which we operate;

o our ability to finance our working capital and other cash
requirements if needed;

o our business strategy for expanding our presence in the
information security market; and

o our ability to distinguish ourselves from our current and future
competitors.

We do not undertake to update, revise or correct any forward-looking
statements. The forward-looking statements are based largely on our current
expectations and are subject to a number of risks and uncertainties. Actual
results could differ materially from these forward-looking statements. Important
factors to consider in evaluating forward-looking statements include:

o the shortage of reliable market data regarding the Internet
information security market;

o changes in external competitive market factors or in our internal
budgeting process that might affect trends in our results of
operations;

o changes in our business strategy or an inability to execute our
strategy due to unanticipated changes in the contract support
services markets; and

o various other factors that may prevent us from competing
successfully in the marketplace.

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.
Before deciding to buy or maintain a position in our common stock, you should
carefully review and consider the various disclosures we made in this report,
and in our other materials filed with the Securities and Exchange Commission
that discuss our business and that disclose various risks, uncertainties and
other factors that may affect our business, results of operations or financial
condition. In particular, you should review the "Risk Factors" section of this
report.

Any of the factors described above or in the "Risk Factors" section
could cause our financial results, including our net income (loss) or growth in
net income (loss) to differ materially from prior results, which in turn could,
among other things, cause the price of our common stock to fluctuate
substantially.

OVERVIEW

We provide professional information security services and
develop and market software and microprocessor-based products used to secure
electronic commerce and communications over the Internet and other
communications networks based on Internet protocols. Our primary technology
offerings use public key infrastructure, or PKI, which is the standard
technology for securing Internet-based commerce and communications. In addition,
Pulsar, one of our wholly-owned subsidiaries, was a computer and networking
product reseller that focused on resales to government agencies, large corporate
accounts and state and local governments. We acquired Pulsar in June 1999 in
exchange for 2,169,938 shares of our common stock. Due to the intensive capital
requirements and low margin returns, as of March 28, 2003, we decided to
exit the Pulsar line of business and as a result, we have completed a wind down
of the Pulsar operations.

Our lack of liquidity and shortage of working capital has limited our
operations. In November 2003, we completed a private placement of Series A
Preferred Stock that should provide adequate working capital through December
31, 2004 (see note 15 to the consolidated financial statements included in this
report). Prior to completing the Series A Preferred Stock financing, creditors
and vendors generally cooperated with us, which has given us time to reduce our
operating expenses and realize increases in revenues in our core business. We
have done both in the last year of our operations. To reach profitability, we
will need to continue improving our sales and continue controlling our operating
expenses.

As result of the Series A Preferred Stock and other financings, we have
incurred substantial cash and non-cash interest amortization charges in years
ended December 31, 2002 and 2003. These charges were made to reflect the value
of warrants issued with these financings together with the beneficial conversion
features of those instruments. We also took a charge to reflect the charge-off
of unamortized balances relate to the warrants and beneficial conversion
features for instruments exchanged for the Series A Preferred Stock. We will
continue to incur non-cash charges through the end of 2005 related to notes that
remain outstanding. Should those notes convert prior to their scheduled maturity
on December 31, 2005, we would incur accelerated non-cash charges to reflect the
early conversion

CRITICAL ACCOUNTING POLICIES

This "Management's Discussion and Analysis or Plan of Operation"
section of this report discusses our consolidated financial statements, which
have been prepared in accordance with accounting principles generally accepted
in the United States. The preparation of those financial statements required 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 believed 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 the notes to our consolidated financial statements
included in this report.

o 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. Revenue from our high assurance token
contract is recognized under the cost-to-cost method of percentage
of completion. 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, and service
contracts is deferred and recognized on the basis of hours
incurred plus other reimbursable contract costs incurred during
the period.

o 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.

o VALUATION OF GOODWILL AND OTHER INTANGIBLE ASSETS. In accordance
with Statement of Financial Accounting Standards Nos. 141 and 142,
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, and at least annually.
Factors we consider important that 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 that is not recoverable is reduced to
fair value.

We accounted for our August 2001 acquisition of BIZ as a purchase.
Under the purchase method of accounting, the purchase price was 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 resulted in goodwill and other intangible assets valued at $64.7
million.

In July 2001, the FASB issued Statement No. 142, "Goodwill and Other
Intangible Assets." We adopted this statement effective January 1, 2002. Under
this statement, goodwill is no longer amortized and is subject to annual testing
for impairment beginning January 1, 2002. The provisions of this statement
require us to perform a two-step test to assess goodwill for impairment. In the
first step, we compare the fair value of each reporting unit to its carrying
value. If the fair value exceeds the carrying value, then goodwill is not
impaired and we need not proceed to the second step. If the carrying value of a
reporting unit exceeds its fair value, then we must determine and compare the
implied fair value of the reporting unit's goodwill to the carrying value of its
goodwill. If the carrying value of the reporting unit's goodwill exceeds its
implied fair value, then we will record an impairment loss in the amount of the
excess. With regard to a reporting unit's goodwill balance at January 1, 2002,
we were required to perform the first step of the annual testing for impairment
by June 30, 2002. If the results of that step indicated that goodwill may have
been impaired, we were then required to complete the second step as soon as
possible, but no later than December 31, 2002.

We performed an assessment of the fair value of the goodwill of our
information security products and services reporting unit as of December 31,
2002 using three different perspectives: a multi-period discounted cash flow
method, which is a variation of the income forecast approach, a market value
approach and market multiples. The discounted cashflow method used to determine
the fair value of an asset used estimated future cash flows and then discounted
the cash flows to present day utilizing a discount rate that reflects the time
value of money and the risk inherent in the asset. The present value of the cash
flows was determined using a discount rate of 30%, which was found to be our
weighted average cost of capital. The results of the analysis indicated that
there was no impairment as of the valuation date as of December 31, 2002.

We performed an assessment of the fair value of the goodwill of our
information security products and services reporting unit as of December 31,
2003, again using the three different perspectives mentioned above. In past
periods we believe that our daily market stock price did not provide a reliable
indicator of the fair value of our equity. Due to the absence of any research
coverage, the market is generally unaware of our new technology advancements.
With our stock being a micro-cap in terms of total market value, our stock is
subject to high volatility and the daily closing price of our stock does not
provide a true reflection of our fair value at any one point in time. Our stock
price was considered as part of the review process, together with a multi-period
discounted cash flow method discussed above, and various market multiple
measures of company. The discounted cashflow method used to determine the fair
value of an asset used estimated future cash flows and then discounted the cash
flows to present day utilizing a discount rate that reflects the time value of
money and the risk inherent in the asset. The present value of the cash flows
was determined using a discount rate of 25%, which was found to be our weighted
average cost of capital. We deemed it appropriate to assess the fair value of
our goodwill by using a weighted average of these three methods. The results of
the analysis indicated that there was no impairment as of the valuation date as
of December 31, 2003.

We are required to annually perform reviews for impairment that may
result in future write-downs. Tests for impairment between annual tests may be
required if events occur or circumstances change that would more likely than not
reduce the fair value of the net carrying amount. We concluded there were no
events that required interim testing.

As the markets for our products are characterized by rapidly changing
technology, evolving industry standards, and the frequent introduction of new
products and enhancements, it is reasonably possible in the near-term that the
estimates of the anticipated future gross revenues, the remaining estimated
economic life, or both will be reduced. Reasonably possible is defined as more
than remote but less than likely. As a result, the remaining goodwill of $25.9
million at December 31, 2003, may be reduced within the next year.

RESULTS OF OPERATIONS -- COMPARISON OF YEARS ENDED DECEMBER 31, 2002 AND 2003

TOTAL REVENUES

Total revenues increased 17% from $11.4 million during 2002 to $13.3
million during 2003. The increase from 2002 to 2003 was due to a $2.2 million
increase in service revenues, a $550,000 increase in license revenues and a
$790,000 decrease in product revenues. The increases in service and license
revenues were primarily attributable to an increase in sales volume of existing
development services contracts and licensing programs. The decrease in product
revenues was due to lower shipments in the fourth quarter of 2003 caused by
lower sales volume of certain models of our ARGUS readers. Also, as of March 31,
2003, we had effectively terminated all remaining employees at Pulsar and shut
down Pulsar's operations. As such, revenues and expenses of Pulsar are shown as
discontinued operations.

We expect continued increases in revenues from services and licenses in
2004 at a rate comparable to the increases experienced in 2003. We anticipate
such activity based on signed development contracts and pending contracts that
we are currently negotiating. We expect increases in information security
product revenues as we concentrate our sales and marketing efforts in this area.

During 2002, 28% and 17% of total revenues was generated from sales to
General Dynamics ("GD") and Micron PC, LLC ("Micron"), respectively. During
2003, we derived 29%, 18% and 12% of our revenues from sales to agencies of the
DoD, GD and Micron. Sales to U.S. government agencies accounted for
approximately 18% and 37% of total revenues during 2002 and 2003, respectively.

Sales to all government agencies accounted for approximately 18% and
37% of our sales during 2002 and 2003, respectively. We expect our revenues to
continue to be heavily concentrated with a few key customers and concentrated in
government projects in 2004.

PRODUCT REVENUES

Product revenues decreased 11% from $7.0 million during 2002 to $6.2
million during 2003. The decrease from 2002 to 2003 consisted primarily of $1.1
million, $667,000 and $158,000 decreases in our ARGUS 2500, ARGUS 300 and ARGUS
210 readers, respectively, partially offset by increases of $764,000 and
$273,000 in our ARGUS 3015 and ARGUS 2600 readers. These decreases were due to
re-engineering of our Argus 300 product and purchase delays caused by large U.S.
government expenditures to support overseas military activities. Based upon
current backlog and planned initiatives, we expect increases in information
security products revenues for 2004.

SERVICE REVENUES

Service revenues increased 84.1% from $2.6 million during 2002 to $4.8
million during 2003. The increase from 2002 to 2003 was primarily attributable
to a $2.1 million increase in revenues associated with a new contract for the
development of JForte, a $163,000 increase in revenues associated with an
existing contract for FORTEZZA and a Bank of America contract concluded with the
realization of $137,000 in revenues associated with the existing contract,
partially offset by a decrease of $177,000 of contracts that did not recur
for 2003. We expect service revenues to continue to increase during 2004 as a
result of newly signed and existing service contracts.

LICENSE REVENUES

License revenues increased 30% from $1.8 million during 2002 to $2.4
million during 2003. The increase from 2002 to 2003 was primarily attributable
to a $700,000 increase in revenues associated with purchased licenses related to
the new contract for JForte, a $769,000 increase in sales generated from our CAC
program, partially offset by a $823,000 decrease in our KMI related licensing
with GD and $137,000 decrease from the completion of a three year contract with
an agency of DoD in 2003. We expect licensing revenues to continue to increase
during 2004 based on incremental sales under the CAC program coupled with
increased sales of our Profile Management software.

PRODUCT GROSS MARGIN

Product gross margin increased as a percentage of net product revenues
from 61% during 2002 to 63% during 2003. The increase was primarily attributable
to reduced costs of products sold and a change in the mix of products sold
during 2003 as compared to 2002. We expect product gross margins to remain at
similar levels for 2004.

SERVICE GROSS MARGIN

Service gross margin decreased as a percentage of service revenues from
75% during 2002 to 62% during 2003. The margin percentage decrease was primarily
attributable to higher labor costs on our new service contracts. We expect
service gross margin percentages to continue to decrease somewhat during 2004
due to increased cost estimates for the JForte project. We also expect that
certain compensation costs formerly considered research and development expenses
prior to 2003 will continue to be included as cost of sales in 2004 due to the
JForte contract, thereby matching labor costs with related revenues. The term of
the JForte contract is approximately 18 months for a total revenue of $3.9
million with approximately $3.0 million of total contract revenue recognized in
2003, and the remaining $899,000 of revenue expected to be recognized by mid
2004.The first phase of this contract is scheduled for completion in mid 2004,
and an agreement for development of additional features has not been reached.

LICENSE GROSS MARGIN

License gross margin decreased as a percentage of license revenues from
90% during 2002 to 81% during 2003. The margin percentage decrease was primarily
attributable to increased costs associated with our JForte program licensing
costs. We expect the annual license gross margin percentages during 2004 to
remain at 2003 levels based on our projected sales mix for 2004.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

Selling, general and administrative ("S,G&A") expenses increased 2%
from $6.8 million during 2002 to $7.0 million during 2003. The increase was
primarily attributable to a $1.1 million charge ($1.3 million charge recorded
during the quarter ended June 30, 2003, less a $209,000 decrease in estimated
accrued liability recorded during the quarter ended September 30, 2003) related
to the settlement with Research Venture, LLC (see note 9 to the consolidated
financial statements included in this report) partially offset by a recovery of
expense in the amount of $532,000 related to the final settlement with Research
Venture, LLC (see note 9 to the consolidated financial statements included in
this report), reductions in workforce, and compensation levels of approximately
$803,000 . As a percentage of total revenues, S,G&A expenses decreased from
59.8% in 2002 to 51.3% in 2003. The percentage decrease was the result of our
success in increasing total revenues by $2.1 million (17%) while increasing
S,G&A expenses by only $141,000 (2%). The amounts related to the final
settlement with Research Venture, LLC are expected to be non-recurring and,
therefore, we anticipate S,G&A to increase in 2004. As we expand our marketing
and sales efforts, we believe S,G&A expenses as a percentage of revenues will
increase in advance of achieving increased revenues. We anticipate a reduction
in professional fees because we require only one independent auditor to issue
audit reports and consents for current regulatory filings.

RESEARCH AND DEVELOPMENT EXPENSES

Research and development ("R&D") expenses decreased 14% from $4.9
million during 2002 to $4.2 million during 2002. The decrease was primarily
attributable to reductions in work force and compensation levels in 2002. As a
percentage of total revenues, R&D expenses decreased from 42.9% in to 31.1% in
2003. As noted in the discussion of Service Gross Margin above, certain
compensation costs formerly considered R&D expenses prior to 2003 are included
as cost of sales in 2003. We expect R&D expenses to continue to decrease during
2004 based upon our forecast of completing the design of our Profile Manager and
Forte chip.

RESEARCH AND DEVELOPMENT - WAVE SYSTEMS CORP.

Effective August 31, 2002, we terminated a development contract with
Wave Systems Corp. By canceling the development contract, we no longer incur the
monthly development charge of $278,000. This caused a reduction of $1.0 million
in expenses in 2003 as compared to 2002.

REALIZED GAIN ON TRADING SECURITIES

During 2003, we recognized a gain of $120,000 from selling 57,000
shares of our holdings in Wave Systems Corp. for $170,000. The gain of $120,000
was partially offset by losses on trading securities in the amount of $18,000.
We expect no further gains or losses since we did not hold any trading
securities at December 31, 2003.

INTEREST EXPENSE, NET

Interest expense, net increased 7% from $672,000 during 2002 to
$717,000 during 2003. The increase was primarily attributable to the increase in
accrued interest from notes payable and interest expense related to settlement
with certain vendors. We expect interest expense to decrease since the level of
debt was reduced during the fourth quarter of 2004 with proceeds from the
issuance of shares of Series A Preferred Stock. In lieu of interest costs, we
will be paying dividends on the Series A Preferred Stock (see note 15 to the
consolidated financial statements included in this report).

NON-CASH INTEREST AND FINANCING EXPENSE

Non-cash interest and financing expense increased by $2.2 million, or
175%, from $1.3 million during 2002 to $3.5 million during 2003. The increase is
related to charges for the repricing of previously issued warrants and the
recognized value of warrants and beneficial conversion features for financings
entered into in 2003, together with the amortization of other debt issue costs
previously recorded. We expect non-cash interest and financing expense to
decrease for 2004 since the level of interest-bearing debt was reduced in
November 2003 in conjunction with the Series A Preferred Stock financing (see
note 15 to the consolidated financial statements included in this report), and
because of the loss on conversion charges of $2.3 million recorded relative to
unamortized costs of debt converted into Series A Preferred Stock.

The convertible secured promissory notes issued on April 16, 2002,
contain a beneficial conversion feature. When a convertible security contains a
conversion price that is less than quoted trading price of a company's common
stock at the date of commitment, then the difference between the conversion
price and the common stock price is called a beneficial conversion feature.
Emerging Issues Task Force ("EITF") Issue No. 00-27, which revised EITF Issue
No. 98-5, requires both the recording of a discount to recognize the computed
value of the conversion feature and amortization of the amount recorded over the
term of the security.

Of the aggregate $5.8 million convertible secured promissory notes
issued on April 16, 2002, we allocated approximately $2.6 million to the value
of the warrants and the remaining $3.2 million to the beneficial conversion
feature of the debt instruments, which were ascribed to these components on a
pro rata basis of fair values calculated for the warrants using a Black Scholes
valuation model and the intrinsic value of the beneficial conversion feature.
The amounts have been recorded as discounts from the face value of the debt with
an equal increase to additional paid-in capital. Based on EITF No. 00-27, the
governing accounting pronouncement, the discounts are being amortized over the
period from the date of issuance to the maturity date of the notes. Accretion of
the discounts totaled $1.1 million and $1.3 million during 2002 and 2003,
respectively.

In connection with the issuance of 1,762,895 common shares related to
the exercise of certain warrants by Mr. Kiphart, Crestview Capital Fund, L.P.
and Crestview Capital Fund II, L.P. (see note 9 to the consolidated financial
statements included in this report), we recorded a charge for the re-pricing of
the exercised warrants of $925,000 as non-cash interest during 2003. There was
no similar charge during 2002.

In connection with a now expired forbearance agreement, we issued to
Richard P. Kiphart and other note holders a total of 200,000 common shares in
full satisfaction of certain interest amounts incurred through August 31, 2003,
together with all penalties and costs through November 30, 2003, related to
securities issued after April 2002. During 2003, we recorded a non-cash charge
of $190,000 related to these issuances. There were no similar charges during
2002.

In connection with the Series A Preferred Stock financing (see note 15
to the consolidated financial statements included in this report), we expect
there will be continued non-cash charges relative to a conversion price that was
below market at the time of commitment and relative to warrants to purchase
common stock issued with the Series A Preferred Stock. With the required
registration statement being declared effective in January 2004 (see note 15 to
the consolidated financial statements included in this report) and as part of
the exchange by holders of previously issued notes for Series A Preferred Stock,
we anticipate charging directly to stockholders' equity the unamortized balances
related to warrants and beneficial conversion features. The unamortized balances
related to warrants and beneficial conversion features related to previously
issued notes that remain outstanding will continue to be amortized through
non-cash charges over the life of those remaining notes.

LOSS ON CONVERSION OF DEBT

In conjunction with the issuance of the April 16, 2002 convertible
secured promissory notes, certain warrants were issued and were recorded as debt
discount in the amount of approximately $2.6 million (see note 9 to the
consolidated financial statements included in this report). Based on EITF No.
00-27, the governing accounting pronouncement, the discounts were amortized over
the period from the date of issuance to the maturity date of the notes. On
November 19, 2003, with the exception of $1.9 million in principal, the April
16, 2002 convertible secured promissory notes and warrants were exchanged in a
private placement for Series A Preferred Stock (note 15 to the consolidated
financial statements included in this report). As such, we recorded a $2.1
million non-cash interest charge related to the unamortized balance of warrant
values and beneficial conversion feature of April 16, 2002 convertible secured
promissory notes that were exchanged for Series A Preferred Stock. The $2.1
million non-cash interest charge was recorded as a loss on conversion of debt in
our consolidated statement of operations. We will continue to amortize a
non-cash interest charge related to the unamortized warrant values and
beneficial conversion feature balances of approximately $1.1 million relative to
the remaining April 16, 2002 convertible secured promissory notes that were not
exchanged for Series A Preferred Stock (note 15 to the consolidated financial
statements included in this report). There was no similar charge during 2002. In
January 2004, approximately $626,000 of the remaining $1.9 million in principal
converted into shares of common stock. We expect to record a approximately
$343,000 as a loss on conversion in the first quarter of 2004, which will
further reduce the unamortized warrant values and beneficial conversion feature
balances of relative to the remaining April 16, 2002 convertible secured
promissory notes to approximately $728,000.

In connection with issuances of the April 16, 2002 convertible secured
promissory notes and warrants, we incurred approximately $741,000 of debt
issuance costs comprised of legal fees, placement agent fees, and $183,000 in
value calculated for the 110,000 warrants issued to the placement agent in the
transaction (note 9 to the consolidated financial statements included in this
report). On November 19, 2003, with the exception of $1,986 in principal, the
April 16, 2002 convertible secured promissory notes were exchanged in a private
placement for Series A Preferred Stock (note 15 to the consolidated financial
statements included in this report). As such, we recorded a $197,000 non-cash
interest charge related to the unamortized balance of debt issuance costs and
warrant value in relation to the April 16, 2002 convertible secured promissory
notes that were exchanged for Series A Preferred Stock (note 15 to the
consolidated financial statements included in this report). The $197,000
non-cash interest charge was recorded as a loss on conversion of debt on our
consolidated statement of operations during 2003. The remaining costs, which are
included in other assets, are being amortized over the term of the remaining
April 16, 2002 convertible secured promissory notes that were not exchanged for
shares of Series A Preferred Stock. There was no similar charge during 2002.

In conjunction with the issuance of a promissory note issued to Richard
P. Kiphart of $500,000 on January 22, 2003, certain warrants were issued and
were recorded as debt discount in the amount of approximately $60,000 (note 9 to
the consolidated financial statements included in this report). Based on EITF
No. 00-27, the governing accounting pronouncement, the discounts were amortized
over the period from the date of issuance to the maturity date of the notes. On
November 19, 2003, this note was exchanged for shares of Series A Preferred
Stock (note 15 to the consolidated financial statements included in this
report). As such, we recorded a non-cash charge of $41,000 related to the
unamortized balance of warrant value relating to the note that was held by Mr.
Kiphart, and exchanged for Series A Preferred Stock (note 15 to the consolidated
financial statements included in this report). The $41,000 non-cash interest
charge was recorded as a loss on conversion of debt on our consolidated
statement of operations. There was no similar charge during 2002.

LOSS FROM EQUITY INVESTEE

In January 2002, we formed SSP Gaming to conduct all business and any
required financing activities relative to the gaming industry. In June 2002, SSP
Gaming and the Venetian Casino Resort, LLC ("Venetian") executed an operating
agreement to form Venetian Interactive ("VI"). The intended purpose of VI was to
provide management services, consulting services, financial services,
intellectual property licensing services, and equipment to the online gaming
industry in venues and to develop and operate Venetian-branded casino sites. In
2002, SSP Gaming recorded $248,000 as a loss from equity investee, which
represented its pro rata portion of the VI net loss. SSP Gaming also recorded
$410,000 as a loss from equity investee, which represented its pro rata portion
of the VI net loss up through June 2003.

In June 2003, the Venetian sent a letter to SSP Gaming demanding
funding, or alternatively taking action to terminate the VI operating agreement
for failure of SSP Gaming to meet its funding commitment and threatening to take
action against SSP Gaming in the matter even though the outcome of the
reassessment was not known. SSP Gaming declined to contribute additional
capital, thereby giving VI the ability to declare SSP Gaming in default (see
note 8 to the consolidated financial statements included in this report). While
SSP Gaming disputes the circumstances cited by the Venetian, due to the
uncertainty regarding the VI agreement, during the quarter ended June 30, 2003,
we recorded an impairment charge equal to the remaining $142,000 book value of
our investment in VI, thereby reducing the carrying value of this investment to
$0 at June 30, 2003. As of December 31, 2003, the balance of equity investment
in affiliate remained at $0. As such, SSP Gaming did not record any loss from
equity investee after June 30, 2003, which would have represented its pro rata
portion of the VI net loss. Since the members of SSP Gaming could not agree on
future capitalization of VI, the operating agreement of VI was terminated in
August 2003 by the Venetian, and we are no longer engaged in this business.

OTHER EXPENSE, NET

Other expense, net, in 2002 was $33,000, which consisted of gains
resulting from settlements with vendors in the amount of $141,000, $28,000 in
expenses associated with the unoccupied Spectrum building, $13,000 in income
related to revisions of estimated liabilities, a $153,000 note discount
associated with the repayment of a note from our co-chairman and $42,000
write-off of interest receivable associated with the same note. Other income,
net, in 2003 was $42,000 which consisted of $143,000 of gain from settlement of
vendor payables, $7,000 of miscellaneous income partially offset by a charge of
$108,000 related to the settlement of an EPA claim (see note 20 to the
consolidated financial statements included in this report). We cannot predict
other expense (income) for 2004.

INCOME TAXES

For 2002, the income tax of $2,000 represents the minimum required
amount for state franchise taxes. For 2003, the income tax of $3,000 represents
the minimum required amount for state franchise taxes. We do not expect any
substantial changes to income tax expense in 2004, as we have substantial net
operating loss carryforwards available to offset taxable income .

LOSS FROM DISCONTINUED OPERATIONS

During the first quarter of 2003, management decided to discontinue the
operations of Pulsar, which was engaged in the network deployment business, and
to focus solely on our core business of information security products and
services (see note 1 to the consolidated financial statements included with this
report). Loss from discontinued operations decreased 92% from 2002 to $106,000
during 2003. Loss from discontinued operations during 2002 primarily consisted
of Pulsar incurring S,G&A expenses of approximately $700,000 and an impairment
charge of $599,000 related to Pulsar intangibles. Loss from discontinued
operations during 2003 relates to the final winding down activities of Pulsar
during the quarter ended March 31, 2003. We expect no further activity from
discontinued operations.

BACKLOG

As of March 23, 2004, we had backlog of $1.8 million, of which $1.4
million, or 78%, was related to licenses and services and $393,000, or 22%, was
related to information security products. The license and service backlog
consisted of $995,000 related to our contracts with or sales to government
agencies and $601,000 related to our subcontract with GD. Orders are subject
to cancellation in certain circumstances, and backlog may therefore not be
indicative of future operating results. At December 31, 2002 and 2003, the
total backlog was $1.6 million and $1.9 million, respectively. As of December
31, 2003, 83% of our backlog was related to licenses and services and 17%
was related to information security products. As of December 31, 2003, the
license and service backlog mainly consisted of $938,000 related to our
contracts with DoD and $602,000 related to our subcontract with GD.

RECENT ACCOUNTING PRONOUNCEMENTS

In May 2003, the FASB issued SFAS No. 150, Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity ("SFAS
150"). SFAS 150 establishes standards for how an issuer classifies and measures
certain financial instruments with characteristics of both liabilities and
equity. SFAS 150 applies specifically to a number of financial instruments that
companies have historically presented within their financial statements either
as equity or between the liabilities section and the equity section, rather than
as liabilities. SFAS 150 is effective for financial instruments entered into or
modified after May 31, 2003, and otherwise is effective at the beginning of the
first interim period beginning after June 15, 2003. The adoption of SFAS 150 did
not have a material effect on our consolidated financial statements.

In December 2003, the FASB issued a revision to Interpretation No. 46,
"Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51
("FIN 46R"). FIN 46R clarifies the application of ARB No. 51, "Consolidated
Financial Statements," to certain entities in which equity investors do not have
the characteristics of a controlling financial interest or do not have
sufficient equity at risk for the entity to finance its activities without
additional subordinated financial support provided by any parties, including the
equity holders. FIN 46R requires the consolidation of these entities, known as
variable interest entities ("VIEs"), by the primary beneficiary of the VIE.
The primary beneficiary is the entity, if any, that will absorb a majority of
the VIEs' expected losses, receive a majority of the VIEs' expected
residual returns, or both.

Among other changes, the revisions of FIN 46R clarified some
requirements of the original FIN 46, which had been issued in January 2003,
eased some implementation problems, and added new scope exceptions. FIN 46R
deferred the effective date of the interpretation for public companies to the
end of the first reporting period ending after March 15, 2004, except that all
public companies must, at a minimum, apply the unmodified provisions of the
interpretation to entities that were previously considered "special-purpose
entities" in practice and under the FASB literature prior to the issuance of FIN
46R by the end of the first reporting period ending after December 15, 2003. As
of December 31, 2003 and 2002, we believe that we are not a primary beneficiary
of any VIE's.

LIQUIDITY AND CAPITAL RESOURCES

At December 31, 2003, we had working capital of $5.5 million. We
incurred a net loss of $9.5 million from operations for 2003 and we expect to
incur additional losses in 2004. On November 19, 2003, we sold 2,150 shares of
Series A Preferred Stock and investor warrants for a total amount of $15.0
million, of which $9.5 million was for new capital and $5.5 million was issued
in exchange for cancellation of previously issued promissory notes. The Series A
Preferred Stock financing provided us with a significant amount of cash, which
improved our working capital position. The December 31, 2003 cash balance of
$6.2 million was mostly comprised of the cash proceeds received from the
issuance of the Series A Preferred Stock. Given our December 31, 2003 cash
balance and the projected operating cash requirements, we anticipate that
existing capital resources will be adequate to satisfy cash flow requirements
through December 31, 2004. Our cash flow estimates are based upon achieving
certain levels of sales, reductions in operating expenses and liquidity
available under our accounts receivable financing.

Cash used in operations for 2003 was $5.9 million compared to $7.0
million during 2002 The decrease in cash used in operations was primarily
attributable to a reduction in operating loss for the yearly period and
increases of $108,000, $74,000 and $116,000 in accounts receivable, inventory
and prepaid expenses, respectively. Also, the decrease in cash used in
operations was partially offset by decreases of $3.3 million and $257,000 in
accounts payable and deferred revenue, respectively. We expect to continue to
use cash in operations due to existing current liabilities that will need to
be paid in 2004.

Cash provided by investing activities for 2003 was $116,000 compared to
$430,000 for 2002. The change in cash provided by investing activities during
2003 was primarily attributable to our having sold a lesser amount of trading
securities during 2003 as compared to 2002. Cash provided by investing
activities in 2003 and 2002 was primarily attributable to proceeds from the sale
of trading securities of $174,000 and $1.1 million, respectively. We did not
hold any trading securities as of December 31, 2003. Also, in 2002 there was
cash used of $700,000 for investment in equity investee. We do not expect any
significant increases or decreases from cash provided by or used in investing
activities in 2004.

Cash provided by financing activities for 2003 was $11.4 million
compared to $3.9 million during 2002. The cash provided by financing activities
during 2003 was primarily attributable to the issuance of Series A Preferred
Stock, which raised $9.5 million of new cash proceeds (see note 15 to the
consolidated financial statements included in this report), and additional
borrowings of $3.3 million required for working capital issued under notes
payable partially offset by principal payments on note payables of $980,000.
Also, in 2003 we borrowed from and repaid related parties an aggregate of
$40,000. As part of the $3.3 million of additional borrowings, $1.25 million was
related to the September 2003 Bridge Loan (see note 5 to the consolidated
financial statements included in this report). Also, during September 2003, we
received cash proceeds of $750,000 in connection with the exercise of certain
warrants (see note 9 to the consolidated financial statements included in this
report) and issued 1,500,000 shares of our common stock. Also, we used $802,000
cash in the payment of costs related to the issuance of Series A Preferred
Stock. We expect to raise additional cash through financing activities in 2004,
through inducements to existing warrant holders, or other debt or equity
placements.

During 2003, we sold the remainder of our investment securities for
approximately $174,000. As of December 31, 2003, accounts receivable totaled
$1.7 million as compared to $1.6 million as of December 31, 2002. This increase
was mainly attributable to increased revenues in 2003 primarily associated with
the funded JForte development project. Accounts payable of $1.1 million as of
December 31, 2003 decreased from $4.4 million as of December 31, 2002. The
decrease is attributable primarily to payments and settlements on balances due
to vendors. Accrued liabilities increased from $1.3 million at December 31,
2002, to $1.5 million as of December 31, 2003, partially due to increased
accruals for declared dividends on our Series A Preferred Stock in the amount of
$139,000 and an accrual of $108,000 for a possible settlement of an EPA claim
(see note 20 to the condensed consolidated financial statements included in this
report). We expect accounts receivable to remain level until we experience a
change in revenues. We anticipate the trend of lower accounts payable to
continue until revenues increase and the increased operations require an
expanded workforce. We expect the trend of higher accrued liabilities to
continue to reflect dividends payable on our Series A Preferred Stock, and to
reflect the $373,000 accrued settlement cost for Research Venture. If not
required to be fulfilled at an earlier date by Research Venture, the accrued
settlement liability expires at the end of August 2004 when any remaining unsold
shares become eligible for sale under Rule 144.

We have incurred net losses and negative cash flows from operations for
the last several years, and as of December 31, 2003, we had an accumulated
deficit of $118 million. We have financed our past operations principally
through the issuance of common stock in a public offering in June 1999, the
issuance of convertible debt and the issuance of convertible preferred stock in
private financing arrangements through December 2003. The net proceeds from our
public offering were approximately $35.3 million. The proceeds from the issuance
of convertible debt for 2002 were $4.8 million. From November 2002 through
October 2003, we raised $3.9 million through bridge financings through which we
issued both secured convertible promissory notes and secured promissory notes.
We raised approximately $9.5 million in cash proceeds through the issuance of
Series A Preferred Stock in November 2003. We have also issued notes and common
stock to settle or restructure previously executed agreements.

Over the past three years, we have spent substantial sums on R&D
activities. During that time period, we incurred substantial losses from
continuing operations. 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, we believe will generate significant
revenues. However, unless we receive orders for these new products, we will not
be able to support the planned level of R&D activity. While we have reduced our
R&D 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 unwillingness of primary vendors of our now discontinued network
deployment business 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 2002, which in turn reduced cash flow. The reduced
cash flow impaired our ability to meet vendor commitments as they became due.
Due to the intensive capital requirements and low margin returns, during the
quarter ended March 31, 2003 we decided to exit the Pulsar line of business and,
as a result, we subsequently wound down the Pulsar operations.

In November 2000, we executed an alliance agreement with EDS for the
marketing of our products to EDS customers. This alliance called for a joint
working relationship between the two companies, was non-exclusive and had a term
of ten years. 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. Under this agreement, as of December 31, 2002, $1.0
million remained outstanding and unpaid to EDS for purchases of hardware and
software. EDS and we executed a Master Services Agreement dated as of November
14, 2001 ("MSA") whereby beginning December 1, 2001 and ending December 31,
2006, EDS and we 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 required that we pay a monthly fee
of $44,000 for account, test and lab management services beginning January 1,
2002. On June 30, 2003, EDS and we executed a Termination and General Release
Agreement ("TGRA") whereby the MSA has been terminated effective December 31,
2002. Pursuant to the TGRA, we agreed to pay EDS a total of $230,579 prior to
December 1, 2003 related to past due charges and, accordingly, EDS and we
released each other from further obligation, thereby terminating the MSA. As of
December 31, 2003, we had made the payments due as required under the TGRA and
we have no further liability owed to EDS.

During 2001, we arranged for the lease of two buildings approximating
63,000 square feet that were under construction and were subsequently completed
in the Spectrum area of Irvine, California from an entity that was partially
owned by our co-chairman, Mr. Shah. 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 was with a related party company
owned by our co-chairman, Mr. Winkler. While that company made a lease deposit,
it did not make any monthly rent payments. In October 2002, we restructured our
lease obligations with our landlord, Research Venture, LLC, for the two
buildings. This restructuring and settlement revised the estimate of anticipated
costs relative to the disposition of one of the building leases that was
recorded in 2001 in the amount of $2.2 million, which was net of anticipated
offsetting sublease income. As a result of the restructuring and settlement, we
increased stockholders' equity by $1.7 million through the issuance of common
stock valued for financial reporting purposes at $956,000 and recorded a gain of
$700,000 for 2002. The settlement required us to issue 959,323 shares of common
stock, pay $500,000 in cash over a one-year period, cancel the lease on one
building approximating 23,000 square feet, and take occupancy of the other
building under a seven-year operating lease for the facility with approximately
40,000 square feet for an initial monthly rental rate of $55,000 plus common
area costs beginning in December 2002. The first payment of $75,000 toward the
$500,000 was made as scheduled in December 2002, with additional payments
scheduled of $100,000 due in March 2003, $150,000 due in June 2003 and a final
payment of $175,000 due in September 2003. We did not timely make the full
$150,000 payment that was due in March 2003. Although we subsequently paid the
balance of the March payment, we did not pay the full $150,000 due in June 2003.
Although we subsequently tendered the full amount due, the late payment meant we
were in default under the facilities settlement agreement. On August 11, 2003,
Research Venture obtained a judgment against us per prior stipulation in the
amount of $2.7 million. As such, we recorded a $1.3 million accrued liability as
of June 30, 2003, which consisted of the original judgment amount of $3.1
million less $456,000 of cash previously paid and $1.4 million of shares
previously issued. On August 29, 2003, we entered into an agreement of
settlement on stipulated judgment with Research Venture and paid cash of
$865,000 and issued 414,450 common shares. As a result of this settlement, we
adjusted the estimated accrued liability by $209,000 and the $500,000 obligation
was satisfied as of September 30, 2003 (see note 9 to the consolidated financial
statements included in this report). Because the registration statement covering
the resale of the additional 414,450 common shares was not timely declared
effective, Research Venture may seek a judgment obligating us to re-purchase the
414,450 shares for $373,000 less $.90 per share for shares sold prior to entry
of a judgment, which amount is included in accrued liabilities at December 31,
2003. As part of this settlement the building lease was terminated, as such
future rental payments are no longer expected. In August 2002, Mr. Shah
surrendered his 25% ownership interest in the entity that owns the two
buildings. At the time of surrendering his interest, the buildings were
encumbered by one or more construction loans for which the lender required
personal guarantees for renewal of the financing. As there was little, if any,
equity in the project and Mr. Shah was unwilling to personally guarantee the
loans, Mr. Shah chose to surrender his membership interest.

In October 2002, we terminated our accounts receivable financing
arrangement with Wells Fargo Business Credit, Inc. and entered into a factoring
agreement with Bay View Funding ("BVF"). The factoring agreement contains a
maximum advance of $750,000, was for an initial term of three months, and we
have the option to renew for successive three-month periods. The agreement
contains a factoring fee, which is based on 1.25% of the gross face value of the
purchased receivable for every 30-day period from the date of purchase by BVF
until the invoice is paid in full. For invoices outstanding more than the 30-day
period, a finance fee will be charged at the rate of .063% of the gross face
value of the purchased receivable for every one day period beyond the 30th day
from the original date of purchase. At the time of purchase, terms call for BVF
to advance 85% of the gross receivable, with the balance remitted after
collection of the invoice less the factoring and finance fee, if applicable. The
agreement contains representations, warranties, and covenants and requires a
monthly minimum fee, including the factoring and financing fees, of .25% of the
maximum advance of $750,000 or approximately $2,000 per month. The agreement
states among other things that a default occurs if we are generally not paying
debts as they become due or if we are left with unreasonably small capital. We
notified BVF of our failure to make certain payments on a timely basis and
therefore requested but did not receive a waiver.

Our significant fixed commitments with respect to note obligations,
leases and inventory purchases as of December 31, 2003 were as follows:

PAYMENTS FOR THE YEAR ENDED DECEMBER 31,
--------------------------------------------------------------
TOTAL 2004 2005 & 2006 2007 & 2008 2009 & AFTER
---------- ---------- ---------- ---------- ----------

CONTRACTUAL OBLIGATIONS
Convertible Notes Term Debt ......... $2,082,364 $ 95,920 $1,986,444 $ -- $ --
Operating Leases .................... 2,064,299 547,186 1,188,490 295,496 33,128
Unconditional Purchase Obligations .. 1,042,205 1,042,205 -- -- --
Total Contractual Cash Obligations .. $5,188,869 $1,685,311 $3,174,934 $ 295,496 $ 33,128

In November 2003, we completed a private placement of Series A
Preferred Stock that should provide adequate working capital through December
31, 2004. The amount of capital that we will need in the future will depend on
many factors including, but not limited to:

o the ability to extend terms of payment to vendors;

o the market acceptance of our products and services;

o 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;

o research and development plans;

o levels of inventory and accounts receivable;

o technological advances;

o competitors' responses to our products and services;

o relationships with partners, suppliers and customers;

o projected capital expenditures;

o a downturn in the economy;

o periodic analysis of our goodwill valuation that may require us to
take additional write-downs in future periods; and

o defaults on financing that will affect the availability of
borrowings, or result in notes being declared immediately due and
payable.

Prior to completing the private placement of Series A Preferred Stock
in November 2003, our financial condition was the result of several factors
including the following:

o our operating results were below expectations;

o sales of products into the commercial markets are taking longer to
develop than originally anticipated and our alliance with EDS did
not produce expected revenues;

o lower than expected margins and reduced revenues from our Pulsar
subsidiary ultimately led us to limit sales orders and eventually
discontinue that operation;

o entering into the lease for additional facilities was a poor
decision that burdened us with additional fixed expenses that were
a drain on operating results; and

o investment in our subsidiary, SSP Gaming, formed to conduct
business and activities relative to the gaming industry, was a
financial drain.

While we have a history of selling products in government markets, our
new products that are 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 products. We believe the
private placement of Series A Preferred Stock completed in November 2003 will
provide adequate resources to complete our first product offering for the
commercial market that is now in beta testing, but there can be no certainty the
commercial markets will be receptive to our offerings.

We may elect to raise capital in the future, 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.

In addition to the completion of the private placement of Series A
Preferred Stock, we have also issued shares to pay obligations in several
transactions. During 2003, we issued 92,304 shares of our common stock for rent
payments relating to a facility lease, 714,383 shares of common stock to pay
interest on long-term notes and 414,450 shares of common stock for payments
relating to the final settlement of a facility lease. In the future, under terms
of notes payable, warrants and convertible preferred stock, we may issue
additional shares of common stock to pay interest and dividends.

Based upon the private placement of Series A Preferred Stock completed
in November 2003, together with forecasted sales and expense levels, we
currently anticipate that existing cash, cash equivalents, investments, term-out
arrangements with vendors and the current availability under our BVF factoring
agreement will be sufficient to satisfy our contemplated cash requirements
through December 31, 2004. However, our forecast is based upon certain
assumptions, which may differ from actual future outcomes. We have incurred
defaults under our financing agreements in the past, but believe we have
adequate capital resources to satisfy our funding needs. In prior periods, we
have notified BVF of our failure to make certain payments on a timely basis and
requested a waiver of such default. Should we incur defaults in the future, we
may not be able to draw funds in the future, which may affect our ability to
fund our operations. Additionally, without a substantial increase in sales or a
reduction in expenses, we will continue to incur operating losses.

RISK FACTORS

AN INVESTMENT IN SHARES OF OUR COMMON STOCK INVOLVES A HIGH DEGREE OF
RISK. IN ADDITION TO THE OTHER INFORMATION CONTAINED OR INCORPORATED BY
REFERENCE IN THIS REPORT, INVESTORS SHOULD CAREFULLY CONSIDER THE FOLLOWING RISK
FACTORS BEFORE DECIDING TO INVEST OR MAINTAIN AN INVESTMENT IN SHARES OF OUR
COMMON STOCK. THIS REPORT CONTAINS OR INCORPORATES BY REFERENCE FORWARD-LOOKING
STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. OUR ACTUAL RESULTS COULD DIFFER
MATERIALLY FROM THOSE ANTICIPATED IN THESE FORWARD-LOOKING STATEMENTS AS A
RESULT OF CERTAIN FACTORS, INCLUDING THOSE SET FORTH IN THE FOLLOWING RISK
FACTORS AND ELSEWHERE IN THIS REPORT. IF ANY OF THE FOLLOWING RISKS ACTUALLY
OCCURS, IT IS LIKELY THAT OUR BUSINESS, FINANCIAL CONDITION AND OPERATING
RESULTS WOULD BE HARMED. AS A RESULT, THE TRADING PRICE OF OUR COMMON STOCK
COULD DECLINE, AND INVESTORS COULD LOSE PART OR ALL OF THEIR INVESTMENT.

WE HAVE A HISTORY OF LOSSES AND MAY INCUR FUTURE LOSSES THAT MAY ADVERSELY
AFFECT OUR BUSINESS AND OUR STOCKHOLDERS BY, AMONG OTHER THINGS, MAKING IT
DIFFICULT FOR US TO RAISE ADDITIONAL DEBT OR EQUITY FINANCING TO THE EXTENT
NEEDED FOR OUR CONTINUED OPERATIONS OR FOR PLANNED EXPANSION.

We may not become profitable or significantly increase our revenue. We
incurred net losses of $9.5 million and $8.6 million for 2003 and 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. As a result, it
may be difficult for us to raise additional debt or equity financing to
the extent needed for our continued operations or for planned expansion.

WE HAVE NOT GENERATED ANY SIGNIFICANT SALES OF OUR PRODUCTS WITHIN THE
COMPETITIVE COMMERCIAL MARKET NOR HAVE WE ESTABLISHED A SUFFICIENT SALES
AND MARKETING FORCE TO PROMOTE OUR PRODUCTS TO POTENTIAL COMMERCIAL
CUSTOMERS, WHICH MAKES IT DIFFICULT TO EVALUATE OUR CURRENT BUSINESS
PERFORMANCE AND FUTURE PROSPECTS.

Although we have had some success in selling our security solutions to
government agencies, we are just beginning to enter the complex and competitive
commercial market for digital commerce and communications security solutions.
Potential customers in our target markets are becoming increasingly aware of the
need for security products and services in the digital economy to conduct their
business. Historically, only enterprises that had substantial resources
developed or purchased security solutions for delivery of digital content over
the Internet or through other means. 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 at 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 and our earnings per share will be adversely
affected.

WE FACE INTENSE COMPETITION AND PRICING PRESSURES FROM A NUMBER OF SOURCES,
WHICH MAY REDUCE OUR AVERAGE SELLING PRICES AND GROSS MARGINS.

The markets for our products and services are intensely competitive. As
a result, we face significant competition from a number of sources. We may be
unable to compete successfully because 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 several smaller and start-up companies with which we compete from time
to time. We expect competition to increase as a result of consolidation in the
information security technology industry.

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 lifecycles. These same competitive pressures may
require us to write down the carrying value of any inventory on hand, which
would adversely affect our operating results and adversely affect our earnings
per share.

WE DERIVE A SUBSTANTIAL PORTION OF OUR REVENUE FROM A SMALL NUMBER OF
CUSTOMERS, AND THE LOSS OF ONLY ONE OF THOSE CUSTOMERS COULD ADVERSELY
AFFECT OUR OPERATING RESULTS.

We depend on a limited number of customers for a substantial portion of
our revenue. During 2002 and 2003, we derived 28% in each year, of our
consolidated net revenue from a single customer, which was a different customer
in each year. Many of our contracts with our significant customers are
short-term. 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 those customers.

OUR RELIANCE ON THIRD PARTY TECHNOLOGIES FOR SOME SPECIFIC TECHNOLOGY
ELEMENTS OF OUR 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.

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 full duration of the third party's patent for the licensed
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 or may need to redesign our products that incorporate that
technology, and we may lose a competitive advantage. In addition, competitors
could obtain licenses for technologies for which we are unable to obtain
licenses, and third parties may develop or enable others to develop a similar
solution to digital communication security issues, either of which events could
erode our market share. Also, dependence on the patent protection of third
parties may not afford us any control over the protection of the technologies
upon which we rely. If the patent protection of any of these third parties were
compromised, our ability to compete in the market also would be impaired.

THIRD PARTIES COULD OBTAIN ACCESS TO OUR PROPRIETARY INFORMATION OR COULD
INDEPENDENTLY DEVELOP SIMILAR TECHNOLOGIES BECAUSE OF THE LIMITED
PROTECTION FOR OUR INTELLECTUAL PROPERTY.

Despite 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 may 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
information transmitted. Furthermore, the laws of other jurisdictions may afford
little or no effective protection of our intellectual property rights. Our
business, financial condition and operating results could be adversely affected
if we are unable to adequately protect our intellectual property rights.

WE MAY FACE HARMFUL CLAIMS OF INFRINGEMENT OF PROPRIETARY RIGHTS, WHICH
COULD REQUIRE US TO DEVOTE SUBSTANTIAL TIME AND RESOURCES TOWARD MODIFYING
OUR PRODUCTS OR OBTAINING APPROPRIATE LICENSES.

There is a risk that our products infringe on proprietary rights of
third parties. Regardless of whether 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 expenses in defending them.
If any infringement 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 by preventing us from selling some or all
of our products.

OUR INABILITY TO MAINTAIN AND DEVELOP NEW STRATEGIC RELATIONSHIPS WITH
PARTNERS AND SUPPLIERS COULD AFFECT OUR ABILITY TO OBTAIN OR SELL OUR
PRODUCTS, AND PREVENT US FROM GENERATING SALES REVENUES.

We obtain and market many of our products through strategic alliance
and supplier agreements. 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.

If alliance or supplier agreements are cancelled, modified or delayed,
if alliance or supplier partners decide not to purchase our products or to
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 to generate sales revenues could be adversely affected.

ANY COMPROMISE OF PKI TECHNOLOGY WOULD ADVERSELY AFFECT OUR BUSINESS BY
REDUCING OR ELIMINATING DEMAND FOR MANY OF OUR INFORMATION SECURITY
PRODUCTS.

Many of our products are based on public key infrastructure ("PKI")
technology, which is the standard technology for securing Internet-based
commerce and communications. 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 information
security products:

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

A SECURITY BREACH OF OUR INTERNAL SYSTEMS OR THOSE OF OUR CUSTOMERS DUE TO
COMPUTER HACKERS OR CYBER TERRORISTS COULD HARM OUR BUSINESS BY ADVERSELY
AFFECTING THE MARKET'S PERCEPTION OF OUR PRODUCTS AND SERVICES.

Since we provide security for Internet and other digital communication
networks, we may become a target for attacks by computer hackers. The ripple
effects throughout the economy of terrorist threats and attacks and military
activities may have a prolonged effect on our potential commercial customers, or
on 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 activities threatened against United States-based
targets.

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's perception of our products and
services. This could cause us to lose customers, resellers, alliance partners or
other business partners.

WE MAY BE EXPOSED TO SIGNIFICANT LIABILITY FOR ACTUAL OR PERCEIVED FAILURE
TO PROVIDE REQUIRED PRODUCTS OR SERVICES.

Products as complex as those we offer may contain undetected errors or
may fail 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. Because our
customers rely on our products for critical security applications, we may be
exposed to claims for damages allegedly 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 information 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.

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 largely depends 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 increases in
governmental regulation and the continued ability of the Internet infrastructure
and communications services to support growing demands, which ability could be
adversely affected by, among other things, delays in development or adoption of
new standards and protocols to handle increased levels of activity. If the use
of electronic commerce and communications does not increase, or increases more
slowly than we expect, demand for our products and services will be adversely
affected.

IF WE DO NOT RESPOND TO RAPID TECHNOLOGICAL CHANGES, OUR PRODUCT AND
SERVICE OFFERINGS COULD BECOME OBSOLETE.

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 are unable to modify
existing products and develop new products and services that are responsive to
changing technology and standards and to meet customer needs in a timely and
cost effective manner, our business could be adversely affected because we would
be unable to sell our product and service offerings that have become obsolete.

DOING BUSINESS WITH THE UNITED STATES GOVERNMENT ENTAILS MANY RISKS THAT
COULD ADVERSELY AFFECT US BY DECREASING THE PROFITABILITY OF GOVERNMENTAL
CONTRACTS WE ARE ABLE TO OBTAIN AND INTERFERING WITH OUR ABILITY TO OBTAIN
FUTURE GOVERNMENTAL CONTRACTS.

Sales to United States government agencies accounted for 37% and 18% of
our consolidated revenues for 2003 and 2002, respectively. Our sales to these
agencies are subject to risks that include:

o early termination of our contracts;
o disallowance of costs upon audit; and
o the need to participate in competitive bidding and proposal
processes, which are costly and 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 their contractors, to deem contractors
unsuitable for new contract awards. Because we engage in the governmental
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 governmental
contracts for a significant period of time, any of which could adversely affect
our business by requiring us to spend money to pay the fines and penalties and
prohibiting us from earning revenues from governmental contracts during the
suspension period.

DELAYS IN DELIVERIES FROM OUR SUPPLIERS OR DEFECTS IN GOODS OR COMPONENTS
SUPPLIED BY OUR VENDORS COULD CAUSE OUR REVENUES AND GROSS MARGINS TO
DECLINE.

We rely on a limited number of vendors for certain components for the
products we are developing. Any undetected flaws in components supplied by our
vendors could lead to unanticipated costs to repair or replace these parts. We
currently purchase some of our components from a single supplier, which presents
a risk that the components may not be available in the future on commercially
reasonable terms, or at all. For example, Atmel Corporation has completed the
masks for production of a specially designed Forte microprocessor for which we
developed the Universal Secure Access Operating Security System(TM) ("USA OSS").
Commercial acceptance of the Forte microprocessor will be dependent on continued
development of applications to service customer requirements. Any inability to
receive or any delay in receiving adequate supplies of the Forte microprocessor,
whether as a result of delays in development of applications or otherwise, would
adversely affect our ability to sell the Forte PKI card.

We do not anticipate maintaining a supply agreement with Atmel
Corporation for the Forte microprocessor. If Atmel Corporation were unable to
deliver the Forte microprocessor for a lengthy period of time or were to
terminate its relationship with us, we would be unable to produce the Forte PKI
card until we could design a replacement computer chip for the Forte
microprocessor. We anticipate this would take substantial time and resources to
complete, which could result in delays or reductions in product shipments that
could adversely affect our business by requiring us to expend resources while
preventing us from selling the Forte PKI card.

Also, if we are unable to obtain or generate sufficient funds to
sustain our operations, we may damage our relationships with our vendors. Slow
and delinquent payments may cause vendors not to sell products to us, or only
with advance payment. If this occurs, we will not have components and services
available for our products. 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.

OUR SUCCESS DEPENDS ON OUR ABILITY TO RETAIN OUR CURRENT MANAGEMENT TEAM.

Our founder, co-chairman, president, and chief operating officer, Kris
Shah, has been with us since 1970, and our co-chairman and chief executive
officer, Marvin Winkler, has been with us since August 2001. Mr. Shah's
experience, technical expertise, industry knowledge and historical company
knowledge would be extremely difficult to replace if we were to lose his
services. Mr. Winkler provides us with unique perspectives on the marketing and
productizing of our intellectual property for uses in the commercial market
space, and future products for our government customers. The precise effect of
the loss of services of either of them is difficult to predict. The loss of Mr.
Shah, at a minimum, would result in significant costs to recruit, hire and
retain a successor and may lead to impaired operating results while the
successor was being recruited and transitioning into the position. We do not
currently maintain key-man life insurance on the lives of either of these
officers.

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 BY IMPAIRING OUR ABILITY TO EFFICIENTLY
CONDUCT OUR OPERATIONS.

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, to
retain existing customers and attract new customers, or to efficiently conduct
our operations, all of which would adversely affect our business. A high level
of employee mobility characterizes the information security and networking
solution industries, and the market for highly qualified individuals in
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, the hiring and
retention of technical employees necessitates the issuance of stock options and
other equity interests, which may dilute earnings per share.

OUR EFFORTS TO EXPAND OUR INTERNATIONAL OPERATIONS ARE SUBJECT TO A NUMBER
OF RISKS, ANY OF WHICH COULD ADVERSELY AFFECT OUR FUTURE INTERNATIONAL
SALES.

We have obtained approvals to export certain of our products and we plan
to increase our international sales. Our inability to obtain or maintain 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:

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

WE ARE UNABLE TO PREDICT THE EXTENT TO WHICH THE RESOLUTION OF LAWSUITS OR
CLAIMS PENDING AGAINST US AND OUR SUBSIDIARY COULD ADVERSELY AFFECT OUR
BUSINESS BY, AMONG OTHER THINGS, SUBJECTING US TO SUBSTANTIAL COSTS AND
LIABILITIES AND DIVERTING MANAGEMENT'S ATTENTION AND RESOURCES.

G2 Resources, Inc. and Classical Financial Services, LLC have filed
complaints against our Pulsar subsidiary alleging that Pulsar breached a
contract by failing to make payments to G2 Resources, Inc. in connection with
services allegedly provided by G2. In April 2001, the court dismissed, for lack
of prosecution activity for more than twelve months, the original complaint that
G2 had filed against Pulsar in January 1998. G2 re-filed the action in May 2001.
In 2002, the court moved this case into the same division handling other matters
related to G2 and Classical Financial Services, LLC, and stayed any further
action in this case pending the resolution of matters between G2 and Classical.
We have been vigorously defending ourselves against the plaintiffs' claims and
have asserted defenses and counterclaims.

In June 2002, Research Venture, LLC filed two lawsuits against us
alleging unlawful detainer and seeking possession of two leased properties,
alleged damages and lost rent. In October 2002, we negotiated a restructuring of
our obligations under the leases. We subsequently defaulted on those
obligations, and Research Venture obtained a judgment against us per prior
stipulation in the amount of $2.7 million. In August 2003, we entered into a
settlement agreement with Research Venture that imposes, among other things,
registration obligations on us regarding shares of common stock that we issued
to Research Venture. If we do not maintain compliance with those obligations,
Research Venture may be entitled to entry of a stipulated judgment against us in
an amount up to $373,000, less $.90 per share for shares sold prior to entry of
a judgment.

In June 2003, Venetian Casino Resort, LLC, or the Venetian, sent a
demand letter to our subsidiary demanding funding, or alternatively taking
action to terminate our subsidiary's operating agreement for failure of our
subsidiary to meet its funding commitment and threatening to take action against
our subsidiary in the matter. Subsequently, the Venetian sent a letter claiming
to terminate the operating agreement. In the quarter ended June 30, 2003, we
recorded an impairment charge of $142,000, which was equal to the remaining book
value of our investment in our subsidiary.

In December 2003, Shane Brophy, an ex-employee, filed a lawsuit
alleging causes of action for breach of employment contract, unpaid wages and
wrongful termination in violation of public policy arising from our termination
of his employment in July 2003. We have responded to the complaint, but no
discovery has been conducted. Therefore, we cannot quantify the outcome or
exposure. However, we strongly deny the claims and believe the complaint is
without merit. We will assert claims for damages against Mr. Brophy, and parties
affiliated with him. Legal counsel for both parties has agreed to dismiss the
complaint against us and have this matter settled through binding arbitration.
There has been no dismissal or arbitration hearing set as of the date of this
report.

On February 6, 2004, we received notice from the Environmental
Protection Agency ("EPA") regarding the Omega Chemical Superfund Site. The
notice states that we are a potentially responsible party ("PRP") that
contributed to the waste at the Omega Site. The notice also states that the
amount of waste contributed to the Omega Site was a comparatively small
quantity, or de minimis quantity. As such, the notice offers us the opportunity
to resolve our liability for waste disposed at the Omega Site. The notice also
states that if we accept the settlement offer, we can be released from further
liability from the United States regarding the Omega Site as well as gaining
contribution protection against lawsuits by other PRPs (see reference to Tolling
Agreement below), who otherwise have claims against us. The settlement offer
amount is $108,000, and we must accept and notify the EPA of such acceptance by
May 7, 2004. We have been advised by our legal counsel and we believe that if we
accept the settlement offer, there would be no further liability regarding this
claim from the EPA, or other PRP's. While we plan to evaluate settlement
alternatives in conjunction with a group of other de minimis parties, we have
recorded a $108,000 liability as a one-time, non-recurring charge, which is
reflected as other expense in the statement of operations for 2003.

Related to the Omega Site, we entered into a Tolling and Waiver
Agreement, dated January 1, 2004, (the "Tolling Agreement") with the Omega PRP
Organized Group (the "Omega Group"). The Tolling Agreement states that the Omega
Group has expended funds in response to the Omega Site and is
committed to and will expend funds in the future in connection with the Omega
Site. The Tolling Agreement states that the Omega Group has a
claim against us for recoupment of costs previously spent and those that will be
expended in the future on the Omega Site. As such, should we
not complete the EPA settlement described above, the Tolling Agreement states
that any unexpired statute of limitations shall be tolled in connection with any
claims that the Omega Group and us have against each other in connection with
the Omega Site.

Any or all of these litigation matters and claims could subject us to
substantial costs and liabilities and divert our management's attention and
resources during our current and future financial reporting periods. If we
believe it is probable that we will incur an estimable amount of expenses in
connection with a litigation matter, we will include the estimated amount of
expenses in accounts payable or accrued liabilities. If we feel unable to make a
reasonable judgment as to the ultimate outcome of, or to assess or quantify our
exposure relating to, a litigation matter, we will not include in our financial
statements an estimated amount of expenses for that matter. Consequently, if we
are unable during any financial reporting period to accurately estimate our
potential liability in connection with a litigation matter, our financial
condition and results of operations in future financial reporting periods may be
adversely affected when we record any unreserved costs or liabilities we
actually have incurred in connection with a litigation matter.

GOVERNMENTAL REGULATIONS AFFECTING SECURITY OF INTERNET AND OTHER DIGITAL
COMMUNICATION NETWORKS COULD LIMIT THE MARKET FOR OUR PRODUCTS AND
SERVICES.

The United States government and 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 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. 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, governmental agencies such as
the Federal Communications Commission periodically issue regulations governing
the conduct of business in telecommunications markets that may adversely affect
the telecommunications industry and us.

BIZ ACQUISITION-RELATED ACCOUNTING CHARGES MAY CONTINUE TO DELAY OR REDUCE
OUR PROFITABILITY AND CAUSE THE MARKET PRICE OF OUR COMMON STOCK TO
DECLINE.

In July 2001, the FASB issued Statement No. 142, "Goodwill and Other
Intangible Assets." We adopted this statement effective January 1, 2002. Under
this statement, goodwill is no longer amortized and is subject to periodic
testing for impairment beginning January 1, 2002. The provisions of this
statement require us to perform a two-step test to assess goodwill for
impairment. In the first step, we compare the fair value of each reporting unit
to its carrying value. If the fair value exceeds the carrying value, then
goodwill is not impaired and we need not proceed to the second step. If the
carrying value of a reporting unit exceeds its fair value, then we must
determine and compare the implied fair value of the reporting unit's goodwill to
the carrying value of its goodwill. If the carrying value of the reporting
unit's goodwill exceeds its implied fair value, then we will record an
impairment loss in the amount of the excess.

We are required to perform tests for impairment at least annually, or
more frequently if events occur or circumstances change that would more likely
than not reduce the fair value of the net carrying amount. We cannot predict
whether or when there will be additional impairment charges, or the amount of
any such charges. If the charges are significant, they could cause the market
price of our common stock to decline.

DEFAULTS UNDER OUR SECURED CREDIT ARRANGEMENTS COULD RESULT IN A
FORECLOSURE ON OUR ASSETS BY OUR CREDITORS.

All of our assets are pledged as collateral to secure portions of our
debt. We were not able to obtain waivers for past covenant defaults, and we may
in the future default under certain covenants of these credit arrangements. This
means that if we are unable to obtain waivers in the future or if we incur a
monetary default on our secured debt obligations, our indebtedness could become
immediately due and payable and the lenders could foreclose on our assets.

WE HAVE OUTSOURCED A PORTION OF OUR COMMERCIAL SOFTWARE DEVELOPMENT TO
INDIA, WHICH COULD PROVE TO BE UNPROFITABLE DUE TO RISKS INHERENT IN
INTERNATIONAL BUSINESS ACTIVITIES.

We have contracted portions of our commercial software development
activities to India in an effort to reduce our operating expenses. We are
subject to a number of risks associated with international business activities
that could adversely affect any operations we may develop in India and could
slow our growth. These risks generally include, among others:

o difficulties in managing and staffing our Indian operations;
o difficulties in obtaining or maintaining regulatory approvals or
in complying with Indian laws;
o reduced or less certain protection for intellectual property
rights;
o differing technological advances, preferences or requirements;
o trade restrictions;
o foreign currency fluctuations; and
o general economic conditions, including instability, in the Indian
market.

Any of these risks could adversely affect our business and results of
operations.

CONFLICTS INVOLVING INDIA COULD ADVERSELY AFFECT ANY OPERATIONS WE MAY
ESTABLISH IN INDIA, WHICH COULD INTERFERE WITH OUR ABILITY TO CONDUCT ANY
OR ALL OF OUR OTHER OPERATIONS.

South Asia has from time to time experienced civil unrest and
hostilities among neighboring countries, including India and Pakistan. In April
1999, India and Pakistan conducted long-range missile tests. Since May 1999,
military confrontations between India and Pakistan have occurred in disputed
regions. In October 1999, the leadership of Pakistan changed as a result of a
coup led by the military. Additionally, other events have heightened the
tensions between India and Pakistan. If a major armed conflict or nuclear war
involving India and any of its neighboring countries occurs, it could, among
other things, prevent us from establishing or maintaining operations in India.
If the successful conduct of operations in India becomes critical to any or all
of our other operations, our business would be adversely affected to the extent
we are unable to establish or maintain operations in India.

WE ARE EXPOSED TO LIABILITY FOR ACTIONS TAKEN BY OUR DOMESTIC EMPLOYEES
WHILE ON ASSIGNMENT AND MAY ALSO BE EXPOSED TO LIABILITY FOR ACTIONS TAKEN
BY ANY FOREIGN EMPLOYEES WE MAY HIRE.

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 exposed to liability for actions taken by our employees while
on assignment. In addition, to the extent we hire employees in India or other
foreign locations, we may also be exposed to liability for actions taken by
those employees in the scope of their employment.

THE RECENTLY COMPLETED SERIES A PREFERRED STOCK FINANCING AND WARRANT
ISSUANCE WERE HIGHLY DILUTIVE, WHICH MAY CAUSE OUR STOCK PRICE TO FALL.

In connection with a financing that closed on November 19, 2003, we
issued shares of Series A Preferred Stock, convertible promissory notes,
investor warrants and placement agent and exchange agent warrants that currently
are exercisable for or convertible into or have been exercised for or converted
into up to approximately 36,885,000 shares of common stock. The initial exercise
and conversion prices of these securities ranged from $.01 per share to $1.50
per share, and most of these derivative securities had exercise or conversion
prices that were below the $1.19 closing sale price of our common stock on that
date. Therefore, the issuance of shares upon exercise or conversion of these
derivative securities will be highly dilutive to the voting power and value of
our common stock and could cause our stock price to fall.

WE RECENTLY ANNOUNCED A PROPOSED MERGER AGREEMENT THAT CARRIES WITH IT
KNOWN AND UNKNOWN RISKS ASSOCIATED WITH INTEGRATING TWO CORPORATE CULTURES
AND PRODUCTS AND SUBSTANTIAL TRANSACTION COSTS THAT MAY ADVERSELY AFFECT
OUR STOCK PRICE AND RESULTS OF OPERATIONS.

On March 22, 2004, we announced the execution of a definitive merger
agreement with SAFLINK, a developer and marketer of biometric software.
Completion of the merger is subject to various conditions, including stockholder
and third party consents, and involves substantial transaction costs. If the
merger fails to close, we will have incurred significant transaction costs and
may be liable to SAFLINK's for its costs and/or a $2 million termination fee
under limited circumstances and may not be able to recover our costs or obtain a
$2 million termination fee from SAFLINK, any of which circumstances would
adversely affect our stock price and results of operations. If the merger is
completed, the operations of the two companies must be integrated to achieve the
benefits contemplated in executing the merger agreement. If the cultures of the
two companies do not mesh properly or if SAFLINK's biometric product does not
integrate properly with our products, the stock price and results of operations
of the combined company would be adversely affected. To date, SAFLINK has not
been profitable. The merger may cause events in the near future that will have
an unknown effect on our operations and stock price.

OUR OBLIGATION TO PAY A TERMINATION FEE UNDER CERTAIN CIRCUMSTANCES AND THE
RESTRICTIONS ON OUR ABILITY TO SOLICIT OTHER ACQUISITION PROPOSALS MAY
DISCOURAGE OTHER COMPANIES FROM TRYING TO ACQUIRE US.

Until the merger with SAFLINK is completed or the merger agreement is
terminated, with limited exceptions, the merger agreement prohibits us from
entering into or soliciting any acquisition proposal or offer for a merger or
other business combination with a party other than SAFLINK. We have agreed to
pay SAFLINK a termination fee of $2 million under specified circumstances. These
provisions could discourage other companies from trying to acquire us even
though they might be willing to offer greater value to our stockholders than
SAFLINK has offered in the merger.

THE NON-CASH INTEREST EXPENSE REQUIRED IN CONNECTION WITH THE DETACHABLE
WARRANTS AND BENEFICIAL CONVERSION FEATURES OF OUR APRIL 2002 FINANCING AND
THE SERIES A PREFERRED STOCK AND WARRANTS ISSUED IN NOVEMBER 2003 MAY
ADVERSELY AFFECT OUR STOCK PRICE.

The secured convertible promissory notes we issued in April 2002 and
the Series A Preferred Stock and replacement notes we issued in November 2003
are convertible into shares of our common stock at a conversion price below the
market price of our common stock at the commitment date for each of those
securities. In addition, the securities were accompanied by common stock

purchase warrants with an exercise price below the market price of our common
stock at the commitment date. Accordingly, under accounting guidelines, we were
required to record a substantial non-cash charge as interest expense for the
April 2002 notes and similar non-cash items for the Series A Preferred Stock and
the warrants. These non-cash charges substantially increased our reported loss
for 2003 and 2002 over the amount that would have otherwise been reported. The
increases in our reported losses may cause a decline in our stock price.

OUR COMMON STOCK PRICE IS SUBJECT TO SIGNIFICANT VOLATILITY, WHICH COULD
RESULT IN SUBSTANTIAL LOSSES FOR INVESTORS AND IN LITIGATION AGAINST US.

The stock market as a whole and individual stocks historically have
experienced extreme price and volume fluctuations, which often have been
unrelated to the performance of the related corporations. During the 52-week
period ended March 23, 2004, the high and low closing sale prices of our common
stock were $.50 and $2.03, respectively. The market price of our common stock
may exhibit significant fluctuations in the future in response to various
factors, many of which are beyond our control and which include:

o variations in our annual or quarterly financial results, which
variations could result from, among other things, the timing,
size, mix and customer acceptance of our product and service
offerings and those of our competitors, and the timing and
magnitude of required capital expenditures;
o company-issued earnings announcements that vary from consensus
analyst estimates;
o changes by financial research analysts in their recommendations or
estimates of our earnings;
o conditions in the economy in general or in the information
technology service sector in particular;
o announcements of technological innovations or new products or
services by us or our competitors; and
o unfavorable publicity or changes in applicable laws and
regulations, or their judicial or administrative interpretations,
affecting the information technology service sector and us.

If our operating results in future quarters fall below the expectations
of market makers, securities analysts and investors, the price of our common
stock likely will decline, perhaps substantially. In the past, securities class
action litigation often has been brought against a company following periods of
volatility in the market price of its securities. We may in the future be the
target of similar litigation. Securities litigation could result in substantial
costs and liabilities and could divert management's attention and resources.
Consequently, the price at which investors purchase shares of our common stock
may not be indicative of the price that will prevail in the trading market.
Investors may be unable to sell their shares of common stock at or above their
purchase price, which may result in substantial losses.

A SIGNIFICANT NUMBER OF SHARES OF OUR COMMON STOCK ARE OR WILL BECOME
ELIGIBLE FOR PUBLIC SALE, AND SALES OF LARGE NUMBERS OF OUR SHARES COULD
ADVERSELY AFFECT THEIR MARKET PRICE AND MAKE IT DIFFICULT FOR US TO RAISE
ADDITIONAL CAPITAL, IF NEEDED, THROUGH SALES OF EQUITY SECURITIES.

As of March 23, 2004, we had issued and outstanding 38,138,998 shares
of common stock, a majority of which were unrestricted, were eligible for resale
without registration under Rule 144 of the Securities Act of 1933, or were
registered for resale or issued with registration rights. In addition, we have
registered or were obligated to register for resale approximately 35,641,000
shares of common stock that were issuable or may become issuable under
derivative securities that were outstanding as of that date. Our common stock
historically has been thinly traded. While our recent trading activity has
increased, if our stockholders seek to sell numbers of shares significantly in
excess of our typical volume, the market price of our shares may decline. Any
adverse effect on the market price for our common stock could make it more
difficult for us to sell equity securities at a time and at a price that we deem
appropriate.

THE MARKET PRICE OF OUR COMMON STOCK COULD SUBSTANTIALLY DECLINE IF ALL OR
A SIGNIFICANT PORTION OF OUR OUTSTANDING DERIVATIVE SECURITIES WERE
CONVERTED INTO OR EXERCISED FOR SHARES OF OUR COMMON STOCK AND RESOLD INTO
THE MARKET, OR IF A PERCEPTION EXISTS THAT A SUBSTANTIAL NUMBER OF SHARES
WILL BE ISSUED UPON CONVERSION OR EXERCISE AND THEN RESOLD INTO THE MARKET.

As of March 23, 2004, we had outstanding 38,138,998 shares of common
stock and also had outstanding preferred stock, options, warrants, and
promissory notes that were then exercisable for or convertible into, or may
become exercisable, for or convertible into approximately 35,641,000 shares of
our common stock. If the conversion or exercise prices at which our outstanding
derivative securities are converted or exercised are lower than the market
price, immediate dilution will occur. In addition, sales of a substantial number
of shares of common stock issued upon conversion or exercise of our outstanding
derivative securities, or even the perception that such sales could occur, could
adversely affect the market price of our common stock. Therefore, a substantial
decline in the value of our shares could result from both the actual and
potential conversion or exercise of our outstanding derivative securities and
the actual and potential resale of the underlying shares into the market.

IF WE ARE UNSUCCESSFUL IN COMPLYING WITH OUR SECURITIES REGISTRATION
OBLIGATIONS, WE MAY BE IN DEFAULT UNDER VARIOUS AGREEMENTS AND COULD FACE
SIGNIFICANT PENALTIES AND A SUBSTANTIAL STIPULATED JUDGMENT.

The agreements we entered into in connection with our issuance of
secured convertible promissory notes and related warrants, our preferred stock
and related warrants and in connection with settlement of litigation require us
to, among other things, register for resale the shares of common stock issued or
issuable under those arrangements and to maintain the effectiveness of the
registration statements for an extended period of time. If we are unable to
timely obtain and maintain effectiveness of the required registration statements
or obtain appropriate waivers or if we default under the arrangements for any
other reason, then the holders of the notes could, among other things, require
us to pay substantial penalties, require us to repay the notes at a premium
and/or foreclose upon their security interest in our assets, the parties to the
settlement arrangements could take action against us that could include the
filing of a substantial stipulated judgment, and the holders of the preferred
stock and related warrants could require us to redeem their shares of preferred
stock at a substantial premium. Any of these events would adversely affect our
business, operating results, financial condition, and ability to service our
other indebtedness by adversely affecting our cash flows.

A SMALL NUMBER OF STOCKHOLDERS, WHO INCLUDE CERTAIN OF OUR OFFICERS AND
DIRECTORS, HAVE THE ABILITY TO CONTROL STOCKHOLDER VOTES AND TO TAKE ACTION
BY WRITTEN CONSENT WITHOUT A MEETING OF STOCKHOLDERS.

As of March 23, 2004, our co-chairmen, Kris Shah and Marvin Winkler and
certain of their family members and affiliates owned, in the aggregate,
approximately 31% of our outstanding common stock. Those stockholders, if
acting together with several other stockholders, 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.
Further, those stockholders have the ability to take action by written consent
on those matters without a meeting of stockholders. Those matters could include
the election of directors, changes in the size and composition of the board of
directors, and mergers and other business combinations involving our company. In
addition, through control of the board of directors and voting power, they may
be able to control certain decisions, including decisions regarding the
qualification and appointment of officers, dividend policy, access to capital
(including borrowing from third-party lenders and the issuance of additional
equity securities), and the acquisition or disposition of our assets. Also, the
concentration of voting power in the hands of those individuals could have the
effect of delaying or preventing a change in control of our company, even if the
change in control would benefit our stockholders, and may adversely affect the
market price of our common stock.

ITEM 7. FINANCIAL STATEMENTS

Reference is made to the financial statements included in this report
beginning at page F-1.

ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

As disclosed in our Form 8-K filed August 1, 2002, on July 25, 2002, we
and our subsidiaries notified KPMG LLP ("KPMG"), the independent accounting firm
that was engaged as SSP's principal accountant to audit our financial
statements, that we intended to engage new certifying accountants, in effect
terminating our relationship with KPMG. Our decision to change accountants was
approved by our audit committee and board of directors. In connection with the
audits of the two years ended December 31, 2001, and during the subsequent
interim period through July 25, 2002, there were no disagreements with KPMG on
any matter of accounting principles or practices, financial statement
disclosure, or auditing scope or procedures which disagreements, if not resolved
to KPMG's satisfaction, would have caused KPMG to make reference to the subject
matter of the disagreement in connection with its opinion. In addition, there
were no reportable events as described in Item 304(a)(1)(v) of Regulation S-K
under the Securities Act of 1933, as amended.

As disclosed in our Form 8-K filed August 6, 2002, on August 2, 2002,
we engaged Haskell & White LLP as our new certifying accountants. We had not
consulted with Haskell & White in the past regarding the application of
accounting principles to a specified transaction or the type of audit opinion
that might be rendered on our financial statements or as to any disagreement or
reportable event as described in Item 304(a)(1)(iv) and Item 304(a)(1)(v) of
Regulation S-K under the Securities Act of 1933.

ITEM 8A. CONTROLS AND PROCEDURES

Our chief executive officer and chief financial officer (our principal
executive officer and principal financial officer, respectively) have concluded,
based on their evaluation as of December 31, 2003 that the design and operation
of our "disclosure controls and procedures" (as defined in Rule 13a-15(e) under
the Exchange Act ), are effective to ensure that information required to be
disclosed by us in the reports filed or submitted by us under the Exchange Act
is accumulated, recorded, processed, summarized and reported to our management,
including our principal executive officer and our principal financial officer,
as appropriate to allow timely decisions regarding whether or not disclosure is
required.

During the quarter ended December 31, 2003, there were no changes in
our "internal" controls over financial reporting (as defined in Rule 13a-15(f)
under the Exchange Act) that have materially affected, or are reasonably likely
to materially affect, our internal controls over financial reporting.

PART III

ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

DIRECTORS AND EXECUTIVE OFFICERS

Set forth below is information regarding our executive officers and
directors as of March 23, 2004:

NAME AGE POSITION
---- --- --------
Marvin J. Winkler............... 49 Co-Chairman of the Board of Directors,
Chief Executive Officer and Director
Kris Shah....................... 64 Co-Chairman of the Board of Directors,
President, Chief Operating Officer,
Secretary and Director
Thomas E. Schiff................ 53 Executive Vice President, Chief Financial
Officer and Assistant Secretary
Gregg Amber (2)................. 47 Director
Ron R. Goldie (1) (2) .......... 52 Director
David A. Janes (1).............. 66 Director
____________

(1) Member of audit committee.
(2) Member of compensation committee.

MARVIN J. WINKLER is our co-chairman of the board of directors,
director and chief executive officer, positions he has held since August 2001
following our acquisition of BIZ. Prior to August 2001 and since April 2000, Mr.
Winkler served as the chief executive officer and chairman of the board of
directors and as a director of BIZ. Mr. Winkler founded BIZ to address the
secure processing and applications required to ensure secure high-speed
knowledge and financial transactions across the Internet. He also established
the industry's first Core-To-Edge(TM) solution set of hardware, software and
firmware products and applications for security in electronic commerce. In June
1999, Mr. Winkler partnered with principals of Broadcom Corporation to co-found
Broadband Interactive Group ("BIG") to demonstrate the applications for
interactive television in a convergent broadband media industry. In November
2001, BIG made an assignment for the benefit of its creditors. In August 1996,
Mr. Winkler acquired Gotcha International, L.P., an apparel manufacturer, and
served as its president and chief executive officer until July 2002. In August
2002, Gotcha filed for Chapter 11 bankruptcy protection in order to terminate
the license of its domestic licensee. Gotcha filed a reorganization plan to
re-pay creditors in full plus interest.

KRIS SHAH is our co-chairman of the board of directors, president,
chief operating officer and secretary. Mr. Shah has been our chairman of the
board of directors and a director since he founded our company in 1970. He
served as our chief executive officer from our founding through August 2001 and
shared that position with Mr. Winkler from August 2001 through September 2003.
Mr. Shah has served as our secretary since May 2001. In addition, from September
2000 until August 2001 and since September 2003, Mr. Shah has served as our
president. Mr. Shah has served as our chief operating officer since September
2003. Mr. Shah's career has involved every major aspect of circuit design and
chip packaging technology, including research and development, manufacturing,
engineering, marketing and strategic planning. Before forming our company, Mr.
Shah held management level positions at Hughes Aircraft Co., Fiberite Inc. and
Bell Industries, Inc. Mr. Shah holds B.S. and M.S. degrees in mechanical
engineering from the University of Southern California.

THOMAS E. SCHIFF has served as our executive vice president and chief
financial officer since our acquisition of BIZ in August 2001 and has served as
our assistant secretary since October 2002. Prior to that, Mr. Schiff served as
the executive vice president, chief financial officer, treasurer and secretary
and as a member of the board of directors of BIZ since its inception in April
2000. From December 1998 to June 2001, he was an executive vice president and
chief financial officer for SW Gotcha Acquisition Ltd and Gotcha International,
L.P. From March 1996 to December 1998, Mr. Schiff was executive vice president
and chief financial officer of Pacific Eyes & T's. Mr. Schiff was formerly a
certified public accountant for the San Francisco office of Peat, Marwick,
Mitchell. He holds a degree in economics from Stanford University and an M.B.A.
degree from the Stanford Graduate School of Business.

GREGG AMBER joined our board in April 2000. From March 2000 until May
2001, Mr. Amber also served as our secretary. Mr. Amber is currently a partner
with the law firm of Rutan & Tucker, LLP. From December 1999 until July 2000,
Mr. Amber was the senior vice president, secretary and general counsel for
ZLand.com, Inc. From March 1998 through November 1999, Mr. Amber was a partner
with the law firm of Rutan & Tucker, LLP. Mr. Amber holds a B.A. degree in
political science and mathematics from Principia College and a J.D. degree from
Stanford Law School.

RON R. GOLDIE joined our board in January 2003. Mr. Goldie has served
domestically and internationally as both a senior business executive and an
attorney with several large law firms, with Mr. Goldie specializing in financial
transactions and managing the business law departments of those firms. From
November 2001 to February 2002, Mr. Goldie was the Chief Financial Officer of
ETC, plc, a London-based firm with operations in electronic payment processing
and encryption, in addition to technology investments both in the United States
and Europe. From October 2000 to September 2001, Mr. Goldie was the Chief
Operating Officer of GlobalNetFinancial ((Nasdaq-NMS: GLBN) (LSE/AIM:GLFA)), an
international dual-listed firm with holdings in numerous financial management
firms in the United States and Europe. Upon returning from London in September
2001, Mr. Goldie formed the Law Offices of Ron R. Goldie to serve both domestic
and European-based clients. Previously, Mr. Goldie served as a senior partner in
various firms, including Mitchell Silberberg & Knupp from March 1999 to April
2001, Stroock & Stroock & Lavan from January 1998 to March 1999, Coudert
Brothers from April 1997 to January 1998, and Jeffer Mangels Butler & Marmaro
from 1990 to 1997. Mr. Goldie earned a B.A. degree in history and a J.D. degree
from University of Southern California.

DAVID A. JANES joined our board in September 2003. Mr. Janes was
commissioned an ensign in the U.S. Naval Reserve in 1959 and maintained an
active participation until he retired, as a two star admiral, from the U.S.
Naval Reserve in 1994. In 1997, Mr. Janes formed Janes Capital Partners, an
investment banking firm specializing in mergers, acquisitions, and equity
investments in manufacturing companies; he served as chairman and chief
executive officer. In 1977, Mr. Janes founded California Manufacturing
Enterprises; he served as chief executive officer until 1998. Mr. Janes
continues to serve as a principal investor and director of Intri-Plex
Technologies U.S. and Intri-Plex Technologies Thailand, a manufacturer of
critical mechanical components for computer disc drives and heat dissipating
substrate for computer chips. Mr. Janes also serves a number of organizations
including the Orange County Council of Boy Scouts of America, where he serves as
vice chairman, and the U.S. Naval Institute Foundation Board of Trustees and the
Navy League of the U.S. Mr. Janes holds a B.S. degree in Economics from the
University of Wisconsin and an M.S. degree in Finance from University of
Wisconsin, Madison, Wisconsin.

There are no family relationships among our officers and directors.

SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

Section 16(a) of the Exchange Act, and the regulations thereunder
require the directors, executive officers and persons who beneficially own more
than 10% of a registered class of our equity securities ("reporting persons") to
file with the Commission initial reports of ownership and reports of changes in
ownership of our common stock and other equity securities, and to furnish us
with copies of all reports that they file.

Based solely upon a review of copies of the reports furnished to us
during our fiscal year ended December 31, 2003 and thereafter, or any written
representations received by us from reporting persons that no other reports were
required, we believe that, all Section 16(a) filing requirements applicable to
our reporting persons during 2003 were met, except that Joel K. Rubenstein and
Gregory J. Clark each filed a late Form 4 to report respective transactions.

AUDIT COMMITTEE MATTERS

During 2003, Ron R. Goldie, David A. Janes and the late Joel K.
Rubenstein served as members of our standing audit committee, with Mr. Goldie
serving as chair. Messrs. Goldie and Janes currently serve on our audit
committee, with Mr. Goldie continuing as chair. Each of Messrs. Goldie and Janes
meets the independence criteria prescribed by applicable law and the rules of
the Commission for audit committee membership, is an "independent director" as
defined in National Association of Securities Dealers, Inc. ("NASD") Rule
4200(a)(15) and meets the NASD's financial knowledge requirements, and Mr.
Goldie, designated by our board of directors as our "audit committee financial
expert" under Commission rules, meets the NASD's professional experience
requirements as well. We are required by NASD rules to appoint an additional
independent director to our audit committee prior to the earlier of February 1,
2005 or our next annual stockholders' meeting.

Our audit committee operates pursuant to a written charter, which was
amended and restated in February 2004 and complies with the applicable
provisions of the Sarbanes-Oxley Act of 2002 and related rules of the Commission
and the NASD. A copy of the audit committee charter is being filed with this
report. As more fully described in the charter, the audit committee is
responsible for overseeing our accounting and financial reporting processes,
including the quarterly review and the annual audit of our consolidated
financial statements by our independent auditors.

CODE OF ETHICS

Our board of directors has adopted a Code of Ethics that applies to all
of our [directors,] officers and employees. We are preparing to post the code on
our Internet website at www.sspsolutions.com and will provide a copy of the code
to any person without charge, upon written request to our chief financial
officer at our principal executive offices.

We intend to satisfy the disclosure requirement under Item 10 of Form
8-K relating to amendments to or waivers from provisions of the code that relate
to one or more of the items set forth in Item 406(b) of Regulation S-B, by
describing on our Internet website, within five business days following the date
of a waiver or a substantive amendment, the date of the waiver or amendment, the
nature of the amendment or waiver, and the name of the person to whom the waiver
was granted.

Information on our Internet website is not, and shall not be deemed to
be, a part of this report or incorporated into any other filings we make with
the Securities and Exchange Commission.

ITEM 10. EXECUTIVE COMPENSATION

COMPENSATION OF EXECUTIVE OFFICERS

The following table provides information concerning the annual,
long-term and other compensation for 2003, 2002 and 2001 earned for services in
all capacities as an employee by our chief executive officer and each of our
other executive officers who received an annual salary and bonus of more than
$100,000 during 2003 (collectively, the "named executive officers"):

SUMMARY COMPENSATION TABLE

LONG-TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
OTHER SECURITIES
NAME AND ANNUAL UNDERLYING ALL OTHER
PRINCIPAL POSITIONS YEAR SALARY BONUS COMPENSATION OPTIONS COMPENSATION
------------------- ---- ------ ----- ------------ ------- ------------

Marvin J. Winkler, 2003 $192,724 -- $17,520 (9) 200,000 --
Co-Chairman and 2002 $130,954 (1) -- $17,979 (4) 26,250 --
Chief Executive Officer (1) 2001 $ 34,615 -- $ 6,400 (6) -- --

Kris Shah, 2003 $192,724 -- $19,920 (8) 200,000 --
Co-Chairman, President 2002 $142,188 (1) -- $25,200 (2) 26,250 $ 3,281 (3)
Chief Operating 2001 $236,908 -- $25,200 (2) -- --
Officer and Secretary

Richard M. Depew, 2003 $133,800 -- $ 5,810 (11) -- $ 9,800 (12)
Former President and 2002 $165,156(1)(7) -- $ 6,000 (5) 26,250 --
Former Chief Operating 2001 $ 60,333 -- $ 2,500 (5) 220,000 --
Officer (1)

Thomas E. Schiff, 2003 $120,095 $ 25,000 $17,950 (10) 250,000 --
Executive Vice President, 2002 $117,989 (1) -- $14,400 (5) 18,750 $ 729 (3)
Chief Financial Officer and 2001 $ 48,096 -- $ 4,800 (5) 47,512 --
Assistant Secretary (1)
____________

(1) Messrs. Shah, Winkler, Depew and Schiff had their annual salaries reduced
by 10% along with all other employees in August 2002, and they deferred
payment of additional salary amounts. Beginning August 1, 2002, their
annual salaries paid were $87,500, $87,500, $148,750 and $112,500,
respectively. Messrs. Shah, Winkler and Depew deferred payment of salary in
the amounts of $29,200, $29,200 and $3,650, respectively, which are
included in accrued liabilities as of December 31, 2002 and are included in
the above table. Beginning in September 2003, Mr. Shah succeeded Mr. Depew
as president and chief operating officer and no longer served as our
co-chief executive officer. Mr. Schiff became our assistant secretary in
October 2002. Also, in November 2003, new employment contracts for Messrs.
Shah, Winkler and Schiff became effective, and Mr. Shah and Mr. Winkler
were paid their deferred salary.

(2) Represents a $19,200 car allowance and $6,000 in health insurance premiums.

(3) Represents matching company contribution to 401(k) plan on the same terms
as were generally made available to all employees.

(4) Represents a $12,000 car allowance and $5,979 in health insurance premiums.

(5) Represents car allowance.

(6) Represents car allowance and $2,400 in health insurance premiums.

(7) In August 2002, Mr. Depew had his annual salary reduced by 10% along with
Messrs. Shah, Winkler, Schiff and all other employees, as described in note
(1) above. When we declined to extend Mr. Depew's employment contract in
August 2003, Mr. Depew denied that he had voluntarily agreed to the 10%
salary reduction that had been accepted by all of our other employees, and
he made a demand for payment of the difference between what he had been
paid since August 2002 and the full salary amount stated in his employment
contract. Therefore, at the termination of Mr. Depew's employment contract,
we paid to him the difference between the $165,156 that was actually paid
to him during 2002 (based upon our understanding that Mr. Depew had agreed
to both reduce his salary along with all other employees and defer a
portion of his compensation otherwise due) and his contractual annual
salary of $175,000.

(8) Represents a $16,800 car allowance and $3,120 in health insurance premiums.

(9) Represents a $10,500 car allowance and $7,020 in health insurance premiums.

(10) Represents a $12,600 car allowance and $5,350 in health insurance premiums.

(11) Represents a $4,000 car allowance and $1,810 in health insurance premiums.

(12) Represents a $9,800 of accrued, but unpaid time off that was paid on at the
date Mr. Depew's contract terminated.

OPTION GRANTS IN LAST FISCAL YEAR

The following table provides information regarding options granted in
2003 to the named executive officers. We did not grant any stock appreciation
rights in 2003.

PERCENT
OF TOTAL
OPTIONS
NUMBER OF GRANTED TO
SECURITIES EMPLOYEES EXERCISE
GRANT UNDERLYING IN FISCAL PRICE PER EXPIRATION
NAME DATE OPTIONS GRANTED YEAR (1) SHARE DATE
---- ---- --------------- -------- ----- ----

Kris Shah................... 7/31/03 200,000 (2) 6.51% $ .81 7/31/13
Marvin J. Winkler........... 7/31/03 200,000 (2) 6.51% $ .81 7/31/13
Thomas E. Schiff ........... 7/31/03 150,000 (2) 4.88% $ .81 7/31/13
Thomas E. Schiff ........... 12/18/03 100,000 (2) 3.26% $ 1.04 12/18/13
____________

(1) Based on options to purchase 3,072,000 shares granted to our employees
during 2003.

(2) The option vests and become exercisable as to 20% of the underlying shares
of common stock upon issuance. The option vests and becomes exercisable as
to the remaining 80% of the underlying shares of common stock at the rate
of 1/48th of the total shares underlying the option per month, commencing
one month after the date of grant of the option.

AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END
OPTION VALUES

The following table provides information regarding the number of shares
of common stock underlying exercisable and unexercisable stock options held by
the named executive officers at December 31, 2003. An option is in-the-money if
the fair market value for the underlying securities exceeds the exercise price
of the option. No options were exercised by the named executive officers during
2003.

NUMBER OF
SECURITIES UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS AT
SHARES DECEMBER 31, 2003 DECEMBER 31, 2003(1)
ACQUIRED VALUE ---------------------------- ------------------------------
NAME ON EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- -------- ----------- ------------- ----------- -------------

Kris Shah................... -- -- 70,667 155,583 $ 34,127 $ 84,236
Marvin J. Winkler........... -- -- 70,667 155,583 $ 34,127 $ 84,236
Thomas E. Schiff............ -- -- 305,112 201,199 $ 32,550 $ 91,138
____________

(1) Based on the last reported sale price of our common stock of $1.39 on
December 31, 2003 (the last trading day during 2003) as reported by The
Nasdaq National Market, minus the exercise price of the options.

EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL
ARRANGEMENTS

KRIS SHAH

On March 6, 2003, we executed a three-year employment agreement with
Mr. Shah that became effective on November 20, 2003 following the closing of our
Series A Preferred Stock financing on November 19, 2003. The employment
agreement replaced a June 9, 1999 employment agreement that had similar terms.
The agreement is subject to successive one-year renewals unless, at least 90
days prior to the expiration of the then-current term, either party gives notice
of its intention not to renew.

The agreement provides for a base salary of $210,000 per year for the
first twelve-month period, with annual increases in the discretion of our
compensation committee. Mr. Shah is entitled to receive bonuses between 0% and
100% of his base salary on a sliding scale based upon our annual revenue and
earnings achievement. Mr. Shah is not entitled to a vehicle allowance. We pay
the costs of medical benefit plans and dental, disability and life insurance
premiums for Mr. Shah and his dependents.

We are obligated to make payments to Mr. Shah upon termination of
employment, depending on the circumstances surrounding the termination. If the
agreement is terminated by Mr. Shah pursuant to the notice provision described
above, or by us for due cause, or by Mr. Shah in breach of the agreement, Mr.
Shah will have the right to exercise all vested stock options, receive his base
salary and accrued vacation through the date of termination and receive benefits
provided by retirement and benefit plans that are earned and vested through the
date of termination.

If the agreement is terminated by Mr. Shah for good reason, as defined
in the agreement, or if we terminate the agreement other than for due cause or
due to Mr. Shah's incapacity, death or retirement, he will be entitled to
receive his base salary through the end of the month during which the
termination occurred, plus credit for any unused vacation, at his then-current
salary during the remainder of the term of the agreement or two years, whichever
is longer. He will also be entitled to payment of a prorated incentive bonus for
the fiscal year in which the termination occurs, and we will be required to
maintain at our expense for his continued benefit all medical and life insurance
to which he was entitled immediately prior to the date of termination (or, at
Mr. Shah's election, immediately prior to the date of a change in control), for
twelve months.

If the agreement is terminated due to his death or incapacity, his
estate or legal representative will be entitled to receive benefits provided by
retirement and benefit plans that are earned and vested through the date of
termination, a prorated incentive bonus for the fiscal year in which the
termination occurs, and base salary payments for six months following the date
of termination (less any payments he receives as a result of any disability
insurance we maintain for his benefit).

The agreement contains non-compete, confidentiality and non-disclosure
clauses designed to protect our intellectual property. The agreement also
contains a provision designed to preclude Mr. Shah from claiming rights to any
products or technologies he develops while in our employ or for a two-year
period following his termination.

In addition, the agreement contains indemnification provisions under
which we agreed to indemnify Mr. Shah if he is a party to or threatened to be
made a party to, or is otherwise involved in any proceeding (other than a
proceeding brought by us against him) by reason of the fact that he is or was an
officer and/or director of our company or is or was serving at the request of
employer as a director, officer, employee or agent of another enterprise, to the
fullest extent permitted by Delaware law.

On July 31, 2003, we issued to Mr. Shah a ten-year option to purchase
up to 200,000 shares of common stock at an exercise price of $.81 per share. The
option vested and became exercisable as to 40,000 shares of common stock
immediately upon the date of grant and is scheduled to vest and become
exercisable as to 1/48th of the total underlying shares each month beginning
August 31, 2003.

MARVIN J. WINKLER

On March 6, 2003, we executed a contract with Mr. Winkler that contains
the same terms and conditions as Mr. Shah's new contract and also became
effective on November 20, 2003. On July 31, 2003, we issued to Mr. Winkler a
ten-year option to purchase up to 200,000 shares of common stock at an exercise
price of $.81 per share. The option vested and became exercisable as to 40,000
shares of common stock immediately upon the date of grant and is scheduled to
vest and become exercisable as to 1/48th of the total underlying shares each
month beginning August 31, 2003.

THOMAS E. SCHIFF

On April 15, 2003, we executed a contract with Mr. Schiff that contains
substantially the same terms and conditions as Mr. Shah's and Mr. Winkler's new
contracts and became effective on November 20, 2003, with the following
differences:

o His base salary was $160,000 per year, which was increased to
$175,000 per year effective January 1, 2004 and

o Mr. Schiff's employment is "at will" but his employment agreement
contains a severance provision that provides that if Mr. Schiff's
employment is terminated other than for cause, we are obligated to
pay to him $175,000 in twelve equal monthly installments.

On July 31, 2003, we issued to Mr. Schiff a ten-year option to
purchase up to 150,000 shares of common stock at an exercise price of $.81 per
share. The option vested and became exercisable as to 30,000 shares of common
stock immediately upon the date of grant and is scheduled to vest and become
exercisable as to 1/48th of the total underlying shares each month beginning
August 31, 2003.

On December 18, 2003 we issued to Mr. Schiff a ten-year option to
purchase up to 100,000 shares of common stock at an exercise price of $1.04 per
share. The option vested and became exercisable as to 20,000 shares of common
stock immediately upon the date of grant and is scheduled to vest and become
exercisable as to 1/48th of the total underlying shares each month beginning
January 18, 2004.

COMPENSATION OF DIRECTORS

On January 27, 2003, our board of directors granted stock options to
our non-employee directors in consideration for their service on our board of
directors and its committees. Taking into account options that previously had
been granted to Messrs. Amber and Rubenstein, our board of directors granted to
each of Messrs. Goldie and Gregory J. Clark options to purchase up to 150,000
shares of common stock, to Mr. Rubenstein an option to purchase up to 120,000
shares of common stock, and to Mr. Amber an option to purchase up to 95,000
shares of common stock. these options have an exercise price of $.6035 per
share, which was equal to 85% of the closing price of a share of our common
stock on the day preceding the date of grant. Mr. Clark resigned from our board
of directors in July 2003, and his option later lapsed.

Mr. Janes was appointed to our board of directors and audit committee
on September 29, 2003 and received on October 8, 2003 an option to purchase up
to 125,000 shares of common stock at an exercise price of $.80 per share. The
January 27, 2003 and October 8, 2003 options vested and became exercisable as to
25% of the underlying shares immediately upon their respective dates of grant.
The remaining 75% of the shares of common stock underlying those options shall
vest and become exercisable in one-third increments immediately following our
2004, 2005 and 2006 annual stockholders' meetings. Those options also contained
a vesting acceleration provision that is triggered by a removal of the director
without cause or by a disposition of all or substantially all of our assets or
business or a disposition of more than 50% of our voting power.

Mr. Rubenstein passed away on February 2, 2004. Our board of directors
approved the vesting of all options held by Mr. Rubenstein effective on the day
of his death.

Historically, our non-employee directors received reimbursement of
travel expenses, but did not receive any cash compensation. Beginning in
February 2003, we paid cash compensation to our non-employee directors serving
on our board of directors and its committees in the annual amounts of $18,000 to
Mr. Goldie, $10,000 to Mr. Amber and $15,000 to Mr. Rubenstein.

Beginning March 1, 2004, we increased the annual cash compensation for
our non-employee directors serving on our board of directors and its committees
to the following:

Annual
Name Compensation Committee Positions
---- ------------ -------------------

Mr. Goldie $30,000 Audit Committee Chairman;
Compensation Committee Member
Mr. Amber $12,000 Compensation Committee Member
Mr. Janes $15,000 Audit Committee Member

Directors are reimbursed for expenses incurred in attending board and
committee meetings. No additional compensation is paid for attending meetings of
committees of our board of directors on which directors serve. Mr. Clark
resigned from our board of directors in July 2003. Upon his appointment to our
board of directors and audit committee, Mr. Janes became entitled to annual
compensation for his service as an audit committee member and board member.

In March 2004 we appointed Messrs. Goldie and Janes to a special
negotiating committee of our board of directors in connection our proposed
merger with SAFLINK. We paid $100,000 and $50,000, respectively, to
Mr. Goldie and Mr. Janes for their services on the committee.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION IN COMPENSATION
DECISIONS

Since January 27, 2003, Messrs. Amber, and Goldie have comprised the
compensation committee, together with Mr. Rubenstein until his death in February
2004. Mr. Amber served as our secretary from March 2000 until May 2001. Mr.
Amber is a partner in the law firm of Rutan & Tucker, LLP which firm acts as our
outside legal counsel but did not receive more than 5% of its 2003 gross
revenues from us. Mr. Goldie has not served as an officer or employee of SSP.
Prior to joining the board of directors in October 2002, Mr. Rubenstein
performed limited consulting services for us, but did not receive more than 5%
of his 2003 gross income from us.

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS

BENEFICIAL OWNERSHIP TABLE

As of the close of business on March 23, 2004, which is the record
date, a total of 38,138,998 shares of our common stock were outstanding. The
following table sets forth information as of that date regarding the beneficial
ownership of our common stock by:

o each of our directors and director nominees;

o each of our current executive officers who is named in the summary
compensation table;

o all of our directors, director nominees and executive officers as
a group; and

o each person known by us to beneficially own 5% or more of the
outstanding shares of our common stock as of the date of the
table.

Except as indicated below, the address for each named beneficial owner
is the same as ours. The inclusion of shares in this table as beneficially owned
is not an admission of beneficial ownership. Percentages shown as an asterisk
represent less than 1.00%.

Beneficial ownership is determined in accordance with Rule 13d-3
promulgated by the Commission, and generally includes voting or investment power
with respect to securities. Except as indicated below, we believe each holder
possesses sole voting and investment power with respect to all of the shares of
common stock owned by that holder, subject to community property laws where
applicable. In computing the number of shares beneficially owned by a holder and
the percentage ownership of that holder, shares of common stock subject to
options or warrants or underlying notes or preferred stock held by that holder
that are currently exercisable or convertible or are exercisable or convertible
within 60 days after the date of the table are deemed outstanding. Those shares,
however, are not deemed outstanding for the purpose of computing the percentage
ownership of any other person or group.

BENEFICIAL OWNERSHIP
OF COMMON STOCK
----------------------------
NUMBER PERCENTAGE OF
NAME OF BENEFICIAL OWNER OF SHARES COMMON STOCK
------------------------ --------- ------------

Kris Shah........................................................ 5,863,776 (1) 15.34%
Marvin J. Winkler................................................ 5,796,888 (2) 15.16%
Thomas E. Schiff................................................. 452,969 (3) 1.18%
Gregg Amber...................................................... 95,454 (4) *
Ron R. Goldie.................................................... 37,500 (5) *
David A. Janes................................................... 31,250 (6) *
Richard P. Kiphart............................................... 13,907,294 (7) 28.60%
Wave Systems Corp................................................ 3,530,283 (8) 9.26%

All directors and executive officers as a group (6 persons)...... 12,246,679 (9) 31.57%

(1) Includes 435,301 shares held by the Chandra L. Shah Trust, of which Mr.
Shah is the trustee; 435,301 shares held by the Leena Shah Trust, of
which Mr. Shah is the trustee; 4,898,940 shares held by the Kris and
Geraldine Shah Family Trust, of which Mr. Shah and his wife are the
trustees and beneficiaries; and; 94,234 shares underlying common stock
purchase options. Voting and dispositive power is held by Kris and
Geraldine Shah as trustees. Mr. Shah is our co-chairman, president,
chief operating officer and secretary.

(2) Includes 94,234 shares underlying common stock purchase options. JAW
Financial, L.P. shares voting and dispositive power over these shares
with JAW Lending, Inc., the general partner of JAW Financial, L.P., and
Marvin J. Winkler, an executive officer and 50% shareholder of JAW
Lending, Inc. Mr. Winkler is our co-chairman and chief executive
officer.

(3) Includes 338,056 shares underlying common stock purchase options.

(4) Includes 90,250 shares underlying common stock purchase options.

(5) Includes 37,500 shares underlying common stock purchase options.

(6) Includes 31,250 shares underlying common stock purchase options.

(7) Includes 3,437,372 outstanding shares of common stock, 1,289,704 shares
of common stock underlying the principal balance of, and estimated
interest on, a retained note, 1,273,800 shares of common stock
underlying an April 2002 warrant, 714,286 shares of common stock
underlying an additional retained warrant, 166,667 shares of common
stock underlying a September 2003 bridge warrant, 4,718,565 shares of
common stock underlying Series A Preferred face amount and dividends,
1,153,450 shares of common stock underlying an A-1 warrant and
1,153,450 shares of common stock underlying an A-2 warrant. Mr.
Kiphart is a principal of and manager - corporate finance at
William Blair & Company, L.L.C. Mr. Kiphart's mailing address is
c/o William Blair & Company, L.L.C., 222 West Adams Street,
Chicago, IL 60606.

(8) Power to vote or dispose of the shares is held by Gerard T. Feeney as
chief financial officer and Steven Sprague as chief executive officer.
The address for Wave Systems Corp. is 480 Pleasant Street, Lee, MA
01238.

(9) Includes 11,592,404 outstanding shares of common stock and 654,275
shares of common stock underlying options.

EQUITY COMPENSATION PLAN INFORMATION

The following table gives information about our common stock that may
be issued upon the exercise of options, warrants and rights under all of our
existing equity compensation plans as of December 31, 2003.

NUMBER OF SECURITIES
REMAINING AVAILABLE FOR
NUMBER OF SECURITIES TO WEIGHTED-AVERAGE FUTURE ISSUANCE UNDER
BE ISSUED UPON EXERCISE EXERCISE PRICE EQUITY COMPENSATION
OF OUTSTANDING OF OUTSTANDING OPTIONS, PLANS (EXCLUDING
OPTIONS, WARRANTS WARRANTS SECURITIES REFLECTED
PLAN CATEGORY AND RIGHTS AND RIGHTS IN COLUMN (a))
------------- ---------- ---------- --------------
(a) (b) (c)

Equity compensation plans approved 4,268,527 (1) $1.29 8,439,169 (2)
by security holders

Equity compensation plans not
approved by security holders -- -- --

Total 4,268,527 $1.29 8,439,169
____________

(1) Represents shares of common stock underlying options that are
outstanding under our 1998 Stock Option Plan, our Second Amended and
Restated 1999 Stock Option Plan, and the BIZ Interactive Zone, Inc.
2000 Stock Option Plan.

(2) Represents shares of common stock available for issuance under options
that may be issued under our 1998 Stock Option Plan and our Second
Amended and Restated 1999 Stock Option Plan.

CHANGES IN CONTROL

In March 2004, we entered into an Agreement and Plan of Merger
and Reorganization with SAFLINK. The merger agreement with SAFLINK contemplates
that we will merge with a newly-formed wholly-owned subsidiary of SAFLINK and
become a wholly-owned subsidiary of SAFLINK, with each share of our common
stock being exchanged for 0.6 shares of SAFLINK common stock. The consummation
of the merger is subject to the adoption by the our stockholders of the merger
agreement, the approval by SAFLINK stockholders of the issuance of shares of
SAFLINK common stock in the merger, and other customary closing conditions.

A substantial number of shares of our common stock will potentially
be issued upon conversion of derivative securities issued to investors and
the placement agent and exchange agent in the Series A Preferred Stock financing
and other bridge financing transactions. If beneficial ownership limitations are
waived or otherwise become inoperative, the holders of those derivative
securities may collectively be in a position to effectuate a change of control
by converting their notes and preferred stock into, and exercising their
warrants for, a number of shares of our common stock that represents in excess
of 50% of our voting power.

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

On January 2, 2000, we entered into a lease agreement for our principal
executive offices with KRDS, Inc. Kris Shah, our co-chairman of the board, is
also the majority stockholder and a director of KRDS, Inc. As of November 1,
2003, we owed KRDS a total of $213,311 under this lease, of which
$178,145 was for rent and $7,126 was for late charges. We also pay the real
property taxes and building insurance for the facility and as of November 1,
2003 had accrued $12,949 for taxes and $15,091 for insurance. KRDS is owned by
Kris Shah and his brothers. In April 2002, we and KRDS entered into an agreement
whereby, upon 60 days' notice, we or KRDS may cancel the remaining balance of
the facility lease with no future liability beyond the date of termination. On
December 1, 2003, we entered into a letter agreement whereby we agreed to
rescind our right of cancellation pay a certain amount of late fees in exchange
for KRDS' agreement to eliminate late charges of $7,126.

Mr. Shah owned 1,400,000 shares of common stock of BIZ that were
converted into 665,174 shares of our common stock upon consummation of the
acquisition of BIZ on August 24, 2001. Prior to the BIZ acquisition, Mr. Shah
purchased shares of BIZ common stock. Part of the consideration consisted of a
promissory note from Mr. Shah with a stated interest rate of 5% per annum and a
maturity date of July 24, 2005. On April 12, 2002, in a transaction approved by
our board of directors, Mr. Shah prepaid the note by paying $347,224. We
recorded a discount of $152,776 that 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%.

In October 2000, we signed a development agreement with Wave Systems
Corp ("Wave"), for the integration of EMBASSY-based systems with set-top box
master reference designs of Broadcom Corporation. Wave owned approximately 16.1%
of our issued and outstanding common stock as of November 7, 2003. To conserve
cash and settle our liability under the development agreement, we entered into
termination and mutual release agreement effective as of September 30, 2002
under which we issued to Wave 1,600,000 shares of our common stock and a
$270,000 non-interest bearing promissory note that we converted into 200,000
shares of common stock on December 13, 2002 at the initial conversion rate of
$1.35 per share. In September 2003, we registered for resale by Wave on Form S-3
the 1,800,000 shares of common stock issued in connection with the settlement.

As described in Item 6 of this report, during 2001, we arranged for the
lease of two buildings that were under construction and were subsequently
completed in the Spectrum area of Irvine, California, from an entity that was
partially owned by our co-chairman, Mr. Shah until August 2002. On one building,
we sublet one-half of the building on terms and conditions matching the
underlying lease. The sublease was with a related party company owned by our
co-chairman, Marvin J. Winkler. No sublease payments were made. In October 2002,
we restructured our lease obligations with landlord, Research Venture, LLC, for
the two Spectrum buildings. The restructuring required the cancellation of the
sub-lease with the company owned by Mr. Winkler. Until August 2002, Mr. Shah had
an ownership interest in Research Venture, LLC.

On December 18, 2001, we issued and sold convertible promissory notes
to four individuals, in the aggregate principal amount of $2,500,000. Messrs.
Shah and Winkler each purchased a note in the principal amount of $375,000 in
this transaction. Their $375,000 notes bore interest at 8% per annum, initially
were convertible into shares of our common stock at $3.60 per share and were due
and payable on December 31, 2005. Messrs. Shah and Winkler waived their right to
have the conversion price of these notes reduced to $1.00 per share in order to
assist us in closing our private placement of April 2002 Notes and April 2002
Warrants. On April 16, 2002, we issued to Messrs. Shah and Winkler
non-convertible unsecured promissory notes due December 31, 2005 in the
principal amounts of $152,776 and $500,000, respectively, in connection with
loans to us made by each of them. These notes bore interest at an annual rate of
10%. In June 2002, Messrs. Shah and Winkler exchanged all four of these notes,
together with accrued but unpaid interest, for 419,119 and 690,257 shares of our
common stock, respectively, at an above-market price of $1.30 per share.

Mr. Amber, one of our directors, served as our secretary from March
2000 until May 2001. Mr. Amber is a partner in the law firm of Rutan & Tucker,
LLP, which firm acts as our outside legal counsel but did not receive more than
5% of its 2001, 2002 or 2003 gross revenues from us.

Under a Securities Purchase, Registration Rights and Security Agreement
dated as of April 16, 2002, we issued an aggregate of $5,796,111 of secured
convertible promissory notes due December 31, 2005 ("April 2002 Notes") and
warrants to purchase an aggregate of 3,477,666 shares of our common stock at an
exercise price of $1.30 per common share ("April 2002 Warrants") to six
accredited investors in a private offering. The investors included Richard P.
Kiphart. At the initial conversion and exercise prices, the April 2002 Notes and
April 2002 Warrants beneficially owned by each of Mr. Kiphart were convertible
for or exercisable into more than 5% of our outstanding shares of common stock
if 4.999% beneficial ownership limitations contained in those securities had
been disregarded.

We issued the April 2002 Notes and April 2002 Warrants in exchange for
$4,000,000 in cash and the cancellation of $1,796,111 of our outstanding 8%
subordinated convertible notes dated December 18, 2001. The cancelled notes
included a $1,500,000 note held by Mr. Kiphart. In conjunction with the November
19, 2003 closing of the Series A Convertible Preferred Stock financing, certain
of the April 2002 Notes were exchanged for other securities. The April 2002
Warrants were either repriced concurrently with the closing of the Series A
Preferred Stock financing or were repriced and exercised on a cashless basis
prior to the closing of the Series A Preferred Stock financing. The April 2002
Warrants are three-year warrants that, as of the closing of the Series A
Preferred Stock financing, had an exercise price equal to $1.25 per share and
contain a cashless exercise provision.

A total of $1,986,444 in principal amount of April 2002 Notes, held by
Mr. Kiphart, and three other investors, remained outstanding following the
closing of the Series A Preferred Stock financing. The retained April 2002 Notes
are secured by all of our assets, mature on December 31, 2005 and bear interest
at an annual rate of 10% payable quarterly in arrears in cash, or at our
discretion, in shares of common stock at a price based upon the average of the
closing sale prices of our common stock for the 30-day period ending on the day
prior to the interest due date. We are subject to restrictive covenants related
to the April 2002 Notes that prevent us from pledging intellectual property as
collateral.

Concurrently with the closing of the Series A Preferred Stock
financing, we cancelled $1,500,000 in principal amount of April 2002 Notes held
by Mr. Kiphart and others in exchange for the issuance of notes ("Additional
Retained Notes") with substantially the same terms except that automatically
upon approval at our 2003 annual stockholders' meeting the Additional Retained
Notes converted in shares of our common stock at a conversion price of $.70. We
issued a total of 2,142,856 shares of common stock for the conversion of the
Additional Retained Notes, of which Mr. Kiphart received 1,428,571 shares of
common stock. The Additional Retained Notes were accompanied by warrants to
purchase up to an aggregate of 1,071,429 shares of common stock on terms
identical to the A-1 warrants except that their exercise price is $1.00 per
share, of which Mr. Kiphart received a warrant to purchase 714,286 of common
stock.

The principal balance of each April 2002 Note is convertible into
shares of our common stock at the election of the holder at the initial
conversion price of $1.00 per share. The outstanding principal balances of the
April 2002 Notes and, at our option, any accrued and unpaid interest,
automatically will convert into shares of common stock at the then-applicable
conversion price if, prior to maturity, our common stock trades at or above
$3.00 per share with average volume of 100,000 shares per day for 20 consecutive
trading days and the registration statement that we filed to cover the resale of
shares of common stock underlying the April 2002 Notes remains effective
throughout each day of the 20 trading day period.

In October 2002, we entered into a financing arrangement with Bay View
Funding that included a factoring agreement that contained a maximum advance of
$750,000. In conjunction with the arrangement, Messrs. Shah and Winkler executed
validity guarantees but were not compensated by us for executing those
guarantees.

On November 14, 2002, we issued $500,000 in principal amount of secured
subordinated promissory notes to Mr. Kiphart, Crestview Capital Fund, LP. and
Crestview Capital Fund II, L.P. The notes were to be secured by all unencumbered
assets of SSP and its subsidiaries and bore interest at 30% per annum. Principal
and interest under the notes were due upon the sooner of November 13, 2003 and
our raising of at least $3,500,000 in equity or debt financing. After the notes
had been outstanding for more than six months, the notes became convertible into
shares of our common stock at a conversion price of $1.30 per share. In
conjunction with the issuance of the notes, we issued to the note holders
three-year warrants to purchase up to an aggregate of 100,000 shares of common
stock at $1.30 per share. The warrants contained a cashless exercise provision.
In conjunction with the bridge financing entered into in September 2003, these
warrants were repriced to an exercise price of $.50 per share and then exercised
on a cashless basis.

In January 2003, holders of April 2002 Notes and Wave executed a waiver
and acknowledgment that approved grants of stock options to non-employee members
of our board of directors at a price equal to 85% of the last sale price of our
common stock on the day preceding the grant date. The investors acknowledged
that the option grants would not conflict with or violate our agreements
together with any related instruments or agreements with those investors.
Additionally, the investors acknowledged that the grant and exercise of the
options would not trigger any anti-dilution or other adjustment or penalty
provisions contained in their agreements with us.

On January 22, 2003, we issued to Mr. Kiphart a $500,000 promissory
note that bore interest at a rate of 15% per year, payable quarterly, with a
minimum interest charge of $50,000. Principal and accrued but unpaid interest
were due upon the earlier of December 31, 2005 and our closing of a $5,000,000
or more equity or debt financing. The note was to be secured by all of the
unencumbered assets of SSP and its subsidiaries, including without limitation,
intellectual property assets and any and all receivables due to the Company from
SSP Gaming. Mr. Kiphart exchanged the note for securities issued in the Series A
financing. Because we had not repaid the note prior to June 30, 2003, we issued
to Mr. Kiphart a three-year warrant to purchase up to 125,000 shares of common
stock at an exercise price of $1.30 per share. In conjunction with the September
Bridge, this warrant was repriced to $.50 per share and then exercised on a
cashless basis.

On March 18, 2003 and March 19, 2003, we issued to each of Crestview
Capital Fund II, L.P. and Mr. Kiphart $100,000 promissory notes that were to be
secured by all of our assets, including SSP Gaming and any rights belonging to
SSP Gaming. In addition, on March 28, 2003, Mr. Winkler agreed to pledge 350,000
shares of common stock held by JAW Financial, L.P. as security for the notes we
issued on March 18, March 19 and March 28, 2003. The notes bore interest in an
amount equal to the following percentage of the principal balance: 10%, if the
notes were repaid within 30 days; 12%, if the notes were repaid within 60 days;
15%, if the notes were repaid within 90 days; and 20%, if the notes were repaid
at maturity. Principal and interest under the notes were due upon the sooner of
120 days from the dates of the notes and our raising of at least $3,500,000 in
equity or debt financing. These notes were exchanged for securities in the
Series A Preferred Stock financing. Each of these notes was accompanied by a
five-year warrant to purchase up to 50,000 shares of common stock at an exercise
price of $.70. In conjunction with the September Bridge, these warrants were
re-priced to $.50 per share and exercised on a cashless basis.

On March 28, 2003, we issued to Mr. Kiphart, Crestview Capital Fund II,
L.P., Mr. Shah and Mr. Winkler promissory notes in the aggregate principal
amount of $440,000. The notes were to be secured by all of our assets and the
assets of SSP Gaming. In addition, Mr. Winkler agreed to pledge 350,000 shares
of common stock held by JAW Financial, L.P. as security for the notes we issued
on March 18, March 19 and March 28, 2003. The notes bore interest at the rate of
18% per year, with interest payable in cash monthly in arrears. Principal and
accrued but unpaid interest under the notes were due upon the sooner of July 26,
2003 or our raising of $3,500,000 in equity or debt financing. The notes were
exchanged for securities issued in the Series A Preferred Stock financing. The
notes were accompanied by five-year warrants to purchase up to an aggregate of
230,000 shares of common stock. The exercise price of the warrants was to be
equal to the greater of $.70 per share or the conversion price of securities we
contemplated issuing in a proposed financing, not to exceed $1.30 per share. The
warrants contained a cashless exercise provision. In conjunction with the
September Bridge, these warrants were repriced to an exercise price of $.50 per
share and exercised on a cashless basis. The promissory notes purchased by
Messrs. Shah and Winkler were paid off following the closing of the Series A
financing. The warrants received by Messrs. Shah and Winkler were exercised on a
cashless basis immediately after their per share exercise prices were set at
$.50 on October 21, 2003.

On August 27, 2003, we issued to Richard P. Kiphart and others 10%
promissory notes totaling $1,250,000. Two of those notes totaling $750,000 were
cancelled as part of the exercise of warrants to purchase 1,500,000 shares of
common stock ("Cash Exercise Warrants") that had been issued in an April 2002
financing, upon the reduction in the per share exercise price of those warrants
from $1.30 to $.50 in conjunction with the September Bridge described below. The
remaining $500,000 note held by Mr. Kiphart was to convert into securities to be
issued in the Series A Preferred Stock financing. However, that note was first
exchanged for a new note issued under a Bridge Loan Agreement dated September 1,
2003 ("September Bridge") between and among us and certain of our existing
security holders, including Mr. Kiphart.

In the September Bridge, we issued to Mr. Kiphart, and others 10%
convertible promissory notes in the aggregate principal amount $1,500,000 in
exchange for $1,000,000 cash and the cancellation of Mr. Kiphart's $500,000 note
dated August 27, 2003. The September Bridge investors received five-year bridge
warrants to purchase up to an aggregate of 500,000 shares of common stock on
substantially the same terms as the A-1 warrants that were to be issued in the
Series A Preferred Stock financing. Mr. Kiphart received 166,667 of these bridge
warrants. The September Bridge notes were due on demand after November 30, 2003
and automatically were reinvested in the Series A Preferred Stock financing at
an assumed value of 110% of their then outstanding balance of principal and
interest. Cash proceeds from the September Bridge were used to pay outstanding
obligations and for general working capital purposes.

In conjunction with the September Bridge, we repriced warrants to
purchase up to 2,055,000 shares of common stock, which warrants had per share
exercise prices ranging from $.60 to $1.30, to a new exercise price of $.50 per
share. As described above, immediately following the repricing, two notes
totaling $750,000 issued August 27, 2003 were cancelled in conjunction with the
exercise of Cash Exercise Warrants to purchase 1,500,000 shares of common stock,
of which Mr. Kiphart purchased 1,000,000 shares of common stock. The remaining

repriced warrants to purchase up to 555,000 shares of common stock, which
warrants had been issued in previous bridge financings, were exercised on a
cashless basis in exchange for the issuance of 262,895 shares of common stock,
of which Mr. Kiphart received 191,842 shares of common stock. In addition, we
reduced the per share exercise price of warrants issued in the April 2002
financing to purchase up to 1,977,666 shares of common stock from $1.30 to
$1.25, which is the initial exercise price of A-1 warrants that were issued in
the Series A Preferred Stock financing.

Under a Forbearance Agreement dated September 1, 2003, Mr. Kiphart and
other holders of notes we issued in the April 2002 financing agreed to refrain
from taking any action under their notes and related documents in exchange for
the issuance of an aggregate of 200,000 shares of common stock to Mr. Kiphart
and others in satisfaction of certain penalties and interest, of which Mr.
Kiphart received 143,286 shares of common stock. We have registered for resale
these shares and the shares of common stock underlying the September 2003 bridge
warrants and the various repriced warrants.

On November 19, 2003, we issued 2,150 shares of Series A Preferred
Stock to 84 accredited investors in exchange for $9,510,333 in cash and
$5,539,667 in cancellation of previously issued promissory notes. The
cancelled notes comprised $3,889,667 of April 2002 Notes that we had issued to
Mr. Kiphart, and others and $1,500,000 of September Bridge notes that were
reinvested in the Series A Preferred Stock financing at 110% of their face
value, as described above. Mr. Kiphart, and other purchasers of the Series A
Preferred Stock received A-1 Warrants and A-2 Warrants, for the purchase of a
total of 10,750,000 shares of the Company's common stock, of which Mr. Kiphart
received warrants for the purchase of 2,308,900 shares of common stock.

We are or have been a party to employment and consulting arrangements
with related parties, as more particularly described above under the heading
"Employment Contracts and Termination of Employment and Change-in-Control
Arrangements." We have also paid compensation to our directors and executive
officers as described above under the headings "Compensation Committee
Interlocks and Insider Participation in Compensation Decisions," "Compensation
of Directors," and "Compensation of Executive Officers."

We are or have been a party to employment and consulting arrangements
with related parties, as more particularly described in Item 11 of this report.

The interest of the particular director, executive officer or security
holder in each matter described above was disclosed to our board of directors
before our board of directors approved the matter.

ITEM 13. EXHIBITS, LIST AND REPORTS ON FORM 8-K

(a) Exhibits
--------

Reference is made to the exhibits listed on the Index to Exhibits that
follows the consolidated financial statements.

(b) Reports on Form 8-K
-------------------

On December 11, 2003, we filed a Form 8-K for December 10, 2003 that
contained information under Item 5 regarding our annual stockholders' meeting
date.

On November 21, 2003, we filed a Form 8-K for November 17, 2003 that
contained information and exhibits under Items 5 and 7 regarding the closing of
a private placement.

On November 5, 2003, we filed a Form 8-K for November 5, 2003 that
contained information under Item 5 regarding our annual stockholders' meeting
date.

On November 3, 2003, we filed a Form 8-K for October 31, 2003 that
contained Items 5 and 7 and included a press release related to a transfer of
shares by our co-chairman.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

AUDIT AND NON-AUDIT FEES

The following table presents fees for professional audit services
rendered by Haskell & White LLP for the audit of our annual consolidated
financial statements for 2003, and fees billed for other services rendered by
Haskell & White LLP and KPMG, LLP:

Haskell &
White LLP KPMG LLP
--------- --------
Audit Fees (excluding audit-related fees) $ 90,000 (1) $ --
All Other Fees:
Audit-Related Fees $ -- --
Tax Fees $ 47,000 (2) $ --
Other Non-Audit Fees $ 5,000 (4) $ 35,000 (3)
Total All Other Fees (5) $ 52,000 $ 35,000
______________________

(1) Represents fees relating to the audit of our annual consolidated financial
statements for 2003, and the review of the condensed consolidated financial
statements included in our quarterly report on Form 10-QSB for March 31,
2003, June 30, 2003 and September 30, 2003.

(2) Other non-audit fees consisted of: (i) review of our registration
statements and issuance of consents to incorporation by reference of their
2002 audit report into our registration statements and consents to the
inclusion of their 2002 audit report in our Form 10-K/A for 2002; and; (ii)
response to Commission comment letters and accounting for settlement
transactions, tax related work and review of proxy and other materials.

(3) Other non-audit fees consisted of: (i) review of registration statements
and issuance of consents to incorporation by reference of their 2001 audit
report into our registration statements; (ii) review and issuance of
consents to the inclusion of their 2001 audit report in our Form 10-K/A for
2002; and; (iii) relating to responses to Commission comment letters.

(4) Tax services billed in 2003 for 2002 tax returns.

(5) The audit committee has considered whether the provision of these services
is compatible with maintaining the auditors' independence. The audit
committee approved 100% of the audit and tax fees prior to services being
rendered, which constituted approximately 83% of Haskell & White billings.

The following table presents fees for professional audit services
rendered by Haskell & White LLP for the audit of our annual consolidated
financial statements for 2002, and fees billed for other services rendered by
Haskell & White LLP:

Haskell &
White LLP KPMG LLP
--------- --------
Audit Fees (excluding audit-related fees) $119,000 (1) $ 47,000 (2)
All Other Fees:
Audit-Related Fees $ 8,000 (3) $ 50,000 (4)
Tax Fees $ 27,000 (7) $ --
Other Non-Audit Fees $ 38,000 (5) $ 114,000 (6)
Total All Other Fees (8) $ 73,000 $ 164,000
______________________

(1) Represents fees relating to the audit of our annual consolidated financial
statements for 2002, and the review of the condensed consolidated financial
statements included in our quarterly report on Form 10-QSB for June 30,
2002 and September 30, 2002.

(2) Represents fees relating to the review of the condensed consolidated
financial statements included in our quarterly report on Form 10-QSB for
March 31, 2002.

(3) Audit-related fees were for the audit of the financial statements of an
employee benefit plan.

(4) Audit-related fees were for the review of registration statements and
issuance of consents to incorporation by reference of their 2001 audit
report into our registration statements and consents to the inclusion of
their 2001 audit report in our Form 10-K for 2002.

(5) Other non-audit fees consisted of $23,000 relating to assistance with
response to Commission comment letters and $15,000 relating to accounting
for settlement transactions.

(6) Other non-audit fees consisted of fees relating to assistance with response
to Commission comment letters.

(7) Tax services billed in 2002 for 2001 tax returns.

(8) The audit committee has considered whether the provision of these services
is compatible with maintaining the auditors' independence.

PRE-APPROVAL POLICIES

The Audit Committee is required to pre-approve the audit and non-audit
services performed by the independent auditor in order to assure that the
provision of such services does not impair the auditor's independence. Unless a
type of service to be provided by the independent auditor has received general
pre-approval, it will require specific pre-approval by the Audit Committee. Any
proposed services exceeding pre-approved cost levels will require specific
preapproval by the Audit Committee.

The appendices to our Policy describe the Audit, Audit-related, Tax and
All Other services that have the pre-approval of the Audit Committee. The term
of any pre-approval is 12 months from the date of pre-approval, unless the Audit
Committee specifically provides for a different period. The Audit Committee will
periodically revise the list of pre-approved services, based on subsequent
determinations.

DELEGATION

The Audit Committee may delegate pre-approval authority to one or more
of its members. The member or members to whom such authority is delegated shall
report any pre-approval decisions to the Audit Committee at its next scheduled
meeting. The Audit Committee does not delegate its responsibilities to
pre-approve services performed by the independent auditor to management.

AUDIT SERVICES

The annual Audit services engagement terms and fees will be subject to
the specific pre-approval of the Audit Committee. The Audit Committee will
approve, if necessary, any changes in terms, conditions and fees resulting from
changes in audit scope, Company structure or other matters.

In addition to the annual Audit services engagement approved by the
Audit Committee, the Audit Committee may grant pre-approval for other Audit
services, which are those services that only the independent auditor reasonably
can provide. The Audit Committee has pre-approved the Audit services listed
below. All other Audit services not listed below must be separately pre-approved
by the Audit Committee.

SERVICE
-------

Statutory audits or financial audits for subsidiaries or affiliates of
the Company

Services associated with SEC registration statements, periodic reports
and other documents filed with the SEC or other documents issued in
connection with securities offerings (e.g., comfort letters, consents),
and assistance in responding to SEC comment letters

Consultations by the Company's management as to the accounting or
disclosure treatment of transactions or events and/or the actual or
potential impact of final or proposed rules, standards or
interpretations by the SEC, FASB, or other regulatory or standard
setting bodies

AUDIT-RELATED SERVICES

Audit-related services are assurance and related services that are
reasonably related to the performance of the audit or review of the Company's
financial statements and that are traditionally performed by the independent
auditor. The Audit Committee believes that the provision of Audit-related
services does not impair the independence of the auditor, and has pre-approved
the Audit-related services listed below. All other Audit-related services not
listed below must be separately pre-approved by the Audit Committee.

SERVICE
-------

Due diligence services pertaining to potential business acquisitions/
dispositions

Financial statement audits of employee benefit plans

Agreed-upon or expanded audit procedures related to accounting and/or
billing records required to respond to or comply with financial,
accounting or regulatory reporting matters

Internal control reviews and assistance with internal control reporting
requirements

Attest services not required by statute or regulation

TAX SERVICES

The Audit Committee believes that the independent auditor can provide
Tax services to the Company such as tax compliance, tax planning and tax advice
without impairing the auditor's independence. However, the Audit Committee will
not permit the retention of the independent auditor in connection with a
transaction initially recommended by the independent auditor, the purpose of
which may be tax avoidance and the tax treatment of which may not be supported
in the Internal Revenue Code and related regulations. The Audit Committee has
preapproved the Tax services listed below. All Tax services involving large and
complex transactions not listed below must be separately pre-approved by the
Audit Committee.

SERVICE
-------

U.S. federal, state and local tax planning and advice

U.S. federal, state and local tax compliance

International tax planning and advice

International tax compliance

Review of federal, state, local and international income, franchise,
and other tax returns

Licensing or purchase of income tax preparations software from the
independent auditor, provided the functionality is limited to
preparation of tax returns

ALL OTHER SERVICES

The Audit Committee may grant pre-approval to those permissible
nonaudit services classified as All Other services that it believes are routine
and recurring services, and would not impair the independence of the auditor.
The Audit Committee has pre-approved the All Other services listed below.
Permissible All Other services not listed below must be separately pre-approved
by the Audit Committee.

SERVICE
-------

A list of the SEC's prohibited non-audit services is listed below.

PROHIBITED NON-AUDIT SERVICES

Bookkeeping or other services related to the accounting records or
financial statements of the audit client; Financial information systems design
and implementation; Appraisal or valuation services, fairness opinions or
contribution-in-kind reports; Actuarial services; Internal audit outsourcing
services; Management functions; Human resources; Broker-dealer, investment
adviser or investment banking services; Legal services; Expert services
unrelated to the audit.

PRE-APPROVAL FEE LEVELS

Pre-approval fee levels for all services to be provided by the
independent auditor will be established periodically by the Audit Committee. Any
proposed services exceeding these levels will require specific pre-approval by
the Audit Committee.

SUPPORTING DOCUMENTATION

With respect to each proposed pre-approved service, the independent
auditor will provide detailed back-up documentation, which will be provided to
the Audit Committee, regarding the specific services to be provided.

PROCEDURES

Requests or applications to provide services that require separate
approval by the Audit Committee will be submitted to the Audit Committee by both
the independent auditor and the Chief Financial Officer, and must include a
joint statement as to whether, in their view, the request or application is
consistent with the SEC's rules on auditor independence.

SSP SOLUTIONS, INC. AND SUBSIDIARIES

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

PAGE

Independent Auditors' Report................................................F-2

Consolidated Balance Sheets as of December 31, 2002 and 2003................F-3

Consolidated Statements of Operations for the years ended
December 31, 2002 and 2003................................................F-4

Consolidated Statements of Shareholders' Equity for the years
ended December 31, 2002 and 2003..........................................F-5

Consolidated Statements of Cash Flows for the years ended
December 31, 2002 and 2003................................................F-7

Notes to Consolidated Financial Statements..................................F-9

F-1

INDEPENDENT AUDITORS' REPORT

To the Board of Directors and Shareholders
SSP Solutions, Inc.

We have audited the accompanying consolidated financial statements of SSP
Solutions, Inc. and subsidiaries as of December 31, 2003 and 2002 and for each
of the years in the two year period ended December 31, 2003, as listed in the
accompanying index. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.

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

In our opinion, the consolidated financial statements referred to above, present
fairly, in all material respects, the financial position of SSP Solutions, Inc.
and subsidiaries as of December 31, 2003 and 2002 and the results of their
operations and their cash flows for each of the years in the two year period
ended December 31, 2003, in conformity with accounting principles generally
accepted in the United States of America.

/s/ HASKELL & WHITE LLP

Irvine, California
March 19, 2004, except for
the last two paragraphs
of Note 20 as to which
the date is March 22, 2004

F-2

SSP SOLUTIONS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)

DECEMBER 31,
-----------------------------
2002 2003
------------ ------------

ASSETS (note 9)

Current assets:
Cash and cash equivalents ........................................ $ 553 $ 6,068
Investment in trading securities ................................. 76 --
Accounts receivable (net of allowance for doubtful accounts
of $187 and $176 as of December 31, 2002 and 2003, respectively) 1,584 1,692
Inventories ...................................................... 238 312
Prepaid expenses ................................................. 315 432
Other current assets ............................................. 173 98
------------ ------------
Total current assets ................................... 2,939 8,602
Property and equipment, net ...................................... 90 83
Other assets ..................................................... 600 202
Equity investment in affiliate ................................... 452 --
Goodwill ......................................................... 25,930 25,930
------------ ------------
$ 30,011 $ 34,817
============ ============

LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities:
Current installments of long-term debt (note 9) .................. $ 2,826 $ 454
Accounts payable ................................................. 4,413 1,057
Accrued liabilities .............................................. 1,300 1,528
Deferred revenue ................................................. 349 92
------------ ------------
Total current liabilities .............................. 8,888 3,131

Long-term debt, less current installments (note 9) ............... -- 915
------------ ------------
Total liabilities ...................................... 8,888 4,046

Preferred stock - Series A, liquidation preference of $21,522,
and none as of December 31, 2003 and 2002, respectively,
$.01 par value; Authorized 5,000,000 shares; 2,150 shares
issued and outstanding in 2003 (note 15) ....................... -- --
------------ ------------

Commitments and contingencies (notes 3, 8, 9, 13, 17 and 19)
Subsequent events (2003) (note 20)

Shareholders' equity (note 15 and 16):
Commonstock, $.01 par value; Authorized 100,000,000 shares;
issued or issuable 24,821,235 and 30,228,344 shares at
December 31, 2002 and 2003, respectively ....................... 248 302
Additional paid-in capital ....................................... 129,298 148,104
Deferred compensation ............................................ (324) (86)
Accumulated deficit .............................................. (108,099) (117,549)
------------ ------------

Total shareholders' equity ............................. 21,123 30,771
------------ ------------

$ 30,011 $ 34,817
============ ============

See accompanying notes to consolidated financial statements

F-3

SSP SOLUTIONS, INC. AND SUBSIDIARIES

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

YEARS ENDED DECEMBER 31,
-------------------------------
2002 2003
------------- -------------

Revenues:
Product ....................................................... $ 6,978 $ 6,188
Service ....................................................... 2,591 4,771
License ....................................................... 1,836 2,386
------------- -------------
Total revenues ........................................... 11,405 13,345
------------- -------------
Cost of Sales:
Product ....................................................... 2,706 2,276
Service ....................................................... 639 1,833
License ....................................................... 181 458
------------- -------------
Total cost of sales ...................................... 3,526 4,567
------------- -------------

Gross margin ....................................................... 7,879 8,778
------------- -------------

Operating Expenses:
Selling, general and administrative ........................... 6,818 6,959
Research and development ...................................... 4,894 4,194
Research and development - Wave Systems Corp. ................. 1,041 --
------------- -------------
Total operating expenses ................................. 12,753 11,153
------------- -------------

Operating loss ..................................................... (4,874) (2,375)

Non-operating Expenses:
Realized loss (gain) on trading securities .................... 130 (102)
Interest expense, net ......................................... 672 717
Non-cash interest and financing expense ....................... 1,287 3,535
Loss on conversion of debt .................................... -- 2,306
Loss from equity investee ..................................... 248 410
Impairment of equity investee ................................. -- 142
Other expense (income), net ................................... 33 (42)
------------- -------------
Total non-operating expenses ............................. 2,370 6,966
------------- -------------
Operating loss before income taxes ................................. (7,244) (9,341)
Provision for income taxes ......................................... 2 3
------------- -------------
Loss from continuing operations .................................... (7,246) (9,344)

Loss from discontinued operations (note 1) ......................... (1,310) (106)
------------- -------------

Net loss ........................................................... $ (8,556) $ (9,450)
============= =============

Earnings available to common stockholders:
Net loss ........................................................... $ (8,556) $ (9,450)
Less: Preferred dividends ......................................... -- (139)
------------- -------------
Earnings attributable to common stockholders ....................... $ (8,556) $ (9,589)
============= =============

Loss per share from continuing operations, basic and diluted ....... $ (.34) $ (.36)
============= =============
Loss per share from discontinued operations, basic and diluted ..... $ (.06) $ --
============= =============
Net loss per share of common stock, basic and diluted .............. $ (.40) $ (.36)
============= =============
Shares used in per share computations, basic and diluted ........... 21,647,707 26,317,114
============= =============

See accompanying notes to consolidated financial statements

F-4

SSP SOLUTIONS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS)

TOTAL
NOTE SHARE-
COMMON STOCK ADDITIONAL RECEIVABLE HOLDERS'
----------------------- PAID IN FROM DEFERRED ACCUMULATED EQUITY
SHARES AMOUNT CAPITAL SHAREHOLDER COMPENSATION DEFICIT (DEFICIT)
---------- ---------- ---------- ---------- ---------- ---------- ----------

Balance, December 31, 2001 ........... 20,631 $ 206 $ 118,608 $ (500) $ (1,193) $ (99,543) $ 17,578
Note Receivable from shareholder ..... -- -- -- 500 -- -- 500
Warrants issued in conjunction
with Convertible Notes ............ -- -- 2,798 -- -- -- 2,798
Beneficial conversion feature
related to convertible debt ....... -- -- 3,152 -- -- -- 3,152
Deferred compensation related to
issuance of stock options ......... -- -- (29) -- 376 -- 347
Reversal of deferred compensation
related to terminated employees ... -- -- (574) -- 483 -- (91)
Amortization of deferred stock
compensation ...................... -- -- -- -- 10 -- 10
Common stock issued for services ..... 26 -- 34 -- -- -- 34
Common stock issued under
Employee Stock Purchase Plan ...... 24 -- 17 -- -- -- 17
Stock options exercised .............. 39 -- 63 -- -- -- 63
Common stock issued in
restructuring of lease
obligations ....................... 959 10 946 -- -- -- 956
Common stock issued in settlement
of development contract ........... 1,800 18 2,406 -- -- -- 2,424
Warrants issued to underwriter ....... -- -- 182 -- -- -- 182
Common stock issued in conversion
of notes payable .................. 1,079 11 1,392 -- -- -- 1,403
Payment of interest in common
stock ............................. 263 3 303 -- -- -- 306
Net loss ............................. -- -- -- -- -- (8,556) (8,556)
---------- ---------- ---------- ---------- ---------- ---------- ----------
Balance, December 31, 2002 ........... 24,821 248 129,298 -- (324) (108,099) 21,123

Bridge warrants related to
September 2003 Bridge loan ........ -- -- 294 -- -- -- 294
Repricing of warrants related to
September 2003 Bridge loan ........ -- -- 924 -- -- -- 924
Reversal of debt discount related to
the exercise of September 2003
Bridge Warrants ................... -- -- 56 -- -- -- 56
Warrants issued in conjunction
with Series A ..................... -- -- 7,229 -- -- -- 7,229
Beneficial conversion feature
related to Series A ............... -- -- 7,019 -- -- -- 7,019
Deferred compensation related to
issuance of stock options ......... -- -- 50 -- 143 -- 193
Reversal of deferred compensation
related to terminated employees ... -- -- (95) -- 95 -- --
Shares issued related to
the Forbearance Agreement ......... 200 2 188 -- -- -- 190
Common stock issued under
Employee Stock Purchase Plan ...... 54 -- 34 -- -- -- 34
Stock options exercised .............. 6 -- 4 -- -- -- 4
Warrants exercised ................... 1,500 18 732 -- -- -- 750
Common stock issued for rent and
in settlement with
Research Venture .................. 507 5 445 -- -- -- 450

See accompanying notes to consolidated financial statements

F-5

SSP SOLUTIONS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (CONTINUED)
(IN THOUSANDS)

Common stock issued in conversion
of notes payable ................. 2,426 22 1,492 -- -- -- 1,514
Payment of interest in common
stock ............................ 714 7 573 -- -- -- 580
Dividends declared - Series A ....... -- -- (139) -- -- -- (139)
Net loss ............................ -- -- -- -- -- (9,450) (9,450)
---------- ---------- ---------- ---------- ---------- ---------- ----------
Balance, December 31, 2003 .......... 30,228 $ 302 $ 148,104 $ -- $ (86) $(117,549) $ 30,771
========== ========== ========== ========== ========== ========== ==========

See accompanying notes to consolidated financial statements

F-6

SSP SOLUTIONS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)

YEARS ENDED DECEMBER 31,
-----------------------------
2002 2003
------------ ------------

Cash flows from operating activities:
Net loss ......................................................... $ (8,556) $ (9,450)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation ..................................................... 290 65
Amortization of non-cash debt issuance costs ..................... 147 294
Non-cash interest and warrant costs .............................. 1,141 1,976
Loss on conversion of debt ....................................... -- 2,306
Gain on vendor settlements ....................................... (270) (27)
Revision of estimated liability .................................. (463) --
Settlement of Wave Systems Corp. contract ........................ 1,041 --
Settlement of Spectrum ........................................... (694) (373)
Discount on notes to related party .......................... 153 --
Loss from equity investee and impairment ......................... 248 452
Deferred compensation ............................................ 266 190
Realized loss (gain) on trading securities ....................... 130 (100)
Common stock issued for rent expense ............................. 34 450
Common stock issued for interest expense ......................... -- 1,506
Common stock issued for penalties and costs ...................... -- 190
Loss from discontinued operations ................................ 1,310 --
Changes in assets and liabilities net of effects of the acquisition:
Accounts receivable .............................................. (393) (108)
Inventories ...................................................... 181 (74)
Prepaid expenses ................................................. 285 (116)
Other current assets ............................................. 214 75
Other assets ..................................................... (557) (94)
Accounts payable ................................................. 1,743 (3,329)
Accrued liabilities .............................................. 311 462
Deferred revenue ................................................. 101 (257)
------------ ------------
Net cash used in continuing operating activities ...................... (3,338) (5,962)
------------ ------------

Net cash used in discontinued operations .............................. (3,669) --
Net cash used in operating activities ................................. (7,007) (5,962)
------------ ------------
Cash flows from investing activities:
Purchases of property and equipment .............................. (24) (58)
Proceeds from the sale of trading securities ..................... 1,154 174
Investment in equity investee .................................... (700) --
------------ ------------
Net cash provided by investing activities ............................. 430 116
------------ ------------
Cash flows from financing activities:
Proceeds from issuance of stock under employee purchase and
option plans .................................................. 81 39
Proceeds from issuance of preferred stock ........................ -- 8,873
Proceeds from issuance of convertible debt ....................... 4,750 3,330
Net borrowings on revolving note payable ......................... 2,328 8,299
Net repayments on revolving note payable ......................... (3,666) (8,200)
Proceeds from issuance of note payable to related party ..... -- 40
Proceeds from issuance of non-convertible debt ................... 653 --
Repayment of note payable to related party ....................... (392) (40)
Proceeds from note receivable from related party ................. 347 --
Repayment on long-term debt ...................................... (228) (980)
------------ ------------
Net cash provided by financing activities ............................. 3,873 11,361
------------ ------------
Net (decrease) increase in cash ....................................... (2,704) 5,515
Cash and cash equivalents at beginning of year ........................ 3,257 553
------------ ------------
Cash and cash equivalents at end of year .............................. $ 553 6,068
============ ============

See accompanying notes to consolidated financial statements

F-7

SSP SOLUTIONS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(IN THOUSANDS)

YEARS ENDED DECEMBER 31,
------------------------
2002 2003
--------- ---------

Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest ............................................................. $ 200 $ 253
========= =========
Income taxes ......................................................... $ 2 $ 3
========= =========

Supplemental disclosure of non-cash investing and financing activities:

Exchange of notes payable for preferred stock ............................. $ -- $ 5,390
Exchange of notes payable for common stock................................ 1,403 1,500
Value of warrants issued .................................................. 2,798 350
Payment of interest in common stock ....................................... 306 581
Dividends declared on Series A Preferred Stock ............................ -- 139
Issuance of common stock .................................................. 2,424 --
Beneficial conversion feature ............................................. 3,152 7,019
Warrants issued ........................................................... 182 7,229
Payment of lease restructuring obligation in common stock ................. 956 450
Repricing of existing warrants............................................. -- 925
See accompanying notes to consolidated financial statements

F-8

SSP SOLUTIONS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

(1) GENERAL INFORMATION

GENERAL

SSP Solutions, Inc. (formally Litronic Inc.) ("SSP" or the "Company")
provides data security solutions for network communication systems. Through the
Company's government systems division, the Company has provided innovative data
security solutions for government communications systems for more than thirty
years. The Company provides software, a secure operating system and hardware
products for 1) the authorization, authentication, and administration of an
organization's security protocols, and 2) card reader products and tokens that
can be used by an organization and its members to protect digital data, thereby
securing the transmission of that digital data via encryption or decryption of
that data on a real-time basis. In addition to selling hardware and software
products, the Company provides support and maintenance services for specific
government communications programs. The Company's government products are
designed and developed in the United States.

Through a wholly-owned subsidiary, Pulsar Data Systems, Inc.
("Pulsar"), the Company engaged in the sale of computer hardware, software,

peripheral equipment, and support services to governmental agencies and
commercial enterprises throughout the United States. Subsequent to December 31,
2002, the Company terminated all remaining employees of Pulsar and as of March
28, 2003, decided to discontinue Pulsar's operations.

BIZ Interactive Zone, Inc. ("BIZ"), a wholly-owned subsidiary of the
Company, was acquired in August 2001.

DETAILS OF THE DISCONTINUED OPERATIONS

Through December 31, 2002, the Company had operated in two business
segments: the information security segment and network solutions segment. During
the quarter ended March 31, 2003 the Company discontinued its network solutions
segment, which was conducted through Pulsar, as the Company determined that this
segment would not return to an operating profit in a reasonable time period. The
total approximate cost to exit the segment was $106. The network solutions
segment assets did not require an impairment write down as there was no
remaining book value of assets in existence at the date the decision to exit the
business was made. As a result, there is no gain or loss on the disposal of the
Company's network solutions segment. In addition, as a result of the disposal of
the network solutions segment, the Company now operates in only one reporting
segment.

Having made the decision to discontinue the network solutions segment,
the Company removed the elements of revenues, cost of sales and expenses from
its previously reported consolidated financial statements and accompanying notes
to consolidated financial statements, and retroactively reclassified the net
effect of these items as loss from discontinued operations in the consolidated
statements of operations for each of the years in the two-year period ended
December 31, 2003.

BIZ ACQUISITION

In August 2001, the Company acquired BIZ, a Delaware Corporation, as a
wholly-owned subsidiary. BIZ had developed, designed, and was in the process of
marketing security solutions for the financial, government, healthcare,
education, and entertainment industries (see note 4). The combined Company
continues to focus on a complete range of solutions for physical access,
electronic commerce, and communications, from the core to the edge. Concurrent
with the BIZ acquisition, the Company changed its name from Litronic Inc., to
SSP Solutions, Inc. The Company combined the business of SSP and BIZ into a
single operating unit under the name SSP Solutions, Inc.

F-9

In connection with the BIZ acquisition, the Company issued an aggregate
of 10,875,128 shares of SSP 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 860,000 shares of its common
stock for issuance upon exercise of BIZ options and warrants assumed by the
Company (see note 4).

(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

BASIS OF FINANCIAL STATEMENT PRESENTATION AND PRINCIPLES OF CONSOLIDATION

The consolidated financial statements and related notes presented
herein have been retroactively adjusted to reflect discontinued operations. The
capital structure presented in these consolidated financial statements is that
of SSP. The consolidated financial statements include the accounts of SSP and
its wholly-owned subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation.

LOSS PER SHARE

Basic earnings (loss) per share includes no dilution and is computed by
dividing earnings (loss) available to common shareholders by the weighted
average number of common shares outstanding for the period. Diluted earnings per
share reflect the potential dilution of securities that could share in the
earnings of an entity. Such shares are not included when there is a loss as the
effect would be anti-dilutive. The same methodology is used to compute loss per
share from discontinued and continuing operations.

REVENUE RECOGNITION

Revenue from some data security hardware products contains embedded
software. However, the embedded software is incidental to the hardware product
sale. Data security license revenue is recognized upon delivery if an executed
license exists, a delivery as defined under the license has occurred, the price
is fixed and determinable, and collection is probable. Software delivered under
a license requires a separate annual maintenance contract that governs the
conditions of post-contract customer support. Post-contract customer support
services can be purchased under a separate contract on the same terms and at the
same pricing, whether purchased at the time of sale or at a later date. Revenue
from these separate maintenance support contracts is recognized ratably over the
maintenance period.

Revenue from cost-plus-award-fee support and development contracts is
recognized on the basis of hours incurred plus other reimbursable contract costs
incurred during the period. For a cost-plus-award-fee support contract, the
Company exercised the contract clause to bill and collect one-half of the award
fee ratably over the term of the contract. Revenue is recognized concurrently
with the billings based on the performance of the contract requirements and
reasonable assurance of collection. Based upon historical results, the Company
has received final awards in excess of one-half of the full award fees. A
post-contract period performance review conducted by the customer determines the
remaining amount of the award fee to be received, which amount is then
recognized as earned revenue together with interest paid on the unpaid balance.
Award fees under development contracts are recognized when confirmed by the
customer.

Revenue from network deployment products was recognized upon transfer
of title, generally upon verification of delivery to the customer, which
represented evidence delivery had occurred, under a sales order represented by a
government purchase order that contained a fixed purchase price. When the
Company fulfilled the elements of the government purchase order, collection of
the revenue recorded was reasonably assured. As of March 28, 2003, the Company
decided to discontinue Pulsar's operations.

The Company's revenue recognition policies are in accordance
with the Securities and Exchange Commission's Staff Accounting Bulletin
No. 101, as amended by Staff Accounting Bulletin No. 104.

CASH AND CASH EQUIVALENTS

The Company considers all highly liquid investments with
maturities of three months or less at the date of purchase to be cash
equivalents.

INVENTORIES

Inventories are stated at the lower of first-in, first-out cost or
market using net realizable value.

F-10

EQUITY INVESTMENT IN AFFILIATE

The Company's investment in an affiliate is accounted for on
the equity method as management does not control the affiliate (see note
8).

PROPERTY AND EQUIPMENT

Property and equipment are stated at cost. Furniture and
equipment are depreciated by the straight-line method over the useful
lives of the assets, generally 2-3 years. Leasehold improvements are
amortized by straight-line method over the term of the related lease or
the estimated useful lives of the assets, whichever is shorter. Property
and equipment sold or retired is eliminated from the accounts in the
year of disposition and the resulting gain or loss is reflected in the
consolidated statement of operations.

GOODWILL AND OTHER INTANGIBLES ASSETS

The Company amortizes definite lived intangible assets relating to
businesses acquired using the straight-line method over the estimated useful
lives of intangible assets.

The Company has adopted the Financial Accounting Standards Board's
(FASB's) Statements of Financial Accounting Standards (Statements) No. 141 and
No. 142, "Business Combinations" and "Goodwill and Other Intangible Assets" for
the BIZ acquisition that was completed on August 24, 2001. In accordance with
Statement No. 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 on a
straight-line basis over their estimated useful lives of between one and three
years. Accordingly, the Company has not recorded amortization of goodwill
related to the BIZ acquisition.

On January 1, 2002, the Company adopted Statement No. 144, "Accounting
for the Impairment or Disposal of Long-Lived Assets". Statement No. 144
supersedes Statement No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of," and provides a single
accounting model for long-lived assets to be disposed of. Although retaining
many of the fundamental recognition and measurement provisions of Statement No.
121, the new rules significantly change the criteria that would have to be met
to classify an asset as held for sale. Statement No. 144 also supersedes the
provisions of Accounting Principles Board (APB) Opinion 30, "Reporting the
Results of Operations - Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions," with regard to reporting the effects of a disposal of a segment
of a business and requires expected future operating losses from discontinued
operations to be displayed in discontinued operations in the period(s) in which
the losses are incurred (rather than as of the measurement date as presently
required by APB Opinion 30. In addition, more dispositions will qualify for
discontinued operations treatment in the income statement. During the quarter
ended March 31, 2003, the Company ceased operating its network solution segment
(note 1). The Company has reclassified the related results of operations to
reflect the disposal of the network solutions segment as a discontinued
operation as of December 31, 2002 and 2003 and in each of the years in the
two-year period ended December 31, 2003.

Amortization of goodwill and other intangibles was $92 and $0,
respectively, for the years ended December 31, 2002 and 2003. Amortization
specifically related to Pulsar has been reported as part of discontinued
operations.

STOCK-BASED COMPENSATION FOR EMPLOYEES AND NON-EMPLOYEES

The Company accounts for its employee stock option plans using the
intrinsic value method. When stock options are granted to employees with
exercise prices less than the fair value of the underlying common stock at the
date of grant, the difference is recognized as deferred compensation expense,
which is amortized over the vesting period of the options.

The Company accounts for stock options issued to non-employees using
the fair value method. The associated cost is recorded in the same manner as if
cash were paid.

At December 31, 2003, the Company has three stock-based employee
compensation plans, which are described more fully in note 16. The Company
accounts for those plans under the recognition and measurement principles of APB
Opinion No. 25, "Accounting for Stock Issued to Employees," and related
Interpretations. The following table illustrates the effect on net loss and
earnings per share if the Company had applied the fair value recognition
provisions of Statement No. 123, "Accounting for Stock Based Compensation,":

F-11

YEAR ENDED
DECEMBER 31,
--------------------------
2002 2003
----------- -----------

Net loss attributable to common shareholders, as reported .... $ (8,556) $ (9,589)
Add: Stock compensation cost reported in accordance with
APB No. 25 .............................................. 266 231
Deduct: Total stock-based employee compensation expense
determined under fair value based method for all
awards, net of related tax effect ................... (1,363) (1,569)
----------- -----------
Pro forma net loss ........................................... $ (9,653) $ (10,927)
=========== ===========

Earnings per share
Net loss per share as reported - basic and diluted ...... $ (.40) $ (.36)
=========== ===========
Pro forma net loss per share - basic and diluted ........ $ (.45) $ (.42)
=========== ===========

The fair value of each option grant was estimated on the date of grant
using the Black-Scholes option-pricing model with the following assumptions in
2002 and 2003: risk-free interest rate of 3.92% and 4.30%, respectively;
dividend yield of 0.00%; and volatility of 129%. The Black-Scholes model, as
well as other currently accepted option valuation models, was developed to
estimate the fair value of freely-tradable, fully-transferable options without
vesting restrictions, which significantly differ from the Company's stock option
plans. These models also require highly subjective assumptions, including future
stock price volatility and expected time until exercise, which greatly affect
the calculated fair value on the grant date.

FAIR VALUE OF FINANCIAL INSTRUMENTS

As of December 31, 2002 and 2003, management believes the fair value of
all financial instruments approximated carrying value.

INCOME TAXES

The Company provides for federal income taxes recognized for the future
tax consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date. A valuation allowance will be provided
where it is more likely than not that the deferred tax assets will not be
realized.

COMPREHENSIVE INCOME

The Company has no transactions, other than net loss, that would be
considered other comprehensive income.

ACCOUNTS RECEIVABLE FINANCING

The Company adopted Statement No. 140, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities" and is
effective for recognition and reclassification of collateral and for disclosures
relating to securitization transactions and collateral. Statement No. 140
outlines the standards for accounting for securitizations and other transfers of
financial assets and collateral and requires certain disclosures (note 9).

USE OF ESTIMATES

The consolidated financial statements have been prepared in conformity
with accounting principles generally accepted in the United States of America.
In preparing the consolidated financial statements, management is required to
make estimates and assumptions that affect the reported amounts of assets and
liabilities as of the dates of the balance sheets and revenues and expenses for
the periods. Actual results could differ from those estimates.

NEW ACCOUNTING STANDARDS

In January 2003, the FASB issued Interpretation 46, "Consolidation of
Variable Interest Entities, an Interpretation of ARB No. 51." Interpretation 46
addresses consolidation by business enterprises of variable interest entities

F-12

which have one or both of the following characteristics: (1) the equity
investment at risk is not sufficient to permit the entity to finance its
activities without additional support from other parties, which is provided
through other interests that will absorb some or all of the expected losses of
the entity; (2) the equity investors lack one or more of the following essential
characteristics of a controlling financial interest: (a) the direct or indirect
ability to make decisions about the entity's activities through voting rights or
similar rights, (b) the obligation to absorb the expected losses of the entity
if they occur, which makes it possible for the entity to finance its activities,
or (c) the right to receive the expected residual returns of the entity if they
occur, which is the compensation for the risk of absorbing expected losses.
Interpretation 46 does not require consolidation by transferors to qualifying
special purpose entities. Interpretation 46 applies immediately to variable
interest entities created after January 31, 2003, and to variable interest
entities in which an enterprise obtains an interest after that date. It applies
in the first fiscal year or interim period beginning after June 15, 2003, to
variable interest entities in which an enterprise holds a variable interest that
it acquired before February 1, 2003.

In December 2003, the FASB issued a revision to Interpretation No. 46,
"Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51
("FIN 46R"). FIN 46R clarifies the application of ARB No. 51, "Consolidated
Financial Statements," to certain entities in which equity investors do not have
the characteristics of a controlling financial interest or do not have
sufficient equity at risk for the entity to finance its activities without
additional subordinated financial support provided by any parties, including the
equity holders. FIN 46R requires the consolidation of these entities, known as
variable interest entities ("VIE's"), by the primary beneficiary of the entity.
The primary beneficiary is the entity, if any, that will absorb a majority of
the entity's expected losses, receive a majority of the entity's expected
residual returns, or both.

Among other changes, the revisions of FIN 46R (a) clarified some
requirements of the original FIN 46, which had been issued in January 2003, (b)
eased some implementation problems, and (c) added new scope exceptions. FIN 46R
deferred the effective date of the Interpretation for public companies to the
end of the first reporting period ending after March 15, 2004, except that all
public companies must, at a minimum, apply the unmodified provisions of the
Interpretation to entities that were previously considered "special-purpose
entities" in practice and under the FASB literature prior to the issuance of FIN
46R by the end of the first reporting period ending after December 15, 2003. As
of December 31, 2003 and 2002, management believes that the Company is not the
primary beneficiary of any VIE's.

RECLASSIFICATIONS

Certain reclassifications were made to the 2002 consolidated financial
statements to conform to the 2003 presentation and reclassifications made
relative to the presentation of discontinued operations (note 1).

(3) LIQUIDITY AND CAPITAL RESOURCES

At December 31, 2003, the Company had working capital of $5,471, and
the Company had incurred a loss from operations for the year then ended. The
Company expects to incur additional losses in 2004. On November 19, 2003, the
Company sold 2,150 shares of Series A Preferred Stock (note 15) and investor
warrants for a total amount of $15,050 of which $9,510 was for new capital and
$5,540 was issued in exchange for cancellation of previously issued promissory
notes. The Series A Preferred Stock issuance provided the Company with a
significant amount of cash, which resulted in improving the Company's working
capital position. The December 31, 2003 cash balance of $6,068 is mostly
comprised of the cash proceeds received from the issuance of the Series A
Preferred Stock. Given the December 31, 2003 cash balance and the projected
operating cash requirements, the Company anticipates that existing capital
resources will be adequate to satisfy cash flow requirements through at least
December 31, 2004. The Company's cash flow estimates are based upon achieving
certain levels of sales, reductions in operating expenses and liquidity
available under its accounts receivable financing.

During 2002 and 2003, the Company incurred defaults, other than for the
payment of principal and interest, under both the Company's accounts receivable
financing and the Company's long-term convertible notes. The Company was not
able to obtain waivers for defaults for any of the notes and has therefore
classified the accounts receivable financing as short term on the balance sheet

F-13

as of December 31, 2002. However, the convertible notes were subject to a
Forbearance Agreement dated September 1, 2003, which provided that the
noteholders agreed not to take any action relative to rights under these notes
until November 30, 2003, and further provided for these notes to be tendered for
the purchase of Series A Preferred Stock in accordance with the face value of
such notes (note 9 and 15). On November 19, 2003, the Company completed the
private placement of the Series A Preferred Stock (note 9 and 15) and had fully
satisfied the Forbearance Agreement and the terms of the notes. As such, the
convertible notes are classified as long-term on the balance sheet as of
December 31, 2003.

The private placement of the Series A Preferred Stock provided the
Company a substantial amount of capital and was dilutive to shareholders. While
the Company does not anticipate the need to raise additional capital after
having closed the private placement of the Series A Preferred Stock, future
capital needs will depend on many factors including, but not limited, to:

o the ability to extend terms received from vendors

o the market acceptance of products and services

o the levels of promotion and advertising that will be required
to launch new products and services and attain a competitive
position in the marketplace

o research and development plans

o levels of inventory and accounts receivable

o technological advances

o competitors' responses to the Company's products and services

o relationships with partners, suppliers and customers

o projected capital expenditures

o a downturn in the economy

In addition to the completion of the private placement of Series A
Preferred Stock (note 15), the Company also issued shares to pay obligations in
several transactions. The Company issued 92,304 shares of its common stock for
rent payments relating to a facility lease, 714,383 shares of its common stock
to pay interest on long-term notes (note 9) and 414,450 shares of its common
stock for payments relating to the final settlement of a facility lease (note
9). In the future, under terms of notes payable and the Series A Preferred Stock
the Company may issue additional common stock to pay interest and Series A
Preferred Stock dividends.

(4) BUSINESS COMBINATIONS

BIZ ACQUISITION

On August 24, 2001, pursuant to an Agreement and Plan of Reorganization
dated July 3, 2001 with BIZ, the Company completed the BIZ acquisition, whereby
BIZ became a wholly-owned subsidiary of the Company. In connection with the BIZ
acquisition, the Company issued an aggregate of 10,875,128 shares of SSP 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 860,000 shares of its common stock for issuance upon exercise of
BIZ options and warrants assumed by the Company.

The BIZ acquisition had 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:

F-14

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

A preliminary purchase price allocation was performed, and the
resulting amounts were included in the Company's September 30, 2001 Form 10-Q.
The preliminary purchase price allocation differed from the final purchase price
allocation as follows: the in-process research and development was valued at
$3,300, and the completed technology was valued at $5,900. The total purchase
price did not change, and the difference was an increase in goodwill.

The other intangible assets are amortized on a straight-line
basis over the following estimated useful lives, in years:

Completed technology.............................. 5
Strategic relationships........................... 1 to 5

In accordance with Statement No. 142, the Company had up until June 30,
2002 to complete the initial test for impairment as of January 1, 2002, the
adoption date of Statement No. 142. In accordance with the transition provisions
of Statement No. 142, the Company conducted the first step of the impairment
tests. The Company assessed the fair value of its two reporting units by
considering their projected cash flows, using risk-adjusted discount rates.
Given consideration of relevant factors, the Company concluded that, as of
December 31, 2001, an impairment write-down of $36,299 was required related to
the BIZ acquisition. Subsequently, the Company reviewed the assumptions used in
the original analysis as of March 31, 2002, June 30, 2002, and September 30,
2002 and concluded that such analyses continued to be adequate and that no
additional write-down was required. In accordance with Statement No. 142, the
Company stopped amortizing goodwill in 2002. Accordingly, the Company does not
anticipate there to be any amortization expense for the next five years related
to intangible assets. The following table provides a reconciliation of the
reported net loss adjusted for goodwill amortization charges for each respective
year:

YEARS ENDED DECEMBER 31,
---------------------------
2002 2003
---------- ----------
Reported net (loss) .......................... $ (8,556) $ (9,450)
Add back goodwill amortization .......... -- --
---------- ----------
Adjusted net loss ....................... $ (8,556) $ (9,450)
========== ==========
Basic earnings per share:
Reported net (loss) ..................... $ (.40) $ (.36)
Add back goodwill amortization: ......... -- --
---------- ----------
Adjusted net loss ....................... $ (.40) $ (.36)
========== ==========

The Company performed an assessment of the fair value of its
Information Security Products and Services reporting units. The Company
performed an assessment of the fair value of the goodwill as of December 31,
2002 using three different perspectives: a multi-period discounted cash flow
method, which is a variation of the income forecast approach; a market value
approach; and market multiples. The process is used to determine the fair value
of an asset by estimating its future cash flows and then discounting the cash
flows to present day utilizing a discount rate that reflects the time value of
money and the risk inherent in the asset. The present value of the cash flows
was determined using a discount rate of 30%, which was found to be the weighted
average cost of capital for the Company. The results of the analysis indicated
that there was no impairment as of the valuation date as of December 31, 2002.

The Company performed an assessment of the fair value of the goodwill
of its information security products and services reporting unit as of December
31, 2003, again using the three different perspectives mentioned above. In past
periods the Company believed that its daily market stock price did not provide a
reliable indicator of the fair value of its equity. Due to the absence of any
research coverage, the market is generally unaware of its new technology
advancements. With the Company's stock being a micro-cap in terms of total
market value, its stock is subject to high volatility and the daily closing
price of its stock does not provide a true reflection of its fair value at any
one point in time. The Company's stock price was considered as part of the
review process, together with a multi-period discounted cash flow ethod
discussed above, and various market multiple measures of the company. The
discounted cashflow method used to determine the fair value of an asset used
estimated future cash flows and then discounted the cash flows to present day
utilizing a discount rate that reflects the time value of money and the risk
inherent in the asset. The present value of the cash flows was determined using
a discount rate of 25%, which was found to be the Company's weighted average
cost of capital. The Company deemed it appropriate to assess the fair value of
its goodwill by using a weighted average of these three methods. The results of
the analysis indicated that there was no impairment as of the valuation date as
of December 31, 2003.

The Company is required to perform reviews for impairment at least
annually that may result in future write-downs. Tests for impairment between
annual tests may be required if events occur or circumstances change that would
more likely than not reduce the fair value of the net carrying amount. The
Company concluded there were no events that required interim testing.

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 in the near-term

F-15

that the estimates of the anticipated future gross revenues, the remaining
estimated economic life, or both will be reduced. Reasonably possible is defined
as more than remote but less than likely. As a result, the remaining goodwill of
$25,930 at December 31, 2003, may be reduced within the next year.

(5) INVESTMENTS

The Company had an investment that is classified as trading securities
as of December 31, 2002. The securities were comprised of Class A Common Stock
of Wave Systems Corp. ("Wave"), par value $.01, received in the BIZ acquisition.
As of December 31, 2002, the Company had 57 shares of Wave with an aggregate
value of $76. During 2002 and 2003, the Company recorded realized loss on
trading securities of $130 and a gain of $102, respectively. During 2003, the
Company sold all of its remaining holdings in Wave.

(6) INVENTORIES

A summary of inventories follows:

DECEMBER 31,
-------------------------------
2002 2003
------------ ------------

Raw materials .......... $ 23 $ 70
Work-in-process ........ 82 37
Finished goods ......... 133 204
------------ ------------
$ 238 $ 312
============ ============

(7) PROPERTY AND EQUIPMENT

A summary of property and equipment follows:

DECEMBER 31,
----------------------------
2002 2003
------------ ------------

Leasehold improvements ............................. $ 28 $ 28
Machinery and equipment ............................ 66 --
Furniture and fixtures ............................. 1,939 1,545
------------ ------------
2,033 1,573
Less accumulated depreciation and amortization ..... 1,943 1,490
------------ ------------
$ 90 $ 83
============ ============

(8) EQUITY INVESTMENT IN AFFILIATE

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 to conduct all business and any required financing activities
relative to the gaming industry. In June 2002, SSP Gaming and the Venetian
Casino Resort, LLC, a Nevada limited liability company based in Las Vegas,

F-16

Nevada ("Venetian"), executed an operating agreement to form Venetian
Interactive, LLC, a Nevada limited liability company ("VI", with SSP Gaming and
Venetian being "Members"). The purpose of VI was to provide management services,
consulting services, financial services, intellectual property licensing
services, and equipment to the online gaming industry in venues where such
activity complies with all regulatory requirements, and to develop and operate
Venetian branded casino sites.

A VI related entity, V.I. Ltd., was awarded both an Interactive Gaming
License and an Electronic Betting Center License by the Alderney Gambling
Control Commission. The licenses permit V.I. Ltd. to conduct Internet gaming
activities under the name "Venetian Interactive."

The VI development budget estimated costs of $4,000 to bring the
Venetian Casino to live status, and an additional $2,200 to support startup
operations. Since beginning development in July 2002, VI has expensed all
operating costs and capitalized third party software development costs incurred
under a fixed price contract. As of June 30, 2003 capitalized development costs
totaled $1,300. The VI operating agreement calls for SSP Gaming to fund
two-thirds of the development costs, up to $2,000, and for Venetian to fund the
remaining one-third of the costs. SSP has invested $800 in SSP Gaming, with
those funds being invested in VI. In June 2003, the VI Managers determined to
re-assess the entire project in view of changes in the regulatory environment
and market conditions, including an updated competitive analysis. The
re-assessment was to include site development costs. The re-assessment was not
presented to SSP Gaming.

In June 2003, the Venetian sent a demand letter to SSP Gaming demanding
funding, or alternatively taking action to terminate the VI operating agreement
for failure of SSP Gaming to meet its funding commitment and threatening to take
action against SSP Gaming in the matter even though the outcome of the
reassessment was not known. SSP Gaming declined to contribute additional
capital, thereby giving VI the ability to declare SSP Gaming in default. If
terminated, the VI operating agreement provides that the Members may look solely
to the assets of VI for return of their contributed capital. Should the assets
of VI be insufficient to pay all VI obligations and return a Member's capital
contributions, the Member has no recourse against other Members. As of December
31, 2003 the operating agreement with VI has been terminated.

While SSP Gaming disputes the circumstances cited by the Venetian, due
to the uncertainty regarding the VI agreement, in the quarter ended June 30,
2003, the Company recorded an impairment charge equal to the remaining $142 book
value of the Company's investment in its subsidiary, thereby reducing the
carrying value of this investment to $0. As of December 31, 2003, the balance of
equity investment in affiliate was $0. As such, SSP Gaming did not record any
loss from equity investee after June 30, 2003, which would have represented its
pro rata portion of the VI net loss. Since the members of SSP Gaming could not
agree on future capitalization of VI, the Venetian terminated the operating
agreement of VI in August 2003 and the Company has ceased all activities of VI.

(9) LONG-TERM DEBT

A summary of long-term debt follows:

DECEMBER 31,
--------------------------
2002 2003
----------- -----------

Secured convertible promissory notes with an interest rate of 10% per annum,
interest payable quarterly, due December 31, 2005 ............................. $ 5,796 $ 1,986
Secured convertible promissory notes with an interest rate of 30% per annum,
interest payable quarterly, due November 14, 2003 ............................. 500 --
Note payable related to restructuring of facilities leases due in installments
on or before September 19, 2003, without interest ............................. 425 --
Promissory note due July 18, 2003 with interest at 6.75% per annum, interest
payable at maturity ........................................................... 429 --
Promissory note due July 18, 2003 without interest ............................... 27 --
Note payable secured by interest in SSP Gaming, payable in monthly installments
of $15,000, including interest at 6% per annum ................................ 196 96
Bay View Funding accounts receivable financing, discount rate of 1.25% of the
receivables factored, interest payable upon payment of receivable ............. 259 358
----------- -----------
7,632 2,440
Less unamortized value of warrants related to debt issued ........................ 4,806 1,071
----------- -----------
Long-term debt, net of debt discounts of $4,806 in 2002 and $1,071 in 2003 ....... 2,826 1,369
Less current installments ........................................................ 2,826 454
----------- -----------
Long-term debt, net of debt discounts of $4,806 in 2002 and $1,071 in 2003 ....... $ -- $ 915
=========== ===========

The long-term debt matures as follows:
2004 454
2005 1,986
----------
Total 2,440
==========

F-17

SECURED SUBORDINATED CONVERTIBLE NOTES

On April 16, 2002, the Company raised $5,000 in cash through the
issuance of $4,000 in 10% secured convertible promissory notes ("10% Convertible
Notes"), $653 in unsecured non-convertible promissory notes ("Non-convertible
Notes", $153 held by co-chairman Kris Shah and $500 held by co-chairman Marvin
Winkler) and the pre-payment of a $500 note receivable due to the Company from
Kris Shah, less an early payment discount of $153. In connection with the
issuance of the 10% Convertible Notes, the Company incurred approximately $626
of issuance costs, which primarily consisted of amortization of warrant costs,
investment banking fees and legal and other professional fees. These notes
mature December 31, 2005 and bear interest at a rate of 10% per annum to be paid
quarterly in cash, or at the Company's discretion, in common shares based upon
the trailing 30-day average prior to the interest due date. The $4,000 in 10%
Convertible Notes were convertible, in whole or in part, at the option of the
holder into an aggregate of 4,000,000 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 were issued with detachable warrants
exercisable for three years to purchase up to an additional 2,400,000 shares at
$1.30 per share, subject to adjustment under certain conditions. In conjunction
with the closing of the sale of the 10% Convertible Notes, $1,750 of principal
and $46 of accrued interest of subordinated notes issued in December 2001 were
exchanged for the 10% Convertible Notes and detachable warrants to purchase
1,077,667 shares at $1.30 per share. In conjunction with the Convertible Bridge
Loan described below, warrants to purchase 1,500,000 of common stock were
re-priced to an exercise price of $.50 per common share and immediately
exercised for cancellation of Warrant Notes (defined below) totaling $750. The
remaining warrants to purchase 1,977,667 shares of common stock were re-priced
to the exercise of A-1 Warrants issued in the Series A Preferred Stock financing
(note 15). The balance of the 10% Convertible Notes was $1,986 as of December
31, 2003.

The 10% Convertible Notes automatically convert prior to maturity if
the Company's common shares trade at or above $3.00 per share with average
volume of 100,000 shares per day for 20 consecutive trading days. The Company is
subject to restrictive covenants related to the 10% Convertible Notes and
Non-convertible Notes that prevent the Company from pledging intellectual
property as collateral. In June 2002, Kris Shah and Marvin Winkler exchanged
their Non-convertible Notes, together with accrued interest, for 119,000 and
391,000 shares, respectively, of the Company's common stock based upon an
above-market exchange price of $1.30 per common share.

The 10% Convertible Notes contain a beneficial conversion feature. When
a convertible security contains a conversion price that is less than the quoted
trading price of a company's common stock at the date of commitment, then the
difference between the conversion price and the common stock price is called a
beneficial conversion feature. Emerging Issues Task Force ("EITF") Issue No.
00-27, which amends EITF Issue No. 98-5, requires both recordation of a discount
to recognize the intrinsic value of the conversion feature and amortization of
the amount recorded over the term of the security.

Of the aggregate $5,796 in 10% Convertible Notes issued, the Company
allocated approximately $2,644 to the value of the warrants and the remaining
$3,152 to the beneficial conversion feature of the debt instruments, which were
ascribed to these components on a pro rata basis of fair values calculated for
the warrants using a Black Scholes valuation model and the intrinsic value of
the beneficial conversion feature. These amounts have been recorded as discounts
from the face value of the debt, with an equal increase to additional paid-in
capital. Based on EITF No. 00-27, the governing accounting pronouncement, the
discounts are being amortized over the period from the date of issuance to the
maturity date of the notes. Amortization expense of the discounts totaled $1,107
and $1,302 for years ended December 31, 2002 and 2003, respectively. On November
19, 2003, with the exception of $1,986 in principal, the 10% Convertible Notes
were exchanged in a private placement for Series A Preferred Stock (note 15). As
such, the Company recorded a $2,226 non-cash interest charge related to the
unamortized balance of warrant value and beneficial conversion feature of 10%
Convertible Notes that were exchanged for Series A Preferred Stock (note 15).
The $2,226 non-cash interest charge was recorded as a loss on conversion of debt
on the Company's consolidated statement of operations during 2003. The Company
will continue to amortize a non-cash interest charge related to the unamortized
warrant values and beneficial conversion feature balances of $1,071 relative to
the remaining 10% Convertible Notes that were not converted to Series A
Preferred Stock.

In connection with issuances of the 10% Convertible Notes and warrants,
the Company incurred approximately $741 of debt issuance costs comprised of
legal and placement fees, and $182 in value calculated for the 110,000 warrants
issued to the placement agent in the transaction. On November 19, 2003, with the
exception of $1,986 in principal, the 10% Convertible Notes were exchanged in a
private placement for Series A Preferred Stock (note 15). As such, the Company
recorded a $197 non-cash interest charge related to the unamortized balance of
debt issuance costs and warrant value in relation to the 10% Convertible Notes
that were exchanged for Series A Preferred Stock (note 15). The $197 non-cash
interest charge was recorded as a loss on conversion of debt in the Company's
consolidated statement of operations during 2003. The remaining costs, which are

F-18

included in other assets, are being amortized over the term of the remaining 10%
Convertible Notes that were not converted to Series A Preferred Stock.
Amortization expense of these costs totaled $142 and $200 for the years ended
December 31, 2002 and 2003. The Company will continue to amortize a non-cash
charge related to the unamortized balances of the remaining costs, which had a
balance of $285 as of December 31, 2003. In January 2004, holders of $626 of
$1,986 in remaining principal of the 10% Convertible Notes converted all or
portions of their 10% Convertible Notes into shares of common stock (note 20).

SECURED PROMISSORY NOTES

On January 22, 2003, the Company issued to Richard P. Kiphart a $500
promissory note that bore interest at a rate of 15% per year, with a minimum
interest charge of $50. Accrued interest was payable quarterly in arrears
beginning, March 31, 2003. Principal and accrued but unpaid interest were due
upon the earlier of December 31, 2005 and the Company's closing of $5,000 or
more in equity or debt financing. Mr. Kiphart had the right to exchange the
principal and outstanding interest on the note for securities that the Company
issued in such an equity or debt financing. In conjunction with the Convertible
Bridge Loan described below, a warrant to purchase up to 125,000 shares of
common stock at an exercise price of $1.30 per common share that Mr. Kiphart
received under the terms of the January 22, 2003 note was re-priced to an
exercise price of $.50 per common share and immediately exercised on a cashless
basis. The note was to be secured by all of the unencumbered assets of SSP and
its subsidiaries, including without limitation, intellectual property assets and
any and all receivables due to the Company from SSP Gaming. On November 19,
2003, this note was exchanged for the purchase of Series A Preferred Stock (note
15). As such, the Company recorded a non-cash charge of $41 related to the
unamortized balance of warrant value of the note held by Mr. Kiphart, and
exchanged for Series A Preferred Stock (note 15). The $41 non-cash interest
charge was recorded as a loss on conversion of debt on the Company's
consolidated statement of operations during 2003. The balance of this note was
$0 as of December 31, 2003.

On March 18, 2003 and March 19, 2003, the Company issued to each of
Crestview Capital Fund II, L.P. and Richard P. Kiphart $100 promissory notes
that were to be secured by all of the Company's assets, including SSP Gaming and
any rights belonging to SSP Gaming. In addition, on March 28, 2003, Marvin
Winkler agreed to pledge 350,000 shares of common stock held by JAW Financial,
L.P., an entity controlled by Mr. Winkler, as security for the notes the Company
issued on March 18, March 19 and March 28, 2003. The notes bore interest in an
amount equal to the following percentage of the principal balance: 10%, if the
notes were re-paid within 30 days; 12%, if the notes were re-paid within 60
days; 15%, if the notes were re-paid within 90 days; and 20%, if the notes were
re-paid at maturity. Principal and interest under the notes were due upon the
sooner of 120 days from the dates of the notes and the Company's raising of at
least $3,500 in equity or debt financing. In conjunction with the September 2003
Bridge Loan described in the next paragraph, warrants issued with these notes to
purchase up to an aggregate of 130,000 shares of common stock at an exercise
price of $.60 per common share were re-priced to an exercise price of $.50 per
common share and immediately exercised on a cashless basis. These notes were
tendered for the purchase of Series A Preferred Stock in accordance with the
face value of such notes (note 15). The balances of these notes were $0 as of
December 31, 2003.

On March 28, 2003, the Company issued to Richard P. Kiphart, Crestview
Capital Fund II, L.P., Kris Shah and Marvin Winkler promissory notes in the
aggregate principal amount of $440, of which $180 was funded prior to March 31,
2003. The notes were to be secured by all of the Company's assets and the assets
of SSP Gaming. In addition, Mr. Winkler agreed to pledge 350,000 shares of
common stock held of record by JAW Financial, L.P. as security for the notes the
Company issued on March 18, March 19 and March 28, 2003. The notes bore interest
at the rate of 18% per year, with interest payable in cash monthly in arrears.
The Company was required to use the proceeds of the notes only for payment of
operating expenses. Principal and accrued but unpaid interest under the notes
were due upon the sooner of July 26, 2003 and the Company's raising of $3,500 in
equity or debt financing. In conjunction with the September 2003 Convertible
Bridge Loan described below, warrants issued with these notes to purchase up to
an aggregate of 200,000 shares of common stock at an exercise price to be the
greater of $.70 per common share or the conversion price of securities the
Company considered issuing in a subsequent financing, but not to exceed $1.30
per common share were re-priced to an exercise priced of $.50 per common share
and immediately exercised on a cashless basis. These notes were tendered for the
purchase of Series A Preferred Stock in accordance with the face value of such
notes (note 15). The notes held by Messrs. Shah and Winkler were re-paid from
the proceeds of the Series A Preferred Stock financing (note 15). The balances
of these notes were $0 as of December 31, 2003.

On April 1, 2003, the Company issued to Richard P. Kiphart a $240
promissory note dated March 28, 2003 that bore interest at a rate of 18% per
annum. Principal and accrued but unpaid interest were due upon the earliest of
July 31, 2003 or the Company obtaining $3.5 million in equity or debt financing.
In conjunction with the Convertible Bridge Loan described below, a warrant

F-19

issued with this note to purchase 120,000 shares of common stock at an exercise
price to be the greater of $.70 per common share or the conversion price of
securities the Company considered issuing in a subsequent financing, but not to
exceed $1.30 per common share, were re-priced to an exercise price of $.50 per
common share and immediately exercised on a cashless basis. Of the $240, the
Company allocated approximately $54 to the value of the warrant that was
ascribed based upon fair values calculated for the warrant using a Black Scholes
valuation model. This amount has been recorded as a discount from the face value
of the debt, with an equal increase to additional paid-in capital. The discount
is being amortized over the period from the date of issuance to the maturity
date of the note. Amortization expense of the discount totaled $54 for 2003.
This note was tendered for the purchase of Series A Preferred Stock in
accordance with the face value of such note (note 15). The balance of this note
was $0 as of December 31, 2003.

OBLIGATIONS FOR RESTRUCTURING FACILITY LEASE

In restructuring existing facility lease agreements (note 11), the
Company agreed to pay $500 in installments without interest. The first payment
of $75 was made as scheduled in December 2002, with additional payments
scheduled of $100 due in March 2003, $150 due in June 2003 and a final payment
of $175 due in September 2003. Although the Company tendered in August 2003 the
remaining balance of the $150 payment that was due in June 2003, Research
Venture claimed a default under the facilities settlement agreement. On August
11, 2003, Research Venture obtained a judgment against the Company per prior
stipulation in the amount of $2.7 million. As such, the Company recorded a $1.3
million accrued liability as of June 30, 2003, which consisted of the original
judgment amount of $3.1 million less $456 of cash previously paid and $1.4
million of shares previously issued. On August 29, 2003, the Company entered
into an agreement of settlement on stipulated judgment with Research Venture.
Under that settlement agreement, Research Venture retained 959,323 shares of
common stock initially issued in connection with the restructuring arrangement
and 96,919 shares of common stock issued upon conversion of $126 of the
principal balance of the $360 non-interest bearing note that the Company had
issued as prepaid rent, and the Company agreed to register those shares for
resale by Research Venture. The Company completed the appropriate registration
of those shares on September 18, 2003. In addition, Research Venture canceled
and surrendered the note, the Company paid to Research Venture cash in the
amount of $865 and issued to Research Venture 414,450 shares of common stock
that were to be registered for resale by Research Venture under a separate
registration statement on or prior to November 30, 2003, and the building lease
agreement was terminated. The 414,450 shares were recorded at the fair value of
$373 and were included on a resale registration statement. Because the Company
did not timely obtain effectiveness of the registration statement covering the
414,450 shares of common stock the Company issued in the August 2003 settlement,
Research Venture may be entitled to entry of a stipulated judgment against the
Company in an amount up to $373,000 less the product of $.90 multiplied by the
number of those shares that Research Venture sells prior to entry of the
stipulated judgment. The settlement agreement contained mutual general release
language, and the August 11, 2003 stipulated judgment was vacated. As a result
of the above settlement, the Company adjusted the estimated accrued liability by
$209, and the $500 obligation was fully satisfied as of December 31, 2003.

NOTE TO REPURCHASE INTEREST IN SSP GAMING

In October 2002, the Company entered into a mutual settlement and
release regarding the default by a party that had contracted to finance the
investment of SSP Gaming, a then wholly-owned subsidiary. The party defaulted
under the financing agreement. To preserve the underlying business
relationships, the Company and the other party executed an agreement whereby the
Company repurchased the party's interest by issuing a note for $250, the amount
invested by the party, and agreed to repay such amount by making an initial $40
payment and additional monthly payments of $15 per month, including interest at
6%, until paid in full. The note is secured by the Company's interest in SSP
Gaming, and includes an acceleration clause whereby the then principal balance
will be paid upon separate SSP Gaming financing of $2,000 or more. The Company
has terminated the operating agreement of VI (note 4), therefore, the Company
does not intend to make the last six monthly payments of $15 each. The balance
of this note is $96 as of December 31, 2003.

SECURED CONVERTIBLE NOTES

In November 2002, the Company issued to Mr. Kiphart, Crestview Capital
Fund, L.P. and Crestview Capital Fund II, L.P. three one-year notes totaling
$500, bearing interest at 30% per annum ("Secured Convertible Notes"). In
conjunction with the convertible bridge loan described below, warrants to
purchase up to 500,000 shares of common stock at an exercise price of $1.30 per
common share that accompanied the Secured Convertible Notes were re-priced to an
exercise price of $.50 per common share and immediately exercised on a cashless
basis. SSP Gaming used the proceeds for investment into the joint venture with
Venetian (note 4). Beginning May 14, 2003, the Secured Convertible Notes were
convertible into the Company's common stock at a conversion price of $1.30 per
share. The Secured Convertible Notes were to be due upon a Company financing of
$3,500 or more, and were to be secured behind the Secured Subordinated
Convertible Notes described above. On November 19, 2003, these notes were
exchanged for the purchase of Series A Preferred Stock (note 15). The balances
of these notes were $0 as of December 31, 2003.

F-20

The fair value of the detachable warrants associated with the Secured
Convertible Notes was estimated at $154 using the Black Scholes valuation model,
based on the following assumptions: risk-free interest rate of 4.85%; dividend
yield of 0.00%; and volatility of 129%. The amount has been recorded as
discounts from the face value of the debt with an equal increase to additional
paid-in capital. The relative fair value of the warrants has been allocated as a
debt discount and is being amortized over the period from the date of issuance
to the maturity date of the Secured Convertible Notes. Amortization expense of
the discounts totaled $154 for year ended December 31, 2003, respectively. On
November 19, 2003, the Secured Convertible Notes were exchanged in a private
placement for Series A Preferred Stock (note 15). The $154 warrant value was
fully amortized over the period from date of issuance to maturity date, which
was prior to November 19, 2003, as such, there was no remaining unamortized
warrant value, which would have been recorded as an additional non-cash interest
due to the conversion on November 19, 2003.

PROMISSORY NOTES

In April 2002, the Company issued two promissory notes due in July 2003
as payment for goods sold by Pulsar's network solutions business. The note, with
an original balance of $679, bore interest at 6.75% per annum, with interest
payable at maturity on July 18, 2003. The note in the amount of $27 did not bear
interest and was due on July 18, 2003. The notes were not re-paid on the due
date. The holder of the notes filed an action to initiate collection of the
balances due. On September 17, 2003, the Company entered into a final settlement
agreement with the note holder and paid $400 in full settlement of principal and
interest otherwise due under both notes. The final settlement agreement resulted
in a gain of $95, which was recorded as other income.

In March 2003, the Company executed documents to settle the action
brought against the Company by Integral Systems, Inc. As part of the settlement,
the Company entered into a Forbearance Agreement dated March 12, 2003 with
Integral Systems that would allow Integral Systems to enter a judgment against
the Company should the Company default in the $20 per month payments due under
the agreement. The Company also issued to Integral Systems a warrant exercisable
for three years to purchase 150,000 at an exercise price of $1.30 per common
share. Additionally, because the Company did not pay off the agreed to
obligation at a discount by June 30, 2003, the Company placed 400,000 shares of
its common stock in a third party escrow as additional security for its
performance under the Forbearance Agreement in July 2003 (see below). During
December 2003, the entire obligation was paid and the Company received the
400,000 shares back from the third party escrow.

AUGUST 2003 EXCHANGEABLE BRIDGE LOAN

On August 27, 2003, the Company issued two notes totaling $750 that
were to be cancelled as payment of the exercise price of previously issued
warrants to purchase 1,500,000 common shares ("Warrant Notes"), and a $500 note
("Exchange Note") that was to be exchanged for a note to be issued as part of
the September 2003 Bridge Loan described below. The September 2003 Bridge Loan
and the Warrant Notes were cancelled in September 2003 when the warrants were
exercised, and the Exchange Note was surrendered and replaced by a note issued
as part of the September 2003 Bridge Loan. As such, the Warrant Notes and
Exchange Note had a balance of $0 as of December 31, 2003.

SEPTEMBER 2003 CONVERTIBLE BRIDGE LOAN

Under a Bridge Loan Agreement dated September 1, 2003 ("September 2003
Bridge Loan"), certain investors agreed to fund a $1,500 10% bridge loan, which
automatically converted at 110% of face value plus accrued interest into the
securities issued in the Series A Financing (note 15). The bridge loan investors
were SDS Merchant Fund, L.P. ($750), Crestview Capital Fund, L.P. ($100),
Crestview Capital Fund II, L.P. ($150) and Richard P. Kiphart, who surrendered
the Exchange Note for a $500 note issued under the September 2003 Bridge Loan.
The bridge loan investors were issued three-year warrants exercisable for
500,000 shares of the Company's common stock at the exercise price of A-1
Warrants to be issued with the Series A Preferred Stock ("Bridge Warrants")
(note 15). The September 2003 Bridge Loan was converted into Series A Preferred
Stock (note 15) and the balance of the September 2003 Bridge Loan was $0 at
December 31, 2003.

The September 2003 Bridge Loan included the cash exercise of a portion
of the warrants issued as part of financing obtained on April 16, 2002 (the
"Registered Warrants"), and the cashless exercise of all other warrants issued
to Mr. Kiphart, Crestview Fund, L.P., and Crestview Fund II, L.P. in financing
obtained after April 2002 ("Unregistered Warrants"). In conjunction with the
September 2003 Bridge Loan, the Company entered into agreements with holders of
certain Registered Warrants to purchase 1,500,000 common shares, whereby they
were immediately exercised upon the decrease of the exercise price to $.50 per
common share in exchange for the cancellation of the Warrant Notes. The exercise
price of the remaining unexercised Registered Warrants was reduced to the
exercise price of the Series A-1 Warrants (note 15). All other Unregistered
Warrants owned by Mr. Kiphart, Crestview Fund, L.P., and Crestview Fund II, L.P.

F-21

that were not subject to an effective registration statement were re-priced to
$.50 and immediately exercised on a cashless basis using the twenty-day weighted
average closing price prior to August 20, 2003.

In conjunction with decreasing the warrant exercise prices to $.50 per
common share on the Registered Warrants and Unregistered Warrants, the Company
recorded a non-cash interest expense totaling $925 in the quarter ended
September 30, 2003.

FORBEARANCE AGREEMENT

Under the terms of a Forbearance Agreement dated September 1, 2003
("Forbearance Agreement"), with the exception of Bay View Funding ("BVF")
discussed below, and the SSP Gaming repurchase noteholder, substantially all
other noteholders with balances outstanding at September 1, 2003, agreed not to
take any action relative to rights under their notes until November 30, 2003,
and further agreed that their notes would be tendered for the purchase of Series
A Preferred Stock at face value. As part of the Forbearance Agreement, the
Company issued to Crestview Fund, L.P., Crestview Fund II, L.P. and Mr. Kiphart
a total of 200,000 common shares in full satisfaction of all penalties and costs
("Penalty Shares") through November 30, 2003, related to securities issued after
April 2002. During 2003, the Company recorded a non-cash charge of $190 related
to the issuance of the Penalty Shares. The Forbearance Agreement had been fully
satisfied in upon the issuance of the Series A Preferred Stock (note 15).

ACCOUNTS RECEIVABLE FINANCING

During November 2001, both the Company and Pulsar entered into separate
financing agreements with Wells Fargo Business Credit ("WFBC"), which provided
for the factoring of accounts receivable. In October 2002, the Company
terminated its arrangement with WFBC and entered into a new financing
arrangement with Bay View Funding ("BVF"). The new factoring agreement contains
a maximum advance of $750, and was for an initial term of three months. At the
Company's option, the agreement is renewable for additional three-month periods.
The agreement contains a factoring fee, which is based on 1.25% of the gross
face value of the purchased receivable for every 30-day period from the date of
purchase by BVF until the invoice is paid in full. For invoices outstanding more
than the 30-day period, a finance fee will be charged at the rate of .063% of
the gross face value of the purchased receivable for every one day beyond the
30th day from the original date of purchase. At the time of purchase, terms call
for BVF to advance 85% of the gross receivable, with the balance remitted after
collection of the invoice less the factoring and finance fee, if applicable. The
agreement contains certain representations, warranties and covenants and
requires a monthly minimum fee, including the factoring and financing fees, of
..25% of the maximum advance of $750, or approximately $2 per month. The BVF
agreement states among other things that a default occurs if the Company does
not pay debts as they become due or if the Company maintains unreasonably small
capital. The Company has notified BVF of the Company's failure to make certain
payments on a timely basis and have requested but not received a waiver of such
default.

Gross receivables transferred to BVF amounted to $2,873 and $1,399
during the years ended December 31, 2002 and 2003, respectively. The Company is
obligated to repurchase certain accounts receivable under the program and,
therefore, the transaction does not qualify as a sale.

Factored receivables included in the accounts receivable balance as of
December 31, 2002 and 2003 were $314 and $452, respectively.

(10) ACCRUED LIABILITIES

A summary of accrued liabilities follows:

DECEMBER 31,
------------------------------
2002 2003
------------- -------------

Accrued professional fees ........................... $ 113 $ 38
Accrued vacation .................................... 363 339
Accrued compensation ................................ 270 128
Accrued dividends declared (note 15) ................ -- 139
Accrued EPA settlement (note 20) .................... -- 108
Accrued commissions ................................. 71 71
Accrued interest .................................... 198 50
Accrued obligation for the repurchase of common stock -- 373
Accrued deferred rent................................ 98 102
Accrued investor relations fees...................... 9 38
Other ............................................... 178 142
------------- -------------
$ 1,300 $ 1,528
============= =============

F-22

(11) RELATED PARTY TRANSACTIONS

KRDS REAL PROPERTY LEASE

In 1999, the primary shareholders of SSP (then known as "Litronic
Inc.") formed KRDS, Inc. ("KRDS") for the sole purpose of purchasing real
property. KRDS's operations primarily consisted of a mortgage obligation,
interest, depreciation and rental income from the Company related to the real
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 60 days' notice, either party may cancel the
remaining balance of the facility lease with no future liability. Neither party
has exercised the exit clause. On December 1, 2003, the Company entered into a
letter agreement whereby it agreed to pay a certain amount of late fees in
exchange for an agreement to cancel the April 2002 agreement described above.

NOTE RECEIVABLE FROM SHAREHOLDER

The note receivable from shareholder consists of a note acquired as
part of the BIZ acquisition. The $500 note was received by BIZ from the
Company's co-chairman, Kris Shah, in conjunction with the issuance of BIZ common
shares prior to the BIZ acquisition, and therefore was shown as a reduction of
shareholders' equity until paid. The note had a stated interest rate of 5% per
annum and was due on July 24, 2005. On April 12, 2002, in a transaction approved
the Company's board of directors, Mr. Shah prepaid the note by paying to the
Company $347, and the Company recorded 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%.

RELATED PARTY FACILITIES LEASING

During 2001, the Company arranged for the lease of two buildings
approximating 63 square feet that were under construction and were subsequently
completed. In October 2002, the Company restructured its lease obligations with
landlord, Research Venture, LLC, for the two buildings located in the Spectrum
area of Irvine, California. This restructuring and settlement provided the basis
for revising the estimate of costs relative to resolving the liability incurred
under the original leases. In 2001 the Company recorded an estimated liability
of $2,171, which was net of then anticipated offsetting sublease income. As a
result of the restructuring and settlement, the Company increased stockholders'
equity by $1,650 through the issuance of common stock valued for financial
reporting purposes at $956 and recorded a gain of $700 for 2002. The settlement
required the Company to issue 959,323 shares of common stock, pay $500 in cash
over a one-year period, cancel the lease on one building approximating 23 square
feet, and take occupancy of the other building under a seven-year operating
lease for the facility with approximately 40 square feet for an initial monthly
rental rate of $55, plus common area costs beginning in December 2002. The
monthly rental rate on the seven-year lease was scheduled to increase to $73,
plus common area costs, at the beginning of the third year. The Company recorded
rent expense on a straight-line basis. At the Company's option, a portion of the
rental rate was payable either in stock or in cash during the first two years of
the lease under certain circumstances through conversion of a $360 subordinated
convertible promissory note that the Company issued as prepaid rent. In August
2002, Mr. Shah surrendered his 25% ownership interest in the entity that owns
the two buildings. The lease was terminated in August 2003 (note 9). At the time
of surrendering his interest, the buildings were encumbered by one or more
construction loans for which the lender required personal guarantees for renewal
of the financing. As there was little, if any, equity in the project and Mr.
Shah was unwilling to personally guarantee the loans, Mr. Shah chose to
surrender his membership interest. In 2003, a total of 92,304 shares were issued
in payment of rent (note 9).

CASHLESS EXERCISE OF WARRANTS

During 2003 the Company issued and repaid bridge notes held by the
Company's co-chairmen, Kris Shah and Marvin Winkler, totaling $40. The repayment
of the $40 bridge notes were repaid simultaneously with the closing of the
Series A financing (note 15) in exchange for a waiver of all penalties and costs
related to their bridge notes and their related warrants to purchase up to
40,000 common shares. On October 21, 2003, these warrants, which were to have an
exercise price equal to the greater of $.70 per common share or the conversion
price of securities the Company considered issuing in a subsequent financing,
but not to exceed $1.30 per common share had their exercise price set at $.50
per common share and were immediately exercised by Mr. Shah and Mr. Winkler on a
cashless basis resulting in the issuance to them of an aggregate of 9,474 shares
of common stock.

F-23

(12) CONCENTRATION OF CREDIT 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 and their
dispersion across different industries and geographic regions. As of December
31, 2002 and 2003, accounts receivable included $133 and $631, respectively, due
from the U.S. government and related agencies. Sales to the U.S. government and
related agencies accounted for 18% and 37% of total revenues for years December
31, 2002 and 2003, respectively.

The Company had sales to two customers that each represented 28% and
17% and of the total revenues for the year December 31, 2002. The Company had
sales to three customers that each represented 28%, 18% and 12% of total
revenues for 2003. No other customers accounted for more than 10% of total
revenues during the years ended December 31, 2002 and 2003. Trade accounts
receivable totaled $1,001 and $1,620 from these major customers as of December
31, 2002 and 2003, respectively.

Some key components used in the manufacture of the Company's products
can only be obtained from single sources.

(13) COMMITMENTS AND CONTRACTUAL OBLIGATIONS

The Company leases office space under noncancelable operating leases.
The terms of the leases range up to seven years. The following summarizes the
future minimum lease payments under all noncancelable operating lease
obligations:

YEAR ENDING DECEMBER 31,
2004 .................................. $ 547
2005 .................................. 586
2006 .................................. 603
2007 .................................. 166
2008 and thereafter ................... 162
---------
$ 2,064
=========

Rental expense under noncancelable operating leases was $802 and
$1,036 for the years ended December 2002 and 2003, respectively. Rental expense
excluded any settlement amounts paid to Research Venture (note 9).

The corporate headquarters are leased from a related party (note 11).
In April 2002, the Company and KRDS entered into an agreement whereby upon sixty
(60) days notice, the Company or KRDS may cancel the remaining term of the
corporate headquarters lease with no future liability. The exit clause is
available provided that all amounts due under the lease are paid current through
the date of termination. On December 1, 2003, the Company entered into a letter
agreement whereby it agreed to pay a certain amount of late fees in exchange for
an agreement to cancel the April 2002 agreement described above.

As of December 31, 2003, the Company had unconditional purchase
obligations of $1,042 for purchases during 2004, which consisted of the
following and are for hardware products purchased for resale, licenses and
software used in contract development programs: Services, $403; Hardware, $286;
Maintenance, $127; Licenses, $155; and; other $71.

(14) LOSS PER SHARE

The calculation of diluted net loss per share excludes potential common
shares if the effect is anti-dilutive. Potential common shares are composed of
incremental shares of common stock issuable upon the exercise of stock options
and warrants. The following table sets forth potential common shares that were
excluded from the diluted net loss per share calculation for the years ended
December 31, 2002 and 2003 because they are anti-dilutive for the periods
indicated (shares in thousands):

2002 2003
----------- -----------

Warrants .................... 4,081 16,247
Stock options ............... 2,039 4,269
----------- -----------
6,120 20,516
========== ==========

(15) SERIES A CONVERTIBLE PREFERRED STOCK

In November 2003, the Company sold and received proceeds from the sale
of a Series A Convertible Preferred Stock ("Series A Preferred Stock"), and
warrants to purchase common stock ("Warrants") to 84 accredited investors in a
transaction exempt

F-24

from registration pursuant to Section 4(2) and Regulation D under the Securities
Act of 1933. The private placement consisted of the following:

Series A Convertible Preferred Stock
------------------------------------

The Company sold 2,150 shares of Series A Preferred Stock and Warrants
for a total amount of $15,050, of which $9,510 was for new capital and $5,540
was issued in exchange for cancellation of previously issued promissory notes.

The aggregate purchase price for 2,150 shares of the Series A Preferred
Stock and Warrants was $15,050 ("Stated Value"), or $7 per share, with an
initial conversion price of $.70 per common share. The Series A Preferred Stock
will initially be convertible into 21,500,000 shares of the Company's common
stock, with Warrants to purchase an additional 10,750,000 shares of common stock
on terms described below.

The holders of the Series A Preferred Stock are entitled to a dividend
payable semi-annually at the rate of 8% per annum, increasing to 12% per annum
eighteen months from closing, payable in cash or common stock at the Company's
option, with the shares of common stock valued at the arithmetic mean of the
Company's closing sales price of common stock for the thirty-day period before
the dividend payment is due. As of December 31, 2003, the Company had declared
and unpaid dividends in the amount of $139.

Due to the rank and liquidation preference (see below) with respect to
the Series A Preferred Stock, the Company recorded the Series A Preferred Stock
outside permanent equity on the balance sheet as of December 31, 2003 as
follows:

Series A preferred stock $ 15,050
Valuation of Series A Preferred Stock Beneficial Conversion (see below) (7,821)
Valuation of Series A Preferred Stock Warrants (see below) (7,229)
Issuance costs of Series A Preferred Stock (see below) (802)
---------
Total outside of permanent equity --
---------

Valuation of Series A Preferred Stock Beneficial Conversion and Warrants
------------------------------------------------------------------------

The Series A Preferred Stock contain a beneficial conversion feature.
When a convertible security contains a conversion price that is less than the
quoted trading price of a company's common stock at the date of commitment, then
the difference between the conversion price and the common stock price is called
a beneficial conversion feature. Emerging Issues Task Force ("EITF") Issue No.
00-27, which amends EITF Issue No. 98-5, requires both recordation of a discount
to recognize the intrinsic value of the conversion feature and amortization of
the amount recorded over the term of the security.

Of the aggregate $15,050 in Series A Preferred Stock issued, the
Company allocated approximately $7,229 to the value of the warrants and the
remaining $7,821 to the beneficial conversion feature of the Series A Preferred
Stock, which were ascribed to these components on a pro rata basis of fair
values calculated for the warrants using a Black Scholes valuation model and the
intrinsic value of the beneficial conversion feature. These amounts have been
recorded as discounts from the value of the Series A Preferred Stock, with an
equal increase to additional paid-in capital. Based on EITF No. 00-27, the
governing accounting pronouncement.

Issuance Costs of the Series A Convertible Preferred Stock
----------------------------------------------------------

In connection with issuances of the Series A Preferred Stock and
related warrants, the Company incurred approximately $802 of issuance costs
comprised of legal and placement and exchange agent fees. These costs were
recorded as an offset against proceeds received from the issuance of Series A
Preferred Stock.

Mandatory Conversion
--------------------

Provided there is a minimum average of $400 trading volume for lowest
twenty dollar volume trading days for the thirty trading days prior to the
Trigger Date and certain other requirements are met, beginning eighteen months
after the Effective Date, as defined below, the Series A Preferred Stock shall
automatically convert into common stock at a conversion price calculated as if
an optional conversion were occurring, if the common stock closes at a price
equal to or greater than $2.10 per share for at least ten of fifteen consecutive
trading days (the tenth day is the "Trigger Date"). If a holder is prohibited
from converting due to a 4.99% ownership limitation, or cap (discussed further
below), the excess portion of the Series A Preferred Stock shall remain
outstanding, but shall cease to accrue any dividends, and will be converted into
shares of common stock as the limitations, from time to time, permit.

F-25

A-1 and A-2 Warrants
--------------------

The holders of the Series A Preferred Stock received a five-year A-1
Warrant to purchase 2,500 shares of common stock and a five-year A-2 Warrant to
purchase 2,500 shares of common stock for each share of Series A Preferred Stock
purchased. The A-1 Warrants have an initial exercise price of $1.25 per share,
which increases to $1.50 six months and one day after the Effective Date, as
defined below. The A-2 Warrants have an initial exercise price of $1.50 per
share, which increases to $1.75 six months and one day after the Effective Date.
Beginning on December 19, 2003, the date of the Company's 2003 annual meeting of
the stockholders, the A-1 and A-2 Warrants became exercisable for up to an
aggregate total of 10,750,000 shares of the Company's common stock, subject to
customary anti-dilution provisions and weighted average anti-dilution provisions
if the Company issues shares of common stock or securities convertible into or
exercisable for common stock, other than excluded securities, at per share
prices less than the then effective exercise price.

Beginning thirty-six months and one day after the Effective Date, and
subject to a minimum average dollar trading volume, the Company may redeem the
A-1 and A-2 Warrants for $.10 per Warrant if the stock closes above $3.00
relative to the A-1 Warrants and $3.50 relative to the A-2 Warrant for ten
consecutive trading days and the exercise limitations described below are not in
effect.

At any time after twelve months after the date of issuance, a holder
may exercise a Warrant on a cashless basis for a net number of common shares,
provided that a registration statement covering the resale of those shares is
not then effective.

A holder may not exercise a Warrant to the extent the number of common
shares to be issued upon exercise would cause the holder and its affiliates to
beneficially own more than 4.99% of the Company's then outstanding shares of
common stock, or would exceed the holder's pro rata share of the Cap Amount
(defined below) if the cap is then applicable.

Registration Rights
-------------------

The Company agreed to file with the Securities and Exchange Commission
("SEC") a registration statement covering the resale of the shares of common
stock underlying the Series A Preferred Stock, Warrants and certain other
securities no later than thirty days after the closing and use best efforts to
have the registration statement declared effective within 120 days after the
closing. The date the SEC declares effective the Registration Statement covering
the common shares reserved for issuance under the Series A Preferred Stock, A-1
Warrants and A-2 Warrants is defined as the "Effective Date." The Company
received notice from the SEC that the Effective Date of the Registration
Statement is January 23, 2004.

Exchange Right and Right of First Offer
---------------------------------------

If the Company completes a private equity or equity linked financing in
future periods ("New Financing"), the holders of Series A Preferred Stock may
exchange their shares of Series A Preferred Stock at 100% of Stated Value for
the securities issued in the New Financing. However, this right terminates when
the New Financing is at least $5,000 of additional equity capital at a price of
not less than the then effective Series A Preferred Stock conversion price per
share. In addition, for any New Financing consummated within eighteen months
after the closing, the holders of the Series A Preferred Stock shall have a
right to purchase up to 50% of their investment amount in the Series A Preferred
Stock in the New Financing provided they respond within five trading days. New
Financings do not include strategic partnerships, acquisition candidates, public
offerings, and certain other issuances as defined in the Series A Preferred
Stock financing agreement.

Rank and Liquidation Preference
-------------------------------

In the event of any liquidation, dissolution, or winding up of the
Company, the holders of the Series A Preferred Stock shall be entitled to
receive prior and in preference to, any distribution of any assets of the
Company's to any holders of the Company's common stock by reason of their
ownership thereof, an amount per share equal to the greater of 143% of Stated
Value plus any accrued and unpaid dividends, or the amount that would be
distributed upon the number of shares of common stock into which shares of the
Series A Preferred Stock could be converted immediately prior to a liquidation
event. If upon the occurrence of such event, the assets and funds thus
distributed to the Series A Preferred Stock shall be insufficient to permit such
payment to all holders of Series A Preferred Stock, all of the Company's assets
and funds legally available for distribution shall be distributed ratably among
the holders of the Series A Preferred Stock. Once the liquidation preference has
been paid to the holders of the Series A Preferred Stock, any remaining assets
shall be distributed pro rata among to the holders of the Company's common
stock. A consolidation or merger, as defined in the Series A Preferred Stock
financing agreement, shall not be deemed to be a liquidation, dissolution or
winding up under this provision.

F-26

Optional Conversion Rights
--------------------------

Subject to limitations on certain conversions, redemptions and
transfers described below, each share of Series A Preferred Stock is convertible
at the option of the holder into shares of common stock at any time or from time
to time after December 19, 2003, the date of the Company's 2003 annual meeting
of stockholders, at a conversion price that depends upon whether a conversion
event has occurred. The initial conversion price for an optional conversion that
occurs prior to a conversion event is $.70 per share and is subject to
adjustments described below. The number of shares of common stock issuable upon
an optional conversion of a share of Series A Preferred Stock that occurs after
a conversion event will be equal to the quotient of the applicable percentage of
the face amount of the share divided by either the conversion event price or, if
the conversion event price is greater than $1.00, then the then-effective
conversion price. The conversion event price in the case of a sale of all or
substantially all of the Company's assets will be equal to the total
consideration the Company receives per share of common stock outstanding at the
time of the conversion event. In the case of any other conversion event, the
conversion event price will be equal to the arithmetic mean of the closing sales
price of the Company's common stock for the 30-day period prior to the day the
Company receives the notice of conversion. If the conversion event price is
greater than $1.00, then the applicable percentage of the face amount is 100%.
If the conversion event price is less than or equal to $1.00, then the
applicable percentage of the face amount is 143%.

If, after the occurrence of a conversion event, the Company is
prohibited from issuing shares of common stock upon an optional conversion as a
result of conversion limitations, then the holders will have the right, at any
time and from time to time thereafter, to require the Company to redeem for cash
up to the number of shares of Series A Preferred Stock that, after giving effect
to the redemption, the then unissued shares portion of the holder's pro rata
share of the Cap Amount is at least equal to 100% of the total number of shares
of common stock issuable upon conversion of such holder's shares of Series A
Preferred Stock.

Redemption Rights
-----------------

Each holder of Series A Preferred Stock will have the right to require
the Company to redeem by purchasing for cash any or all of their then
outstanding shares of Series A Preferred Stock for an amount per share equal to
the redemption amount in effect at the time of redemption, at any time and from
time to time after a redemption event occurs and is continuing. If the
redemption event is the failure of the Company's stockholders to timely
authorize the issuance of shares of common stock in excess of the Cap Amount,
then the redemption amount for each share of Series A Preferred Stock in excess
of a holder's pro rata share of the cap amount will be equal to the face amount
of the share plus all accrued dividends on the share through the date of payment
of the redemption amount. In the case of all other redemption events, except as
described in the following paragraph, the redemption amount will be equal to the
quotient of 143% of the face amount plus accrued dividends divided by the lesser
of the then current conversion price and the value of a share of common stock
valued at the arithmetic mean of the closing sales price of the Company's common
stock for the 30-day period prior to when the Company receives the redemption
notice.

With respect to the redemption events relating to the Company's failure
to remove restrictive legends and the Company's indication that it does not
intend to honor conversions of shares of Series A Preferred Stock in accordance
with the terms of the certificate of designation, the redemption amount will be
the greater of the redemption amount described in the last sentence of the
preceding paragraph and the "parity value" of the shares to be redeemed. The
"parity value" will be the product of (i) the highest number of shares of common
stock issuable upon an optional conversion of the shares of Series A Preferred
Stock without giving effect to any limitations on conversion and treating the
trading day immediately preceding the redemption date as the conversion date and
(ii) the highest closing price of a share of common stock during the period
beginning on the date of first occurrence of the redemption event and ending one
trading day prior to the redemption date.

If the Company fails to pay the redemption amount for a share of Series
A within five business days after receiving a redemption notice, then the holder
of the share will be entitled to interest on the redemption amount at a rate
equal to the lower of 24% per annum and the highest legal rate until the Company
pays the redemption amount. If the Company is unable to redeem all shares of
Series A Preferred Stock that are covered by redemption notices, then the
Company must redeem shares to the extent it is able from each redeeming holder
on a pro rata basis.

Conversion Price Adjustments
----------------------------

The conversion price of the Series A Preferred Stock is subject to
customary anti-dilution adjustments and also is subject to downward
weighted-average anti-dilution adjustments if the Company issues shares of
common stock or securities convertible into or exercisable for shares of common
stock, other than certain excluded securities, at per share prices less than the
then effective conversion price.

F-27

Stockholder Approval
--------------------

The Company was required to file a preliminary proxy statement seeking
stockholder approval to authorize the issuance of common shares upon conversion
of the Series A Preferred Stock and upon exercise of the A-1 and A-2 Warrants in
excess of 19.99% (the "Cap Amount") of the common shares outstanding on the
closing date. On December 5, 2003, the Company filed the proxy statement, and on
December 23, 2003, the Company obtained approval from the shareholders.

Board Representation and Voting Rights
--------------------------------------

The holders of the Series A Preferred Stock had the right to appoint
two independent members to the Company's Board of Directors. When the Company
satisfied its registration requirements discussed above, the number of
independent members that can be appointed by the holders of the Series A
Preferred Stock was reduced to one. Additionally, the Company agreed that its
Board of Directors would appoint a chief operating officer no later than 120
days after closing. Mr. Shah was appointed as Chief Operating Officer.

On any matters as to which Delaware law requires the vote of the
holders of Series A Preferred Stock, voting together as one class with the
holders of common stock, each share of Series A Preferred Stock will have a
number of votes equal to the number of shares of common stock into which it is
then convertible, subject to 4.999% ownership limitations described below and
except that the number of votes to which a share of Series A Preferred Stock is

entitled will be determined without taking into account any conversion price
adjustments that may have occurred. Subject to the voting requirements described
below, and except as otherwise may be required under Delaware law, on the
matters described in the preceding sentence, the affirmative vote or consent of
the holders of at least a majority of the then outstanding shares of Series A
Preferred Stock will constitute approval of the holders of Series A Preferred
Stock.

The approval of holders of at least 75% of the then-outstanding shares
of Series A Preferred Stock is required in order for the Company to enter into
an agreement, commitment or understanding regarding altering the terms or rights
of the Series A Preferred Stock or issuing additional shares of Series A
Preferred Stock or any securities ranking senior to the Series A Preferred Stock
as to distribution of assets upon liquidation. The approval of holders of a
majority of the then-outstanding shares of Series A Preferred Stock is required
in order for the Company to enter into an agreement, commitment or understanding
in which the Company would repurchase or pay dividends or distribution on
securities ranking junior to the Series A Preferred Stock as to distribution of
assets upon liquidation, other than pursuant to an equity compensation plan
approved by the board of directors, or create or allow to exist most liens or
security interests on the Company's assets.

Limitations on Certain Conversions, Redemptions and Transfers
-------------------------------------------------------------

The number of shares issuable in connection with optional conversions,
mandatory conversions and redemptions may not exceed the Cap Amount or any cap
amount prescribed by any market upon which the Company's common stock is listed
or traded. The cap amount shall be allocated PRO RATA to the holders of Series A
Preferred Stock and other securities issued pursuant to the securities Purchase
agreement or related agreements. As discussed above, the Cap Amount as defined
above is no longer applicable.

In addition, no holder of Series A Preferred Stock may receive in
connection With optional conversions, mandatory conversions or redemptions a
number of shares of common stock that would result in the holder and its
affiliates together beneficially owning more than 4.99% of the then-outstanding
shares of the Company's common stock. This limitation may only be altered or
removed with the vote or written approval of a majority of the outstanding
shares of the Company's common stock and the written approval of holders of at
least 50% of the outstanding shares of Series A Preferred Stock.

Exchange of Previously Issued Notes
-----------------------------------

On April 16, 2002, the Company issued $5,796 of 10% Convertible Notes
(note 9) to investors in exchange for cash and previously issued notes. In
addition to the $1,500 raised in the September 2003 Bridge Loan, in a series of
transactions beginning in November 2002 through April 2003, the Company issued
other bridge notes totaling $1,640. The principal amount outstanding under the
10% Convertible Notes, the September 2003 Bridge Loan and the series of other
bridge loans totaled $8,936 ("Total Notes") immediately prior to the closing of
the Series A Preferred Stock financing. As part of the Series A Preferred Stock
financing, the Company issued 982 shares of Series A Preferred Stock and related
Series A-1 and A-2 Warrants in exchange for cancellation of $6,876 of the
principal amount of the Total Notes ("Exchanged Notes"), leaving outstanding a
$1,986 principal balance of 10% Convertible Notes. In addition, the Company
cancelled 10% Convertible Notes in the principal amount of $1,500 held by
Richard P. Kiphart, Crestview Capital Fund, L.P., Crestview Capital Fund II,
L.P., and Crestview Offshore Fund, Inc. in exchange for the issuance of notes
with identical terms except that automatically converted into 2,153,589 shares
of common stock at a conversion price of $.70 per common share after being
approved at the 2003 Annual Meeting of Shareholders held on December 19, 2003.
The replacement notes were accompanied by warrants to purchase up to 1,071,429
shares of common stock, which warrants were identical to the A-1 Warrants except
that their exercise price is $1.00 per common share.

F-28

Placement Agent Agreement and Warrants
--------------------------------------

On August 26, 2003, the Company executed an engagement letter with
Burnham Hill Partners ("BHP") to act as the Company's exclusive placement agent
for the Series A Preferred Stock financing. As compensation related to the
Series A Preferred Stock financing, the Company agreed to pay BHP a cash fee
equal to 3.5% of the gross proceeds received by the Company in connection with
the cash exercise of the 1,500,000 Registered Warrants (note 9). The Company
also agreed to pay approximately 7.6% of the gross cash proceeds of new capital
in connection with the Series A Preferred Stock financing. The Company also
agreed to pay BHP 4% of the gross proceeds received by the Company in connection
with the future exercise of the A-1 Warrants and A-2 Warrants. The Company also
agreed to issue warrants to BHP in an amount equal to 7% of the common shares
underlying the aggregate number of Series A Preferred Stock shares issued for
new capital ("Placement Warrants") which resulted in the issuing 1,102,389
warrants. The Company also agreed to issue warrants in an amount equal to 2.5%
of the amount of Series A Preferred Stock shares issued in exchange for the
cancellation of notes ("Exchange Warrants"), which resulted in issuing 192,004
warrants. The Placement Warrants are exercisable at the conversion price of the
Series A Preferred Stock, expire five years from the issuance date, have
standard piggyback registration rights, have a cashless exercise provision and
have the right to have the underlying shares f common stock registered for
re-sale in connection with the Series A Preferred Stock financing. The Exchange
Warrants have the same terms as the Placement Warrants, but the exercise price
is agreed to be $.01 per share. As part of the engagement letter with BHP, the
Company agreed to execute a separate letter indemnifying BHP and its related
parties for services provided under the engagement letter. The term of the
engagement letter with BHP is twelve months.

Cashless Exercise of Warrants
-----------------------------

In November 2003, the bridge notes held by the Company's co-chairmen,
Kris Shah and Marvin Winkler, totaling $40,000 were repaid using proceeds from
the Series A Preferred Stock financing. On October 21, 2003, warrants to
purchase up to 40,000 shares of the Company's common stock, which warrants had
been issued in accompaniment with the bridge notes and had an exercise price to
be determined, had their exercise price set on terms identical to those
established for other, unaffiliated warrant holders. As a result, the warrants'
exercise price was set at $.50 in consideration for a waiver of certain
penalties and the immediate exercise of the warrants on a cashless basis.
Messrs. Shah and Winkler received an aggregate of 9,474 shares of common stock
pursuant to the cashless exercise.

(16) SHAREHOLDERS' EQUITY - OPTIONS AND WARRANTS

Under the Company's 1998 and 1999 Stock Option Plans ("the Plans"),
which were established in April 1998 and February 1999, respectively, options
granted were either qualified or nonqualified options. Qualified options must
have an exercise price of not less than 100% of the fair market value of a share
of common stock on the date of grant, except that qualified options granted to
an optionee who owns more than 10% of the total voting securities of the Company
on the date of grant must have an exercise price of not less than 110% of the
fair market value of a share of common stock on the date of grant. Nonqualified
options must have an exercise price of not less than 85% of the fair market
value of a share of common stock on the date of grant. The total number of
shares of common stock that were available for grant under each of the Plans was
1,500,000 shares. All stock options granted under the Plans had ten-year terms.
Unless otherwise provided by the board of directors or the committee of the
board that administers the Plans, each option granted under the 1998 Plan vested
on December 31, 1998 as to 10-15%, plus an additional 2.5% for each year of
service with the Company, and vested as to 20% each December 31 thereafter until
fully vested. Prior to 2002, unless otherwise provided by the board of directors
or the committee of the board that administers the Plans, each option granted
under the 1999 Plan vested 20% on each anniversary of the date of grant.

There were no options granted under the 1998 Stock Option Plan since
1998. The Company does not intend to grant options in the future under the 1998
Stock Option Plan.

On August 23, 2001, the Company's stockholders approved the amendment
and restatement of the 1999 Stock Option Plan. The Amended and Restated 1999
Stock Option Plan ("Restated Plan") increased the number of shares of common
stock available for grant under that plan from 1,500,000 to 4,000,000. Starting
in 2002, unless otherwise provided by the board of directors or the committee of
the board that administers the Plans, new options issued by the Company under
the Restated Plan to employees generally vest and become exercisable 25% upon
the first anniversary the grant issuance, and thereafter vest as to 1/48 of the
total number of shares underlying the option each month until vested and
exercisable in full. The option exercise price requirements for the Restated
Plan are the same as those for the Plans. In the discretion of the board of
directors or the committee that administers the Restated Plan, payment of the
purchase price for the shares of common stock acquired through the exercise of
an option may be made in cash, shares of the Company's common stock or a

F-29

combination of cash and shares of its common stock. Options may be exercised
during a period of time fixed by the board of directors or the committee that
administers the Restated Plan, except that no option may be exercised more than
ten years after the date of grant and, in the case of a qualified stock option
granted to an optionee who owns more than 10% of the total voting securities of
the Company on the date of grant, the option exercise period may not exceed five
years.

Options to purchase approximately 920,926 shares of common stock under
the Restated Plan were made to all Company employees in August 2002. Subject to
continued service and other provisions of the grants, each option is scheduled
to vest and become exercisable 20% upon issuance on August 1, 2002 and 1/48 of
the total shares underlying the option each month thereafter until vested and
exercisable in full. The August 2002 employee options expire on July 31, 2012.

On December 23, 2003, the Company's stockholders approved an amendment
and restatement of the Amended and Restated 1999 Stock Option Plan ("Second
Amended 1999 Plan"), which increased the number of shares of common stock
available for grant under that plan from 4,000,000 to 10,000,000. Starting in
2003, unless otherwise provided by the board of directors or the committee of
the board that administers the Plans, new options issued by the Company under
the Second Amended 1999 Plan to employees generally vest and become exercisable
25% upon the first anniversary the grant issuance, and thereafter vest as to
1/48 of the total number of shares underlying the option each month until vested
and exercisable in full. The option exercise price requirements for the Second
Amended 1999 Plan are the same as those for the Restated Plan and the Plans. In
the discretion of the board of directors or the committee that administers the
Second Amended 1999 Plan, payment of the purchase price for the shares of common
stock acquired through the exercise of an option may be made in cash, shares of
the Company's common stock or a combination of cash and shares of its common
stock. Options may be exercised during a period of time fixed by the board of
directors or the committee that administers the Second Amended 1999 Plan, except
that no option may be exercised more than ten years after the date of grant and,
in the case of a qualified stock option granted to an optionee who owns more
than 10% of the total voting securities of the Company on the date of grant, the
option exercise period may not exceed five years.

Options to purchase approximately 3,075,000 shares of common stock
under the Second Amended 1999 Plan were made to all Company employees during
2003. Subject to continued service and other provisions of the grants, each
option is scheduled to vest and become exercisable 20% upon issuance on the
grant date and 1/48 of the total shares underlying the option each month
thereafter until vested and exercisable in full. The employee options expire on
the tenth anniversary date of grant in 2013.

BIZ INTERACTIVE ZONE, INC. 2000 STOCK OPTION PLAN

The BIZ Plan was assumed as part of the BIZ acquisition. The BIZ Plan
is closed and there were no additional options granted during 2002 and 2003. As
of December 31, 2002 and 2003, there were options outstanding to purchase
approximately 377,718 and 358,714 shares, respectively. Under the BIZ Plan, and
subject to continued service and other provisions of the employee options, each
option vests and becomes exercisable as to 25% of the underlying shares of
common stock upon the first anniversary the date of issuance, and vests as to
1/48 of the underlying shares of common stock each month thereafter until vested
and exercisable in full. The options generally are exercisable for ten years
from their dates of grant.

2001 EMPLOYEE STOCK PURCHASE PLAN ("ESPP")

During 2001, the Company established the ESPP, which was approved by
the Company's shareholders on August 23, 2001. A total of 1,000,000 shares of
common stock were authorized for issuance under the ESPP. If a right expires or
becomes unexercisable without having been exercised in full, the shares of
common stock that were subject to that right will again become available for
grant under the ESPP. The number of shares issuable under the ESPP, and the
purchase price per share, is subject to proportional adjustments to reflect
stock splits, stock dividends, mergers, consolidations and similar events. There
were 23,916 and 54,208 shares issued under the ESPP during the years ended
December 31, 2002 and 2003, respectively.

DEFERRED COMPENSATION

The deferred compensation consists of amounts related to stock options
and warrants assumed as part of the BIZ acquisition, as well as non-employee
stock option grants and issuances of stock.

Equity instruments issued to non-employees are measured using the fair
value of the equity instrument based on using the stock price and other
measurement assumptions as of the earlier of the date at which a performance
commitment to earn the equity instruments is reached or the date on which the
performance is complete.

F-30

During 2002 and 2003, the Company granted 47,250 and 40,000 stock
options to non-employees, respectively. The vesting terms of the options ranged
from immediate to four years and from immediate to five years from the date of
grant for options issued in 2002 and 2003, respectively. In connection with the
granting of these options the Company recorded deferred compensation of $0 and
$96 and recognized compensation expense of $2 and $0 related to options granted
in the prior year for the years ended December 31, 2002 and 2003, respectively.
The terms of these options range from two to four years.

Additionally, in conjunction with the BIZ acquisition, the Company
assumed 837,396 options under the BIZ stock option plan of which 377,718 and
358,714 options remained outstanding as of December 31, 2002 and 2003. Selected
employee stock options were granted to employees with exercise prices at less
than the fair value of the underlying common stock at the date of grant.
Accordingly, compensation expense will be recognized and recorded over the
vesting period. The options generally vest 25% upon the completion of one year
of service and the remaining 75% in equal monthly installments over the next
three years from the date of grant.

Using the Black Scholes valuation model, the Company recorded deferred
compensation related to the BIZ options of $36 and $0 at December 31, 2002 and
2003, respectively. The Company recorded compensation expense of $264 and $150
and reversal of deferred compensation related to terminated employees of $484
and $95 for the years ended December 31, 2002 and 2003, respectively.

WARRANTS

In conjunction with the issuance of the 10% Convertible Notes in April
2002 (note 9), the Company issued detachable warrants to purchase 3,477,666
shares at $1.30 per share. The exercise price of and number of shares underlying
the warrants are subject to adjustment under certain conditions. The warrants
are exercisable at any time prior to the third anniversary of their issuance, in
whole or in part, and contain a cashless exercise provision. In addition, the
Company reduced the per share exercise price of warrants issued in the April
2002 financing to purchase up to 1,977,666 shares of common stock from $1.30 to
$1.25, which is the initial exercise price of A-1 warrants that were issued in
the Series A Preferred Stock financing (note 15).The warrants were valued at
approximately $2,644 using a Black Scholes valuation model. The amounts have
been recorded as discounts from the face value of the debt with an equal
increase to additional paid-in capital. Based on EITF No. 00-27, the governing
accounting pronouncement, the discounts are being amortized over the period from
the date of issuance to the maturity date of the notes. Accretion of the
discounts totaled $1,392 for 2003. On November 19, 2003, with the exception of
$1,986 in principal, the 10% Convertible Notes were exchanged in a private
placement for Series A Preferred Stock (note 15). As such, the Company recorded
a $2,226 non-cash interest charge related to the unamortized balance of warrant
values and beneficial conversion feature of 10% Convertible Notes that were
exchanged for Series A Preferred Stock (note 15). The Company will continue to
amortize a non-cash interest charge related to the unamortized warrant values
and beneficial conversion feature balances of $1,071 relative to the remaining
10% Convertible Notes that were not converted to Series A Preferred Stock.

The Company also issued a placement warrant in conjunction with the 10%
Convertible Notes issued in April 2002 (note 9). The warrant provides for the
purchase of 110,000 shares at $1.00 per share. The exercise price of and number
of shares underlying the warrants are subject to adjustment under certain
conditions. The warrant is exercisable at any time prior to the third
anniversary of its issuance, in whole or in part, and contains a cashless
exercise provision. The warrant was valued at approximately $182 using a Black
Scholes valuation model. The amount has been recorded as debt issuance cost
carried under other long term assets with an equal increase in additional
paid-in capital. These costs are being amortized over the term of the 10%
Convertible Notes. Amortization expense of these costs totaled $142 and $40 for
the years ended December 31, 2002 and 2003. The Company will continue to
amortize a non-cash charge related to the unamortized balances of these costs,
which had a balance of $285 as of December 31, 2003.

In conjunction with the issuance of the Secured Convertible Notes in
November 2002 (note 9), the Company issued to the note holders warrants to
purchase up to 500,000 shares of common stock at $1.30 per share. The exercise
price of and number of shares underlying the warrants are subject to adjustment
under certain conditions. In conjunction with the September Bridge notes, these
warrants were re-priced to $.50 per share and exercised on a cashless basis
during 2003. The warrants were valued at approximately $154 using a Black
Scholes valuation model. The amounts have been recorded as discounts from the
face value of the debt with an equal increase to additional paid-in capital. The
discounts are being amortized over the period from the date of issuance to the
maturity date of the notes. Amortization expense of the discounts totaled $154
for year ended December 31, 2003, respectively. On November 19, 2003, the
Secured Convertible Notes were exchanged in a private placement for Series A
Preferred Stock (note 15). The $154 warrant value was fully amortized over the
period from date of issuance to maturity date, which was prior to November 19,
2003, as such, there was no remaining unamortized warrant value, which would
have been recorded as an additional non-cash interest due to the conversion on
November 19, 2003.

F-31

In conjunction with the issuance of the Series A Preferred Stock (note
15), the Company issued to A-1 Warrants, A-2 Warrants, Placement Agent Warrants,
Exchange Warrants and Bridge Warrants to purchase up to an aggregate of
13,615,822 shares of common stock at $.01 to $1.50 per share. All of the
warrants issued in conjunction with the Series A Preferred Stock issuance were
valued at approximately $5,101 using a Black Scholes valuation model, which has
been recorded a additional paid in capital on the Company's balance sheet (note
15).

A summary of the status of the Company's warrants as of December 31,
2002 and 2003 and changes during the years ended on those dates is
presented below (shares in thousands):

2002 2003
---------------------------- ----------------------------
WEIGHTED WEIGHTED
NUMBER OF AVERAGE NUMBER OF AVERAGE
UNDERLYING EXERCISE UNDERLYING EXERCISE
WARRANTS SHARES PRICE SHARES PRICE
-------- ------------ ------------- ------------ ------------

Outstanding at beginning of year 394 $ 14.58 4,081 $ 2.29
Granted 3,687 $ 1.30 17,590 1.11
Cancelled -- $ -- (3,349) .97
Exercised -- $ -- (2,075) .50
------------ ------------ ------------
Outstanding at end of year 4,081 $ 2.29 16,247 1.66
============ ============ ============

Warrants exercisable at year-end 4,081 16,247
Weighted-average fair value of
warrants granted during the year $ .98 $ .60

The following table summarizes information about warrants outstanding
at December 31, 2003 (shares in thousands):

WARRANTS OUTSTANDING WARRANTS EXERCISABLE
----------------------------------------------------- ---------------------------------
NUMBER WEIGHTED-AVERAGE NUMBER
RANGE OF EXERCISE OUTSTANDING AT REMAINING WEIGHTED-AVERAGE EXERCISABLE AT WEIGHTED-AVERAGE
PRICES 12/31/03 CONTRACTUAL LIFE EXERCISE PRICE 12/31/03 EXERCISE PRICE
------ -------------- ---------------- ---------------- -------------- ----------------

$ .01 - $ .01 192 4.89 $ .01 192 $ .01
$ .70 - $ .70 1,102 4.88 $ .70 1,102 $ .70
$1.00 - $ 1.00 1,181 4.55 $ 1.00 1,181 $ 1.00
$1.25 - $ 1.30 8,003 3.89 $ 1.26 8,003 $ 1.26
$1.50 - $ 1.50 5,375 4.92 $ 1.50 5,375 $ 1.50
$2.11 - $ 2.11 24 1.58 $ 2.11 24 $ 2.11
$18.15 370 .44 $ 18.15 370 $ 18.15
-------- --------
Outstanding at end of year 16,247 4.28 $ 1.66 16,247 $ 1.66
======== ========

OPTIONS

A summary of the status of the Company's stock option plans as of
December 31, 2002 and 2003 and changes during the years ending on those dates is
presented below (shares in thousands):

2002 2003
---------------------------- ----------------------------
WEIGHTED WEIGHTED
NUMBER OF AVERAGE NUMBER OF AVERAGE
UNDERLYING EXERCISE UNDERLYING EXERCISE
OPTIONS SHARES PRICE SHARES PRICE
------- ------------ ------------- ------------ ------------

Outstanding at beginning of year 1,614,000 $ 3.26 2,039 $ 3.26
Granted 1,151 $ 1.44 3,075 .79
Cancelled (687) $ 2.80 (853) 2.16
Expired -- -- (6) 4.05
Exercised (39) $ 1.63 (6) .58
------------ ------------- ------------ ------------
Outstanding at end of year 2,039 $ 2.40 4,249 $ 1.29
============ ============= ============ ============

F-32

Options exercisable at year-end 920 1,728
Weighted-average fair value of
option granted during the year $ 1.20 $ .71

As of December 31, 2003, there were 6,126,293 shares available for
grant.

The following table summarizes information about stock options
outstanding at December 31, 2003 (shares in thousands):

OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------------------- ---------------------------------
NUMBER WEIGHTED-AVERAGE NUMBER
RANGE OF EXERCISE OUTSTANDING AT REMAINING WEIGHTED-AVERAGE EXERCISABLE AT WEIGHTED-AVERAGE
PRICES 12/31/03 CONTRACTUAL LIFE EXERCISE PRICE 12/31/03 EXERCISE PRICE
------ -------------- ---------------- ---------------- -------------- ----------------

$ .60 - $ .70 421 8.66 $ 0.61 127 $ 0.63
$ .80 - $ .81 2,314 9.59 $ 0.81 654 $ 0.81
$1.04 - $1.30 886 8.83 $ 1.27 420 $ 1.29
$2.11 - $2.50 395 6.83 $ 2.14 368 $ 2.12
$2.61 - $3.56 78 6.26 $ 2.99 56 $ 2.95
$4.13 - $6.14 4 7.09 $ 4.64 2 $ 4.58
$6.19 - $6.88 108 6.43 $ 6.82 67 $ 6.80
$8.75 - $9.75 42 5.64 $ 9.17 34 $ 9.17
---------- ----------
4,249 8.91 $ 1.29 1,728 $ 1.66
========== ==========

The weighted average remaining contractual life of stock options
outstanding at December 31, 2003 and 2002 was 8.9 years and 11.4 years,
respectively.

(17) EMPLOYEE RETIREMENT SAVINGS PLAN

Effective January 1, 1998, the Company established a retirement plan
that is intended to qualify under Section 401(k) of the Internal Revenue Code.
Under the plan, eligible employees are able to contribute up to 20% of their
compensation not to exceed the maximum IRS deferral amount. The Company may also
match employee contributions at its discretion. During 2002 and 2003, the
Company made contributions of $90 and $0 to this plan, respectively.

(18) INCOME TAXES

The provision (benefit) for income taxes from continuing
operations is comprised of the following for the respective years ended:

DECEMBER 31
----------------------------
2002 2003
------------ -----------

Current:
Federal $ -- $ --
State 53 2
Foreign -- --
------------ -----------
Total $ 53 $ 2
============ ===========

Deferred tax assets and liabilities result from differences
between the financial statement carrying amounts and the tax basis of
existing assets and liabilities. The significant components of deferred
income taxes are as follows:

DECEMBER 31
----------------------------
2002 2003
------------ -----------
Deferred tax assets:
Net operating loss carry forward $ 11,851 $ 14,110
Credit carry forward 237 237
Start-up cost 6,444 6,444
------------ -----------
Total deferred tax assets 18,532 20,791
Less valuation allowance (18,532) (20,791)
------------ -----------
Net deferred tax assets $ -- $ --
============ ===========

F-33

The Company has recorded a valuation allowance in the amount set forth
above for certain deductible temporary differences, net operating loss carry
forwards and credit carry forwards where it is more likely than not that the
Company will not receive future tax benefits. The net change in the valuation
allowance for 2002 and 2003 was $2,765 and $2,259 respectively.

Subsequently recognized tax benefits relating to the valuation
allowance for deferred tax assets as of December 31, 2003 will be allocated as
follows:

Income tax benefit that would be reported in the
consolidated statements of operations $ 14,262
Goodwill 6,529
-------------
Total $ 20,791
=============

As of December 31, 2002, the Company had federal and state net
operating losses ("NOL") carry forwards of approximately $38,371 and $17,734,
respectively. These NOL carry forwards will expire through year 2021 for the
federal NOL and 2006 for the state NOL. Additionally, the Company has federal
and state research and experimentation ("R&E") credit carry forwards of
approximately $237. These R&E Credit carry forwards expire through 2021 for the
federal R&E Credit and indefinitely for the state R&E Credit. Certain of these
NOL carryforwards may be limited in accordance with Internal Revenue Code 382.

Income tax expense differs from the amount computed by applying the
federal corporate income tax rate of 34% to income (loss) before income taxes as
follows:

YEAR ENDED
DECEMBER 31
-----------------------
2002 2003
-------- --------

Statutory tax rate (34)% (34)%
Goodwill amortization and impairment of goodwill and
other Intangibles -- --
In-process research and development -- --
Change in valuation allowance 34% 34%
State income taxes, net -- --
Research and experimentation credit -- --
Other -- --
-------- --------
Effective tax rate --% --%
======== ========

(19) CONTINGENT LIABILITIES

Because 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
governmental 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 that could have a material 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
matters that arise in the ordinary course of business. Except as specifically
disclosed, the Company is unable to estimate a potential loss or potential range
of loss associated with any of the pending claims described herein.

On January 16, 1998, G2 Resources Inc. ("G2") filed a complaint against
Pulsar in the Fifteenth Judicial Circuit in Palm Beach County, Florida. G2
claimed that Pulsar breached a contract under which G2 agreed to provide
services related to the monitoring of government contracts available for bid and
the preparation and submission of bids on behalf of Pulsar. The contract
provided that Pulsar pay G2 $500 in 30 monthly installments of $16 and an
additional fee of 2% of the gross dollar amount generated by awards. In its

F-34

complaint, G2 alleged that Pulsar failed to make payments under the contract,
and G2 claimed damages in excess of $525 plus interest, costs and attorneys'
fees. In the course of discovery, G2 asserted that its losses/costs arising out
of its claim amounted to approximately $10,300. Pulsar asserted that G2 failed
to perform the services required under the contract and Pulsar filed a claim for
compensatory damages, interest and attorneys' fees against G2. Classical
Financial Services, LLC ("Classical") intervened in the case. Classical claimed
that G2 assigned its accounts receivable to Classical under a financing program
and that Pulsar breached its obligations to Classical by failing to make
payments under the contract with G2. Pulsar asserted defenses to Classical's
claim. On April 20, 2001, a court hearing was held and G2's complaint against
Pulsar was dismissed without prejudice on the basis of no prosecution activity
for more than 12 months. On May 22, 2001, G2 filed a new complaint against
Pulsar. In August 2002, the case was moved from Division AF to Division AH of
the Fifteenth Judicial Circuit in Palm Beach County Court, Civil Division. In
April 2003, the court stayed all matters in the case pending the outcome of
litigation between G2 and Classical. The Company believes that the claims made
by G2 and Classical against Pulsar are without merit and intends to vigorously
defend against these claims.

In restructuring existing facility lease agreements (note 9) and to
resolve litigation brought by Research Venture, LLC ("Research Venture"), the
Company agreed to pay $500 in installments without interest. The first payment
of $75 was made as scheduled in December 2002, with additional payments
scheduled of $100 due in March 2003, $150 due in June 2003 and a final payment
of $175 due in September 2003. The Company did not timely make the full $150
payment that was due in March 2003. The Company subsequently tendered the
balance of the March payment due, but did not pay the full $150 due in June
2003. While the Company subsequently tendered the balance of the payment due,
Research Venture claimed a default under the facilities settlement agreement. On
August 11, 2003, Research Venture obtained a judgment against the Company per
prior stipulation in the amount of $2,700. As such, the Company recorded a
$1,300 accrued liability as of June 30, 2003, which consisted of the original
judgment amount of $3,100 less $456 of cash previously paid and $1,400 of shares
previously issued.

On August 29, 2003, the Company entered into an agreement of settlement
on stipulated judgment with Research Venture. Under that settlement agreement,
Research Venture retained the 959,323 shares of common stock initially issued in
connection with the restructuring arrangement and 96,919 shares of common stock
issued upon conversion of the note, and the Company agreed to register those
shares for resale by Research Venture. The Company completed the appropriate
registration of those shares on September 18, 2003. Under the settlement,
Research Venture canceled and surrendered the note that had been issued as
prepaid rent, and cancelled the $300 balance remaining of $500 installments, the
Company paid to Research Venture $865 in cash and issued to Research Venture
414,450 shares of common stock, and the building lease agreement was terminated.
The 414,450 shares were recorded at the amount of $373 and must be registered
for resale by Research Venture under a separate registration statement on or
prior to November 30, 2003, or be subject to re-purchase by the Company for up
to $373 as described below. The settlement agreement contained mutual general
release language, and the August 11, 2003 stipulated judgment was vacated. As a
result of the above settlement, the Company adjusted the estimated accrued
liability by $209 in the quarter ended September 30, 2003.

The Company and Research Venture also entered into an amended
stipulation for entry of judgment on August 29, 2003. Under the amended
stipulation, because the Company did not timely obtain effectiveness of the
registration statement covering the additional 414,450 shares of common stock
issued as of August 29, 2003, Research Venture may be entitled to obtain
entry against the Company of a stipulated judgment in the amount of $373 less
the product of $.90 multiplied by the number of the additional 414,450 shares of
common stock that Research Venture sells prior to entry of the stipulated
judgment(note 9). If the stipulated judgment is entered, any unsold shares will
be returned to the Company for cancellation upon payment as described in this
paragraph. As of January 21, 2004, the Company had filed the required
registration statement (note 15).

At the end of June 2003, the Venetian sent a demand letter to the
Company's subsidiary demanding funding, or alternatively taking action to
terminate the operating agreement for failure of the Company's subsidiary to
meet its funding commitment (note 4). The Venetian threatened to take action
against the Company's subsidiary in the matter, but this obligation, if any, is
contractually limited to the Company's subsidiary. Other than the subsidiary's
investment in VI, it has no other assets.

F-35

believes the complaint is without merit. The Company will assert claims for
damages against Mr. Brophy, and parties affiliated with him. Legal counsel for
both parties has agreed to dismiss the complaint against the Company and have
this matter settled through binding arbitration. There has been no dismissal or
arbitration hearing set as of the date of this report.

As of December 31, 2003, accounts payable totaled $1,057. Of that
amount, $243 was aged at least 90 days. Unless payment is made or satisfactory
payment plans agreed to, it is likely that 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.

(20) SUBSEQUENT EVENTS

On January 21, 2004, the Company filed with the SEC a registration
statement covering the resale of the shares of common stock underlying the
Series A Preferred Stock, Warrants (note 15) and other securities. The Company
received notice from the SEC that the Effective Date of the Registration
Statement is January 23, 2004.

During the period from January 1, 2004 through the date of this report,
the Company have received notices from holders of Series A Preferred Stock
indicating their conversion of 656 shares of Series A Preferred Stock into
6,560,000 shares of common stock.

During January 2004, certain holders of secured convertible promissory
notes with principal balances of $626 exercised their right to convert their
notes at the exercise price of $1.00 into shares of common stock, thereby
reducing the Company's long term debt and increasing by 626,444 the Company's
common shares issued and outstanding. The Company will record an additional loss
on conversion of debt in the first quarter of 2004 of approximately $90 for the
related unamortized balance of debt issuance costs.

On February 6, 2004, the Company received notice from the Environmental
Protection Agency ("EPA") regarding the Omega Chemical Superfund Site. The
notice states that the Company is a potentially responsible party ("PRP") that
contributed to the waste at the Omega Site. The notice also states that the
amount of waste contributed to the Omega Site was a comparatively small quantity
or de minimis quantity. As such, the notice is intended to offer the Company the
opportunity to resolve its liability for waste disposed at the Omega Site. The
notice also states that if the Company accepts the settlement offer, the Company
can be released from further liability from the United States regarding the
Omega Site as well as gaining contribution protection against lawsuits by other
PRPs, who potentially have claims against the Company. The settlement offer
amount is $108,000 and the Company must accept and notify the EPA of such
acceptance by May 7, 2004. The Company has been advised by its legal counsel and
believes that if it accepts the settlement offer, there would be no further
liability regarding this claim from the EPA or other PRP's. As such, the Company
plans to accept the settlement offer of $108 and has recorded the liability
as a one time non-recurring charge as other expense on the statement of
operations for 2003.

Related the Omega Site, the Company entered into a Tolling and Waiver
Agreement, dated January 1, 2004, and fully executed on February 25, 2004 (the
"Tolling Agreement") with the Omega PRP Organized Group. The Tolling Agreement
states that the Omega Group has expended funds in response to the Omega Site and
is committed to and will expend funds in the future in connection with the Omega
Site. The Tolling Agreement states that the Omega Group has a claim against the
Company for recoupment of costs previously spent and those that will be expended
in the future on the Omega Site. As such, the Tolling Agreement states that any
unexpired statute of limitations shall be tolled in connection with any claims
that the Omega Group and the Company have against each other in connection with
the Omega Site.

Following the termination of the Operating Agreement of VI
(note 4), on February 23, 2004, the Company transferred 40% of any and all
ownership rights and privileges that it may have in VI to Bear Trax, LLC, a Utah
limited liability company, pursuant to the terms of the mutual settlement
agreement relating to the Company's repurchase of an interest in SSP Gaming
(note 9).

PROPOSED MERGER WITH SAFLINK CORPORATION

In March 2004, the Company entered into an Agreement and Plan of Merger
and Reorganization with SAFLINK Corporation, an unaffiliated Delaware
corporation ("SAFLINK") that offers biometric software solutions that protect
intellectual property, secure information assets and eliminate passwords.
SAFLINK's biometric software provides Identity Assurance Management(TM),
allowing administrators to verify the identity of users and control their access
to computer networks, physical facilities, applications, manufacturing process
control systems, and time and attendance systems.

The merger agreement with SAFLINK contemplates that the Company will
merge with a newly-formed wholly-owned subsidiary of SAFLINK and become a
wholly-owned subsidiary of SAFLINK, with each share of the Company's common
stock being exchanged for 0.6 shares of SAFLINK common stock. The consummation
of the merger is subject to the adoption by the Company's stockholders of the
merger agreement, the approval by SAFLINK stockholders of the issuance of shares
of SAFLINK common stock in the merger, and other customary closing conditions.

F-36

INDEX TO EXHIBITS

EXHIBIT
NUMBER DESCRIPTION
------ -----------

2.1 Reorganization Agreement dated February 9, 1999, by and among Litronic
Inc. and Kris Shah and Geraldine M. Shah, as Trustees Ramesh R. Shah
and Patricia L. Shah, as Trustees, Dilip R. Shah and Shila D. Shah, as
Trustees, Kris Shah, as the Trustee of the Leena Shah, Kris Shah, as
the Trustee of the Chandra L. Shah (1)

2.2 Stock Acquisition Agreement dated February 9,1999, by and among
Litronic Inc., Litronic Industries, Inc., Pulsar Data Systems, Inc.,
William W. Davis, Sr. and Lillian A. Davis, and Kris Shah and
Geraldine M. Shah, as Trustees Ramesh R. Shah and Patricia L. Shah,
as Trustees, Dilip R. Shah and Shila D. Shah, as Trustees, Kris
Shah, as the Trustee of the Leena Shah, Kris Shah, as the Trustee of
the Chandra L. Shah (1)

2.3 Agreement and Plan of Reorganization entered into as of July 3, 2001,
by and among Litronic Inc., Litronic Merger Corp., and BIZ Interactive
Zone, Inc. (15)

2.4 Agreement and Plan of Reorganization dated March 22, 2004, by and among
SAFLINK Corporation, Spartan Acquisition Corporation and SSP Solutions,
Inc. (schedules and exhibits listed in the agreement will be provided
to the Commission upon request)(26)

3.1 Amended and Restated Certificate of Incorporation filed with the
Secretary of State of Delaware on June 8, 1999 (1)

3.2 Certificate of Amendment of the Amended and Restated Certificate of
Incorporation of Litronic Inc. filed with the Secretary of State of
Delaware on August 24, 2001 (4)

3.3 Certificate of Amendment of the Amended and Restated Certificate of
Incorporation of SSP Solutions, Inc. filed with the Secretary of State
of Delaware on July 12, 2002 (14)

3.4 Bylaws of Litronic Inc. (1)

3.5 Certificate of Correction of Certificate of Amendment of Amended and
Restated Certificate of Incorporation of SSP Solutions, Inc. filed
November 12, 2003 (17)

3.6 Certificate of Designation, Preferences and Rights of Series A
Convertible Preferred Stock of SSP Solutions, Inc. filed November 18,
2003 (17)

3.7 Action With Respect to Bylaws of SSP Solutions, Inc. as of September
24, 2003 (28)

4.1 Form of Common Stock Certificate (2)

10.1 Employment Agreement dated June 9, 1999 between Litronic Inc. and Kris
Shah (1) (#)

10.2 Litronic Industries, Inc. 1998 Stock Option Plan (1) (#)

10.3 Form of Litronic Industries, Inc. 1998 Stock Option Plan Incentive
Stock Option Agreement (1) (#)

10.4 SSP Solutions, Inc. Second Amended and Restated 1999 Stock Option Plan
(27) (#)

10.5 BIZ Interactive Zone, Inc. 2000 Stock Option Plan (9) (#)

10.6 SSP Solutions, Inc. 2001 Employee Stock Purchase Plan (9) (#)

10.7 Lease dated January 2, 2000 between KRDS, Inc. and Litronic Inc. (10)

10.8 Amendment Right to Cancel dated April 11, 2002 relating to Lease dated
January 2, 2000 between KRDS, Inc. and Litronic Inc. (4)

10.9 Purchase, Development and Deployment Agreement dated October 2, 2000
between BIZ Interactive Zone, Inc. and Wave Systems Corp. (2)

10.10 Amendment No. 1, dated May 10, 2001, to Purchase, Development, and
Deployment Agreement dated October 2, 2000 between BIZ Interactive
Zone, Inc. and Wave Systems Corp. (2)

10.11 Lease dated October 10, 2001 between Litronic Inc. and Research
Venture, LLC, related to real property located at 9012 Research Drive,
Irvine, California 92618 (2)

10.12 Lease dated October 10, 2001 between Litronic Inc. and Research
Venture, LLC, related to real property located at 11 Cushing, Irvine,
California 92618 (2)

10.13 Master Services Agreement dated December 1, 2001 between SSP Solutions,
Inc., Electronic Data Systems Corp. and EDS Information Services LLC
(2)

10.14 Task Order Number 2001-001 dated December 1, 2001 between SSP
Solutions, Inc., Electronic Data Systems Corp. and EDS Information
Services LLC (2)

10.15 Reseller Agreement dated November 21, 2001 between Control Break
International Corp. and SSP Solutions, Inc. (2)

10.16 Securities Purchase, Registration Rights and Security Agreement dated
as of April 16, 2002 by and among SSP Solutions, Inc., Crestview
Capital Fund, L.P., Crestview Capital Fund II, L.P., Crestview Offshore
Fund, Inc., Robert Geras, Richard P. Kiphart and Nefilim Associates,
LLC (5)

10.17 Amendment Number 1 to OEM Agreement dated April 18, 2002 between
Control Break International Corp. and SSP Solutions, Inc. (12)

10.18 Waiver and Acknowledgment dated January 28, 2003 among Crestview
Capital Fund, L.P., Crestview Capital Fund II, L.P., Crestview Offshore
Fund, Inc., Robert Geras, Richard P. Kiphart and Nefilim Associates,
LLC, LLC Wave Systems Corp. (4)

10.19 Second Amended and Restated Operating Agreement of SSP Gaming, LLC
dated April 7, 2003 by SSP Solutions, Inc., the sole member of SSP
Gaming, LLC (4)

10.20 Employment Agreement dated August 16, 2001 between Litronic, Inc. and
Richard M. Depew (4) (#)

10.21 Termination Agreement and Mutual Release dated September 30, 2002
effective as of August 31, 2002 by and among SSP Solutions, Inc., BIZ
Interactive Zone, Inc. and Wave Systems Corp. (7)

10.22 Factoring Agreement dated as of October 18, 2002 by and between SSP
Solutions, Inc. and Bay View Funding for the sale and assignment of
accounts receivable (13)

10.23 Validity Indemnification dated as of October 18, 2002 by Kris Shah for
the benefit of Bay View Funding relative to SSP Solutions, Inc.
Factoring Agreement dated October 18, 2002 (13)

10.24 Validity Indemnification dated as of October 18, 2002 by Marvin Winkler
for the benefit of Bay View Funding relative to SSP Solutions, Inc.
Factoring Agreement dated October 18, 2002 (13)

10.25 First Amendment to Standard Industrial/Commercial Single-Tenant
Lease--Net dated October 23, 2002 between SSP Solutions, Inc. and
Research Venture, LLC relating to real property located at 9012
Research Drive, Irvine, California (8)

10.26 Stipulation for Entry of Judgment dated October 23, 2002 between SSP
Solutions, Inc. and Research Venture, LLC (8)

10.27 Mutual Settlement and Release dated October 31, 2002 by and among Game
Base of Nevada, Inc., Robert V. Brazell, SSP Gaming, LLC, Marvin
Winkler and SSP Solutions, Inc. (4)

10.28 Memorandum of Understanding and Agreement dated November 26, 2002
between SSP Solutions, Inc., Pulsar Data Systems, Inc. and Electronic
Data Systems Corporation (4)

10.29 Venetian Interactive Operating Agreement dated June 7, 2002 between SSP
Gaming, LLC and Venetian Casino Resort, LLC (4)

10.30 Forbearance Agreement dated March 12, 2003 between SSP Solutions, Inc.
and Integral Systems, Inc., effective September 1, 2002 (4)

10.31 Employment Agreement dated March 6, 2003 between SSP Solutions, Inc.
and Kris Shah (4) (#)

10.32 Employment Agreement dated March 6, 2003 between SSP Solutions, Inc.
and Marvin J. Winkler (4) (#)

10.33 Employment Agreement dated April 14, 2003, between SSP Solutions, Inc.
and Thomas E. Schiff (4) (#)

10.34 SSP Solutions, Inc. Purchase Agreement, 8.0% Subordinated Convertible
Notes, dated December 17, 2001 (without schedules) among SSP Solutions,
Inc., Richard P. Kiphart, Sandy Tennant, Marvin J. Winkler and Kris
Shah (2)

10.35 Subordinated Convertible Note, dated December 17, 2001, between SSP
Solutions, Inc. and Richard P. Kiphart (2)

10.36 Subordinated Convertible Note, dated December 17, 2001, between SSP
Solutions, Inc. and Sandy Tennant (2)

10.37 Amended and Restated Subordinated Convertible Note dated December 18,
2001 made by SSP Solutions, Inc. in favor of Marvin J. Winkler (2)

10.38 Amended and Restated Subordinated Convertible Note dated December 18,
2001 made by SSP Solutions, Inc. in favor of Kris Shah (2)

10.39 Form of Subordination Agreement dated as of October 18, 2002 by
Crestview Capital Fund, L.P., Crestview Offshore Fund, Inc., Crestview
Capital Fund II L.P., Richard P. Kiphart, Robert Geras and Nefilim
Associates, LLC for the benefit of Bay View Funding relative to SSP
Solutions, Inc. Factoring Agreement dated October 18, 2002 (4)

10.40 Promissory Note and Pledge Agreement dated July 24, 2000 between Kris
Shah and BIZ Interactive Zone, Inc. (2)

10.41 Form of Secured Convertible Promissory Notes dated April 16, 2002
issued by SSP Solutions, Inc. in favor of Crestview Capital Fund, L.P.,
Crestview Capital Fund II, L.P., Crestview Offshore Fund, Inc., Robert
Geras, Richard P. Kiphart and Nefilim Associates, LLC in the principal
amounts of $1,075,000, $400,000, $25,000, $250,000, $3,789,667, and
$256,444, respectively (5)

10.42 Form of Warrants to Purchase Common Stock dated April 16, 2002 issued
by SSP Solutions, Inc. in favor of Crestview Capital Fund, L.P.,
Crestview Capital Fund II, L.P., Crestview Offshore Fund, Inc., Robert
Geras, Richard P. Kiphart and Nefilim Associates, LLC in the amounts of
645,000, 240,000, 15,000, 150,000, 2,273,800 and 153,866, respectively
(5)

10.43 Promissory Note dated April 16, 2002 in the principal amount of
$152,776 made by SSP Solutions, Inc. in favor of Kris Shah (5)

10.44 Promissory Note dated April 16, 2002 in the principal amount of
$500,000 made by SSP Solutions, Inc. in favor of Marvin Winkler (5)

10.45 Promissory Note dated April 18, 2002 in the principal amount of
$679,193 made by SSP Solutions, Inc. in favor of Control Break
International Corp. (4)

10.46 Promissory Note dated April 18, 2002 in the principal amount of
$26,594.74 made by SSP Solutions, Inc. in favor of Control Break
International Corp. (4)

10.47 Subordinated Convertible Promissory Note dated as of September 30, 2002
in the principal amount of $270,000 made by SSP Solutions, Inc. in
favor of Wave Systems Corp. (7)

10.48 Subordinated Convertible Promissory Note dated October 23, 2002 in the
principal amount of $360,000 made by SSP Solutions, Inc. in favor of
Research Venture, LLC (8)

10.49 Form of Promissory Notes dated November 14, 2002 made by SSP Solutions,
Inc. and SSP Gaming, LLC in favor of Crestview Capital Fund II, L.P.,
Crestview Capital Fund, L.P. and Richard P. Kiphart, in the principal
amounts of $100,000, $100,000, and $300,000, respectively (4)

10.50 Form of Warrants to Purchase Common Stock dated November 14, 2002
issued by SSP Solutions, Inc. to Crestview Capital Fund II L.P.,
Crestview Capital Fund L.P., Richard P. Kiphart in the amounts of
20,000, 20,000, and 60,000 shares, respectively (4)

10.51 Promissory Note dated January 22, 2003 in the principal amount of
$500,000 made by SSP Solutions, Inc. in favor of Richard P. Kiphart (4)

10.52 Form of Promissory Notes dated March 18, 2003 and March 19, 2003,
respectively, made by SSP Solutions, Inc. in favor of Crestview Capital
Fund, L.P. and Richard P. Kiphart, respectively, each in the principal
amount of $100,000 (4)

10.53 Form of Warrants to Purchase Common Stock dated March 18, 2003 and
March 19, 2003, respectively, issued by SSP Solutions, Inc. in favor of
Crestview Capital Fund L.P. and Richard P. Kiphart, respectively, each
in the amount of 100,000 shares (4)

10.54 Form of Promissory Notes dated March 28, 2003 made by SSP Solutions,
Inc. in favor of Richard P. Kiphart, Crestview Capital Fund II, L.P.,
Marvin J. Winkler and the Kris and Geraldine Shah Family Trust,
respectively, in the principal amounts of $240,000, $160,000, $10,000
and $30,000, respectively (4)

10.55 Form of Warrants to Purchase Common Stock dated March 28, 2003 issued
by SSP Solutions, Inc. in favor of Crestview Capital Fund L.P., Richard
P. Kiphart, Marvin J. Winkler and the Kris and Geraldine Shah Family
Trust, respectively, in the amounts of 120,000, 80,000, 5,000 and
15,000 shares, respectively (4)

10.56 Warrant to Purchase Common Stock dated March 12, 2003 by SSP Solutions,
Inc. to Integral Systems, Inc. (4)

10.57 Securities Purchase Agreement dated as of November 19, 2003 among SSP
Solutions, Inc. and the investors named in Exhibit A thereto (17)

10.58 Form of Series A-1 Warrant dated as of November 19, 2003 issued by SSP
Solutions, Inc. in favor of each investor named in Exhibit A to the
Securities Purchase Agreement of even date therewith (17)

10.59 Form of Series A-2 Warrant dated as of November 19, 2003 issued by SSP
Solutions, Inc. in favor of each investor named in Exhibit A to the
Securities Purchase Agreement of even date therewith (17)

10.60 Registration Rights Agreement dated as of November 19, 2003 among SSP
Solutions, Inc. and each investor named in Exhibit A thereto (17)

10.61 Form of Secured Convertible Promissory Note dated November 19, 2003
made by SSP Solutions, Inc. in favor of Richard P. Kiphart, Crestview
Capital Fund, L.P. and Crestview Capital Fund II, L.P. in the principal
amounts of $1,250,000, $350,000 and $130,000, respectively (issued as
retained note that replaces note dated April 16, 2002) (17)

10.62 Form of Secured Convertible Promissory Note dated November 19, 2003
made by SSP Solutions, Inc. in favor of Richard P. Kiphart, Crestview
Capital Fund, L.P., Crestview Capital Fund II, L.P. and Crestview
Offshore Fund, Inc. in the principal amounts of $1,000,000, $325,000,
$150,000 and $25,000, respectively (issued as additional retained note
that has automatic conversion feature triggered by stockholder approval
and that replaces note dated April 16, 2002) (17)

10.63 Form of Warrant to Purchase Common Stock dated November 19, 2003 issued
by SSP Solutions, Inc. in favor of Richard P. Kiphart, Crestview
Capital Fund, L.P., Crestview Capital Fund II, L.P. and Crestview
Offshore Fund, Inc. as to 714,286 shares, 232,143 shares, 107,143
shares and 17,857 shares, respectively (issued in accompaniment with
additional retained note that has automatic conversion feature
triggered by stockholder approval and that replaces note dated April
16, 2002) (17)

10.64 Warrant dated July 31, 2000, issued by BIZ Interactive Zone, Inc. in
favor of Roth Capital Partners, Inc. as to 23,756 shares, assumed by
SSP Solutions, Inc. in the acquisition of BIZ Interactive Zone, Inc.
(24)

10.65 Agreement of Settlement on Stipulated Judgment dated August 29, 2003
between SSP Solutions, Inc. and Research Venture, LLC (19)

10.66 Lease Surrender and Termination Agreement dated August 29, 2003 between
SSP Solutions, Inc. and Research Venture, LLC (19)

10.67 Amended Stipulation for Entry of Judgment dated August 29, 2003 between
SSP Solutions, Inc. and Research Venture, LLC (19)

10.68 Promissory Note dated August 27, 2003, in the amount of $250,000 made
by SSP Solutions, Inc. in favor of Crestview Capital Fund II, L.P.,
cancelled in payment of exercise price of re-priced warrants (21)

10.69 Promissory Note dated August 27, 2003, in the amount of $250,000 made
by SSP Solutions, Inc. in favor of Crestview Capital Fund II, L.P.,
cancelled in payment of exercise price of re-priced warrants (21)

10.70 Bridge Loan Agreement dated September 1, 2003, by and among Richard P.
Kiphart, Crestview Capital Fund, L.P., Crestview Capital Fund II, L.P.,
SDS Merchant Fund, L.P., and SSP Solutions, Inc. in the amount of
$1,500,000 (21)

10.71 Form of 10% Convertible Bridge Notes dated September 1, 2003, September
17, 2003 and October 6, 2003 made by SSP Solutions, Inc. in favor of
Richard P. Kiphart, SDS Merchant Fund, L.P., Crestview Capital Fund,
L.P., and Crestview Capital Fund II, L.P., respectively, in the
principal amounts of $500,000, $750,000, $100,000 and $150,000,
respectively (21)

10.72 Form of Warrants issued with 10% Convertible Bridge Notes dated
September 1, 2003, September 17, 2003 and October 6, 2003 made by SSP
Solutions, Inc. in favor of Richard P. Kiphart, SDS Merchant Fund,
L.P., Crestview Capital Fund, L.P., and Crestview Capital Fund II,
L.P., respectively, as to 166,667, 250,000, 33,333 and 50,000 shares of
common stock, respectively (21)

10.73 Forbearance Agreement dated September 1, 2003, made by and among SSP
Solutions, Inc. and Richard P. Kiphart, Crestview Capital Fund, L.P.,
Crestview Capital Fund II, L.P., Crestview Offshore Fund, Inc., Robert
Geras and Nefilim Associates, LLC (21)

10.74 Form of First Amendment to Warrants to Purchase Common Stock (subject
to a registration statement) made and entered into as of September 1,
2003, by and between SSP Solutions, Inc., and Richard P. Kiphart,
Crestview Capital Fund, L.P., Crestview Capital Fund II, L.P.,
Crestview Offshore Fund, Inc., Robert Geras and Nefilim Associates,
LLC, respectively (21)

10.75 Form of First Amendment to Warrants to Purchase Common Stock (not
subject to a registration statement) made and entered into as of
September 1, 2003, by and between SSP Solutions, Inc., and Richard P.
Kiphart, Crestview Capital Fund, L.P., and Crestview Capital Fund II,
L.P., respectively (21)

10.76 Placement Agent Agreement dated August 26, 2003, between SSP Solutions,
Inc. and Burnham Hill Partners in connection with the sale of Series A
Convertible Preferred Stock (21)

10.77 Form of Placement Agent Warrants dated as of November 19, 2003 issued
by SSP Solutions, Inc. in favor of Burnham Hill Holdings, LLC (as to
800,000 shares of common stock), Hilary Bergman (as to 49,204 shares),
Brad Reifler (as to 49,204 shares), Matthew Balk (as to 65,000 shares),
Eric Singer (as to 20,681 shares), Hudson Valley Capital Management (as
to 50,720 shares), Chris Shufeldt (as to 1,750 shares), Kimball & Cross
Investment Management Corp. (as to 5,830 shares), Brian Herman (as to
27,040 shares), Sean Callahan (as to 7,600 shares), Mark Ford (as to
12,960 shares), Daniel Pietro (as to 900 shares), Claude Ware (as to
4,000 shares), James St. Clair (as to 6,000 shares) and Roger Lockhart
(as to 1,500 shares) (24)

10.78 Form of Exchange Agent Warrants dated as of November 19, 2003 issued by
SSP Solutions, Inc. in favor of Burnham Hill Holdings, LLC (as to
163,000 shares of common stock), Hilary Bergman (as to 9,599 shares),
Brad Reifler (as to 9,599 shares) and Matthew Balk (as to 9,806 shares)
(24)

10.79 Warrant Agreement dated as of June 14, 1999 between Litronic Inc. and
BlueStone Capital Partners, L.P. and Pacific Crest Securities Inc. (22)

10.80 Forbearance Agreement dated March 12, 2003 between SSP Solutions, Inc.
and Integral Systems, Inc., effective September 1, 2002 (23)

10.81 Warrant to Purchase Common Stock dated March 12, 2003 by SSP Solutions,
Inc. to Integral Systems, Inc. (23)

10.82 Letter Agreement dated December 1, 2003, between KRDS, Inc. and SSP
Solutions, Inc., relative to payment of a certain amount of late fees
in exchange for cancellation of the Letter Agreement of April 11, 2002.

10.83 Form of Stockholder Agreement by and among SAFLINK Corporation,
Spartan Acquisition Corporation and the following stockholders
of SSP Solutions, Inc.: Richard P. Kiphart, JAW Financial, L.P., The
Winkler Childrens Trust 1998, The Schiff Family 1998 living Trust,
Leena Shah Trust, Kris & Geraldine Shah Family Trust, and Chandra L.
Shah Trust (26)

10.84 Form of Stockholder Agreement by and among SSP Solutions, Inc. and the
following stockholders of SAFLINK corporation: Glenn L. Argenbright;
Gregory Jensen; Jon C. Engman; SDS Merchant Fund, L.P. (a/k/a SDS
Capital Group SPC, Ltd.); North Sound Legacy Fund LLC; North Sound
Legacy Institutional Fund LLC; and North Sound Legacy international
Ltd. (26)

16 Letter dated August 6, 2002 from KPMG LLP regarding change in
certifying accountant (16)

21 Subsidiaries of SSP Solutions, Inc. (25)

23 Consent of Haskell & White LLP, Independent Auditors (25)

31 Certifications Required by Rule 13a-14(a) of the Securities Exchange
Act of 1934, as amended, as Adopted Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 (25)

32 Certification of Chief Executive Officer and Chief Financial Officer
Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906
of the Sarbanes-Oxley Act of 2002 (25)

99 Amended and Restated Charter of the Audit Committee of the Board of
Directors of SSP Solutions, Inc. adopted as of February 10, 2004 (25)

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

(#) Management contract or compensatory plan, contract or arrangement
required to be filed as an exhibit.

(1) Filed as an exhibit to our Form S-1 filed with the Securities and
Exchange Commission ("Commission") on February 11, 1999 (registration
statement no. 333-72151) and incorporated herein by reference.

(2) Filed as an exhibit to our Form 10-K for the year ended December 31,
2001 (file no. 000-26227) and incorporated herein by reference.

(3) Filed as an exhibit to Amendment No. 2 to our Form S-1 filed with the
Commission on May 6, 1999 (registration statement no. 333-72151) and
incorporated herein by reference.

(4) Filed as an exhibit to the initial filing of our Form 10-K for the year
ended December 31, 2002 and incorporated herein by reference.

(5) Filed as an exhibit to our Form 8-K report for April 16, 2002 and
incorporated herein by reference.

(6) Filed as an exhibit to our Form S-3 filed with the Commission on June
14, 2002 (registration statement no. 333-90574) and incorporated herein
by reference.

(7) Filed as an exhibit to our Form 8-K report for September 27, 2002 and
incorporated herein by reference.

(8) Filed as an exhibit to our Form 8-K report for October 23, 2002
and incorporated herein by reference.

(9) Filed as an exhibit to our Form S-8 filed with the Commission on
November 13, 2001 (registration statement no. 333-73204) and
incorporated herein by reference.

(10) Filed as an exhibit to our Form 10-K for the year ended December 31,
2000 and incorporated herein by reference.

(11) Filed as an exhibit to our Form 10-Q for the quarter ended September
30, 2001 and incorporated herein by reference.

(12) Filed as an exhibit to our Form 10-Q for the quarter ended June 30,
2002 and incorporated herein by reference.

(13) Filed as an exhibit to our Form 10-Q for the quarter ended September
30, 2002 and incorporated herein by reference.

(14) Filed as an exhibit to Amendment No. 1 to our Form 10-Q for the quarter
ended June 30, 2002 and incorporated herein by reference.

(15) Filed as an exhibit to our Definitive Proxy Statement filed with the
Commission July 25, 2001 and incorporated herein by reference.

(16) Filed as an exhibit to Amendment No. 1 to our Form 8-K report for July
25, 2002 and incorporated herein by reference.

(17) Filed with the Commission on November 21, 2003 as an exhibit to our
current report on Form 8-K for November 17, 2003 and incorporated
herein by reference.

(18) Filed with the Commission on November 4, 2002 as an exhibit to our
current report on Form 8-K for October 23, 2002 and incorporated
herein by reference.

(19) Filed with the Commission on September 9, 2003 as an exhibit to our
current report on Form 8-K for August 27, 2003 and incorporated
herein by reference.

(20) Filed with the Commission on November 19, 2003 as an exhibit to our
quarterly report on Form 10-QSB for September 30, 2003 and
incorporated herein by reference.

(21) Filed with the Commission on January 20, 2004 as an exhibit to our
Form S-3 and incorporated herein by reference.

(22) Filed as an exhibit to Amendment No.2. to our Form S-1 filed with
the Commission on May 6, 1999 (registration statement no. 333-72151)
and incorporated herein by reference.

(23) Filed as an exhibit to the initial filing of our Form 10-K for the
year ended December 31, 2002 and incorporated herein by reference.

(24) Filed as an exhibit to our Amendment No.1 Form S-3 filed with the
Commission on January 21, 2004 (registration statement no.
333-111402) and incorporated herein by reference.

(25) Filed as an exhibit to this Form 10-KSB for the year ended
December 31, 2003.

(26) Filed with the Commission on March 24, 2004 as an exhibit to the
registrant's current report on Form 8-K for March 22, 2004 and
incorporated herein by reference.

(27) Filed as an exhibit to our Definitive Proxy Statement filed with the
Commission on December 8, 2003 and incorporated herein by reference.

(28) Filed as an exhibit to our Form 8-K report for September 26, 2003 and
incorporated herein by reference.

SIGNATURES

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

Dated: March 30, 2004 SSP Solutions, Inc.

By: /s/ MARVIN J. WINKLER
------------------------------------------
Marvin J. Winkler, Chief Executive Officer

Pursuant to the requirements of the Securities Act of 1934, this report
is made by the following persons on behalf of the registrant and in the
capacities indicated.

NAME TITLE DATE
---- ----- ----

/s/ MARVIN J. WINKLER Co-Chairman of the Board of Directors, March 30, 2004
------------------------ Director and Chief Executive Officer
Marvin J. Winkler (Principal Executive Officer)

/s/ KRIS SHAH Co-Chairman of the Board of Directors, March 30, 2004
------------------------ Director and President and Chief Operating Officer
Kris Shah

/s/ THOMAS E. SCHIFF Executive Vice President and Chief March 30, 2004
------------------------ Financial Officer (Principal Financial
Thomas E. Schiff Officer and Principal Accounting Officer)

/s/ GREGG AMBER Director March 30, 2004
------------------------
Gregg Amber

/s/ RON R. GOLDIE Director March 30, 2004
------------------------
Ron R. Goldie

Director March 30, 2004
------------------------
David A. Janes

EXHIBITS FILED WITH THIS REPORT

EXHIBIT
NUMBER DESCRIPTION
------ -----------

10.82 Amendment of Right to Cancel dated December 1, 2003 relating to Lease
dated January 2, 2000 between KRDS, Inc. and SSP Solutions, Inc.

21 Subsidiaries of SSP Solutions, Inc.

23 Independent Auditors' Consent

31 Certifications Required by Rule 13a-14(a) of the Securities Exchange
Act of 1934, as amended, as Adopted Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002

32 Certification of Chief Executive Officer and Chief Financial Officer
Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906
of the Sarbanes-Oxley Act of 2002

99 Amended and Restated Charter of the Audit Committee of the Board of
Directors of SSP Solutions, Inc. adopted as of February 10, 2004